REGISTRATION NO. 333-46197
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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URSUS TELECOM CORPORATION
(Exact Name Of Registrant As Specified In Its Charter)
FLORIDA 4825 65-0398306
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
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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)
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LUCA M. GIUSSANI
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)
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COPIES TO:
James R. Tanenbaum, Esq. Ralph V. De Martino, Esq.
Scott Baena, 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
<PAGE>
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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.
|X|
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.
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<PAGE>
200,000 Shares
URSUS TELECOM CORPORATION
Common Stock
This prospectus is being used in connection with the offering from
time to time of up to 200,000 shares of common stock, of Ursus Telecom
Corporation, a Florida corporation, by the registering stockholders of Ursus
Telecom Corporation. Ursus Telecom Corporation is not selling any of the shares
and will not receive any of the proceeds from sales of the shares by the
registering stockholders.
The registering stockholders may sell or distribute the shares on
terms to be determined at the time of sale in transactions in the
over-the-counter market, in negotiated transactions, or by a combination of
these methods.
The registering stockholders may sell the shares to or through
securities broker-dealers or other agents. The broker-dealers or other agents
may receive compensation from the registering stockholders and/or the purchasers
of the shares for parties the broker-dealers may act as agent for or to and sell
as principal to, or both. Particular broker-dealers may be compensated in excess
of customary commissions. Agents or dealers may acquire shares or interests in
the shares as a pledgee and distribute the shares or interests in that capacity.
The registering stockholders and any brokers, dealers or agents
participating in the sale or distribution of shares may be deemed "underwriters"
within the meaning of the Securities Act, and any profits realized by them on
the sale of the shares may be considered to be underwriting compensation.
Ursus Telecom Corporation will bear all of the expenses in connection
with the registration and sale of the shares by the registering stockholders
(other than underwriting discounts and selling commissions).
The common stock is traded on the Nasdaq National Market System under
the symbol "UTCC." The closing sale price per share of the common stock on March
31, 1999 was $4.5625.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 10.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS APRIL 2, 1999.
<PAGE>
TABLE OF CONTENTS
Prospectus Summary...........................................................3
Summary Financial Data.......................................................8
Risk Factors................................................................10
Use Of Proceeds.............................................................26
Capitalization..............................................................26
Dividend Policy.............................................................27
Selected Financial Data.....................................................28
Management's Discussion And Analysis Of Financial Condition and
Results of Operations.....................................................30
The International Telecommunications Industry...............................44
Business....................................................................49
Management..................................................................67
Certain Relationships And Related Party Transactions........................76
Principal And Registering Shareholders......................................77
Description Of Capital Stock................................................78
Shares Eligible For Future Sale.............................................81
Legal Matters...............................................................85
Experts.....................................................................85
Additional Information......................................................85
Reports To Shareholders.....................................................86
Glossary Of Terms...........................................................87
Index To Financial Statements...............................................F-1
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED ENTIRELY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD CONSIDER
CAREFULLY THE INFORMATION SET FORTH UNDER "RISK FACTORS." FOR YOUR CONVENIENCE,
TECHNICAL TERMS AND ACRONYMS USED IN THIS PROSPECTUS ARE BOTH DEFINED WHEN FIRST
USED AND DEFINED IN THE "GLOSSARY OF TERMS" ON PAGE 87.
URSUS TELECOM CORPORATION
On May 18, 1998, Ursus Telecom Corporation ("Ursus" or "we") sold 1,500,000
shares common stock in an initial public offering. After deducting underwriting
discounts and commissions and professional fees, we received approximately $11.6
million from the initial public offering.
We are an international telecommunications company that operates a digital,
switch-based telecommunications network (the "Network") from Sunrise and Tampa,
Florida. The Network is used to originate and terminate international calls for
our own subscriber base. We exploit favorable market niches by providing
competitive and technologically advanced telecommunications services. We focus
on small and medium-sized businesses in emerging or deregulating markets such as
South Africa, Latin America, the Middle East in primarily Lebanon and Egypt,
Russia, Germany and France.
We operate through a network of independent exclusive agents that allow us
to maintain a significant competitive advantage. Each agent uses a proprietary
agent support system developed and provided by us to provide marketing, customer
support, billing and collections, in local language and time. We supply each of
our agents with near real time data for customer management, usage analysis and
billing from our local and wide area network. Through our agent network, we are
developing and maintaining close relationships with vendors of telephone systems
such as Siemens, Plessey and Alcatel in key markets in order to promote our line
of telecommunications services.
We have traditionally entered a particular market using call reorigination.
Call reorigination gives our overseas customers access to our U.S.-based
switching center which provides a U.S. dial tone. Our users access our Network
by placing a telephone call, hanging up and waiting for an automated call
reorigination. Call reorigination gives our users a dial tone so that they can
then initiate and complete a call. Call reorigination gives our customers the
convenience and rates provided by a U.S. dial tone. In contrast, locally imposed
international rates may be substantially higher. We derive approximately 76% of
our revenues from call reorigination.
Call reorigination does not require substantial investment in equipment or
capital expenditures. Call reorigination allows the development of a viable
customer base by effectively exploiting the difference between the local
International Direct Dial ("IDD") rate and the generally more favorable rates in
the U.S. We have successfully used this strategy to develop foreign markets and
created a revenue stream with little more than marketing and incremental call
costs. We expect that call reorigination will continue to serve as a low cost
and profitable method of opening new markets. We will continue this method of
business development in certain regulated markets in Africa, the Middle East,
Europe and Asia.
In addition, we provide an array of basic and value added services to our
customers, which include:
o long distance international telephone services
o direct dial access for corporate customers
o dedicated access via a leased line for high volume users
o calling cards
o abbreviated or speed dialing
o international fax store and forward
o switched Internet services
o itemized and multicurrency billing
o follow me calling or call forwarding
o enhanced call management and reporting services
On September 17, 1998, we purchased all the issued and outstanding common
stock of Access Authority, Inc. ("Access") for $8 million in cash. Access
provides international long distance telecommunication services, including call
reorigination, domestic toll-free access and various value-added features to
small and medium sized businesses and individuals in over 38 countries. 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.
We believe that our proprietary software system provides an efficient
infrastructure for back room processing, gives us a strategic advantage over our
competitors and will facilitate the rapid and economical consolidation of
acquired competitors. To remain competitive and to mitigate the high proportion
of variable costs associated with call reorigination, we plan to expand by:
o Increasing sales to existing customers.
o Providing wholesale services to other carriers.
o Entering into selected acquisitions.
o Expanding the business generated by our existing agents.
o Using a portion of the initial public offering proceeds to expand our
primary digital switching platform and network access "nodes" by using
a hybrid network of Internet, Intranet and circuit-based facilities.
o A "node" is a specially configured multiplexer which provides the
interface between the local public switched telephone network
where the node is located and a switch. The local public switched
telephone network can be accessed by the public through private
lines, wireless systems and pay phones. 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 us to
extend our network into new geographic locations by accessing the
local public switched telephone network without deploying a
switch.
o Enhancing our capabilities as a "direct access" provider 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.
o Direct access is 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
(1) simplified premises- to-anywhere calling, (2) faster call
set-up times and (3) potentially lower access and transmission
costs, provided there is sufficient traffic over the circuit to
generate economies of scale.
o Exploiting our market penetration and technological sophistication by
using internet protocol ("IP") telephony technology, which processes
data and/or voice transmission over the Internet and Intranet.
o 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.
o Using IP telephony technology concurrently with call reorigination.
o Deploying 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.
In summary, we intend to become a significant provider of international
telecommunications services within emerging and deregulating markets. We plan to
maximize our profit potential by (1) leveraging our existing infrastructure and
market penetration, (2) expanding our customer base and (3) growing our U.S.
wholesale business. We believe that we can gain strategic advantages while
capitalizing on the opportunities presented by deregulation and technological
advances in the global telecommunications industry, by using our independent
agent network, efficient back office systems and favorable relationships with
some U.S. telecommunications carriers.
Our growth strategy has:
o increased revenues from $13.2 million to $20.8 million in the fiscal
years ended March 31, 1996 and March 31, 1997, respectively;
o increased revenues from $20.8 million to $28.0 million in the fiscal
years ended March 31, 1997 and March 31, 1998, respectively; and
o for the nine months ended December 31, 1996, 1997 and 1998, revenues
have increased from $14.9 million in 1996 to $21.0 million in 1997 and
$ 24.3 million in 1998.
Our pretax profits have:
o 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;
o decreased from $2.0 million in the fiscal year ended March 31,
1997 to $1.7 million in the fiscal year ended March 31, 1998; and
o for the nine months ended December 31, 1997 and 1998 pretax profits
have decreased from approximately $1.4 million in 1997 to $0.5 million
in 1998.
We are a Florida corporation that was formed in March 1993. Our principal
executive offices are located at 440 Sawgrass Corporate Parkway, Suite 112,
Sunrise, Florida 33325, and our telephone number is (954) 846-7887.
<PAGE>
THE OFFERING
Common stock offered by the
Registering Shareholders (the
"Offering")........................... 200,000 shares (the "Shares")
Common stock to be outstanding
after the Offering(1)................. 6,600,000 shares
Nasdaq National Market Symbol......... "UTCC"
Risk Factors.......................... You should carefully consider all of
the information set forth in this
prospectus, and, in particular, the
"Risk Factors" starting on page 10.
(1) Excludes approximately 737,500 shares of common stock subject to options
granted to some of our directors, officers and employees at exercise prices
ranging from $3.375 to $9.50 (the "Option Prices"). See "Management-Stock
Incentive Plan" and "Shares Eligible for Future Sale."
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
A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE SET FORTH IN "RISK FACTORS"
ON PAGE 10 AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" ON PAGE 30.
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth certain summary financial information for
(i) the fiscal years ended March 31, 1995, 1996, 1997, 1998, which have been
derived from our audited financial statements and the accompanying notes
included elsewhere in this prospectus, (ii) fiscal year ended March 31, 1994,
which have been derived from our unaudited financial statements which are not
included in this prospectus, (iii) nine months ended December 31, 1997 and 1998,
which have been derived from our unaudited financial statements which are
included in this prospectus and (iv) the unaudited pro forma information for the
year ended March 31, 1998 and the nine months ended December 31, 1998 giving pro
forma effect to our acquisition of Access. The pro forma data are presented for
illustrative purposes only and do not purport to represent what our results
actually would have been had the acquisition occurred at the dates indicated,
nor does it purport to project the results of operations for any future period.
The EBITDA information has not been audited. In the opinion of our 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 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 our consolidated financial statements and accompanying notes
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
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Proforma Proforma
1994 1995 1996 1997 1998 1998 1997 1998 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands, except for per share and other operating data)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $848 $6,291 $13,228 $20,838 $28,098 $75,652 $21,029 $24,343 $41,743
Gross profit 344 2,544 5,553 8,643 9,565 23,116 7,240 8,675 12,530
Operating income (loss) (814) 159 1,369 2,004 1,720 2,264 1,414 277 (992)
Net income (loss) (813) 382 790 1,253 1,074 1,867 890 168 (292)
Pro forma net income (loss) per
share -basic and dilutive (1)
(Historical for the period ended
December 31, 1998) (.18) .08 .16 .25 .21 .38 .18 .03 .05
the period ended
Pro forma weighted average shares
outstanding (1) 4,615 4,869 5,000 5,000 5,000 5,000 5,000 6,199 6,199
EBITDA (2) (771) 231 1,463 2,140 1,927 3,436 1,558 843 264
</TABLE>
<TABLE>
<CAPTION>
As of
As of March 31, DECEMBER 31,
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BALANCE SHEET DATA 1994 1995 1996 1997 1998 1998
<S> <C> <C> <C> <C> <C> <C>
Total current assets $381 $1,273 $2,363 $4,566 $5,502 $9,193
Working capital (deficiency) (129) 150 811 1,646 1,092 2,653
Total assets 683 1,720 2,797 5,243 7,733 22,387
Total current liabilities 510 1,122 1,552 2,920 4,410 6,540
Long term debt, less current portion 729 730 580 425 297 836
Total shareholders' equity (deficit) (563) (162) 609 1,861 2,948 14,843
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(1) Pro forma net income (loss) per common share-basic and dilutive is computed
based on the pro forma weighted average number of common shares outstanding
during each period and gives retroactive effect to the stock split and
recapitalization. See Note 2 to Consolidated Financial Statements.
(2) 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
because it is a measure commonly used by securities analysts.
</TABLE>
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES CERTAIN RISKS AND
SUBSTANTIAL DILUTION. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS,
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN EVALUATING
WHETHER TO INVEST IN OUR COMMON STOCK.
BUSINESS RISKS
OUR BUSINESS DEPENDS SUBSTANTIALLY UPON INDEPENDENT EXCLUSIVE AGENTS.
We provide our services through a network of independent exclusive and
non-exclusive agents which market our services on a commission basis. Our
international market penetration primarily reflects the marketing, sales and
customer service activities of our agents. We enter into exclusive relationships
with some of our agents. The success of our business within the exclusive
territory largely depends on the effectiveness of the local agent in conducting
its business.
As of December 31, 1998, we had 185 agents operating in approximately
44 countries. Of our 185 agents, 14 were exclusive agents which operated in 28
countries. The use of agents exposes us to significant risks. We depend on the
continued viability and financial stability of our agents. In the fiscal years
ended March 31, 1998 and 1997, four major agents generated approximately 58% and
57% of our revenues, respectively. For the nine months ended December 31, 1998,
these agents in the aggregate accounted for approximately 48% of our revenues.
One single South African agent accounted for approximately 28% of our revenues
during the fiscal year ended March 31, 1998 and 24% for the nine months ended
December 31, 1998. The reduction in dependence on single agents during the nine
month period is the result of our acquisition of Access.
Our continuing success depends in substantial part on our ability to
recruit, maintain and motivate our agents. We are subject to competition in the
recruiting of agents from other organizations that use agents to market their
products and services. We could lose one or more significant agents in the
future. Our business may be harmed if one or more of these agents suffered
financial problems, terminated its relationship with us, or could not satisfy
customers. We could be exposed to lost revenues, bad debt expense, lost
customers, potential liability under contracts the agents commit us to perform,
and damage to our reputation.
Under certain local laws our exclusive arrangements with an agent
might be difficult or expensive to terminate. We have entered into non-compete
agreements with our agents which prohibit their competition with us during their
engagement and for a period of time after termination. However, we cannot assure
you that any particular non-compete agreement will be enforceable as a practical
matter or under the applicable laws of the jurisdiction in which an agent
operates. See "Use of Proceeds," "-Our exposure to credit risk and bad debt will
increase as we grow," and "-Expansion by acquisitions, strategic alliances and
other business combinations could adversely impact our operating results."
INCREASED COMPETITION AND DEREGULATION MAY LEAD TO LOWER PROFITS.
Historically, we have derived a significant portion of our revenues by
providing call reorigination services. We believe that our industry has reached
a stage of development where the higher gross profit margins associated with our
early stages have moved to more moderate gross profit margins. Deregulation and
increased competition may cause the pricing advantage of call reorigination
relative to conventional international long distance service to diminish and
disappear in certain markets. Increased competition is likely to cause
international rates to decrease.
We may respond to the changing competitive environment by making
certain pricing, service or marketing decisions or entering into acquisitions or
strategic alliances. These actions could have a material adverse effect on our
business, financial condition and results of operations. To maintain our
customer base and attract new business we may have to offer direct access
services to certain destinations at prices significantly below the current
prices charged for call reorigination. In some markets, we may try to maintain
our existing call reorigination customers and attract new customers through the
use of direct access "call-through access methods," including IP telephony.
Call-through access methods provide international long distance service through
conventional long distance on "transparent" call origination. Transparent call
origination allows a call to be automatically processed through a programmed
switch without the usual "hang up" and "call back."
Our overall gross profit margins may fluctuate in the future based on
(1) our mix of minutes sold to other carriers and international long distance
services sold directly to end-user customers and (2) our percentage of calls
using direct access compared to call reorigination. As a result of the foregoing
factors, we may experience materially adverse circumstances that could harm our
business and reduce our common stock price. See "- Expansion by acquisitions,
strategic alliances and other business combinations could adversely impact our
operating results," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
POLITICAL, ECONOMIC AND LEGAL RISKS IN EMERGING MARKETS COULD MATERIALLY AND
ADVERSELY EFFECT OUR OPERATIONS.
For the fiscal year ended March 31, 1998 and the nine months ended
December 31, 1998, we derived approximately 79% and 63%, respectively, of our
revenues from operations in emerging markets. Our business is subject to
numerous risks and uncertainties, including political, economic and legal risk
in these markets. These risks include:
o unexpected changes in regulatory requirements and
telecommunication standards
o tariffs, customs, duties and other trade barriers
o technology export and import restrictions or prohibitions
o delays from customs brokers or government agencies
o seasonal reductions in business activity
o difficulties in staffing and managing foreign operations
o problems in collecting accounts receivable
o foreign exchange controls which restrict or prohibit repatriation
of funds
o potentially adverse tax consequences resulting from operating in
multiple jurisdictions with different tax laws
o the sensitivity of our revenues and cost of long distance
services to changes in the ratios between outgoing and incoming
traffic, and our ability to obtain international transmission
facilities
POLITICAL RISK
The political systems of many of the emerging market countries in
which we operate or plan 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. Expropriation can occur by an outright
taking or by confiscatory taxes or other policies. Our operations could be
materially and adversely impacted by these factors.
LEGAL RISK
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, we cannot assure you
that we can protect and enforce our rights in emerging market countries. If
cannot protect our rights, it may have a material adverse effect upon our
operations. Additionally, we operate in uncertain regulatory environments. The
laws and regulations applicable to our activities in emerging market countries
are in general, new, in some cases, incomplete, and subject to arbitrary change.
The local laws and regulations may not become stable in the future and any
changes could harm our business, financial condition or results of operations.
WE FACE COMPETITORS WITH GREATER RESOURCES IN MARKETS WITH LOW BARRIERS TO
ENTRY.
Many current or potential competitors have substantially greater
financial, marketing and other resources than us. If our competitors devote
significant additional resources to targeting our customer base in our
geographic markets, then our business, financial condition and results of
operations could be harmed.
The call reorigination business has minimal capital requirements.
Regulatory limitations are usually the most significant barrier to entry. We
anticipate that the markets in which we operate or plan to operate will continue
to deregulate. Competitors with greater resources than us could enter these
markets and acquire our customers. We may have to (1) reduce our prices to
maintain our customer base, (2) increase our investments in telecommunications
infrastructure and (3) increase marketing expenditures to address the increased
competition. Competition could increase our operating costs in these markets and
adversely impact our business.
We offer or intend to offer new services or services that have
previously been provided only by the incumbent telecommunications operators
("ITOS"). The ITO is the dominant carrier and is often government owned or
protected. We may be unable to react to any significant international long
distance rate reductions imposed by ITOs to counter external competitive
threats. We may also be unable to increase our traffic volume or reduce our
operating costs sufficiently to offset any resulting rate decreases. This may
negatively impact our business and profitability.
Our other competition and potential competition includes:
o various independent providers similar to us in size and resources
o to a lesser extent, major international carriers and their global
alliances.
o cable television companies
o wireless telephone companies
o Internet access providers
o large-end users which have dedicated circuits or private
networks.
We cannot assure you that we will be able to compete successfully against new or
existing competitors. See "Increased competition and deregulation may lead to
lower profits."
RAPID CHANGES IN TECHNOLOGY AND CUSTOMER REQUIREMENTS COULD PLACE US AT A
COMPETITIVE DISADVANTAGE.
Rapid and significant technological advancements and introductions of
new technological products and services characterize our industry. As new
technologies develop, we may be placed at a competitive disadvantage.
Competitive pressures may force us to implement new technologies at substantial
cost. In addition, competitors may implement new technologies before we do or
provide enhanced services at more competitive costs. We may not be able to
implement technologies on a timely basis or at an acceptable cost. One or more
of the technologies we currently use or implement in the future, may not be
preferred by customers or may become obsolete. If we cannot (1) respond to
competitive pressures, (2) implement new technologies on a timely basis, or (3)
offer new or enhanced services, then our business, financial condition and
results of operations could be harmed. See "Increased competition and
deregulation may lead to lower profits," and "We face competitors with greater
resources in markets with low barriers to entry."
A NETWORK FAILURE THAT INTERRUPTS OPERATIONS COULD HAVE A MATERIAL ADVERSE
EFFECT ON US.
Our success largely depends upon our ability to deliver high quality,
uninterrupted telecommunication services. We must protect our software and
hardware from loss and damage. A systems or hardware failure that interrupts our
operations could have a material adverse effect on our business. We currently
operate two switching operations, located in Tampa and Sunrise, Florida.
Physical damage to the switch facility could not be remedied by using other
facilities in a different location. This could have a material adverse effect on
our operations.
As we expand and call traffic grows, there will be increased stress on
our hardware, circuit capacity and traffic management systems. Our operations
also require us to successfully expand and integrate new and emerging
technologies and equipment. This may also increase the risk of system failure
and result in further strains. We cannot guarantee that system failures will not
occur. We attempt 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. We also maintain insurance in commercially reasonable
amounts. However, significant or prolonged system failures, or difficulties for
customers in accessing and maintaining connection would result in uninsurable
damage. Damage may include: harm to our reputation, attrition and financial
loss.
OUR EXPOSURE TO CREDIT RISK AND BAD DEBTS WILL INCREASE AS WE GROW.
As we expand our business and move into new territories our exposure
to credit risk will increase. Many of the foreign countries that we operate in
do not have established credit bureaus. This makes it more difficult to
determine the creditworthiness of potential customers and agents. Under our
exclusive agency arrangements, the agent is responsible for analyzing the
creditworthiness of the customer and assuming the credit risk. We believe that
this minimizes our direct credit risk, and our bad debt expenses have
historically been minimal. However, in certain circumstances we have supported
our agency relationships by bearing some credit losses. In addition, the agent,
and not the ultimate user of our services, is responsible for payment to us. We
cannot assure you that our bad debt expense will not rise significantly above
historic or anticipated levels. Our experience indicates that a certain portion
of past due receivables will never be collected and that bad debt is a necessary
cost of conducting business in the telecommunications industry. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
OUR ABILITY TO MANAGE AND RESPOND TO GROWTH WILL BE CRITICAL FOR SUCCESS.
Recently, we have experienced significant growth. Our ability to
manage and respond to growth will be critical to our success. Interruptions of
or a decline in the quality of our services because of expansion difficulties or
an inability to effectively manage expanding operations could materially harm
our business. We plan to grow by expanding our service offerings in deregulating
markets in Africa, the Middle East, Latin America and targeted areas of Asia,
Europe and Russia. We anticipate that future growth will depend on a number of
factors, including (1) the effective and timely development of customer
relationships, (2) the ability to enter new markets and expand in existing
markets, and (3) the recruitment, motivation and retention of qualified agents.
Our continued growth requires greater management, operational and financial
resources. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."
As we grow, we may have difficulty accurately forecasting our
telecommunications traffic. Inaccurate forecasts may cause us to:
o make investments in insufficient or excessive transmission
facilities
o incur disproportionate fixed expenses
o force us to route excessive overflow traffic to other carriers
where the quality of services may not be commensurate with the
transmission quality we provide
We cannot assure you that we can add services or expand our geographic
markets. Existing regulatory barriers to our current or future operations may
not be reduced or eliminated. Even if we add services or expand into new
markets, our administrative, operational, infrastructure and financial resources
and systems may not sustain our growth and success. See "Rapid changes in
technology and customer requirements could place us at a competitive
disadvantage."
EXPANSION BY ACQUISITIONS, STRATEGIC ALLIANCES AND OTHER BUSINESS COMBINATIONS
ADVERSELY IMPACT OUR OPERATING RESULTS.
We plan to reduce our exposure to risks associated with the use of
exclusive independent agents in existing and new markets by entering into
acquisitions, joint ventures, strategic alliances and other types of business
combinations with agents and other strategic partners the complement our
business. If our investments in or alliances with third parties do not result in
a controlling interest or are nonexclusive arrangements, we may be subject to
additional business and operating risks that we cannot control. In addition, we
may face the following risks with any business combination:
o the difficulty of identifying appropriate acquisition candidates
or partners
o the difficulty of assimilating the operations of the respective
entities
o the potential disruption of our ongoing business
o possible costs associated with the development and integration of
such operations
o the potential inability to maximize our financial and strategic
position by successfully incorporating licensed or acquired
technology into our service offerings
o the failure to maintain uniform standards, controls, procedures
and policies
o the impairment of relationships with employees, customers and
agents as a result of changes in management
o higher customer attrition with respect to customers obtained
through acquisitions
o diversion of management resources
o difficulty in obtaining any required regulatory approvals
o increased foreign exchange risk
o risks associated with entering new markets
Additionally, business combinations may not:
o result in increased sales or an expanded customer base
o give us a presence in new territories
o allow us to effectively penetrate our target markets
We may not be successful in overcoming these risks or any other
problems encountered with business combinations. Our acquisitions could also
involve issuances of our equity securities, which could dilute the value of
shares already issued and create significant transaction expenses. This could
have a material adverse effect on our operating results.
We have not entered into any investments or alliances, except with (1)
respect to Ursus Telecom France, (2) our Uruguayan Agent for the purchase of all
of its assets, and (3) our Argentine Agent for the purchase of all of its
assets. See "Business-Purchase of Uruguayan Agency," "Business - Acquisition of
Access Authority, Inc." and "Business-Purchase of Argentine Agency."
TERMINATION OF SALE ARRANGEMENTS OR OPERATING AGREEMENTS WITH CARRIERS COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We obtain most of our transmission capacity under volume-based resale
arrangements with facilities-based and other carriers, including ITOs. Two
carriers provide the majority of our transmission capacity. Under these
arrangements, we are subject to the risk of unanticipated price fluctuations,
service restrictions and cancellations. With the exception of the Bahamas, we
have not experienced sudden or unanticipated price fluctuations, service
restrictions or cancellations. We believe that our relationships with our
carriers are generally satisfactory. However, the deterioration or termination
of our arrangements, or our inability to enter into new arrangements with one or
more of carriers, could have a material adverse effect upon our cost structure,
service quality, network coverage, results of operations and financial
condition.
Our growth strategy in new markets is based to some extent on our
ability to enter into "operating agreements" with domestic and foreign carriers.
Operating agreements typically provide 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 from, the international long distance
providers' respective countries at a negotiated per minute rate. This is also
called the "accounting rate." Operating agreements can be terminated on short
notice. Deregulation of telephone communications in many countries or a
significant reduction in outgoing traffic carried by us, could cause foreign
partners to decide to terminate their operating agreements, or could cause the
operating agreements to have substantially less value to us. Termination of
operating agreements could have a material adverse effect on our business,
results of operations and financial condition.
WE RELY ON UNPATENTED TECHNOLOGY.
We rely on unpatented proprietary know-how and continuing
technological advancements to maintain our competitive position. A failure to
protect our rights to unpatented trade secrets and know-how could negatively
impact our business. We have entered into confidentiality and invention
agreements with certain of our employees and consultants. However, we cannot
assure you that the agreements will be honored or that we will be able to
effectively protect our rights to our unpatented trade secrets and know-how. We
cannot assure you that our competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets and know-how. See "Business--The Network" and
"Business--Management Information Systems."
We have not registered or trademarked "Ursus" and our logo in any
jurisdiction. We are filing registrations of our name and logo in the United
States. We may not obtain adequate trademark, service mark or similar protection
of our name and logo.
GOVERNMENT REGULATION--ENFORCEMENT AND INTERPRETATION OF TELECOMMUNICATION LAWS
AND REGULATIONS IS UNPREDICTABLE AND SUBJECT TO CHANGE.
Our business may be harmed if we do not obtain or retain the necessary
governmental approvals for our services and transmission methods. Regulatory
compliance problems could adversely impact our business. Our interstate and
international facilities-based and resale services are regulated by the Federal
Communications Commission ("FCC"). Regulations promulgated by the FCC could
change. In addition, 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 in each country. In some cases, government
officials and ministries may be influenced by ITOs.
We may be presented with the following potential risks and problems:
o In some countries, we may need government approval to provide
international telecommunications service that will compete with
state-authorized carriers.
o Our operations may be affected by increased regulatory
requirements in a foreign jurisdiction.
o Transit agreements or arrangements, may be affected by laws or
regulations in either the transited or terminating foreign
jurisdiction.
o Future regulatory, judicial, legislative or political changes
could prohibit us from offering services.
o Regulators or third parties could raise material questions about
our compliance with applicable laws or regulations.
We have pursued, and expect to continue to pursue, a strategy of
providing our services to the maximum extent we believe 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, our
aggressive strategy may result in our (1) providing services or using
transmission methods that are found to violate local laws or regulations or (2)
failing to obtain required approvals in violation of local laws and regulations.
If we believe we will be subject to enforcement actions by the FCC or the local
authority, we will seek to modify our operations or discontinue operations to
comply with laws and regulations. However, even if violations are corrected, we
may be subject to fines, penalties or other sanctions. If our interpretation of
applicable laws and regulations proves incorrect, we could lose, or be unable to
obtain, regulatory approvals necessary to provide certain of our services or to
use certain of our transmission methods. We could also have substantial monetary
fines and penalties imposed against us.
We also face the following specific regulatory risks:
RESTRICTION OF CALL REORIGINATION BY CERTAIN COUNTRIES MAY PREVENT US
fROM PROVIDING SERVICES.
Call reorigination generated approximately 76% of our revenues during
the fiscal year ended March 31, 1998 and 78% for the nine months ended December
31, 1998. Some countries restrict or prohibit call reorigination. A substantial
number of countries have prohibited certain forms of call reorigination. These
prohibitions have caused us to stop providing call reorigination services in the
Bahamas and may require us 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 stating
that the laws of 79 countries prohibit call reorigination.
If a foreign jurisdiction expressly prohibits call reorigination using
uncompleted call signaling, and has attempted but failed to enforce its laws
against U.S. service providers, the FCC may require U.S. carriers to stop
providing call reorigination services. In extreme circumstances, the FCC may
revoke the U.S. carrier's authorization. To date, the FCC has ordered carriers
to cease providing call reorigination using uncompleted call signaling to
customers in the Philippines. It is expected that the FCC will also take this
action with respect to carriers in Saudi Arabia. Except as we discuss in this
prospectus, we have not been notified by any regulator or government agency that
we are not in compliance with applicable regulations. See "Business-Government
Regulation."
THE PROVISION OF CALL ORIGINATION IN SOUTH AFRICA WITHOUT A LICENSE
MAY VIOLATE TELECOMMUNICATIONS ACT OF 1996.
For the fiscal year ended March 31, 1998, South Africa comprised our
most significant single market and accounted for approximately 29% of our total
revenues. In South Africa, our agent's provision of certain services will be,
and its 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, who is issued
a telecommunications license, to provide services other than public switched
services. We believe that our agent may provide call reorigination services to
customers in South Africa without a license. However, 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 our 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. If our agent is found to be providing
telecommunications service without a required license, it could be subject to
(1) fines, (2) termination of its call reorigination service to customers in
South Africa and (3) possible denial of license applications to provide
services. We cannot guarantee that the courts in South Africa will not rule that
call reorigination is illegal, or that the South African legislature will not
promulgate an explicit prohibition on call reorigination. Any adverse legal
action could harm our business.
THE FCC MAY LIMIT REFILING.
The FCC is currently considering a 1995 request (the "1995 Request")
to limit or prohibit the practice where a carrier routes traffic originating
from Country A and destined for Country B through its facilities in Country C.
The FCC has permitted third country calling where all countries involved consent
to the routing arrangements. This is called "transiting." Under certain
arrangements referred to as "refiling," the carrier in Country B does not
consent to receiving traffic from Country A and does not realize the traffic it
receives from Country C is originating from Country A. While our revenues
attributable to refiling arrangements are minimal, refiling may constitute more
of our operations in the future. The FCC has not stated whether refiling
arrangements are inconsistent with U.S. or International Telecommunications
Union ("ITU") regulations. If the FCC determines that refiling violates U.S.
and/or international law, it could negatively impact our future operations.
WE COULD FACE PENALTIES IF WE VIOLATE THE FCC'S INTERNATIONAL
SETTLEMENTS POLICY.
We are also required to conduct our 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 for the
termination of traffic over each respective network. Several of our arrangements
with foreign carriers are subject to the ISP. The FCC could take the view that
one or more of these arrangements do not comply with the existing ISP rules. A
traffic arrangement that does not comply with the ISP may need FCC approval. If
the FCC, on its own initiative or in response to a challenge filed by a third
party, determines that our foreign carrier arrangements do not comply with FCC
rules, it may (1) issue a cease and desist order, (2) impose fines or, (3) in
extreme circumstances, revoke or suspend our FCC authorizations. This could have
a material adverse effect on our business, financial condition and results of
operations.
WE COULD FACE PENALTIES IF WE VIOLATE THE FCC'S TARIFF REQUIREMENTS
FOR INTERNATIONAL LONG DISTANCE SERVICES.
We are required to file with the FCC a tariff containing the rates,
terms and conditions for our international telecommunications services. We are
also required to file with the FCC any agreements with customers that have
rates, terms, or conditions are different from our tariff. The FCC or a third
party could bring an action against us if we (1) charge rates other than those
set forth our tariff or a customer agreement filed with the FCC, (2) violate our
tariff or filed customer agreement or (3) fail to file with the FCC
carrier-to-carrier agreements Any actions could result in fines, judgments or
penalties and could have a material adverse impact on our business.
RECENT AND POTENTIAL FCC ACTIONS MAY HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS.
Regulatory action that has been and may be taken in the future by the
FCC may enhance the intense competition faced by Ursus. The FCC has established
lower ceilings for the rates that U.S. carriers will pay foreign carriers for
the termination of international services. The FCC also recently changed its
rules to implement a World Trade Organization agreement, which in part allows
U.S. carriers to accept certain exclusive arrangements with certain foreign
carriers. The implementation of these changes could have a material adverse
effect on our business, financial condition and results of operations.
WE COULD FACE PENALTIES IF WE VIOLATE U.S. DOMESTIC LONG DISTANCE
SERVICE REGULATIONS.
Our ability to provide domestic long distance service in the United
States is regulated by the FCC and state Public Service Commissions ("PSCs").
The FCC and PSCs regulate interstate and intrastate rates, respectively,
ownership of transmission facilities, and the terms and conditions under which
our domestic U.S. services are provided. In general, neither the FCC nor the
relevant state PSCs exercise direct oversight over prices charged for our
services or our profit levels. However, either or both may do so in the future.
Federal and state law and regulations require that we file tariffs listing the
rates, terms and conditions of services provided. Any failure to (1) maintain
proper federal and state tariffs or certifications, (2) file required reports,
or (3) any difficulties or delays in obtaining required authorizations, could
have a material adverse effect on our business. 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, we may be subject to fines and penalties.
POSSIBLE FCC REGULATIONS MAY PUT US AT A COST DISADVANTAGE.
Long distance carriers, such as Ursus, may have to purchase access
services from local exchange carriers ("LECs") to originate and terminate calls
in connection their services. Access charges represent a significant portion of
our cost of U.S. domestic long distance services. Generally, access charges are
regulated by the FCC for interstate services and by PSCs for intrastate
services. The FCC is reviewing its regulation of LEC access charges to better
account for increasing levels of local competition. If these proposed rate
structures are adopted, we could be placed at a significant cost disadvantage
compared to larger competitors.
The FCC has also adopted certain measures to implement the 1996
Telecommunications Act that will impose new regulatory requirements. One
requirement is the contribution of some portion of telecommunications revenues
to a universal service fund designated to fund affordable telephone service for
consumers, schools, libraries and rural healthcare providers. These
contributions became payable beginning in 1998 for all interexchange carriers
but not for providers of solely international services. We are a provider of
international services, and are therefore, generally not subject to the
contribution requirements. However, with the acquisition of Access, some of our
business is subject to the contribution requirements at a rate of approximately
$10,000 per month.
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. On January 28, 1999, the U.S. Court of
Appeals for the D.C. Circuit agreed with the ruling, but reduced the rate to
$.24 per call. As this ruling applies only to domestic payphones, our costs are
not significant.
FCC APPROVAL FOR TRANSFERS OF CONTROL COULD DELAY OR PREVENT CHARGES
OF CONTROL.
The FCC and certain state agencies must approve transfers of control.
Transfers of control include pro forma transfers of control, without public
notice, corporate reorganizations, and assignments of regulatory authorizations.
The approval requirements may delay, prevent or deter a change in control or an
acquisition of another company. The FCC also imposes certain restrictions on
U.S.-licensed telecommunications companies that are affiliated with foreign
telecommunications carriers. The FCC could restrict our ability to provide
service on certain international routes if we (1) become controlled by or under
common control with a foreign telecommunications carrier, or (2) obtain a
greater than 25% interest in or control over a foreign telecommunications
carrier.
ACTIONS BY BATELCO BLOCK OUR ABILITY TO SERVICE BAHAMIAN CUSTOMERS.
We entered into an operating agreement with the Bahamas Telephone
Company ("Batelco") to provide international telecommunications services to
customers in the Bahamas. Recently, Batelco has taken several actions designed
to block our ability to offer services to customers in the Bahamas. We believe
Batelco's actions violate the terms of our operating agreement and are
inconsistent with U.S. policy. We are working with the U.S. government,
including the U.S. Embassy in the Bahamas and the FCC to restore our circuits to
full capacity. If Batelco is permitted to block our provision of service to
customers in the Bahamas, either permanently or over a protracted time period,
it may materially impact our business. For the fiscal year ended March 31, 1998,
we derived approximately 4.9% of our revenues from services we provided in the
Bahamas, as compared to 5.6% for the fiscal year ended March 31, 1997.
FRAUD LOSS COULD MATERIALLY HARM OUR BUSINESS.
The telecommunications industry has historically been exposed to fraud
losses. We have implemented anti-fraud measures. In order to minimize losses
relating to fraudulent practices we (1) enter into employment agreements with
our employees, (2) limit and monitor access to our information systems and (3)
monitor use of our services. A failure to control fraud could materially harm
our business, financial condition and results of operations. Fraud has
historically been a more significant problem for large providers of
telecommunications services than it has for us, because our few employees and
switching facilities are relatively easier to monitor than those of the large
providers. As we continue to grow, our exposure to fraud losses will increase.
WE MAY HAVE DIFFICULTY ENHANCING OUR SYSTEMS OR INTEGRATING NEW TECHNOLOGY INTO
IT.
We believe our information systems are sufficient for our current
operations. However, our systems will require enhancements, replacements and
additional investments to continue their effectiveness and enable us to manage
an expanded Network. We may have difficulty enhancing our systems or integrating
new technology into them. If we are unable to implement any required system
enhancement, acquire new systems or integrate new technology in a timely and
cost effective manner, it could have a material adverse effect on our business,
financial condition and results of operations. See "Business-- Management
Information Systems."
THE LOSS OF KEY PERSONNEL COULD ADVERSELY EFFECT OUR BUSINESS.
We depend on the efforts of our senior officers and on our ability to
hire and retain qualified management personnel. The loss of any key personnel
could materially and adversely effect our business and our future prospects. We
have entered into employment agreements with certain of our senior officers. We
have obtained key person life insurance, of which we are the beneficiary, on the
lives of each of Messrs. Giussani and Chaskin in the amount of $2 million. Our
future success will depend on our ability to attract and retain key personnel to
help us with the growth and development of our business. See "Management."
FOREIGN EXCHANGE RATE RISKS THAT ARE NOT OFFSET COULD HARM OUR BUSINESS.
We bill primarily in United States Dollars and are generally 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 our operations have been, and will continue to be,
denominated in United States Dollars. Both increases and decreases in the United
States Dollar create risks for us that could harm our business. For example, if
the United States Dollar appreciates relative to the local currency, our
services will grow more expensive relative to our competitors, such as the ITOs,
that use the local currency. Any depreciation of the value of the United States
Dollar relative to the local currency increases the cost of our capital
expenditures made in the local currency.
Our focus on emerging markets increases the risks that currency
fluctuations pose. Currency speculation and fluctuation could impact our
operations in Latin America, South Africa, the Middle East or our other emerging
markets. We monitor exposure to currency fluctuations, and may, as appropriate,
use certain financial hedging instruments in the future. However, we cannot
assure you that the use of financial hedging instruments will successfully
offset exchange rate risks, or that such currency fluctuations will not harm our
business and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
WE MAY NOT BE ABLE TO RAISE ADDITIONAL MONEY IF WE NEED IT.
We believe that the remaining proceeds of the initial public offering,
combined with other existing and anticipated sources of liquidity, will be
sufficient to fund our capital requirements for approximately 12 months. We
could however, require additional capital to implement our growth strategy. If
additional capital is required, we may be unable to raise it. In addition, even
if we can raise the capital, the terms of the financing may not be favorable to
us or could dilute the common stock you purchase in the Offering. We 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources."
LEGAL PROCEEDINGS INVOLVING OUR CHIEF EXECUTIVE OFFICER.
Mr. Luca Giussani, our president and chief executive officer, was the
subject of a criminal proceeding in Italy under Italian law. This proceeding 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 for consulting services which it is alleged he did not perform. It
was alleged that the invoice was used to disguise an lawful political
contribution made by that corporation. Mr. Giussani was not charged with making
an unlawful political contribution. Rather, it was 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 and on February 19, 1999, the
investigating magistrates decided not to refile charges against Mr. Giussani
having determined that he had not committed improper conduct. There is currently
no criminal proceeding pending against Mr. Giussani. See "Management-Certain
Legal Proceedings."
WE MAY FACE AN INCREASED RISK OF VIOLATING THE FOREIGN CORRUPT PRACTICES ACT AS
WE FOCUS ON EMERGING MARKETS.
As a result of the initial public offering, we must comply with the
Foreign Corrupt Practices Act ("FCPA"). The FCPA generally prohibits U.S.
companies and their intermediaries from bribing foreign officials for the
purpose of obtaining or keeping business. We may be exposed to liability under
the FCPA as a result of past or future actions taken without our knowledge by
agents, strategic partners or other intermediaries. Violations of the FCPA may
also call into question the credibility and integrity of our financial reporting
systems. Our focus on certain emerging markets may tend to increase this risk.
Liability under the FCPA could have a material adverse effect on our business.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS COULD MATERIALLY IMPACT
OUR STOCK PRICE.
Our quarterly operating results have fluctuated and may continue to
fluctuate due to various factors. The factors include the following:
o the timing of investments
o general economic conditions
o specific economic conditions in the telecommunications industry
o the effects of governmental regulation and regulatory changes
o user demands
o capital expenditures
o costs relating to the expansion of operations
o the introduction of new services by us or our competitors,
o the mix of services sold and the mix of channels through which
our services are sold
o changes in prices charged by our competitors.
Variations in our operating results could materially affect the price
of our common stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OUR CONTROLLING SHAREHOLDERS CAN ELECT A MAJORITY OF THE MEMBERS OF THE BOARD OF
DIRECTORS AND APPROVE FUNDAMENTAL CORPORATE TRANSACTIONS.
A group of shareholders (the "Controlling Shareholders") beneficially
own an aggregate of 76.9% of the outstanding shares of our common stock and 100%
of our Series A preferred stock. The Controlling Shareholders can elect a
majority of the board of directors and approve certain fundamental corporate
transactions including mergers, consolidations and sales of assets. As long as
the Controlling Shareholders hold the shares of Ursus, third parties cannot gain
control of Ursus except through purchases of common stock beneficially owned or
otherwise controlled by the Controlling Shareholders.
Owners of the Series A preferred stock have the exclusive right to
elect two (2) of the five (5) members of our board of directors, and one member
less than a numerical majority of any expanded board of directors. The common
stock votes cumulatively for the election of directors. Therefore, the
Controlling Shareholders can elect at least one member of the board of directors
so long as they control at least 33.3% of the outstanding common stock. A
smaller percentage would be required if the size of our board of directors is
expanded. Each of the Controlling Shareholders has advised us 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 by them. However,
we cannot guarantee that any of the Controlling Shareholders will not decide to
sell all or a portion of their holdings at some future date. We also cannot
guarantee that you, as a holder of common stock, will be allowed to participate
in a transfer by any of the Controlling Shareholders of a controlling interest
in the Ursus or that you will realize any premium with respect to your shares of
common stock. See "Offering Risks-Our certificate of incorporation and bylaws
and Florida law contain provisions that could discourage a takeover," "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."
YEAR 2000 PROBLEMS BY OUR CARRIERS AND OTHER THIRD PARTIES HAS NOT BEEN
EVALUATED AND THE IMPACT ON OUR BUSINESS IS STILL UNCERTAIN.
We are currently in the process of evaluating whether we will
encounter any problems related to the Year 2000. The impact of the Year 2000,
which has been widely reported in the media, could cause malfunctions in certain
software and databases that use date sensitive processing relating to the Year
2000 and beyond. We have completed an evaluation of all our systems and found
that most of the computer systems, software and databases which are proprietary
to Ursus are Year 2000 ready. We have also begun to evaluate third party
business entities with which we are engaged in business or for which we provide
services, to determine if there will be any unexpected interruptions. We will
request representations from these third parties as to whether or not they
anticipate any difficulties in addressing Year 2000 problems and, if so, whether
or not we would be adversely affected by any of such problems. Our management
expects to have this process completed by the second quarter of 1999.
We have obtained representations from the manufacturer of the
telephony switches that they are Year 2000 ready. As these switches are critical
to us, they have been tested internally and found to be compliant. Our billing
system will be upgraded to a Year 2000 ready version in the first quarter of
1999 at minimal cost to us. We have received assurances from other software and
equipment manufacturers that their hardware and software are Year 2000 ready.
Our management has determined that costs to correct any problems
encountered with the Year 2000 will be immaterial. However, until such time as
the third parties with which we conduct business respond to us, the full impact
of the Year 2000 is not known. As a result the impact on the our business,
results of operations and financial condition cannot be assessed with certainty.
<PAGE>
OFFERING RISKS
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock may fluctuate for reasons that
are unrelated to our operating performance. In particular, the price of our
common stock may be affected by general market price movements as well as
developments specifically related to the telecommunications industry. These
developments include: announcements concerning Ursus or our competitors,
technological innovations, government regulations, and litigation concerning
proprietary rights or other matters.
SHARES AVAILABLE FOR FUTURE SALE MAY IMPACT OUR STOCK PRICE AND OUR ABILITY TO
RAISE OTHER CAPITAL.
Future sales of a substantial number of shares of common stock, or the
perception that sales could occur, could have a material adverse effect on the
prevailing market price of the common stock. This could also impair our future
ability to raise capital through an offering of our equity or convertible
securities.
The 1,500,000 shares of common stock that were sold in the initial
public offering are freely tradable by persons other than "affiliates" of Ursus
without restriction under the Securities Act. The term "affiliates" is defined
in Rule 144 of 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. Rule 144 allows
affiliates to resell such securities after satisfying a two-year holding period
and subject to the foregoing volume limitations. The Controlling 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
Controlling 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
month period following the initial public offering, without the prior written
consent of Joseph Charles & Associates, Inc. However, upon expiration of these
agreements, the Controlling Shareholders will be free to sell any common stock
held by them, subject to the rules and regulations promulgated under the
Securities Act. We have also registered 1,000,000 shares of common stock
reserved for issuance pursuant to our stock option plan, including options to
purchase 737,500 shares at the Option Prices. See "Management-Stock Incentive
Plan" and "Shares Eligible for Future Sale."
OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND FLORIDA LAW CONTAIN PROVISIONS
THAT COULD DISCOURAGE A TAKEOVER.
Certain provisions of our Amended and Restated Articles of
Incorporation and Bylaws and Florida law could delay or frustrate the removal of
incumbent directors. These provisions could also make a merger, tender offer or
proxy contest involving Ursus difficult. The provisions include:
o the Amended and Restated Articles of Incorporation permit
cumulative voting for directors.
o the Amended and Restated Articles of Incorporation require a
66.66% vote of shareholders to amend certain provisions of the
Amended and Restated Articles of Incorporation.
o the Amended and Restated Articles of Incorporation provide for a
staggered board of directors.
o the owners of 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.
o 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 "Business Risks - Our controlling
shareholders can elect of majority of the members of the board of directors and
approve fundamental corporate transactions."
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE.
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." Forward-looking statements involve known and unknown risks,
uncertainties and other factors and may prove inaccurate. The factors that may
cause forward-looking statement to prove inaccurate include, among others, the
following:
o general economic and business conditions
o prospects for the international long distance telecommunications
industry
o competition
o changes in business strategy or development plans
o the loss of key personnel
o the availability of capital
o 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"
You should not place undue reliance on such forward-looking
statements. We disclaim any obligation to update any of these 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.
<PAGE>
USE OF PROCEEDS
This prospectus relates to Shares being offered and sold for the
accounts of the Registering Stockholders. We will not receive any of the
proceeds from the sale of the Shares offered by the Registering Stockholders. We
will pay for certain expenses related to the registration of the Shares. See
"Registering Stockholders" and "Plan of Distribution."
CAPITALIZATION
The following table shows the capitalization of Ursus as of December
31, 1998. This table should be read in conjunction with our consolidated
financial statements and notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized;
<S> <C>
1,000 shares issued and outstanding $10
Common stock, $.01 par value; 20,000,000 shares authorized,
6,500,000 issued and outstanding (1) 65,000
Additional paid-in capital 11,914,843
Translation adjustment (9,455)
Retained earnings 2,853,193
----------------
Total shareholders' equity $14,842,501
================
- -----------------
(1) Excludes 627,000 shares of common stock subject to options granted upon
commencement of the initial public offering and 110,500 shares of common
stock subject to options granted subsequent to the initial public offering.
See "Management-Stock Incentive Plan."
</TABLE>
<PAGE>
DIVIDEND POLICY
We have not paid any cash dividends to our shareholders since
inception and do not anticipate paying any cash dividends in the foreseeable
future. Any determination to pay dividends will depend on our 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."
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock began trading on the Nasdaq on May 13, 1998 under the
symbol "UTCC." Prior to such date, no public market for our common stock
existed. The following table sets forth, for the periods indicated the high, low
and closing bids per share of common stock as reported by Nasdaq.
<TABLE>
<CAPTION>
STOCK PRICES
HIGH LOW CLOSE
---- --- -----
1998 Fiscal Year
<S> <C> <C> <C>
First Quarter (commencing May 13) ended June 30, 1998 $11.75 $8.3125 $8.50
Second Quarter ended September 30, 1998 $8.875 $3.4375 $5.625
Third Quarter ended December 31, 1998 $5.625 $2.625 $2.875
</TABLE>
The above quotations represent inter-dealer prices without retail
markups, markdowns or commissions and may not necessarily represent actual
transactions.
On March 31, 1999, the closing sales price for the common stock on the
Nasdaq was $4.5625 per share. As of March 31, 1999, we had 6,600,000 shares of
common stock issued and outstanding.
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial information
for (i) the fiscal years ended March 31, 1995, 1996, 1997 and 1998, which have
been derived from our audited financial statements and notes thereto included
elsewhere in this prospectus, (ii) the fiscal year ended March 31, 1994 which
has been derived from our unaudited financial statements which are not included
herein) (iii) the nine months ended December 31, 1997 and 1998, which have been
derived from our unaudited financial statements included herein) and (iv) our
unaudited pro forma information for the year ended March 31, 1998 and the nine
months ended December 31, 1998 giving pro forma effect to the acquisition of
Access. Such pro forma data are presented for illustrative purposes only and do
purport to represent what our results actually would have been had the
acquisition occurred at the dates indicated, nor does it purport to project the
results of operations for any future period. The information for EBITDA is not
audited. In the opinion of our 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 following financial information should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and notes thereto
appearing elsewhere herein.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
------------------- -----------------------
Proforma Proforma
1994 1995 1996 1997 1998 1998 1997 1998 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands, except for per share and other operating data)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $848 $6,291 $13,228 $20,838 $28,098 $75,652 $21,029 $24,342 $41,743
Gross profit 344 2,544 5,553 8,643 9,565 23,116 7,240 8,675 12,530
Operating income (loss) (814) 159 1,369 2,004 1,720 2,264 1,414 277 (992)
Net income (loss) (813) 382 790 1,253 1,074 1,867 890 168 (231)
Pro forma net income (loss) per
share -basic and dilutive (1)
(Historical for the period ended
December 31, 1998) (.18) .08 .16 .25 .21 .38 .18 .03 (.05)
the period ended
Pro forma weighted average shares
outstanding (1) 4,615 4,869 5,000 5,000 5,000 5,000 5,000 6,199 6,199
OTHER FINANCIAL DATA:
EBITDA (2) (771) 231 1,463 2,140 1,927 3,436 1,558 843 264
Net cash provided by (used in)
operating activities (497) 229 672 858 1,545 - 638 (1,216) -
Net cash (used in) investing
activities (338) (173) (222) (439) (301) - (171) (8,483) -
Net cash (used in) provided by
financing activities 995 (40) (150) (155) (944) - (529) 12,169 -
Capital expenditures 330 143 93 352 487 - 321 527 -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
As of
As of March 31, DECEMBER 31,
------------------------------------------------ ----------------------
BALANCE SHEET DATA 1994 1995 1996 1997 1998 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total current assets $381 $1,273 $2,363 $4,566 $5,502 $9,193
Working capital (deficiency) (129) 150 811 1,646 1,092 2,653
Total assets 683 1,720 2,797 5,243 7,733 22,387
Total current liabilities 510 1,122 1,552 2,920 4,410 6,540
Long term debt, less current portion 729 730 580 425 297 836
Total shareholders' equity (deficit) (563) (162) 609 1,861 2,948 14,843
-----------
(1) Pro forma net income (loss) per common share -basic and dilutive is
computed based on the pro forma weighted average number of common shares
outstanding during each period and gives retroactive effect to the stock
split and recapitalization. See Note 2 to Consolidated Financial
Statements.
(2) 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
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE
RELATED NOTES AND OTHER INFORMATION 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
We are a provider of international telecommunications services. We
offer 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. Our primary service is call reorigination, which accounted for
approximately 76% of our revenues for the fiscal year ended March 31, 1998 and
approximately 78% for the nine months ended December 31, 1998. We also sell
services to other carriers and resellers on a wholesale basis. Our retail
customer base, which includes corporations and individuals, is primarily located
in South Africa, Latin America, the Middle East (Lebanon and Egypt), Russia,
Germany, France and Japan. We operate a switched-based digital
telecommunications network. We installed our first switch in Sunrise, Florida,
which became fully operational in October 1993. We first earned revenues in
November 1993. We installed an additional switch in Paris, France during the
quarter ended March 31, 1998, which became operational on March 1, 1998. On
September 17, 1998, as described below, we acquired Access. This acquisition
added a switching operation in Tampa, Florida and effectively tripled the number
of minutes going through our switches. From November 1993 until the current
time, we have grown by marketing our services through a worldwide network of
independent agents which now service in the aggregate approximately 93,000
registered subscribers as of December 31, 1998. Usage of our services has
increased from 552,374 minutes in the fiscal year ended March 31, 1994 to
31,732,805 minutes in the fiscal year ended March 31, 1998. For the nine months
ended December 31, 1998 usage was 44,835,301 minutes compared to 22,787,792
minutes for the same period of 1997.
On September 17, 1998, we purchased all the issued and outstanding
common stock of Access for $8 million in cash. Access provides international
long distance telecommunication services, including call reorigination, domestic
toll-free access and various value-added features to small and medium sized
businesses 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.
We have accounted for the Access acquisition using the purchase
method. Accordingly, the results of operations of Access are included in our
consolidated results as of September 17, 1998, the date of acquisition. Under
the purchase method of accounting, we have allocated the purchase price to
assets and liabilities acquired based upon their estimated fair values.
We utilized certain net proceeds of our 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 our initial public offering
remain.
Our management believes that the funds raised by the initial public
offering has and will allow us to expand our customer base and the number of
markets we penetrate by:
o acquiring competitors using a portion of the proceeds of the
initial public offering as the equity component of the purchase
price for strategic acquisitions, and using debt as the other
component of the purchase price. We believe such leveraged
acquisitions would add additional annual revenues to our
business. Deregulation and increased competition in the
telecommunications industry have created a strong motivation to
gain market share rapidly in selective markets through
acquisitions.
o acquiring equity interests in our exclusive agents in selected
markets to further cement the contractual relationships with
these agents and to expand our business in markets offering
favorable opportunities and returns.
o 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. We intend 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.
o purchasing telecommunications equipment, including switches,
using financing arrangements in order to expand our wholesale
business and our 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.
REVENUE
The geographic origin of our revenues is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
YEAR ENDED MARCH 31, December 31,
1996 1997 1998 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Africa $1,403,094 $3,899,701 $8,346,025 $6,057,730 $6,063,663
Europe 1,988,030 4,252,104 3,857,504 3,013,155 5,674,097
Latin America 6,337,284 7,265,473 6,523,384 5,050,602 4,498,064
Middle East 2,101,864 3,741,890 4,721,592 3,500,512 3,385,258
Other 1,397,802 1,363,852 1,719,272 1,395,126 1,932,292
United States - 315,407 2,930,547 2,011,988 2,789,524
-------------------------------------------------------------------------------------
$13,228,074 $20,838,427 $28,098,324 $21,029,113 $24,342,899
=====================================================================================
</TABLE>
<PAGE>
Our subscriber base has grown as follows:
AS OF: NUMBER OF SUBSCRIBERS (1)
----- -------------------------
December 31, 1998 93,090
March 31, 1998 30,850
March 31, 1997 15,729
March 31, 1996 9,791
1) Subscribers are defined as the number of users of our network
whether as a direct retail customer or through a wholesaler/reseller.
The number of our independent agents has varied as follows:
AS OF: NUMBER OF INDEPENDENT AGENTS
----- ----------------------------
December 31, 1998 185 (1)
March 31, 1998 14
March 31, 1997 17
March 31, 1996 15
(1) Of which 171 are non-exclusive.
The percentage of retail (minutes sold to retail end users) and
wholesale (minutes sold to other telecommunication carriers and resellers)
revenues has been as follows:
PERIOD ENDED RETAIL WHOLESALE
- ------------ % %
------ ---------
Nine months ended December 31, 1998 66.0% 34.0%
Year Ended March 31, 1998 86.1% 13.9%
Year Ended March 31, 1997 98.5% 1.5%
Year Ended March 31, 1996 100% -
We expect that wholesale revenues will increase in the near term, and
may become a more significant portion of our total revenue. We generate retail
revenues primarily through our independent agents. No single subscriber
represents 1% or more of our revenue. The agency agreements that are exclusive
typically have an initial term of five years with two additional three-year
renewal periods. The four largest independent agents account for approximately
48.2% of our revenue for nine months ended December 31, 1998. Any material
disruption in or termination of these agreements could have a material adverse
effect on our operations.
We believe our retail services are priced below those of the ITOs in
each country in which we offer our services. Prices for telecommunications
services in many of our core markets have declined as a result of deregulation
and increased competition. We believe that worldwide deregulation and increased
competition are likely to continue to reduce our retail revenues per billable
minute. We believe, however, that any decrease in retail revenues per minute
will be at least partially offset by an increase in billable minutes by our
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 our ability to exploit
purchasing discounts based on increased traffic volumes.
COST OF GOOD SOLD AND GROSS MARGIN
The most significant portion of our cost of telecommunications
services are transmission and termination costs, which vary based on the number
of minutes used. We purchase switched minutes from other carriers. We have
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. We have historically been able to arrange
favorable volume purchase arrangements based upon our high usage and excellent
credit history, and these arrangements continue under more recent terminable
agreements.
During the last year, our segment of the international
telecommunications industry has experienced a general tightening of gross
margins due to declining retail and wholesale prices. Our own gross margin
results, particularly for the fiscal year ended March 31, 1998, have reflected
this trend. Factors impacting our lower gross margin compared to earlier periods
include declining retail prices, development of the wholesale business with
lower profit margins (averaging approximately 5% to 20%), and increased
incremental costs associated with our call reorigination customers. The
reduction in retail prices reflects increased competition arising from
deregulation as well as our 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, we
expect 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 our operating results compared to the more immediate revenue reductions
resulting from price discounting. We expect that deregulation and increasing
competition will continue to reduce revenues per minute thereby reducing profit
margins, particularly for our call reorigination business, which results in high
variable costs, including non-billable access costs.
Our cost of providing telecommunications services to customers consist
largely of: (1) variable costs associated with origination, transmission and
termination of voice and data telecommunications services over other carriers'
facilities, and (2) costs associated with owning or leasing and maintaining
switching facilities and circuits. Currently, the variable portion of our cost
of revenue predominates, 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, our existing gross profitability primarily reflects
the difference between revenues and the cost of transmission and termination
over other carrier's facilities. Therefore, we seek to lower the variable
portion of our cost of services by eventually originating, transporting and
terminating a higher portion of our traffic over our own Network or via media
such as the Internet and private data networks, and by increasing our purchasing
power and volume discounts through increasing of the number of minutes we
purchase from other carriers.
We realize higher gross margins from our retail services than from our
growing wholesale services. However, wholesale services provide a source of
additional revenues and add significant minutes originating and terminating on
our Network, enhancing our purchasing power for switched minutes and enabling us
to take advantage of volume discounts.
We seek to reduce our 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 our
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 us 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 our least cost routing choices and capabilities.
Our 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.
We pay commission expense to our network of independent agents. Our
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:
Nine months ended December 31, 1998................................11.5%
Year Ended March 31, 1998..........................................17.3%
Year Ended March 31, 1997..........................................18.4%
Year Ended March 31, 1996..........................................18.4%
Because our contracts with our agents generally are long-term, these
costs remained stable as a percentage of revenue during the past three years.
With the acquisition of Access, we have increased our wholesale business and
therefore have decreased commissions as a percentage of sales. We have not paid
commissions to generate wholesale sales. The aggregate sales commissions paid by
us have increased over the past three years as our business has expanded. We
anticipate 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 our 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. We perform standard due diligence prior to signing
agency agreements and then expend significant time training the agents in our
practices and procedures.
Our general and administrative expenses consist of salaries and
benefits and corporate overhead. Included in salaries through March 31, 1998 is
a bonus of approximately $588,000 paid to two officers of Ursus. These
arrangements have been terminated and replaced with new employment agreements.
In addition, the cost of collecting accounts receivable is minimal. We have
achieved these results because of our 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. Our financial results may reflect higher levels of bad debt losses as our
wholesale and other lines of business expand and as we make equity investments
in our independent agents. We expect that general and administrative expenses
may increase as a percentage of revenues in the near term as we incur additional
costs associated with our development and expansion, expansion of our marketing
and sales organization, and introduction of new telecommunications services.
In addition to efforts to reduce our cost of goods sold by migrating
customers to direct access by deploying IP telephony technology and maximizing
volume discounts, we also actively manage and seek to reduce our selling,
general and administrative expenses. As part of this focus, we use our network
of exclusive independent agents to bear much of the marketing expenses that our
competitors may bear directly. Furthermore, our strategy of using our
competitors' infrastructure to carry our telecommunications traffic also
controls our fixed costs. We aggressively manage our 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 our existing productivity per
employee.
Depreciation and amortization expense consists primarily of the
expenses associated with our investments in equipment and the acquisition of
Access. Depreciation and amortization will continue to increase substantially as
we install additional switches and other fixed facilities. We expect 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.
<PAGE>
SUMMARY OF OPERATING RESULTS
(STATED AS A PERCENTAGE OF REVENUES)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
-------------------- ------------
1996 1997 1998 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues 58.0 58.5 66.0 65.6 64.4
Gross profit 42.0 41.5 34.0 34.4 35.6
Operating expenses:
Commission 18.4 18.1 14.9 15.2 11.5
Selling, general and administrative 12.5 13.2 12.3 11.9 20.7
Depreciation and amortization 0.7 0.6 0.7 0.6 2.3
Total operating expenses 31.6 31.9 27.9 27.7 34.5
Operating income 10.3 9.6 6.1 6.7 1.1
Other (income) expense 0.4 -- (0.1) (0.1) (1.0)
Income before income taxes 9.9 9.6 6.2 6.8 2.1
Income tax expense 4.0 3.5 2.5 2.6 1.4
Net income 6.0 6.0 3.8 4.2 0.7
</TABLE>
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AS COMPARED TO
THE NINE MONTHS ENDED DECEMBER 31, 1997:
REVENUES. Revenues increased $3.3 million (15.8%) from $21.0 million
for the nine months ended December 31,1997 to $24.3 for the nine months ended
December 31, 1998. The revenue increase attributable to the Access acquisition
amounted to $7.0 million for the nine months ended December 31, 1998. Ursus, on
a consolidated basis, had a 22.0 million minute increase over the same period
last year. Access contributed 21.9 million minutes to Ursus on a consolidated
basis since the acquisition on September 17, 1998. Revenue per minute declined
from $0.92 per minute to $0.54 per minute over this period resulting from the
lower per minute rates generated by Access. The decrease in revenue per minute
is consistent with the Ursus' entry into the more mature markets of Germany and
Japan and with an increase of 94.2% in wholesale sales, which traditionally
generate lower revenues per minute.
COST OF REVENUES. Cost of revenues increased $1.9 million (13.6%),
from $13.8 million for the nine months ended December 31, 1997 to $15.7 million
for the nine months ended December 31, 1998. Cost of revenues as a percentage of
sales decreased from 65.6% to 64.4%, This decrease in Ursus' 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 $1.4 million (19.8%) from $7.2
million for the nine months ended December 31, 1997 to $8.7 million for the nine
months ended December 31, 1998. As a percentage of revenue, gross profit
increased 1.2% from 34.4% during the nine months ended December 31, 1997 to
35.6% for the nine months ended December 31, 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 Ursus purchases thereby increasing
the likelihood of further volume based carrier discounts. For the nine months
ended December 31, 1998 as compared to the nine months ended December 31, 1997,
the average cost per minute has decreased 43% or an average of $0.26 per minute.
OPERATING EXPENSES. Operating expenses increased $2.6 million (44.2%)
from $5.8 million for the nine months ended December 31, 1997 to $8.4 million
for the nine months ended December 31, 1998. The increase was due primarily to
the acquisition of Access which added $1.6 million in operating expenses. In
addition, the increase was due to 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 selling, general and administrative expenses increased
8.8% from 11.8% to 20.6%. Ursus has aggressively expanded its personnel and
infrastructure in anticipation of increased traffic and revenues through the
implementation of its acquisition program. Ursus expects that operating expenses
as a percentage of revenue will decrease with the further integration of the
operations of Access and other potential future acquisitions.
Depreciation and amortization expense increased approximately $463,000
(326.9%) from approximately $133,000 for the nine months ended December 31, 1997
to approximately $570,000 for the nine months ended December 31, 1998 as a
result of the expansion of Ursus' 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 $158,000
as compared to no expense for the same period last year.
OPERATING INCOME. Operating income decreased from $1.1 million for the
nine months ended December 31, 1997 to approximately $0.3 million for the nine
months ended December 31, 1998 primarily as a result of a 101.8% increase in
selling, general and administrative expenses and a 326.9% increase in
depreciation.
OTHER INCOME (EXPENSE). Other income increased approximately $226,000
from approximately $13,000 for the nine months ended December 31, 1997 to
approximately $239,000 for the nine months ended December 31, 1998, primarily
because of investment income derived from the invested proceeds of our initial
public offering.
NET INCOME. As a result of all of the foregoing factors, particularly
a 44.2% increase in operating expenses, and in light of Ursus' strategic
decision to increase its gross revenues and market share through price
reductions, Ursus' net income decreased approximately $0.7 million from
approximately $0.9 million for the nine months ended December 31, 1997 to
approximately $0.2 million for the nine months ended December 31, 1998. Net
income has also been impacted by start up losses from Ursus' subsidiary in
France, which amounted to $252,000 for the nine months ended December 31, 1998.
Management believes that Ursus' 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.
YEAR ENDED MARCH 31, 1998 COMPARED TO MARCH 31, 1997
REVENUES. Revenues increased $7.3 million (34.8%) from $20.8 million
in the fiscal year ended March 31, 1997 to $28.1 million in the fiscal year
ended March 31, 1998. The increase in revenues reflects increased billed retail
customer minutes, particularly in the South African and Middle Eastern markets.
In addition, we earned $3.9 million of wholesale revenue in the fiscal year
ended March 31, 1998, as compared to $315,000 in the fiscal year ended March 31,
1997.
COST OF REVENUES. Cost of revenues increased by $6.3 million (52%)
from $12.2 million in the fiscal year ended March 31, 1997 to $18.5 million in
the fiscal year ended March 31, 1998. 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 58.5% to 66%, because selling
prices per minute decreased faster than costs per minute. This increase in our
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 our call reorigination business. As
discussed in "Cost 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, a fact which resulted
in a decline in the gross profit margin in the retail segment of revenues from
41.4% for the fiscal year ended March 31, 1997 to 37.9% for the fiscal year
ended March 31, 1998. Our margins for 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 3.5%.
GROSS PROFITS. Gross profit increased $1 million (10.7%) from $8.6
million in the fiscal year ended March 31, 1997 to $9.6 million in the fiscal
year ended March 31, 1998. As a percentage of revenue, gross profit decreased
7.5% from 41.5% in the fiscal year ended March 31, 1997 to 34.0% in the fiscal
year ended March 31, 1998. Gross profit margin decreased because sales price per
minute decreased faster than cost price per minute, and we began our wholesale
carrier business which operates on much lower gross profit margins of 9.9% as
compared to 37.9% for the retail segment for the fiscal year ended March 31,
1998. The reduction in prices reflects price competition from deregulation as
well as our 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 our wholesale
business, we eventually expect to reduce the rates we pay for switched minutes
through volume discounts and other mechanisms.
OPERATING EXPENSES. Operating expenses increased $1.2 million (18.2%)
from $6.6 million in the fiscal year ended March 31, 1997 to $7.8 million in the
fiscal year ended March 31, 1998. The increase was due to an increase in
commission expense of $0.4 million (reflecting increased gross revenues in spite
of a 1.1% decrease in total commission paid to agents as a percentage of retail
revenues), and increases in salaries and wages of $0.5 million and a general
SG&A expenses increase of $0.2 million. Operating expenses as a percentage of
revenues decreased by 4%, primarily because additional SG&A expenses were more
than offset by increased revenues in the fiscal year ended March 31, 1998, and
our SG&A expenses were absorbed by a larger base of revenues.
Depreciation and amortization expense increased approximately $70,000
from approximately $126,000 in the fiscal year ended March 31, 1997 to
approximately $196,000 in the fiscal year ended March 31, 1998 as a result of
switch upgrades, the purchase of additional computer equipment and software, and
leasehold improvements.
INTEREST EXPENSE. Interest was approximately $39,000 in the fiscal
year ended March 31, 1997 and $24,000 in the fiscal year ended March 31, 1998,
reflecting a reduction in our outstanding long-term debt.
OPERATING INCOME. Operating income decreased $0.3 million from $2.0
million in the fiscal year ended March 31, 1997 to $1.7 million in the fiscal
year ended March 31, 1998 primarily as a result of decreased gross margin rates
due to the increase in cost of revenues from 58.5% to 66% of revenues, this
despite the fact that total operating expenses as a percentage of revenues
decreased by 4%. Other operating expenses did not change significantly.
NET INCOME. As a result of all of the foregoing factors including a
26% increase in SG&A, and in particular because of our strategic decision to
increase our gross revenues through price reductions, net income decreased
approximately $179,000 from approximately $1.3 million in the fiscal year ended
March 31, 1997 to approximately $1.1 million in the fiscal year ended March 31,
1998.
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 our 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, we 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 us. The slight (0.5%) increase in
cost of revenues as a percentage of revenues reflects our wholesale revenues in
the fiscal year ended March 31, 1998 (with a lower profit margin than retail
revenues) of $0.3 million, with no corresponding amount in the fiscal year ended
March 31, 1997.
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. The gross profit margin on the retail segment of the
business was 41.4% compared to 42% for the fiscal year ended March 31, 1997,
while wholesale revenues generated a 48% gross profit margin, which was
unusually high due to a one-time favorable rate arbitrage opportunity on a route
to Thailand.
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 our 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 us to secure expansion
financing and negotiate strategic alliances resulted in increased costs of $0.5
million. In addition, we increased staffing levels from 12 to 17 and secured
additional office facilities at our 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 our 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 our 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. We also opened new markets by
entering into four new independent agency agreements in the period, and
increased our 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 than offset by increased revenues in the period, and our 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 our income before taxes. These agreements have been terminated and
replaced by new contracts with these officers effective January 1, 1998. 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 our 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 our 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
Our capital requirements consist of capital expenditures in connection
with the acquisition and maintenance of switching capacity and working capital
requirements. Historically, our capital requirements have been met primarily
through funds provided by operations, term loans funded or guaranteed by our
majority shareholder and capital leases.
On May 18, 1998, we completed our initial public offering which
generated net proceed of approximately 11.6 million.
Net cash provided by operating activities was $0.7 million in 1996,
$0.9 million in 1997 and $1.5 million in 1998. 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 fiscal year ended March 31, 1998 compared to the same period in 1997, net
cash provided by operating activities increased by approximately $0.6 million
reflecting net earnings being offset by an increase in accounts receivable
resulting primarily from longer payment cycles from our agents, relative to our
accounts payable to carriers. A similar trend occurred during the nine months
ended December 31, 1998, as compared to the same period of 1997 as cash provided
by operating activities decreased from $$0.6 to net cash used in operating
activities of $1.2 million.
Net cash used in investing activities was $0.2 million in 1996, $0.4
million in 1997 and $.3 million in 1998. The net cash used in investing
activities in 1995, 1996, and 1997 principally reflects an increase in equipment
purchases. During the nine month period ended December 31, 1998, we acquired
Access resulting in a use of $7.5 million in cash in addition to the use of $0.5
million of cash, used principally for equipment purchases and an advance to
related parties.
Net cash used in financing activities was approximately $150,000 in
1996, $155,000 in 1997 and $944,000 in 1998. The activities consisted of debt
repayment, primarily to our bank for long-term financing obtained in 1993 and
1994. Net cash used in financing activities for the fiscal year ended March 31,
1998 was approximately $944,000 reflecting debt repayment and deferred costs
related to our initial public offering. For the nine months ended December 31,
1998, net cash provided by financing activities was $12.2 million primarily as a
result of the net proceeds from the initial public offering.
Aggregate proceeds from the sale of 1,500,000 shares of common stock
by us in the initial public offering were $14,250,000. Net proceeds of the
initial public offering, after deducting underwriting discounts and commissions
and professional fees aggregated approximately $11.6 million. We used $7.5
million net of cash acquired on September 17, 1998 in connection with our
acquisition of Access and $0.7 million for working capital purposes.
We expect that the net proceeds remaining from the initial public
offering of $2.75 million, together with internally generated funds, will
provide sufficient funds for us to expand our business as planned and to fund
anticipated growth for the next 12 months. However, the amount of our future
capital requirements will depend upon many factors, including performance of our
business, the rate and manner in which we expand, staffing levels and customer
growth, as well as other factors not within our control, including competitive
conditions and regulatory or other government actions. If our plans or
assumptions change or prove to be inaccurate or the net proceeds of the initial
public offering, together with internally generated funds or other financing,
prove to be insufficient to fund our growth and operations, then some or all of
our development and expansion plans could be delayed or abandoned, or we may
have to seek additional funds earlier than anticipated. In order to provide
flexibility for potential acquisition and network expansion opportunities, we
may seek in the near future to enter into a financing arrangement. Other future
sources of capital for us could include public and private debt, including a
high yield debt offering, equipment leasing facilities, and equity financing.
There can be no assurance that any such sources of financing would be available
to us in the future or, if available, that they could be obtained on terms
acceptable to us. While such a financing may provide us with additional capital
resources that may be used to implement our business plan, the incurrence of
indebtedness could impose risks, covenants and restrictions on us that may
affect us in a number of ways, including the following: (1) a significant
portion of our 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; (2) such a financing could impose
covenants and restrictions on us that may limit our flexibility in planning for,
or reacting to, changes in our business or that could restrict our ability to
redeem stock, incur additional indebtedness, sell assets and consummate mergers,
consolidations, investments and acquisitions; and (3) our degree of indebtedness
and leverage may render us more vulnerable to a downturn in our business, in the
telecommunications industry or the economy generally.
On December 18, 1998 and in connection to our growth strategy, we
entered into an equipment lease facility of up to $20 million, which provides
for leases of four-five years at interest rates of 8.0% to 8.5%. The interest
rates are fixed at the inception of each lease, with subsequent leases based on
the change in five-year treasury securities.
SEASONALITY
We have historically experienced, and expect to continue to
experience, a decrease in the use of our 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
We are currently in the process of evaluating whether we will
encounter any problems related to the Year 2000. The impact of the Year 2000,
which has been widely reported in the media, could cause malfunctions in certain
software and databases that use date sensitive processing relating to the Year
2000 and beyond. We have completed an evaluation of all our systems and found
that most of the computer systems, software and database which are proprietary
to Ursus are Year 2000 ready. We have also begun to evaluate third party
business entities with which we are engaged in business or for which we provide
services, to determine if there will be any unexpected interruptions. We will
request representations from these third parties as to whether or not they
anticipate any difficulties in addressing Year 2000 problems and, if so, whether
or not we would be adversely affected by any of such problems. Our management
expects to have this process completed by the second quarter of 1999.
We have obtained representations from the manufacturer of the
telephony switches that they are Year 2000 ready. As these switches are critical
to us, they have been tested internally and found to be compliant. Our billing
system will be upgraded to a Year 2000 ready version in the first quarter of
1999 at minimal cost to us. We have received assurances from other software and
equipment manufactures that their hardware and software are Year 2000 ready.
Our management has determined that costs to correct any problems
encountered with the Year 2000 will be immaterial. However, until such time as
the third parties with which we conduct business respond to us, the full impact
of the Year 2000 is not known. As a result, the impact on our business, results
of operations and financial condition cannot be assessed with certainty.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, "DISCLOSURE ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION," which is effective for fiscal years
beginning after December 15, 1997. This Statement supersedes SFAS No. 14,
"FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE," and amends SFAS No.
94, "CONSOLIDATION OF ALL MAJORITY-OWNED SUBSIDIARIES." This Statement requires
annual financial statements and interim reports to disclose information about
products and services, geographic areas and major customers based on a
management approach. This approach requires disclosing financial and descriptive
information about an enterprise's reportable operating segments based on
information management uses in making business decisions and assessing
performance. This new approach may result in additional information being
disclosed and may require new interim information not previously reported. We
plan to adopt SFAS No. 131 in fiscal 1999 with impact only to our disclosure
information and not our results of operations.
<PAGE>
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 International Telecommunications Union, an
international telecommunications association based in Switzerland, (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:
o deregulation and privatization of telecommunications markets
worldwide;
o diversification of services through technological innovation;
o globalization of major carriers though market expansion,
consolidation and strategic alliances;
o greater consumer demand;
o increases in international business travel;
o privatization of ITOs;
o growth of computerized transmission of voice and data
information; and
o the introduction of IP telephony technology.
These trends have sharply increased the use of, and reliance upon,
telecommunications services throughout the world. We believe 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:
o 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.
o THE EUROPEAN UNION ("EU") FULL COMPETITION DIRECTIVE, adopted in
March 1996, abolishes exclusive rights for the provision of
"voice telephony" services throughout the EU and the public
switched telephone network to any member country of the EU by
January 1, 1998, subject to extension by an EU member country.
Voice telephony is the commercial provision for the public of the
direct transport and switching of speech in real- time between
public switched network termination points. Voice telephony,
enables any user to use equipment connected to such a network
termination point in order to communicate with another
termination points.
o 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 us with significant opportunities to
compete in markets that were not previously accessible. In some
countries, for example, we 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 our
business, financial condition and results of operations or that
members of the WTO will implement the terms of the WTO Agreement.
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 Ursus, 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 Ursus
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 for resale traffic and/or by
potentially investing 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,
international simple resale, also called "ISR," and ownership of
switching facilities in foreign countries. International simple resale
is the use of international leased lines for the resale of switched
telephony services to the public which bypasses the current system of
accounting rates. Refiling 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 public switched telephone system 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." The accounting rate is 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. 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, we can take advantage of the 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 the 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.
COMPETITION
The international telecommunications industry is highly competitive.
Our success depends upon our ability to compete with a variety of other
telecommunications providers in each of its markets, including the ITOs in each
country in which we operate 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
we believe that such competition will continue to intensify as the number of new
market entrants increases. Many of our current or potential competitors have
substantially greater financial, marketing and other resources than us.
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. We price our services primarily by offering discounts to the
prices charged by the local ITOs. We have no control over the prices set by the
local ITOs or by our competitors, and some of our competitors may be able to use
their financial resources and/or market position to cause severe price
competition in the countries in which we operate. Although we do not believe
that there is an economic incentive for our competitors to pursue such a pricing
strategy or that our 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 our markets will force us to
continue to reduce our prices. For example, we on a number of occasions, reduced
certain rates which we charge to non-wholesale customers in response to pricing
reductions enacted by certain ITOs. Such price reductions may reduce our revenue
and margins. We have experienced, and expect to continue to experience,
declining revenue per billable minute in a number of our markets, in part as a
result of increasing worldwide competition within the telecommunications
industry.
We believe that the ITOs generally have certain competitive advantages
due to their control over "local connectivity" and close ties with national
regulatory authorities. Local connectivity are the physical circuits connecting
the switching facilities of a telecommunications services provider to the
interexchange and transmission facilities of a facilities-based carrier. We also
believe 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. We believe that, at least in the short-term, the
ITOs will not concentrate on marketing their services to our small-and
medium-sized business customer base. We could, however, be denied regulatory
approval in certain jurisdictions in which our services would otherwise be
permitted, thereby requiring us to seek judicial or other legal enforcement of
our right to provide services.
In response to deregulation, additional competitors of various sizes
are beginning to emerge, particularly in the EU. Our services are currently
marketed to small-and medium-sized businesses and thus we generally do 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." Dial-up access is a form of service
where access to a network is obtained by dialing an international toll-free
number or a local access number.
We believe 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."
Our principal competitors are the local ITOs and a number of other
alternative reorigination or direct access providers such as IDT, Viatel,
Justice, Telegroup, USA Global Link, USFI, Inc., Kallback and RSL
Communications.
<PAGE>
BUSINESS
Ursus is an international telecommunications company that exploits
favorable market niches by providing competitive and technologically advanced
telecommunications services. We focus 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. We
serve these markets through a network of independent exclusive agents. We
believe that we derive a significant competitive advantage from our 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 us. Each agent is supplied near real
time data for customer management, usage analysis, and billing from our local
and wide area network. Through our agent network, we develop and maintain close
relationships with vendors of telephone systems such as Siemens, Plessey and
Alcatel in key markets in order to promote the Ursus line of telecommunications
services, allowing us 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 our 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
our foreign customers. Call reorigination provides customers 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. We
derive approximately 76% of our 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, we plan to expand our 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 we 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, we intend to migrate some of our customers
from call reorigination to direct access service.
We plan 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, we are not currently engaged in any negotiations to acquire
any business. See "Business-Purchase of Uruguayan Corporation" and
Business-Acquisition of Access Authority, Inc." and "Business-Formation of
French Subsidiary." We believe that our proprietary enterprise software system
provides an efficient infrastructure for back room processing, thereby giving us
a strategic advantage over our competitors. Our 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.
We operate the Network from our technical facilities in Sunrise,
Florida, using a hybrid network of Internet, Intranet and circuit based
facilities. We plan to use a portion of the initial public offering proceeds to
expand our primary digital switching platform and secondary network access
nodes, thereby expanding our services in a reliable, flexible and cost effective
manner. We also plan to exploit our 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 our costs, we plan to use a portion of the initial public
offering proceeds to establish a hybrid network for IP fax and voice services.
We believe that this application could increase the gross margins of its
existing and future retail business and allow us to accelerate our growth
strategy.
We expect 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, and allows us
to develop a customer base by effectively exploiting the difference between the
local IDD rate and the generally more favorable rates we enjoy in the U.S. We
have 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, our 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 we 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 us the
opportunity to develop a market with a relatively small financial risk.
In summary, we intend to become a significant provider of
international telecommunications services within the emerging and deregulating
markets. We intend to maximize our profit potential by leveraging our existing
infrastructure, market penetration, expanding customer base and growing U.S.
wholesale business. By using our independent agent network, efficient back
office systems, and favorable vendor relationships with some of the major U.S.
telecommunications carriers, we believe we can gain strategic advantages while
capitalizing on the opportunities presented by deregulation and technological
advances in the global telecommunications industry.
We provide an array of basic and value added services to our
customers, which include:
o long distance international telephone services
o direct dial access for corporate customers
o dedicated access for high volume users
o calling cards
o abbreviated dialing
o international fax store and forward
o switched Internet services
o itemized and multicurrency billing
o follow me calling
o enhanced call management and reporting services
URSUS' SERVICES
Our principal services include:
o Ursus ComNet - enables virtual private network calling to members
of a "closed user group" subject only to regulatory limitations.
A "closed user group" is a group of specified users permitted by
applicable regulations to access a private voice of data network,
which access would be denied the users individually.
o 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.
o 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.
o 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. We are currently deploying a network of
Internet Fax Servers in several countries including Lebanon,
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 we plan to
expand our network of Internet-based telephony to more than 20
locations by March 31, 1999.
o Ursus ComPlus Travel - provides calling card access from over 56
countries utilizing our ITFS numbers. In addition, we utilize 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 our switch in Sunrise, Florida where the customer may
dial over the 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 we optimize 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 our switch through the
infrastructure of contracting carriers to their destinations at the lowest
available rates. These switching capabilities also enable us to efficiently
perform billing functions and account activation and to provide value-added
services. We rely upon Symmetrical Optical Network ("SONET") "fiber optic"
facilities to multiple carriers to provide redundancy in the event of technical
difficulties in the Network. Fiber-optic transmission mediums consist of
high-grade glass fiber through which light beams are transmitted carrying a high
volume of the communications traffic. We maintain redundant switching facilities
in Sunrise, Florida to provide protection for our switching operations. Our
strategy is to monitor our anticipated traffic volume on a regular basis and to
increase carrier trucking capacity before reaching the capacity limitations of
such circuits.
Our customers access our services either through "dial up access" or
"direct access." Dial up access is obtained via: (1) paid access, which requires
the customer to pay the local PTO for the cost of a local call, where
appropriate, in order to access our services, at December 31, 1998,
approximately 4.4% of our revenues; (2) call reorigination, which enables the
customer to receive a return call providing a dial tone originated from our
Sunrise, Florida switching center by ITFS, at December 31, 1998, approximately
78% of our revenues; (3) Home Country Direct, which accesses the Sunrise,
Florida switching center by direct dial, at December 31, 1998, approximately
3.1% of our revenues; or (4) Dedicated Access (Direct Access) from wholesale
carrier customers in North America, at December 31, 1998, approximately 4.8% of
our 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. Direct access overall accounted for approximately 24% of our
overall revenues for the fiscal year ended March 31, 1998 and 21.5% for the nine
months ended December 31, 1998.
To reduce the variable telecommunications costs and improve usage, we
are, where regulations permit, in the process of changing our 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 our services through call reorigination
or ITFS numbers. The exception to this rule is the Bahamas, where our 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-enforcement and interpretation of telecommunication laws
and regulations is unpredictable and subject to change."
Currently, our Network is primarily used to originate and terminate
international long distance traffic for our own subscribed customer base. We
intend to further leverage our 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-enforcement and interpretation of telecommunication laws and
regulations is unpredictable and subject to change."
The economic benefits to Ursus of owning and operating our 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, we will only install our own fixed
facilities when existing traffic on a carrier route is adequate to offset the
costs of installation.
We plan, 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 we plan 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 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 public
switched telephone system, 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 Ursus, 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 fiscal year ended March 31, 1998, we derived approximately 76% of
its revenues and operating income from international call reorigination
services.
Our research and development efforts have been nominal and have
focused almost exclusively upon refining and upgrading its back office computer
systems. We have 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 our
resources to our computer systems and back office procedures, we believe that we
have developed an efficient and flexible operating system, minimized its payroll
and maximized the efficiency of our back office operations. See "-Management
Information Systems."
MANAGEMENT INFORMATION SYSTEMS
We have made significant investments developing and implementing
sophisticated information systems which enable us to: (1) monitor and respond to
customer needs by developing new and customized services; (2) manage LCR; (3)
provide customized billing information; (4) provide high quality customer
service; (5) detect and minimize fraud; (6) verify payables to suppliers; and
(7) rapidly integrate new customers. We believe that our network intelligence,
billing and financial reporting systems enhances our ability to competitively
meet the increasingly complex and demanding requirements of the international
long distance markets. We continuously provide enhancements and ongoing
development to maintain our state of the art switching, billing and information
service platforms.
We currently have a turnaround time of approximately 24 hours for new
account entry. Our billing system provides multi-currency billing, itemized call
detail, city level detail for destination reporting and electronic output for
select accounts. We provide customers with several payment options, including
automated credit card processing and automated direct debiting.
We have developed proprietary software, utilizing our own in-house
staff of programmers, to provide telecommunications services and render customer
support. In contrast to most traditional telecommunications companies, the
software used to support our enterprise resides outside of the switches and
"canned" closed systems and, therefore, does not currently rely on third party
manufacturers for upgrades. We believe our software configuration facilitates
the rapid development and deployment of new services and provides us with a
competitive advantage. Our Sunrise, Florida central switch has a call detail
recording function which enables us to: (1) achieve accurate and rapid
collection of call records; (2) detect fraud and unauthorized usage; and (3)
permit rapid call detail record analysis and rating.
We also use our 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 our 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.
INTERNET PROTOCOL (IP) TELEPHONY
Virtually all of today's voice and fax traffic is carried over the
public switched telephone network. 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 public switched telephone system. 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 public branch exchange ("PBX"). PBX is
switching equipment that allows connection of a private extension telephone to
the public switched telephone network or to a private line. To place a call, the
caller would dial the number of the party they are calling, just like making a
call-through the public switched telephone network. 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 our inception in 1993 up until our acquisition of Access, our
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 us, and settle
all customer invoices, net of the agency's commission share, directly with us
within a prescribed period. We may reduce our reliance upon our existing
independent agents by expanding our business through strategic acquisitions or
may make equity investments in certain independent agents. In addition, we may
in the future start to enroll non-exclusive independent agents to cover new
territories.
We require each prospective agent to submit a business plan and
demonstrate the financial resources and commitment required to carry out its
marketing and customer service plan approved by us prior to its appointment.
Each agent is licensed by and required to do business in the name of Ursus and
execute subscriber agreements with end users on behalf of and for the benefit of
us.
We know of no competitor that operates in this manner and attribute
this program with our 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.
Our agreements with our 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 our services
at rates prescribed by us and to abide by our marketing and sales policies and
rules. Agent compensation is paid directly by us and is based exclusively upon
payment for our services by customer funds the agents obtain for us. The
commission paid to agents ranges between 15 to 20% of revenues received by Ursus
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.
Revenues attributable to the four most significant agents for the fiscal year
ended March 31, 1998, were approximately 58% and were 48.2% for the nine months
ended December 31, 1998. Exclusive agents settle their accounts with us 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. We may record additional bad debt expense, however, based on
increases in wholesale business, consummation of acquisitions and equity
investments in the agents.
For the fiscal year ended March 31, 1998, and the nine months ended
December 31, 1998, excluding Access, we derived approximately 86% of our
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 we initiated discussions with certain of our exclusive
agents with regard to the acquisition of an equity interest in their agencies.
We believe that it would be beneficial to have an ownership interest in our 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. We believe that
this strategy will provide us 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 agreements in France,
Argentina and Uruguay, we have no agreement to purchase an interest in any of
our other agents."
CUSTOMER BASE
Our 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). We also provide our 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 we believe 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.
We believe 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. We offer these small- and
medium-sized companies significantly discounted international calling rates
compared to the standard rates charged by the major carriers and ITOs.
We also plan to offer international termination services to other
carriers, including resellers, on a wholesale basis, as a "carriers' carrier."
Our carrier customers as a group currently provide us with a relatively stable
customer base and thereby assist us in projecting potential utilization of our
network facilities. In addition, the potentially significant levels of traffic
volume that could be generated by such carrier customers may enable us to obtain
larger usage discounts based on potential volume commitments. We believe that
revenues from our carrier customers will represent a growing portion of our
overall revenues in the future.
We also target residential customers with high international calling
patterns such as ethnic communities and plan to increase the marketing of
prepaid calling cards.
Currently, no end retail customer individually accounts for more than
1% of our revenue.
The largest wholesale customer accounted for approximately 9.5% of our
revenue as of March 31, 1998 (2.2% for the nine months ended December 31, 1998).
PRINCIPAL MARKETS FOR URSUS' 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. We currently have approximately a
0.03% share of this global market.
GEOGRAPHIC ORIGIN OF REVENUES
The geographic origin of our revenues is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
-------------------- ------------
1996 1997 1998 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Africa $1,403,094 $3,899,701 $8,346,025 $6,057,730 $6,063,663
Europe 1,988,030 4,252,104 3,857,504 3,013,155 5,674,097
Latin America 6,337,284 7,265,473 6,523,384 5,050,602 4,498,064
Middle East 2,101,864 3,741,890 4,721,592 3,500,512 3,385,258
Other 1,397,802 1,363,852 1,719,272 1,395,126 1,932,292
United States - 315,407 2,930,547 2,011,988 2,789,524
-------------------------------------------------------------------------------------------
$13,228,074 $20,838,427 $28,098,324 $21,029,113 $24,342,899
===========================================================================================
</TABLE>
GEOGRAPHIC MARKETS
LATIN AMERICA. Historically, we derived significant portions of our
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, we have 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 our 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, 1998, Argentina with sales
of $3.2 million represented 49% of our total Latin American business followed by
Peru with a 24% share. For the nine months ended December 31, 1998 sales from
our agent in Argentina were $1.9 million or 41.9% of Latin American sales. Peru
represented 19.3% of such sales to Latin America during the same period. We
enjoy a top 10 market share among call reorigination companies operating in
Argentina and Peru.
MIDDLE EAST AND AFRICA. We are currently a significant operator in
certain emerging markets in the Middle East and Africa. We are a market leader
for alternative access call reorigination in both Lebanon and South Africa.
Lebanon and Egypt together produce up to $12,000 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 $4.2 million in sales for
the fiscal year ended March 31, 1998. For the nine months ended December 31,
1998, sales to Lebanon amounted to $2.8 million.
SOUTH AFRICA. Sales grew from $3.8 million for the fiscal year ended
March 31, 1997 to sales of $8.1 million for the fiscal year ended March 31,
1998. For the nine months ended December 31, 1998, sales to South Africa
amounted to $6.0 million. We have expanded our customer base from Johannesburg,
South Africa, to Cape Town and Durban, and other South African urban centers.
This territory is currently generating between $25,000 and $35,000 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, we and
our independent agents maintain close relationships with vendors of 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 we maintain a close relationship
with the vendors for both pre-sale and retrofit applications.
EU AND RUSSIA. The EU market will be a major focus as we pursue our
strategy of locating switches at the network center of major switched-based
suppliers in Europe.
FRANCE. Our 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, we began to migrate our customers in
France from the call reorigination access method currently used to international
long distance services utilizing direct access over leased lines and restricted
dial-in for customers in closed-user groups. We will provide direct access
service via a leased line connection between the customer's phone system and our
switch in Paris. Following deregulation, we 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 us 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 began
interconnecting with France Telecom's Pubic Switched Telephone system on January
1, 1998.
RUSSIA. In consideration of the increased risk of bad debt exposure in
this territory, we have for now, effective March 26, 1999, suspended commercial
activities in the Russian market. We had been active in the Russian market,
centered in the Moscow region, for over almost 3 years, with direct dial up
access having replaced call reorigination for approximately 2 years months. As
of March 31, 1998, traffic had grown to approximately $5,000 to $7,000 per day
with the majority of calling derived from the direct dial up access lines from
Moscow. Overall, Russia generated sales for us 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 $2.3 million for the
for the fiscal year ended March 31, 1998. As a result of the turbulent economy
in Russia, sales for the nine months ended December 31, 1998 decreased to
approximately $1.1 million.
EXPANSION PLANS
Pursuant to our formation of a joint venture with its French agents,
we 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, we plan to install additional switches in Europe, upgrade our switch in
Sunrise, Florida and open points of presence ("POPs") in up to three to five
cities in Western Europe in order to expand our accessibility outside of the
switch locations. Pop's are interlinked groups of modems, routers and other
computer equipment, located in a particular city or metropolitan area, that
allow a nearby subscriber to access the Network through a local telephone call.
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.
We expect to use a significant portion of the remaining proceeds of
the initial public offering to expand and proliferate our Network and our
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 our IP telephony based fax and voice services.
We intend to enter additional markets and expand our operations
through acquisitions, joint ventures, strategic alliances and the establishment
of new operations. We will consider acquisitions of certain competitors which
have a high quality customer base and which would, upon consolidation with our
operations, become profitable. In addition, we may acquire equity interests in
our existing agents and may pursue partnership arrangements in emerging and
maturing markets with existing sales organizations and other non-defined
telecommunications entities.
FORMATION OF FRENCH SUBSIDIARY
On November 20, 1997, we entered into a letter of intent with respect
to a proposed joint venture with our French agents, Central Call and Mondial
Telecom and two of their principals. Pursuant to the letter of intent, we
organized Ursus Telecom France as a limited liability company. Under the
original letter of intent we held 50.1% of the shares of Ursus Telecom France.
The remaining shares were held by Central Call, Mondial Telecom and the two
principals. The letter of intent and subsequent agreement on April 17, 1998,
required Ursus to buy out the remaining 49.9% of the shares at a later date.
On March 5, 1999, we entered into a modification agreement with
Central Call , Mondial Telecom, the two principals and Ponthieu Ventures, a
French corporation, which made several changes including: (1) We reduced our
ownership to 50% from 50.1%, (2) Ponthieu Ventures now shares the remaining 50%
of the ownership with Central Call, Mondial Telecom and the two principals and
(3) Ursus agreed to repurchase certain switch equipment from Ursus Telecom
France at recorded book value.
Ursus committed 500,000 FF or approximately $90,000 to the joint
venture for the period April 1, 1999 through December 31, 1999. As of March 5,
1999, the results of Ursus Telecom France will no longer be consolidated, as a
subsidiary, with those of Ursus because Ursus now has only a 50% ownership
interest in Ursus Telecom France.
PURCHASE OF THE URUGUAYAN AGENT
On August 17, 1998, we entered into an asset purchase agreement with
our agent in Uruguay. The agreement provided that we pay in consideration for
the agency assets the sum of $132,988. A $72,988 accounts receivable balance
from this agent has been converted into a deposit on the purchase price by us.
The acquisition closed during the fourth quarter of fiscal 1999 and has been
accounted for using the purchase method of accounting.
ACQUISITION OF ACCESS AUTHORITY, INC.
On September 17, 1998, pursuant to a Stock Purchase Agreement (the
"Agreement') dated as of September 15, 1998, we purchased all the issued and
outstanding common stock of Access. Pursuant to the Agreement, the shareholders
of Access received aggregate consideration of $8 million in cash. The terms of
the Agreement, including the purchase price, were negotiated by the parties on
an arms length basis.
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 business and individuals in over
38 countries throughout the world. Access markets its services through
independent and a geographically dispersed sales force consisting of agents and
wholesalers. Access operates a switching facility in Clearwater, Florida.
We utilized certain net proceeds of our initial public offering to pay
for the Access 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.
We have filed a current report on Form 8-K with the Securities and
Exchange Commission dated October 2, 1998 and an amendment thereto on December
1, 1998 describing the Access acquisition. The historical financial statements
of Access together with certain pro forma financial information is included in
this Form S-1 filing commencing on Page F-1.
PURCHASE OF STARCOM S.A. AND OUR ARGENTINE AGENT
On January 22, 1999, we acquired the operations of Starcom S.A., an
Argentine corporation and Rolium S.A., a Panamanian corporation (our agent). In
accordance with the stock purchase agreements, we paid $183,000 and issued
50,000 shares of unregistered common stock to the seller. The stock purchase
agreements contain provisions which call for additional consideration of
$267,000 to be paid in equal installments of $133,500 on January 22, 2000 and
2001. An additional 50,000 shares of our common stock have been placed in escrow
and will be released on July 22, 1999 if the seller adheres to the covenants,
indemnities and obligations of the agreements. The fair market value of our
common stock was valued at $425,000 at the date of acquisition. In addition,
$100,000 was placed in escrow to pay certain liabilities of Starcom S.A.
resulting in total consideration of $975,000. The acquisition will be accounted
for using the purchase method of accounting. Therefore, the result of operations
subsequent to the closing will be included in the consolidated financial
statements of Ursus. As of the date of this filing, information needed to
determine the allocation of purchase price to the assets acquired is not
available. The aggregate purchase price of this acquisition will be allocated
based on estimated fair value of the assets acquired with any excess allocated
to intangible assets to be written off over the estimated useful life.
GOVERNMENT REGULATION
OVERVIEW
Our provision of international and national long distance
telecommunications services is heavily regulated. Also, local laws and
regulations differ significantly among the jurisdictions in which we operate,
and, within such jurisdictions, the interpretation and enforcement of such laws
and regulations can be unpredictable. Many of the countries in which we provide,
or intend to provide, services prohibit, limit or otherwise regulate the
services which we can provide, or intend to provide, and the transmission
methods by which we can provide such services.
We provide a substantial portion of our customers with access to our
services through the use of call reorigination. Revenues attributable to call
reorigination represented approximately 76% of our revenues during the fiscal
year ended March 31, 1998 and are expected to continue to represent a
substantial but decreasing portion of our 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 us to cease providing call reorigination services in the Bahamas and may
require us 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 we provide call reorigination
services in some of those countries, the only country on such list that accounts
for a material share of our total revenues is South Africa which accounted for
about approximately 28.9% of our revenues for the fiscal year ended March 31,
1998. 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 us to cease
providing call reorigination services to such country or, in extreme
circumstances, by revoking our authorizations.
A summary discussion of the regulatory frameworks in certain
geographic regions in which we operate or which we have 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 regulations
or regulatory posture.
UNITED STATES
Our 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 telecommunication facilities. The FCC has
authorized us, 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 we operate. As described above, our regulatory strategy could
result in us 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 we
have violated the terms of our Section 214 authorization, it could impose a
variety of sanctions on us, including fines, additional conditions on our
Section 214 authorization, cease and desist or show cause orders, or, in extreme
circumstances, the revocation of our 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.
We are required to file with the FCC a tariff containing the rates,
terms and conditions applicable to our international telecommunications
services. We are 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 our tariff. If we charge rates other than those set
forth in, or otherwise violates, our tariff or a customer agreement filed with
the FCC, the FCC or a third party could bring an action against us, which could
result in a fine, a judgment or other penalties against us.
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 closed user groups. 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 closed user group
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 (1) dedicated customer access
is used to provide the service, (2) the service confers new value-added benefits
on users (such as alternative billing methods) or (3) 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
We currently provide call reorigination services to customers in
France. We are permitted to provide call reorigination in France without a
license. Although we do not currently provide such services, under current law,
we may lease circuits and provide switched voice services to closed user groups
in France without a license. We anticipate that we will migrate our customers to
forms of call-through other than call reorigination after March 1, 1998 and have
recently entered into a joint venture agreement with Central Call and Mondial
Telecom to provide switch-based direct access services in France. We anticipate
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. We intend to expand our services to include,
for example, direct access and facilities-based services in France. If we decide
to provide switched voice services to the public, including direct access and/or
call-through services, or to own facilities, we 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 (1) operates transmission facilities for the provision of
telecommunications services to the public; or (2) 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. We
currently do not provide services to customers in Germany, but are contemplating
opportunities in entering this market, which, after the U.S., makes up for the
largest single telecommunication market in the world.
LATIN AMERICA
We currently provide call reorigination to customers in certain Latin
American countries, including Argentina, Peru, Ecuador, Uruguay and Colombia. We
are subject to a different regulatory regime in each country in Latin America
where we conduct business. Local regulations determine whether we 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 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. We do 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 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.
We seek to take advantage of gradual deregulation of the South African
telecommunications industry by offering permitted services to customers in South
Africa. Currently, we provide 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 that call reorigination operations are an offense under the SA
Telecommunications Act. Several entities, including our 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 we believe that South
African law does not prohibit us or our agent from providing call reorigination
services to customers in South Africa without a license, if our 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.
Our South African agent was issued an interim "Value Added Network
Service License" by SATRA in early April 1998. This license allows us in
conjunction with our Agent to operate a data network system through which all
data and facsimile transmissions can be routed. Our South African agent
estimates that approximately 50% of current telecom revenues are generated by
data and facsimile traffic and plans to migrate this revenue segment over packet
switched networks within the next six to twelve months so that carriage of this
traffic will not involve call reorigination.
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 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
Our 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. Although no
written text in Lebanon prohibits call reorigination and a number of carriers
are currently engaged in such activity, the MPT has stated that call
reorigination is illegal 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 our 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
have also 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, any such
regulations could materially affect our 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 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.
Our independent agents historically have collected, and will continue
to collect, VAT on services where it is offered in a VAT country. We believe
that whatever potential negative impact the amendment will have on our
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, 1998, we had 60 full-time employees. None of our
employees are covered by a collective bargaining agreement. We believe that our
relationship with our employees is satisfactory.
TRADEMARKS
We have traditionally relied upon the common law protection of our
trade name afforded under various local laws, including the United States.
However, we intend to file for trademark protection of our 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 we may be precluded from registering and/or using the Ursus mark and/or
logo in such countries.
PROPERTIES
We currently occupy approximately 8,087 square feet of office space in
Sunrise, Florida, which serves as our principal executive office and 6,000
square feet of office space in Clearwater, Florida, which we assumed upon our
acquisition of Access. The leases have total annual rental obligations of
approximately $224,000. The lease in Sunrise expires on April 30, 2003. The
lease in Clearwater has been extended through April while we determine the
appropriateness of the space. We believe that our office space is adequate for
our current purposes.
LEGAL PROCEEDINGS
Access is involved as plaintiff and defendant in a legal action, as
described below, which is incident to its business. Our management does not
believe that this action will have a material impact on our financial condition.
In February 1998, Access filed an action against Edwin Alley, d/b/a
Phone Anywhere ("Alley")in the United States District Court for the Middle
District of Florida claiming that Alley, a former sales agent for Access,
breached his agency agreement with Access, wrongfully diverted customers and
business to Access's competitors, misappropriated Access's trade secrets,
breached fiduciary and other duties owed to Access and engaged in unfair
competition. Access 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 Access from
soliciting or providing services to customers located by him. Discovery is
proceeding on Access's claims. Alley has moved for summary judgment on
jurisdictional grounds and Access is responding to the motion.
Subsequent to the filing of Access's federal action, Alley commenced
an action against Access 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 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>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our
directors and executive officers.
NAME Age POSITION
---- --- --------
Luca M. Giussani............. 44 Chief Executive Officer and Director
Jeffrey R. Chaskin........... 45 President, Chief Operating Officer
and Director
Johannes S. Seefried......... 39 Chief Financial and Director
Gregory J. Koutoulas......... 49 Vice President, Controller and Secretary
Richard C. McEwan............ 43 Vice President Agent Relations
William Newport............... 62 Director, Chairman of the Board of
Directors
Kenneth L. Garrett........... 55 Director
Luca M. Giussani, a co-founder of Ursus, has served as Chief Executive
Officer and Director since our inception and as President from our inception
until October 1998. Mr. Giussani currently works full time for us in the United
States. Prior to co-founding Ursus 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 Ursus and has been our Chief
Operating Officer and a Director since our inception. Mr. Chaskin was named
President in October 1998. 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 Ursus since
February 1997 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 (the
"Satander Group"), 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 and 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 Ursus 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 us on a full-time basis, Mr. McEwan was our
consultant since our 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
overseas agency of Gateway USA providing call reorigination services. Mr. McEwan
also provides consulting services to our 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 Ursus 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 became a director of Ursus in April 1998. 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, LLP II, a group
providing venture capital 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 the initial public offering, the
directors were 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, our 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. Rather, it was 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 and on February 19, 1999, the
investigating magistrates decided not to refile charges against Mr. Giussani
having determined that he had not committed improper conduct. There is currently
no criminal proceeding pending against Mr. Giussani.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has established 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
(1) amend our Articles of Incorporation or the Bylaws, (2) adopt an agreement of
merger or consolidation, (3) recommend to the shareholders the sale, lease, or
exchange of all or substantially all of our, property and assets, (4) recommend
to the shareholders a dissolution of Ursus or revoke a dissolution, (5) elect a
director, or (6) declare a dividend or authorize the issuance of stock. William
Newport and Kenneth L. Garrett serve on our Compensation Committee. Our
Compensation Committee is responsible for recommending to the board of directors
our executive compensation policies for senior officers and administering the
1998 Stock Incentive Plan. See "-Stock Incentive Plan." Johannes S. Seefried,
William Newport and Kenneth L. Garrett 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
We 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 initial public offering, Mr. Newport received 15,000, and
Mr. Garrett received 10,000, non-qualified options at the Option Prices. We 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, 1998, 1997 and 1996 by Ursus to or on behalf of the Chief Executive
Officer and our three other executive officers.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------
Name and Year Salary Bonus Other Annual
Principal Position ---- ------ ----- Compensation
------------------ ------------
<S> <C> <C> <C> <C>
Luca M. Giussani.................... 1998 $187,615 $281,909 $38,100(1)
President and Chief Executive 1997 $170,000 $251,405 $ 8,200(1)
Officer 1996 $170,000 $164,326 $ 4,704(1)
Jeffrey R Chaskin (2).............. 1998 $187,615 $281,909 $32,516(1)
Executive Vice President and 1997 $170,000 $251,405 $ 4,583(1)
Chief Operating Officer 1996 $170,000 $164,326 $ 3,057(1)
Johannes S Seefried (3)............ 1998 $137,942 $ 75,000 $ 1,490(1)
Chief Financial and Accounting 1997 $ 61,981 - -
Officer
Richard McEwan (4).................. 1998 $ 76,000 $40,000 $20,962(5)
Vice President of Agency 1997 - - $50,000(5)
Relations 1996 - - $50,000(6)
- -----------
(1) Consists of the use of Ursus automobile, prepaid bonuses and vacation pay.
(2) Does not include compensation paid to Mr. Chaskin's wife, Joanne M. Canter,
an employee of Ursus. Ms. Canter's salary for 1996, 1997 and 1998 was
$18,692, $18,000 and $18,069, respectively.
(3) Mr. Seefried joined Ursus on July 8, 1996.
(4) Mr. McEwan joined Ursus on September 1, 1997.
(5) Consulting fees paid from April 1, 1997 to August 30, 1997.
(6) Consulting fees.
</TABLE>
<PAGE>
LONG TERM COMPENSATION
In connection with our initial public offering we established the 1998
Stock Incentive Plan, whereby 1,000,000 shares of common stock were authorized
for issuance. As of December 31, 1998 we granted 737,500 10-year options to
purchase common stock at the Option Prices. The options granted to our executive
officers are as follows:
NAME AND OPTIONS EXERCISE PRICE VESTING PERIOD
PRINCIPAL POSITION ------- -------------- --------------
------------------
Luca M. Giussani 150,000 $9.50 75,000 May 12, 1998
President and Chief 75,000 January 1, 1999
Executive Officer
Jeffrey R. Chaskin 150,000 $9.50 75,000 May 12, 1998
Executive Vice 75,000 January 1, 1999
President and
Chief Operating
Officer
Johannes S. Seefried 150,000 100,000 at $9.5 75,000 May 12, 1998
Chief Financial and 50,000 at $4.125 75,000 January 1, 1999
Accounting Officer
Richard McEwan 100,000 $9.50 50,000 May 12, 1999
Vice President of 50,000 August 31, 1999
Agency Relations
Relations
EMPLOYMENT AGREEMENTS
We have 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 our Chief Executive and Chief Operating Officers, provide for
each to receive:
(a) 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;
(b) 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 our
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 us 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);
(c) bonuses commencing with our fiscal year beginning on April 1,
1998, determined as a percentage of the executive's base annual
pay depending upon the our EBITDAB, these 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;
(d) 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 Ursus can
receive under applicable "golden parachute" regulations;
(e) confidentiality provisions and a non-compete agreement within the
State of Florida for one year after any termination of
employment; and
(f) 10-year options to purchase 150,000 shares of common stock at the
Option Prices, 75,000 of which vest upon consummation of the
initial public offering and the balance in January 1999 or upon a
change in control of Ursus. 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 comprised 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 Ursus accruing prior to
January 1, 1998.
We have entered into an employment agreement with Johannes Seefried,
our Chief Financial and Accounting Officer, providing for terms similar to those
in the employment agreements with Messrs. Giussani and Chaskin described above,
except that:
(a) the term of the agreement is for two years from January 1, 1998;
(b) the base annual salary is $170,000 in 1998 and $200,000 in 1999;
(c) 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 the initial public offering, in addition to bonuses payable as
a percentage of base annual pay depending on the EBITDAB of $4
million or more realized by Ursus 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
(d) 10-year options to purchase 100,000 shares of common stock at the
Option Prices, 50,000 of which vest upon consummation of the
initial public offering and the balance in January 1999 or upon a
change in control of Ursus. Options to purchase $200,000 worth of
common stock will be tax-qualified, the remaining options will be
non-qualified.
On September 1, 1997, we entered into a two-year employment agreement
with Richard McEwan, our 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 Ursus 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 our adoption 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 Ursus 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 Ursus and the board of directors at our sole discretion. The agreement
permits Mr. McEwan to continue to perform services for our 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 us. 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
Our board of directors and shareholders adopted the "1998 Stock
Incentive Plan" (the "Stock Incentive Plan" or the "Plan") in February 1998. Our
Compensation Committee will administer the Plan. All of our employees, directors
and consultants are eligible to receive "Incentive Awards" under the Stock
Incentive Plan. Under the Stock Incentive Plan we may 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. We may not grant more than 200,000
shares of common stock as to any individual during any calendar year under the
Stock Incentive Plan. On the effective date of their respective employment
agreements, we granted to our Chief Executive, Chief Operating and Chief
Financial Officers 10-year stock options exercisable at the Option Prices
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 Ursus. In addition, our Compensation Committee, in a
board of directors meeting, held on April 8, 1998, granted to Mr. McEwan 10-year
stock options exercisable at the Option Prices, covering 100,000 shares of
common stock, and granted to a number of employees 10-year stock options
exercisable at the Option Prices covering a total of 102,000 shares. Half of Mr.
McEwan's options vest one year after the effective date of the initial public
offering, and the other half vest on August 31, 1999. The 102,000 options
granted to employees vest one year after the date of the initial public offering
and can only be exercised 18 months after that date.
On July 23, 1998, our Compensation Committee granted 70,500 10-year
stock options of which 58,000 had an exercise price of $9.50 and 12,500 have an
exercise price equal to the market value of the stock on September 15, 1998 or
$3.375.
On October 25, 1998, our Compensation Committee repriced the exercise
price of 160,000 stock options previously granted. The exercise price of the
options was reduced to the then current market value of $4.125.
On November 9, 1998, our Compensation Committee granted 40,000 10-year
stock options at an exercise price of $4.125, which was equal to the then
current market value.
Our Compensation Committee fixed the exercise price of an incentive
stock option and a non-qualified stock option 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 our common stock.
Our Compensation Committee determines the period that the stock
options are exercisable. In no event may stock options be exercised more than
ten years after the date of grant. Our 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 our
common stock. 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 Ursus, 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
Internal Revenue Code.
At the time a stock option is granted, our 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 Ursus of shares of common stock already owned by the
option holder, or by such other method as our Compensation Committee may permit
from time to time. However, a holder may not use previously owned shares of
common stock to 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 three months 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. Our 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 our 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 our
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.
Our 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 (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 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 our Compensation
Committee, but in no event more than ten years from the date of grant.
Our 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. Our 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, our 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.
We shall obtain such consideration for granting options under the
Stock Incentive Plan as our Compensation Committee in its discretion may
request.
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.
Our board of directors or our 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 our shareholders.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our board of directors established a Compensation Committee in April
1998. Prior to such time, decisions concerning executive compensation were made
by our board of directors, including Messrs. Giussani, Chaskin and Seefried, all
of whom were and continue to be executive officers of Ursus and participated in
deliberations of the board of directors regarding executive officer
compensation. See "Committees of the Board of Directors."
None of our executive officers currently serve on the Compensation
Committee of another entity or any other committee of the board of directors of
another entity performing similar functions.
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
LOANS AND ADVANCES TO EXECUTIVE OFFICERS
Between December 26, 1995 and July 15, 1997, we loaned an aggregate of
$127,000 to Luca Giussani, our Chief Executive Officer. The loans were evidenced
by unsecured notes bearing interest at 7.65% per annum. In addition, we made
cash advances totaling $4,749 on behalf of Mr. Giussani during this period. At
March 31, 1998, Mr. Giussani had repaid all outstanding balances owed to Ursus.
During fiscal 1995, 416.67 Class C shares were issued to Jeffrey
Chaskin, our 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 waived any other claims for
compensation from Ursus accruing prior to January 1, 1998. Messrs. Giussani and
Chaskin each received $281,909 in bonuses under these agreements for fiscal year
ended March 31, 1998. See "Management- Employment Agreements." As of December
31, 1998 we have advanced each of Messrs. Giussani and Chaskin $18,460 towards
their bonuses for the fiscal year ended March 31, 1999.
On October 23, 1998 our Compensation Committee approved a special
one-time bonus of $120,000 to each of Messrs. Giussani and Chaskin to reward
them for their efforts in closing the acquisition of Access.
TERM LOANS AND GUARANTEE BY CHIEF EXECUTIVE OFFICER
During 1993, we 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, we repaid a total of $250,000 on the term
loans. In June 1996, we 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. During
the fourth quarter of fiscal 1998 we repaid the remaining balance of $85,000 and
terminated the loan agreement.
Luca Giussani, the our 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, we entered into a one-year consulting agreement
with Ben Rispoli, a minority shareholder of Ursus. 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 our marketing efforts for a monthly retainer of $11,250, plus
reimbursement of reasonable travel expenses.
On January 20, 1998, Messrs. Giussani, Rispoli and Ursus entered into
an agreement (the "January Agreement"). The January Agreement resolved the
matter of Mr. Rispoli's beneficial interest in our securities held in a
fiduciary capacity by Fincogest, S.A. ("Fincogest"). Fincogest is a nominee
Swiss entity that holds record title for our securities beneficially owned by
Mr. Giussani as well as Mr. Rispoli. Mr. Rispoli had a beneficial interest in
the securities held by Fincogest since our 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
extended Mr. Rispoli's consulting agreement to December 31, 1998, provided that
the consulting agreement cannot be terminated except for "cause" and modified
the agreement to include an additional payment of $15,000 upon consummation of
an initial public offering of the our securities during the term of the
consulting agreement. The consulting agreement was mutually terminated as of
December 31, 1998.
Between December 21, 1995 and June 26, 1996, we 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 us 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 us by the
consultant have been offset against the consultant's retainer.
PRINCIPAL AND REGISTERING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of the date of this prospectus, of
(i) each person known by us to own beneficially five percent or more of the
outstanding common stock immediately prior to the Offering; (ii) the Registering
Shareholders; (iii) each of our directors; (iv) each of the executive officers
named in the Summary Compensation Table; and (v) all directors and executive
officers of Ursus as a group. The address of each person listed below is 440
Sawgrass Corporate Parkway, Suite 112, Sunrise, Florida 33325, unless otherwise
indicated.
NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER SHARES OWNERSHIP
- ------------------------ ---------- -----------
Ben Christian Rispoli (1)................ 375,000 5.3%
Luca M. Giussani (1)(2).................. 4,275,000(4) 60.4%
Jeffrey R. Chaskin....................... 650,000(4) 9.2%
Johannes S. Seefried..................... 150,000(5) 2.1%(7)
Gregory J. Koutoulas (9)................. - -
Richard McEwan (3)....................... - -
William Newport.......................... 15,000(6) (7)
Kenneth L. Garrett....................... 10,000(8) (7)
All Executive Officers and Directors
as a Group (7 Persons)................... 5,100,000(4)(5)(6)(8) 72.1%
- -----------
(1) 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%), residing at Corso Marconi 92, San Remo, Italy. Each of Mr.
Giussani and Mr. Rispoli has sole voting and investment power with respect
to his shares of common stock.
(2) Fincogest, S.A. also owns 100% of the outstanding shares of Series A
preferred stock of Ursus, all of which are beneficially owned by Mr.
Giussani, who holds sole voting and investment power with respect to the
Series A preferred stock.
(3) Excludes 10-year options to purchase 150,000 shares of common stock granted
to Mr. McEwan, one-half vesting one year after the initial public offering,
and one-half vesting on August 31, 1999.
(4) Includes 10-year options to purchase 150,000 shares of common stock.
(5) Includes 10-year options to purchase 150,000 shares of common stock.
(6) Includes 10-year options to purchase 15,000 shares of common stock.
(7) Less than 1%.
(8) Includes 10-year options to purchase 10,000 shares of common stock.
(9) Excludes 10-year options to purchase 20,000 shares of common stock.
As used in this table, "beneficial ownership" means the sole or shared
power to vote, or to direct the voting of a security, or the sole or shared
investment power with respect to a security (i.e., the power to dispose, or
direct the disposition, of a security). Accordingly, they may include shares
owned by or for, among others, the wife, minor children or certain other
relatives of such individual, as well as other shares as to which the individual
has the right to acquire within 60 days after such date.
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock is subject to the
Florida Business Corporation Act ("FBCA") and to provisions contained in our
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. Reference is made to such exhibits for a detailed description of
the provisions thereof summarized below.
Our authorized capital stock consists of 1,000,000 shares of preferred
stock, $.01 par value per share, of which 1,000 shares of Series A preferred
stock will be issued and outstanding, and 20,000,000 shares of common stock, par
value $.01 per share, 6,600,000 shares of which are issued and outstanding.
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 our board of directors and paid by us.
In the event of any liquidation, dissolution or winding-up of Ursus,
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 our board of directors has the authority
to fix the rights and preferences of, and to issue, our authorized but unissued
preferred stock without approval of the holders of our 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 our board of directors which may be elected by
the holders of such stock.
The common stock presently outstanding are fully paid and
non-assessable.
PREFERRED STOCK
Our 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 Ursus, (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. We have authorized one class of Series A
preferred stock, consisting of 1,000 shares, all of which are issued and
outstanding and owned by our 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 our 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 preferred stock will not participate in
dividends and will not be redeemable or convertible into common stock. The
holders of 662/3 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
As of December 31, 1998, granted options to purchase up to 737,500
shares of common stock, at the Option Prices, pursuant to the provisions of the
our Stock Incentive Plan. See "Management-Stock Incentive Plan." Our
Compensation Committee of the board of directors may authorize the issuance of
additional options under the Stock Incentive Plan. We filed a registration
statement on Form S-8 under the Securities Act to register these shares. See
"Shares Eligible for Future Sale."
REPRESENTATIVE'S WARRANTS
Pursuant to an underwriting agreement with Joseph Charles &
Associates, Inc. ("Joseph Charles") which was entered into in May 1998 in
connection with the initial public offering (the "Underwriting Agreement"), we
sold to Joseph Charles, as representative of the underwriters, for the sum of
$150.00, warrants to purchase up to 150,000 shares of common stock at $15.20 per
share, subject to certain anti- dilution provisions for stock splits, stock
dividends, recombinations and reorganizations ("Representative's Warrants"). The
shares purchasable upon exercise of the Representative's Warrant are identical
to the shares offered pursuant to our initial public offering. The
Representative's Warrants are not transferable for one year from the date of
issuance, except to officers of Joseph Charles and members of the selling group
and their officers. For the life of the Representative's Warrants, the holder
thereof is given the opportunity to profit from a rise in the market price of
our common stock with a resulting dilution in the interest of other
shareholders. We may find it more difficult to raise additional equity capital
while the Representative's Warrants are outstanding; at any time when the
holders of the Representative's Warrants might be expected to exercise them, we
would probably be able to obtain additional equity capital on terms more
favorable than those provided in the Representative's Warrants. Pursuant to the
terms of the Representative's Warrants, we agreed to register under the
securities act, at its expense on one occasion, the Representative's Warrants
and/or the underlying shares at the request of the holders thereof. We have has
also agreed to afford certain "piggy-back" registration rights to the holders of
the Representative's Warrants and/or the underlying warrant shares (which expire
on May 12, 2003).
VOTING RIGHTS
Shareholders are entitled to one vote for each share of common stock
held of record. Holders of common stock vote cumulatively for the election of
directors. The holders of Series A preferred stock, voting as a separate class,
are 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 URSUS' 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 could have the effect of delaying,
deferring or preventing changes in control of Ursus.
Our Amended and Restated Articles of Incorporation contain certain
provisions that could discourage potential takeover attempts and impede attempts
by shareholders to change management. The Amended and Restated Articles of
Incorporation provide for a classified board of directors consisting of three
classes as nearly equal in size as practicable. Each class holds 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 expire in 1998, 1999
and 2000, respectively. Our Amended and Restated Articles of Incorporation
provide that no director may be removed except for cause and by the vote of not
less than 66.66% of the total outstanding voting power of the securities of
Ursus which are then entitled to vote in the election of directors. The Amended
and Restated Articles of Incorporation permit the board of directors to create
new directorships, and our 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 66.66% of the total outstanding voting power of the securities of
Ursus then entitled to vote in the election of directors is required to amend
the foregoing provisions of the Amended and Restated Articles of Incorporation.
Ursus 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 Ursus.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article NINTH of our Amended and Restated Articles of Incorporation
provides that, to the full extent permitted by the FBCA, directors shall not be
personally liable to Ursus or our shareholders for damages for breach of any
duty owed to the Ursus or our shareholders.
Our Amended and Restated Articles of Incorporation and Bylaws provide
that we shall indemnify our directors and officers to the fullest extent
permitted by the FBCA.
We maintain directors' and officers' liability insurance which is
intended to provide our directors and officers protection from personal
liability in addition to the protection provided by our 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.
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
DESCRIPTION
We have outstanding 6,600,000 shares of common stock. The 1,500,000
shares of common stock sold in the initial public offering are freely tradable
by persons other than "affiliates" of Ursus, as that term is defined in Rule 144
under the Securities Act, without restriction or registration under the
Securities Act. The remaining 5,100,000 outstanding shares (all such shares
being referred to herein as the "Controlling Shareholders Shares") are held by
our Controlling Shareholders, with the exception of the 100,000 shares issued in
connection with the Starcom acquisition. The Controlling 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 Controlling 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 May
12, 1999.
As currently in effect, Rule 144 generally permits the public sale in
ordinary trading transactions of "restricted securities" and of securities owned
by "affiliates" 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 an initial
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 Ursus or
an affiliate of Ursus, 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 (1) 1% of our
then outstanding shares of common stock or (2) the share's average weekly
trading volume during the four calendar weeks preceding the date the Notice of
Sale is filed with the Securities and Exchange 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 Ursus.
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
Ursus 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.
We have has reserved 1,000,000 shares of our common stock for issuance
under the Stock Incentive Plan. We have filed a Registration Statement on Form
S-8 under the Securities Act to register these shares. Subject to compliance
with Rule 144 by affiliates of Ursus, any shares issued upon exercise of options
granted under the Stock Incentive Plan are freely tradable. However, such shares
will not be transferable without the consent of the Representative until May 12,
1999.
SALES BY REGISTERING SHAREHOLDERS
This prospectus relates to the offer and sale from time to time of
200,000 shares of common stock. The Shares are offered by the Registering
Stockholders identified in the table below. It is unknown if, when, or in what
amounts a Registering Stockholder may offer the Shares for sale. There is no
assurance that the Registering Stockholders will sell any or all of the Shares
offered.
Because the Registering Stockholders may offer all or some of the
Shares pursuant to the Offering, and because there are currently no agreements,
arrangements or understandings with respect to the sale of any of the Shares
that will be held by the Registering Stockholders after completion of the
Offering, we cannot give an estimate of the amount of the Shares that will be
held by the Registering Stockholders after completion of the Offering.
The Registering Stockholders and any broker or dealer to or through
whom any of the Shares are sold may be deemed to be underwriters within the
meaning of the Securities Act with respect to the Shares offered, and any
profits realized by the Registering Stockholders are not expected to exceed
normal selling expenses for sales. The registration of the Shares under the
Securities Act shall not be deemed an admission by the Registering Stockholders
or Ursus that the Registering Stockholders are underwriters for purposes of the
Securities Act of any Shares offered under this prospectus.
The following table sets forth the name of each Registering
Stockholder and the number of shares and percentage of common stock owned
beneficially by each Registering Stockholder as of December 31, 1998. We will
not receive any of the proceeds from the sale of Shares by the Registering
Stockholders.
Any underwriting commission paid by Ursus 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 Ursus) 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.
<TABLE>
<CAPTION>
NAME OF REGISTERING SHARES BENEFICIALLY SHARES TO BE SOLD IN SHARES BENEFICIALLY
STOCKHOLDER OWNED BEFORE THE OFFERING THE OFFERING (1) OWNED AFTER THE OFFERING
NUMBER PERCENT NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Luca M. Giussani 4,200,000 62.5% ---- 4,200,000 62.5%
Jeffrey R. Chaskin 375,000 5.6% ---- 375,000 5.6%
- --------------------
(1) 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 Representatives consent
until 12 months after the date of the initial public offering.
</TABLE>
<PAGE>
PLAN OF DISTRIBUTION
We will not receive any of the proceeds from the sale of the common
stock offered by the Registering Stockholders. The Registering Stockholders may
sell all or a portion of the shares of common stock from time to time while the
Registration Statement of which this prospectus is a part remains effective. To
the extent required, the number of shares of common stock to be sold, the names
of the Registering Stockholders, the purchase price, the name of any agent or
dealer and any applicable commissions with respect to a particular offer will be
set forth in an accompanying supplement to this prospectus. The aggregate
proceeds to the Registering Stockholders from the sale of common stock offered
will be the prices at which such securities are sold, less any commissions.
Following the expiration of the 12 month holdback period to which
their shares are subject or the waiver of such holdback by the underwriters, the
common stock may be sold by the Registering Stockholders in transactions on the
over-the-counter market, in negotiated transactions, or by a combination of
these methods, at fixed prices that may be changed, at market prices prevailing
at the time of sale, at prices related to such market prices or at negotiated
prices. A Registering Stockholder may elect to engage a broker or dealer to
effect sales in one or more of the following transactions: (a) block trades in
which the broker or dealer so engaged will attempt to sell the converted shares
as agent but may position and resell a portion of the block as principal to
facilitate the transaction, (b) purchases by a broker or dealer as principal and
resale by such broker or dealer for its account pursuant to this prospectus, and
(c) ordinary brokerage transactions and transactions in which the broker
solicits purchasers, (d) pro rata distributions as part of the liquidation and
winding up of the affairs of the Registering Stockholders, (e) privately
negotiated transactions and (f) exchange distributions and/or secondary
distributions in accordance with the rules of the Nasdaq. In effecting sales,
brokers and dealers engaged by Registering Stockholders may arrange for other
brokers or dealers to participate. Brokers or dealers may receive commissions or
discounts from Registering Stockholders in amounts to be negotiated (and, if
such broker-dealer acts as agent for the purchaser of such shares, from such
purchaser). Broker-dealers may agree with the Registering Stockholders to sell a
specified number of such shares at a stipulated price per share, and, to the
extent such broker-dealer is unable to do so acting as agent for a Registering
Stockholder, to purchase as principal any unsold shares at the price required to
fulfill the broker-dealer commitment to such Registering Stockholder.
Broker-dealers who acquire shares as principal may thereafter resell
such shares from time to time in transactions (which may involve crosses and
block transactions and sales to and through other broker-dealers, including
transactions of the nature described above) in the over-the-counter market or
otherwise at prices and on terms then prevailing at the time of sale, at prices
then related to the then- current market price or in negotiated transactions
and, in connection with such resales, may pay to or receive from the purchasers
of such shares commissions as described above. The Registering Stockholders may
also pledge such shares to banks, brokers or other financial institutions as
security for margin loans or other financial accommodations that may be extended
to such Registering Stockholders, and any such bank, broker or other institution
may similarly offer, sell and effect transactions in such shares.
The Registering Stockholders may from time to time deliver all or a
portion of the Shares to cover a short sale or sales upon the exercise,
settlement, or closing of a call equivalent position or a put equivalent
position.
The Registering Stockholders may sell all or any portion of the Shares
in reliance upon Rule 144 under the Securities Act. Shares not sold pursuant to
the Registration Statement of which this prospectus is a part may be subject to
certain restrictions under the Securities Act and could be sold, if at all, only
pursuant to Rule 144 or another exemption from the registration requirements of
the Securities Act. In general, under Rule 144, a person (or persons whose
Shares are aggregated) who has satisfied a one-year holding period may, under
certain circumstances, sell within any three-month period a number of Shares
which does not exceed the greater of one percent of our outstanding shares of
common stock or the average weekly reported trading volume of our common stock
during the four calendar weeks prior to such sale. Rule 144 also permits, under
certain circumstances, the sale of Shares by a person who is not an affiliate of
Ursus and who has satisfied a two-year holding period without any volume
limitation. Therefore, both during and after the effectiveness of the
Registration Statement, sales of the Shares may be made by the Registering
Stockholders pursuant to Rule 144.
The Registering Stockholders and any broker-dealers or agents that
participate with the Registering Stockholders in sales of shares of common stock
may be deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales. In such event, any commissions received by such
broker-dealers or agents and any profit on the resale of the shares of common
stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
Ursus will pay all expenses incident to the Offering and sale of the
common stock to the public other than underwriting discounts and selling
commissions.
Ursus and the Registering Stockholders may agree to indemnify certain
persons, including broker-dealers or others, against certain liabilities in
connection with the Offering of the Shares, including liabilities under the
Securities Act.
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. These transactions may be effected on the Nasdaq
national market or otherwise. Stabilizing, if commenced, may be discontinued at
any time. For a description of these activities, see "underwriting."
INITIAL PUBLIC OFFERING
In connection with the initial public offering, we entered into an
Underwriting Agreement with Joseph Charles, the representative of the
underwriters, a copy of which has been filed with the Securities and Exchange
Commission as an exhibit to the Registration Statement. The Underwriting
Agreement provided that the underwriters purchase, on a "firm commitment" basis,
1,500,000 shares from us upon closing of the underwriting at a price to us which
reflected an underwriter's discount of 7 3/4 % from the price at which such
shares would be offered for sale to the public, $9.50 per share; that is, Joseph
Charles would pay Ursus $8.76375 per share or an aggregate of $13,145,625 for
all 1,500,000 shares. The difference of $.73625 per share between the
underwriters' price and the price to the public, or an aggregate of $1,104,375
for 1,500,000 shares, represented the underwriters, compensation. Pursuant to
the Underwriting Agreement, we also granted the underwriters a 45-day option to
purchase up to an additional 225,000 shares of common stock to cover
over-allotments at the Option Prices less the underwriting discount of 7 3/4%,
Joseph Charles did not exercise the over-allotment option. The Underwriting
Agreement further provided that Joseph Charles would receive from us a
non-accountable expense allowance equal to 3% of the aggregate offering price of
the shares offered pursuant thereto. In addition to the foregoing, Joseph
Charles acquired the Representative's Warrants. See "Description of Capital
Stock--Representative's Warrants." The initial public offering closed on May 18,
1998.
We have also agreed, for a period of two (2) years from May 12, 1998,
at the option of Joseph Charles, to nominate a designee of Joseph Charles as a
non-voting advisor to our board of directors. The 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 reimbursement for expenses for attendance at board of
directors meetings. Joseph Charles has not yet exercised its right to designate
such a person.
At the closing of the initial public offering, we retained Joseph
Charles as a financial consultant for two years. Upon the closing of the initial
public offering, we paid, in full, an aggregate consulting fee of $72,000 to
Joseph Charles for its consulting services.
Except (1) in connection with acquisitions, (2) the issuance of up to
1,000,000 shares of common stock issuable under the Stock Incentive Plan, or,
(3) with the consent of the Representative, warrants issued in connection with a
debt offering intended to fund acquisitions we have agreed that, for a period of
twelve (12) months from the closing of the initial public offering, we will not
issue, sell or purchase any shares of common stock or preferred stock or issue
warrants or options or other equity securities without the prior written consent
of the Representative. In addition, our officers, directors and principal
shareholders 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 of our shares of common stock or preferred stock owned by them
for a period of at least twelve (12) months from the closing of the initial
public offering without the prior written consent of the Representative except
for transfers among existing shareholders and gifts to their children or trusts
for their children provided such persons agree to be bound by the foregoing
restrictions. 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.
LEGAL MATTERS
Stroock & Stroock & Lavan LLP, Miami, Florida has passed upon certain
legal matters regarding the common stock for Ursus.
EXPERTS
Our consolidated financial statements at March 31, 1998 and 1997 and
for each of the three years in the period ended March 31, 1998, 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 in this prospectus, and are included in reliance
upon their report given upon the authority of Ernst & Young LLP as experts in
accounting and auditing.
The consolidated financial statements of Access at December 31, 1997
and 1996 and for each of the three years in the period ended December 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 appearing elsewhere in this Prospectus and are included in reliance
upon their report given upon the authority of Ernst & Young LLP as experts in
accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Post
Effective Amendment No. 1 to the registration statement on Form S-1 under the
Securities Act, of which this prospectus forms a part, with respect to the
common stock offered by the Registering Stockholders. This prospectus omits
certain information contained in the registration statement, and reference is
made to the registration statement for further information with respect to Ursus
and the common stock offered hereunder. 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 Securities and Exchange Commission.
The registration statement, including exhibits and schedules thereto
may be inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the Securities and Exchange 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 Securities and Exchange Commission, Washington, D.C.
20549. In addition, registration statements and certain other filings made by
the Securities and Exchange Commission through its Electronic Data Gathering and
Retrieval ("EDGAR") systems are publicly available through the Securities and
Exchange Commission's site on the Internet's World Wide Web, located at
http://www.sec.gov. Information on our company can also be obtained at our
investor relations website, located at http://www.ursustele.com.
REPORTS TO SHAREHOLDERS
We plan to furnish our 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.
<PAGE>
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.
CALL-THROUGH-The provision of international long distance service
through conventional long distance or "transparent" call reorigination.
CLEC-Competitive Local Exchange Carrier.
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.
FCPA-Foreign Corrupt Practices Act.
FIBER-OPTIC-A transmission medium consisting of high-grade glass fiber
through which light beams are transmitted carrying a high volume of
telecommunications traffic.
IDD-International Direct Dial.
INTERNET PROTOCOL (IP)-A class of product that uses data and/or voice
transmission over the Internet/Intranet.
IRU-Indefeasible Right of Use.
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.
LCR-Least Cost Routing.
LEC (LOCAL EXCHANGE CARRIER)-Companies from which Ursus and other long
distance providers must purchase "access services" to originate and terminate
calls in the U.S.
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.
PSCS-Public Service Commissions.
PRIVATE LINE-A dedicated telecommunications connection between end
user locations.
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 A process which uses interconnecting circuits to form a
transmission path.
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
where the call is automatically and swiftly processed by a programmed switch
without the usual "hang up" and "callback."
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).
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
URSUS TELECOM CORPORATION
Pro Forma Condensed Consolidated Financial Statements (unaudited) F-2
Pro Forma Condensed Consolidated Statement of Operations for F-3
the Year Ended March 31, 1998 (unaudited)
Pro Forma Condensed Consolidated Statement of Operations for
the Nine Months Ended December 31, 1998 (unaudited) F-4
Notes To Unaudited Pro Forma Condensed Consolidated Statements
of Operations F-5
Consolidated Financial Statements
F-6
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of March 31, 1997 and 1998 and
December 31, 1998 (unaudited) F-7
Consolidated Statements of Income for the Fiscal Years Ended
March 31, 1996, 1997 and 1998 and the Nine Months Ended
December 31, 1998 (unaudited) F-8
Consolidated Statement of Shareholders' Equity (Capital
Deficiency) for the Fiscal Years Ended March 31, 1996, 1997
and 1998 and the Nine months Ended December 31, 1998 (unaudited) F-9
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 1996, 1997 and 1998 and the Nine months
Ended December 31, 1998 (unaudited) F-10
Notes to Consolidated Financial Statements F-13
ACCESS AUTHORITY INC.
Combined Consolidated Financial Statements F-29
Report of Independent Auditors F-29
Consolidated Balance Sheets as of December 31, 1996 and 1997
and June 30, 1998 (unaudited) F-30
Combined Consolidated Statements of Operations for the Years
Ended December 31, 1995, 1996 and 1997 and the Six Months Ended
June 30, 1997 and 1998 (unaudited) F-31
Combined Consolidated Statements of Stockholders' Deficit for
the Years Ended December 31, 1995, 1996 and 1997 and the
Six Months Ended June 30, 1998 (unaudited) F-32
Combined Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1996 and 1997 and the Six Months
Ended June 30, 1997 and 1998 (unaudited) F-33
Notes to Combined Consolidated Financial Statements F-34
<PAGE>
PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Consolidated Statements of Operations
The following pro forma condensed consolidated statements of operations are set
forth herein to give effect to the acquisition of Access by the Company as if
such acquisition had occurred as of the beginning of each period presented by
combining the statements of operations of (i) the Company for the year ended
March 31, 1998 and Access for the year ended December 31, 1997, and (ii) the
Company for the nine months ended December 31, 1998 and Access for the six
months ended June 30, 1998. The pro forma consolidated statements of operations
do not reflect any potential cost savings which may be obtained following the
acquisition. The pro forma adjustments and assumptions are based on estimates,
evaluations and other data currently available.
The pro forma condensed consolidated statements of operations are provided for
illustrative purposes only and are not necessarily indicative of the combined
results of operations that would have been reported on a historical basis, nor
do they represent a forecast of the combined future results of operations for
any future period. All information contained herein should be read in
conjunction with the Consolidated Financial Statements and the notes thereto of
the Company and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included herein and the financial statements and notes
thereto of Access included herein.
<PAGE>
<TABLE>
<CAPTION>
URSUS TELECOM CORPORATION
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1998
URSUS
TELECOM ACCESS
CORPORATION AUTHORITY INC.
YEAR ENDED YEAR ENDED
MARCH 31, DECEMBER 31, PRO FORMA
1998 1997(A) ADJUSTMENTS PRO FORMA
--------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Retail $24,198,629 $24,096,245 $48,294,874
Wholesale 3,899,695 23,457,638 27,357,333
--------------------------------------------------------------------------------------
Total revenues 28,098,324 47,553,883 75,652,207
Cost of revenues:
Retail 15,017,899 14,421,434 29,439,333
Wholesale 3,514,796 19,581,748 23,096,544
--------------------------------------------------------------------------------------
Total cost of revenues 18,532,695 34,003,182 52,535,877
--------------------------------------------------------------------------------------
Gross profit 9,565,629 13,550,701 23,116,330
Operating expenses:
Commissions 4,181,651 5,473,772 9,655,423
Selling, general and administrative
expenses 3,467,585 6,557,425 10,025,010
Depreciation and amortization 196,497 413,078 527,012(b) 1,136,587
--------------------------------------------------------------------------------------
Total operating expenses 7,845,733 12,444,275 527,012 20,817,020
--------------------------------------------------------------------------------------
Operating income 1,719,896 1,106,426 (527,012) 2,299,310
Other income (expense):
Interest expense (23,747) (140,888) (164,635)
Interest income 26,752 48,444 75,196
Gain (loss) on sale of equipment 10,584 - 10,584
--------------------------------------------------------------------------------------
13,589 (92,444) (78,855)
--------------------------------------------------------------------------------------
Income before provision (benefit)
for income taxes 1,733,485 1,013,982 (527,012) 2,220,455
Provision (benefit) for income taxes 659,577 (361,000) (d) 298,577
--------------------------------------------------------------------------------------
Net income $1,073,908 $ 1,374,982 $(527,012) $1,921,878
======================================================================================
Pro forma net income per common
share-basic and dilutive $ .21 $ .38
======================================================================================
Pro forma weighted average shares
outstanding 5,000,000 5,000,000
======================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
URSUS TELECOM CORPORATION
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998
URSUS
TELECOM ACCESS
CORPORATION AUTHORITY INC.
FOR THE NINE FOR THE SIX
MONTHS ENDED MONTHS ENDED
DECEMBER 31, JUNE 30, PRO FORMA PRO FORMA
1998 1998(A) ADJUSTMENTS
-------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Retail $19,277,901 $8,586,575 $27,864,476
Wholesale 5,064,998 9,979,816 15,044,814
-------------------------------------------------------------------------------
Total revenues 24,342,899 18,566,391 42,909,290
Cost of revenues:
Retail 11,752,914 5,755,106 17,508,020
Wholesale 3,914,616 8,251,976 12,166,592
-------------------------------------------------------------------------------
Total cost of revenues 15,667,530 14,007,082 29,674,612
-------------------------------------------------------------------------------
Gross profit 8,675,369 4,559,309 13,234,678
Operating expenses:
Commissions 2,803,169 1,070,895 3,874,064
Selling, general and administrative expenses 5,025,665 3,699,393 8,725,058
Depreciation and amortization 569,557 263,101 397,720 (c) 1,230,378
-------------------------------------------------------------------------------
Total operating expenses 8,398,391 5,033,389 397,720 13,829,500
-------------------------------------------------------------------------------
Operating income (loss) 276,978 (474,080) (397,720) (594,822)
Other income (expense):
Interest expense (31,869) (23,621) (55,490)
Interest income 273,966 46,446 320,412
Gain (loss) on sale of equipment (3,244) - (3,244)
Gain on contingency settlement - 499,756 499,756
-------------------------------------------------------------------------------
238,853 522,581 761,434
-------------------------------------------------------------------------------
Income (loss)before provision (benefit)
for income taxes 515,830 48,501 (397,720) 166,612
Provision (benefit) for income taxes 347,981 18,000 (d) 365,981
-------------------------------------------------------------------------------
Net income(loss) $ 167,850 $ 30,501 $ (397,720) $ (199,369)
===============================================================================
Pro forma net income per common
Share-basic and dilutive $ .03 $ (.03)
===============================================================================
Pro forma weighted average shares outstanding 6,199,407 6,199,407
===============================================================================
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Note 1. The unaudited pro forma condensed consolidated statements of operations,
including the notes thereto, should be read in conjunction with the historical
consolidated financial statements of the Company and the combined consolidated
financial statements of Access for the indicated periods.
Note 2. The Company purchased Access on September 17, 1998, and the results of
operations of Access have been included in the Company's historical results from
that date to December 31, 1998. For the purpose of presenting the pro forma
statements of operations data as if the acquisition was completed as of the
beginning of each period presented, the Company's statement of operations for
the year ended March 31,1998 has been combined with Access' statement of
operations for the year ended December 31, 1997. Additionally, the Company's
statement of operations for the nine month period ended December 31, 1998 has
been combined with Access's statement of operations for the six month period
ended June 30, 1998. The purpose of combining the two companies is for the
presentation of unaudited pro forma condensed consolidated statements of
operations only.
Note 3. The unaudited pro forma condensed consolidated statements of operations
for the Company and Access have been prepared as if the acquisition was
completed as of the beginning of each period presented. The unaudited pro forma
net loss per share is based on the weighted average number of common shares of
the Company's Common Stock outstanding during the periods presented.
Note 4. The unaudited pro forma condensed consolidated statements of operations
do not reflect activity subsequent to the periods presented and therefore do not
reflect the loss of revenue attributable to Access's loss of two agents. These
agents in the aggregate accounted for approximately $2 million per month of
revenue for the year ended December 31, 1997.
Note 5. The following pro forma adjustments are reflected in the unaudited pro
forma condensed consolidated statements of operations.
(a) Certain reclassifications have been made to Access's historical financial
statements to conform to Ursus Telecom Corporation's presentation.
(b) To record amortization expense of intangibles for the year ended March 31,
1998 for the excess of purchase price over the fair value of net assets
acquired. The Company has allocated the excess of purchase price over the
fair value of net assets acquired to goodwill and customer lists using
lives of 25 and 5 years, respectively.
(c) To record amortization expense of intangibles for the nine months ended
December 31, 1998. The Company has allocated the excess of purchase price
over the fair value of net assets acquired to goodwill and customer lists
using lives of 25 and 5 years, respectively.
(d) No tax effect has been recorded as the amortization expense is
non-deductible for income tax purposes.
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Ursus Telecom Corporation
We have audited the accompanying consolidated balance sheets of Ursus Telecom
Corporation as of March 31, 1997 and 1998, and the related consolidated
statements of income, shareholders' equity (deficit) and cash flows for each of
the three years in the period ended March 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 16. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Ursus
Telecom Corporation at March 31, 1997 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Miami, Florida
July 2, 1998
<PAGE>
<TABLE>
<CAPTION>
URSUS TELECOM CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1997 1998 1998
---------------------------------------------------
(UNAUDITED)
ASSETS
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 740,765 $1,035,149 $3,519,626
Accounts receivable, net 3,378,886 4,183,750 4,568,865
Advances and notes receivable--related parties 185,694 65,274 88,962
Prepaid expenses 51,570 54,980 385,278
Income taxes receivable 161,430 60,430 -
Deferred taxes 9,076 49,841 603,913
Other current assets 38,716 52,944 26,844
---------------------------------------------------
Total current assets 4,566,137 5,502,368 9,193,488
Equipment, net 587,368 1,258,074 3,439,846
Deferred taxes 17,373 14,042 14,042
Deposit on acquisition - 377,141 214,299
Deferred costs of public offering - 514,619 -
Intangibles, net - - 8,931,966
Other assets, net 72,508 66,267 593,737
---------------------------------------------------
Total assets $5,243,386 $7,732,511 $22,387,378
===================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,714,789 $4,064,394 $4,277,268
Accrued expenses 38,660 89,838 492,232
Commissions payable 85,516 57,085 1,101,634
Customer advances - 90,000 157,798
Income taxes payable 74,146 - 233,038
Current portion of capital lease obligations - 48,835 239,997
Deferred revenue 7,006 59,970 37,980
---------------------------------------------------
Total current liabilities 2,920,117 4,410,122 6,539,947
Long term portion of capital lease obligations - 296,555 836,078
Deferred taxes 36,834 77,614 168,852
Long-term debt 425,000 - -
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 issued and outstanding - 50,000 65,000
Common stock--Class A: $50 par value; 500 shares authorized,
issued and outstanding 25,000 - -
Common stock--Class B: $50 par value; 15,500 shares authorized,
3,500 issued and outstanding 175,000 - -
Common stock--Class C: $50 par value; 4,000 shares authorized,
1,416.67 issued and outstanding, net of discount of $2,084 68,750 - -
Stock subscription receivable (18,750) - -
Additional paid-in capital - 218,740 11,914,843
Translation adjustment - (5,873) 9,455
Retained earnings 1,611,435 2,685,343 2,853,193
-------------------------------------------------
Total shareholders' equity 1,861,435 2,948,220 14,842,501
-------------------------------------------------
Total liabilities and shareholders' equity $5,243,386 $7,732,511 22,387,378
====================================================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
URSUS TELECOM CORPORATION
Consolidated Statements of Income
YEAR ENDED MARCH 31, NINE MONTHS ENDED
DECEMBER 31,
1996 1997 1998 1997 1998
--------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Retail $13,228,074 $20,523,019 $24,198,629 $18,420,864 $19,277,901
Wholesale - 315,408 3,899,695 2,608,249 5,064,998
---------------------------------------------------------------------------------------
Total revenues 13,228,074 20,838,427 28,098,324 21,029,113 24,342,899
Cost of revenues:
Retail 7,675,370 12,031,794 15,017,899 11,376,834 11,752,914
Wholesale - 163,878 3,514,796 2,411,922 3,914,616
---------------------------------------------------------------------------------------
Total cost of revenues 7,675,370 12,195,672 18,532,695 13,788,756 15,667,530
---------------------------------------------------------------------------------------
Gross profit 5,552,704 8,642,755 9,565,629 7,240,357 8,675,369
Operating expenses:
Commissions 2,429,830 3,766,235 4,181,651 3,202,016 2,803,169
Selling, general and administrative 1,659,591 2,746,379 3,467,585 2,490,506 5,025,665
expenses
Depreciation and amortization 94,415 126,292 196,497 133,429 569,557
---------------------------------------------------------------------------------------
Total operating expenses 4,183,836 6,638,906 7,845,733 5,825,951 8,398,391
---------------------------------------------------------------------------------------
Operating income 1,368,868 2,003,849 1,719,896 1,414,406 276,978
Other income (expense):
Interest expense (59,353) (39,363) (23,747) (19,691) (31,869)
Interest income 5,089 16,271 26,752 22,443 273,966
Gain (loss) on sale of equipment - 9,644 10,584 10,584 (3,244)
---------------------------------------------------------------------------------------
(54,264) (13,448) 13,589 13,336 238,853
---------------------------------------------------------------------------------------
Income before provision
for income taxes 1,314,604 1,990,401 1,733,485 1,427,742 515,831
Provision for income taxes 524,553 737,895 659,577 537,259 347,981
---------------------------------------------------------------------------------------
Net income $ 790,051 $1,252,506 $ 1,073,908 $ 890,483 $ 167,850
=======================================================================================
Pro forma net income per common
share-basic and dilutive $ .16 $ .25 $ .21 $ .18 $ .03
=======================================================================================
Pro forma weighted average shares
outstanding 5,000,000 5,000,000 5,000,000 5,000,000 6,199,407
=======================================================================================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ursus Telecom Corporation
Consolidated Statements of Shareholders' Equity (Deficit)
RETAINED
ADDITIONAL STOCK EARNINGS ACCUMULATED
PREFERRED COMMON STOCK COMMON PAID-IN SUBSCRIPTION (ACCUMULATED TRANSLATION
STOCK CLASS A CLASS B CLASS C STOCK CAPITAL RECEIVABLE DEFICIT) ADJUSTMENT TOTAL
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
April 1, 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
Stock split and
recapitalization 10 (25,000) (175,000) (68,750) 50,000 218,740 - - - -
Net income - - - - - - - 1,073,908 - 1,073,908
Translation
adjustment - - - - - - - - (5,873) (5,873)
-----------------------------------------------------------------------------------------------------------------
Balance at
March 31, 1998 10 - - - 50,000 $218,740 - 2,685,343 (5,873) 2,948,220
Net Income - - - - - - - 167,850 - 167,850
Translation
Adjustment - - - - - - - - 15,328 15,328
Issuance of
Common Stock
net of offering
costs
of $514,619 - - - - 15,000 11,696,103 - - - 11,711,103
-----------------------------------------------------------------------------------------------------------------
Balance at
December 31,
1998 (unaudited) $10 $ - $ - - $65,000 $11,914,843 $ - $2,853,193 $ 9,455 $14,842,501
=================================================================================================================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ursus Telecom Corporation
Consolidated Statements of Cash Flows
YEAR ENDED MARCH 31, NINE MONTHS
ENDED
DECEMBER 31,
1996 1997 1998 1997 1998
----------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
<S> <C> <C> <C> <C> <C>
Net income $790,051 $1,252,506 $1,073,908 $890,483 $ 167,850
Adjustments to reconcile net
income to net
cash provided by operating activities:
Depreciation and amortization 94,415 126,292 196,497 133,429 569,557
Allowance for doubtful accounts 10,232 3,619 50,964 - 80,281
(Gain) loss on sale of equipment - (9,644) (10,584) (10,584) 3,244
Deferred income taxes 296,815 (2,799) 3,346 1,958 17,173
Changes in operating assets
and liabilities excluding the
effects of the business
acquisition:
Accounts receivable (943,913) (1,647,068) (1,232,969) (1,733,215) 554,771
Prepaid expenses (4,499) (33,155) (34,564) (2,198) 63,679
Other current assets - (38,716) (43,250) (2,577) 26,100
Income taxes receivable - (161,430) 101,000 161,430 60,430
Accounts payable 482,538 1,268,595 1,349,605 1,120,151 (2,359,101)
Accrued expenses (20,473) 15,877 51,178 32,331 (519,104)
Commissions payable (2,435) 56,862 (28,431) (10,195) 31,160
Customers advances - - 90,000 30,000 (123,444)
Income taxes payable 8,225 47,868 (74,146) (34,364) 233,038
Deferred revenue 9,314 (2,308) 52,964 61,504 (21,990)
Deferred discounts (47,798) (18,567) - - -
----------------------------------------------------------------------------
Net cash provided by (used in) 672,472 857,932 1,545,518 638,153 (1,216,356)
operating activities
INVESTING ACTIVITIES
Purchase of equipment (93,646) (352,081) (486,767) (320,690) (527,116)
Sale of equipment - 10,000 - - -
(Increase) decrease in
advances to related parties (122,668) (63,026) 180,597 151,843 (23,688)
Cash used for the acquisition
of Access Authority Inc.,
net of cash acquired - - - - (7,484,753)
(Increase) decrease in other assets (6,152) (33,976) 5,040 (2,142) (447,520)
----------------------------------------------------------------------------
Net cash used in investing activities (222,466) (439,083) (301,130) (170,989) (8,483,077)
FINANCING ACTIVITIES
Deferred costs of public offering - - (514,619) (207,531) -
Repayments of long-term debt (150,000) (155,000) (425,000) (340,000) -
Collection of stock subscription receivable - - 18,750 18,750 -
Net proceeds from the sale of common stock - - - - 12,225,722
Repayments on capital leases - - (23,262) - (57,140)
---------------------------------------------------------------------------
Net cash (used in)
provided by financing activities (150,000) (155,000) (944,131) (528,781) 12,168,582
Effect of foreign exchange rate changes
on cash and cash equivalents - - (5,873) - 15,328
----------------------------------------------------------------------------
Net increase (decrease)in cash
and cash equivalents 300,006 263,849 294,384 (61,617) 2,484,477
Cash and cash equivalents at
beginning of period 176,910 476,916 740,765 740,765 1,035,149
----------------------------------------------------------------------------
Cash and cash equivalents at $ 476,916 $ 740,765 $1,035,149 $ 679,148 $3,519,626
end of period
============================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ursus Telecom Corporation
Consolidated Statements of Cash Flows (continued)
YEAR ENDED MARCH 31, NINE MONTHS ENDED
DECEMBER 31,
1996 1997 1998 1997 1998
--------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION
<S> <C> <C> <C> <C> <C>
Cash paid for interest $ 58,670 $ 38,838 $ 26,915 $ 22,224 $ 31,869
================================================================================
Cash paid for income taxes $201,460 $ 854,256 $ 540,751 $ 408,236 $156,000
================================================================================
Trade-in allowance for used equipment $ - $ 60,000 $ 67,500 $ 67,500 $ -
================================================================================
Property and equipment
acquired under capital lease $ - $ - $ 368,652 $ - $647,031
================================================================================
Receivable applied as a
deposit on acquisition $ - $ - $ 377,141 $ 321,059 $(162,842)
================================================================================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1998 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 and
Europe. The Company extends credit to both its retail and wholesale 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
some 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 12 - Significant Customers, and Note 13-
Business Risk.
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 businesses 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 allocated
the purchase price to assets and liabilities acquired based upon their estimated
fair values.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements as of December 31, 1998
and for each of the nine month periods ended December 31, 1998 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, 1998 and 1997 are not necessarily indicative of the results
of operations for a full fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform with current
period presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
CONSOLIDATION
The consolidated financial statements of the Company include the accounts of its
50.4% owned subsidiary, Ursus Telecom France a limited liability company
incorporated in France, which was formed during the year. The subsidiary was
formed with a contribution by the Company of a switch and other equipment with a
historical net book value of approximately $153,000. The minority shareholders
contributed their knowledge of the local market and an existing customer base.
The consolidated financial statements also include the accounts of Access as of
September 17, 1998. All significant transactions between the Company and its
subsidiaries have been eliminated in consolidation.
MINORITY INTEREST
The Company would generally allocate to the minority shareholder its share of
any profits or losses. For the year ended March 31, 1998 and the nine months
ended December 31, 1998 the minority interest shareholder did not fund its share
of the losses and, as a result, the Company absorbed 100% of the cumulative
unfunded net losses through December 31, 1998.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's French subsidiary have been translated
into U.S. dollars from their functional currency, French Francs, in the
accompanying statements in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52 "FOREIGN CURRENCY TRANSLATION." Balance sheet amounts
have been translated at the exchange rate on the balance sheet date and income
statement amounts have been translated at average exchange rates in effect
during the period. The net translation adjustment is recorded as a component of
shareholders' equity.
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
are expensed as incurred. Purchased software is included in equipment and is
depreciated using the straight-line method.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
At December 31, 1998 intangible assets, net of accumulated amortization, consist
of goodwill of $8,390,527 and customer lists of $541,439. Goodwill is being
amortized over 25 years on a straight-line basis and customer lists over the
estimated run-off of the customer bases not to exceed five years. Accumulated
amortization at December 31, 1998 was $157,917. The Company will periodically
evaluate the realizability of intangible assets. The carrying value of goodwill
will be reviewed if the facts and circumstances suggest that it may be impaired.
If this review indicates that goodwill will not be recoverable, as determined
based on the undiscounted cash flows of the assets over the remaining
amortization period, the Company's carrying value of the goodwill will be
adjusted to fair value.
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.
INCOME TAXES
Deferred income tax assets and liabilities are determined based upon differences
between the financial statement and income tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse.
PRO FORMA NET INCOME PER 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 7, occurred at the beginning of
the earliest year presented.
In December 1997, the Company adopted the provisions of 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Following is a reconciliation of amounts used in the per share computations:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED MARCH 31, ENDED
DECEMBER 31,
1996 1997 1998 1997 1998
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income-numerator basic computation $ 790,051 $1,252,506 $1,073,908 $ 890,483 $ 167,850
Effect of dilutive securities-None - - - - -
-----------------------------------------------------------------------
Net income as adjusted-numerator diluted
computation $ 790,051 $1,252,506 $1,073,908 $ 890,483 $ 167,850
=======================================================================
Pro forma weighted average shares-
denominator basic computation 5,000,000 5,000,000 5,000,000 5,000,000 6,199,407
Effect of dilutive securities-None - - - - -
-----------------------------------------------------------------------
Pro forma weighted average shares as
adjusted-denominator 5,000,000 5,000,000 5,000,000 5,000,000 6,199,407
=======================================================================
Pro forma net income per share:
Basic $ 0.16 $ 0.25 $ 0.21 $ 0.18 $ 0.03
=======================================================================
Diluted $ 0.16 $ 0.25 $ 0.21 $ 0.18 $ 0.03
=======================================================================
</TABLE>
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable, advances
and notes receivable- related party, accounts payable, accrued expenses and long
term debt approximate fair value due to the short maturity of these items.
COMPREHENSIVE INCOME: FINANCIAL STATEMENT PRESENTATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
COMPREHENSIVE INCOME: FINANCIAL STATEMENT PRESENTATION (FASB) which requires 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. SFAS No. 130 is
effective for the Company's fiscal year ending March 31, 1999. The adoption of
SFAS No. 130 is not expected to have a material effect on the Company's
consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the FASB issued SFAS No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION," which is effective for fiscal years
beginning after December 15, 1997. This Statement supersedes SFAS No. 14,
"FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE," and amends SFAS No.
94, "CONSOLIDATION OF ALL MAJORITY-OWNED SUBSIDIARIES." This Statement requires
annual financial statements and interim reports to disclose information about
products and services, geographic areas and major customers based on a
management approach. This approach requires disclosing financial and descriptive
information about an enterprise's reportable operating segments based on
information management uses in making business decisions and assessing
performance. This new approach may result in additional information being
disclosed and may require new interim information not previously reported. The
Company plans to adopt SFAS No. 131 in fiscal 1999 with impact only to the
Company's disclosure information and not its financial condition, results of
operations or cash flows.
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1998 1998
-----------------------------------------------------
<S> <C> <C> <C>
Billed services $2,281,835 $2,937,650 $4,471,771
Unbilled services 1,112,051 1,312,064 701,007
Allowance for doubtful accounts (15,000) (65,964) (603,913)
-----------------------------------------------------
$3,378,886 $4,183,750 $4,568,865
=====================================================
</TABLE>
4. EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED MARCH 31, DECEMBER 31,
USEFUL LIVES 1997 1998 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Switch equipment 7 years $459,607 $934,693 $3,113,374
Computer equipment 3 years 187,581 407,759 1,099,056
Computer software 3 years 66,260 85,759 512,506
Office Furniture and equipment 5 years 86,381 117,364 161,097
Leasehold Improvements 7 years 61,478 144,625 225,606
------------------------------------------------
861,307 1,690,200 5,111,639
Less accumulated depreciation
and amortization (273,939) (432,126) (1,671,793)
--------------------------------------------------
$587,368 $1,258,074 $3,439,846
==================================================
</TABLE>
5. LONG-TERM DEBT
Long-term debt consisted of a term loan to a bank in the original amount of
$500,000 due August 31, 1998 at an approximate rate of 8.75%. The loan was
repaid in full prior to March 31, 1998.
6. CAPITAL LEASES
The Company has entered into various lease agreements to acquire switches and
other equipment under capital leases. At the inception of these agreements the
assets had an aggregate carrying amount of $1,531,243. Depreciation on these
assets is included with depreciation expense on the income statement.
The following is a schedule of future minimum lease payments under capital
leases as of December 31, 1998:
Fiscal year ended March 31,
1999 $214,558
2000 364,902
2001 341,783
2002 257,207
2003 118,251
-------------
1,296,701
Less: Imputed interest at rates of 11-16% (220,626)
Present value of lease obligation
(current portion $239,997) $1,076,075
=============
7. STOCKHOLDERS' EQUITY
Prior to the stock split and recapitalization, as discussed below, the Company
was authorized to issue three classes of common stock at a par value of $50.
Class A, Class B and Class C shares had the same dividend and liquidation
rights. Class A shares carried the sole right to elect the first three directors
of the Company, Class B shares were identical to Class A shares except for the
right to elect the first three directors, and Class C shares were nonvoting for
all purposes.
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 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 18, 1998. The issuance of the warrants and stock option
plan became effective May 18, 1998 (the effective date of the Company's public
offering).
The 1,000 shares of Series A Preferred Stock is owned by the Company's principal
shareholder. The 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. 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 new Preferred Stock that has greater or equal voting right with respect to
the election of directors.
7. STOCKHOLDERS' EQUITY (CONTINUED)
INITIAL PUBLIC OFFERING
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 and commissions, and professional fees
aggregated approximately $11.6 million. Through December 31, 1998, the net
proceeds have been used to fund the Access acquisition and for general corporate
purposes.
WARRANTS
The Company sold to the underwriter for an aggregate purchase price of $150,
warrants to purchase 150,000 shares of Common Stock at a price equal to 160%
($15.20) of the Offering Price.
The underwriter's warrants contain anti-dilution provisions for stock splits,
stock dividends, re- combinations 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
the Offering).
8. STOCK OPTION PLAN
On February 12, 1998 the Company's Board of Directors and shareholders adopted
the "1998 Stock Incentive Plan" (the "Stock Incentive Plan" or the "Plan"). 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. In connection with their respective employment
agreements and the initial public offering, the Board of Directors granted the
Company's Chief Executive, Chief Operating and Chief Financial Officers, 10-year
stock options exercisable at the Offering Price ($9.50) covering 150,000,
150,000 and 100,000 shares of Common Stock, respectively. Half of these options
vest upon the effective date of the initial public offering and the balance vest
on January 1, 1999 or upon a change in control of the Company.
The Company accounts for stock options issued to employees pursuant to APB
Opinion 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", and related
Interpretations. Under APB Opinion 25, because the exercise price of the
employee stock options described above equals the market price of the underlying
stock on the date of grant, no compensation cost is recognized. See Note 16.
On April 8, 1998, the Board of Directors subject to the consummation of the
Public Offering granted a vice president 10-year stock options exercisable at
$9.50 (the "Offering Price"), covering 100,000 shares of Common Stock, granted
to a number of employees 10-year stock options exercisable at the Offering Price
covering a total of 102,000 shares and granted the non-employee directors
10-year stock options exercisable at the Offering Price covering an aggregate
25,000 shares, of which half vest on the effective date of the Public Offering
and half vest on January 1, 1999. Half of the vice president's options vest one
year after the effective date of the Offering, and the other half vest on August
31, 1999. The 102,000 options granted to employees vest one year after the
Offering.
On July 23, 1998 the Board of Directors granted an additional 70,500 10-year
stock options, including 50,000 to the Chief Financial Officer, which are
exercisable at the Offering Price. One half of the options vest immediately and
the other half vest the earlier of January 1, 1999 or a change in control of the
Company. Of the remaining 20,500 stock options, 12,500 stock options have an
exercise price equal to the market value of the Company's stock on September 12,
1998 ($3.375) and 8,000 stock options have an exercise price equal to the
Offering Price. The 20,500 stock options vest one year after grant date.
On October 23, 1998 the Board of Directors repriced certain previously issued
stock options aggregating 160,000 shares to the market value on the date of the
repricing or an exercise price of $4.125 per share.
9. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, NINE MONTHS ENDED
DECEMBER 31,
1996 1997 1998 1997 1998
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current - Federal $194,452 $632,434 $560,316 $535,302 $264,709
State 33,286 108,260 95,915 1,957 33,672
Deferred 296,815 (2,799) 3,346 - 49,600
--------------------------------------------------------------------------
Total $524,553 $737,895 $659,577 $537,259 $347,981
==========================================================================
</TABLE>
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,
1997 1998 1998
Deferred tax assets:
<S> <C> <C> <C>
Accounts Receivable $ - $24,822 $195,412
Accrued expenses 9,076 25,019 352,132
Amortization 17,373 3,393 3,948
Deferred rent - 10,649 10,649
NOL Carryforward - - 33,721
Tax Credits - - 22,093
----------------------------------------------------
Total deferred tax assets 26,449 63,883 617,955
Deferred tax liabilities:
Depreciation 36,834 65,161 156,954
Prepaid bonus - 11,723 11,723
Other - 730 175
----------------------------------------------------
Total deferred tax liabilities 36,834 77,614 168,852
----------------------------------------------------
Total net deferred tax liabilities $10,35 $13,731 $449,103
====================================================
</TABLE>
<PAGE>
9. 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,
1996 1997 1998 1997 1998
<S> <C> <C> <C> <C> <C>
Tax at federal statutory rate 34.00% 34.00% 34.00% 34.00% 34.00%
State taxes, net 3.63 3.63 3.63 3.66 3.63
of federal benefit Goodwill - - - - 17.08
Unrecognized benefit of foreign
Net operating losses - - - - 16.51
Other 2.27 (.56) .42 (.34) (3.76)
--------------------------------------------------------------------
39.90% 37.07% 38.05% 37.23% 67.46%
====================================================================
</TABLE>
10. RELATED PARTY TRANSACTIONS
Advances and notes receivable--related parties consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1998 1998
----------------------------------------
<S> <C> <C> <C>
Note receivable--officer, unsecured, due on demand,
bearing interest at 7.65% per annum $117,000 $ - $ -
Notes receivable--minority shareholder 65,000 - -
Cash advances--officer - 465 10,706
Prepaid bonuses--officers - 31,154 36,919
Advances receivable--affiliates, unsecured,
non-interest bearing 3,694 33,655 41,337
----------------------------------------
$185,694 $65,274 $88,962
========================================
</TABLE>
During fiscal 1995, 416.67 shares of Class C shares were issued to an
officer/minority shareholder in exchange for a $18,750 promissory note bearing
interest at 7.65%, due March 1, 1997. Accordingly, this stock subscription
receivable is reflected as a deduction from shareholders' equity at March 31,
1996 and 1997. On December 19, 1997, the officer/minority shareholder repaid
this note.
Between December 21, 1995 and June 26, 1996 the Company loaned $65,000 in the
aggregate to a minority shareholder. The loans were unsecured and bore interest
at the rate of 7.65% per annum. As of March 31, 1998 these loans were paid in
full.
On December 23, 1997, the Company's Chief Executive Officer repaid the Company
the outstanding balance of a note in the amount of $127,000 plus accrued
interest and cash advances totaling $11,608.
In connection with the Company's term loan paid off during the year (See Note
5), the Company paid the Chief Executive Officer approximately $3,900
representing interest on the amount pledged as collateral to secure the loan.
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 provides written notice of
non-renewal. The agreement provides for a monthly retainer of $11,250 plus
reimbursement of reasonable travel expenses. On January 20, 1998, the Company
extended this consulting agreement to December 31, 1998 and modified 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.
11. COMMITMENTS AND CONTINGENCIES
The approximate annual minimum lease payments under the non-cancelable operating
leases as of December 31, 1998 are:
1999 $ 64,209
2000 225,598
2001 199,466
2002 174,383
2003 165,256
Thereafter 13,771
----------------
$842,683
================
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. Rent expense for the
years ended March 31, 1998, 1997 and 1996 amounted to $121,532, $113,716 and
$61,366, respectively. For the nine months ended December 31, 1998 and 1997 rent
expense was $144,829 and $83,325, respectively.
The Company enters into various contracts, which require it to purchase
telecommunications services. The approximate minimum purchase commitments under
these contracts as of December 31, 1998 is approximately $380,000.
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. On January 1, 1998
and February 9, 1998 the Company amended its 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.
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.
On January 1, 1998 and amended on February 9, 1998 the Company entered into a
two-year employment agreement with its Chief Financial and Accounting Officer
providing for a base salary of $170,000 in calendar year 1998 and $200,000 in
calendar year 1999. In accordance with the agreement, the Company paid a $50,000
bonus upon signing of the agreement and paid, in May 1998, a $75,000 bonus upon
the completion of the Company's initial public offering. The agreement further
provides for additional bonuses based upon the Company's operating results, as
defined therein.
In connection with the acquisition of Access, the Company has obligations under
existing employment contracts for two key Access employees. The contracts have
base annual salaries of $125,000 per year and expire on January 31, 1999. On
December 4, 1998 the Company amended these agreements to provide for annual base
salaries of $150,000 plus incentive bonuses based on sales and profitability.
For the years ended March 31, 1998, 1997 and 1996 bonuses of $588,096, $501,350,
$328,651 respectively, were paid under the employment agreements. For the nine
months ended December 31, 1998 and 1997 such bonuses amounted to $168,858 and
$451,557 respectively
On November 20, 1997 the Company entered into a letter of intent with respect to
the formation of Ursus Telecom France, a joint venture that provides for the
Company to pay within six months after the completion of its initial public
offering (the "Offering"), a cash sum that equals three and one-half times the
average monthly traffic revenues contributed to the venture by the minority
interests over the months of February, March and April 1998. This payment, which
was made on December 3, 1998 and amounted to approximately $111,000, was
considered an advance towards the share purchase program which is no longer in
place pursuant to the modification agreement discussed below.
On March 5, 1999, we entered into a modification agreement with Central Call ,
Mondial Telecom, the two principals and Ponthieu Ventures, a French corporation,
which made several changes including: (1) We reduced our ownership to 50% from
50.1%, (2) Ponthieu Ventures now shares the remaining 50% of the ownership with
Central Call, Mondial Telecom and the two principals and (3) Ursus agreed to
repurchase certain switch equipment from Ursus Telecom France at recorded book
value.
Ursus committed 500,000 FF or approximately $90,000 to the joint venture for the
period April 1, 1999 through December 31, 1999. As of March 5, 1999, the results
of Ursus Telecom France will no longer be consolidated, as a subsidiary, with
those of Ursus because Ursus now has only a 50% ownership interest in Ursus
Telecom France.
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 December 18, 1998 the Company entered into an equipment lease facility of up
to $20 million, which provides for leases of 4-5 years at interest rates of 8 to
8.5%. The interest rates are fixed at the inception of each lease, with
subsequent leases based on the change in five-year treasury securities. As of
December 31, 1998 the Company has utilized the lease facility to finance the
purchase of two switches with a cost of approximately $647,000.
12. SIGNIFICANT CUSTOMERS
The Company has a number of significant independent agents. Net revenues from
the significant independent agents were in the following percentages of total
net revenues:
MARCH 31 DECEMBER 31,
1996 1997 1998 1997 1998
----------------------------------------------------------------
Customer 1 12% - - - -
Customer 2 16% 11% 11% 12% -
Customer 3 11% 15% 15% 15% 12%
Customer 4 11% 19% 29% 28% 24%
Customer 5 - 12% - - -
Customer 6 - - 10% 10% -
Accounts receivable as a percentage of total accounts receivable due from the
significant independent agents noted above were as follows:
MARCH 31 DECEMBER 31,
1996 1997 1998 1998
-------------------------------------------------------
Customer 1 8% - - -
Customer 2 8% 9% 7% 6%
Customer 3 15% 21% 25% 24%
Customer 4 23% 28% 24% 24%
Customer 5 - 10% - -
Customer 6 - - 7% 10%
13. 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 and non-exclusive agent agreements. Although the Company believes that
alternate agents could be found, loss of an agent in one of the Company's
primary geographical areas could have a negative effect on the Company's
operating results (see Note 12).
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 28.9% of the Company's revenues in fiscal 1998.
SERVICES IN THE BAHAMAS--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. At present, the Company is unable to predict the outcome of this
matter. The Company's customers in the Bahamas represented approximately 4.8% of
the Company's revenues in fiscal 1998.
UNINSURED CASH BALANCES--At December 31, 1998, the Company had approximately
$3,231,000 in cash and cash equivalents that were either not federally insured
or invested in U.S. Treasury Obligations.
RELIANCE ON SUPPLIERS--A majority of the Company's transmission and switching
facilities are provided by two telecommunications carriers. For the nine months
ended December 31, 1998 and 1997 approximately $5,610,000 and $7,741,000,
respectively, of cost were incurred to these carriers and for the years ended
March 31, 1998 and 1997, approximately $10,063,000 and $7,757,000, respectively,
of costs were incurred to these carriers. 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. Several carriers
may exercise their right to terminate service agreement upon 30 day notice.
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.
14. BUSINESS SEGMENT INFORMATION
The Company operates in a single industry segment. For the years ended March 31,
1995, 1996 and 1997, substantially all of the Company's revenues were derived
from traffic transmitted through switch facilities located in Sunrise, Florida.
Beginning in March 1998 the Company began operating a switch in Paris, France
and with the acquisition of Access in Tampa, Florida, and Frankfurt, Germany.
The geographic origin of the traffic is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
1996 1997 1998 1997 1998
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Africa $ 1,403,094 $3,899,701 $8,346,025 $6,057,730 $6,063,663
Europe 1,988,030 4,252,104 3,857,504 3,013,155 5,674,097
Latin America 6,337,284 7,265,473 6,523,384 5,050,602 4,498,064
Middle East 2,101,864 3,741,890 4,721,592 3,500,512 3,385,258
Other 1,397,802 1,363,852 1,719,272 1,395,126 1,932,292
United States - 315,407 2,930,547 2,011,988 2,789,524
-----------------------------------------------------------------------
Total revenues $13,228,074 $20,838,427 $28,098,324 $21,029,113 $24,342,899
=======================================================================
</TABLE>
14. BUSINESS SEGMENT INFORMATION
All of the Company's physical assets are located in the United States, Paris,
France and Frankfurt), Germany. Account receivables are primarily due from
independent agents in various geographical areas and customers in the United
States.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 1,
1996 1997 1998 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Africa $382,595 $822,731 $994,793 $1,111,957
Europe 426,294 694,461 709,598 930,258
Latin America 572,903 798,428 905,223 890,802
Middle East 276,433 698,842 1,110,904 1,174,779
Other 88,593 109,481 134,232 369,541
United States - 269,943 394,964 695,441
Less: Allowance (11,381) (15,000) (65,964) (603,913)
for doubtful
accounts
----------------------------------------------------------------
Total accounts receivable $1,735,437 $3,378,886 $4,183,750 $4,568,865
================================================================
</TABLE>
15. DEPOSIT ON ACQUISITION
On August 12, 1997, the Company entered into an agreement with its largest
independent agent (in South Africa- See Note 13) to acquire an approximate 9%
interest in the agency. The Company has applied accounts receivable of
approximately $377,000 due from this agent as payment for the equity interest
stated above.
On August 18, 1998, the Company and its agent in South Africa mutually rescinded
the above agreement. The agent has repaid the accounts receivable previously
applied as a deposit.
16. ACQUISITIONS
ACCESS AUTHORITY INC.
On September 17, 1998, the Company purchased all the issued and outstanding
common stock of 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 businesses 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.
16. ACQUISITIONS (CONTINUED)
The Company has accounted for the Access acquisition using the purchase method
of accounting. 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 allocated
the purchase price to assets and liabilities acquired based upon their estimated
fair values as follows:
Current Assets $2,567,520
Property and Equipment, net 1,422,509
Intangibles 9,089,883
Current Liabilities (4,929,912)
------------------------
Total Purchase Price 8,150,000
========================
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.
Pro forma operating results for the year ended March 31, 1998 and the nine
months ended December 31, 1998, as if the Access acquisition had occurred at the
beginning of the respective periods is as follows:
YEAR ENDED NINE
MARCH 31, MONTHS
1998 ENDED
DECEMBER
31, 1998
------------------------------------------------
Total revenue $ 75,652,207 $42,909,290
Net income(loss) 1,921,878 (199,369)
Basic and diluted net
income(loss) per common share $ 0.38 $ (.03)
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 nine months ended December 31, 1998.
This pro forma is presented for informational purposes only and is not
necessarily indicative of future operations.
URUGUAY AGENT
During the quarter ended June 30, 1998, the Company agreed to acquire its agent
in Uruguay. Consideration for the agency was $132,988. A $72,988 accounts
receivable balance from such agent has been converted to a deposit on the
purchase price by the Company. The acquisition will be accounted for using the
purchase method of accounting, as such, the result of operations subsequent to
the closing will be included in the consolidated financial statements of the
Company. As of the date of this filing,information needed to determine the
allocation of purchase price to the assets acquired is not available. The
aggregate purchase price of this acquisition will be allocated based on
estimated fair value of the assets acquired with any excess allocated to
intangible assets to be written off over the estimated useful life.
ARGENTINE AGENT AND STARCOM S.A.
On January 22, 1999, the Company acquired the operations of Starcom S.A. an
Argentine Corporation and Rolium S.A. a Panamanian Corporation. In accordance
with the Stock Purchase Agreement the aggregate consideration for the two
entities was $183,000 and 100,000 shares of the Company's unregistered common
stock (50,000 shares have been placed in escrow and will be released in six
months if the seller adheres to the covenants, indemnities and obligations of
the Agreement). The fair market value of the Company's Common stock was valued
at $425,000 at the date of acquisition. These agreements contain provisions
which call for additional consideration of $267,000 to be paid in equal
installment of $133,500 on January 22, 2000 and 2001. In addition, $100,000 was
placed in escrow to pay certain liabilities of Starcom S.A. which results in
total consideration of $975,000. The acquisition will be accounted for using the
purchase method of accounting, as such, the result of operations subsequent to
the closing will be included in the consolidated financial statements of the
Company. Information needed to determine the allocation of purchase price to the
assets acquired is not yet available. The aggregate purchase price of this
acquisition will be allocated based on estimated fair value of the assets
acquired with any excess allocated to intangible assets to be amortized over the
estimated useful life.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
BALANCE
AT BALANCE
BEGINNING COST AND OTHER DEDUCTIONS/ AT END
OF EXPENSES ADDITIONS WRITE-OFFS OF
PERIOD PERIOD
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nine months ended December
31,1998 (unaudited) Allowance
for doubtful accounts $65,964 $262,662 $456,507 $(181,220) $603,913
- ------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1998
Allowance for doubtful
accounts $15,000 $103,616 $ - $(52,652) $65,964
- ------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1997
Allowance for doubtful
accounts $11,381 $ 84,258 $ - $(80,639) $15,000
- ------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1996
Allowance for doubtful
accounts $ 1,149 $ 10,232 $ - $ - $11,381
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Other additions represent the allowances for doubtful accounts, which were
recorded in connection with business acquisitions.
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Access Authority, Inc.
We have audited the accompanying consolidated balance sheets of Access
Authority, Inc., which was combined with UMS Telecom, Ltd. in July 1995, a
company under common control (the "Company"), as of December 31, 1996 and 1997,
and the related combined consolidated statements of operations, stockholders'
deficit, and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
consolidated 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 consolidated financial position of Access Authority,
Inc. as of December 31, 1996 and 1997, and the combined consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Tampa, Florida
February 7, 1998
<PAGE>
Access Authority, Inc.
Consolidated Balance Sheets
<TABLE>
DECEMBER 31 JUNE 30,
1996 1997 1998
--------------------------------------------------------------
ASSETS (UNAUDITED)
Current assets:
<S> <C> <C> <C>
Cash $ 1,038,608 $ 2,857,097 $ 923,410
Accounts receivable - net of
allowance for doubtful
accounts of $200,000, $577,000
and $546,000 in 1996,
1997 and 1998, respectively 1,268,817 1,954,240 802,290
Prepaid expenses and other current assets 17,360 43,173 311,962
Deferred income taxes - 422,000 467,000
--------------------------------------------------------------
Total current assets 2,324,785 5,276,510 2,504,662
Property and equipment, net 1,311,411 1,638,752 1,590,479
Note receivable - officer 48,628 48,628 48,628
Deposits 253,389 256,733 79,254
Goodwill, net 30,024 25,531 22,334
Other assets 39,323 2,684 1,880
--------------------------------------------------------------
Total assets $ 4,007,560 $ 7,248,838 $ 4,247,237
==============================================================
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 3,445,267 $ 5,903,619 $ 3,093,420
Commissions payable 645,345 941,914 1,134,992
Accrued expenses and other current liabilities 349,803 300,098 151,027
Unearned income and customer deposits 771,692 639,656 396,473
Current portion of capital lease obligations 52,499 79,098 89,099
Notes payable - related parties 10,732 - -
------------------------------------------------------------
Total current liabilities 5,275,338 7,864,385 4,865,011
Notes payable - related parties 584,468 - -
Capital lease obligation, net of current portion 330,446 192,163 70,435
Deferred income taxes - - 89,000
Stockholders' deficit:
Preferred stock:
Authorized - 5,000,000 shares
Issued and outstanding shares - none - - -
Common stock - $.01 par value:
Authorized - 20,000,000 shares
Issued and outstanding - 981 shares 10 10 10
Additional paid-in capital 77,932 77,932 77,932
Accumulated deficit (2,260,634) (885,652) (855,151)
---------------------------------------------------------------
Total stockholders' deficit (2,182,692) (807,710) (777,209)
---------------------------------------------------------------
Total liabilities and stockholders' deficit $ 4,007,560 $ 7,248,838 $ 4,247,237
===============================================================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
Access Authority, Inc.
Combined Consolidated Statements of Operations
<TABLE>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1995 1996 1997 1997 1998
--------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Telecommunications revenue $ 5,220,621 $ 25,473,244 $ 47,553,883 $ 21,989,968 $ 18,566,391
Operating expenses:
Cost of telecommunications services 4,126,169 19,398,035 34,003,182 16,018,509 14,007,082
Selling 764,002 2,975,672 5,694,440 2,717,858 1,459,473
General and administrative 763,682 2,701,867 5,203,585 2,419,534 2,892,754
Provision for doubtful accounts 453,735 1,082,731 1,133,172 704,087 418,061
Depreciation and amortization 57,091 227,310 413,078 167,700 263,101
--------------------------------------------------------------------------------------
Total operating expenses 6,164,679 26,385,615 46,447,457 22,027,688 19,040,471
--------------------------------------------------------------------------------------
Income (loss) from operations (944,058) (912,371) 1,106,426 (37,720) (474,080)
Interest income - - (48,444) (11,735) (46,446)
Interest expense 52,934 74,176 140,888 91,173 23,621
Gain on contingency settlement - - - - (499,756)
---------------------------------------------------------------------------------------
Income (loss) before income tax
expense (benefit) (996,992) (986,547) 1,013,982 (117,158) 48,501
Income tax expense (benefit)
Current expense - - 61,000 - (26,000)
Deferred expense (benefit) - - - 44,000 (422,000)
---------------------------------------------------------------------------------------
- - - 18,000 (361,000)
---------------------------------------------------------------------------------------
Net income (loss) $ (996,992) $ (986,547) $ 1,374,$82 $ (117,158) $ 30,501
======================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Access Authority, Inc.
Notes to Combined Consolidated Financial Statements
(Information pertaining to the six months ended
June 30, 1997, 1998 and the September 17, 1998
Agreement is unaudited)
Access Authority, Inc.
Combined Consolidated Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID IN ACCUMULATED
SHARES STOCK CAPITAL DEFICIT TOTAL
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 700 $ 7 $ 1,993 $ (277,095) (275,095)
Equipment contributed by
Stockholders - - 59,842 - 59,842
Issuance of common stock in
conjunction with business
Acquisition 124 1 7,099 - 7,100
Issuance of common stock in
exchange for services 157 2 8,998 - 9,000
Net loss - - - (996,992) (996,992)
--------------------------------------------------------------------------------------------
Balance, December 31, 1995 981 10 77,932 (1,274,087) (1,196,145)
Net loss - - - (986,547) (986,547)
--------------------------------------------------------------------------------------------
Balance December 31, 1996 981 10 77,932 (2,260,634) (2,182,692)
1996
Net income - - - 1,374,982 1,374,982
--------------------------------------------------------------------------------------------
Balance, December 31, 1997 981 10 77,932 (885,652) (807,710)
Net loss(unaudited) - - - 30,501 30,501
--------------------------------------------------------------------------------------------
Balance, June 30, 1998
(unaudited) 981 $ 10 $ 77,932 $ (855,151) $ (777,209)
=============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Access Authority, Inc.
Combined Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30,
1995 1996 1997 1997 1998
---------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss) $ (996,992) $ (986,547) $ 1,374,982 $ (117,158) $ 30,501
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Provision for doubtful accounts 453,735 1,082,731 1,133,172 167,700 314,024
Depreciation and amortization 57,091 227,310 413,078 704,087 263,101
Gain on contingency settlement - - - - (499,756)
Issuance of common stock in
exchange for services 9,000 - - - -
Deferred taxes - - (422,000) - 44,000
(Increase) decrease in
accounts receivable (598,286) (2,123,074) (1,818,595) (812,299) 837,926
Decrease (increase) in
prepaid expenses and other
current assets 9,270 42,743 (25,813) (58,683) (268,789)
(Increase) decrease in deposits
and other assets (75,202) (159,289) 33,295 33,222 177,479
Increase (decrease) in accounts
payable and accrued expenses 1,024,138 2,909,636 2,705,216 925,610 (2,266,436)
Increase (decrease) in unearned
income and customer deposits 374,635 365,251 (132,036) (91,888) (243,183)
------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 257,389 1,358,761 3,261,299 750,591 (1,611,133)
------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (148,029) (648,093) (735,926) (465,098) (210,827)
Issuance of note receivable
to officer - (48,628) - - -
Cash acquired in acquisition
of wholly-owned subsidiary 16,311 - - - -
------------------------------------------------------------------------------------------
Net cash used in investing
activities (131,718) (696,721) (735,926) (465,098) (210,827)
------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds of demand note
payable - banks 20,848 - - - -
Repayment of demand note - bank - (20,848) - - -
Repayment of capital lease
obligations - - (111,684) (35,037) (111,727)
Increase (decrease) in notes
payable related parties 228,430 (12,355) (595,200) (192,192) -
------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 249,278 (33,203) (706,884) (227,229) (111,727)
------------------------------------------------------------------------------------------
Net increase (decrease) in cash 374,949 628,837 1,818,489 58,264 (1,933,687)
Cash at beginning of period 34,822 409,771 1,038,608 1,038,608 2,857,097
------------------------------------------------------------------------------------------
Cash at end of period $409,771 $1,038,608 $2,857,097 $1,096,872 $ 923,410
==========================================================================================
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the period
for interest $ 10,300 $ 46,800 $158,274 $ 91,173 $ 23,621
==========================================================================================
Cash paid during the period
for income taxes $ - $ - $ 91,000 $ - $ 9,790
==========================================================================================
Property and equipment
contributed by stockholders $ 59,842 $ - $ - $ - $ -
==========================================================================================
Property and equipment acquired
in exchange for note payable to
related parties $ 31,250 $ - $ - $ - $ -
==========================================================================================
Property and equipment acquired
under capital lease obligations $ - $ 382,945 $ 37,724 $ 37,724 $ -
obligations
==========================================================================================
Purchases of property and equipment
included in accounts payable $ - $ 135,217 $ - $ - $ -
accounts payable
==========================================================================================
Issuance of common stock in
conjunction with
business acquisition $ 7,100 $ - $ - $ - $ -
==========================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
1. BUSINESS
The Company provides international telecommunications services, including call
reorigination and domestic toll-free access and various value-added features, to
small and medium-sized businesses and individuals in over 38 countries
throughout the world. The Company markets its services through an independent
and geographically dispersed sales force consisting of agents and wholesalers.
On September 17, 1998, pursuant to a Stock Purchase Agreement (the "Agreement')
dated as of September 15, 1998, Ursus Telecom Corporation purchased all of the
issued and outstanding common stock of Access Authority, Inc. Pursuant to the
Agreement, the shareholders of Access received aggregate consideration of $8
million in cash. The terms of the Agreement, including the purchase price, were
negotiated by the parties on an arms length basis.
2. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements combine the accounts of Access Authority,
Inc. and UMS Telecom, Ltd. (UMS Telecom) for the period under common control up
to the date of the Company's merger with UMS Telecom in July 1995. The
consolidated financial statements include the accounts of Access Authority,
Inc., a Delaware corporation, and its wholly-owned subsidiary. Significant
intercompany transactions and balances have been eliminated.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements as of June 30, 1998 and
for each of the six month periods ended June 30, 1997 and 1998 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 six months
ended June 30, 1997 and 1998 are not necessarily indicative of the results of
operations for a full fiscal year.
2. ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CREDIT RISK
Financial instruments that subject the Company to credit risk consist primarily
of accounts receivable. Concentrations of credit risk with respect to accounts
receivable are minimal due to the large number of customers comprising the
Company's customer base and their dispersion throughout the world. In addition,
the Company has further reduced credit risk by requiring a substantial portion
of its customers to pay by credit card. The Company performs ongoing credit
evaluations of its customers who do not pay with credit cards and in certain
circumstances may require a deposit. The Company maintains an allowance for
potential credit losses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable and accounts payable approximate
fair value because of their short-term nature. The carrying amounts of the notes
payable and capital lease obligations approximate fair value because their
interest rates are based upon rates currently available to the Company for debt
with similar terms and conditions.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight- line method over the estimated useful lives of the
assets which range from five to seven years.
INTANGIBLE AND LONG-LIVED ASSETS
The Company reviews the recoverability of intangible and long-lived assets
whenever events or changes in circumstances indicate that the carrying value of
such assets may not be recoverable. If the expected future cash flows for the
use of such assets are less than the carrying value, the Company's policy is to
record a write-down that is determined based on the difference between the
carrying value of the asset and its estimated fair market value.
Goodwill, which represents the cost in excess of the fair Access Authority, Inc.
2. ACCOUNTING POLICIES (CONTINUED)
TELECOMMUNICATIONS REVENUE
Revenues are recorded as income when the services are provided. Unearned income
represents amounts received from the sale of telecommunications services to be
provided in future periods.
3. MERGERS AND ACQUISITIONS
In July 1995, UMS Telecom, formerly affiliated with the Company by common
ownership, was merged with and into the Company. This transaction was accounted
for as a reorganization of companies under common control in a manner similar to
a pooling of interests. As a result of the common investor group's control over
both Access Authority, Inc. and UMS Telecom, the accompanying combined
consolidated financial statements have been prepared to reflect the accounts of
the Company, UMS Telecom, and the Company's wholly-owned subsidiary on a
combined basis for periods prior to the merger.
In August 1995, the Company acquired all of the outstanding stock of National
Business Telephone Services, Inc. (NBTS) in exchange for 124 shares of the
Company's common stock valued at $7,100 in a business combination accounted for
as a purchase. The cost of the acquisition exceeded the fair value of the net
assets acquired by $39,068, which has been recorded as goodwill. The results of
operations of NBTS are included in the accompanying financial statements since
the date of acquisition.
Both UMS Telecom and NBTS had elected to be treated as Subchapter S corporations
for federal and state income tax reporting purposes. The transactions with the
Company terminated these elections. Application of SFAS No. 109 for the change
in tax status of these entities was immaterial.
4. SIGNIFICANT CUSTOMERS
The Company has had a number of significant agents. Net revenues from the
significant agents were in the following percentages of total revenues:
DECEMBER 31, JUNE 30,
1995 1996 1997 1997 1998
----------------------------------------------------------
Agent 1 - 29% 30% 30% -
Agent 2 - - 14% 14% 12%
Agent 3 - - 29% 27% 31%
----------------------------------------------------------
Totals - 29% 73% 73% 43%
==========================================================
During the entire period, no individual customer of the agents accounted for
more than 10% of the Company's revenues. Further, during 1998 the Company
discontinued a relationship with Agent 1, resulting in a significant loss of
revenue. (See Note 13)
5. NOTE RECEIVABLE - OFFICER
The Company has amounts due from an officer totaling $48,628 as of December 31,
1996 and 1997 and at June 30, 1998. The note bears interest at 5% per annum and
is due on demand.
6. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
DECEMBER 31, JUNE 30,
1996 1997 1998
--------------------------------------
Telephone equipment $493,752 $752,984 $885,489
Telephone equipment under
capital lease obligation 515,559 515,559 515,559
Computer equipment 477,046 791,500 868,699
Automobiles 11,944 11,944 11,944
Office furniture and
equipment 42,663 55,214 55,214
Leasehold improvements 21,924 44,954 46,077
Software development cost 59,600 174,141 174,141
----------------------------------------
1,622,488 2,346,296 2,557,123
Accumulated depreciation
and amortization (311,077) (707,544) (966,644)
----------------------------------------
$1,311,411 $1,638,752 $1,590,479
========================================
7. MAJOR SUPPLIERS
Substantially all of the Company's line charges were incurred with no more than
three providers. Purchases from these providers accounted for 87%, 89%, and 76%
of the cost of the telecommunication services for the years ended December 31,
1995, 1996, and 1997, respectively and 92% for the six months ended June 30,
1997 and 92% from five carriers for the same period in 1998. Periodically, the
Company enters into agreements with certain carriers that require minimum
monthly usage commitments in return for discounts on services provided. The
Company believes that it will exceed its minimum monthly commitments for all
carriers. At December 31, 1996, 1997 and at June 30, 1998, accounts payable
includes $2,326,538, $3,035,004 and $2,478,896 due to these providers,
respectively.
8. NOTES PAYABLE - RELATED PARTIES
During 1997, the Company paid the remaining balance due under the notes payable
to related parties.
The Company incurred interest expense related to the notes payable of $47,393,
$68,655, and $97,348 for the years ended December 31, 1995, 1996, and 1997,
respectively. Accrued but unpaid interest related to the notes payable was
included in the outstanding balance of the demand note payable at December 31,
1996.
9. OTHER RELATED PARTY TRANSACTIONS
The Company pays a management fee to an affiliate for administrative services.
Management fees were $60,000, $125,000, and $70,000 for the years ended December
31, 1995, 1996, and 1997, respectively and $6,700 and $438,204 for the six
months ended June 30, 1997 and 1998, respectively. The management fee is based
upon the allocable share of time certain employees of the affiliate dedicated to
the Company. The Company reimbursed affiliates $50,975, $122,340, and $151,346
for expenses in the years ended December 31, 1995, 1996, and 1997, respectively
and $61,791 and $56,048 for the six months ended June 30, 1997 and 1998,
respectively. Unpaid balances related to these expenses were included in the
balance of the demand note payable to the affiliate at December 31, 1996.
9. OTHER RELATED PARTY TRANSACTIONS (CONTINUED)
In 1997, the Company entered into a four-year lease agreement with an affiliate
for office space. The agreement contains a one-year renewal option. In 1997,
lease payments totaled $180,000. This lease was subsequently terminated upon the
sale of the Company to Ursus Telecom Corporation on September 17, 1998.
In August 1995, certain stockholders contributed to the Company equipment with a
historical cost basis of $91,092 subject to a note payable of $31,250. The
excess of the fair market value of the equipment, which equaled its historical
cost basis, over the liability assumed by the Company has been reflected as a
contribution of capital.
10. INCOME TAXES
Components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31, JUNE 30,
1996 1997 1998
------------------------------------------------
Deferred tax assets:
Accrued liabilities
and reserves $ 356,000 $ 424,000 $ 202,000
Net operating losses 376,000 - 265,000
Valuation allowance (719,000) - -
------------------------------------------------
Total deferred tax assets $ 13,000 $ 424,000 $ 467,000
Deferred tax liabilities $ (13,000) $ (2,000) $ (89,000)
------------------------------------------------
Net deferred tax assets $ - $ 422,000 $ 378,000
================================================
10. INCOME TAXES (CONTINUED)
As of June 30, 1998, the Company has approximately $720,000 of net operating
loss carryforwards that begin to expire in 2013. During 1997, the Company
utilized $1,078,000 and $478,000 of federal and state net operating loss
carryforwards, respectively. Prior to 1997, the Company recorded a valuation
allowance against its deferred tax assets as realization was not assured. The
following table reconciles the difference between the amount of income tax
(benefit) expense that would result from applying statutory rates to the pretax
loss/income and the amount presented in the accompanying statements of
operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
JUNE 30,
1995 1996 1997 1997 1998
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Federal income tax
(benefit) expense
at statutory rates $(339,000) $(336,000) $345,000 $ - $ 16,000
State income tax
(benefit) (35,000) (9,000) 13,000 - 2,000
expense, net of
federal taxes
Valuation allowance 374,000 345,000 (719,000) - -
---------------------------------------------------------------------
$ - $ - $(361,000) $ - $ 18,000
=====================================================================
</TABLE>
11. LEASE COMMITMENTS
The Company leases certain switching equipment for its German operations, under
an agreement which has been accounted for as a capital lease. The related
equipment had a cost of $515,559 and accumulated depreciation of $128,889 at
June 30, 1998. The agreement required an initial payment of $150,000 and a
variable monthly installment of principal based upon usage with a minimum
monthly payments of $7,500 through payoff.
Further, the Company leases its facilities and certain other equipment under
noncancelable operating leases that expire through 2001. Rent expense under
operating leases totaled approximately $62,000, $86,000, and $269,000 for the
years ended December 31, 1995, 1996, and 1997, respectively and approximately
$201,000 and $171,000 for the six months ended June 30, 1997 and 1998,
respectively. Certain leases require the payment of related property taxes,
insurance, maintenance, and other costs. In connection with the sale of the
Company to Ursus Telecom on September 17, 1998 a lease that required monthly
payments of $15,000 per month has been terminated and as such, payments due
subsequent to that date are no longer a commitment of the Company.
Minimum future lease payments under both capital and operating leases (including
the lease with affiliate) together with the present value of the net minimum
lease payments under capital leases as of June 30, 1998 are summarized as
follows:
CAPITAL OPERATING
LEASES LEASES
--------------------------------------
1998 $ 52,658 $ 59,954
1999 105,369 -
2000 12,211 -
--------------------------------------
Total minimum lease payments 170,238 $ 59,954
=============
Amounts representing interest 10,704
--------------
Present value of net minimum lease $159,534
payments ==============
12. GEOGRAPHIC INFORMATION
The Company has operations in the United States and derives a significant
portion of its revenues from customers located in foreign countries. At December
31, 1997 and June 30, 1998 the Company had assets with a net book value of
approximately $490,763 and $386,670 in Germany, respectively. Prior to 1996,
there were no assets in a country other than the United States. The following is
a summary of telecommunications revenue.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
1995 1996 1997 1997 1998
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Export revenues $4,966,881 23,236,687 42,006,247 $19,424,618 $16,416,248
United States revenues 253,740 2,236,557 5,547,636 2,565,350 2,150,143
-------------------------------------------------------------------------------------------
Total $5,220,621 $25,473,244 $47,553,883 $21,989,968 $18,566,391
===========================================================================================
</TABLE>
Export revenues for the years ended December 31, 1996 and 1997, and the six
months ended June 30, 1997 and 1998 consists of the following geographic
regions.
<TABLE>
<CAPTION>
SIX MONTH ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------------
1996 1997 1997 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Europe $10,602,650 $12,273,657 $ 5,675,611 $ 6,405,877
Asia 10,479,917 13,919,022 6,436,464 7,344,533
Central and South
America 1,691,972 14,128,258 6,533,218 2,033,326
Middle East/Africa 462,148 1,685,310 779,325 632,512
----------------------------------------------------------------
$23,236,687 $42,006,247 $19,424,618 $16,416,248
================================================================
</TABLE>
13. CONTINGENCY
The Company had received a claim from a former vendor aggregating $1.7 million.
The Company disputed the amount of the charges and had requested that the vendor
substantiate the claim by providing the call records and bills for the
telecommunications services alleged to have been provided. The vendor has not
produced the records but has joined the Company in a lawsuit as a third party
defendant in which the plaintiff, a supplier of telecommunications services,
alleged that the vendor failed to pay it for services provided and sought
damages of approximately $3.8 million. The vendor alleged that the plaintiff was
obliged to provide the services at a lower rate and that the Company was liable
to it at such lower rate for the services that are the subject of the
plaintiff's complaint. The plaintiff in the lawsuit also sought to foreclose on
its security interest in the vendor's receivables, including its claim against
the Company. The Company had entered into an agreement with the plaintiff in the
lawsuit, whereby the plaintiff had agreed not to prosecute or collect any claims
against the Company. In June 1998 the above case was settled for $75,000
resulting in a gain of approximately $500,000, which has been recorded as other
income in the six months ended June 30, 1998.
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.
Management does not believe that this action will have a material impact on the
financial condition or the results of operations of the Company.
14. YEAR 2000 ISSUE (UNAUDITED)
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and has begun converting critical data processing
systems. The Company currently expects the project to be substantially complete
by early 1999 and to cost less than $20,000. This estimate includes internal
costs, but excludes the costs to upgrade and replace systems in the normal
course of business. The Company does not expect this project to have a
significant effect on operations. As of June 30, 1998, the Company has not
incurred any significant expenses. The Company will continue to implement
systems with strategic value though some projects may be delayed due to resource
constraints.
<PAGE>
Until March __, 1999 (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.
200,000 Shares
Ursus Telecom Corporation
Common Stock
-------
PROSPECTUS
-------
MARCH __, 1999
<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 will be approximately as
follows:
Legal fees and expenses $30,000
Accounting fees and expenses $15,000
----------------
Total $45,000
================
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
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:
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 Representative's Warrant
10.16+ - Form of Lock Up Letter
21.1+ - List of Subsidiaries
23.1* - Consent of Ernst & Young LLP
23.2* - Consent of Ernst & Young LLP
23.3+ - Consent of Stroock & Stroock & Lavan LLP
(contained in 5.1)
24.1+ - Power of Attorney
27* - Financial Data Schedule
99.1+ - Consent of Kenneth L. Garrett
- -----------
+ Previously filed.
* Filed herewith.
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.
(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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Post Effective 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 2nd day of
April, 1999.
URSUS TELECOM CORPORATION
BY: /s/ Luca M. Giussani
--------------------------------
Luca M. Giussani
CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, this
Post Effective 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 April 2, 1999
Luca M. Giussani Director
*
- -------------------------- President, Chief Operating April 2, 1998
Jeffrey R. Chaskin Officer and Director
*
- -------------------------- Chief Financial Officer and April 2, 1998
Johannes S. Seefried Director
*
- -------------------------- Director April 2, 1998
William M. Newport
*
- -------------------------- Director April 2, 1998
Kenneth L. Garrett
*By: /s/ Luca M. Giussani
----------------------------------
Luca M. Giussani, as Attorney-in-Fact
and agent pursuant to Power of
Attorney previously filed.
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Ursus Tel.net
Ursus Telecom France
Access Authority, Inc.
National Business Telephone, Inc.
Ursus Overseas Holding, Inc.
Bransur Acquisition Corporation
Ursus Telecom Data,(Pty) Ltd.
Ursus Telecom Uruguay
Starcom S.A
Rolium Corporation
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 July 2, 1998, in the Post Effective Amendment No. 2
to the Registration Statement (Form S-1 No. 333-46197) and related Prospectus of
Ursus Telecom Corporation for the registration of 200,000 shares of its Common
Stock on behalf of the Registering Stockholders.
/s/ ERNST & YOUNG LLP
Miami, Florida
March 31, 1999
EXHIBIT 23.2
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 February 7, 1998, with respect to the financial
statements of Access Authority, Inc. included in the Post Effective Amendment
No. 2 to the Registration Statement (Form S-1 No. 333-46197) and related
Prospectus of Ursus Telecom Corporation for the registration of 200,000 shares
of its Common Stock on behalf of the Registering Stockholders.
/s/ ERNST & YOUNG LLP
Tampa, Florida
March 31, 1999
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,519,626
<SECURITIES> 0
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<ALLOWANCES> (603,913)
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<BONDS> 0
0
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<COMMON> 65,000
<OTHER-SE> 14,777,491
<TOTAL-LIABILITY-AND-EQUITY> 22,387,378
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