SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER: 333-46197
Ursus Telecom Corporation
(Exact name of registrant as specified in its charter)
Florida 65-0398306
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
440 Sawgrass Corporate Parkway, Suite 112, Sunrise, Florida 33325
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (954-846-7887)
N/A
(Former name, former address and
former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
As of October 31, 1999, the number of the registrant's Common Shares of $.01 par
value outstanding was 6,632,900.
<PAGE>
URSUS TELECOM CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements(Unaudited)...................................1
Condensed Consolidated Statements of Operations for the
Three and Six Month Periods Ended September 30, 1998 and 1999..........2
Condensed Consolidated Statements of Cash Flows for the
Six Month Periods Ended September 30, 1998 and 1999....................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.................................................15
Item 2. Changes in Securities and Use of Proceeds.........................15
Item 6. Exhibits and Reports on Form 8-K..................................16
Signatures................................................................16
<PAGE>
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, SEPTEMBER 30,
ASSETS 1999 1999
--------------------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $2,406,643 $1,960,156
Accounts receivable, net 4,960,510 5,391,313
Prepaid expenses 297,828 293,137
Advances and notes receivable--related parties 10,843 187,303
Taxes receivable - 547,835
Deferred taxes 401,173 436,084
Other current assets 563,615 16,676
--------------------------------
Total current assets 8,640,612 8,832,504
Equipment, net 3,677,059 4,276,496
Intangible assets, net 10,180,152 9,872,121
Investment in unconsolidated subsidiary 207,754 66,871
Other assets, net 337,005 639,025
================================
Total assets $23,042,582 $23,687,017
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $4,787,040 $5,328,422
Commissions payable 1,066,232 920,307
Current portion of capital lease obligations 324,166 397,122
Current portion of notes payable - 190,209
Other current liabilities 328,493 275,475
--------------------------------
Total current liabilities 6,505,931 7,111,535
Long term portion of capital lease obligations 789,430 955,880
Long term portion of notes payable - 285,157
Deferred taxes 329,413 471,934
Other long-term obligations 133,500 133,500
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;
6,600,000 and 6,632,900 issued and outstanding at March 31, 1999
and September 30, 1999, respectively 66,000 66,329
Additional paid-in capital 12,338,843 12,508,762
Retained earnings 2,879,455 2,153,910
-----------------------------------
Total shareholders' equity 15,284,308 14,729,011
===================================
Total liabilities and shareholders' equity $23,042,582 $23,687,017
===================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
URSUS TELECOM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $6,780,942 $9,129,730 $13,248,378 $18,560,177
Cost of revenues 4,342,394 5,892,611 8,570,263 12,215,283
----------------------------------------------------------------
Gross profit 2,438,548 3,237,119 4,678,115 6,344,894
Operating expenses:
Commissions 868,447 679,897 1,799,120 1,444,890
Selling, general and administrative expenses 1,421,087 2,642,215 2,553,369 5,067,039
Depreciation and amortization 140,615 405,509 228,904 804,342
----------------------------------------------------------------
Total operating expenses 2,430,149 3,727,621 4,581,393 7,316,271
----------------------------------------------------------------
Operating income (loss) 8,399 (490,502) 96,722 (971,377)
Other income (expense):
Interest expense (10,102) (50,962) (20,452) (85,790)
Interest income 143,166 24,608 231,979 48,985
Write down of investment - - - (75,390)
Gain on sale of equipment - 1,026 - 3,426
-----------------------------------------------------------------
133,064 (25,328) 211,527 (108,769)
-----------------------------------------------------------------
Income before provision (benefit)
for income taxes 141,463 (515,830) 308,249 (1,080,146)
Provision (benefit) for income taxes 79,689 (120,136) 155,370 (354,599)
=================================================================
Net income (loss) $ 61,774 $ (395,694) $ 152,879 $ (725,547)
=================================================================
Net income per common
share-basic and dilutive $ .01 $ ( .05) $ .03 $ ( .10)
=================================================================
Weighted average shares outstanding 6,500,000 7,404,000 6,110,497 6,977,454
=================================================================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
URSUS TELECOM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
1998 1999
-------------------------------------
Operating activities
<S> <C> <C>
Net income (loss) $ 152,879 $ (725,547)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 228,904 804,342
Allowance for doubtful accounts 150,863 243,291
Deferred taxes - 107,610
Gain on sale of equipment - (3,426)
Loss on the sale of investment 75,390
Changes in operating assets and liabilities excluding the
effects of the business acquisition:
Accounts receivable 547,991 (749,443)
Prepaid expenses (126,891) 110,227
Other current assets (22,285) 584,544
Income tax receivable - (467,210)
Accounts payable and accrued expenses (1,529,562) 616,730
Commissions payable 29,472 (145,925)
Other current liabilities (18,152) (105,753)
-------------------------------------
Net cash provided by (used in) operating activities (586,781) 344,830
Investing activities
Purchase of equipment (303,022) (361,754)
Increase in advances to related parties (164,658) (176,460)
Cash used in the business acquisition, net of cash acquired (7,484,753) -
Increase in other assets (84,841) (162,025)
-------------------------------------
Net cash used in investing activities (8,037,274) (700,239)
Financing activities
Repayments of long-term debt - (72,852)
Net proceeds from the sale of common stock 12,231,193 170,248
Repayments on capital leases (27,184) (188,474)
-------------------------------------
Net cash provided by (used in) financing activities 12,204,009 (91,078)
Effect of foreign exchange rate changes on
cash and cash equivalents 14,881 -
-------------------------------------
Net increase (decrease) in cash and cash equivalents 3,594,835 (446,487)
Cash and cash equivalents at beginning of period 1,035,149 2,406,643
=====================================
Cash and cash equivalents at end of period $ 4,629,984 $ 1,960,156
=====================================
Supplemental cash flow information
Cash paid for interest $ 20,452 $ 85,790
=====================================
Cash paid for income taxes $ 156,000 $ -
=====================================
Assets acquired under capital leases and other financing $ - $ 942,337
=====================================
Receivable applied as a deposit on acquisition $ 72,988 $ -
=====================================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The financial statements included herein are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and Securities Exchange Commission ("SEC") regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In management's
opinion, the financial statements reflect all adjustments (of a normal and
recurring nature) which are necessary to present fairly the financial position,
results of operations, stockholders' equity and cash flows for the interim
periods. These financial statements should be read in conjunction with the
audited consolidated financial statements for the year ended March 31, 1999, as
set forth in Form 10-K of Ursus Telecom Corporation (the "Company"), ("Ursus")
or ("UTCC"). The results for the three and six month periods ended September 30,
1999, are not necessarily indicative of the results that may be expected for the
year ending March 31, 2000.
The condensed consolidated balance sheet at March 31, 1999 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
(2) 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, we believe that such amounts will not have a material
adverse affect on the Company's financial condition or results of operations.
On August 19, 1999, we entered into a network agreement with Global Crossing USA
Inc. pursuant to which we will purchase a minimum of $30 million of capacity in
Global Crossing's fiber optic cable systems over a period of three years.
(3) NET INCOME (LOSS) PER COMMON SHARE
Basic and dilutive net income (loss) per share reflect weighted average common
shares outstanding for all periods presented.
In December 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, "EARNINGS PER SHARE." SFAS No. 128 replaced
the calculation of primary and fully diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods are presented to conform to the new
requirements.
<PAGE>
Following is a reconciliation of amounts used in the per share computations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER
SEPTEMBER 30, 30,
------------------------------------------------------------
1998 1999 1998 1999
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss)-numerator basic computation $ 61,774 $ (395,694) $ 152,879 $ (725,547)
Effect of dilutive securities-None - - - -
============================================================
Net income (loss) as adjusted for assumed conversion-numerator
diluted computation $ 61,774 $ (395,694) $152,879 $(725,547)
============================================================
Weighted average shares-denominator basic computation 6,500,000 7,404,000 6,110,497 6,977,454
Effect of dilutive securities-Stock options - - - -
------------------------------------------------------------
Weighted average shares as adjusted-denominator 6,500,000 7,404,000 6,110,497 6,977,454
============================================================
Net income (loss) per share:
Basic $ 0.01 $ (0.05) $ 0.03 $ (0.10)
============================================================
Diluted $ 0.01 $ (0.05) $ 0.03 $ ( 0.10)
============================================================
</TABLE>
(4) SEGMENT DISCLOSURES
The Company operates in one single industry segment, the international long
distance telecommunications industry. For the three and six months ended
September 30, 1998 and 1999, substantially all of the Company's revenues were
derived from traffic transmitted through its primary switch facility located in
Sunrise, Florida.
(5) COMPREHENSIVE INCOME (LOSS)
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 results of operations or
stockholders' equity. The only component of other comprehensive income (loss)
reflected in the Company's balance sheet is foreign currency translation
adjustments.
The following is a summary of the components of comprehensive income (loss):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------
1998 1999 1998 1999
---------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 61,774 $ (395,694) $ 152,879 $ (725,547)
Other comprehensive income (loss) net of tax
foreign currency translation 11,772 - 14,881 -
---------------------------------------------------------
Comprehensive income (loss) $ 73,546 $ (395,694) $167,760 $ (725,547)
=========================================================
</TABLE>
(6) RECLASSIFICATIONS
Certain previous year amounts have been reclassified to conform to the current
year presentation.
(7) NOTES PAYABLE
The Company has entered into several vendor financing arrangements to purchase
equipment and software. The aggregate amount financed by the Company amounted to
$548,218. Such amounts have been financed over a period of one to three years
with interest rates of 7.75% to 8.75%. At September 30, 1999, the balance due
under these agreements was $475,366 with $190,209 representing the current
portion. Pursuant to these agreements, interest and principal is payable monthly
and the notes are secured by the equipment.
(8) EQUITY
On April 30, 1999, the Board of Directors granted 150,000 stock purchase
warrants (the "Warrants). Pursuant to agreements with the Company, Joseph
Charles and Associates was granted Warrants to purchase 50,000 shares of common
stock as a retainer to obtain acquisition financing and Continental Capital and
Equity Corporation ("Continental") was granted Warrants to purchase 100,000
shares of common stock in return for providing public relation expertise to
Ursus. The Warrants granted to Joseph Charles and Associates expire on July 1,
2004 and have an exercise price of $5.00 per share. The Warrants granted to
Continental expire on October 14, 2000 and have various exercise prices ranging
from $6.00 to $10.00 per share. The Company uses the Black-Scholes option
pricing model to determine the estimated fair value of the Warrants granted. The
estimated fair value of the Warrants granted during the six months ended
September 30, 1999 was approximately $29,000 and is included in selling, general
and administrative expenses on the accompanying statement of operations.
At September 30, 1999, the Company had a total of 300,000 Warrants outstanding
with a weighted average exercise price of $11.27 per share as follows:
Warrants Exercise Price Expiration Date
------------------ ----------------- ---------------
150,000 $15.20 May 18, 2003
50,000 $5.00 July 1, 2004
20,000 $6.00 See above
20,000 $8.00 See above
60,000 $10.00 See above
==================
300,000
==================
(9) WRITE DOWN OF INVESTMENT IN URSUS TELECOM FRANCE
On July 29, 1999, the Company's subsidiary Ursus Telecom France signed a letter
of intent to sell the joint venture for approximately 2.6 million French Francs
or approximately $425,000. The final selling price is subject to due diligence
by the buyer. The sale will result in an estimated loss of approximately
$75,000. Accordingly, a $75,000 write down of the Company's investment has been
included in the September 30, 1999 statement of operations. The Company also has
agreed to buy a switch from the joint venture, which has an estimated fair
market value of $120,000 in exchange for amounts owed to the Company from the
joint venture. As of October 31, 1999 the joint venture owed the Comany
approximately $135,000.
(10) LEGAL PROCEEDINGS
Access Authority Inc. ("Access"), a wholly owned subsidiary of the company
acquired in 1998, is involved as plaintiff and defendant in a legal action, as
described below, which is incident to its business. Our management does not
believe that this action will have a material impact on our financial condition.
In February 1998, Access filed an action against Edwin Alley, d/b/a Phone
Anywhere ("Alley") in the United States District Court for the Middle District
of Florida claiming that Alley, a former sales agent for Access, breached his
agency agreement with Access, wrongfully diverted customers and business to
Access's competitors, misappropriated Access's trade secrets, breached fiduciary
and other duties owed to Access and engaged in unfair competition. Access seeks
compensatory damages, injunctive relief and a declaratory judgment. Alley
counter-claimed 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 us or any other person that the objectives or plans of Ursus
will be achieved or that any of the operating expectations will be realized. The
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 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. Ursus 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
URSUS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE
RELATED NOTES AND OTHER INFORMATION REGARDING URSUS INCLUDED ELSEWHERE IN THIS
FORM 10-Q.
OVERVIEW
We are a provider of international telecommunications services and offer a broad
range of discounted international and enhanced telecommunication services,
including United States originated long distance service and direct-dial
international service, typically to small and medium-sized businesses and
travelers. We have expanded our geographic coverage in Europe, Japan, Central
and South America through our acquisition of Access in September 1998. We intend
to continue to capitalize on the increased demand for high-quality international
telecommunications services resulting from the globalization of the world's
economies and the worldwide trend toward telecommunications deregulation.
Our primary service is call reorigination, however, we have increasingly been
migrating calls to direct access using internet protocol and other methods. 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),
France, Germany, Japan and New Zealand. We operate a switched-based digital
telecommunications network out of our primary switching hub located in Sunrise,
Florida.
We have also developed an e-commerce site known as theStream.com. Our goal for
theStream.com is to become a leading communications portal on the Internet and a
one-stop e-commerce shop for global telecommunications services. The site is
running on an IBM RS/6000 server system, which incorporates a series of high
quality and client-friendly service options such as voice over the Internet
(VOIP), PC to phone and other sophisticated web-centric applications. The site
is anticipated to facilitate access to a host of value-added telecommunications
products and services. We have completed the first two phases of the project and
anticipate that a full marketing effort will begin in December 1999 in
connection with the translation of the site into various languages. Currently
the site is operating on a test basis, and therefore we have not generated any
significant revenue as of the filing of this Form 10-Q. See discussion in
"Liquidity and Capital Resources" herein regarding the effects of theStream.com.
OTHER OPERATING DATA
The following information for the three and six months ended September 30, 1999
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 report for the year ended March 31, 1999.
The following table sets forth income statement data as a percentage of revenues
for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 64.0 64.5 64.7 65.8
Gross profit 36.0 35.5 35.3 34.2
Operating expenses:
Commission 12.8 7.5 13.6 7.8
Selling, general and administrative 20.9 28.9 19.3 27.3
Depreciation and amortization 2.1 4.4 1.7 4.3
Total operating expenses 35.8 40.8 34.6 39.4
Operating income (loss) 0.2 (5.3) 0.7 (5.2)
Other (expense) income 1.9 (0.3) 1.6 (0.6)
Income (loss) before income taxes 2.1 (5.6) 2.3 (5.8)
Net income 0.9 (4.3) 1.2 (3.9)
EBITDA(1) 2.2 (0.9) 2.5 (1.3)
</TABLE>
(1) As used herein "EBITDA" consists of earnings (loss) before interest, income
taxes, depreciation and amortization. EBITDA is a measure commonly used in the
telecommunications industry to analyze companies on the basis of operating
performance. EBITDA is not a measure of financial performance under generally
accepted accounting principles, is not necessarily comparable to similarly
titled measures of other companies and should not be considered as an
alternative to net income as a measure of performance nor as an alternative to
cash flow as a measure of liquidity.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1998:
REVENUES. Revenues increased $2.3 million (34.6%) from $6.8 million for the
three months ended September 30, 1998 to $9.1 million for the three months ended
September 30, 1999. The revenue attributable to the Access acquisition amounted
to $5.7 million for the three months ended September 30, 1999. Our consolidated
company had a 17.4 million minute increase during this period over the same
period last year, all of which is attributable to the acquisition of Access.
Revenue per minute declined from $0.65 per minute to $0.33 per minute over this
period resulting from the lower per minute rates generated by Access and an
industry wide decrease in revenues per minute. The decrease in revenue per
minute is consistent with our entry into the more mature markets of Germany and
Japan and with increased wholesale sales, which traditionally generate lower
revenue per minute.
COST OF REVENUES. Cost of revenues increased $1.6 million (35.7%), from $4.3
million for the three months ended September 30, 1998 to $5.9 million for the
three months ended September 30, 1999. Cost of revenues as a percentage of sales
increased from 64.0% to 64.5%. This increase in our costs is directly
attributable to the increased revenue associated with the acquisition of Access.
We have been able to hold costs down as a percentage of revenue despite a 229%
increase in wholesale sales, which typically generate lower margins and thus a
higher cost for every revenue dollar. We have accomplished this primarily as a
result of declining carrier cost per minute, aggressive negotiation with
carriers, volume discounts and the use of advanced least cost routing
techniques.
GROSS PROFIT. Gross profit increased $0.8 million (32.7%) from $2.4 million for
the three months ended September 30, 1998 to $3.2 million for the three months
ended September 30, 1999. As a percentage of revenue, gross profit decreased
1.4% from 36.0% during the three months ended September 30, 1998 to 35.5% for
the three months ended September 30, 1999. Gross profit increased due to the
Access acquisition, but decreased as a percentage of revenue as result of the
increase in wholesale revenue generated by Access. The decreased margins were
offset by a reduction in carrier costs as a percentage of revenue because the
number of minutes we purchased tripled and thereby increased our volume-based
carrier discounts. For the three months ended September 30, 1999 as compared to
the three months ended September 30, 1998 average cost per minute has decreased
50.0% or an average of $0.21 per minute.
OPERATING EXPENSES. Operating expenses increased $1.3 million (53.4%) from $2.4
million for the three months ended September 30, 1998 to $3.7 million for the
three months ended September 30, 1999. The increase was due primarily to the
acquisition of Access which added $1.5 million in operating expenses during the
quarter. As a percentage of revenues, selling, general and administrative
expenses increased 38.3% from 20.9% to 28.9%. We have aggressively expanded our
personnel and infrastructure in anticipation of increased traffic and revenues
through the implementation of our expansion plans.
Depreciation and amortization expense increased approximately $265,000 (188.4%)
from approximately $141,000 for the three months ended September 30, 1998 to
approximately $406,000 for the three months ended September 30, 1999 as a result
of expansion of our infrastructure in connection with its expansion plans. In
addition, the acquisition of Access increased the amount of depreciable fixed
assets and resulted in approximately $129,000 in amortization expense on the
intangibles.
OPERATING INCOME (LOSS). Operating income (loss) decreased from approximately
$8,400 in income for the three months ended September 30, 1998 to a loss of
approximately $491,000 for the three months ended September 30, 1999 primarily
as a result of a 85.9% increase in selling, general and administrative expenses,
a 188.4% increase in depreciation and a 1.4% decrease in gross profit margins,
as described above.
NET INCOME (LOSS). As a result of all of the foregoing factors, and in light of
our strategic decision to increase our gross revenues and market share through
price reductions, our net income decreased approximately $458,000 from net
income of approximately $62,000 of income for the three months ended September
30, 1998 to a net loss of approximately $396,000 for the three months ended
September 30, 1999.
EBITDA. EBITDA decreased approximately $233,000 from approximately 149,000 for
the three months ended September 30, 1998, to a EBITDA loss of approximately
$84,000 for the three months ended September 30, 1999, as a result of the
foregoing factors.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED TO
THE SIX MONTHS ENDED SEPTEMBER 30, 1998:
REVENUES. Revenues increased $5.4 million (40.1%) from $13.2 million for the six
months ended September 30, 1998 to $18.6 million for the six months ended
September 30, 1999. The revenue attributable to the Access acquisition amounted
to $11.6 million for the six months ended September 30, 1999. Our consolidated
company had a 36.4 million minute increase during this period over the same
period last year, all of which was attributable to the acquisition of Access.
Revenue per minute declined from $0.73 per minute to $0.34 per minute over this
period resulting from the lower per minute rates generated by Access and an
industry wide decrease in revenues per minute. The decrease in revenue per
minute is consistent with our entry into the more mature markets of Germany and
Japan and with increased wholesale sales, which traditionally generate lower
revenue per minute.
COST OF REVENUES. Cost of revenues increased $3.6 million (42.5%), from $8.6
million for the six months ended September 30, 1998 to $12.2 million for the six
months ended September 30, 1999. Cost of revenues as a percentage of sales
increased from 64.7% to 65.8%. This increase in our costs is directly
attributable to the increased revenue associated with the acquisition of Access.
We have been able to hold costs down as a percentage of revenue despite a 396.2%
increase in wholesale sales, which typically generate lower margins and thus a
higher cost for every revenue dollar. We have accomplished this primarily as a
result of declining carrier cost per minute, aggressive negotiation with
carriers, volume discounts and the use of advanced least cost routing
techniques.
GROSS PROFIT. Gross profit increased $1.6 million (35.6%) from $4.7 million for
the six months ended September 30, 1998 to $6.3 million for the six months ended
September 30, 1999. As a percentage of revenue, gross profit decreased 3.1% from
35.3% during the six months ended September 30, 1998 to 34.2% for the six months
ended September 30, 1999. Gross profit increased due to the Access acquisition,
but decreased as a percentage of revenue as result of the increase in wholesale
revenue generated by Access. The decreased margins were offset by a reduction in
carrier costs as a percentage of revenue because the number of minutes we
purchased tripled and thereby increased our volume-based carrier discounts. For
the six months ended September 30, 1999 as compared to the six months ended
September 30, 1998 average cost per minute has decreased 53.2% or an average of
$0.25 per minute.
OPERATING EXPENSES. Operating expenses increased $2.7 million (59.7%) from $4.6
million for the six months ended September 30, 1998 to $7.3 million for the six
months ended September 30, 1999. The increase was due primarily to the
acquisition of Access which added $3.0 million in operating expenses during the
quarter. As a percentage of revenues, selling, general and administrative
expenses increased 41.4% from 19.3% to 27.3%. We have aggressively expanded our
personnel and infrastructure in anticipation of increased traffic and revenues
through the implementation of our expansion plans.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
approximately $575,000 (251.4%) from approximately $229,000 for the six months
ended September 30, 1998 to approximately $804,000 for the six months ended
September 30, 1999 as a result of the expansion of our infrastructure in
connection with the expansion plans. In addition, the acquisition of Access
increased the amount of depreciable fixed assets and resulted in approximately
$258,000 in amortization expense on the intangibles.
OPERATING INCOME (LOSS). Operating income (loss) decreased from approximately
$97,000 in income for the six months ended September 30, 1998 to a loss of
approximately $971,000 for the six months ended September 30, 1999 primarily as
a result of a 98.4% increase in selling, general and administrative expenses, a
251.4% increase in depreciation and a 3.1% decrease in gross profit margins as
described above.
<PAGE>
NET INCOME (LOSS). As a result of all of the foregoing factors, and in light of
our strategic decision to increase our gross revenues and market share through
price reductions, our net income decreased approximately $879,000 from net
income of approximately $153,000 of income for the six months ended September
30, 1998 to a net loss of approximately $726,000 for the six months ended
September 30, 1999. Net income has also been impacted by the sale of our
subsidiary in France, which amounted to approximately $75,000 for the six months
ended September 30, 1999.
EBITDA. EBITDA decreased approximately $568,000 from approximately $329,000 for
the six months ended September 30, 1998, to a EBITDA loss of approximately
$239,000 for the six months ended September 30, 1999, 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, the continued
development of theStream.com 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, capital
leases and vendor financing agreements.
Net cash provided by operating activities was approximately $345,000 for the six
months ended September 30, 1999 as compared to net cash used in operating
activities of $587,000 for the same period last year. The net cash provided by
operating activities in the first quarter ended September 30, 1999 increased as
a result of improved timing of vendor payment to coincide with collections from
customers offset by a decrease in net income.
Net cash used in investing activities was approximately $700,000 for the six
months ended September 30, 1999 and approximately $8.0 million for the six
months ended September 30, 1998. The decrease was caused by the acquisition of
Access in the six months ended September 30, 1998.
Net cash used in financing activities was approximately $91,000 for the six
months ended September 30, 1999 which reflects lease and note payments offset by
the sale of common stock due to stock option exercises. For the six months ended
September 30, 1998 cash provided by financing activities was $12.2 million which
reflects the result of the Company's initial public offering, which after the
expenses of such offering accounted for an increase in cash of approximately
$11.6 million. As of September 30, 1999 approximately $1.3 million of the
proceeds remain.
The Company expects that the remaining 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 6 to
9 months. Based on our current business model, we are actively seeking equity or
other financing to support our increased capital requirements, that have
increased primarily because of the Company's continuing development of
theStream.com. 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.
In order to provide flexibility for potential acquisition and network expansion
opportunities, the Company has and will continue to seek financing arrangements
with vendors or other financial institutions. Other future sources of capital
for the Company could include public and private debt, including high yield debt
offerings, equity financing and lease lines. There can be no assurance that any
such sources of financing will 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. In addition equity financing will increase dilution and thus affect
earnings per share to the common share holder.
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.
RISKS ASSOCIATED WITH THE YEAR 2000
OVERVIEW
The impact of the Year 2000, which has been widely reported in the media, could
cause malfunctions in certain software and databases that use date sensitive
processing relating to the Year 2000 and beyond. We have completed an evaluation
of all our systems and found that most of the computer systems, software and
database which are proprietary to Ursus are Year 2000 ready. We are currently in
the final stages of testing our mission critical equipment which includes our
switches and other telephony equipment. We have also evaluated third party
business entities with which we are engaged in business or for which we provide
service to determine if there will be any unexpected interruptions. We have
requested representations from these third parties as to whether or not they
anticipate any difficulties in addressing Year 2000 problems and, if so, whether
or not we would be adversely affected by any of such problems. We have
substantially completed this process.
We also have obtained representations from the manufacturer of the telephony
switches that they are Year 2000 ready. As these switches are critical to us,
they also have been tested internally and found to be Year 2000 ready. Our
billing system, which was scheduled for an upgrade for operational reasons has
been upgraded to a Year 2000 ready version. We have received assurances from
other software and equipment manufactures that their hardware and software are
Year 2000 ready.
COSTS
Costs thus far have been immaterial to correct Year 2000 non-compliance. Our
management has determined that costs to complete our Year 2000 readiness project
will be immaterial. However, until such time as we attain 100% readiness status,
the full impact of the Year 2000 is not known. As a result, the impact on our
business, results of operations and financial condition cannot be assessed with
certainty.
RISKS
We believe that we will complete our goal of 100% readiness before December 31,
1999. Consequently, we do not believe that the Year 2000 problem will have a
material adverse effect on our business, cash flows, or results of operations.
However, if we do not achieve readiness prior to December 31, 1999, if
management's plan fails to identify and remedy all critical Year 2000 problems
or if major suppliers or customers experience material Year 2000 problems, our
results of operations or financial condition could be materially and adversely
affected.
CONTINGENCY PLANS
We have developed appropriate contingency plans to mitigate, to the extent
possible, any significant Year 2000 noncompliance, if any. If we are required to
implement our contingency plans, the cost of Year 2000 readiness may be greater
than the amount referenced above and there can be no assurance that these plans
will be adequate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposure relates to changes in foreign currency exchange
rates and to changes in interest rates. Although the Company's functional
currency is the United States Dollar, a significant portion of our revenue is
derived from sales outside the United States. In the future, the Company expects
to continue to derive a significant portion of its revenue outside the United
States, and changes in foreign currency exchange rates may have a significant
effect on the Company's ability to operate competitively in those countries. The
Company historically has not engaged in hedging transactions. Our financial
instruments consisting of lease obligations and notes payable have fixed
interest rates and are short term and therefore are not sensitive to market
changes in interest rates. Potential increases in interest rates could increase
borrowing costs and could have a material impact on our financial performance.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
Access is involved as plaintiff and defendant in a legal action, as described
below, which is incident to its business. Our management does not believe that
this action will have a material impact on our financial condition.
In February 1998, Access filed an action against Alley in the United States
District Court for the Middle District of Florida claiming that Alley, a former
sales agent for Access, breached his agency agreement with Access, wrongfully
diverted customers and business to Access's competitors, misappropriated
Access's trade secrets, breached fiduciary and other duties owed to Access and
engaged in unfair competition. Access seeks compensatory damages, injunctive
relief and a declaratory judgment. Alley counter-claimed 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.
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
Net proceeds to Ursus from the offering, after deducting the total expenses of
such offering, were approximately $11.7 million. In connection with the
acquisition of Access, we utilized $8.1 million, representing the purchase price
plus the costs of the transaction. In addition, we have utilized approximately
$0.3 million for the Starcom acquisition and $2.0 million for working capital
purposes. Consequently, approximately $1.3 million of the net proceeds of such
offering remain as of September 30, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) (i) Exhibit 10 -- Global Crossing Network Agreement between Global Crossing
USA Inc. and Ursus Telecom corporation, dated as of July 30, 1999
("Network Agreement") (incorporated herein by reference from the
Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 19, 1999).
(ii) Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K -- Current Report on Form 8-K filed on Aaugust 19,
1999 with respect to the Network Agreement.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
URSUS TELECOM CORPORATION
By: /S/ JOHANNES SEEFRIED
-----------------------------
Johannes S. Seefried
Chief Financial Officer
and authorized officer of registrant
Dated: NOVEMBER 15, 1999
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER
- --------
10*+ Global Crossing Agreement, dated as of July 19, 1999, between Global
Crossing USA Inc. and Ursus Telecom Corporation
27** Financial Data Schedule
* Incorporated herein by reference.
** Filed herewith.
+ Confidential treatment has been requested with respect to portions of the
agreement indicated. A complete copy of this agreement, including the
redacted items, has been filed separately with the Securities and Exchange
Commission.
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