SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER: 333-46197
URSUS TELECOM CORPORATION
(Exact name of registrant as specified in its charter)
Florida 65-0398306
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
440 Sawgrass Corporate Parkway, Suite 112, Sunrise, Florida 33325
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (954-846-7887)
N/A
(Former name, former address and
former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
As of February 14, 1999, the number of the registrant's Common Shares of $.01
par value outstanding was 6,600,000.
<PAGE>
URSUS TELECOM CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION: PAGE
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1998 3
Condensed Consolidated Statements of Income for the
Three and Nine Month Periods Ended December 31, 1997
and 1998 4
Condensed Consolidated Statements of Cash Flows for
the Nine Month Periods Ended December 31, 1997
and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 14
Item 2: Changes in Securities and Use of Proceeds 14
Item 6: Exhibits 14
Signatures
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
URSUS TELECOM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1998
-----------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,035,149 $3,519,626
Accounts receivable, net 4,183,750 4,568,865
Prepaid expenses 54,980 385,278
Advances and notes receivable--related parties 65,274 88,962
Deferred taxes 49,841 603,913
Other current assets 113,374 26,844
-----------------------------------
Total current assets 5,502,368 9,193,488
Equipment, net 1,258,074 3,439,846
Deposit on acquisition 377,141 214,299
Deferred costs of public offering 514,619 -
Intangibles, net - 8,931,966
Other assets, net 80,309 607,779
-----------------------------------
Total assets $7,732,511 $22,387,378
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $4,154,232 $4,769,500
Commissions payable 57,085 1,101,634
Current portion of capital lease obligations 48,835 239,997
Other current liabilities 149,970 428,816
------------------------------------
Total current liabilities 4,410,122 6,539,947
Long term portion of capital lease obligations 296,555 835,853
Other long-term obligations 77,614 169,077
Commitment and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized;
1,000 shares issued and outstanding 10 10
Common stock, $.01 par value; 20,000,000 shares authorized,
5,000,000 and 6,500,000 issued and outstanding at
March 31, 1998 and December 31, 1998, respectively 50,000 65,000
Additional paid-in capital 218,740 11,914,843
Accumulated other comprehensive income - foreign
currency translation adjustment (5,873) 9,455
Retained earnings 2,685,343 2,853,193
------------------------------------
Total shareholders' equity 2,948,220 14,842,501
------------------------------------
Total liabilities and shareholders' equity $7,732,511 $22,387,378
===================================
</TABLE>
<PAGE>
URSUS TELECOM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1997 1998 1997 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Retail $6,181,611 $7,580,036 $18,420,864 $19,277,901
Wholesale 1,633,051 3,458,423 2,608,249 5,064,998
--------------------------------------------------------------------
Total revenues 7,814,662 11,038,459 21,029,113 24,342,899
Cost of revenues:
Retail 3,425,493 4,358,522 11,376,834 11,752,914
Wholesale 1,593,498 2,683,628 2,411,922 3,914,616
--------------------------------------------------------------------
Total cost of revenues 5,018,991 7,042,150 13,788,756 15,667,530
--------------------------------------------------------------------
Gross profit 2,795,670 3,996,309 7,240,357 8,675,369
Operating expenses:
Commissions 1,077,130 1,004,052 3,202,016 2,803,169
Selling, general and administrative expenses 1,044,838 2,472,321 2,490,506 5,025,665
Depreciation and amortization 46,827 339,683 133,429 569,557
--------------------------------------------------------------------
Total operating expenses 2,168,795 3,816,056 5,825,951 8,398,391
--------------------------------------------------------------------
Operating income 626,875 180,253 1,414,406 276,978
Other income (expense):
Interest expense (4,845) (11,417) (19,691) (31,869)
Interest income 14,743 41,987 22,443 273,966
Gain on sale of equipment - (3,244) 10,584 (3,244)
--------------------------------------------------------------------
9,898 27,326 13,336 238,853
--------------------------------------------------------------------
Income before provision 636,773 207,579 1,427,742 515,830
for income taxes
Provision for income taxes 239,618 192,610 537,259 347,981
--------------------------------------------------------------------
Net income $ 397,155 $ 14,969 $ 890,483 $ 167,850
====================================================================
Pro forma net income per common
share-basic and dilutive (historical in 1998) $ .08 $ .00 $ .18 $ .03
====================================================================
Pro forma weighted average shares outstanding
(historical in 1998) 5,000,000 6,512,500 5,000,000 6,199,407
====================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
URSUS TELECOM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1997 1998
------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $890,483 $ 167,850
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 133,429 569,557
Allowance for doubtful accounts - 80,281
Deferred taxes 1,958 17,173
(Gain) loss on sale of equipment (10,584) 3,244
Changes in operating assets and liabilities excluding the
effects of the business acquisition:
Accounts receivable (1,733,215) 554,771
Prepaid expenses (2,198) 63,679
Other current assets 158,853 86,530
Accounts payable and accrued expenses 1,152,482 (2,878,205)
Commissions payable (10,195) 31,160
Other current liabilities 57,140 87,604
------------------------------------
Net cash provided by (used in) operating activities 638,153 (1,216,356)
INVESTING ACTIVITIES
Purchase of equipment (320,690) (527,116)
Decrease (increase) in advances to related parties 151,843 (23,688)
Cash used in the business acquisition, net of cash acquired - (7,484,753)
Increase in other assets (2,142) (447,520)
------------------------------------
Net cash used in investing activities (170,989) (8,483,077)
FINANCING ACTIVITIES
Deferred costs of public offering (207,531) -
Repayments of long-term debt (340,000) -
Collection of stock subscription receivable 18,750 -
Net proceeds from the sale of common stock - 12,225,722
Repayments on capital leases - (57,140)
------------------------------------
Net cash (used in) provided by financing activities (528,781) 12,168,582
Effect of foreign exchange rate
changes on cash and cash equivalents - 15,328
------------------------------------
Net (decrease) increase in cash and cash equivalents (61,617) 2,484,477
Cash and cash equivalents at beginning of period 740,765 1,035,149
------------------------------------
Cash and cash equivalents at end of period 679,148 3,519,626
====================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 22,224 $ 31,869
====================================
Cash paid for income taxes $ 408,236 $ 156,000
====================================
Property and equipment acquired under capital lease $ - $ 647,031
====================================
Trade-in allowance for used equipment $ 67,500 $ -
====================================
Receivable applied as a deposit on acquisition $ 321,059 $ (162,842)
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The financial statements included herein are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and Securities and Exchange Commission ("SEC") regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In management's
opinion, the financial statements reflect all adjustments (of a normal and
recurring nature) which are necessary to present fairly the financial position,
results of operations, stockholders' equity and cash flows for the interim
periods. These financial statements should be read in conjunction with the
audited consolidated financial statements for the year ended March 31, 1998, as
set forth in Form 10-K of Ursus Telecom Corporation (the "Company" or "UTCC").
The results for the nine month period ended December 31, 1998, are not
necessarily indicative of the results that may be expected for the year ending
March 31, 1999.
(2) ACQUISITION
On September 17, 1998 the Company purchased all the issued and outstanding
common stock of Access Authority Inc. ("Access") for $8 million in cash. Access
is a provider of international long distance telecommunication services,
including call reorigination, domestic toll-free access and various value-added
features to small and medium sized 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 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 remain.
(See Use of Proceeds)
Pro forma operating results for the nine months ended December 31, 1998 and the
year ended March 31, 1998, giving effect to the acquisition at the beginning of
the respective periods, is as follows:
Nine Months Year Ended
Ended March 31,
December 31, 1998 1998
----------------------- ---------------
Total revenue $ 41,361,900 $ 75,652,207
====================== ===============
Net income(loss) (482,710) 1,985,736
====================== ===============
Basic and diluted net
income(loss) per share of Common
Stock $ (0.08) $ 0.39
====================== ===============
<PAGE>
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 nine months ended September 30, 1998 with
the Company's results of operations for the nine months ended December 31, 1998.
The pro forma data is presented for informational purposes only and is not
necessarily indicative of future operations. The pro forma operating results
should be read in conjunction with the Company's Current Report on Form 8-K
filed on October 2, 1998 with the SEC and all subsequent filings amending such
Form 8-K.
(3) PRO FORMA NET INCOME PER COMMON SHARE
Pro forma basic and dilutive net income per share reflect pro forma weighted
average common shares outstanding for all periods presented assuming the stock
split and recapitalization, described in Note 5, occurred at the beginning of
the earliest year presented.
In December 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128,"EARNINGS PER SHARE." SFAS No. 128 replaced
the calculation of primary and fully diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods are presented to conform to this new
standard.
The following is a reconciliation of amounts used in the per share computations:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
December 31, December 31,
---------------------------------------------------------
1997 1998 1997 1998
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net income-numerator basic computation $ 397,155 $ 14,969 $ 890,483 $ 167,850
Effect of dilutive securities-None - - - -
----------------------------------------------------------
Net income as adjusted for assumed conversion-numerator
diluted computation $ 397,155 $ 14,969 $ 890,483 $ 167,850
==========================================================
Pro forma weighted average shares-denominator basic
Computation (historical in 1998) 5,000,000 6,500,000 5,000,000 6,195,256
Effect of dilutive securities-Stock options - 12,500 - 4,151
----------------------------------------------------------
Pro forma weighted average shares
as adjusted- denominator
(historical in 1998) 5,000,000 6,512,500 5,000,000 6,199,407
==========================================================
Pro forma net income per share (historical in 1998):
Basic $ 0.08 $ 0.00 $ 0.18 $ 0.03
==========================================================
Diluted $ 0.08 $ 0.00 $ 0.18 $ 0.03
==========================================================
</TABLE>
<PAGE>
(4) COMPREHENSIVE INCOME
The Company has adopted the provisions of SFAS 130, "REPORTING COMPREHENSIVE
INCOME" (SFAS 130) in 1998 which is required for fiscal years beginning after
December 15, 1997. The Statement requires the presentation of comprehensive
income and its components in the financial statements and the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid in capital in the equity section of the balance sheet. The
adoption of SFAS 130 has no impact on the Company's net income or stockholders'
equity. The only component of other comprehensive income reflected in the
Company's balance sheet is foreign currency translation adjustments which even
prior to adoption of SFAS 130 would have been separately reported in
stockholders' equity.
The following is a detail of comprehensive income:
Three Months Nine Months
Ended Ended
December 31, December 31,
----------------------------------------
1997 1998 1997 1998
----------------------------------------
Net income $397,155 $ 14,969 $ 890,483 $167,850
Other comprehensive income (loss)
net of tax
Foreign currency translation - 447 - 15,328
-----------------------------------------
Comprehensive income $397,155 $ 15,416 $ 890,483 $183,178
==========================================
(5) SIGNIFICANT EVENTS
Effective May 18, 1998, the Company sold 1,500,000 shares of its common stock in
an initial public offering (the "Offering"). Net proceeds of the Offering, after
deducting underwriting discounts, commissions and professional fees amounted to
approximately $11.6 million.
On February 6, 1998, the Board of Directors and shareholders approved (i) the
filing of amended and restated Articles of Incorporation that provided for,
among other things, the authorization of 20,000,000 shares of Common Stock and
1,000,000 shares of Preferred Stock, (ii) a 923.08 for 1 stock split of the
issued and outstanding Class C Common Stock, (iii) the reclassification and
split of every four shares of outstanding Class A and Class B common stock into
3,692.32 shares of Common Stock and 1 share of preferred stock, (iv) an option
plan reserving up to 1,000,000 shares of Common Stock, and (v) the granting of
150,000 warrants for the purchase of Common Stock to the Company's underwriters.
The stock split and reclassification became effective on February 18, 1998. The
issuance of the warrants and stock option plan became effective May 18, 1998
(the effective date of the Company's Offering).
On October 25, 1998 the Board of Directors repriced certain previously issued
stock options aggregating 160,000 shares to the market value on the date of the
repricing or an exercise price of $4.125 per share. Of the 160,000 options,
110,000 represented options granted to employees and 50,000 options granted to
one executive officer.
(6) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has disputes with carriers over
billing discrepancies. Although management has historically been successful in
resolving these disputes, there can be no assurance that ongoing disputes will
be resolved as anticipated. In the event that an ongoing dispute results in an
additional liability, the Company believes that such amounts will not have a
material adverse affect on the Company's financial condition or results of
operations.
(7) RECLASSIFICATIONS
Certain amounts appearing in the financial statements have been reclassified to
conform to the current periods presentation.
<PAGE>
(8) DEFERRED TAXES
Deferred taxes consists of the following:
MARCH 31, DECEMBER 31,
1998 1998
----------------------------------
Deferred tax assets:
Allowance for Doubtful Accounts $24,822 $195,412
Accrued expenses 25,019 352,132
Amortization 3,393 3,948
Deferred rent 10,649 10,649
NOL Carryforward - 33,721
Tax Credits - 22,093
----------------------------------
Total deferred tax assets 63,883(1) 617,955(1)
Deferred tax liabilities:
Depreciation 65,161 156,954
Prepaid bonus 11,723 11,723
Other 730 175
----------------------------------
Total deferred tax liabilities 77,614(2) 168,852(2)
----------------------------------
Total net deferred tax liabilities $13,731 $449,103
==================================
(1) Of these amounts $14,042 has been classified as long-term and is included in
other assets as of March 31, 1998 and December 31, 1998.
(2) Amounts are included in other long-term obligations
(9) SUBSEQUENT EVENTS
ACQUISITION
The Company has agreed to acquire its agent in Uruguay. Consideration for the
agency will be $132,988. The Company has converted a $72,988 accounts receivable
balance from this agent and paid the agent $30,000 as a deposit to be applied to
the purchase price. Upon the closing of the agreement, which is expected to be
during February of 1999, the acquisition will be accounted for using the
purchase method of accounting, as such, the Agency's results subsequent to the
closing will be included in the consolidated financial statements of the
Company.
On January 22, 1999, the Company acquired the operations of Starcom S.A. an
Argentine Corporation and Rolium S.A. a Panamanian Corporation. In accordance
with the Stock Purchase Agreement the aggregate consideration for the two
entities was $183,000 and 100,000 shares of unregistered common stock (50,000
shares have been placed in escrow and will be released in six months if the
seller adheres to the covenants, indemnities and obligations of the Agreement).
The fair market value of the Company's Common stock was valued at $425,000 at
the date of acquisition. These agreements contain provisions which call for
additional consideration of $267,000 to be paid in equal installment of $133,500
on January 22, 2000 and 2001. In addition, $100,000 was placed in escrow to pay
certain liabilities of Starcom S.A. which results in total consideration of
$975,000. The acquisition will be accounted for using the purchase method of
accounting, as such, the result of operations subsequent to the closing will be
included in the consolidated financial statements of the Company. As of the date
of this filing, information needed to determine the allocation of purchase price
to the assets acquired is not available. The aggregate purchase price of this
acquisition will be allocated based on estimated fair value of the assets
acquired with any excess allocated to intangible assets to be written off over
the estimated useful life.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward- looking
statements are statements other than historical information or statements of
current condition. Some forward looking statements may be identified by use of
such terms as "believes", "anticipates", "intends", or "expects". These forward-
looking statements relate to the plans, objectives and expectations of the
Company for future operations. In light of the risks and uncertainties inherent
in all such projected operational matters, the inclusion of forward-looking
statements in this report should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved or that any of the Company's operating expectations will be realized.
The Company's revenues and results of operations are difficult to forecast and
could differ materially from those projected in the forward-looking statements
contained in this report as a result of numerous factors including among others,
the following: (i) changes in customer rates per minute; (ii) foreign currency
fluctuations; (iii) termination of certain service agreements or inability to
enter into additional service agreements; (iv) inaccuracies in the Company's
forecast of traffic growth; (v) changes in or developments under domestic or
foreign laws, regulations, licensing requirements or telecommunications
standards; (vi) foreign political or economic instability; (vii) changes in the
availability of transmission facilities; (viii) loss of the services of key
officers; (ix) loss of a customer which provides significant revenues to the
Company; (x) highly competitive market conditions in the industry; (xi)
obsolescence of and changes in telecommunications switching and access
equipment; and (xii) concentration of credit risk. The foregoing review of the
important factors should not be considered as exhaustive; the Company undertakes
no obligation to release publicly the results of any future revisions it may
make to forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE
RELATED NOTES AND OTHER INFORMATION REGARDING THE COMPANY INCLUDED ELSEWHERE IN
THIS FORM 10-Q.
OVERVIEW
The Company is a provider of international telecommunications services and
offers a broad range of discounted international and enhanced telecommunication
services, including U.S. originated long distance service and direct-dial
international service, typically to small and medium-sized businesses and
travelers. The Company has expanded its geographic coverage in Europe, Japan,
Central and South America through its acquisition of Access. The Company is
capitalizing on the increasing demand for high-quality international
telecommunications services resulting from the globalization of the world's
economies and the worldwide trend toward telecommunications deregulation.
The Company's primary service is call reorigination, however, the Company has
increasingly been migrating calls to direct access. The Company also provides
service to other carriers and resellers. The Company's retail customer base,
which includes corporations and individuals, is primarily located in South
Africa, Latin America, the Middle East (Lebanon and Egypt), Russia, France,
Germany, Japan and New Zealand. The Company operates a switched-based digital
telecommunications network. The Company has domestic switching facilities in
Tampa and Sunrise, Florida and international switching facilities in Paris,
Moscow, Frankfurt and Tokyo.
<PAGE>
OTHER OPERATING DATA
The following information for the three and nine months ended December 31, 1997
and 1998 is provided for informational purposes and should be read in
conjunction with the unaudited Consolidated Financial Statements and Notes
provided herein and the Consolidated Financial Statements presented with the
Company's annual Form 10K for the year ended March 31, 1998.
The following table sets forth income statement data as a percentage of revenues
for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months ended
December 31, December 31,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 64.2 63.8 65.6 64.4
Gross profit 35.8 36.2 34.4 35.6
Operating expenses:
Commission 13.8 9.1 15.2 11.5
Selling, general and administrative 13.4 22.4 11.9 20.7
Depreciation and amortization 0.6 3.1 0.6 2.3
Total operating expenses 27.8 34.6 27.7 34.5
Operating income 8.0 1.6 6.7 1.1
Other (expense) income 0.2 0.3 0.1 1.0
Income before income taxes 8.2 1.9 6.8 2.1
Net income 5.1 0.1 4.2 0.7
EBITDA(1) 8.6 4.7 7.4 3.5
(1) As used herein "EBITDA" consists of earnings before interest, income taxes,
depreciation and amortization. EBITDA is a measure commonly used in the
telecommunications industry to analyze companies on the basis of operating
performance. EBITDA is not a measure of financial performance under generally
accepted accounting principles, is not necessarily comparable to similarly
titled measures of other companies and should not be considered as an
alternative to net income as a measure of performance nor as an alternative to
cash flow as a measure of liquidity.
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AS COMPARED
TO THE THREE MONTHS ENDED DECEMBER 31, 1997:
REVENUES. Revenues increased $3.2 million (41.3%) from $7.8 million for the
three months ended December 31, 1997 to $11.0 million for the three months ended
December 31, 1998. The revenue increase attributable to the Access acquisition
amounted to $6.0 million for the three months ended December 31, 1998. The
consolidated company had a 16.9 million minute increase during this period over
the same period last year. Access contributed 19.2 million of the total minutes
to the consolidated Company during the quarter. Revenue per minute declined from
$0.80 per minute to $0.41 per minute over this period resulting from the lower
per minute rates generated by Access. The decrease in revenue per minute is
consistent with the Company's entry into the more mature markets of Germany and
Japan and with an increase of 112% in wholesale sales, which traditionally
generate lower revenue per minute.
COST OF REVENUES. Cost of revenues increased $2.0 million (40.3%), from $5.0
million for the three months ended December 31, 1997 to $7.0 million for the
three months ended December 31, 1998. However, cost of revenues as a percentage
of sales decreased from 64.2% to 63.8%. This decrease in the Company's costs as
a percentage of revenues primarily reflects declining carrier cost per minute as
the result of aggressive negotiation, volume discounts, as well as the use of
advanced least cost routing techniques.
<PAGE>
GROSS PROFIT. Gross profit increased $1.2 million (42.9%) from $2.8 million for
the three months ended December 31, 1997 to $4.0 million for the three months
ended December 31, 1998. As a percentage of revenue gross profit increased 0.4%
from 35.8% during the three months ended December 31, 1997 to 36.2% for the
three months ended December 31, 1998. Gross profit increased as a result of a
reduction in carrier costs as a percentage of revenue, despite higher wholesale
sales, which traditionally have lower margins. The acquisition of Access has
tripled the number of minutes the Company purchases thereby increasing
volume-based carrier discounts. For the three months ended December 31, 1998 as
compared to the three months ended December 31, 1997 average cost per minute has
decreased 50% or an average of $0.26 per minute.
OPERATING EXPENSES. Operating expenses increased $1.6 million (34.6%) from $2.2
million for the three months ended December 31, 1997 to $3.8 million for the
three months ended December 31, 1998. The increase was due primarily to the
acquisition of Access which added $1.4 million in operating expenses. In
addition, bonuses paid under contract to executive officers and increased bad
debt expenses contributed to the increase. As a percentage of revenues, selling,
general and administrative expenses increased 9.0% from 13.4% to 22.4%. 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 further integration of the operations of
Access and other potential future acquisitions.
Depreciation and amortization expense increased approximately $293,000 (625.4%)
from approximately $47,000 for the three months ended December 31, 1997 to
approximately $340,000 for the three months ended December 31, 1998 as a result
of expansion of the Company's infrastructure in connection with its acquisition
program. In addition, the acquisition of Access increased the amount of
depreciable fixed assets and resulted in approximately $134,000 in amortization
expense on the intangibles.
OPERATING INCOME. Operating income decreased from $0.6 million for the three
months ended December 31, 1997 to approximately $0.2 million for the three
months ended December 31, 1998 primarily as a result of a 136.6% increase in
selling, general and administrative expenses and a 625.4% increase in
depreciation.
NET INCOME. As a result of all of the foregoing factors, particularly a 75.9%
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 $382,000 from approximately
$397,000 for the three months ended December 31, 1997 to approximately $15,000
for the three months ended December 31, 1998. Net income has also been impacted
by start up losses from the Company's subsidiary in France, which amounted to
$140,000 for the three months ended December 31, 1998. Management believes that
the Company's strategy to increase market share through acquisition and
aggressive pricing will result in lower costs per minute and therefore will lead
to greater net income in the future.
EBITDA. EBITDA decreased approximately $154,000 (22.8%) from 674,000 for the
three months ended December 31, 1997, to approximately $520,000 for the three
months ended December 31, 1998, as a result of the foregoing factors.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AS COMPARED TO
THE NINE MONTHS ENDED DECEMBER 31, 1997:
REVENUES. Revenues increased $3.3 million (15.8%) from $21.0 million for the
nine months ended December 31,1997 to $24.3 for the nine months ended December
31, 1998. The revenue increase attributable to the Access acquisition amounted
to $7.0 for the nine months ended December 31, 1998. The consolidated company
had a 22.0 million minute increase over the same period last year. Access
contributed 21.9 million minutes to the consolidated Company since the
acquisition on September 17, 1998. Revenue per minute declined from $0.92 per
minute to $0.54 per minute over this period resulting from the lower per minute
rates generated by Access. The decrease in revenue per minute is consistent with
the Companies entry into the more mature markets of Germany and Japan and with
an increase of 94.2% in wholesale sales, which traditionally generate lower
revenues per minute.
COST OF REVENUES. Cost of revenues increased $1.9 million (13.6%), from $13.8
million for the nine months ended December 31, 1997 to $15.7 million for the
nine months ended December 31, 1998. Cost of revenues as a percentage of sales
decreased from 65.6% to 64.4%, This decrease in the Company's costs as a
percentage of revenues primarily reflects declining carrier cost per minute as
the result of aggressive negotiation, volume discounts, as well as the use of
advanced least cost routing techniques.
GROSS PROFIT. Gross profit increased $1.4 million (19.8%) from $7.2 million for
the nine months ended December 31, 1997 to $8.7 million for the nine months
ended December 31, 1998. As a percentage of revenue, gross profit increased 1.2%
from 34.4% during the nine months ended December 31, 1997 to 35.6% for the nine
months ended December 31, 1998. Gross profit increased as a result of a
reduction in carrier costs as a percentage of revenue, despite higher wholesale
sales, which traditionally have lower margins. The acquisition of Access has
tripled the number of minutes the Company purchases thereby increasing the
likelihood of further volume based carrier discounts. For the nine months ended
December 31, 1998 as compared to the nine months ended December 31, 1997, the
average cost per minute has decreased 43% or an average of $0.26 per minute.
OPERATING EXPENSES. Operating expenses increased $2.6 million (44.2%) from $5.8
million for the nine months ended December 31, 1997 to $8.4 million for the nine
months ended December 31, 1998. The increase was due primarily to the
acquisition of Access which added $1.6 million in operating expenses. In
addition, the increase was due to selling, general and administrative expenses
consisting primarily of salaries and benefits for executives, additional
marketing and accounting personnel and increased bad debt expenses. As a
percentage of revenues, selling, general and administrative expenses increased
8.8% from 11.8% to 20.6%. 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 further integration
of the operations of Access and other potential future acquisitions.
Depreciation and amortization expense increased approximately $463,000 (326.9%)
from approximately $133,000 for the nine months ended December 31, 1997 to
approximately $570,000 for the nine months ended December 31, 1998 as a result
of the expansion of 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 $158,000
as compared to no expense for the same period last year.
OPERATING INCOME. Operating income decreased from $1.1 million for the nine
months ended December 31, 1997 to approximately $0.3 million for the nine months
ended December 31, 1998 primarily as a result of a 101.8% increase in selling,
general and administrative expenses and a 326.9% increase in depreciation.
OTHER INCOME (EXPENSE). Other income increased approximately $226,000 from
approximately $13,000 for the nine months ended December 31, 1997 to
approximately $239,000 for the nine months ended December 31, 1998, primarily
because of investment income derived from the invested proceeds of the Offering.
NET INCOME. As a result of all of the foregoing factors, particularly a 44.2%
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 $0.7 million from approximately
$0.9 million for the nine months ended December 31, 1997 to approximately $0.2
million for the nine months ended December 31, 1998. Net income has also been
impacted by start-up losses from the Company's subsidiary in France, which
amounted to $252,000 for the nine months ended December 31, 1998. Management
believes that the Company's strategy to increase market share through
acquisition and aggressive pricing combined with the increased volume in traffic
will result in lower costs per minute and therefore will lead to greater net
income in the near future.
EBITDA. EBITDA decreased from approximately $1.5 million for the nine months
ended December 31, 1997, to approximately $0.8 million for the nine months ended
December 31, 1998, as a result of the foregoing factors.
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 December 18, 1998, the Company entered into an equipment lease facility of up
to $20 million, which provides for leases of 4-5 years at interest rates of 8 to
8.5%. The interest rates are fixed at the inception of each lease, with
subsequent leases based on the change in five-year treasury securities. The
lease facility will be used to fund equipment purchases in connection with the
Company's growth strategy. As of December 31, 1998, the Company had not utilized
this lease facility. The Company has purchased two switches at an approximate
cost of $647,000, which has not been paid for and that will be financed by this
facility.
Net cash provided by operating activities was $0.6 million for the nine months
ended December 31, 1997 and net cash used in operating activities was $1.2
million for the nine months ended December 31, 1998. The net cash used in
operating activities mainly reflects net earnings being offset by an increase in
accounts receivable from customers resulting primarily from longer payment
cycles from the Company's agents relative to the Company's accounts payable to
carriers.
Net cash used in investing activities was approximately $171,000 for the nine
months ended December 31, 1997 and approximately $8.5 million for the nine
months ended December 31, 1998 reflecting the acquisition of Access and an
increase in equipment purchases.
Net cash used in financing activities was approximately $529,000 for the nine
months ended December 31, 1997 as compared to net cash provided by financing
activities of $12.2 million for the nine months ended December 31, 1998. The
increase was primarily the result of the Company's initial public offering
("Offering"), which after the expenses of such Offering resulted in an increase
in cash of approximately $11.6 million.
The Company expects that the remaining net proceeds from the Offering, together
with internally generated funds, will provide sufficient funds for the Company
to expand its business as planned and to fund anticipated growth for the next 12
months. However, the amount of the Company's future capital requirements will
depend upon many factors, including performance of the Company's business, the
rate and manner in which it expands, staffing levels and customer growth, as
well as other factors not within the Company's control, including competitive
conditions and regulatory or other government actions. If the Company's plans or
assumptions change or prove to be inaccurate or the net proceeds of the
Offering, together with internally generated funds or other financing, prove to
be insufficient to fund the Company's growth and operations, then some or all of
the Company's development and expansion plans could be delayed or abandoned, or
the Company may be required to seek additional funds earlier than anticipated.
In order to provide flexibility for potential acquisition and network expansion
opportunities, the Company may seek in the near future to enter into a financing
arrangement. Other future sources of capital for the Company could include
public and private debt, including a high yield debt offering, equity financing
and capital lease arrangements. There can be no assurance that any such sources
of financing would be available to the Company in the future or, if available,
that they could be obtained on terms acceptable to the Company. While such a
financing may provide the Company additional capital resources that may be used
to implement its business plan, the incurrence of indebtedness could impose
risks, covenants and restrictions on the Company that may affect the Company in
a number of ways, including the following: (i) a significant portion of the
Company's cash flow from operations may be required for the repayment of
interest and principal payments arising from the financing, with such cash flow
not being available for other purposes; (ii) such a financing could impose
covenants and restrictions on the Company that may limit its flexibility in
planning for, or reacting to, changes in its business or that could restrict its
ability to redeem stock, incur additional indebtedness, sell assets and
consummate mergers, consolidations, investments and acquisitions; and (iii) the
Company's degree of indebtedness and leverage may render it more vulnerable to a
downturn in its business or in the telecommunications industry or the economy
generally.
<PAGE>
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 there 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 year 2000
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 manufacturer's that their
hardware and software are year 2000 compliant.
Management has determined that costs to correct any problems encountered with
the year 2000 are expected 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 issue is not known. As a result the impact on
the Company's business, results of operations and financial condition cannot be
assessed with certainty.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved as plaintiff and defendant in a legal action, as
described below, which is incident to its business. Management does not
believe that this action will have a material impact on the financial
condition of the Company.
In February 1998, the Company filed an action against Edwin Alley, d/b/a
Phone Anywhere in the United States District Court for the Middle District
of Florida claiming that Edwin Alley, d/b/a Phone Anywhere ("Alley"), a
former sales agent for the Company, breached its agency agreement with the
Company, wrongfully diverted customers and business to the Company's
competitors, misappropriated the Company's trade secrets, breached
fiduciary and other duties owed to the Company and engaged in unfair
competition. The Company seeks compensatory damages, injunctive relief and
a declaratory judgment. Alley counterclaimed for breach of contract and
quantum meruit, seeking damages and injunctive relief to enjoin the Company
from soliciting or providing services to customers located by him.
Discovery is proceeding on the Company's claims. Alley has moved for
summary judgment on jurisdictional grounds and the Company is responding to
the motion.
Subsequent to the filing of the Company's federal action, Alley commenced
an action against the Company in the Circuit Court of the Sixth Judicial
Circuit, Pinellas County, Florida. In that action, Alley asserts
essentially the same claims and seeks the same relief as in his federal
counterclaim. The Company 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. The
Pinellas County proceeding has been stayed pending disposition of the
federal action.
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
Effective Date of the Company's Registration Statement: May 12, 1998
Commission File Number: 333-46197
Date the Offering Commenced: May 18, 1998
Name of Managing Underwriter: Joseph Charles & Associates, Inc.
Class of Securities Registered: Common Stock
Amount registered: 1,500,000 shares of Common Stock(1)
Amount sold: 1,500,000 shares of Common Stock
Aggregate price of offering amount registered: $14,250,000
Aggregate offering price of amount sold: $14,250,000
Expenses: The expenses incurred
for the Company's account in
connection with the Offering are
as follows:
Underwriting Discounts and $1,104,375
Commissions
Non-accountable expense 427,500
allowance
Professional fees 556,350
Consulting fees 72,000
Listing, printing and related 298,800
fees
Other Expenses 152,400
------------
Total Expenses $ 2,611,425
============
None of the expenses of the Offering consisted of direct or indirect payments to
(i) directors, officers, general partners or affiliates of the Company, (ii)
persons owning 10 percent or more of any class of equity securities of the
Company, or (iii) affiliates of the Company.
Net proceeds to the Company from the Offering, after deducting the total
expenses described above, were approximately $11.6 million. In connection with
the acquisition of Access, the Company has utilized $8.15 million, representing
the purchase price plus the costs of the transaction. In addition, the Company
has utilized approximately $0.7 million for working capital purposes and as
such, approximately $2.75 million of the net proceeds of such Offering remain as
of December 31, 1998.
- ----------------
(1) Excludes 200,000 shares of Common Stock registered on behalf of certain
shareholders of the Company. The Company will not receive any proceeds upon the
sale of these securities.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(i) Exhibit 10 - Stock Purchase Agreement by and among Access
Authority Inc.("Access") the shareholders of Access and Ursus Telecom
Corporation dated as of September 15, 1998 (incorporated by reference
from the Company's Current Report on Form 8-K filed on
October 2, 1998).
(ii) Exhibit 27.1- Financial Data Schedule
(b) Reports on Form 8-K
(i) Current Report on Form 8-K filed on October 2, 1998 with respect to
the consummation of the acquisition of Access.
(ii) Current Report on Form 8-K/a filed on December 1, 1998 with respect to
providing financial information in connection with the acquisition of
Access.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
URSUS TELECOM CORPORATION
By: /S/ JOHANNES SEEFRIED
Johannes S. Seefried
Chief Financial Officer
and authorized officer of registrant
Dated: FEBRUARY 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Ursus
Telecom Corporation's financial statements for the nine months ended December
31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> SEP-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,519,626
<SECURITIES> 0
<RECEIVABLES> 5,171,618
<ALLOWANCES> 602,753
<INVENTORY> 0
<CURRENT-ASSETS> 9,193,488
<PP&E> 5,111,639
<DEPRECIATION> 1,671,793
<TOTAL-ASSETS> 22,387,378
<CURRENT-LIABILITIES> 6,539,947
<BONDS> 0
0
10
<COMMON> 65,000
<OTHER-SE> 14,777,491
<TOTAL-LIABILITY-AND-EQUITY> 22,387,378
<SALES> 0
<TOTAL-REVENUES> 24,342,899
<CGS> 0
<TOTAL-COSTS> 15,667,530
<OTHER-EXPENSES> 8,398,391
<LOSS-PROVISION> 262,662
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 515,831
<INCOME-TAX> 347,981
<INCOME-CONTINUING> 167,850
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<NET-INCOME> 167,850
<EPS-PRIMARY> .03
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