REGISTRATION NO. 333-46197
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST EFFECTIVE AMENDMENT NO. 1
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 Number)
organization)
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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. / /
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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The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8 of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8, may determine.
<PAGE>
200,000 Shares
URSUS TELECOM CORPORATION
Common Stock
This Prospectus is being used in connection with the offering (the
"Offering") from time to time of up to 200,000 shares (the "Shares") of common
stock, $.01 par value (the "Common Stock"), of Ursus Telecom Corporation, a
Florida corporation ("Ursus" or the "Company"), by certain stockholders of the
Company identified herein (the "Registering Stockholders"). See "Registering
Stockholders." The Company is not selling any of the Shares offered hereby and
will not receive any of the proceeds from sales of Common Stock by the
Registering Stockholders.
The sale or distribution of any of the Shares may be effected by the
Registering Stockholders from time to time 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, at fixed prices that may be
changed, at market prices prevailing at the time of the sale, at prices related
to such market prices or at negotiated prices. The Registering Stockholders may
effect such transactions by selling the Shares to or through securities
broker-dealers or other agents, and such broker-dealers or other agents may
receive compensation in the form of discounts, concessions or commissions from
the Registering Stockholders and/or the purchasers of the Common Stock for whom
such broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). Additionally, agents or dealers may acquire Common Stock
or interests therein as a pledgee and may, from time to time, effect
distributions of the Common Stock or interests in such capacity. See
"Registering Stockholders" and "Plan of Distribution." The Registering
Stockholders and any brokers, dealers or agents through whom sales of the Common
Stock are made may be deemed "underwriters" within the meaning of the Securities
Act, and any profits realized by them on the sale of the Common Stock may be
considered to be underwriting compensation.
The Company has agreed to bear all of the expenses in connection with
the registration and sale of the shares offered hereby by the Registering
Stockholders (other than underwriting discounts and selling commissions). The
Common Stock is traded on the Nasdaq National Market System (the "Nasdaq") under
the symbol "UTCC." The closing sale price per share of the Common Stock on the
Nasdaq on December 31, 1998 was $2.875.
See "Risk Factors" beginning on page 9 for a discussion of certain
factors that should be considered in connection with an investment in the Common
Stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JANUARY 13, 1999.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: Northeast Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048; and Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such reports and other
information may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, DC 20549, on payment of prescribed charges.
In addition, such reports, proxy statements and other information may be
electronically accessed at the Commission's site on the World Wide Web located
at http://www.sec.gov. Such reports, proxy statements and other information
concerning the Company may also be inspected at the offices of the Nasdaq, 1735
K Street, NW, Washington DC 20006-1500.
The Company has filed with the Commission a Post Effective Amendment
No. 1 to a Registration Statement on Form S-1, of which this Prospectus forms a
part (together with any amendments and exhibits thereto, the "Registration
Statement"), under the Securities Act in respect of the Shares offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. Such additional information may be
obtained from the public reference room of the Commission, 450 Fifth Street,
N.W., Washington, DC 20549. Statements contained in this Prospectus or in any
document incorporated by reference in this Prospectus as to the contents of any
contract or other document referred to herein or therein are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such reference.
CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. THE STATEMENTS IN "RISK FACTORS" IN THIS PROSPECTUS
CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING
CERTAIN RISKS AND UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS
THAT COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY
TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS.
THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS PROSPECTUS.
THE COMPANY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO DISSEMINATE ANY UPDATES
OR REVISIONS TO ANY FORWARD-LOOKING STATEMENT CONTAINED HEREIN TO REFLECT ANY
CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN
EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE
READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS
SHOULD CONSIDER CAREFULLY THE INFORMATION SET FORTH UNDER "RISK FACTORS."
TECHNICAL TERMS AND ACRONYMS USED IN THIS PROSPECTUS ARE DEFINED IN THE
"GLOSSARY OF TERMS."
THE COMPANY
On May 18, 1998, the Company sold 1,500,000 shares of its Common Stock
in an initial public offering (the "Public Offering"). Net proceeds of the
Public Offering, after deducting underwriting discounts and commissions, and
professional fees aggregated approximately $11.6 million.
Ursus is an international telecommunications company that exploits
favorable market niches by providing competitive and technologically advanced
telecommunications services. The Company focuses on small and medium-sized
businesses located in emerging or deregulating markets, including South Africa,
Latin America, the Middle East (primarily Lebanon and Egypt), Russia and France.
The Company serves these markets through a network of independent exclusive
agents. The Company believes that it derives a significant competitive advantage
from this exclusive agent network. Each agent provides marketing, customer
support, billing and collections, in local language and time, utilizing a
proprietary turn-key agent support system developed and provided by the Company.
Each agent is supplied near real time data for customer management, usage
analysis and billing from the Company's local and wide area network. Through its
agent network, the Company develops and maintains close relationships with
vendors of telephone systems such as Siemens, Plessey and Alcatel in key markets
in order to promote the Ursus line of telecommunications services, allowing the
Company to offer competitively priced and value added services that compare
favorably to the pricing and service offerings of the local incumbent
telecommunication operators ("ITOs").
Ursus has traditionally entered a particular market using call
reorigination, a system that provides the Company's overseas customers the
opportunity to access a U.S.-based switching center by means of a manual or
transparent automated dialing procedure, or other methods that provide a U.S.
dial tone to its foreign customers. Call reorigination provides a customer with
the convenience and rate economies provided by a U.S. dial tone, as opposed to
locally imposed international rates, which may be substantially higher. The
Company derives approximately 82% of its revenues from call reorigination. In
order to remain price competitive and to mitigate the high proportion of
variable costs per minute associated with call reorigination, the Company plans
to expand its direct access services by locating switching platforms at network
centers of major telecommunications providers, such as MCI WorldCom, Cable and
Wireless and France Telecom, and by deploying smaller network access nodes in
less populated service areas. This network topology, which the Company will
first use in France, provides subscribers with direct access service for voice
and fax. Ultimately, where regulatory conditions are favorable and calling
volumes are adequate to cover the associated fixed costs, the Company intends to
migrate some of its customers from call reorigination to direct access service.
Ursus plans to expand by increasing sales to existing customers; by
expanding the business generated by its existing agents; by providing wholesale
services to other carriers; and through selected acquisitions. Except as
disclosed herein, Ursus is not currently engaged in any negotiations to acquire
any business. See "Business-Formation of French Subsidiary", "Business-Purchase
of Uruguayan Corporation" and "Business Acquisition of Access Authority Inc."
The Company believes that its proprietary enterprise software system provides an
efficient infrastructure for back room processing, giving it a strategic
advantage over its competitors. The Company's computerized back office systems
handle traditionally labor intensive processing tasks such as call rating,
customer registration, billing and network management, with a high degree of
efficiency and short turn-around time. Management believes that these
efficiencies would facilitate the rapid and economical consolidation of acquired
competitors.
The Company operates a digital, switch-based telecommunications
network (the "Network") from its technical facilities in Sunrise, Florida, and,
using a hybrid network of Internet, Intranet and circuit-based facilities, plans
to use a portion of the Public Offering proceeds to expand its primary digital
switching platform and secondary network access nodes, thereby expanding its
services in what the Company believes is a reliable, flexible and cost-effective
manner. The Company also plans to exploit its market penetration and
technological sophistication through the application of Internet Protocol ("IP")
telephony technology, particularly for fax transmissions. Faxing represents a
large portion of the overall international telecommunications business, and IP
faxing offers significant cost savings and favorable regulatory treatment. IP
telephony creates the opportunity to bypass the switched telephone network by
using cost-effective packet switched networks such as private Intranets and/or
the public Internet for the delivery of fax and voice communications. To exploit
these opportunities and to further reduce its costs, the Company plans to use a
portion of the Public Offering proceeds to establish a hybrid network for IP fax
and voice services. The Company believes this application could increase the
gross margins of its existing and future retail business and allow it to
accelerate its growth strategy.
The Company expects that call reorigination will continue to serve as
a low cost and profitable method of opening new markets and expects to continue
this method of business development in certain regulated markets in Africa, the
Middle East, Europe and Asia. Reoriginating a U.S. dial tone requires little
investment in equipment and limited capital deployment in a foreign territory,
thus allowing the Company to develop a viable customer base by effectively
exploiting the difference between the local International Direct Dial ("IDD")
rate and the generally more favorable rates the Company enjoys in the U.S. The
Company has successfully used this strategy to develop foreign markets, thereby
creating a revenue stream with little more than marketing and incremental call
costs. In addition, using IP telephony technology, concurrently with call
reorigination, could significantly improve the profitability of this business
segment, without requiring the substantial investments in switches of a direct
access network. Accordingly, the Company's strategy is to deploy IP telephony
technology where feasible in order to create a hybrid network capable of
carrying significant amounts of customer traffic on a low cost platform with a
modest initial capital investment. This strategy mitigates the risk that the
Company will not attain, in some of its markets, the critical mass of business
required to amortize the fixed costs of a direct access network and affords the
Company the opportunity to develop a market with a relatively small financial
risk.
In summary, the Company intends to become a significant provider of
international telecommunications services within emerging and deregulating
markets. The Company intends to maximize its profit potential by leveraging its
existing infrastructure, market penetration, expanding customer base and growing
U.S. wholesale business. By using its independent agent network, efficient back
office systems, and favorable vendor relationships with some of the major U.S.
telecommunications carriers, the Company believes it can gain strategic
advantages while capitalizing on the opportunities presented by deregulation and
technological advances in the global telecommunications industry.
Ursus provides an array of basic and value added services to its
customers, which include:
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
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's growth strategy has increased revenues from $13.2
million to $20.8 million in the fiscal years ended March 31, 1996 and March 31,
1997, respectively; and from $20.8 million to $28.0 million in the fiscal years
ended March 31, 1997 and March 31, 1998, respectively. For the six months ended
September 30, 1996, 1997 and 1998, revenues have increased from $9.5 million in
1996 to $13.2 million in 1997 and $13.3 million in 1998. The Company's pretax
profits have grown from $1.3 million in the fiscal year ended March 31, 1996 to
$2.0 million in the fiscal year ended March 31, 1997, and 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. For the six months ended September 30, 1997 and 1998
pretax profits have decreased from approximately $791,000 in 1997 to $308,000 in
1998.
The Company is a Florida corporation that was formed in March 1993.
The Company's principal executive offices are located at 440 Sawgrass Corporate
Parkway, Suite 112, Sunrise, Florida 33325, and its telephone number is (954)
846-7887.
<PAGE>
THE OFFERING
Common Stock offered by the
Registering Shareholders.................... 200,000 shares
Common Stock to be outstanding
after the Offering(1)....................... 6,500,000 shares
Nasdaq National Market Symbol............... "UTCC"
Risk Factors................................. Prospective investors should
carefully consider all of the
information set forth in this
Prospectus, and, particularly,
should consider the factors set
forth in "Risk Factors."
(1) Excludes approximately 737,500 shares of Common Stock subject to
options granted to certain of the Company's directors, officers and
employees at exercise prices ranging from 3.375 to $9.50 ( the "Public
Offering Price"). See "Management-Stock Incentive Plan" and "Shares
Eligible for Future Sale."
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK OFFERED HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK TO
STABILIZE ITS MARKET PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL
OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE
IMPOSITION OF PENALTY BIDS. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ
NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. ACTUAL EVENTS OR RESULTS MAY DIFFER SIGNIFICANTLY FROM
THE EVENTS OR RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE SET FORTH
IN "RISK FACTORS" AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth certain summary financial information
for the Company for (i) the fiscal years ended March 31, 1995, 1996, 1997, 1998,
which have been derived from the Company's audited financial statements and
notes thereto included elsewhere in this Prospectus, (ii) the fiscal year ended
March 31, 1994, which have been derived from unaudited financial statements of
the Company which are not included herein, (iii) the six months ended September
30, 1997 and 1998, which have been derived from unaudited financial statements
of the Company which are included herein, and (iv) the unaudited pro forma
information for the year ended March 31, 1998 and the six months ended September
30, 1998 give pro forma effect to the acquisition of Access. Such pro forma data
are presented for illustrative purposes only and do not purport to represent
what the Company's 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 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 the Company's consolidated financial
statements and notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
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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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations data:
Total revenues $848 $6,291 $13,228 $20,838 $28,098 $75,652 $13,214 $13,248 31,815
Gross profit 344 2,544 5,553 8,643 9,565 23,116 4,445 4,678 9,237
Operating income (loss) (814) 159 1,369 2,004 1,720 2,264 787 97 (659)
Net income (loss) (813) 382 790 1,253 1,074 1,867 493 153 (98)
Pro forma net income (loss) per share
-basic and dilutive (1)
(Historical for the period
ended September 30, 1998) (.18) .08 .16 .25 .21 .38 .10 .03 (.02)
Pro forma weighted average shares
outstanding (1) 4,615 4,869 5,000 5,000 5,000 5,000 5,000 6,110 6,110
EBITDA (2) (771) 231 1,463 2,140 1,927 3,436 885 326 115
As of
As of March 31, September 30,
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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 10,826
Working capital (deficiency) (129) 150 811 1,646 1,092 3,121
Total assets 683 1,720 2,797 5,243 7,733 23,018
Total current liabilities 510 1,122 1,552 2,920 4,410 7,705
Long term debt, less current portion 729 730 580 425 297 312
Total shareholders' equity (deficit) (563) (162) 609 1,861 2,948 14,833
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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 herein because it is a measure
commonly used by securities analysts.
</TABLE>
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OF THE COMPANY INVOLVES CERTAIN
RISKS. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN
EVALUATING AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. TECHNICAL TERMS AND
ACRONYMS USED IN THIS PROSPECTUS ARE DEFINED IN THE "GLOSSARY OF TERMS." THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE SET FORTH IN THE
FOLLOWING RISK FACTORS AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
COMPANY RISKS
OPERATING RISKS
Historically, the Company has derived a significant portion of its
revenues by providing call reorigination services. The Company believes that as
deregulation occurs and competition increases in certain international markets,
the pricing advantage of call reorigination relative to conventional
international long distance service will diminish and may disappear in certain
markets. To maintain its existing customer base and attract new business in such
markets, the Company anticipates that it will have to offer direct access
services to certain destinations at prices significantly below the current
prices charged for call reorigination. The Company will seek to satisfy this
requirement in selected target markets by migrating its existing call
reorigination customers and attracting new business through deployment of direct
access and other call-through access methods, including IP telephony. There can
be no assurance that the Company will succeed in such efforts. Failure to
accomplish this objective could have a material adverse effect on the Company's
business, financial condition and results of operations.
In many of the Company's existing and target markets, the Company
offers or intends to offer new services or services that have previously been
provided only by the local ITOs. Accordingly, there can be no assurance that
such operations will generate operating or net income, and the Company's
prospects must therefore be considered in light of the risks, expenses, problems
and delays inherent in establishing a new business in a rapidly changing
industry. The Company's overall gross margins may fluctuate in the future based
on its mix of wholesale (selling minutes to other carriers) and retail (selling
directly to end-user customers) international long distance services and the
percentage of calls using direct access compared to call reorigination, in
addition to the reaction to any significant international long distance rate
reductions imposed by ITOs to counter external competitive threats.
As a strategic response to a changing competitive environment, the
Company may elect from time to time to make certain pricing, service or
marketing decisions or enter into acquisitions, investments and strategic
alliances that could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company believes that its
industry has reached a stage of development insofar as the gross profit margins
associated with its early stages have yielded to a more moderated profit margin
structure on an industry-wide basis. Furthermore, the Company's strategic
decisions to reduce its pricing structure in particular markets to gain
additional market share and achieve operating efficiencies may materially
adversely affect the profitability of the Company's operations in such markets.
As a result of the foregoing factors, the Company may in the future experience
materially adverse circumstances that could reduce the price of the Company's
Common Stock. See "-Risks Associated with Expansion by Acquisitions, Strategic
Alliances and Similar Transactions" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS OF INTERNATIONAL TELECOMMUNICATIONS BUSINESS
The Company's international telecommunications business is subject to
certain risks, such as changes in foreign governmental regulations and
telecommunications standards, licensing requirements, tariffs, taxes, customs,
duties and other trade barriers, as well as political and economic instability.
In addition, the Company's revenues and cost of long distance services are
sensitive to changes in international settlement rates, changes in the ratios
between outgoing and incoming traffic, and the Company's ability to obtain
international transmission facilities. International rates charged to customers
are likely to decrease in the future for a variety of reasons, including
increased competition between existing carriers, entry of new carriers into
niche markets and the consummation of joint ventures among large international
carriers that facilitate targeted pricing and cost reductions. In addition, the
Company's business could be adversely affected by a reversal in the current
trend toward deregulation of government-owned telecommunications carriers. There
can be no assurance that the Company will be able to increase its traffic volume
or reduce its operating costs sufficiently to offset any resulting rate
decreases.
RISKS RELATING TO EMERGING MARKETS
For the fiscal year ended March 31, 1998 and the six months ended
September 30, 1998, the Company derived approximately 79% of its revenues from
operations in emerging markets, where the Company's businesses are subject to
numerous risks and uncertainties, including political, economic and legal risks,
such as unexpected changes in regulatory requirements, tariffs, customs, duties
and other trade barriers, difficulties in staffing and managing foreign
operations, problems in collecting accounts receivable, foreign exchange
controls which restrict or prohibit repatriation of funds, technology export and
import restrictions or prohibitions, delays from customs brokers or government
agencies, seasonal reductions in business activity, and potentially adverse tax
consequences resulting from operating in multiple jurisdictions with different
tax laws, which could materially adversely impact the Company's business,
financial condition and results of operations.
The political systems of many of the emerging market countries in
which the Company operates or plans to operate are slowly emerging from a legacy
of totalitarian rule. Political conflict and, in some cases, civil unrest and
ethnic strife may continue in some of these countries for a period of time. Many
of the economies of these countries are weak, volatile and reliant on
substantial foreign assistance. Expropriation of private businesses in such
jurisdictions remains a possibility, whether by an outright taking or by
confiscatory tax or other policies. There can be no assurance that the Company's
operations will not be materially and adversely affected by such factors.
Legal systems in emerging market countries frequently have little or
no experience with commercial transactions between private parties. The extent
to which contractual and other obligations will be honored and enforced in
emerging market countries is largely unknown. Accordingly, there can be no
assurance that difficulties in protecting and enforcing rights in emerging
market countries will not have a material adverse effect upon the Company and
its operations. Additionally, the Company's businesses operate in uncertain
regulatory environments. The laws and regulations applicable to the Company's
activities in emerging market countries are in general new and subject to
arbitrary change and, in some cases, incomplete. There can be no assurance that
local laws and regulations will become stable in the future, or that changes
thereto will not materially adversely affect the Company's business, financial
condition or results of operations.
DEPENDENCE ON INDEPENDENT EXCLUSIVE AGENTS
The Company provides its services through a network of independent and
exclusive agents. Its international market penetration primarily reflects the
marketing, sales and customer service activities of these agents, who market the
Company's services on a commission basis. As of September 30, 1998, the Company
had 14 agents, excluding the agent relationships acquired as the result of the
purchase of Access, operating in approximately 28 countries. The use of these
agents exposes the Company to significant risks, including dependence on the
continued viability and financial stability of its agents. In the fiscal year
ended March 31, 1998 and 1997, the four major agents generated approximately 58%
and 57% of the Company's revenues, respectively. For the six months ended
September 30, 1998, these agents in the aggregate accounted for approximately
64% of the Company's revenues. In particular, the Company's single South African
agent accounted for approximately 28% of revenues during the fiscal year ended
March 31, 1998 and 32% for the six months ended September 30, 1998. Although the
Company has not historically experienced significant attrition in agencies,
there can be no assurance that it will not suffer the loss of one or more
significant agents in the future. If one or more of these agents were to suffer
financial problems, terminate its relationship with the Company, or were unable
to satisfy customers, this could create a material adverse effect on the
Company's business, financial condition or results of operations, including, but
not limited to lost revenues, bad debt expense, lost customers, potential
liability under contracts the agents commit the Company to perform, and damage
to the Company's business reputation.
The Company's continuing success depends in substantial part on its
ability to recruit, maintain and motivate its agents. The Company is subject to
competition in the recruiting of agents from other organizations that use agents
to market their products and services, including those that market
telecommunications services. Because the Company enters into exclusive
relationships with its agents, the success of the Company's business within the
exclusive territory largely depends on the effectiveness of the local agent in
conducting its business. If an agent were to become ineffective in conducting
its business, the Company might seek to terminate its relationship with the
agent, and under certain local laws the Company's exclusive arrangements with
such agent might be difficult or expensive to terminate. The Company has entered
into non-compete agreements with its agents prohibiting their competition with
the Company during their engagement and for a period of time after its
termination, however, there can be no assurance that any such non-compete
agreement would be enforceable as a practical matter or under the applicable
laws of the jurisdiction in which an agent operates. See "Use of Proceeds" and
"Business-Purchase of Equity Interest in South African Agent." However, such
measures entail other risks. See "-Credit Risks," "-Risks Associated with
Expansion by Acquisitions, Strategic Alliances and Similar Transactions" and
"-Foreign Exchange Rate Risks."
COMPETITION
The international telecommunications industry is highly competitive
and subject to the introduction of new services facilitated by advances in
technology. International telecommunications providers compete on the basis of
price, customer service, transmission quality, breadth of service offerings and
value-added services. The Company competes with a variety of international long
distance telecommunications providers in each of its markets, including the
respective ITO in each country in which the Company operates, various
independent providers similar to the Company in size and resources, and, to a
lesser extent, major international carriers and their global alliances. Other
potential competitors include cable television companies, wireless telephone
companies, Internet access providers and large-end users which have dedicated
circuits or private networks. Many of the Company's current or potential
competitors have substantially greater financial, marketing and other resources
than the Company. If the Company's competitors were to devote significant
additional resources to the provision of international long distance
telecommunications services to the Company's target customer base of small and
medium-sized businesses in the Company's targeted geographic markets, then the
Company's business, financial condition and results of operations could be
materially adversely affected. The Company's principal method of competition is
to provide competitive service to its customers at a reasonable price. The
Company believes it is able to provide competitive service to its customers
primarily by providing value-added services, such as detailed billing, and by
utilizing a network of agents who maintain close relationships with vendors of
telephone hardware and who are knowledgeable about the telecommunications
business in their geographic markets, making them better able to respond to
customer needs. The Company maintains competitive pricing by keeping its own
costs down, principally by using its proprietary software to handle back office
billing and record keeping. There can be no assurance that the Company will be
able to compete successfully against new or existing competitors. See "-Risks of
International Telecommunications Business."
LESSENING OF BARRIERS TO ENTRY IN MARKETS WHERE THE COMPANY OPERATES
The call reorigination business has a small capital requirement and
regulatory limitations often form the most significant barrier to entry. The
Company anticipates that as the markets in which it operates or will operate
continue to deregulate, the Company will increase its investments in
telecommunications infrastructure and the Company or its relevant agent will
increase marketing expenditures to address increased competition resulting from
decreased regulatory difficulties of entry into those markets, particularly
since the cost of providing telecommunications services is relatively low and
not a significant barrier to entry into the markets where Ursus provides
services. As a result, the Company may experience increased operating costs in
those markets. Additional competitors with greater resources than the Company
could enter these markets and acquire customers of the Company or force the
Company to reduce its prices to maintain its customer base which could
materially adversely affect the Company's business, financial condition and
results of operations.
RAPID CHANGES IN TECHNOLOGY AND CUSTOMER REQUIREMENTS
Rapid and significant technological advancements and introductions of
new products and services utilizing new technologies characterize the
telecommunications industry. As new technologies develop, the Company may be
placed at a competitive disadvantage, and competitive pressures may force the
Company to implement new technologies at substantial cost. In addition,
competitors may implement new technologies before the Company is able to
implement such technologies, allowing those competitors to provide enhanced
services and quality, or services at more competitive costs, compared with that
which the Company is able to provide. There can be no assurance that the Company
will be able to respond to such competitive pressures and implement such
technologies on a timely basis or at an acceptable cost. One or more of the
technologies currently utilized by the Company, or which it may implement in the
future, may not be preferred by its customers or may become obsolete. If the
Company is unable to respond to competitive pressures, implement new
technologies on a timely basis, or penetrate new markets in a timely manner in
response to changing market conditions or customer requirements, or if new or
enhanced services offered by the Company do not achieve a significant degree of
market acceptance, then the Company's business, financial condition and results
of operations could be materially adversely affected. See "-Risks of
International Telecommunications Business" and "-Competition."
RISK OF NETWORK FAILURE
The success of the Company largely depends upon its ability to deliver
high quality, uninterrupted telecommunication services, and on its ability to
protect its software and hardware against damage from fire, earthquake, power
loss, telecommunications failure, natural disaster such as hurricanes and
similar events. Any systems or hardware failure that causes interruptions in the
Company's operations could have a material adverse effect on the Company.
Because the Company at the present time operates only one switch, located in
Florida, physical damage to this facility (including damage by hurricane) could
not be remedied by using redundant facilities of the Company located elsewhere,
and could have a material adverse effect on the Company. As the Company expands
and call traffic grows, there will be increased stress on hardware, circuit
capacity and traffic management systems. There can be no assurance that the
Company will not experience system failures. The Company's operations also
depend on its ability to successfully expand and integrate new and emerging
technologies and equipment, which could increase the risk of system failure and
result in further strains. The Company attempts to mitigate customer
inconvenience in the event of a system disruption by routing traffic to other
circuits and switches which may be owned by other carriers and to minimize its
own risk of loss in the event of Network failure by maintaining insurance in
commercially reasonable amounts. However, significant or prolonged system
failures, or difficulties for customers in accessing and maintaining connection
would result in an uninsurable risk, including damage to the Company's
reputation, attrition and financial loss. Any damage to the Company's operations
center would have a negative impact on the Company and its ability to maintain
its operations and generate accurate call detail reports.
CREDIT RISKS
Many of the foreign countries in which the Company operates do not
have established credit bureaus, thereby making it more difficult to ascertain
the creditworthiness of potential customers. Under the Company's exclusive
agency arrangements, the agent, and not the Company is responsible for analyzing
the creditworthiness of the customer and assumes this credit risk. The Company
believes that using this local platform for its business minimizes its credit
risk, and the Company's bad debt expenses have historically been minimal.
However, the Company has in certain circumstances supported its agency
relationships by bearing some credit losses. Also, there is a credit risk
inherent in the use of independent agents by the Company; because the agent, and
not the ultimate user of the Company's services, is responsible for the payment.
There can be no assurance that, with regard to any particular time period or
periods, particular geographic location or locations or any particular agent or
agents, the Company's bad debt expense will not rise significantly above
historic or anticipated levels. While the Company continually seeks to minimize
bad debt, the Company's experience indicates that a certain portion of past due
receivables will never be collected and that such bad debt is a necessary cost
of conducting business in the telecommunications industry. As the Company
implements its plans to expand its customer base and wholesale business and move
into new territories, whether directly, through arrangements with agents, equity
investments in agents, acquisitions or otherwise, the credit risk to which the
Company is exposed will increase. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH AND IMPLEMENTING EXPANSION STRATEGY
The Company has experienced significant growth in recent periods. The
Company's ability to manage and respond to growth will be critical to its
success. The Company anticipates that future growth will depend on a number of
factors, including the effective and timely development of customer
relationships, the ability to enter new markets and expand in existing markets,
and the recruitment, motivation and retention of qualified agents. Sustaining
growth will require the continuing enhancement of the Company's operational
systems and additional management, operational and financial resources. If the
Company is successful in its growth strategy, there will be additional demands
on its customer support, marketing, distribution and other resources. There can
be no assurance that the Company will be able to manage its expanding operations
effectively or that it will be able to maintain or accelerate its rate of
growth. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."
The Company's strategy is to continue its growth by expanding its
service offerings and principal geographic markets in Africa, the Middle East,
Latin America and targeted areas of Europe and Russia, especially in
deregulating markets. To accommodate its growth strategy, the Company will be
required to invest additional capital and resources to enhance its information
systems by replacing or upgrading certain existing systems and integrating new
systems. There can be no assurance that the Company can add services or expand
its geographic markets or that existing regulatory barriers to its current or
future operations will be reduced or eliminated. Even if the Company succeeds in
adding services or expanding into new markets, there can be no assurance that
its administrative, operational, infrastructure and financial resources and
systems will remain adequate. See "-Dependence on Effective Information
Systems."
As the Company grows, it may have difficulty accurately forecasting
its telecommunications traffic. Inaccuracies in such forecasts could result in
the Company making investments in insufficient or excessive transmission
facilities and incurring disproportionate fixed expenses, as well as cause it to
route excessive overflow traffic to other carriers. The Company would not be
able to assure that the quality of services routed to other carriers would be
commensurate with the transmission quality provided by the Company.
Interruptions of or a decline in the quality of the Company's services resulting
from expansion difficulties could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH EXPANSION BY ACQUISITIONS, STRATEGIC ALLIANCES AND
SIMILAR TRANSACTIONS
As part of its growth strategy, the Company intends to reduce its
exposure to risks associated with the use of exclusive independent agents in
existing and new markets, by acquiring some or all of the equity interest in,
entering into joint venture arrangements with, or forming strategic alliances
with, agents and other strategic partners whose businesses complement that of
the Company. If the Company's investments in or alliances with third parties do
not result in a controlling interest or are nonexclusive arrangements, the
Company may be subject to additional business and operating risks outside of its
management's control. The Company has not entered into any such arrangements,
except with Central Call and Mondial Telecom, with which the Company has entered
into a memorandum of understanding with respect to the acquisition of customer
lists, and with its Uruguayan Agent with respect to the purchase of all of its
assets. See "Business-Formation of French Subsidiary", Business-Purchase of
Uruguayan Corporation" and "Business Acquisition of Access Authority Inc." Any
future acquisition, investment, strategic alliance or related effort will be
accompanied by the risks commonly encountered in such transactions or efforts.
Such risks include, among others, the difficulty of identifying appropriate
acquisition candidates or partners, the difficulty of assimilating the
operations of the respective entities, the potential disruption of the Company's
ongoing business, possible costs associated with the development and integration
of such operations, the potential inability of management to maximize the
Company's financial and strategic position by successfully incorporating
licensed or acquired technology into the Company's service offerings, the
failure to maintain uniform standards, controls, procedures and policies, the
impairment of relationships with employees, customers and agents as a result of
changes in management, and higher customer attrition with respect to customers
obtained through acquisitions. There can be no assurance that the Company would
be successful in overcoming these risks or any other problems encountered with
such acquisitions, investments, strategic alliances or related efforts.
Acquisitions also involve other risks, including changes in pricing
due to competition, difficulties in integrating the acquired operations,
diversion of management resources, obtaining any required regulatory approvals,
increased foreign exchange risk and the risks associated with entering new
markets. There can be no assurance that acquisitions, strategic alliances or any
other similar events will result in increased sales or an expanded customer
base, give the Company the presence in new territories that it seeks, or enable
the Company to effectively penetrate its target markets.
Acquisitions by the Company could entail potentially dilutive
issuances of equity securities of the Company, as well as significant
transaction expenses and interest expense, which could have a material adverse
effect on the Company's operating results.
GOVERNMENT REGULATION
The Company is required to file periodic reports with the United
States Department of Commerce, due to the ownership interest of Fincogest, S.A.,
a Swiss corporation, in the Company. See "Principal and Registering
Shareholders." The Company has failed to comply with this reporting requirement
and is in the process of preparing these reports for filing with the Department
of Commerce.
The international telecommunications industry is subject to
international treaties and agreements, and to laws and regulations that vary
from country to country. Enforcement and interpretation of these laws and
regulations can be unpredictable and are often subject to informal views of
government officials and ministries that regulate telecommunications in each
country. In some cases, such government officials and ministries are subject to
influence by ITOs.
In some countries where the Company operates or plans to operate,
local laws or regulations limit or require prior government approval for the
provision of international telecommunications service in competition with
state-authorized carriers. For example, the Company's provision of services over
facilities in its Network or by purchasing minutes from other carriers for
resale to its customers, or its ownership of facilities may be affected by
increased regulatory requirements in a foreign jurisdiction. Moreover, the
Company's use of transit agreements or arrangements, if any, may be affected by
laws or regulations in either the transited or terminating foreign jurisdiction.
There can be no assurance that future regulatory, judicial, legislative or
political changes will permit the Company to offer to residents of such
countries all or any of its services or will not have a material adverse effect
on the Company, that regulators or third parties will not raise material issues
regarding the Company's compliance with applicable laws or regulations, or that
regulatory decisions will not have a material adverse effect on the Company. If
the Company is unable to provide the services which it presently provides or
intends to provide, or to use its existing or contemplated transmission methods
due to its inability to obtain or retain the requisite governmental approvals
for such services or transmission methods, or for any other reason related to
regulatory compliance or lack thereof, such developments could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company has pursued, and expects to continue to pursue, a strategy
of providing its services to the maximum extent it believes to be permissible
under applicable laws and regulations. To the extent that the interpretation or
enforcement of applicable laws and regulations is uncertain or unclear, the
Company's aggressive strategy may result in the Company's (i) providing services
or using transmission methods that are found to violate local laws or
regulations or (ii) failing to obtain approvals required under such laws or
regulations to which the Company believes that it is subject, or the Company
otherwise discovers that it is in violation of local laws and regulations and
believes that it is subject to enforcement actions by the FCC or the local
authority, it would seek to modify its operations or discontinue operations so
as to comply with such laws and regulations. There can be no assurance, however,
that the Company will not be subject to fines, penalties or other sanctions as a
result of violations even though such violations are corrected. If the Company's
interpretation of applicable laws and regulations proves incorrect, it could
lose, or be unable to obtain, regulatory approvals necessary to provide certain
of its services or to use certain of its transmission methods. The Company also
could have substantial monetary fines and penalties imposed against it.
CALL REORIGINATION The services provided by the Company consist
primarily of call reorigination services. In some countries, use of call
reorigination is restricted or prohibited. If it is demonstrated that the law of
a foreign jurisdiction expressly prohibits call reorigination using uncompleted
call signaling, and that the foreign government attempted but failed to enforce
its laws against U.S. service providers, the Federal Communications Commission
("FCC") may require U.S. carriers to cease providing call reorigination services
using uncompleted call signaling. To date, the FCC has ordered carriers to cease
providing call reorigination using uncompleted call signaling to customers in
the Philippines, and it is expected that the FCC will take this action with
respect to carriers providing call reorigination using uncompleted call
signaling to customers in Saudi Arabia. Prior to taking such action, the FCC
permits countries to submit information to the FCC regarding the legal status of
call reorigination services in their respective countries. According to FCC
records, 30 countries thus far have submitted such information to the FCC,
including the Bahamas, Egypt, Lebanon and South Africa. See "Business-Government
Regulation." Submission of this information does not imply that the FCC believes
that the country's laws expressly prohibit call reorigination using uncompleted
call signaling. Revenues attributable to call reorigination represented
approximately 76% of the Company's revenues during the fiscal year ended March
31, 1998 and 82% for the six months ended September 30, 1998. A substantial
number of countries have prohibited certain forms of call reorigination as a
mechanism to access telecommunications services. Such actions have caused the
Company to cease providing call reorigination services in the Bahamas and may
require it to do so in other jurisdictions in the future. As of November 20,
1997, reports had been filed with the FCC and/or the ITU that the laws of 79
countries prohibit call reorigination. There can be no assurance that certain of
the Company's services and transmission methods will not continue to be or will
not become prohibited in certain jurisdictions, and, depending on the
jurisdictions, services and transmission methods may become affected, which
could result in a material adverse effect on the Company's business, financial
condition and results of operations. To the extent that a country that has
expressly prohibited call reorigination using uncompleted call signaling is
unable to enforce its laws against call reorigination using uncompleted call
signaling, it can request that the FCC enforce such laws in the United States,
by requiring the Company to cease providing call reorigination services to such
country or, in extreme circumstances, by revoking the Company's authorizations.
To date, except as indicated herein, the Company has not been notified by any
regulator or government agency that its provision of services is not in
compliance with applicable regulations.
In South Africa, the Company's agent's future provision of certain
services will be, and its current provision of call reorigination services may
be, subject to the Telecommunications Act of 1996 (the "SA Telecommunications
Act") and the Post Office Act of 1958. The SA Telecommunications Act permits a
party to provide a range of services other than public switched services under,
and in accordance with, a telecommunications license issued to that party in
accordance with the SA Telecommunications Act. Although the Company believes
that South African law does not prohibit its agent from providing call
reorigination services to customers in South Africa without a license, the
telecommunications regulator in South Africa ("SATRA") has ruled that the
provision of call reorigination services to customers in South Africa without a
license violates the SA Telecommunications Act. Several entities, including the
Company's agent, filed a lawsuit to stay and reverse SATRA's ruling on the basis
that SATRA lacks the authority to issue such a ruling and that the SA
Telecommunications Act does not prohibit the provision of call reorigination
services. SATRA has agreed not to prosecute any person in the call reorigination
industry unless the South African courts rule that it may. It is anticipated
that final adjudication of this lawsuit could take up to four years to occur. If
the Company's agent is determined to be providing a telecommunications service
without a required license, it could be subject to fines, to the termination of
its call reorigination service to customers in South Africa and, potentially, to
the denial of license applications to provide liberalized services. There can be
no guarantee that the courts in South Africa will not rule that call
reorigination is illegal, that they will not do so soon, or that the South
African legislature will not promulgate an explicit prohibition on call
reorigination. For the fiscal year ended March 31, 1998, South Africa comprised
the Company's most significant single market and accounted for approximately 29%
of the Company's total revenues. Any such adverse legal action could therefore
have a material adverse effect on the Company's business, financial condition
and results of operation. The Company's South African agent was issued an
interim "Value Added Network Service License" by SATRA in early April 1998. This
license allows the Company in conjunction with its Agent to operate a data
network system through which all data and facsimile transmissions can be routed.
The Company's 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.
The Company's interstate and international facilities-based and resale
services are subject to regulation by the FCC, and regulations promulgated by
the FCC are subject to change in the future. See "Business-Government
Regulation-United States."
THE FCC'S POLICIES ON TRANSIT AND REFILE. The FCC is currently
considering a 1995 request (the "1995 Request") to limit or prohibit the
practice whereby a carrier routes, through its facilities in a third country,
traffic originating from one country and destined for another country. The FCC
has permitted third country calling where all countries involved consent to the
routing arrangements (referred to as "Transiting"). Under certain arrangements
referred to as "Refiling," the carrier in the destination country does not
consent to receiving traffic from the originating country and does not realize
the traffic it receives from the third country is actually originating from a
different country. While the Company's revenues attributable to Refiling
arrangements are minimal, Refiling may constitute a larger portion of the
Company's operations in the future. The FCC to date has made no pronouncement as
to whether Refiling arrangements are inconsistent with U.S. or International
Telecommunications Union ("ITU") regulations. It is possible that the FCC will
determine that Refiling violates U.S. and/or international law, which could have
a material adverse effect on the Company's future business, financial condition
and results of operations.
THE FCC'S INTERNATIONAL SETTLEMENTS POLICY. The Company is also
required to conduct its facilities-based international business in compliance
with the FCC's international settlements policy (the "ISP"). The ISP establishes
the permissible arrangements for facilities-based carriers that are based in the
U.S. and their foreign counterparts to compensate each other for terminating
each other's traffic over their respective networks. Several of the Company's
arrangements with foreign carriers are subject to the ISP and it is possible
that the FCC could take the view that one or more of these arrangements do not
comply with the existing ISP rules. The FCC recently enacted certain changes in
its rules designed to permit alternative arrangements outside of its ISP as a
means of encouraging competition and achieving lower, cost-based accounting and
collection rates as more facilities-based competition is permitted in foreign
markets. If the Company enters into a traffic agreement with a foreign carrier
for the provision of telecommunications services that does not comply with the
ISP, it may be required to obtain FCC approval under this alternative
arrangements mechanism. If the FCC, on its own initiative or in response to a
challenge filed by a third party, determines that the Company's foreign carrier
arrangements do not comply with FCC rules, among other measures, it may issue a
cease and desist order, impose fines on the Company or, in extreme
circumstances, revoke or suspend its FCC authorizations. See "-Recent and
Potential FCC Actions." Such action could have a material adverse effect on the
Company's business, financial condition and results of operations.
THE FCC'S TARIFF REQUIREMENTS FOR INTERNATIONAL LONG DISTANCE
SERVICES. The Company is also required to file with the FCC a tariff containing
the rates, terms and conditions applicable to its international
telecommunications services. The Company is also required to file with the FCC
any agreements with customers containing rates, terms, and conditions for
international telecommunications services, if those rates, terms, or conditions
are different than those contained in the Company's tariff. If the Company
charges rates other than those set forth in, or otherwise violates, its tariff
or a customer agreement filed with the FCC, or fails to file with the FCC
carrier-to-carrier agreements, the FCC or a third party could bring an action
against the Company, which could result in a fine, a judgment or other penalties
against the Company. Such actions could have a material adverse effect on the
Company's business, financial condition and results of operations.
RECENT AND POTENTIAL FCC ACTIONS. Regulatory action that has been and
may be taken in the future by the FCC may enhance the intense competition faced
by the Company. In addition to its new policy on alternative arrangements, the
FCC has also established lower ceilings ("benchmarks") for the rates that U.S.
carriers will pay foreign carriers for the termination of international
services. Moreover, the FCC recently changed its rules to implement the WTO
Agreement, in part by allowing U.S. carriers to accept certain exclusive
arrangements with certain foreign carriers. See "The International
Telecommunications Industry." While these rule changes may provide the Company
with more flexibility to respond more rapidly to changes in the global
telecommunications market, they will also provide similar flexibility to the
Company's competitors. The implementation of these changes could have a material
adverse effect on the Company's business, financial condition and results of
operations.
U.S. DOMESTIC LONG DISTANCE SERVICES. The Company currently carries a
DE MINIMIS amount of U.S. domestic long distance traffic, if any, for its
foreign-billed customers. Such traffic generally would be limited to incidental
interstate or intrastate calls made by payphone users in the United States that
are billed in foreign countries but that brought their calling cards to the
United States while traveling. The Company's ability to provide domestic long
distance service in the United States is subject to regulation by the FCC and
relevant state Public Service Commissions ("PSCs") which regulate interstate and
intrastate rates, respectively, ownership of transmission facilities, and the
terms and conditions under which the Company's domestic U.S. services are
provided. In general, neither the FCC nor the relevant state PSCs exercise
direct oversight over prices charged for the Company's services or the Company's
profit levels, but either or both may do so in the future. The Company, however,
is required by federal and state law and regulations to file tariffs listing the
rates, terms and conditions of services provided. Any failure to maintain proper
federal and state tariffing or certification or file required reports, or any
difficulties or delays in obtaining required authorizations, could have a
material adverse effect on the Company's business, financial condition and
results of operations. The FCC also imposes some requirements for marketing of
telephone services and for obtaining customer authorization for changes in the
customer's primary long distance carrier. If these requirements are not met, the
Company may be subject to fines and penalties.
To originate and terminate calls in connection with providing their
services, long distance carriers such as the Company may have to purchase access
services from local exchange carriers ("LECs") or competitive local exchange
carriers ("CLECs"). Access charges represent a significant portion of the
Company's cost of U.S. domestic long distance services and, generally, such
access charges are regulated by the FCC for interstate services and by PSCs for
intrastate services. The FCC has undertaken a comprehensive review of its
regulation of LEC access charges to better account for increasing levels of
local competition. While the resolution of these issues is uncertain, if these
proposed rate structures are adopted, many long distance carriers, including the
Company, could be placed at a significant cost disadvantage to larger
competitors. In addition, the FCC has adopted certain measures to implement the
1996 Telecommunications Act that will impose new regulatory requirements,
including the requirement that the Company contribute some portion of its
telecommunications revenues to a universal service fund designated to fund
affordable telephone service for consumers, schools, libraries and rural
healthcare providers. These contributions will become payable beginning in 1998
for all interexchange carriers but not for providers of solely international
services. The Company believes that it is not subject to universal service
contribution requirements, but there can be no guarantee that the FCC will not
find that the Company is subject to such requirements.
The FCC issued an order on October 9, 1997, concluding that
interexchange carriers must compensate payphone owners at a rate of $.284 per
call for all calls using their payphones. This compensation method will be
effective from October 7, 1997 through October 7, 1999. After this time period,
interexchange carriers will be required to compensate payphone owners at a
market-based rate minus $0.066 per call. A number of carriers have appealed this
FCC order to the U.S. Court of Appeals for the D.C. Circuit or have sought FCC
reconsideration of this order. Although the Company cannot predict the outcome
of the FCC's proceedings on the Company's business, it is possible that such
proceedings could have a material adverse effect on the Company's business,
financial condition and results of operations.
The FCC and certain state agencies also impose prior approval
requirements on transfers of control, including pro forma transfers of control
(without public notice), and corporate reorganizations, and assignments of
regulatory authorizations. Such requirements may delay, prevent or deter a
change in control of the Company or the Company's acquisition of another
company. The FCC also imposes certain restrictions on U.S.-licensed
telecommunications companies that are affiliated with foreign telecommunications
carriers, especially if the foreign telecommunications carrier obtains a 25% or
greater interest in a company. If the Company becomes controlled by or under
common control with a foreign telecommunications carrier, or if the Company
obtains a greater than 25% interest in or control over a foreign
telecommunications carrier, the FCC could restrict the Company's ability to
provide service on certain international routes.
BAHAMAS. The Company has entered into an operating agreement with the
Bahamas Telephone Company ("Batelco") to provide, among other things,
international telecommunications services to customers in the Bahamas. Recently,
Batelco has taken several actions designed to block the Company's ability to
offer services to customers in the Bahamas. The Company believes these actions
violate the terms of its operating agreement with Batelco. The Company also
believes that Batelco's actions are inconsistent with U.S. policy and is working
with the U.S. government, including the U.S. Embassy in the Bahamas and the FCC
to restore the Company's circuits to full capacity. If Batelco is permitted to
block permanently or over a protracted period of time the Company's provision of
service to customers in the Bahamas, such action could have a material adverse
impact on the Company's business, financial condition and results of operation.
For the fiscal year ended March 31, 1998, the Company derived approximately 4.9%
of its revenues from services it provided in the Bahamas, as compared to 5.6%
for the fiscal year ended March 31, 1997.
DEPENDENCE ON ARRANGEMENTS WITH CARRIERS
The Company obtains most of its transmission capacity under
volume-based resale arrangements with facilities-based and other carriers,
including ITOs, however, the majority of these services are provided by only two
carriers. Under these arrangements, the Company is subject to the risk of
unanticipated price fluctuations and service restrictions or cancellations. The
Company generally has not experienced sudden or unanticipated price
fluctuations, service restrictions or cancellations imposed by such
facilities-based carriers, except in the Bahamas. See "Government
Regulation-Bahamas" above. Although the Company believes that its arrangements
and relationships with such carriers generally are satisfactory, the
deterioration or termination of the Company's arrangements and relationships, or
the Company's inability to enter into new arrangements and relationships with
one or more of such carriers, could have a material adverse effect upon the
Company's cost structure, service quality, network coverage, results of
operations and financial condition.
The Company's growth strategy in new markets is to some extent based
on its ability to enter into operating agreements with domestic and foreign
carriers. In accordance with industry practices, operating agreements entered
into by the Company will be terminable upon short notice. While the Company
successfully negotiates and maintains operating agreements, none of which has
been terminated to date, the trend toward deregulation of telephone
communications in many countries and a significant reduction in outgoing traffic
carried by the Company, among other things, could cause foreign partners to
decide to terminate their operating agreements, or could cause such operating
agreements to have substantially less value to the Company. Termination of these
operating agreements could have a material adverse effect on the Company's
business, results of operations and financial condition.
EXPOSURE TO FRAUD
The telecommunications industry has historically been exposed to fraud
losses. The Company has implemented anti-fraud measures, such as employment
agreements with its employees, limiting and monitoring access to its information
systems and monitoring use of its services in order to minimize losses relating
to fraudulent practices. However, there can be no assurance that the Company
will effectively control fraud when operating in the international
telecommunications arena. Fraud has historically been a more significant problem
for large providers of telecommunications services than it has for the Company,
whose few employees and switching facilities are relatively easier to monitor
than those of the large providers. As the Company continues to grow and hire new
employees and implement its plans to increase the number of switching facilities
that it owns, its exposure to fraud losses will increase. The Company's failure
to control fraud effectively could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
While the Company believes its information systems are sufficient for
its current operations, such systems will require enhancements, replacements and
additional investments to continue their effectiveness in the future,
particularly to enable the Company to manage an expanded Network. There can be
no assurance that the Company will not encounter difficulties in enhancing its
systems or integrating new technology into its systems. The inability of the
Company to implement any required system enhancement, to acquire new systems or
to integrate new technology in a timely and cost effective manner could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Management Information Systems."
RISKS ASSOCIATED WITH 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. The Company has
completed an evaluation of all its systems and found that most of the Company's
computer systems, software and databases are proprietary to the Company and are
year 2000 compliant. The Company also has begun to evaluate third party business
entities with which the Company is engaged in business or for which the Company
provides services, to determine if their will be any unexpected interruptions.
The Company 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 the Company would be adversely affected by any of such
problems. Management expects to have this process completed by September 1999.
The Company has obtained representations from the manufacturer of the
telephony switches that they are year 2000 compliant. As these switches are
critical to the Company they have been tested internally and found to be
compliant. The Company's billing system will be upgraded to a year 2000
compliant version by June 1999 at no cost to the Company. The Company has
received assurances from other software and equipment manufacture's that their
hardware and software are year 2000 compliant.
Management has determined that costs to correct any problems
encountered with the Year 2000 to be immaterial. However, until such time as the
third parties, with which the Company conducts business respond to the Company,
the full impact of the year 2000 is not known. As a result the impact on the
Company's business, results of operations and financial condition cannot be
assessed with certainty.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its senior officers and on
its ability to hire and retain qualified management personnel. The loss of the
services of any of these individuals could materially and adversely affect the
business of the Company and its future prospects. The Company has entered into
employment agreements with certain of its senior officers. The Company has
obtained key person life insurance, of which the Company is the beneficiary, on
the lives of each of Messrs. Giussani and Chaskin in the amount of $2 million.
The Company's future success will also depend on its ability to attract and
retain additional management, technical, marketing, sales, financial and other
personnel required in connection with the growth and development of its
business. See "Management."
LEGAL PROCEEDINGS INVOLVING THE COMPANY'S CHIEF EXECUTIVE OFFICER
Mr. Luca Giussani, the Company's president and chief executive
officer, was the subject of a criminal proceeding in Italy under Italian law,
which was part of a series of indictments issued against numerous people.
Specifically, about May 1996 Mr. Giussani was charged with transmitting an
invoice in 1991 to a corporation pursuant to an existing consulting contract for
consulting services which it is alleged he did not perform. It was alleged that
the invoice was used to disguise a political contribution made by that
corporation which was unlawful under Italian law. Mr. Giussani was not charged
with making an unlawful political contribution; but rather it is alleged that
through the use of this invoice, Mr. Giussani facilitated the corporation's
falsification of corporate records to disguise the contribution. Mr. Giussani
consistently denied any improper conduct in connection with this matter and
believed that he would ultimately be vindicated. In October 1997, the trial
judge dismissed the claim against Mr. Giussani for lack of evidence. There is
currently no criminal proceeding pending against Mr. Giussani; although he has
been advised that the investigating magistrates are currently contemplating
refiling charges against him and the other former defendants in this case in
order to prevent the running of the applicable statute of limitations. There can
be no assurance that Mr. Giussani will prevail on the merits with respect to any
charges brought against him. See "Management-Certain Legal Proceedings."
FOREIGN CORRUPT PRACTICES ACT
As a result of the Public Offering, the Company has become subject to
the Foreign Corrupt Practices Act ("FCPA"), which generally prohibits U.S.
companies and their intermediaries from bribing foreign officials for the
purpose of obtaining or keeping business. The Company may be exposed to
liability under the FCPA as a result of past or future actions taken without the
Company's knowledge by agents, strategic partners or other intermediaries.
Violations of the FCPA may also call into question the credibility and integrity
of the Company's financial reporting systems. The Company's focus on certain
emerging markets may tend to increase this risk. Such liability under the FCPA
could have a material adverse effect on the Company's business, financial
condition and results of operations.
FOREIGN EXCHANGE RATE RISKS
The Company currently bills primarily in United States Dollars and
generally is paid by customers outside of the United States either in United
States Dollars or in local currency at predetermined exchange rates.
Substantially all of the costs to develop and improve the Company's switching
facilities and the Network have been, and will continue to be, denominated in
United States Dollars. If the United States Dollar appreciates relative to the
local currency, then the Company may suffer a competitive disadvantage because
its services will grow more expensive than those of its competitors, such as the
ITOs, that deal only in the local currency. Any depreciation of the value of the
United States Dollar relative to the local currency may adversely affect the
Company by effectively increasing the cost of the Company's capital expenditures
made in such local currency. As the Company's business develops and expands, the
Company anticipates that in many countries it may bill and receive payment in
local currency at prevailing exchange rates. The Company's focus on emerging
markets may tend to increase the risks that currency fluctuations pose. Although
the Company has minimal operations in the Asian countries affected by recent
substantial currency fluctuations, there can be no assurance that currency
speculation and fluctuation will not affect the Company in Latin America, South
Africa, the Middle East or its other emerging markets. The Company monitors
exposure to currency fluctuations, and may, as appropriate, use certain
financial hedging instruments in the future. However, there can be no assurance
that the use of financial hedging instruments will successfully offset exchange
rate risks, or that such currency fluctuations will not have a material adverse
effect on the Company's business, results of operations and financial condition.
See "-Risks of International Telecommunications Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CAPITAL EXPENDITURES
The Company believes that the proceeds of the Public Offering,
combined with other existing and anticipated sources of liquidity, will be
sufficient to fund its capital requirements for approximately 12 months. Certain
events could occur that would require the Company to obtain additional
financing. Such events could include faster than expected growth or lower than
anticipated funds generated from operations. In such case, the Company could
require additional capital to continue to expand and upgrade the Network, fund
the acquisition of businesses or investments in joint ventures and strategic
alliances, or to otherwise implement its growth strategy. The Company may in the
near future seek additional equity or debt financing, which could include a
high-yield debt offering, to provide flexibility for potential acquisitions and
network expansion. The exact amount of the Company's future capital requirements
will depend upon many factors, including the cost, timing and extent of upgrades
to and expansion of the Network and existing and new services, the Company's
ability to penetrate new markets, regulatory changes, the status of competing
services, the magnitude of potential acquisitions, investments and strategic
alliances and the Company's results of operations. Individually or collectively,
variances in these and other factors could materially change the Company's
actual capital requirements. If additional capital is required, there can be no
assurance that the Company will be able to raise such capital, or, if raised,
that the terms of such financing will be favorable to the Company or will not be
dilutive to the investments of purchasers of Common Stock in the Public
Offering. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have fluctuated and may
continue to fluctuate due to various factors, including the timing of
investments, general economic conditions, specific economic conditions in the
telecommunications industry, the effects of governmental regulation and
regulatory changes, user demands, capital expenditures, costs relating to the
expansion of operations, the introduction of new services by the Company or its
competitors, the mix of services sold and the mix of channels through which
those services are sold, changes in prices charged by the Company's competitors,
and other factors outside of the Company's control. Any combination of such
factors, or any one of such factors, may in the future cause fluctuations in
quarterly operating results. Variations in the Company's operating results could
materially affect the price of the Company's Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PROTECTION OF INTELLECTUAL PROPERTY
The Company relies on unpatented proprietary know-how and continuing
technological advancements to maintain its competitive position. Although the
Company has entered into confidentiality and invention agreements with certain
of its employees and consultants, no assurance can be given that such agreements
will be honored or that the Company will be able to effectively protect its
rights to its unpatented trade secrets and know-how. Moreover, no assurance can
be given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets and know-how. See "Business--The Network" and
"Business--Management Information Systems."
The Company has not registered or trademarked "Ursus" and the
Company's logo in any jurisdiction. The Company is filing registrations of its
name and logo in the United States, but there can be no assurance that it will
obtain adequate trademark, service mark or similar protection of its name and
logo.
CONTROL BY CONTROLLING SHAREHOLDERS
A group of shareholders (the "Controlling Shareholders") beneficially
own an aggregate of 76.9% of the outstanding shares of the Company's Common
Stock and 100% of the Company's Series A Preferred Stock. The Series A Preferred
Stock has the exclusive rights to elect two (2) of the five (5) members of the
Company's Board of Directors, and one member less than a numerical majority of
any expanded Board. Moreover, the Common Stock votes cumulatively for the
election of Directors, which means that the Controlling Shareholders have the
power to elect at least one member of the Board of Directors so long as they
control at least 33.3% of the outstanding Common Stock (or an even smaller
percentage if the size of the Board is expanded). Accordingly, the Controlling
Shareholders have the ability to elect a majority of the members of the Board of
Directors and to approve certain fundamental corporate transactions, including
mergers, consolidations and sales of assets. As long as the Controlling
Shareholders are the controlling shareholders of the Company, third parties will
not be able to gain control of the Company through purchases of Common Stock not
beneficially owned or otherwise controlled by the Controlling Shareholders.
While each of the Controlling Shareholders has advised the Company that their
current intention is to continue to hold all of the shares of Series A Preferred
Stock and substantially all of the Common Stock beneficially owned by them,
there can be no assurance that any of the Controlling Shareholders will not
decide to sell all or a portion of their holdings at some future date or that in
any transfer by any of the Controlling Shareholders of a controlling interest in
the Company that any other holders of Common Stock will be allowed to
participate in such transaction or will realize any premium with respect to
their shares of Common Stock. See "Offering Risks-Effects of Certain
Anti-Takeover Provisions," "Principal and Registering Shareholders" and
"Description of Capital Stock-Certain Provisions of the Company's Amended and
Restated Articles of Incorporation, Bylaws and Certain Statutory Provisions."
OFFERING RISKS
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may experience fluctuations
unrelated to the Company's operating performance. In particular, the price of
the Common Stock may be affected by general market price movements as well as
developments specifically related to the telecommunications industry such as,
among other things, announcements concerning the Company or its competitors,
technological innovations, government regulations, and litigation concerning
proprietary rights or other matters.
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The 1,500,000 shares of Common Stock that were sold in the Public
Offering are freely tradable by persons other than "affiliates" of the Company,
as that term is defined in Rule 144 ("Rule 144") under the Securities Act of
1933, as amended (the "Securities Act"), without restriction under the
Securities Act. Generally, Rule 144 permits unaffiliated stockholders to resell,
after satisfying a one year holding period, into the public market within any
three month period, a number of shares which does not exceed the greater of 1%
of the shares outstanding or the average weekly trading volume during the four
calendar weeks preceding the sale, and allows affiliates to resell such
securities after satisfying a two-year holding period and subject to the
foregoing volume limitations. The Controlling Shareholders 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 the 12 months period following the
Public Offering, without the prior written consent of Joseph Charles &
Associates, Inc. (the "Representative"). 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. The Company has registered 1,000,000 shares of Common Stock
reserved for issuance pursuant to the Company's stock option plan, including
options to purchase 737,500 shares at exercise prices ranging from $3.375 to
$9.50. Any future sales of a substantial number of shares of Common Stock, or
the perception that such sales could occur, could have a material adverse effect
on the prevailing market price of the Common Stock and could impair the
Company's future ability to raise capital through an offering of its equity or
convertible securities. See "Management-Stock Incentive Plan" and "Shares
Eligible for Future Sale."
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation and Bylaws and Florida law could delay or frustrate the removal of
incumbent directors and could make difficult a merger, tender offer or proxy
contest involving the Company, even if such events could be viewed as beneficial
by the Company's shareholders. For example, the Amended and Restated Articles of
Incorporation permit cumulative voting for directors, and the 1,000 shares of
outstanding Series A Preferred Stock have the right to elect one less than a
majority of the Board of Directors. In addition, the Board of Directors has the
ability to issue "blank check" preferred stock without shareholder approval.
Although the Board has no present plan to issue additional shares of preferred
stock, the rights of the holders of common stock may be materially limited or
qualified by the issuance of additional preferred stock in the future. See
"Description of Capital Stock" and "Company Risks-Control by Existing
Shareholders." The Amended and Restated Articles of Incorporation require a
66.66% vote of shareholders to amend certain provisions of the Amended and
Restated Articles of Incorporation and provide for a staggered Board of
Directors.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including, without
limitation, statements containing the words "believes," "plans," "anticipates,"
"intends," "expects," and words of similar import, constitute "forward-looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or the international long distance
telecommunications industry to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general economic
and business conditions; prospects for the international long distance
telecommunications industry; competition; changes in business strategy or
development plans; the loss of key personnel; the availability of capital; and
other factors referenced in this Prospectus, including, without limitation,
under the captions "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." Given these uncertainties, prospective investors are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce the
results of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.
<PAGE>
USE OF PROCEEDS
This Prospectus relates to Shares being offered and sold for the
accounts of the Registering Stockholders. The Company will not receive any of
the proceeds from the sale of the Shares offered by the Registering
Stockholders. The Company 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 the Company as of
September 30, 1998. This table should be read in conjunction with the Company's
consolidated financial statements and notes thereto appearing elsewhere in this
Prospectus.
SEPTEMBER 30,
1998
Debt:
Long-term portion of capital lease obligations $312,289
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized;
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 11,920,314
Translation adjustment 9,008
Retained earnings 2,838,222
---------------
Total shareholders' equity 14,832,554
---------------
Total capitalization $15,144,843
===============
- -----------------
(1) Excludes 627,000 shares of Common Stock subject to options granted upon
commencement of the Public Offering and 110,500 shares of Common Stock
subject to options granted subsequent to such Public Offering. See
"Management-Stock Incentive Plan."
<PAGE>
DIVIDEND POLICY
The Company has not paid any cash dividends to its shareholders since
inception and does not anticipate paying any cash dividends in the foreseeable
future. Any determination to pay dividends will depend on the Company's
financial condition, capital requirements, results of operations, contractual
limitations and any other factors deemed relevant by the Board of Directors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
PRICE RANGE OF COMMON STOCK
The Common Stock began trading on the Nasdaq on May 13, 1998 under the
symbol "UTCC." Prior to such date, no public market for the Company's 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
<S> <C> <C> <C>
1998 Fiscal Year
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 December 31, 1998, the closing sales price for the Common Stock on
the Nasdaq was $2.875 per share. As of December 31, 1998, the Company had
6,500,000 shares of Common Stock issued and outstanding.
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial information
for the Company for (i) the fiscal years ended March 31, 1995, 1996, 1997 and
1998, which have been derived from the Company's audited financial statements
and notes thereto included elsewhere in this Prospectus(ii) the fiscal year
ended March 31, 1994 which has been derived from unaudited financial statements
of the Company which are not included herein (iii) the six months ended
September 30, 1997 and 1998, which have been derived from unaudited financial
statements included herein and (iv) the unaudited pro forma information for the
year ended March 31, 1998 and the six months ended September 30, 1998 give pro
forma effect to the acquisition of Access. Such pro forma data are presented for
illustrative purposes only and do purport to represent what the Company's
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
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
the Company's financial statements and notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
----------------------- ---------------------
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 $13,214 $13,248 31,815
Gross profit 344 2,544 5,553 8,643 9,565 23,116 4,445 4,678 9,237
Operating income (loss) (814) 159 1,369 2,004 1,720 2,264 787 97 (659)
Net income (loss) (813) 382 790 1,253 1,074 1,867 493 153 (98)
Pro forma net income (loss) per share
-basic and dilutive (1)
(Historical for the period ended
September 30, 1998) (.18) .08 .16 .25 .21 .38 .10 .03 (.02)
Pro forma weighted average shares
outstanding (1) 4,615 4,869 5,000 5,000 5,000 5,000 5,000 6,110 6,110
Other Financial Data:
EBITDA (2) (771) 231 1,463 2,140 1,927 3,436 885 326 115
Netv cash provided by (used in)
operating activities (497) 229 672 858 1,545 - 34 (587) -
Net cash (used in) investing
activities (338) (173) (222) (439) (301) - (164) (8,037) -
Net cash (used in) provided by
financing activities 995 (40) (150) (155) (944) - (259) 12,204 -
Capital expenditures 330 143 93 352 487 - 222 303 -
As of
As of March 31, September 30,
---------------------------------------------------- ------------------
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 10,826
Working capital (deficiency) (129) 150 811 1,646 1,092 3,121
Total assets 683 1,720 2,797 5,243 7,733 23,018
Total current liabilities 510 1,122 1,552 2,920 4,410 7,705
Long term debt, less current portion 729 730 580 425 297 312
Total shareholders' equity (deficit) (563) (162) 609 1,861 2,948 14,833
- -----------------
(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 THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE RELATED NOTES AND OTHER INFORMATION REGARDING THE COMPANY
INCLUDED ELSEWHERE IN THE PROSPECTUS. THIS DISCUSSION CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL EVENTS OR RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED EVENTS OR RESULTS AS A RESULT OF
CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO THE "RISK FACTORS" DISCUSSED
ELSEWHERE IN THE PROSPECTUS.
OVERVIEW
The Company is a provider of international telecommunications
services. The Company offers a broad range of discounted international and
enhanced telecommunication services, including U.S. originated long distance
service and direct-dial international service, typically to small and
medium-sized businesses and travelers. The Company's primary service is call
reorigination, which accounted for approximately 76% of its revenues for the
fiscal year ended March 31, 1998 and approximately 82% for the six months ended
September 30, 1998. The Company also sells services to other carriers on a
wholesale basis. The Company's retail customer base, which includes corporations
and individuals, is primarily located in South Africa, Latin America, the Middle
East (Lebanon and Egypt), Russia and France. The Company operates a
switched-based digital telecommunications network. The Company installed its
first switch in Sunrise, Florida, which became fully operational in October
1993. Revenues were first earned in November 1993. The Company has acquired an
additional switch, which was installed in Paris, France during the quarter ended
March 31, 1998 and which became operational on March 1, 1998. From November 1993
until the current time, the Company has grown by marketing its services through
a worldwide network of independent agents which service in the aggregate
approximately 36,000 registered Company subscribers as of September 30, 1998,
excluding Access. Usage of the Company's 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 six months ended September 30, 1998
usage was 18,040,171 compared to 13,059,848 for the same period of 1997.
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.
The Company utilized certain net proceeds of the Company's 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.
The Company's management believes that the funds raised by the Public
Offering has allowed the Company to expand its customer base and the number of
markets it penetrates by:
a) acquiring competitors using a portion of the proceeds of
the Public Offering as the equity component of the purchase price for
strategic acquisitions, and using debt as the other component of the
purchase price. The Company believes such leveraged acquisitions would
add additional annual revenues to its business. Deregulation and
increased competition in the telecommunications industry have created a
strong motivation to gain market share rapidly in selective markets
through acquisitions.
b) acquiring equity interests in the Company's exclusive
agents in selected markets to further cement the contractual
relationships with these agents and to expand the Company's business in
markets offering favorable opportunities and returns.
c) deploying new technologies such as IP telephony technology
to bypass today's switched telephone network by using cost-effective
packet switched networks and/or the public Internet for the delivery of
fax and some voice communications. The Company intends to deploy a
number of fax servers in selected countries to exploit the
opportunities provided by IP telephony technology. This strategy will
allow for more aggressive market penetration in selected markets,
particularly in regulated markets, and a possible reduction in
transmission costs.
d) purchasing telecommunications equipment, including
switches, using financing arrangements in order to expand the Company's
wholesale business and its direct access Network, particularly where
demand by existing customers warrants the capital investment required
to migrate such customers from a call reorigination to a direct access
method.
REVENUE
The geographic origin of the Company's revenues is as follows:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
1996 1997 1998 1997 1998
---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Africa $1,403,094 $3,899,701 $8,346,025 3,989,068 4,225,350
Europe 1,988,030 4,252,104 3,857,504 2,043,914 1,985,934
Latin America 6,337,284 7,265,473 6,523,384 3,465,699 2,745,113
Middle East 2,101,864 3,741,890 4,721,592 2,094,143 2,311,945
Other 1,397,802 1,363,852 1,719,272 983,212 883,192
United States - 315,407 2,930,547 638,415 1,096,844
----------------------------------------------------------------------------------------
$13,228,074 $20,838,427 $28,098,324 $13,214,451 $13,248,378
=========================================================================================
The Company's subscriber base has grown as follows:
As of: Number of
Subscribers
September 30, 1998 ( excluding Access) 36,210
March 31, 1998 30,850
March 31, 1997 15,729
March 31, 1996 9,791
The number of the Company's independent agents has varied as follows:
As of: Number of Independent
Agency Agreements
September 30, 1998 (excluding Access) 14
March 31, 1998 14
March 31, 1997 17
March 31, 1996 15
</TABLE>
<PAGE>
The percentage of retail (minutes sold to retail end users) and
wholesale (minutes sold to other telecommunication carriers) revenues has been
as follows:
PERIOD ENDED Retail Wholesale
% %
Six Months ended September 30, 1998 88.2% 11.8%
Year Ended March 31, 1998 86.1% 13.9%
Year Ended March 31, 1997 98.5% 1.5%
Year Ended March 31, 1996 100% -
The Company expects that wholesale revenues will increase in the near
term, and may become a more significant portion of the Company's total revenue.
The Company generates retail revenues primarily through its independent agents.
No single Company subscriber represents 1% or more of the Company's revenue.
Agency agreements generally are exclusive and typically have an initial term of
five years with two additional three-year renewal periods. The four largest
independent agents account for approximately 64% of the Company's revenue for
the six months ended September 30, 1998. Any material disruption in or
termination of these agreements could have a material adverse effect on the
Company's operations.
The Company believes its retail services are priced below those of the
ITOs in each country in which the Company offers its services. Prices for
telecommunications services in many of the Company's core markets have declined
as a result of deregulation and increased competition. The Company believes that
worldwide deregulation and increased competition are likely to continue to
reduce the Company's retail revenues per billable minute. The Company believes,
however, that any decrease in retail revenues per minute will be at least
partially offset by an increase in billable minutes by the Company's customers,
and by decreased cost per billable minute as a result of the deployment of
direct access facilities, the application of IP telephony technology
particularly for fax transmissions and the Company's ability to exploit
purchasing discounts based on increased traffic volumes.
COST OF GOOD SOLD AND GROSS MARGIN
The most significant portion of the Company's cost of
telecommunications services are transmission and termination costs, which vary
based on the number of minutes used. The Company purchases switched minutes from
other carriers. The Company has historically purchased a portion of the minutes
subject to fixed volume commitments. Carriers have recently reserved the right
to terminate these agreements upon short notice. The Company has historically
been able to arrange favorable volume purchase arrangements based upon its high
usage and excellent credit history, and these arrangements continue under more
recent terminable agreements.
During the last year, the Company's segment of the international
telecommunications industry has experienced a general tightening of gross
margins due to declining retail and wholesale prices. The Company's own gross
margin results, particularly for the fiscal year ended March 31, 1998, have
reflected this trend. Factors impacting the Company's lower gross margin
compared to earlier periods include declining retail prices, development of the
wholesale business with lower profit margins (averaging approximately 5% to
10%), and increased incremental costs associated with the Company's call
reorigination customers. The reduction in retail prices reflects increased
competition arising from deregulation as well as the Company's strategic
decision to gain market share and increase revenue through more competitive
pricing. By increasing total minutes purchased through aggressive retail
expansion and development of a wholesale business, the Company expects to reduce
the rates it pays for switched minutes through volume discounts and other
mechanisms. The benefits of such cost reductions have a slower impact on the
Company's operating results compared to the more immediate revenue reductions
resulting from price discounting. The Company expects that deregulation and
increasing competition will continue to reduce revenues per minute thereby
reducing profit margins, particularly for the Company's call reorigination
business, which results in high variable costs, including non-billable access
costs.
The Company's costs of providing telecommunications services to
customers consist largely of: (i) variable costs associated with origination,
transmission and termination of voice and data telecommunications services over
other carriers' facilities, and (ii) costs associated with owning or leasing and
maintaining switching facilities and circuits. Currently, the variable portion
of the Company's cost of revenue predominate, based on the large proportion of
call reorigination customers and the number of minutes of use transmitted and
terminated over other carrier's facilities. Thus, the Company's existing gross
profitability primarily reflects the difference between revenues and the cost of
transmission and termination over other carrier's facilities. Therefore, the
Company seeks to lower the variable portion of its cost of services by
eventually originating, transporting and terminating a higher portion of its
traffic over its own Network or via media such as the Internet and private data
networks, and by increasing its purchasing power and volume discounts through
the increase of the number of minutes it purchases from other carriers.
The Company realizes higher gross margins from its retail services
than from its growing wholesale services. However, wholesale services provide a
source of additional revenues and add significant minutes originating and
terminating on the Company's Network, enhancing the Company's purchasing power
for switched minutes and enabling it to take advantage of volume discounts.
The Company seeks to reduce its cost of revenues by expanding and
upgrading the Network, adding to the Network more owned and leased facilities,
and increasing the traffic volume carried by these facilities, so that the
percentage of the Company's revenues based on variable costs, including higher
access costs from call reorigination, will decline as revenues based on a fixed
cost structure increase, thereby allowing the Company to spread the fixed costs
over increasing traffic volumes; negotiating lower cost of transmission over the
facilities owned and operated by other carriers, principally through increased
purchasing volumes; and expanding the Company's least cost routing choices and
capabilities.
The Company's overall gross margins may, however, fluctuate in the
future based on its mix of wholesale and retail international long distance
services and the percentage of calls using direct access and/or call-through
compared to call reorigination.
OPERATING EXPENSES
Operating expenses include; commissions, selling expenses, general and
administrative expenses and depreciation and amortization expenses.
The Company pays commission expense to its network of independent
agents pursuant to long-term agency agreements. The Company's decision to use
independent agents has been driven by the low initial fixed costs associated
with this distribution channel, and the agents' familiarity with local business
and marketing practices. The percentage of retail revenue paid for commissions
(excluding Access) has been as follows:
Six Months Ended September 30, 1998.............................15.4%
Year Ended March 31, 1998.......................................17.3%
Year Ended March 31, 1997.......................................18.4%
Year Ended March 31, 1996.......................................18.4%
Because the Company's contracts with its agents generally are
long-term, the Company expects these costs to remain stable as a percentage of
revenue. The Company has not paid commissions to generate wholesale sales. The
aggregate sales commissions paid by the Company have increased over the past
three years as its business has expanded. The Company anticipates that in the
future revenues from direct access (which carries lower commission rates) and
especially wholesale services (which involve minimal or no commissions) will
increase relative to its existing services, and therefore commissions will
decline as a percentage of revenues.
Selling expenses (exclusive of commissions) consist of selling and
marketing costs, including salaries and benefits, associated with attracting and
servicing independent agents. The Company performs standard due diligence prior
to signing agency agreements and then expends significant time training the
agents in the Company's practices and procedures.
The Company's general and administrative expenses consist of salaries
and benefits and corporate overhead. Included in salaries through March 31, 1998
is a bonus of approximately $588,000 paid to two officers of the Company. These
arrangements have been terminated and replaced with new employment agreements.
In addition, the cost of collecting accounts receivable is minimal. The Company
has achieved these results because of its ability to attract, train and retain
high quality independent agents and because the independent agents contractually
assume the risk of credit loss and the cost of collection on the underlying
sales. The Company's financial results may reflect higher levels of bad debt
losses as its wholesale and other lines of business expand and as it makes
equity investments in its independent agents. The Company expects that general
and administrative expenses may increase as a percentage of revenues in the near
term as the Company incurs additional costs associated with its development and
expansion, expansion of its marketing and sales organization, and introduction
of new telecommunications services.
In addition to the Company's efforts to reduce its cost of goods sold
by migrating customers to direct access by deploying IP telephony technology and
maximizing volume discounts, the Company also actively manages and seeks to
reduce its selling, general and administrative expenses. As part of this focus,
the Company uses its network of exclusive independent agents to bear much of the
marketing expenses that its competitors may bear directly. Furthermore, the
Company's strategy of using its competitors' infrastructure to carry its
telecommunications traffic also controls the Company's fixed costs. The Company
aggressively manages its back office systems, by developing and implementing
efficient computerized systems in order to maximize selling, general and
administrative expenses ("SG&A") efficiency (e.g., revenue and EBITDA per Dollar
of SG&A) and maximize the Company's existing productivity per employee.
Depreciation and amortization expense consists primarily of the
expenses associated with the Company's investments in equipment, and will
continue to increase substantially as the Company installs additional switches
and other fixed facilities. The Company expects these increased costs will be
amortized over an increased revenue base, resulting in stable percentage costs.
Other income (expense) consists primarily of interest expense on
long-term debt and interest income earned in connection with advances to
officers and consultants and short-term investments.
<TABLE>
<CAPTION>
SUMMARY OF OPERATING RESULTS
(STATED AS A PERCENTAGE OF REVENUES)
Six Months ended
Year Ended March 31, September 30,
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 66.4 64.7
Gross profit 42.0 41.5 34.0 33.6 35.3
Operating expenses:
Commission 18.4 18.1 14.9 16.1 13.6
Selling, general and administrative 12.5 13.2 12.3 10.9 19.3
Depreciation and amortization 0.7 0.6 0.7 0.7 1.7
Total operating expenses 31.6 31.9 27.9 27.7 34.6
Operating income 10.3 9.6 6.1 5.9 0.7
Other (Income) expense 0.4 0.1 -- 0.1 1.6
Income before income taxes 9.9 9.6 6.2 6.0 2.3
Income tax expense 4.0 3.5 2.5 3.7 1.2
Net income 6.0 6.0 3.8 6.6 2.5
</TABLE>
SIX MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE SIX MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES. Revenues remained unchanged at approximately $13.2 million
for the six months ended September 30, 1998 as compared to the same period last
year. Revenue during this period remained unchanged despite a 38% increase in
minutes of traffic for the six months ended September 30, 1998 as compared to
the same period last year, which was caused by an average decrease of $0.28 per
minute in rate charges. With the acquisition of Access, the Company believes
that both traffic and revenues will increase significantly. Along with this
anticipated increase in revenue the Company expects revenue per minute to
decrease as it enters into more mature markets such as Germany and Japan which
has historically generated lower revenues per minute.
COST OF REVENUES. Cost of revenues decreased $ 0.2 million (2.3%),
from $8.8 million for the six months ended September 30, 1997 to $8.6 million
for the six months ended September 30, 1998. Cost of revenues as a percentage of
sales decreased from 66.4% to 64.7%. This decrease in the Company's costs as a
percentage of revenues primarily reflects declining carrier costs per minute as
the result of aggressive negotiation, volume discounts, and the use of advanced
least cost routing techniques.
GROSS PROFIT. Gross profit increased $0.3 million (5.3%) from $4.4
million for the six months ended September 30, 1997 to $4.7 million for the six
months ended September 30, 1998. As a percentage of revenue gross profit
increased 1.7% from 33.6% during the six months ended September 30, 1997 to
35.3% for the six months ended September 30, 1998. Gross profit increased as a
result of a reduction in carrier costs as a percentage of revenue, despite
higher wholesale sales, which traditionally have lower margins. The acquisition
of Access has tripled the number of minutes the Company purchases thereby
increasing the likelihood of further volume based carrier discounts. For the six
months ended September 30, 1998 as compared to the six months ended September
30, 1997 average cost per minute has decreased 28% or an average of $0.19 per
minute.
OPERATING EXPENSES. Operating expenses increased $1.1 million (25.3%)
from $3.7 million for the six months ended September 30, 1997 to $4.5 million
for the six months ended September 30, 1998. The increase was due to increased
selling, general and administrative expenses consisting primarily of salaries,
benefits and bonuses for additional executives, in addition to an increase in
marketing and accounting personnel required as a result of internal expansion
and the Company's Public Offering. As a percentage of revenues operating
expenses increased 6.9% from 27.7% to 34.6%. The Company has aggressively
expanded its personnel and infrastructure in anticipation of increased traffic
and revenues through the implementation of its acquisition program. The Company
expects that operating expenses as a percentage of revenue will decrease with
the integration of the operations of Access and other potential future
acquisitions.
Depreciation and amortization expense increased approximately $142,000
(164%) from approximately $87,000 for the six months ended September 30, 1997 to
approximately $229,000 for the six months ended September 30, 1998 as a result
of the expansion of the Company's infrastructure in connection with its
acquisition program. The increase is attributable to a new switch in Paris,
upgrades to existing switches, the purchase of additional computer equipment and
software, and leasehold improvements. In addition, amortization of the
intangibles as a result of the acquisition of Access was approximately $24,000
as compared to no expense for the same period last year
OPERATING INCOME. Despite a 5.25% increase in gross profit, operating
income decreased from $0.8 million for the six months ended September 30, 1997
to approximately $0.1 million for the six months ended September 30, 1998
primarily as a result of a 77% increase in selling, general and administrative
expenses and a 164% increase in depreciation.
OTHER INCOME (EXPENSE). Other income increased approximately $209,000
from approximately $3,000 for the six months ended September 30, 1997 to
approximately $212,000 for the six months ended September 30, 1998, primarily
because of investment income derived from the invested proceeds of the Public
Offering.
NET INCOME. As a result of all of the foregoing factors, particularly
a 25.3% increase in operating expenses, and in light of the Company's strategic
decision to increase its gross revenues and market share through price
reductions, the Company's net income decreased approximately $340,000 from
approximately $493,000 for the six months ended September 30, 1997 to
approximately $153,000 for the six months ended September 30, 1998. Net income
has also been impacted by start up losses from the Company's subsidiary in
France, which amounted to $112,000 for the six months ended September 30, 1998.
Management believes that the Company's strategy to increase market share through
acquisition and aggressive pricing combined with the increased volume in traffic
will result in lower costs per minute and therefore should lead to increased net
income.
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, the Company 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 the
Company's costs as a percentage of revenues primarily reflects declining retail
prices, the growth of the less profitable wholesale business, and increasing
incremental non-billable access costs associated with the Company's call
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. The Company's 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 the Company began its
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 the Company's strategic decision to gain market share and increase
revenue through more competitive pricing. By increasing total minutes purchased
not only through aggressive retail expansion, but also through expansion of its
wholesale business, the Company eventually expects to reduce the rates it pays
for switched minutes through volume discounts and other mechanisms.
OPERATING EXPENSES. Operating expenses increased $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
the Company's 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 the Company's 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 the Company's strategic
decision to increase its gross revenues through price reductions, the Company's
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 the Company's
increased market penetration, especially in the South African, Russian and
Middle Eastern markets. The total number of independent agents increased from 15
to 17. In addition, the Company earned wholesale revenues of $0.3 million in
1997 with no corresponding amount in 1996.
COST OF REVENUES. Cost of revenues increased $4.5 million (58.9%) from
$7.7 million in 1996 to $12.2 million in 1997, principally reflecting the
increased amount of traffic being handled by the Company. The slight (0.5%)
increase in cost of revenues as a percentage of revenues reflects the Company's
wholesale revenues in the fiscal year ended March 31, 1997 (with a lower profit
margin than retail revenues) of $0.3 million, with no corresponding amount in
the fiscal year ended March 31, 1996.
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 the Company's independent agents. Bonuses paid to officers pursuant
to their employment agreements, additional consulting and travel expenses
related to maintaining and improving agency relations, additional legal and
professional fees and travel expenses related to the attempt by the Company to
secure expansion financing and negotiate strategic alliances resulted in
increased costs of $0.5 million. In addition, the Company increased staffing
levels from 12 to 17 and secured additional office facilities at its
headquarters in Sunrise, Florida resulting in increased costs of $0.2 million.
The growth in other categories of operating expenses of $0.4 million related
primarily to the Company's increased level of activity.
Depreciation and amortization expense increased approximately $30,000
as a result of switch upgrades, the purchase of additional computer equipment
and software, and leasehold improvements incurred in connection with the office
expansion.
As a percentage of revenue, operating expenses increased slightly to
31.9% in 1997 from 31.6% in 1996, as additional revenue offset the additional
costs and expenses.
OPERATING INCOME. Operating income increased by $0.6 million (46.4%)
from $1.4 million in 1996 to $2.0 million in 1997. As a percentage of revenue,
operating income decreased by 0.7% to 9.6% in 1997 from 10.3% in 1996, primarily
reflecting a 0.5% reduction created by the impact of the commencement of the
lower margin wholesale business in 1997.
INTEREST EXPENSE. Interest expense decreased to approximately $40,000
from approximately $60,000, reflecting reductions in long-term debt.
NET INCOME. As a result of these factors, and principally reflecting
the growth in the Company's minutes billed to customers, net income increased to
$1.3 million from $0.8 million in 1996.
YEAR ENDED MARCH 31, 1996 COMPARED TO MARCH 31, 1995
REVENUES. Revenues increased $6.9 million (110.3%) from $6.3 million
in 1995 to $13.2 million in 1996, primarily from an increase in billed customer
minutes from international call reorigination. The Company also opened new
markets by entering into four new independent agency agreements in the period,
and increased its market penetration within existing markets.
COST OF REVENUES. Cost of revenues increased $4.0 million from $3.7
million in 1995 to $7.7 million in 1996, primarily as a result of the increase
in traffic volume. Cost of revenues as a percentage of revenues decreased from
59.6% to 58.0%, reflecting the negotiation of volume discounts and other
favorable carrier agreements.
GROSS PROFITS. Gross profits increased $3.0 million (118.3%) from $2.5
million in 1995 to $5.6 million in 1996. As a percentage of revenue, gross
profit increased to 42.0% in 1996 from 40.4% in 1995 due to favorable
negotiations of the cost of switched minutes provided by carriers.
OPERATING EXPENSES. Operating expenses increased $1.8 million (75.4%)
from $2.4 million in 1995 to $4.2 million in 1996. As a percentage of revenues,
overall operating expenses decreased from 37.9% in 1995 to 31.6% in 1996,
primarily because increased selling, general and administrative expenses were
more than offset by increased revenues in the period, and the Company's overhead
expenses were absorbed by a larger base of revenues. Commissions increased by
$1.2 million from 1995 to 1996 as a direct result of increased revenues.
Commissions as a percentage of revenue decreased from 19.5% in 1995 to 18.4% in
1996, primarily because of commission adjustments with the agents. Officers'
salaries and bonuses increased $0.2 million from $0.4 million in 1995 to $0.7
million in 1996 primarily as a result of the provisions, in effect until
December 31, 1997, contained in the officers' contracts that provided for bonus
payments as a fraction of the Company's income before taxes. These agreements
have been terminated and replaced by new contracts with these officers effective
January 1, 1998. Other expenses increased $0.3 million, primarily as a result of
increases in employment and payments under a consulting agreement.
Depreciation and amortization expense increased approximately $20,000
from approximately $70,000 in 1995 to approximately $90,000 in 1996, primarily
due to capital expenditures for switch equipment and computer equipment.
INTEREST EXPENSE. Interest expense was approximately $60,000 in 1995
and 1996. Average long-term debt outstanding, and the interest rate charged
during the two periods did not change significantly.
OPERATING INCOME. Operating income increased by $1.2 million, from
$0.2 million in 1995 to $1.4 million in 1996, as a result of increased sales and
the resultant increased gross profit. In addition the Company's operating
expenses declined from 37.9% to 31.6% of total revenues from 1995 to 1996 as a
result of a decrease in the commission pay-out to agents and a decrease in SG&A
of 6.5% in relation to total revenues.
NET INCOME. Net income increased $0.4 million (107%) from $0.4 million
in 1995 to $0.8 million in 1996 as a result of increased levels of operating
income and the elimination of the Company's deferred tax asset valuation
allowance in 1995 resulting in an increased income in 1995 of $0.3 million. Had
this tax benefit not been realized in 1995, net income in 1996 would have
increased by $0.7 million over 1995 amounts.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements consist of capital expenditures in
connection with the acquisition and maintenance of switching capacity and
working capital requirements. Historically, the Company's capital requirements
have been met primarily through funds provided by operations, term loans funded
or guaranteed by its majority shareholder and capital leases.
On May 18, 1998, the Company completed a Public Offering of its Common
Stock. The net proceeds of the Offering were 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 the Company's agents, relative to the Company's
accounts payable to carriers. A similar trend occurred during the six months
ended September 30, 1998, as compared to the same period of 1997 as cash
provided by operating activities decreased from $34,000 to net cash used in
operating activities of $0.6 million.
Net cash used in investing activities was $0.2 million in 1996, $0.4
million in 1997, $0.3 million in 1998. The net cash used in investing activities
in 1996, 1997, 1998 principally reflects an increase in equipment purchases.
During the six month period ended September 30, 1998 the company acquired Access
resulting in a use of $7.5 million in cash in addition to the use of $0.5
million in 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 the Company's 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 the Company's Public Offering. For the six months ended
September 30, 1998, net cash provided by financing activities was $12.2 million
as a result of the net proceeds from the Public Offering.
Aggregate proceeds from the sale of 1,500,000 shares of Common Stock
by the Company in the Public Offering were $14,250,000. Net proceeds of the
Public Offering, after deducting underwriting discounts and commissions and
professional fees aggregated approximately $11.6 million. The Company used $7.5
million net of cash acquired on September 17, 1998 in connection with its
acquisition of Access.
The Company expects that the net proceeds remaining from the Public
Offering of $3.45 million, together with internally generated funds, will
provide sufficient funds for the Company to expand its business as planned and
to fund anticipated growth for the next 12 months. However, the amount of the
Company's future capital requirements will depend upon many factors, including
performance of the Company's business, the rate and manner in which it expands,
staffing levels and customer growth, as well as other factors not within the
Company's control, including competitive conditions and regulatory or other
government actions. If the Company's plans or assumptions change or prove to be
inaccurate or the net proceeds of the Public Offering, together with internally
generated funds or other financing, prove to be insufficient to fund the
Company's growth and operations, then some or all of the Company's development
and expansion plans could be delayed or abandoned, or the Company may be
required to seek additional funds earlier than anticipated. In order to provide
flexibility for potential acquisition and network expansion opportunities, the
Company may seek in the near future to enter into a financing arrangement. Other
future sources of capital for the Company could include public and private debt,
including a high yield debt offering, lease lines (see below) and equity
financing. There can be no assurance that any such sources of financing would be
available to the Company in the future or, if available, that they could be
obtained on terms acceptable to the Company. While such a financing may provide
the Company additional capital resources that may be used to implement its
business plan, the incurrence of indebtedness could impose risks, covenants and
restrictions on the Company that may affect the Company in a number of ways,
including the following: (i) a significant portion of the Company's cash flow
from operations may be required for the repayment of interest and principal
payments arising from the financing, with such cash flow not being available for
other purposes; (ii) such a financing could impose covenants and restrictions on
the Company that may limit its flexibility in planning for, or reacting to,
changes in its business or that could restrict its ability to redeem stock,
incur additional indebtedness, sell assets and consummate mergers,
consolidations, investments and acquisitions; and (iii) the Company's degree of
indebtedness and leverage may render it more vulnerable to a downturn in its
business or in the telecommunications industry or the economy generally.
On December 18, 1998 and in connection with the Company's growth strategy, 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.
SEASONALITY
The Company has historically experienced, and expects to continue to
experience, a decrease in the use of its services in the months of August and
December due to the closing of many businesses for holidays in Europe and the
United States during those months.
IMPACT OF YEAR 2000
The 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. The Company has
completed an evaluation of all its systems and found that most of the Company's
computer systems, software and databases are proprietary to the Company and are
year 2000 compliant. The Company also has begun to evaluate third party business
entities with which the Company is engaged in business or for which the Company
provides services, to determine if their will be any unexpected interruptions.
The Company 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 the Company would be adversely affected by any of such
problems. Management expects to have this process completed by September 1999.
The Company has obtained representations from the manufacturer of the
telephony switches that they are year 2000 compliant. As these switches are
critical to the Company they have been tested internally and found to be
compliant. The Company's billing system will be upgraded to a year 2000
compliant version by June 1999 at no cost to the Company. The Company has
received assurances from other software and equipment manufacture's that their
hardware and software are year 2000 compliant.
Management has determined that costs to correct any problems
encountered with the Year 2000 to be immaterial. However, until such time as the
third parties, with which the Company conducts business respond to the Company,
the full impact of the year 2000 is not known. As a result the impact on the
Company's 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. The
Company plans to adopt SFAS No. 131 in fiscal 1999 with impact only to the
Company's disclosure information and not its results of operations.
THE INTERNATIONAL TELECOMMUNICATIONS INDUSTRY
THE MARKET AND TRENDS
The international telecommunications industry provides voice and data
transmission from one national telephone network to another. The industry has
experienced dramatic changes during the past decade resulting in significant
growth in the use of services and enhancements to technology. The industry is
expecting similar growth in revenue and traffic volume in the foreseeable
future. According to the ITU, the international telecommunications industry
accounted for $61.3 billion in revenues and 70 billion minutes of use in 1996,
increasing from $23.9 billion in revenues and 19.1 billion minutes of use in
1987, which represent compound annual growth rates of 11% and 15.5%,
respectively. The ITU projects that revenues will approach $82.2 billion by the
year 2000 with the volume of traffic expanding to 114 billion minutes of use,
representing compound annual growth rates of 7.6% and 13%, respectively, from
1996. The market for telecommunications services is highly concentrated, with
Europe and the United States accounting for approximately 41.4% and 32.3%,
respectively, of the industry's worldwide international minutes of use in 1996,
while Asia represented 17%, Latin America 5.1% and Africa 1.9%. AT&T, Deutsche
Telecom, MCI WorldCom, France Telecom and British Telecom originated
approximately 37.4% of the aggregate international long distance traffic minutes
in 1996.
The industry is being shaped by the following trends: deregulation and
privatization of telecommunications markets worldwide; diversification of
services through technological innovation; globalization of major carriers
though market expansion, consolidation and strategic alliances; greater consumer
demand; increases in international business travel; privatization of ITOs;
growth of computerized transmission of voice and data information; and the
introduction of IP telephony technology. These trends have sharply increased the
use of, and reliance upon, telecommunications services throughout the world. The
Company believes that despite these trends, a high percentage of the world's
businesses and residential consumers continue to be subject to high prices and
poor quality of service. Demand for improved service and lower prices have
spurred deregulation and created opportunities for private industry to compete
in previously closed or restricted sectors of the international market.
Increased competition, in turn, has spurred a broadening of products and
services, and new technologies have contributed to improved quality and
increased transmission capacity and speed.
Significant legislation and agreements adopted since the beginning of
1996 are expected to lead to further liberalization of the majority of the
world's telecommunication markets. These agreements or directives include:
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 EU FULL COMPETITION DIRECTIVE, adopted in March 1996,
abolishes exclusive rights for the provision of Voice
Telephony services throughout the EU and the PSTNs of any
member country of the EU by January 1, 1998, subject to
extension by an EU member country.
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 the Company with significant
opportunities to compete in markets that were not previously
accessible. In some countries, for example, the Company would
be allowed under the agreement to own facilities or to
interconnect to the public switched network on reasonable and
non-discriminatory terms. There can be no assurance, however,
that the pro-competitive effects of the WTO Agreement will not
have a material adverse effect on the Company's business,
financial condition and results of operations or that members
of the WTO will implement the terms of the WTO Agreement.
By eroding the traditional monopolies held by ITOs, many of which are
wholly or partially government owned, deregulation is providing the U.S.-based
providers opportunities to negotiate more favorable agreements with both
traditional ITOs and alternative emerging foreign providers. In addition,
deregulation in certain foreign countries is enabling U.S.-based providers to
establish local switching and transmission facilities in order to terminate
their own traffic and begin to carry international long distance traffic
originated in those countries.
In order to succeed in the changing telecommunications market, small-
and medium-sized carriers (including the Company) must offer their customers a
full range of services. To date, most carriers do not have the critical mass of
customers to receive large volume discounts on international traffic from the
larger facilities-based carriers such at AT&T, MCI WorldCom and Sprint. In
addition, small- and medium-sized carriers have only a limited ability to invest
in international facilities. Alternative international carriers such as the
Company are beginning to capitalize on the demand for less expensive
international transmission facilities by taking advantage of increasing traffic
volumes to obtain volume discounts on international routes (resale traffic)
and/or 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,
ISR and ownership of switching facilities in foreign countries.
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 PSTN of a foreign country or directly to premises of a
customer or foreign partner. Applicable regulatory authorities
currently only sanction ISR on a limited number of routes, but it is
increasing in use and is expected to expand significantly as
deregulation continues. Deregulation also has made it possible for U.S.
based long distance providers to establish their own switching
facilities in certain foreign countries, enabling them to directly
terminate traffic.
OPERATING AGREEMENTS. Under traditional operating agreements,
international long distance traffic is exchanged under bilateral
agreements between international long distance providers that have
rights in facilities in different countries. Operating agreements
provide for the termination of traffic in, and return traffic from, the
international long distance providers' respective countries at a
negotiated "accounting rate." Under a traditional operating agreement,
the international long distance provider that originates more traffic
compensates the long distance provider in the other country by paying
an amount determined by multiplying the net traffic imbalance by the
latter's share of the accounting rate.
By negotiating resale agreements with carriers who have
entered into operating agreements, the Company can take advantage of
such carrier's economic incentive to increase outgoing traffic to a
particular country. The resold call volume increases the market share
for that carrier to a particular country, thereby increasing such
carrier's proportionate return traffic from the correspondent under the
accounting rate process.
Under a typical operating agreement each carrier has a right
in its portion of the transmission facilities between two countries. A
carrier acquires ownership rights in a digital fiber-optic cable by
purchasing direct ownership in a particular cable (usually prior to the
time the cable is placed in service), by acquiring an "Indefeasible
Right of Use" ("IRU") in a previously installed cable, or by leasing or
obtaining capacity from another long distance provider that
either has direct ownership or IRU rights in the cable. If a long
distance provider has sufficiently high traffic volume, routing calls
across leased or IRU cable capacity is generally more cost-effective on
a per call basis than the use or resale arrangements with other long
distance providers. However, leased capacity and acquisition of IRU
rights require a company to make a substantial initial investment of
its capital based on the amount of the capacity being acquired.
In deregulated countries such as the United States and most EU member
states, carriers may establish switching facilities, own or lease fiber-optic
cable, enter into operating agreements with foreign carriers and, accordingly,
provide direct access or call-through service. In markets that have not
deregulated or are slow to implement deregulation, such as most emerging markets
countries, international long distance carriers have used advances in technology
to develop innovative alternative access methods, such as call reorigination. As
countries deregulate, the demand for alternative access methods typically
decreases as carriers are permitted to offer a wider range of services.
COMPETITION
The international telecommunications industry is highly competitive.
The Company's success depends upon its ability to compete with a variety of
other telecommunications providers in each of its markets, including the ITOs in
each country in which the Company operates and global alliances among some of
the world's largest telecommunications carriers. Other potential competitors
include cable television companies, wireless telephone companies, electric and
other utilities with rights of way, railways, microwave carriers and large end
users, which have private networks. The intensity of such competition has
recently increased and the Company believes that such competition will continue
to intensify as the number of new market entrants increases. Many of the
Company's current or potential competitors have substantially greater financial,
marketing and other resources than the Company.
Competition for customers in the telecommunications industry is
primarily based on price and, to a lesser extent, on the type and quality of
services offered. The Company prices its services primarily by offering
discounts to the prices charged by the local ITOs. The Company has no control
over the prices set by the local ITOs or by its competitors, and some of the
Company's competitors may be able to use their financial resources and/or market
position to cause severe price competition in the countries in which the Company
operates. Although the Company does not believe that there is an economic
incentive for its competitors to pursue such a pricing strategy or that its
competitors are likely to engage in such a course of action, there can be no
assurance that severe price competition will not occur. Additionally,
intensified competition in certain of the Company's markets will force the
Company to continue to reduce its prices. For example, the Company on a number
of occasions reduced certain rates which it charges to non-wholesale customers
in response to pricing reductions enacted by certain ITOs. Such price reductions
may reduce the Company's revenue and margins. The Company has experienced, and
expects to continue to experience, declining revenue per billable minute in a
number of its markets, in part as a result of increasing worldwide competition
within the telecommunications industry.
The Company believes that the ITOs generally have certain competitive
advantages due to their control over local connectivity and close ties with
national regulatory authorities. The Company also believes that, in certain
instances, some regulators have shown a reluctance to adopt policies and grant
regulatory approvals that would result in increased competition for the local
ITO. The Company believes that, at least in the short-term, the ITOs will not
concentrate on marketing their services to the Company's small-and medium-sized
business customer base. The Company could, however, be denied regulatory
approval in certain jurisdictions in which its services would otherwise be
permitted, thereby requiring the Company to seek judicial or other legal
enforcement of its right to provide services.
In response to deregulation, additional competitors of various sizes
are beginning to emerge, particularly in the European Union. The Company's
services are currently marketed to small-and medium-sized businesses and thus
the Company generally does not directly compete with mega-carrier alliances,
which generally target larger multinational corporate customers. In addition,
many smaller carriers have emerged, most of which specialize in offering
intercontinental telephone services utilizing dial up access methods. The
Company believes that competition will continue to intensify as the number of
new service providers increases due to the overall growth in the industry and
the global trend toward deregulation. In February 1997, the WTO announced that
69 countries, including the United States, South Africa and all of the EU member
states, entered into the WTO Agreement, which is expected to result in greater
competition from new market entrants and existing telecommunications service
providers in such markets. See "Business-Government Regulation."
The Company's principal competitors are the local ITOs and a number of
other alternative reorigination or direct access providers such as IDT, Viatel,
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. The Company focuses on small-and medium-sized
businesses located in emerging or deregulating markets, including South Africa,
Latin America, the Middle East (primarily Lebanon and Egypt), Russia and France.
The Company serves these markets through a network of independent exclusive
agents. The Company believes that it derives a significant competitive advantage
from this exclusive agent network. Each agent provides marketing, customer
support, billing and collections, in local language and time, utilizing a
proprietary turn-key agency support system developed and provided by the
Company. Each agent is supplied near real time data for customer management,
usage analysis, and billing from the Company's local and wide area network.
Through its agent network, the Company develops and maintains close
relationships with vendors of telephone systems such as Siemens, Plessey and
Alcatel in key markets in order to promote the Ursus line of telecommunications
services, allowing the Company to offer competitively priced and value added
services that compare favorably to the pricing and service offerings of the
ITOs.
Ursus has traditionally entered a particular market using call
reorigination, a system that provides the Company's overseas customers the
opportunity to access a U.S.-based switching center by means of a manual or
transparent automated dialing procedure, or other methods that provide a U.S.
dial tone to its foreign customers. Call reorigination provides a customer with
the convenience and rate economies provided by a U.S. dial tone, as opposed to
locally imposed international rates, which may be substantially higher. The
Company derives approximately 82% of its revenues from call reorigination. In
order to remain price competitive and to mitigate the high proportion of
variable costs per minute associated with call reorigination, the Company plans
to expand its direct access services by locating switching platforms at network
centers of major telecommunications providers, such as MCI WorldCom, Cable and
Wireless and France Telecom, and by deploying smaller network access nodes in
less populated service areas. This network topology, which the Company will
first use in France, provides subscribers with direct access service for voice
and fax. Ultimately, where regulatory conditions are favorable and calling
volumes are adequate to cover the associated fixed costs, the Company intends to
migrate some of its customers from call reorigination to direct access service.
Ursus plans to expand by increasing sales to existing customers; by
expanding the business generated by its existing agents; by selling wholesale
services to other carriers; and through selected acquisitions. Except as
disclosed herein, Ursus is not currently engaged in any negotiations to acquire
any business. See "Business-Purchase of Uruguayan Corporation" and "Business
- -Acquisition of Access Authority Inc" and "Business-Formation of French
Subsidiary." The Company believes that its proprietary enterprise software
system provides an efficient infrastructure for back room processing, thereby
giving it a strategic advantage over its competitors. The Company's computerized
back office systems handle traditionally labor intensive processing tasks such
as call rating, customer registration, billing and network management with a
high degree of efficiency and short turn-around time. Management believes that
these efficiencies would facilitate the rapid and economical consolidation of
acquired competitors.
The Company operates the Network from its technical facilities in
Sunrise, Florida, using a hybrid network of Internet, Intranet and circuit based
facilities, and plans to use a portion of the Public Offering proceeds to expand
its primary digital switching platform and secondary network access nodes,
thereby expanding its services in a reliable, flexible and cost effective
manner. The Company also plans to exploit its market penetration and
technological sophistication through the application of IP telephony technology,
particularly for fax transmissions. Faxing represents a large portion of the
overall international telecommunications business, and IP faxing offers
significant cost savings and favorable regulatory treatment. IP telephony
technology creates the opportunity to bypass the switched telephone network by
using cost-effective packet switched networks such as private Intranets and/or
the public Internet for the delivery of fax and voice communications. To exploit
these opportunities and to further reduce its costs, the Company plans to use a
portion of the Public Offering proceeds to establish a hybrid network for IP fax
and voice services. The Company believes that this application could increase
the gross margins of its existing and future retail business and allow it to
accelerate its growth strategy.
The Company expects that call reorigination will continue to serve as
a low cost and profitable method of opening new markets and expects to continue
this method of business development in certain regulated markets in Africa, the
Middle East, Europe and Asia. Reoriginating a U.S. dialtone requires little
investment in equipment and limited capital deployment in a foreign territory,
thus allowing the Company to develop a customer base by effectively exploiting
the difference between the local IDD rate and the generally more favorable rates
the Company enjoys in the U.S. The Company has successfully used this strategy
to develop foreign markets and has thereby created a revenue stream with little
more than marketing and incremental call costs. In addition, using IP telephony
technology, concurrently with call reorigination, could significantly improve
the profitability of this business segment, without requiring the substantial
investments in switches of a direct access network. Accordingly, the Company's
strategy is to deploy IP telephony technology where feasible in order to create
a hybrid network capable of carrying significant amounts of customer traffic on
a low cost platform with a modest initial capital investment. This strategy
mitigates the risk that the Company will not attain, in some of its markets, the
critical mass of business required to amortize the fixed costs of a direct
access network and affords the Company the opportunity to develop a market with
a relatively small financial risk.
In summary, the Company intends to become a significant provider of
international telecommunications services within the emerging and deregulating
markets. The Company intends to maximize its profit potential by leveraging its
existing infrastructure, market penetration, expanding customer base and growing
U.S. wholesale business. By using its independent agent network, efficient back
office systems, and favorable vendor relationships with some of the major U.S.
telecommunications carriers, the Company believes it can gain strategic
advantages while capitalizing on the opportunities presented by deregulation and
technological advances in the global telecommunications industry.
Ursus provides an array of basic and value added services to its
customers, which include:
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
THE COMPANY'S SERVICES
The Company's principal services include:
o Ursus ComNet - enables virtual private network calling to members of a
closed user group subject only to regulatory limitations.
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.
0 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. The
Company is currently deploying a network of Internet Fax Servers in
several countries including Lebanon, Ecuador, Argentina and South
Africa. Further deployments are expected by mid-to late fiscal year
1998 in certain other countries in Latin America, Africa, the Middle
East and Europe, and the Company plans to expand its network of
Internet-based telephony to more than 20 locations by March 31, 1999.
o Ursus ComPlus Travel - provides calling card access from over 56
countries utilizing the Company's ITFS numbers. In addition, the
Company utilizes the USA DIRECT Home Country Direct numbers of AT&T
from over 136 countries to provide a premium calling card service. By
arrangement with AT&T, AT&T connects its USA DIRECT numbers via a code
to the Ursus switch in Sunrise, Florida where the customer may dial
over the Ursus Network while traveling.
THE NETWORK
The Network uses a high capacity, programmable switching platform
designed to deploy network-based intelligent services quickly and cost
effectively. The switches are modular and scaleable and incorporate advanced
technologies such as hierarchical call control and network management software.
This type of switches can also provide a bridge between various protocols and
standards. As the Network continues to evolve, the installed base of switches
could be upgraded easily to create a cost-effective, scaleable switching point
in a software intelligence-based network. The Network's "intelligent switches"
incorporate proprietary software to achieve least cost routing ("LCR"), the
process by which the Company optimizes the routing of calls over the Network to
every directly dialable country in the world. LCR allows calls that are not
routed over the Network to be routed directly from the Company's switch through
the infrastructure of contracting carriers to their destinations at the lowest
available rates. These switching capabilities also enable the Company to
efficiently perform billing functions and account activation and to provide
value-added services. The Company relies upon Synchronoux Optical Network
("SONET") fiber optic facilities to multiple carriers to provide redundancy in
the event of technical difficulties in the Network. The Company maintains
redundant switching facilities in Sunrise, Florida to provide protection for its
switching operations. The Company's strategy is to monitor its anticipated
traffic volume on a regular basis and to increase carrier trunking capacity
before reaching the capacity limitations of such circuits.
The Company's customers access its services either through "dial up
access" or "direct access." Dial up access is obtained via: (i) paid access,
which requires the customer to pay the local PTO for the cost of a local call,
where appropriate, in order to access the Company's services (at September 30,
1998, approximately 18% of the Company's revenues); (ii) call reorigination,
which enables the customer to receive a return call providing a dial tone
originated from the Company's Sunrise, Florida switching center by ITFS (at
September 30, 1998, approximately 82% of the Company's revenues); (iii) Home
Country Direct, which accesses the Sunrise, Florida switching center by direct
dial (at September 30, 1998, approximately 3.7% of the Company's revenues); or
(iv) Dedicated Access (Direct Access) from wholesale carrier customers in North
America (at September 30, 1998, approximately 6.8% of the Company's revenues).
Direct access allows accessing a network by using a permanent point-to-point
circuit typically leased from a facilities-based carrier. The advantages of
direct access include simplified premises-to-anywhere calling, faster call
set-up times and potentially lower access and transmission costs, provided there
is an adequate level of traffic over the circuit to generate economies of scale.
Paid access accounted for approximately 60% of the Company's French and Russian
revenue for the fiscal year ended March 31, 1998 (58% for the six months ended
September 30, 1998) and approximately 24% of the Company's overall revenues for
this period ( 18% for the six months ended September 30, 1998).
To reduce the variable telecommunications costs and improve usage, the
Company is, where regulations permit, in the process of changing its customer
base from call reorigination and ITFS access to paid access, and, ultimately to
direct access. Until regulations permit, all customers outside of the
Europe/Russia area are expected to continue to access the Company's services
through call reorigination or ITFS numbers. The exception to this rule is the
Bahamas, where the Company's subscriber base utilizes a Home Country Direct
number provided by Batelco, the local Bahamian PTO, under a bilateral
correspondent agreement. See "Risk Factors-Government Regulation."
Currently, the Company's Network is primarily used to originate and
terminate international long distance traffic for its own subscribed customer
base. The Company intends to further leverage its Network and foreign presence
to take advantage of anticipated settlement agreement obsolescence by offering
other carriers and ITOs an alternative to the traditional settlement process for
origination and termination of long distance traffic. This process is known as
"Refiling." The FCC issued directives in December 1996 encouraging circumvention
of settlements in the historic sense where possible. This change is likely to
create new opportunities with ITO partners in emerging markets. See "-Government
Regulation."
The economic benefits to the Company of owning and operating its own
direct access Network arise from reduced variable transmission costs. Calls not
routed through the Network generate significantly higher variable costs because
they are connected using relatively expensive ITFS numbers or call
reorigination. In contrast, because the Network has significant fixed costs
associated with its operations, consisting primarily of leased line rental
charges, local connectivity and facility/network management costs, calls routed
through the Network have lower variable costs than off-network traffic. However,
for the foreseeable future, Ursus will, for economic reasons, piggyback on the
networks of major global operators. Consequently, it will only install its own
fixed facilities when existing traffic on a carrier route is adequate to offset
the costs of installation.
The Company plans, however, to deploy a network of IP telephony fax
servers in selected countries by the end of 1998. To avoid the high fixed costs
of a switched telephone network the Company plans to develop a hybrid network of
IP telephony technology for the delivery of fax and eventually voice
transmissions.
TECHNOLOGY
Deregulation of telecommunications markets throughout the world has
coincided with substantial technological innovation. The proliferation of
digital fiber-optic cable in and between major markets has significantly
increased transmission capacity, speed and flexibility. Improvements in computer
software and processing technology have enabled telecommunications providers to
offer a broad range of enhanced voice and data services. Advances in technology
also have created multiple ways for telecommunications carriers to provide
customer access to their networks and services. These include customer-paid
local access, international and national toll-free access, direct digital access
through a dedicated line, equal access through automated routing from the PSTN
(as defined), IP telephony and call reorigination. The type of access offered
depends on the proximity of switching facilities to the customer, customer
needs, and the regulatory environment. Overall, these changes have resulted in a
trend towards bypassing traditional international long distance operating
agreements as international long distance companies seek to operate more
efficiently. As countries deregulate, the demand for alternative access methods
typically decreases because carriers are permitted to offer a wider range of
facilities-based services on a transparent basis. The most common form of
traditional alternative international access, call reorigination, avoids high
international rates offered by the ITO in a particular regulated country by
providing a dial tone from a deregulated country, typically the United States.
Technical innovations, ranging from inexpensive dialers to sophisticated
in-country switching platforms, have enabled telecommunications carriers such as
the Company to offer a "transparent" form of call reorigination, thereby
avoiding complicated end-customer usage procedures. To place a call using
traditional call reorigination, a user dials a unique phone number to an
international carrier's switching center and then hangs up after it rings or
alternatively, if using a transparent processing method, a dialer automatically
performs these dialing functions. The user then receives an automated call
reorigination providing a dial tone from the U.S., which enables the user to
complete the call. For the fiscal year ended March 31, 1998, the Company derived
approximately 76% of its revenues and operating income from international call
reorigination services.
The Company's research and development efforts have been nominal and
have focused almost exclusively upon refining and upgrading its back office
computer systems. The Company has neither the resources nor the expertise to
derive any significant advantages from research or development into
telecommunications equipment and prefers to use the equipment developed by
others. By devoting its resources to its computer systems and back office
procedures, the Company believes that it has developed an efficient and flexible
operating system, minimized its payroll and maximized the efficiency of its back
office operations. See "-Management Information Systems."
MANAGEMENT INFORMATION SYSTEMS
The Company has made significant investments developing and
implementing sophisticated information systems which enable the Company to: (i)
monitor and respond to customer needs by developing new and customized services;
(ii) manage LCR; (iii) provide customized billing information; (iv) provide high
quality customer service; (v) detect and minimize fraud; (vi) verify payables to
suppliers; and (vii) rapidly integrate new customers. The Company believes that
its network intelligence, billing and financial reporting systems enhances its
ability to competitively meet the increasingly complex and demanding
requirements of the international long distance markets. The Company
continuously provides enhancements and ongoing development to maintain its state
of the art of its switching, billing and information service platforms.
The Company currently has a turnaround time of approximately 24 hours
for new account entry. The Company's billing system provides multi-currency
billing, itemized call detail, city level detail for destination reporting and
electronic output for select accounts. Customers are provided with several
payment options, including automated credit card processing and automated direct
debiting.
The Company has developed proprietary software to provide
telecommunications services and render customer support. In contrast to most
traditional telecommunications companies, the software used to support the
Company's enterprise resides outside of the switches and "canned" closed systems
and, therefore, does not currently rely on third party manufacturers for
upgrades. The Company believes its software configuration facilitates the rapid
development and deployment of new services and provides the Company with a
competitive advantage. The Company's Sunrise, Florida central switch has a call
detail recording function which enables the Company to: (i) achieve accurate and
rapid collection of call records; (ii) detect fraud and unauthorized usage; and
(iii) permit rapid call detail record analysis and rating.
The Company also uses its proprietary software in analyzing traffic
patterns and determining network usage, busy hour percentage, originating
traffic by switching center, terminating traffic by supplier and originating
traffic by customer. This data is utilized to optimize LCR, which may result in
call traffic being transmitted over the Company's transmission facilities, other
carriers' transmission facilities or a combination of such facilities. If
traffic cannot be handled over the least cost route due to overflow, the LCR
system is designed to transmit the traffic over the next available least cost
route.
The Company develops its software in-house utilizing its own staff of
programmers.
INTERNET PROTOCOL (IP) TELEPHONY
Virtually all of today's voice and fax traffic is carried over the
Public Switched Telephone Network ("PSTN"). Phone switches either owned by the
ITOs or other enterprise common carriers and resellers allow ordinary telephones
and fax machines to reach one another anywhere in the world. The advent of IP
telephony has created the opportunity to bypass today's switched telephone
network and use cost-effective packet switched networks (Intranet) and/or the
public Internet for the delivery of voice and fax communications. Prior to 1995,
the market for IP telephony products was virtually nonexistent. It was commonly
believed that quality voice communications across the Internet/Intranet was
impossible. This situation dramatically changed with the introduction of a new
class of products which significantly enhanced voice transmissions over the
Internet/Intranet. As a class of products, this is referred to as IP telephony.
As companies realized that quality IP telephony communication was possible, they
quickly joined the race to capitalize on the opportunity. Desktop software
offering computer-to computer communication flourished due in part to the
explosive growth of the Internet. The current generation of IP telephony
applications allows users to make calls using a standard telephone and a
centralized Internet/Intranet substituting for the PSTN. This centralized IP
connection is accomplished via IP telephony gateway servers. The principle
behind such a system is similar to IP telephony desktop applications, but rather
than using the microphone and speakers connected to multimedia PCs, users speak
into a standard telephone connected to a PBX (as defined). To place a call, the
caller would dial the number of the party they are calling, just like making a
call-through the PSTN. The PBX would then route the call-through the IP
telephony gateway via a programmed trunk interface and the gateway contacts
another gateway at the called site. Several companies have developed and are
currently using this technology. Furthermore, developments in hardware, software
and networks are expected to continue to improve the quality and viability of IP
telephony. In time, packet-switched networks may become less expensive to
operate than circuit-switched networks, primarily because carriers can compress
voice traffic and thereby can place more calls on a single line.
AGREEMENTS WITH INDEPENDENT AGENTS
From its inception in 1993 to the present, the Company's sales and
marketing efforts have been conducted through exclusive independent agents in
each of its markets. Each of these independent agents operate in accordance with
a model of practices and procedures developed by the Company, and settle all
customer invoices (net of the agency's commission share) directly with the
Company within a prescribed period. The Company may reduce its reliance upon its
existing independent agents by expanding its business through strategic
acquisitions or may make equity investments in certain independent agents. In
addition, the Company may in the future start to enroll non-exclusive
independent agents to cover new territories.
Each prospective agent is required to submit a business plan and
demonstrate the financial resources and commitment required to carry out its
marketing and customer service plan approved by the Company prior to its
appointment. Each agent is licensed by and required to do business in the name
of the Company and execute subscriber agreements with end users on behalf of and
for the benefit of the Company.
The Company knows of no competitor that operates in this manner and
attributes this program with its successful market penetration, high degree of
customer satisfaction and rapid collections cycle. Most of the costs of
marketing, sales and customer service are paid from the commissions retained by
each of the agents.
The Company's agreements with its independent exclusive agents
typically provide for a five-year term with an optional renewal for two
additional terms of three years and a two-year non-compete clause effective upon
termination of the agreement. Furthermore, the agreements require the agents to
offer the Company's services at rates prescribed by the Company and to abide by
the Company's marketing and sales policies and rules. Agent compensation is paid
directly by the Company and is based exclusively upon payment for the Company's
services by customer funds the agents obtain for the Company. The commission
paid to agents ranges between 15 to 20% of revenues received by the Company and
varies depending on individual contracts, the exclusivity of the agency and the
type of service sold. Commissions are paid each month based on payments received
during the prior month from receivables collected by the agent. For the fiscal
year ended March 31, 1998, approximately 58% of the Company's revenues were
attributable to the most significant four independent agents ( 64% for the six
months ended September 30, 1998) . Agents settle their accounts with the Company
in U.S. Dollars and therefore bear the risk of fluctuations in the exchange
rates between the local currency and the U.S. Dollar. Agents are held
accountable for customer collections and are responsible for bad debt
attributable to customers they enroll. The Company may record additional bad
debt expense, however, based on increases in wholesale business, consummation of
acquisitions and equity investments in the agents.
For the fiscal year ended March 31, 1998 and the six months ended
September 30, 1998 the Company excluding Access derived approximately 86% of its
revenues from customers enrolled by agents who are contractually prohibited from
offering competitive telecommunications services to their customers during the
term of their contract.
In mid-1997 the Company initiated discussions with certain of its
exclusive agents with regard to the acquisition of an equity interest in their
agencies. The Company believes that it would be beneficial to have an ownership
interest in its key marketing and customer service organizations while
maintaining the benefits derived from the local expertise of the exclusive
agent, as well as the productivity derived from local ownership and profit
making. The Company believes that this strategy will provide the Company with
the benefits derived from direct ownership of the local sales organization while
retaining the benefits of the existing entrepreneurial structure. Other than
with respect to pending agreements in France and Uruguay, the Company has
no agreement to purchase an interest in any of its agents.
CUSTOMER BASE
The Company's target customers are small and medium-sized businesses
with significant international telephone usage (i.e., generally in excess of
$500 in international phone calls per month). The Company also provides its
services to a growing base of individual retail customers. The corporate market
includes manufacturers, distributors, trading companies, financial institutions,
and import-export companies, for which long distance telecommunications service
represents a significant business expense, and such customers are therefore
focused on value and quality. It is estimated that small and medium-sized
businesses account for the majority of all businesses, and the Company believes
that in most markets they account for a significant percentage of the
international long distance traffic originated in those markets. For example,
the EU estimates that in 1996 there were 15 million small and medium-sized
businesses in the EU and that these businesses accounted for more than one half
of all jobs in the EU in 1996, almost half of all business revenue and about $30
billion per year in total telecommunications revenue.
The Company believes that small- and medium-sized businesses have
generally been under served by the major global telecommunications carriers and
the ITOs, which have focused on offering their lowest rates and best services
primarily to higher volume multinational business customers. The Company offers
these small- and medium-sized companies significantly discounted international
calling rates compared to the standard rates charged by the major carriers and
ITOs.
The Company also plans to offer international termination services to
other carriers, including resellers, on a wholesale basis, as a "carriers'
carrier." The Company's carrier customers as a group currently provide the
Company with a relatively stable customer base and thereby assist the Company in
projecting potential utilization of its network facilities. In addition, the
potentially significant levels of traffic volume that could be generated by such
carrier customers may enable the Company to obtain larger usage discounts based
on potential volume commitments. The Company believes that revenues from its
carrier customers will represent a growing portion of the Company's overall
revenues in the future.
The Company also targets residential customers with high international
calling patterns such as ethnic communities and plans to increase the marketing
of prepaid calling cards.
Currently, no end retail customer of the Company individually accounts
for more than 1% of the Company's revenue.
The largest wholesale customer accounted for approximately 9.5% of the
Company's revenue as of March 31, 1998 (3.7% for the six months ended September
30, 1998).
PRINCIPAL MARKETS FOR THE COMPANY'S SERVICES
The worldwide international long distance public switched
telecommunications market generated an estimated $61.3 billion in revenue and 70
billion minutes in traffic in 1996 with minutes of use projected to grow at a
rate of 13% per annum through the year 2000. The Company currently has
approximately a 0.03% share of this global market.
GEOGRAPHIC ORIGIN OF REVENUES
<TABLE>
<CAPTION>
The geographic origin of the Company's revenues is as follows:
Six months ended
Year Ended March 31, September 30,
1996 1997 1998 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Africa $1,403,094 $3,899,701 $8,346,025 3,989,068 4,225,350
Europe 1,988,030 4,252,104 3,857,504 2,043,914 1,985,934
Latin America 6,337,284 7,265,473 6,523,384 3,465,699 2,745,113
Middle East 2,101,864 3,741,890 4,721,592 2,094,143 2,311,945
Other 1,397,802 1,363,852 1,719,272 983,212 883,192
United States - 315,407 2,930,547 638,415 1,096,844
-------------------------------------------------------------------------------------------
$13,228,074 $20,838,427 $28,098,324 $13,214,451 $13,248,378
===========================================================================================
</TABLE>
GEOGRAPHIC MARKETS
LATIN AMERICA. Historically, the Company derived significant portions
of its telecommunications revenue from Latin America, principally from Argentina
and Peru. Since most Latin American countries currently restrict competition to
a limited number of specific services, the Company has developed a two-stage
market penetration strategy to capitalize on current and future opportunities in
Latin America. The first step is to take advantage of current market conditions
and, within the parameters of the Company's product line, i.e., using the call
reorigination access method, to provide the fullest range of services
permissible under local regulations. During the fiscal year ended March 31,
1998, Argentina with sales of $3.2 million represented 49% of the Company's
total Latin American business followed by Peru with a 24% share. For the six
months ended September 30, 1998 sales in Argentina were $1.3 million or 49.2% of
Latin American sales. Peru represented 24.1% of such sales to Latin America
during the same period. The Company enjoys a top 10 market share among call
reorigination companies operating in Argentina and Peru.
MIDDLE EAST AND AFRICA. The Company is currently a significant
operator in certain emerging markets in the Middle East and Africa. The Company
is a market leader for alternative access call reorigination in both Lebanon and
South Africa. It is anticipated that African revenues will more than double over
the next twelve months, not including the high growth markets of Lebanon and
Egypt which together produce up to $20,000 of revenue per day. Lebanon grew from
$1.4 million in sales in the fiscal year ended March 31, 1996 to $3.2 million in
the fiscal year ended March 31, 1997 and $4.2 million in sales for the fiscal
year ended March 31, 1998. For the six months ended September 30, 1998 sales to
Lebanon amounted to $2.1 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 six months ended September 30, 1998, sales to South Africa
amounted to $4.2 million. The Company has expanded its customer base from
Johannesburg, South Africa, to Cape Town and Durban, and other South African
urban centers. This territory is currently generating between $30,000 and
$40,000 per day in revenues. The South African agent currently manufactures its
own proprietary network interface dialer in South Africa. In places such as
South Africa, the Company and its independent agents maintain close
relationships with vendors of internal phone equipment ("PBX") such as Siemens,
Plessey and Alcatel. These vendors are integrating and configuring their
customer's PBX equipment to utilize the Company as a possible alternative
international telecommunications carrier, and the Company maintains a close
relationship with the vendors for both pre-sale and retrofit applications.
EU AND RUSSIA. The EU and Russian markets will be a major focus as the
Company pursues its strategy of locating switches at the network center of major
switched-based suppliers in Europe.
FRANCE. The Company's current customers in France (centered in the
Paris region) include small and medium-sized businesses and retail individuals.
Since installing the Paris switch in March 1998, the Company began to migrate
its customers in France from the call reorigination access method currently used
to international long distance services utilizing direct access over leased
lines and restricted dial-in for customers in closed-user groups. The Company
will provide direct access service via a leased line connection between the
customer's phone system and the Company's switch in Paris. Following
deregulation, the Company may offer long distance services, which are presently
restricted to closed user groups, with prefix dialing and value-added services.
The services currently provided by the Company in France do not require a
license. In accordance with the telecommunications laws passed in France in July
1996, the process of liberalizing the telecommunications market is regulated by
a new government authority, and the telecommunications market in France was
liberalized on January 1, 1998 along with the markets of most other EU member
states. In accordance with the standard terms and conditions and price lists for
interconnection with France Telecom, duly approved by the French
Telecommunications Authority on April 9, 1997, new operators began
interconnecting with France Telecom's PSTN on January 1, 1998.
RUSSIA. The Company has been active in the Russian market (centered in
the Moscow region) for over 24 months, with direct dial up access having
replaced call reorigination for approximately 18 months. As of March 31, 1998
traffic had grown from 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 the Company of approximately $2.5 million in the
fiscal year ended March 31, 1997 from approximately $700,000 in the fiscal year
ended March 31, 1996 and posted sales of approximately $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 six months ended September 30, 1998, have decreased to
approximately $818,000.
The Company hopes to expand its Russian business by capitalizing upon
the technologically advanced services it offers which compare favorably to the
relatively undeveloped services offered by the Russian ITO.
Minutes of total outgoing international traffic in Russia have
dramatically increased from 287 million minutes in 1995 to 851 million minutes
in 1996. Historically, about 50% of all international traffic and about 40% of
long distance traffic within the Russian Federation originated in Moscow and
some 30% of international traffic and about 25% of long distance traffic
originated in St. Petersburg. Penetration levels for aggregate
telecommunications services in these two cities equal about 46% for Moscow and
about 36% for St. Petersburg. Other Russian urban areas with low penetration are
less likely in the near future to generate any large international traffic,
because there is a much lower business demand and a smaller number of wealthy
individuals supporting a market. The overall growth in long-distance and
international traffic over the past several years in the Russian Federation did
not, however, significantly change the network usage level, which means that
Russia still generates one of the lowest levels of per-line international and
long distance traffic in the world. This is in large part due to the fact that
international and long distance tariffs in Russia have been increasing very
rapidly in real terms.
Despite the recent changes in the Russian telecommunications industry,
and recent significant investments in local telecommunications infrastructure,
the level of telecommunications service generally available from most public
operators in Moscow remains below that available in cities of Western Europe and
the United States. Outside Moscow (and, to a lesser extent St. Petersburg), most
standard Russian telecommunications equipment is obsolete. For example, many of
the telephone exchanges are electromechanical and most telephones still use
pulse dialing.
The telecommunications market in Russia currently includes a number of
operators that compete in different offering segments-local, inner-city,
international data and cellular services. Growth in the Russian
telecommunications industry has been principally driven by businesses in Moscow
requiring international and domestic long distance voice and data services and
by consumers using mobile telephony. This growth has been most significant as
multinational corporations have established a presence in Moscow and Russian
businesses have begun to expand. The service sector, which includes operations
in distribution, financial services and professional services and tends to be
the most telecommunications intensive sector of the economy, is growing rapidly
particularly in Moscow. Since moving to a more market-oriented economy, the
economic conditions in the outlying regions in Russia have also generally
improved. The telecommunications industry in the outlying regions has also
experienced recent growth, principally as a result of growth in the industrial
sector as well as the establishment of satellite offices in the regions by
multinational corporations and growing Russian businesses.
EXPANSION PLANS
Pursuant to its formation of a joint venture with its French agents,
the Company recently installed a switch in Paris with inter-connectivity to some
of the major carriers operating in the Paris marketplace. During the next twelve
months, the Company plans to install additional switches in Europe, upgrade its
switch in Sunrise, Florida and open POPs (as defined) in up to 3-5 cities in
Western Europe in order to expand its accessibility outside of the switch
locations. Expanding the Network in Europe to include additional major European
business centers should ultimately reduce transmission costs and increase the
addressable market of the European portion of the Network.
The Company expects to use a significant portion of the Public
Offering proceeds to expand and proliferate its Network and its services on a
more rapid basis by deploying additional switches and POPs and installing fixed
facilities to interconnect POPs and nodes, in addition to deploying its IP
telephony based fax and voice services.
The Company intends to enter additional markets and expand its
operations through acquisitions, joint ventures, strategic alliances and the
establishment of new operations. The Company will consider acquisitions of
certain competitors which have a high quality customer base and which would,
upon consolidation with the Company's operations, become profitable. In addition
the Company may acquire equity interests in its existing agents and may pursue
partnership arrangements in emerging and maturing markets with existing sales
organizations and other non-defined telecommunications entities.
FORMATION OF FRENCH SUBSIDIARY
On November 20, 1997, the Company entered into a letter of intent with
respect to a proposed joint venture with Central Call and Mondial Telecom, its
French agents. Pursuant to the letter of intent, as amended, the Company
organized Ursus Telecom France, a limited liability company, capitalized at
FF50,000 or approximately $8,300. The Company holds 50% plus two shares of the
Ursus Telecom France. The remaining shares are held equally by Central Call and
Mondial Telecom. The results of Ursus Telecom France will be consolidated with
those of the Company as a subsidiary.
The letter of intent calls for the Company to pay within six months
after the completion of its public offering, a cash sum that equals three and
one-half times the average monthly traffic revenues contributed to the venture
by Central Call and Mondial Telecom over the months of February, March and April
1998. This payment is considered an advance towards the share purchase program
as described below. The letter of intent requires that Ursus Telecom France
commence operations by January 31, 1998. Ursus Telecom France effectively
commenced operations on March 1, 1998. The letter of intent was amended on April
17, 1998 to reflect the effective commencement of operations, and to adjust the
valuation months to March, April and May 1998. This payment, which was made on
December 3, 1998 and amounted to approximately $111,000, is considered an
advance towards the share purchase program as described below.
Central Call and Mondial Telecom have the right to require that the
Company purchase the shares held in the joint venture by Central Call and
Mondial Telecom in any one of the following three manners: (a) in three
installments of 33.3% each on the first, second and third anniversary of the
Public Offering, (b) in two installments, the first of 66.66% on the second
anniversary of the Public Offering and the remaining 33.33% on the third
anniversary or (c) in one installment on the third anniversary of the Public
Offering. A purchase of shares by the Company from Central Call or Mondial
Telecom, if any, will be accounted for as a purchase.
The valuation for these subsequent share purchases will depend on
whether the Company pays in cash or issues its stock as payment. The cash
purchase price would value the joint venture at 5.5 times average monthly
revenues; and the stock price would be based on an enterprise value of eight
times average monthly revenues. These enterprise values would be multiplied by
the percentage interest being acquired to determine the purchase price. The
Company reserves the option to choose among one of the two available payment and
valuation methods after consultation with Central Call and Mondial Telecom.
PURCHASE OF THE URUGUAYAN AGENT
On August 17, 1998 the Company entered into an asset purchase
agreement with its agent in Uruguay. The agreement provides that the Company
will 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 the Company. The acquisition will be accounted for using
the purchase method of accounting. Upon the closing of the agreement, the
Agency's results will be included in the consolidated financial statements of
the Company.
ACQUISITION OF ACCESS AUTHORITY INC.
On September 17, 1998, pursuant to a Stock Purchase Agreement (the "Agreement')
dated as of September 15, 1998, the Company purchased all the issued and
outstanding common stock of Access Authority, Inc. ("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.
The Company utilized certain net proceeds of the Company's 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.
The Company has filed a current report on Form 8K 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.
GOVERNMENT REGULATION
OVERVIEW
The Company's provision of international and national long distance
telecommunications services is heavily regulated. Also, local laws and
regulations differ significantly among the jurisdictions in which the Company
operates, and, within such jurisdictions, the interpretation and enforcement of
such laws and regulations can be unpredictable. Many of the countries in which
the Company provides, or intends to provide, services prohibit, limit or
otherwise regulate the services which the Company can provide, or intends to
provide, and the transmission methods by which it can provide such services.
The Company provides a substantial portion of its customers with
access to its services through the use of call reorigination. Revenues
attributable to call reorigination represented approximately 76% of the
Company's revenues during the fiscal year ended March 31, 1998 and are expected
to continue to represent a substantial but decreasing portion of the Company's
revenues in the medium to long-term. A substantial number of countries have
prohibited certain forms of call reorigination as a mechanism to access
telecommunications services. This has caused the Company to cease providing call
reorigination services in the Bahamas and may require it to do so in other
jurisdictions in the future. As of November 20, 1997, reports had been filed
with the FCC and/or the ITU that the laws of 79 countries prohibit call
reorigination. While the Company provides call reorigination services in some of
those countries, the only country on such list that accounts for a material
share of the Company's total revenues is South Africa which accounted for about
approximately 28.9% of the Company's 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 the Company
to cease providing call reorigination services to such country or, in extreme
circumstances, by revoking the Company's authorizations.
A summary discussion of the regulatory frameworks in certain
geographic regions in which the Company operates or which it has targeted for
penetration is set forth below. This discussion is intended to provide a general
outline of the more relevant regulations and current regulatory posture of the
various jurisdictions and is not intended as a comprehensive discussion of such
regulations or regulatory posture.
UNITED STATES
The Company's provision of international service to, from, and through
the United States is subject to regulation by the FCC. Section 214 of the
Communications Act requires a company to obtain authorization from, the FCC to
resell international telecommunications services of other US carriers or to own
or lease and operate international telecommunicating facilities. The FCC has
authorized the Company pursuant to the Section 214 to provide international
telecommunications services, to resell public switched international
telecommunications services of other U.S. carriers and to own or lease
international facilities. The Section 214 authorization requires, among other
things, that services be provided in a manner consistent with the laws of
countries in which the Company operates. As described above, the Company's
regulatory strategy could result in the Company's providing services that
ultimately may be considered to be provided in a manner that is inconsistent
with local law. If the FCC finds that the Company has violated the terms of its
Section 214 authorization, it could impose a variety of sanctions on the
Company, including fines, additional conditions on the Section 214
authorization, cease and desist or show cause orders, or, in extreme
circumstances, the revocation of the Section 214 authorization, the latter of
which is usually imposed only in the case of serious violations.
In particular, if it is demonstrated that the law of a foreign
jurisdiction expressly prohibits call reorigination, i.e. call re-origination,
using uncompleted call signaling, and that the foreign government attempted but
failed to enforce its laws against U.S. service providers, the FCC may require
U.S. carriers to cease providing call reorigination services using uncompleted
call signaling. To date, the FCC has only ordered carriers to cease providing
call reorigination using uncompleted call signaling only to customers in the
Philippines, although it is expected that the FCC will take this action with
respect to carriers providing call reorigination using uncompleted call
signaling to customers in Saudi Arabia. Prior to taking such action, the FCC
permits countries to submit information to the FCC regarding the legal status of
call reorigination services in their respective countries. According to FCC
records, 30 countries thus far have submitted such information to the FCC,
including the Bahamas, Egypt, Lebanon and South Africa. Submission of this
information does not imply that the FCC believes that the country's laws
expressly prohibit call reorigination using uncompleted call signaling.
The Company is required to file with the FCC a tariff containing the
rates, terms and conditions applicable to its international telecommunications
services. The Company is also required to file with the FCC any agreements with
customers containing rates, terms, and conditions for international
telecommunications services, if those rates, terms, or conditions are different
than those contained in the Company's tariff. If the Company charges rates other
than those set forth in, or otherwise violates, its tariff or a customer
agreement filed with the FCC, the FCC or a third party could bring an action
against the Company, which could result in a fine, a judgment or other penalties
against the Company.
EUROPE
In Europe, regulation of the telecommunications industry is governed
at a supra-national level by the EU, which is responsible for creating
pan-European policies and, through legislation, has developed a regulatory
framework to establish an open, competitive telecommunications market. In 1990,
the EU issued the Services Directive requiring each EU member state to abolish
existing monopolies in telecommunications services, with the exception of voice
telephony. The intended effect of the Services Directive was to permit the
competitive provision of all services other than voice telephony, including
value-added services and voice services to CUGs. However, local implementation
of the Services Directive through the adoption of national legislation has
resulted in differing interpretations of the definition of prohibited voice
telephony and permitted value-added and CUG services. Voice services accessed by
customers through leased lines are permissible in all EU member states. The
European Commission has generally taken a narrow view of the services classified
as voice telephony, declaring that voice services may not be reserved to the
ITOs if (i) dedicated customer access is used to provide the service, (ii) the
service confers new value-added benefits on users (such as alternative billing
methods) or (iii) calling is limited by a service provider to a group having
legal, economic or professional ties.
In March 1996, the EU adopted the Full Competition Directive
containing two key provisions which required EU member states to allow the
creation of alternative telecommunications infrastructures by July 1, 1996, and
which reaffirmed the obligation of EU member states to abolish the ITOs
monopolies in voice telephony by 1998 and to institute mechanisms to prevent the
ITOs from acting anti-competitively toward new market entrants. To date, Sweden,
Finland, Denmark, the Netherlands and the United Kingdom have liberalized
facilities-based services to all routes. Certain EU countries may delay the
abolition of the voice telephony monopoly based on exemptions established in the
Full Competition Directive. These countries include Spain (December 1998),
Portugal and Ireland (January 1, 2000) and Greece (2003).
FRANCE
The Company currently provides call reorigination services to
customers in France. The Company is permitted to provide call reorigination in
France without a license. Although it does not currently provide such services,
under current law, the Company may lease circuits and provide switched voice
services to CUGs in France without a license. The Company anticipates that it
will migrate its customers to forms of call-through other than call
reorigination after March 1, 1998 and has recently entered into a joint venture
agreement with Central Call and Mondial Telecom to provide switch-based direct
access services in France. The Company anticipates providing a range of enhanced
telecommunications services and switched voice services to business users by
routing traffic via the international switched networks of competitors to the
ITO.
A new telecommunications law, passed in 1996 to implement the Full
Compensation Directive in France, establishes a licensing regime and an
independent regulator and imposes various interconnection and other requirements
designed to facilitate competition. The Company intends to expand its services
to include, for example, direct access and facilities-based services in France.
If it decides to provide switched voice services to the public, including direct
access and/or call-through services, or to own facilities, the Company will have
to apply for a license from the Minister of Telecommunications.
GERMANY
The regulation of the telecommunications industry in Germany is
governed by the Telekommunikations-Gesetz, the Telecommunications Act of 1996
("TKG"), which, with respect to most of its provisions, became effective in
August 1996. Under the TKG, a license ("TKG License") is generally required by
any person that (i) operates transmission facilities for the provision of
telecommunications services to the public; or (ii) offers voice telephony
services to the public through telecommunications networks operated by such
provider. While TKG represents the final phase of the reform of the German
telecommunications industry, the law protected the monopoly rights of Deutsche
Telecom over the provision of the voice telephony until January 1, 1998. The
Company currently does not provide services to customers in Germany, but is
contemplating opportunities in entering this market, which, after the U.S.,
makes up for the largest single telecommunication market in the world.
LATIN AMERICA
The Company currently provides call reorigination to customers in
certain Latin American countries, including Argentina, Peru, Ecuador, Uruguay
and Colombia. The Company is subject to a different regulatory regime in each
country in Latin America in which it conducts business. Local regulations
determine whether the Company can obtain authorization to offer the transmission
of voice and voice band data directly or through call reorigination, or for the
provision of value-added services, such as voicemail and data transmission.
Regulations governing the latter are generally more permissible than those
covering voice telephony.
Some countries in Latin America oppose the provision of call
reorigination. In Brazil, call reorigination is currently permissible. In
Colombia, the Ministry of Communications has stated that call reorigination
access is prohibited and has so notified the FCC. The Company does not believe
that the Ministry of Communications has the requisite authority to regulate in
this area, which authority is the subject of litigation brought by a third party
in the Colombian courts. At present, regulations appear to permit call
reorigination access in Argentina. However, the regulatory agency in Argentina
has changed its position regarding call reorigination access on several
occasions in the past, and this issue is the subject of an ongoing legal
dispute.
Various countries in Latin America have taken initial steps towards
deregulation in the telecommunications market during the last few years. In
addition, various Latin American countries have completely or partially
privatized their national carriers, including Argentina, Chile, Mexico, Peru and
Venezuela. Certain countries have competitive local and/or long distance
sectors, most notably Chile, which has competitive operators in all sectors.
Colombia is scheduled to grant several new concessions for national and
international long distance service providers in addition to its ITO by the end
of 1998. Venezuela has also legalized value-added services such as voicemail and
data transmission and has targeted January 1, 2000 as the date for full
deregulation. Brazil is in the process of opening its telecommunications market
to competition and privatizing its ITO, pursuant to its new law adopted in July
1997. Brazil established an independent regulator in October 1997, and
value-added and private network services, are already open to competition. In
Mexico, the former ITO has been privatized, its exclusive long distance
concession expired in August 1996 and it has been obligated to interconnect with
the networks of competitors since January 1997. Competition in Mexico has been
initiated and an independent regulator has been established. Three countries in
the region, Chile, Mexico and the Dominican Republic, have opened their long
distance telecommunications markets to competition.
SOUTH AFRICA
The telecommunications industry in South Africa is regulated under the
Post Office Act of 1958 (the "SA Post Office Act") and the SA Telecommunications
Act. Telkom SA Limited ("Telkom"), the state-owned ITO, has a statutory monopoly
on the construction, maintenance and use of any telecommunications lines, as
well as on the provision of public switched telecommunications services. The
government of South Africa has indicated that this monopoly will be phased out
over five to six years. Notwithstanding this monopoly, the SA Telecommunications
Act permits a party to provide a range of services other than public switched
services under, and in accordance with, a telecommunications license can be
issued to that party in accordance with the SA Telecommunications Act.
The SA Telecommunications Act established a new telecommunications
regulatory authority called SATRA, whose functions include the granting of
telecommunications licenses, applications for which are solicited by the South
African Minister of Telecommunications pursuant to the SA Telecommunications
Act. As an independent regulatory authority, SATRA is subject to common law
provisions and provisions in the SA Telecommunications Act that limit its
ability to act outside of its granted authority and without affording parties
due process. SATRA's members are appointed by the President on the advice of
Parliament's standing committees on communications. Although the SA
Telecommunications Act states that SATRA should be independent and impartial in
the performance of its functions, it must act in accordance with policy
directions issued by the South African Minister of Telecommunications.
The Company seeks to take advantage of gradual deregulation of the
South African telecommunications industry by offering permitted services to
customers in South Africa. Currently, the Company provides call reorigination
services to customers in South Africa and may, in the future, seek any necessary
licenses to provide liberalized services such as value added services. In August
1997, SATRA issued a ruling that call reorigination operations are an offense
under the SA Telecommunications Act. Several entities, including the Company's
South African agent, filed a lawsuit to stay and reverse SATRA's ruling on the
basis that SATRA lacks the authority to issue such a ruling and that the SA
Telecommunications Act does not prohibit the provision of call reorigination
services. SATRA has agreed not to prosecute any person in the call reorigination
industry unless the South African courts rule that it may. It is anticipated
that final adjudication of this lawsuit could take up to four years to occur,
however, the South African courts may rule sooner or the South African
legislature may promulgate an explicit prohibition on call reorigination.
Although the Company believes that South African law does not prohibit the
Company or it's agent from providing call reorigination services to customers in
South Africa without a license, if the Company's agent is determined to be
providing a telecommunications service without a license, it could be subject to
fines, to the termination of its call reorigination service to customers in
South Africa and, potentially, to the denial of license applications to provide
liberalized services.
The Company's South African agent was issued an interim "Value Added
Network Service License" by SATRA in early April 1998. This license allows the
Company in conjunction with its Agent to operate a data network system through
which all data and facsimile transmissions can be routed. The Company's 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
The Company's ability to provide services in the Middle East depends
on the regulatory environment in each particular country. In Lebanon, for
example, the telecommunications industry is regulated by the Ministry of Posts
and Telecommunications ("MPT"), which also operates the ITO-the General
Directorate of Telecommunications (the "GDT"). The GDT currently has a monopoly
on the provision of wireline telecommunications services in Lebanon. 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 the Company's knowledge, there currently are no domestic and few foreign laws
or regulations that prohibit voice communications over the Internet. The FCC is
currently considering whether or not to impose surcharges or additional
regulation upon providers of Internet telephony. In addition, several efforts
have been made to enact U.S. federal legislation that would either regulate or
exempt from regulation services provided over the Internet. State public utility
commissions also may retain intrastate jurisdiction and could initiate
proceedings to regulate the intrastate aspects of Internet telephony. A number
of countries that currently prohibit voice telephony competition with the ITOs
also have prohibited Internet telephony. Several other countries permit but
regulate Internet telephony. If foreign governments, Congress, the FCC, or state
utility commissions prohibit or regulate Internet telephony, there can be no
assurance that any such regulations will not materially affect the Company's
business, financial condition or results of operation.
VAT
The EU imposes value-added taxes ("VAT") upon the sale of goods and
services within the EU. The rate of VAT varies among EU members, but ranges from
15% to 25% of the sales of goods and services. Under VAT rules, businesses are
required to collect VAT from their customers upon the sale to such customers of
goods and services and remit such amounts to the VAT authorities. In this regard
it is expected that non-EU based telecommunications providers will be required
to appoint a VAT agent and register for VAT in every EU member state in which it
has individual customers.
France and Germany have adopted rules that, as of January 1, 1997,
deem telecommunications services provided by non-EU based companies to be
provided where the customer is located, thereby subjecting the
telecommunications services provided to customers in the EU by non-EU based
companies to VAT. The German and French rules impose VAT on both the residential
and business customers of non-EU based telecommunications companies. In the case
of sales to non-VAT registered customers, German and French rules require that
the non-EU based telecommunications carrier collect and remit the VAT. In the
case of sales by such providers to German VAT-registered customers, the German
rules generally require that such customers collect and remit the VAT. Under the
so-called "Nullregelung" doctrine, however, certain business customers that are
required to charge VAT on goods and services provided to their customers
(generally, companies other than banks and insurance companies) are entitled to
an exemption from VAT on telecommunications services. In the case of sales by
such providers to French VAT-registered customers, the French rules require that
such business customers collect and remit the VAT.
The EU has adopted a proposed amendment to the Sixth Directive that,
if adopted in present form, would require all EU members to adopt legislation to
impose VAT on non-EU based telecommunications services provided to customers in
the EU by non-EU based companies, beginning as early as December 31, 1998. Under
the proposed amendment, non-EU based telecommunications companies would be
required to collect and remit VAT on telecommunications services provided to EU
businesses as well as to individuals.
The Company's independent agents historically have collected, and will
continue to collect, VAT on services where it is offered in a VAT country. The
Company believes that whatever potential negative impact the amendment will have
on its operations as a result of the imposition of VAT on traditional call
reorigination, such impact will be partially mitigated by the customer migration
towards and the higher gross margins associated with direct access services.
EMPLOYEES
As of September 30, 1998, the Company had 60 full-time employees. None
of the Company's employees are covered by a collective bargaining agreement.
Management believes that the Company's relationship with its employees is
satisfactory.
TRADEMARKS
The Company has traditionally relied upon the common law protection of
its trade name afforded under various local laws, including the United States.
However, the Company intends to file for trademark protection of its Ursus name
in the United States. It is possible that prior registration and/or uses of the
mark or a confusingly similar mark may exist in one or more of such countries,
in which case the Company might be precluded from registering and/or using the
Ursus mark and/or logo in such countries.
PROPERTIES
The Company currently occupies approximately 8,087 square feet of
office space, in Sunrise, Florida, which serves as the Company's principal
executive office and 6,000 square feet of office space in Clearwater, Florida,
which was assumed with the acquisition of Access. The leases have an annual
rental obligation of approximately $224,000. The lease in Sunrise expires on
April 30, 2003, while the lease in Clearwater has been extended through April as
the Company determines the appropriateness of such space. The Company believes
that such offices are adequate for its current purposes.
LEGAL PROCEEDINGS
Access is involved as plaintiff and defendant in a legal action, as
described below, which is incident to its business. Management does not believe
that this action will have a material impact on the financial condition of the
Company.
In February 1998, 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 its 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 those
persons who are directors and executive officers of the Company.
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 Officer and Director
Gregory J. Koutoulas 49 Vice President, Controller and
Secretary
Richard C. McEwan 43 Vice President of Agent Relations
William Newport 62 Director, Chairman of the Board of
Directors
Kenneth L. Garrett 55 Director
Luca M. Giussani, a co-founder of the Company, has served as
President, Chief Executive Officer and Director of the Company since its
inception. Mr. Giussani currently works full time for the Company in the United
States. Prior to co-founding the Company with Mr. Chaskin, Mr. Giussani served
as an advisor to a number of developing countries for the restructuring of their
foreign debt, as well as a consultant to several public sector Italian
contractors specializing in the construction of power plants. Prior to 1993, Mr.
Giussani was an officer of Orient & China S.P.A., a trading company specializing
in transactions with China, and in the following concerns that provided
consulting services to Italian contractors: Intraco P.E.F., Balzar Trading Ltd.
and Ursus Finance Ltd.
Jeffrey R. Chaskin is a co-founder of the Company and has been its
Chief Operating Officer and a Director since its inception. Mr. Chaskin was
named President in October of 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 the Company
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, 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 and Secretary of the
Company since April 1995 and Controller since November 1994. From 1990 to 1994,
Mr. Koutoulas served as Controller of F.A.S.T., INC., a wholesale distributor of
health and beauty aids. Prior to his position with F.A.S.T., INC., from 1987 to
1989, Mr. Koutoulas was employed by Bertram Yacht, a manufacturer of luxury
yachts, as Manager of Financial Analysis and Cost Accounting. Mr. Koutoulas
received a B.S. in Economics with a concentration in Accounting from Purdue
University in 1971 and is a licensed Certified Public Accountant.
Richard C. McEwan has been Vice President of Agency Relations since
September 1, 1997. Prior to joining the Company on a full-time basis, Mr. McEwan
was a consultant to the Company since its inception after leaving Gateway USA
where he served as its Director of International Development since 1990. From
1988 to 1990 Mr. McEwan was co-founder and Executive Vice President of Gateway
Asia-Taiwan, the first overseas agency of Gateway USA providing call
reorigination services. Mr. McEwan also provides consulting services to the
Company's agent in the Bahamas. Mr. McEwan received a B.A. from Brigham Young
University in 1980 and a Masters of International Management from the American
Graduate School of International Management (Thunderbird) in 1982.
William M. Newport became a Director and Chairman of the Board of
Directors of the Company in February 1998. Mr. Newport was Chief Executive
Officer of AT&T's cellular business from 1981 to 1983. In 1983, Mr. Newport
joined the Bell Atlantic Corporation when it was formed as a result of the AT&T
divestiture and retired in December 1992 from the Bell Atlantic Group as a Vice
President for Strategic Planning, after a 36-year career in the
telecommunications industry. Mr. Newport served as a director of Integrated
Micro Products, a manufacturer of fault tolerant computers for
telecommunications equipment vendors, from 1994 to 1996, and currently serves as
a director of the Corporation for National Research Initiatives, a non-profit
information technology research and development company, Authentix Networks,
Inc., a wireless roaming fraud prevention and detection service provider, Ovum
Holdings plc., a telecommunications consulting firm, and Condor Technology
Solutions, a publicly traded company that provides information technology
services, such as information systems development, networking, desk top
computing systems and design installations. Mr. Newport holds degrees in
Electrical Engineering from Purdue University and in Management from the Sloan
School of Management at M.I.T.
Kenneth L. Garrett became a director of the Company 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 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, the Company's president and chief executive
officer, was the subject of a criminal proceeding in Italy under Italian law,
which was part of a series of indictments issued against numerous people.
Specifically, about May 1996 Mr. Giussani was charged with transmitting an
invoice in 1991 to a corporation pursuant to an existing consulting contract for
consulting services which it is alleged he did not perform. It was alleged that
the invoice was used to disguise a political contribution made by that
corporation which was unlawful under Italian law. Mr. Giussani was not charged
with making an unlawful political contribution; but rather it is alleged that
through the use of this invoice, Mr. Giussani facilitated the corporation's
falsification of corporate records to disguise the contribution. Mr. Giussani
consistently denied any improper conduct in connection with this matter and
believed that he would ultimately be vindicated. In October 1997, the trial
judge dismissed the claim against Mr. Giussani for lack of evidence. There is
currently no criminal proceeding pending against Mr. Giussani; although he has
been advised that the investigating magistrates are currently contemplating
refiling charges against him and the other former defendants in this case in
order to prevent the running of the applicable statute of limitations. Mr.
Giussani is confident that he will prevail on the merits with respect to any
charges brought against him. The Company does not believe that the outcome of
the proceedings, even assuming Mr. Giussani were convicted, would have a
material adverse impact on the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established three standing committees: the
Executive Committee, the Compensation Committee and the Audit Committee. Luca
Giussani, Jeffrey Chaskin and Johannes S. Seefried serve on the Executive
Committee. The Executive Committee is authorized to exercise the powers of the
Board of Directors between meetings. However, the Executive Committee may not
(i) amend the Articles of Incorporation or the Bylaws of the Company, (ii) adopt
an agreement of merger or consolidation, (iii) recommend to the shareholders the
sale, lease, or exchange of all or substantially all of the Company's property
and assets, (iv) recommend to the shareholders a dissolution of the Company or
revoke a dissolution, (v) elect a director, or (vi) declare a dividend or
authorize the issuance of stock. William Newport and Kenneth L. Garrett serve on
the Compensation Committee. The Compensation Committee is responsible for
recommending to the Board of Directors the Company's executive compensation
policies for senior officers and administering the 1998 Stock Incentive Plan (as
defined). See "-Stock Incentive Plan." Johannes S. Seefried, William Newport and
Kenneth L. Garrett 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
The Company pays 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 Public Offering, Mr. Newport received 15,000, and Mr.
Garrett received 10,000, non-qualified options at the Public Offering Price. The
Company will reimburse each director for ordinary and necessary travel expenses
related to such director's attendance at Board of Directors and committee
meetings.
EXECUTIVE COMPENSATION
The Summary Compensation Table below provides certain summary
information concerning compensation paid or accrued during the fiscal year ended
March 31, 1998, 1997 and 1996 by the Company to or on behalf of the Chief
Executive Officer and the three other executive officers of the Company.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Name and Year Salary Bonus Other Annual
Principal Position Compensation
Luca M. Giussani 1998 $187,615 $281,909 $38,100(1)
President and Chief 1997 $170,000 $251,405 $8,200(1)
Executive Officer 1996 $170,000 $164,326 $4,704(1)
Jeffrey R. Chaskin (2).......1998 $187,615 $281,909 $32,516(1)
Executive Vice President 1997 $170,000 $251,405 $4,583(1)
and 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 1997 $61,981 - -
Accounting 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 Company automobile, prepaid bonuses
and vacation pay.
(2) Does not include compensation paid to Mr. Chaskin's wife, Joanne M.
Canter, an employee of the Company. Ms. Canter's salary for 1996, 1997
and 1998 was $18,692, $18,000 and $18,069, respectively.
(3) Mr. Seefried joined the Company on July 8, 1996.
(4) Mr. McEwan joined the Company on September 1, 1997.
(5) Consulting fees paid from April 1, 1997 to August 30, 1997.
(6) Consulting fees.
<PAGE>
LONG TERM COMPENSATION
In connection with the Public Offering the Company established the
1998 Stock Incentive Plan, whereby 1,000,000 shares of Common Stock were
authorized for issuance. As of September 30, 1998 the Company had granted
737,500 10-year options to purchase Common Stock at various exercise prices
ranging from $3.375 to $9.50. Options granted to 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 President 75,000 January 1, 1999
and Chief Operating
Officer
Johannes S. Seefried 150,000 100,000 at 75,000 May 12, 1998
Chief Financial and $9.50 75,000 January 1, 1999
Accounting Officer 50,000 at $4.125
Richard McEwan 100,000 $9.50 50,000 May 12, 1999
Vice President of 50,000 August 31, 1999
Agency Relations
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, effective on
January 1, 1998, with each of Luca Giussani, Jeffrey Chaskin, Johannes S.
Seefried and Richard McEwan for terms ranging from two to five years.
The employment agreements with each of Messrs. Giussani and Chaskin,
respectively, the Company's Chief Executive and Chief Operating Officers,
provide for each to receive:
(i) base annual salary of $225,000 in 1998, $250,000 in 1999,
$275,000 in 2000, $300,000 in 2001 and $325,000 in 2002;
(ii) minimum bonuses payable at the beginning of each
calendar year, commencing in January 1998, of
$45,000; in addition, each executive will receive
additional bonuses, depending upon the Company's
operating results, of $45,000 for each $1 million of
earnings before interest, taxes, depreciation,
amortization and such bonuses ("EBITDAB") up and
including to an "EBITDAB" of $4 million, as
generated by the Company during any fiscal year
beginning on April 1, 1998 (such bonuses to be
prorated for EBITDAB of a fraction of $1 million and
paid monthly, subject to continuing adjustment for
each quarterly and fiscal year's EBITDAB);
(iii) bonuses commencing with the Company's fiscal
year beginning on April 1, 1998, determined as a
percentage of the executive's base annual pay
depending upon the Company's EBITDAB, these bonuses
begin to be payable at 20% of base annual pay for
EBITDAB of at least $4 million, and increase in
increments of 5% of base annual pay for each $1
million of additional EBITDAB above an EBITDAB of
$4 million (such bonuses to be prorated for EBITDAB
of a fraction of $1 million and paid quarterly
subject to continuing adjustment for each fiscal
year's EBITDAB) provided that aggregate bonuses as
described in (ii), above and this section
(iii) shall not exceed 200% of the annual base pay;
(iv) in the event of a termination without cause, or
termination by the executive for good reason,
compensation for the balance of the remaining term
of the agreement, but for not less than one year; or
in the event of termination of the executive
following a change in control, a payment of three
years' base includible compensation, equal to the
maximum tax deduction that the Company can receive
under applicable "golden parachute" regulations;
(v) confidentiality provisions and a non-compete
agreement within the State of Florida for one year
after any termination of employment; and
(vi) 10-year options to purchase 150,000 shares of Common
Stock at the Public Offering Price, 75,000 of which
vested upon the consummation of the Public Offering
and the balance in January 1999 or upon a change in
control of the Company. Mr. Giussani's options
will be non-qualified. Options to purchase
$200,000 worth of Common Stock issued to Mr.
Chaskin will be tax-qualified and remainder will be
non-qualified.
The agreements provide that the bonuses already paid to Messrs. Giussani and
Chaskin through December 1997 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 the Company accruing prior
to January 1, 1998.
The Company has entered into an employment agreement with Johannes
Seefried, its Chief Financial and Accounting Officer, providing for terms
similar to those in the employment agreements with Messrs. Giussani and Chaskin
described above, except that:
(i) the term of the agreement is for two years from January 1, 1998;
(ii) the base annual salary is $170,000 in 1998 and $200,000 in 1999;
(iii) a guaranteed bonus of $50,000 is payable at the commencement of
the agreement and a bonus of $75,000 is payable upon
consummation of the 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 the Company in any
fiscal year beginning on or after April 1, 1998 and during
the term of the agreement; all in accordance with the formula
set forth in paragraph (iii), above with respect to Messrs.
Giussani and Chaskin; and
(iv) 10-year options to purchase 100,000 shares of Common Stock at
the Offering Price, 50,000 of which vest upon consummation of
the Public Offering and the balance in January 1999 or upon a
change in control of the Company. Options to purchase $200,000
worth of Common Stock will be tax-qualified, the remaining
options will be non-qualified.
On September 1, 1997, the Company entered into a two-year employment
agreement with Richard McEwan, its Vice President of Agent Relations. The
agreement automatically renews for successive one-year terms unless either party
provides written notice of non-renewal. Mr. McEwan was paid a starting bonus of
$40,000 upon joining the Company and will receive a base annual salary of
$130,000. Mr. McEwan is also eligible to receive bonuses each December at the
discretion of the Board of Directors. Upon adoption by the Company of a stock
incentive plan, Mr. McEwan is entitled to receive incentive stock options to
purchase a number of shares equal to two percent of the Company's Common Stock
outstanding as of the date of the agreement, at an option price and subject to a
vesting schedule to be determined by the Company and its Board of Directors at
their sole discretion. The agreement permits Mr. McEwan to continue to perform
services for the Company's independent agent in the Bahamas, provided that doing
so does not create a conflict of interest or unreasonably interferes with the
performance of his duties under his employment agreement. Pursuant to that
arrangement, Mr. McEwan provides "back office" support services to that agent in
return for consulting fees equal to approximately 30% of the amount of agency
fees that the Bahamas agent collects from the Company. These fees, which
amounted to approximately $30,000 in 1996 and $50,000 in 1997 are paid directly
to a trust of which Mr. McEwan is a trustee, and from which he received a $1,000
monthly trustee's fee through September 1997, after which that fee ceased being
paid. The beneficiaries of the trust include various charitable endeavors, but
also include the children of Mr. McEwan.
STOCK INCENTIVE PLAN
The Company's Board of Directors and shareholders adopted the "1998
Stock Incentive Plan" (the "Stock Incentive Plan" or the "Plan") in February
1998. The Compensation Committee will administer the Plan. All employees and
directors of and consultants to the Company are eligible to receive "Incentive
Awards" under the Stock Incentive Plan. The Stock Incentive Plan allows the
Company to issue Incentive Awards of stock options (including incentive stock
options and non-qualified stock options), restricted stock and stock
appreciation rights.
A total of 1,000,000 shares of Common Stock are authorized for
issuance under the Stock Incentive Plan. Not more than 200,000 shares of Common
Stock may be the subject of incentives granted to any individual during any
calendar year under the Stock Incentive Plan. On the effective date of their
respective employment agreements, the Company granted its Chief Executive, Chief
Operating and Chief Financial Officers 10-year stock options exercisable at the
Public Offering Price covering 150,000, 150,000 and 100,000 shares of Common
Stock, respectively. Half of these options vest upon issuance, and the balance
vest on January 1, 1999 or upon a change in control of the Company. In addition,
the compensation committee in a Board of Directors meeting held on April 8, 1998
granted to Mr. McEwan 10-year stock options exercisable at the Public Offering
Price, covering 100,000 shares of Common Stock, and granted to a number of
employees 10-year stock options exercisable at the Public Offering Price
covering a total of 102,000 shares. Half of Mr. McEwan's options vest one year
after the effective date of the Public Offering, and the other half vest on
August 31, 1999 The 102,000 options granted to employees vest one year after the
Public Offering, and can only be exercised 18 months after the Public Offering.
On July 23, 1998 the 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 the Compensation Committee repriced the exercise
price of 160,000 stock options previously granted. The Option's exercise price
was reduced to the then current market value of $4.125.
On November 6, 1998 the 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.
The exercise price of an incentive stock option and a non-qualified
stock option is fixed by the Compensation Committee at the date of grant;
however, the exercise price under an incentive stock option must be at least
equal to the fair market value of the Common Stock at the date of grant, and
110% of the fair market value of the Common Stock at the date of grant for any
incentive stock option granted to an optionee that owns more than 10% of the
Common Stock of the Company.
Stock options are exercisable for the duration determined by the
Compensation Committee, but in no event more than ten years after the date of
grant. The Compensation Committee may fix the vesting schedule and duration of
options on the date of grant (in the case of qualified options, the term cannot
exceed ten years from the date of grant or five years for options granted to an
optionee that owns more than 10% of the Common Stock of the Company). The
aggregate fair market value (determined at the time the option is granted) of
the Common Stock with respect to which incentive stock options are exercisable
for the first time by a participant during any calendar year (under all stock
option plans of the Company) shall not exceed $100,000; to the extent this
limitation is exceeded, such excess options shall be treated as non-qualified
stock options for purposes of the Stock Incentive Plan and the Code.
At the time a stock option is granted, the Compensation Committee may,
in its sole discretion, designate whether the stock option is to be considered
an incentive stock option or non-qualified stock option. Stock options with no
such designation shall be deemed non-qualified stock options.
Payment of the purchase price for shares acquired upon the exercise of
options may be made by any one or more of the following methods: in cash, by
check, by delivery to the Company of shares of Common Stock already owned by the
option holder, or by such other method as the Compensation Committee may permit
from time to time. However, a holder may not use previously owned shares of
Common Stock to 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. The Board of Directors may
extend the post-termination exercise period for any individual, but not beyond
the expiration of the original term of the option.
An option grant may, in the discretion of the Compensation Committee,
include a reload option right that entitles the holder, upon exercise of the
original option and payment of an exercise price for the option in shares, to
purchase at the fair market value per share at the time of exercise the number
of shares used to pay the option exercise price. A reload option may, in the
Compensation Committee's discretion, permit the holder upon exercise of the
option to purchase the number of shares equal to the number of shares issued
upon exercise of the original option. Any reload option will be subject to the
same expiration date and exercisable at the same time as the original option
with respect to which it is granted.
The Compensation Committee may grant stock appreciation rights, either
independently or in connection with the grant of a stock option. Stock
appreciation rights granted in connection with an option may fall into one of
two categories: "Conjunctive Rights" or "Alternative Rights." Conjunctive Rights
will, upon exercise of the related stock option, entitle the holder to receive
payment of an amount equal to the product obtained by multiplying (a) the spread
between the fair market value per share at the time of exercise and the per
share option exercise price, and (b) the number of shares in respect of which
the related option is exercised. Alternative Rights will, upon surrender of the
related option with respect to the number of shares as to which such rights are
then exercised, entitle the holder to receive payment of an amount equal to the
product obtained by multiplying (i) the spread between the fair market value per
share at the time of exercise and the per share option exercise price, and (ii)
the number of shares in respect of which the rights are exercised. The duration
of stock appreciation rights granted in connection with a stock option will be
coterminous with the duration of the stock option.
Stock appreciation rights granted independently will, upon their
exercise, entitle the holder to receive payment of an amount equal to the
product obtained by multiplying (a) the excess of the fair market value per
share on the date of exercise of the stock appreciation rights over the fair
market value per share on the date of grant of the stock appreciation rights,
and (b) the number of shares in respect of which the stock appreciation rights
are exercised. Stock appreciation rights granted independently of any stock
option will be exercisable for a duration determined by the Compensation
Committee, but in no event more than ten years from the date of grant.
The Compensation Committee may also grant restricted stock awards
under the Plan. Restricted stock awards will not be transferable until the
restrictions are satisfied, removed or expire, and will bear a legend to that
effect. The Compensation Committee may impose such other conditions as it deems
advisable on any restricted shares granted to or purchased pursuant to a
restricted stock award made under the Plan.
Awards granted under the Plan contain anti-dilution provisions which
will automatically adjust the number of shares subject to the award in the event
of a stock dividend, split-up, conversion, exchange, reclassification or
substitution. In the event of any other change in the corporate structure or
outstanding shares of Common Stock, the Compensation Committee may make such
equitable adjustments to the number of shares and the class of shares available
under the Stock Incentive Plan or to any outstanding award as it shall deem
appropriate to prevent dilution or enlargement of rights.
The Company shall obtain such consideration for granting options under
the Stock Incentive Plan as the Compensation Committee in its discretion may
request.
Each award may be subject to provisions to assure that any exercise or
disposition of Common Stock will not violate federal and state securities laws.
No award may be granted under the Stock Incentive Plan after the day
preceding the tenth anniversary of the adoption of the Stock Incentive Plan.
The Board of Directors or the Compensation Committee may at any time
withdraw or amend the Stock Incentive Plan and may, with the consent of the
affected holder of an outstanding award, at any time withdraw or amend the terms
and conditions of outstanding awards. Any amendment which would increase the
number of shares issuable pursuant to the Stock Incentive Plan or to any
individual thereunder or change the class of individuals to whom options may be
granted shall be subject to the approval of the shareholders of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors established a compensation committee in April
1998. Prior to such time, decisions concerning executive compensation were made
by the Board of Directors, including Messrs. Giussani, Chaskin and Seefried, all
of whom were and continue to be executive officers of the Company and
participated in deliberations of the Board of Directors regarding executive
officer compensation. See "-Committees of the Board of Directors."
None of the executive officers of the Company currently serve on the
compensation committee of another entity or any other committee of the board of
directors of another entity performing similar functions.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
LOANS AND ADVANCES TO EXECUTIVE OFFICERS
Between December 26, 1995 and July 15, 1997, the Company loaned an
aggregate of $127,000 to Luca Giussani, its Chief Executive Officer. The loans
were evidenced by unsecured notes bearing interest at 7.65% per annum. In
addition, the Company made cash advances totaling $4,749 on behalf of Mr.
Giussani during this period. At March 31, 1998, Mr. Giussani had repaid all
outstanding balances owed to the Company.
During fiscal 1995, 416.67 Class C shares were issued to Jeffrey
Chaskin, the Company's Chief Operating Officer, in exchange for a $18,750
promissory note bearing interest at 7.65% per annum, due March 1, 1997. Mr.
Chaskin's 541.67 Class C shares were pledged as security for the note. On
February 21, 1997, this loan was converted to an unsecured note bearing interest
at 7.65% per annum, payable by February 21, 1998. Mr. Chaskin repaid the loan in
full on December 19, 1997.
BONUSES PAID TO EXECUTIVE OFFICERS
Pursuant to the employment agreements effective January 1, 1998, all
bonuses, including any advance payments, paid to Messrs. Giussani and Chaskin
through December 1997 comprise the entire bonus to which each is entitled in
respect of the 1998 fiscal year. They also waived any other claims for
compensation from the Company 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 September 30, 1998 the Company has advanced each of Messrs. Giusanni and
Chaskin $107,092 towards their bonuses for the fiscal year ended March 31, 1999.
On October 23, 1998 the Compensation Committee approved a special
one-time bonus of $120,000 to each of Messrs. Guisanni and Chaskin to reward
them for their efforts in closing the acquisition of Access.
TERM LOANS AND GUARANTEE BY CHIEF EXECUTIVE OFFICER
During 1993, the Company entered into two term loan agreements with
Citibank-Zurich providing for an aggregate loan amount of $730,000. The due
dates of the two loans were May 20, 1996 and November 11, 1996, respectively.
During 1995 and through April 1996, the Company repaid a total of $250,000 on
the term loans. In September 1996, the Company replaced the two existing term
loans with a new term loan with the same lender in the amount of $500,000 due
August 31, 1998. During the fourth quarter of fiscal 1998 the Company repaid the
remaining balance of $85,000 and terminated the loan agreement.
Luca Giussani, the Company's Chief Executive Officer, provided
security for these term loans by pledging money-market accounts equal to 100% of
the outstanding loan balances.
AGREEMENTS WITH RISPOLI
On November 1, 1995, the Company entered into a one-year consulting
agreement with Ben Rispoli, a minority shareholder of the Company. The agreement
automatically renews for successive one-year terms unless either party provides
written notice of non-renewal. Pursuant to the agreement Mr. Rispoli will
provide consulting services to assist the Company's marketing efforts for a
monthly retainer of $11,250, plus reimbursement of reasonable travel expenses.
On January 20, 1998, Messrs. Giussani, Rispoli and the Company entered
into an agreement (the "January Agreement"). The January Agreement resolved the
matter of Mr. Rispoli's beneficial interest in the Company's securities held in
a fiduciary capacity by Fincogest, S.A. ("Fincogest"). Fincogest is a nominee
Swiss entity that holds record title for the Company's securities beneficially
owned by Mr. Giussani as well as Mr. Rispoli. Mr. Rispoli had a beneficial
interest in the securities held by Fincogest since the Company's inception. The
January Agreement resolves that Mr. Rispoli beneficially owns 8.3% of the Common
Stock held by Fincogest, and that Mr. Giussani beneficially owns the remaining
91.7% of the Common Stock and all of the Series A Preferred Stock. The January
Agreement also extends Mr. Rispoli's consulting agreement to December 31, 1998
and provides that the consulting agreement cannot be terminated except for
"cause" and modifies the agreement to include an additional payment of $15,000
upon consummation of the Public Offering of the Company's securities during the
term of the consulting agreement.
Between December 21, 1995 and June 26, 1996, the Company loaned
$65,000 in the aggregate to Ben Rispoli. The notes are unsecured and bear
interest at the rate of 7.65% per annum. Beginning in September of 1997, the
consultant's monthly retainer is being offset by the Company against the
consultant's outstanding loan balance and accrued interest. At December 31, 1997
the outstanding loan balance and accrued interest was $28,894. At March 31,
1998, all amounts due to the Company by the consultant have been offset against
the consultant's retainer.
PRINCIPAL AND REGISTERING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of the date of this Prospectus, of
(i) each person known by the Company to own beneficially five percent or more of
the outstanding Common Stock immediately prior to the Offering; (ii) the
Registering Shareholders; (iii) each of the Company's directors; (iv) each of
the executive officers named in the Summary Compensation Table; and (v) all
directors and executive officers of the Company as a group. The address of each
person listed below is 440 Sawgrass Corporate Parkway, Suite 112, Sunrise,
Florida 33325, unless otherwise indicated.
Name of Beneficial Owner Number of Percent
Shares of Ownership
Ben Christian Rispoli (1) 375,000 5.6%
Luca M. Giussani (1)(2) 4,200,000(4) 62.5%
Jeffrey R. Chaskin 575,000(4) 8.6%
Johannes S. Seefried 75,000(5) (7)
Richard McEwan (3) - -
William Newport 7,500(6) (7)
Kenneth L. Garrett 5,000(8) (7)
All Executive Officers
And Directors as a Group
(7 Persons) 4,862,500(4)(5)(6)(8) 72.0%
- -----------
(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 the Company, all of which are beneficially owned by
Mr. Giussani, who holds sole voting and investment power with respect
to the Series A Preferred Stock.
(3) Excludes 10-year options to purchase 100,000 shares of Common Stock
granted to Mr. McEwan, one-half vesting one year after the Public
Offering, and one-half vesting on August 31, 1999.
(4) Includes 10-year options to purchase 75,000 shares of Common Stock.
(5) Includes 10-year options to purchase 75,000 shares of Common Stock.
(6) Includes 10-year options to purchase 7,500 shares of Common Stock.
(7) Less than 1%.
(8) Includes 10-year options to purchase 5,000 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 the capital stock of the Company is
subject to the Florida Business Corporation Act ("FBCA") and to provisions
contained in the Company's Amended and Restated Articles of Incorporation and
Bylaws, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part. Reference is made to such
exhibits for a detailed description of the provisions thereof summarized below.
The authorized capital stock of the Company consists of 1,000,000
shares of Preferred Stock, $.01 par value per share (the "Preferred Stock"), of
which 1,000 shares of Series A Preferred Stock will be issued and outstanding,
and 20,000,000 shares of Common Stock, par value $.01 per share, 6,500,000
shares of which will be 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 the Board of Directors and paid by the Company.
In the event of any liquidation, dissolution or winding-up of the
Company, holders of Common Stock will be entitled to share equally and ratably
in all assets available for distribution after payment of creditors, holders of
any series of Preferred Stock outstanding at the time, and any other debts,
liabilities and preferences. Since the Company's Board of Directors has the
authority to fix the rights and preferences of, and to issue, the Company's
authorized but unissued Preferred Stock without approval of the holders of its
Common Stock, the rights of such holders may be materially limited or qualified
by the issuance of the Preferred Stock. See "-Preferred Stock."
The holders of Common Stock will be entitled to vote cumulatively for
the election of those members of the Board of Directors which may be elected by
the holders of such stock.
The Common Stock presently outstanding are fully paid and
non-assessable.
PREFERRED STOCK
The Board of Directors has the authority to issue Preferred Stock from
time to time in one or more series, without shareholder approval, and with
respect to each series to determine (subject to limitations prescribed by law):
(1) the number of shares constituting such series, (2) the dividend rate on the
shares of each series, whether such dividends shall be cumulative and the
relation of such dividends to the dividends payable on any other class of stock,
(3) whether the shares of each series shall be redeemable and the terms of any
redemption thereof, (4) whether the shares shall be convertible into Common
Stock or other securities and the terms of any conversion privileges, (5) the
amount per share payable on each series or other rights of holders of such
shares on liquidation or dissolution of the Company, (6) the voting rights, if
any, for shares of each series, (7) the provision of a sinking fund, if any, for
each series and (8) generally any other rights and privileges not in conflict
with the Amended and Restated Articles of Incorporation for each series and any
qualifications, limitations or restrictions thereof.
SERIES A PREFERRED STOCK. The Company has authorized one class of
Series A Preferred Stock, consisting of 1,000 shares, all of which are issued
and outstanding and owned by the Company's principal shareholder. The Series A
Preferred Stock will have the exclusive right to elect one less than a majority
of the members of the Board of Directors, and is entitled to a $1.00 per share
liquidation preference over the Common Stock. Other than with respect to payment
of this liquidation preference, the Series A Preferred Stock will not share in
liquidation payments. The Series A 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 the Company had granted options to purchase up
to 737,500 shares of Common Stock, at various exercise prices ranging from
$3.375 to $9.50, pursuant to the provisions of the Company's Stock Incentive
Plan. See "Management-Stock Incentive Plan." The Compensation Committee of the
Board of Directors may authorize the issuance of additional options under the
Stock Incentive Plan. The Company 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 Public Offering (the "Underwriting Agreement"), the Company
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 the Company's 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
the Common Stock of the Company with a resulting dilution in the interest of
other shareholders. The Company 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, the Company 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, the Company 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. The Company 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 will vote cumulatively for the election
of Directors. The holders of Series A Preferred Stock, voting as a separate
class, will be entitled to elect two (2) of the five (5) members of the Board of
Directors, and one less than a numerical majority of any expanded Board of
Directors.
CERTAIN PROVISIONS OF THE COMPANY'S AMENDED AND RESTATED ARTICLES OF
INCORPORATION, BYLAWS AND CERTAIN STATUTORY PROVISIONS
Certain provisions in the Amended and Restated Articles of
Incorporation, the Bylaws and the FBCA could have the effect of delaying,
deferring or preventing changes in control of the Company.
The Company's 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. The Company's Amended and Restated Articles of
Incorporation provide that no director may be removed except for cause and by
the vote of not less than 66.66% of the total outstanding voting power of the
securities of the Company which are then entitled to vote in the election of
directors. The Amended and Restated Articles of Incorporation permit the Board
of Directors to create new directorships, and the Company's Bylaws permit the
Board of Directors to elect new directors to serve the full term of the class of
directors in which the new directorship was created. The Bylaws also provide
that the Board of Directors (or its remaining members, even if less than a
quorum) is empowered to fill vacancies on the Board of Directors occurring for
any reason for the remainder of the term of the class of directors in which the
vacancy occurred. A vote of not less than 66.66% of the total outstanding voting
power of the securities of the Company then entitled to vote in the election of
directors is required to amend the foregoing provisions of the Amended and
Restated Articles of Incorporation.
The Company is subject to Sections 607.0901 and 607.0902 of the
Florida Business Corporation Act. In general, Section 607.0901 restricts the
ability of a greater than 10% shareholder of a company to engage in a wide range
of specified transactions (including mergers, asset sales, and other affiliated
transactions) between such company and such shareholder or a person or entity
controlled by or controlling such shareholder. The statute provides that such a
transaction must be approved by the affirmative vote of the holders of
two-thirds of such company's voting shares, unless it is approved by a majority
of the disinterested directors. Section 607.0902 restricts the ability of a
third party to effect an unsolicited change in control of a company. In general,
the statute provides that shares acquired in a transaction which effects a
certain threshold change in the ownership of a company's voting shares (a
"control share acquisition") have the same voting rights as shares held by the
acquiring person prior to the acquisition only to the extent granted by a
resolution adopted by shareholders in a prescribed manner. These statutory
provisions may have an anti-takeover effect by deterring unsolicited offers or
delaying changes in control or management of the Company.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article NINTH of the Company's Amended and Restated Articles of
Incorporation provides that, to the full extent permitted by the FBCA, directors
shall not be personally liable to the Company or its shareholders for damages
for breach of any duty owed to the Company or its shareholders.
The Company's Amended and Restated Articles of Incorporation and Bylaws
provide that the Company shall indemnify its directors and officers to the
fullest extent permitted by the FBCA.
The Company maintains directors' and officers' liability insurance
which is intended to provide the Company's directors and officers protection
from personal liability in addition to the protection provided by the Company's
Amended and Restated Articles of Incorporation and Bylaws as described above.
TRANSFER AGENT
The transfer agent for the Common Stock is Continental Stock Transfer
& Trust Company.
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
DESCRIPTION
The Company has outstanding 6,500,000 shares of Common Stock. The
1,500,000 shares of Common Stock sold in the Public Offering are freely tradable
by persons other than "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act, without restriction or registration under the
Securities Act. The remaining 5,000,000 outstanding shares (all such shares
being referred to herein as the "Controlling Shareholders Shares") are held by
the Company's Controlling Shareholders. 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 a public
offering. In general, under Rule 144, if a period of at least one year has
elapsed since the date the restricted securities were acquired from the Company
or an affiliate of the Company, as applicable, then the holder of such
restricted securities (including an affiliate) is entitled, subject to certain
conditions, to sell in broker's transactions or to market makers within any
three-month period a number of shares which does not exceed the greater of (i)
1% of the Company's then outstanding shares of Common Stock or (ii) the share's
average weekly trading volume during the four calendar weeks preceding the date
the Notice of Sale is filed with the Commission. Sales under Rule 144 are also
subject to certain manner-of-sale provisions and requirements as to notice and
the availability of current public information about the Company. Affiliates may
sell shares not constituting restricted securities in accordance with the
foregoing limitations and requirements but without regard to the one-year
period. However, a person who is not and has not been an affiliate of the
Company at any time during the 90 days preceding the sale of the shares, and who
has beneficially owned restricted securities for at least two years, is entitled
to sell such shares without regard to the volume limitation and other conditions
of Rule 144.
The Company has reserved 1,000,000 shares of its Common Stock for
issuance under the Stock Incentive Plan. The Company has 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 the Company, 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 hereby.
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, no estimate can be given as to 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 hereby, 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 the Company 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 September 30, 1998. The
Company will not receive any of the proceeds from the sale of Shares by the
Registering Stockholders.
Any underwriting commission paid by the Company or Registering
Shareholders to underwriters or agents in connection with the offering of the
shares of Common Stock, and any discounts, concessions or commissions allowed by
underwriters to participating dealers, will be set forth in a Prospectus.
Underwriters, dealers and agents participating in the distribution of shares of
Common Stock (including agents only soliciting or receiving offers to purchase
shares on behalf of the Company) may be deemed to be underwriters, and any
discounts or commissions received by them and any profit realized by them on
resale of the shares may be deemed to be underwriting discounts and commissions
under the Securities Act.
<TABLE>
<CAPTION>
Shares to
Name of Registering Shares Beneficially 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>
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 Public Offering.
</TABLE>
<PAGE>
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from the sale of the
Common Stock offered hereby. 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 hereby
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 the Company's outstanding
shares of Common Sock or the average weekly reported trading volume of the
Company's 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 the Company 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.
The Company will pay all expenses incident to the offering and sale of
the Common Stock to the public other than underwriting discounts and selling
commissions.
The Company 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.
PUBLIC OFFERING
In connection with the Public Offering, the Company entered into an
Underwriting Agreement with Joseph Charles, the representative of the
underwriters, a copy of which has been filed with the 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 the
Company upon closing of the underwriting at a price to the Company reflecting 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 the Company $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, the Company 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 Public Offering price 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 receive from the Company a non-accountable
expense allowance equal to 3% of the aggregate Public Offering proceeds 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 Public Offering closed on May 18, 1998.
The Company has 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 the Company's Board of Directors, this
designee will be entitled to 10-year options to purchase 4,000 shares of Common
Stock at its fair market value at the time of grant for each year of service in
such capacity, and to compensation of $2,000 per meeting attended in person,
$500 per meeting attended by conference call and reimbursement for expenses for
attendance at Board Meetings. Joseph Charles has not yet exercised its right to
designate such a person.
At the closing of the Public Offering, the Company retained Joseph
Charles as a financial consultant for two years. The aggregate fee paid Joseph
Charles for such consulting services was $72,000 which fee was paid in full upon
closing of the Public Offering.
Except in connection with acquisitions, the issuance of up to
1,000,000 shares of Common Stock issuable under the Stock Incentive Plan, or,
with the consent of the Representative, warrants issued in connection with a
debt offering intended to fund acquisitions the Company has agreed, for a period
of twelve (12) months from the closing of the Public Offering, that it will not
issue, sell or purchase any shares of Common Stock or Preferred Stock or issue
warrants or options or other equity securities of the Company without the prior
written consent of the Representative. In addition, the officers, directors and
principal shareholders of the Company have agreed that they will not offer,
sell, contract to sell, transfer, assign, contract to assign, gift, grant any
option or warrant to purchase, or right to acquire, announce an intention to
sell, pledge, exchange, contract to exchange or otherwise dispose of or contract
to dispose of, directly or indirectly any shares of Common Stock or Preferred
Stock of the Company owned by them for a period of at least twelve (12) months
from the closing of the 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
Certain legal matters with respect to the Common Stock have been
passed upon for the Company by Stroock & Stroock & Lavan LLP, Miami, Florida.
EXPERTS
The consolidated financial statements of Ursus Telecom Corporation 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 herein, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Access Authority, Inc. 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 herein and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the 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 the Company 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 Commission.
The Registration Statement, including exhibits and schedules thereto
may be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's Regional Offices located at Seven World Trade Center, Suite 1300,
New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials may also be obtained at
prescribed rates from the Public Reference Section of the Commission,
Washington, D.C. 20549. In addition, registration statements and certain other
filings made by the Commission through its Electronic Data Gathering and
Retrieval ("EDGAR") systems are publicly available through the Commission's site
on the Internet's World Wide Web, located at http://www.sec.gov.
REPORTS TO SHAREHOLDERS
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and a report thereon by independent
certified public accountants and with quarterly reports for the first three
quarters of each fiscal year containing unaudited summary financial information.
<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.
CAGR-Compound Annual Growth Rate.
CALL-THROUGH-The provision of international long distance service
through conventional long distance or "transparent" call reorigination.
CLEC-Competitive Local Exchange Carrier.
CUG (CLOSED USER GROUP)-A group of specified users, such as employees
of a company, permitted by applicable regulations to access a private voice or
data network, which access would otherwise be denied to them as individuals.
DIRECT ACCESS-A means of accessing a network through the use of a
permanent point-to-point circuit typically leased from a facilities-based
carrier. The advantages of direct access include simplified premises-to-anywhere
calling, faster call set-up times and potentially lower access and transmission
costs (provided there is sufficient traffic over the circuit to generate
economies of scale).
DIAL-UP ACCESS-A form of service whereby access to a network is
obtained by dialing an international toll-free number or a local access number.
EUROPEAN UNION OR EU-Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain,
Sweden and the United Kingdom.
FACILITIES-BASED CARRIER-A carrier which transmits a significant
portion of its traffic over owned transmission facilities.
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.
IPLC (INTERNATIONAL PRIVATE LINE CIRCUITS)-Point-to-point permanent
connections which can carry voice and data. IPLCs are owned and maintained by
ITOs or third party resellers.
INTERNET PROTOCOL (IP)-A class of product that uses data and/or voice
transmission over the Internet/Intranet.
IDD-International Direct Dial.
ISDN (INTEGRATED SERVICE DIGITAL NETWORK)-A hybrid digital network
capable of providing transmission speeds of up to 128 kilobits per second for
both voice and data.
ISP-International Settlements Policy. The ISP establishes the
permissible arrangements between facilities-based carriers based in the U.S. and
their foreign counterparts for terminating each other's traffic over their
respective networks.
IRU-Indefeasible Right of Use.
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 the Company 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.
PSTN (PUBLIC SWITCHED TELEPHONE NETWORK)-A telephone network which is
accessible by the public through private lines, wireless systems and pay phones.
REFILE-Traffic originating from one country (original country) and
destined to another country (receiving country) is routed through a third
country without the knowledge of the receiving country. The receiving country
has only identified the third country and assumes the traffic originated from
the third country only.
RESALE-Resale by a provider of telecommunications services of services
sold to it by other providers or carriers on a wholesale basis.
SWITCHING FACILITY-A device that opens or closes circuits or selects
the paths or circuits to be used for transmission of information. Switching is a
process of interconnecting circuits to form a transmission path between users.
TRANSIT-Traffic originating from one country and destined to another
country is routed through a third country with the full knowledge and consent of
all countries and carriers concerned.
TRANSPARENT CALL REORIGINATION-Technical innovations have enabled
telecommunications carriers to offer a "transparent" form of call reorigination
without the usual "hang up" and "callback" whereby the call is automatically and
swiftly processed by a programmed switch.
VALUE-ADDED TAX (VAT)-A consumption tax levied on end-consumers of
goods and services in applicable jurisdictions.
VOICE TELEPHONY-A term used by the EU, defined as the commercial
provision for the public of the direct transport and switching of speech in
real-time between public switched network termination points, enabling any user
to use equipment connected to such a network termination point in order to
communicate with another termination points.
WTO-World Trade Organization (based in Geneva, Switzerland).
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
URSUS TELECOM CORPORATION
Pro Forma Condensed Consolidated Financial Statements (unaudited) F-1
Condensed Consolidated Statement of Operations for the Year ended
March 31, 1998 F-2
Pro Forma Condensed Consolidated Statement of Operations for the
Six Months ended September 30, 1998 (unaudited) F-3
Notes To Unaudited Pro Forma Condensed Consolidated Statements Of
Operations F-4
Consolidated Financial Statements
Report of Independent Certified Public Accountants F-5
Consolidated Balance Sheets as of March 31, 1997 and 1998 and
September 30, 1998 (unaudited) F-6
Consolidated Statements of Income for the fiscal years ended
March 31, 1996, 1997 and 1998 and the six months ended
September 30, 1998 (unaudited) F-7
Consolidated Statement of Shareholders' Equity (Capital
Deficiency) for the fiscal years ended March 31, 1996,
1997 and 1998 and the six months ended September 30, 1998
(unaudited) F-8
Consolidated Statements of Cash Flows for the fiscal years
ended March 31, 1996, 1997 and 1998 and the six months ended
September 30, 1998 (unaudited) F-9
Notes to Consolidated Financial Statements F-10
ACCESS AUTHORITY INC.
Combined Consolidated Financial Statements F-25
Report of Independent Certified Public Accountants F-25
Consolidated Balance Sheets as of December 31, 1996 and 1997
and June 30, 1998 (unaudited) F-26
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-27
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-28
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-29
Notes to Combined Consolidated Financial Statements F-30
<PAGE>
PRO FORMA FINANCIAL INFORMATION
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 six months ended September 30, 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>
Ursus Telecom Corporation
Unaudited Pro Forma Condensed
Consolidated Statement of Operations
For the Year ended March 31, 1998
<TABLE>
<CAPTION>
Ursus Telecom Access
Corporation Authority Inc.
Year ended Year ended
March 31, December 31, Pro Forma Pro Forma
1998 1997(a) Adjustments As Adjusted
----------------------------------------------------------------------------
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 3,467,585 6,557,425 10,025,010
expenses
Depreciation and amortization 196,497 413,078 562,341 (b) 1,171,916
----------------------------------------------------------------------------
Total operating expenses 7,845,733 12,444,275 562,341 20,852,349
----------------------------------------------------------------------------
Operating income 1,719,896 1,106,426 (562,341) 2,263,981
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 (562,341) 2,185,126
Provision (benefit) for income taxes 659,577 (361,000) (d) 298,577
----------------------------------------------------------------------------
Net income $ 1,073,908 $ 1,374,982 $(562,341) $ 1,866,549
============================================================================
Pro forma net income per common
share-basic and dilutive $ .21 $ .38
============================================================================
Pro forma weighted average shares
outstanding 5,000,000 5,000,000
============================================================================
Ursus Telecom Corporation
</TABLE>
<PAGE>
Unaudited Pro Forma Condensed
Consolidated Statement of Operations
For the Six Months ended September 30, 1998
<TABLE>
<CAPTION>
Ursus Telecom Access
Corporation Authority Inc.
For the Six For the Six
Months Ended Months Ended
September 30, June 30, Pro Forma Pro Forma
1998 1998(a) Adjustments As Adjusted
--------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Retail $11,687,009 $8,586,575 $ 20,273,584
Wholesale 1,561,369 9,979,816 11,541,185
--------------------------------------------------------------------------
Total revenues 13,248,378 18,566,391 31,814,769
Cost of revenues:
Retail 7,339,275 5,755,106 13,094,381
Wholesale 1,230,988 8,251,976 9,482,964
--------------------------------------------------------------------------
Total cost of revenues 8,570,263 14,007,082 22,577,345
--------------------------------------------------------------------------
Gross profit 4,678,115 4,559,309 9,237,424
Operating expenses:
Commissions 1,799,120 1,070,895 2,870,015
Selling, general and administrative expenses 2,553,369 3,699,393 6,252,762
Depreciation and amortization 228,904 263,101 281,170 (c) 773,175
----------------------------------------------------------------------------
Total operating expenses 4,581,393 5,033,389 281,170 9,895,952
--------------------------------------------------------------------------
Operating income (loss) 96,722 (474,080) (281,170) (658,528)
Other income (expense):
Interest expense (20,452) (23,621) (44,073)
Interest income 231,979 46,446 278,425
Gain on contingency settlement 499,756 499,756
--------------------------------------------------------------------------
211,527 522,581 734,108
--------------------------------------------------------------------------
Income (loss)before provision (benefit)
for income taxes 308,249 48,501 (281,170) 75,580
Provision (benefit) for income taxes 155,370 18,000 (d) 173,370
--------------------------------------------------------------------------
Net income(loss) $ 152,879 $ 30,501 $ (281,170) $ (97,790)
==========================================================================
Pro forma net income per common
Share-basic and dilutive $ .02 $ (.02)
==========================================================================
Pro forma weighted average shares outstanding 6,110,497 6,110,497
==========================================================================
</TABLE>
<PAGE>
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's statement of operations for the year ended March 31,1998
has been combined with Access's statement of operations for the year ended
December 31, 1997. Additionally, the Company's statement of operations for the
six month period ended September 30, 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 preliminarily allocated the excess of purchase
price over the fair value of net assets acquired to goodwill and customer
lists using lives of 20 and 7 years, respectively.
(c) To record amortization expense of intangibles for the six months ended
September 30, 1998. The Company has preliminarily allocated the excess of
purchase price over the fair value of net assets acquired to goodwill and
customer lists using lives of 20 and 7 years, respectively.
(d) No tax effect has been recorded as the amortization expense is
non-deductible for income tax purposes.
Report of Independent Certified Public Accountants
<PAGE>
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. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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.
/s/ Ernst & Young LLP
Miami, Florida
July 2, 1998
<PAGE>
Ursus Telecom Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, September 30,
1997 1998 1998
----------------------------------------------------
Assets (unaudited)
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 740,765 $1,035,149 $4,629,984
Accounts receivable, net 3,378,886 4,183,750 4,616,375
Advances and notes receivable--related parties 185,694 65,274 229,932
Prepaid expenses 51,570 54,980 592,796
Income taxes receivable 161,430 60,430 78,008
Deferred taxes 9,076 49,841 603,913
Other current assets 38,716 52,944 74,598
----------------------------------------------------
Total current assets 4,566,137 5,502,368 10,825,606
Equipment, net 587,368 1,258,074 2,778,404
Deferred taxes 17,373 14,042 14,042
Deposit on acquisition - 377,141 102,988
Deferred costs of public offering - 514,619 -
Intangibles, net - - 9,066,180
Other assets, net 72,508 66,267 231,057
----------------------------------------------------
Total assets $5,243,386 $7,732,511 $23,018,277
====================================================
Liabilities and shareholders' equity Current liabilities:
Accounts payable $2,714,789 $4,064,394 $5,542,064
Accrued expenses 38,660 89,838 593,026
Commissions payable 85,516 57,085 1,099,946
Customer advances - 90,000 281,577
Income taxes payable 74,146 - -
Current portion of capital lease obligations - 48,835 146,486
Deferred revenue 7,006 59,970 41,483
----------------------------------------------------
Total current liabilities 2,920,117 4,410,122 7,704,582
Long term portion of capital lease obligations - 296,555 312,289
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 11,920,314
Translation adjustment - (5,873) 9,008
Retained earnings 1,611,435 2,685,343 2,838,222
----------------------------------------------------
Total shareholders' equity 1,861,435 2,948,220 14,832,554
----------------------------------------------------
Total liabilities and shareholders' equity $5,243,386 $7,732,511 23,018,277
====================================================
See accompanying notes.
</TABLE>
<PAGE>
Ursus Telecom Corporation
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended March 31, Six Months ended September 30,
1996 1997 1998 1997 1998
----------------------------------------------------------------------------------------
(unaudited) (unaudited)
Revenues:
<S> <C> <C> <C> <C> <C>
Retail $13,228,074 $20,523,019 $24,198,629 $12,239,253 $11,687,009
Wholesale - 315,408 3,899,695 975,198 1,561,369
----------------------------------------------------------------------------------------
Total revenues 13,228,074 20,838,427 28,098,324 13,214,451 13,248,378
Cost of revenues:
Retail 7,675,370 12,031,794 15,017,899 7,951,341 7,339,275
Wholesale - 163,878 3,514,796 818,423 1,230,988
----------------------------------------------------------------------------------------
Total cost of revenues 7,675,370 12,195,672 18,532,695 8,769,764 8,570,263
----------------------------------------------------------------------------------------
Gross profit 5,552,704 8,642,755 9,565,629 4,444,687 4,678,115
Operating expenses:
Commissions 2,429,830 3,766,235 4,181,651 2,124,886 1,799,120
Selling, general and administrative 1,659,591 2,746,379 3,467,585 1,445,668 2,553,369
expenses
Depreciation and amortization 94,415 126,292 196,497 86,603 228,904
----------------------------------------------------------------------------------------
Total operating expenses 4,183,836 6,638,906 7,845,733 3,657,157 4,581,393
----------------------------------------------------------------------------------------
Operating income 1,368,868 2,003,849 1,719,896 787,530 96,722
Other income (expense):
Interest expense (59,353) (39,363) (23,747) (14,846) (20,452)
Interest income 5,089 16,271 26,752 7,700 231,979
Gain (loss) on sale of equipment - 9,644 10,584 10,584 -
----------------------------------------------------------------------------------------
(54,264) (13,448) 13,589 3,438 211,527
----------------------------------------------------------------------------------------
Income before provision
for income taxes 1,314,604 1,990,401 1,733,485 790,968 308,249
Provision for income taxes 524,553 737,895 659,577 297,641 155,370
----------------------------------------------------------------------------------------
Net income $ 790,051 $ 1,252,506 $ 1,073,908 $ 493,327 $ 152,879
========================================================================================
Pro forma net income per common
share-basic and dilutive
(Historical for the period
ended September 30, 1998) $ .16 $ .25 $ .21 $ .10 $ .03
========================================================================================
Pro forma weighted average shares
outstanding 5,000,000 5,000,000 5,000,000 5,000,000 6,110,497
========================================================================================
See accompanying notes.
</TABLE>
<PAGE>
Ursus Telecom Corporation
Consolidated Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
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
----------------------------------------------------------------------------------------------------------------
Balance at
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 subscrip-
tion 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)
(unaudited) --------------------------------------------------------------------------------------------------------
Balance at
March 31, 1998 10 - - - 50,000 218,740 - 2,685,343 (5,873) 2,948,220
Net income
(unaudited) - - - - - - - 152,879 - 152,879
Translation
adjustment - - - - - - - - 14,881 14,881
Issuance of
common stock
net of offering
costs of $514,619
(unaudited) - - - - 15,000 11,701,574 - - - 11,716,574
------------------------------------------------------------------------------------------------------------------
Balance at
September 30,
1998(unaudited) $10 $ - $ - $ - $65,000 $11,920,314 $ - $2,838,222 $9,008 $14,832,554
==================================================================================================================
See accompanying notes.
</TABLE>
<PAGE>
Ursus Telecom Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended March 31, Six Months ended
September 30,
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 $493,327 $ 152,879
Adjustments to reconcile net income to net
cash provided (used in) by operating activities:
Depreciation and amortization 94,415 126,292 196,497 86,603 228,904
Allowance for doubtful accounts 10,232 3,619 50,964 25,000 150,863
Gain on sale of equipment - (9,644) (10,584) 10,584 -
Deferred income taxes 296,815 (2,799) 3,346 19,577 16,948
Changes in operating assets and liabilities
excluding the effects of the business acquisition:
Accounts receivable (943,913) (1,647,068) (1,232,969) (860,675) 547,991
Prepaid expenses (4,499) (33,155) (34,564) (72,674) (143,839)
Other current assets - (38,716) (43,250) (33,274) (21,654)
Income taxes receivable - (161,430) 101,000 (56,026) (17,578)
Accounts payable 482,538 1,268,595 1,349,605 447,450 (1,094,305)
Accrued expenses (20,473) 15,877 51,178 17,090 (418,310)
Commissions payable (2,435) 56,862 (28,431) (10,758) 29,472
Customers advances - - 90,000 - 335
Income taxes payable 8,225 47,868 (74,146) (74,146) -
Deferred revenue 9,314 (2,308) 52,964 41,501 (18,487)
Deferred discounts (47,798) (18,567) - - -
-----------------------------------------------------------------------------
Net cash provided by (used in) operating activities 672,472 857,932 1,545,518 33,579 (586,781)
Investing activities
Purchase of equipment (93,646) (352,081) (486,767) (221,607) (303,022)
Sale of equipment - 10,000 - - -
(Increase)decrease in advances to related parties (122,668) (63,026) 180,597 49,685 (164,658)
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 7,888 (84,841)
-----------------------------------------------------------------------------
Net cash (used in) provided by investing activities (222,466) (439,083) (301,130) (164,034) (8,037,274)
Financing activities
Deferred costs of public offering - - (514,619) (83,635) -
Repayments of long-term debt (150,000) (155,000) (425,000) (175,000) -
Collection of stock subscription receivable - - 18,750 - -
Net proceeds from the sale of common stock - - - - 12,231,193
Repayments on capital leases - - (23,262) - (27,184)
-----------------------------------------------------------------------------
Net cash (used in) provided by financing activities (150,000) (155,000) (944,131) (258,635) 12,204,009
Effect of foreign exchange rate changes on cash and
cash equivalents - - (5,873) - 14,881
-----------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 300,006 263,849 294,384 (389,090) 3,594,835
Cash and cash equivalents at beginning of period 176,910 476,916 740,765 740,765 1,035,149
-----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 476,916 $ 740,765 $1,035,149 $ 351,675 $4,629,984
=============================================================================
</TABLE>
<PAGE>
Ursus Telecom Corporation
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended March 31, Six Months ended
September 30,
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 $ 17,367 $ 20,452
================================================================================
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 $ - $ -
================================================================================
Receivable applied as a deposit on acquisition
$ - $ - $ 377,141 $ - $ 72,988
================================================================================
See accompanying notes.
</TABLE>
<PAGE>
Ursus Telecom Corporation
Notes to Consolidated Financial Statements
(Information pertaining to the six months ended
September 30, 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 all
of its current agents. The initial term of the agreements has generally been for
a period of five years. Provided that agents are not in default, agents
generally have the option of renewing their agreements for two additional terms
of three years each by notifying the Company at least six months prior to the
agreement's expiration date. See Note 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 September 30, 1998
and for each of the six month periods ended September 30, 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 six months
ended September 30, 1998 and 1997 are not necessarily indicative of the results
of operations for a full fiscal year.
Reclassifications
Certain reclassifications have been made to the September 30, 1998 financial
statements as previously reported on Form 10-Q, as a result of new information
obtained subsequent to the filing of such Form 10-Q.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
2. Summary of Significant Accounting Policies (continued)
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 six months
ended September 30, 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 September 30, 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.
Intangible Assets
At September 30, 1998 intangible assets, net of accumulated amortization,
consist of goodwill of $8,475,519 and customer lists of $590,661. 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 September 30, 1998, was $23,703. The Company will
periodically evaluate the realizability of intangible assets. In making such
evaluations, the Company will compare certain financial indicators such as
expected undiscounted future revenues and cash flows to the carrying amount of
the intangibles.
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.
2. Summary of Significant Accounting Policies (continued)
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.
Following is a reconciliation of amounts used in the per share computations:
<TABLE>
<CAPTION>
Six Months ended
Year ended March 31, September 30,
1996 1997 1998 1997 1998
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income-numerator basic computation $790,051 $1,252,506 $1,073,908 $ 493,327 $ 152,879
Effect of dilutive securities-None - - - - -
-----------------------------------------------------------------------
Net income as adjusted-numerator diluted
computation $790,051 $1,252,506 $1,073,908 $ 493,327 $152,879
=======================================================================
Pro forma weighted average shares-
denominator basic computation 5,000,000 5,000,000 5,000,000 5,000,000 6,110,497
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 6,110,497
=======================================================================
Pro forma net income per share:
Basic $ 0.16 $ 0.25 $ 0.21 $ 0.10 $ 0.03
=======================================================================
Diluted $ 0.16 $ 0.25 $ 0.21 $ 0.10 $ 0.03
=======================================================================
</TABLE>
2. Summary of Significant Accounting Policies (continued)
Accounting for the Impairment of Long-Lived Assets
During fiscal 1997, the Company adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets. SFAS 121 requires impairment
losses to be recorded on long-lived assets when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. The Company, based on current
circumstances, does not believe that any long-lived assets are impaired.
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.
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 results of operations.
3. Accounts Receivable
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1997 1998 1998
-----------------------------------------------------
<S> <C> <C> <C>
Billed services $2,281,835 $2,937,650 $4,323,110
Unbilled services 1,112,051 1,312,064 966,599
Allowance for doubtful accounts (15,000) (65,964) (673,334)
-----------------------------------------------------
$3,378,886 $4,183,750 4,616,375
=====================================================
</TABLE>
4. Equipment
Equipment consists of the following:
<TABLE>
<CAPTION>
Estimated March 31, September 30,
Useful Lives 1997 1998 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Switch equipment 7 years $459,607 $934,693 $2,363,196
Computer equipment 3 years 187,581 407,759 1,235,681
Computer software 3 years 66,260 85,759 288,443
Office Furniture and equipment 5 years 86,381 117,364 160,371
Leasehold improvements 7 years 61,478 144,625 218,403
------------------------------------------------
861,307 1,690,200 4,266,094
Less accumulated depreciation
and amortization (273,939) (432,126) (1,487,690)
------------------------------------------------
$587,368 $1,258,074 $2,778,404
================================================
</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 $884,211. 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 September 30, 1998:
1999 $ 74,082
2000 193,424
2001 100,266
2002 88,055
2003 118,252
----------------
574,079
Less: Imputed interest at rates of 11-16% (115,304)
----------------
Present value of lease obligation (current portion $46,670) $ 458,775
================
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.
<PAGE>
7. Stockholders' Equity (continued)
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 are 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.
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.
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, the Board of Directors agreed to grant, subject to the consummation
of the initial public offering, to 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 will apply APB Opinion 25, "Accounting For Stock Issued to
Employees", and related Interpretations in accounting for options granted to
employees. 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 25, 1998 the Board of Directors reprised certain previously issued
stock options aggregating 160,000 shares to the market value on the date of the
reprising 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, Six months ended
September 30,
1996 1997 1998 1997 1998
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current - Federal $194,452 $632,434 $560,316 $254,138 $ 118,190
State 33,286 108,260 95,915 43,503 20,232
Deferred 296,815 (2,799) 3,346 - 16,948
--------------------------------------------------------------------------
Total $524,553 $737,895 $659,577 $297,641 $ 155,370
==========================================================================
</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, September 30,
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 $10,385 $13,731 $449,103
====================================================
</TABLE>
9. Income Taxes (continued)
The reconciliation of the effective income tax expense (benefit) to federal
statutory rates is as follows:
<PAGE>
<TABLE>
<CAPTION>
Six months ended
Year ended March 31, September 30,
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 of federal benefit 3.63 3.63 3.63 3.63 3.63
Goodwill - - - - 2.89
Unrecognized benefit of foreign
Net operating losses - - - - 13.64
Other 2.27 (.56) .42 (.56) (3.76)
--------------------------------------------------------------------
39.90% 37.07% 38.05% 37.07% 50.40%
====================================================================
</TABLE>
10. Related Party Transactions
Advances and notes receivable--related parties consist of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1997 1998 1998
----------------------------------------
Note receivable--officer, unsecured, due on demand,
<S> <C> <C> <C> <C>
bearing interest at 7.65% per annum $117,000 $ - $ -
Notes receivable--minority shareholder 65,000 - -
Cash advances--officer - 465 10,686
Prepaid bonuses --officers - 31,154 214,184
Advances receivable--affiliates, unsecured, non-interest
bearing 3,694 33,655 5,062
----------------------------------------
$185,694 $ 65,274 $229,932
========================================
</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.
<PAGE>
11. Commitments and Contingencies
The approximate annual minimum lease payments under the non-cancelable operating
leases as of September 30, 1998 are:
1999 $136,874
2000 230,287
2001 195,539
2002 173,789
2003 175,458
Thereafter 14,645
------------------
$926,592
==================
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 six months ended September 30, 1998 and 1997 rent
expense was $43,532 and $24,445, respectively.
The Company has entered into various contracts, which require it to purchase
telecommunications services. The approximate minimum purchase commitments under
these contracts as of September 30, 1998 is approximately $497,200.
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 six
months ended September 30, 1998 and 1997 such bonuses amounted to $103,740 and
$140,684, respectively
<PAGE>
11. Commitments and Contingencies (continued)
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, is
considered an advance towards the share purchase program as described below.
The minority partners have the right to require that the Company to purchase
their shares in any one of the following three manners: (a) in three
installments of 33.33% each on the first, second and third anniversary of the
Offering, (b) in two installments, the first of 66.66% on the second anniversary
of the Offering and the remaining 33.33% on the third anniversary or (c) in one
installment on the third anniversary of the Offering. Further, the Company has
the right to purchase the minority interest with either cash or stock. The cash
purchase price would value the joint venture at 5.5 times average monthly retail
revenues; and the stock price would be based on eight times average monthly
revenues. These values would be multiplied by the percentage interest being
acquired to determine the purchase price.
In the ordinary course of business, the Company has disputes with carriers over
billing discrepancies. Although management has historically been successful in
resolving these disputes, there can be no assurance that ongoing disputes will
be resolved as anticipated. In the event that an ongoing dispute results in an
additional liability, the Company believes that such amounts will not have a
material adverse affect on the Company's financial condition or results of
operations.
On October 30, 1998, the Company agreed to purchase two additional switches and
upgrade two existing switches for a total commitment of approximately $610,000.
In addition, the Company has committed to purchase other equipment amounting to
approximately $1.2 million. On December 18, 1998 and in connection with these
commitments, the Company has 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.
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 excluding Access:
March 31 September 30,
1996 1997 1998 1997 1998
-------------------------------------------------------------
Customer 1 12% - - - -
Customer 2 16% 11% 11% 14% 11%
Customer 3 11% 15% 15% 13% 16%
Customer 4 11% 19% 29% 26% 34%
Customer 5 - 12% - - -
Customer 6 - - 10% - -
Accounts receivable as a percentage of total accounts receivable due from the
significant independent agents noted above excluding the affects of the
acquisition of Access were as follows:
March 31 September 30,
1996 1997 1998 1998
-------------------------------------------------------
Customer 1 8% - - -
Customer 2 8% 9% 7% 6%
Customer 3 15% 21% 25% 26%
Customer 4 23% 28% 24% 25%
Customer 5 - 10% - -
Customer 6 - - 7% 3%
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 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 September 30, 1998, the Company had $708,854 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 six months
ended September 30, 1998 and 1997 approximately $3,196,000 and $5,041,000,
respectively, was paid to these carriers and for the years ended March 31, 1998
and 1997, approximately $10,063,000 and $7,757,000, respectively, was paid 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>
Six Months ended
Year ended March 31, September 30,
1996 1997 1998 1998 1997
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Africa $ 1,403,094 $ 3,899,701 $ 8,346,025 $ 3,989,068 $ 4,225,350
Europe 1,988,030 4,252,104 3,857,504 2,043,914 1,985,934
Latin America 6,337,284 7,265,473 6,523,384 3,465,699 2,745,113
Middle East 2,101,864 3,741,890 4,721,592 2,094,143 2,311,945
Other 1,397,802 1,363,852 1,719,272 983,212 883,192
United States - 315,407 2,930,547 638,415 1,096,844
-----------------------------------------------------------------------
Total revenues $13,228,074 $20,838,427 $28,098,324 $13,214,451 $13,248,378
=======================================================================
</TABLE>
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, September 30,
1996 1997 1998 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Africa $382,595 $822,731 $994,793 1,342,063
Europe 426,294 694,461 709,598 789,763
Latin America 572,903 798,428 905,223 887,021
Middle East 276,433 698,842 1,110,904 1,214,715
Other 88,593 109,481 134,232 479,640
United States - 269,943 394,964 558,947
Less: Allowance for doubtful (11,381) (15,000) (65,964) (655,774)
accounts
----------------------------------------------------------------
Total accounts receivable $1,735,437 $3,378,886 $4,183,750 $4,616,375
================================================================
</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. An agreement has not yet been finalized and as such, this amount
has been classified as a deposit. In addition, this agent can cancel this
arrangement under certain circumstances, provided that the agent reimburses the
Company in full for the $377,000 described above.
On August 18, 1998, the Company and its agent in South Africa mutually rescinded
the above agreement. The agent has begun to repay the above amount over several
months.
16. Acquisitions
During the quarter ended June 30, 1998 the Company agreed to acquire its agent
in Uruguay. Consideration for the agency will be $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. Upon the closing of the agreement, the Agency's
results will be included in the consolidated financial statements of the
Company.
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.
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 six months ended September 30, 1998 and the
year ended March 31, 1998, as if the Access acquisition had occurred at the
beginning of the respective periods is as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
September 30, March 31,
1998 1998
--------------------------------------------------
<S> <C> <C>
Total revenue $31,814,769 $ 75,652,207
Net income(loss) (97,790) 1,866,549
Basic and diluted net income(loss)
per common share $ (0.02) $ 0.38
</TABLE>
The pro forma financial information has been compiled by combining the results
of operations of Access for the year ended December 31, 1997 with the Company's
results of operations for the year ended March 31, 1998 and by combining
Access's results of operations for the six months ended June 30, 1998 with the
Company's results of operations for the six months ended September 30, 1998.
This pro forma is presented for informational purposes only and is not
necessarily indicative of future operations.
<PAGE>
Report of Certified Public Accountants
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>
<CAPTION>
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>
<CAPTION>
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 (benefit) - - 61,000 - (26,000)
Deferred expense (benefit) - - (422,000) - 44,000
--------------------------------------------------------------------------------------------
- - (361,000) - 18,000
--------------------------------------------------------------------------------------------
Net income (loss) $(996,992) $(986,547) $1,374,982 $(117,158) $ 30,501
============================================================================================
See accompanying notes.
</TABLE>
<PAGE>
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)
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)
=============================================================================================
See accompanying notes.
</TABLE>
<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 - bank 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 $ -
=============================================================================
Purchases of property and equipment included in
accounts payable $ - $ 135,217 $ - $ - $ -
==============================================================================
Issuance of common stock in conjunction with
business acquisition $ 7,100 $ - $ - $ - $ -
==============================================================================
See accompanying notes.
</TABLE>
<PAGE>
Access Authority, Inc.
Notes to Combined Consolidated Financial Statements
(Information pertaining to the six months ended
June 30, 1997 and 1998 and the September 17, 1998
Agreement is unaudited)
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.
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.
<PAGE>
2. Accounting Policies (continued)
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 market value of
identifiable net assets acquired, is being amortized using the straight-line
method over five years.
<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)
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.
<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)
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:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997 1998
----------------------------------------------------------------------
<S> <C> <C> <C>
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
======================================================================
</TABLE>
<PAGE>
7. Major Suppliers
Access Authority, Inc.
Notes to Combined Consolidated Financial Statements
(Information pertaining to the six months ended
June 30, 1997, 1998 and September 17, 1998
Agreement is unaudited
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.
<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)
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:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997 1998
----------------------------------------------------------------
Deferred tax assets:
<S> <C> <C> <C>
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
================================================================
</TABLE>
<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)
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)
expense, net of federal taxes (35,000) (9,000) 13,000 - 2,000
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.
<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)
11. Lease Commitments (continued)
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 payments $ 159,534
===============
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>
<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)
12. Geographic Information (continued)
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.
<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)
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>
TABLE OF CONTENTS
Page
Prospectus Summary 3
Summary Financial Data 7
Risk Factors 8
Use of Proceeds 21
Capitalization 21
Dividend Policy 22
Selected Financial Data 23
Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
The International Telecommunications Industry 34
Business 38
Management 54
Certain Relationships and Related Party Transactions 61
Principal and Registering Shareholders 62
Description of Capital Stock 63
Shares Eligible for Future Sale 66
Legal Matters 70
Experts 70
Additional Information 70
Reports to Shareholders 70
Glossary of Terms 71
Index to Financial Statements 74
-----------
Until February 7, 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
-------
January 13, 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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Post Effective Amendment No. 1 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 8th
day of January, 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. 1 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
Luca M. Giussani Chief Executive Officer and Director January 8, 1999
/s/ JEFFREY R. CHASKIN
Jeffrey R. Chaskin President, Chief Operating Officer
and Director January 8, 1999
/s/ JOHANNES S. SEEFRIED
Johannes S. Seefried Chief Financial Officer and Director January 8, 1999
/s/ WILLIAM M. NEWPORT
William M. Newport Director January 7, 1999
/s/ KENNETH L. GARRETT
Kenneth L. Garrett Director January 11, 1999
<PAGE>
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.
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. 1 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
January 11, 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
1 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
January 8, 1999
<TABLE> <S> <C>
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0
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