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, 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 February 14, 2000, the number of the registrant's Common Shares of $.01
par value outstanding was 6,777,100.
<PAGE>
URSUS TELECOM CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION................................................3
Item 1. Financial Statements (Unaudited)...................................3
Condensed Consolidated Balance Sheets
as of March 31, 1999 and September 30, 1999...........................3
Condensed Consolidated Statements of Operations for the
Three and Nine Month Periods Ended
December 31, 1998 and 1999............................................4
Condensed Consolidated Statements of Cash Flows for the
Nine Month Periods Ended December 31, 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
Item 3. Quantitative and Qualitative Disclosures
about Market Risk.................................................14
PART II. OTHER INFORMATION...................................................15
Item 1. Legal Proceedings.................................................15
Item 2. Changes in Securities and use of Proceeds.........................16
Item 6. Exhibits and Reports on form 8-K..................................15
Signatures................................................................17
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
URSUS TELECOM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, December 31,
ASSETS 1999 1999
------------------------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $2,406,643 $1,843,847
Accounts receivable, net 4,960,510 4,335,096
Prepaid expenses 297,828 349,763
Advances and notes receivable
--related parties 10,843 202,690
Taxes receivable - 777,571
Deferred taxes 401,173 1,000,179
Other current assets 563,615 105,748
------------------------------------
Total current assets 8,640,612 8,614,894
Equipment, net 3,677,059 4,268,416
Intangible assets, net 10,180,152 9,745,974
Investment in unconsolidated subsidiary 207,754 66,871
Internal use software, net 137,196 617,496
Other assets, net 199,809 100,862
------------------------------------
Total assets $23,042,582 $23,414,513
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $4,787,040 $5,325,089
Commissions payable 1,066,232 999,731
Current portion of capital lease obligations 324,166 418,432
Current portion of notes payable - 167,124
Other current liabilities 328,493 205,338
------------------------------------
Total current liabilities 6,505,931 7,115,714
Long term portion of capital lease obligations 789,430 847,864
Long term portion of notes payable - 244,631
Deferred taxes 329,413 940,516
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 6,776,500 issued and
outstanding at March 31, 1999
and December 31, 1999,
respectively 66,000 67,765
Additional paid-in capital 12,338,843 13,575,926
Retained earnings 2,879,455 488,587
------------------------------------
Total shareholders' equity 15,284,308 14,132,289
------------------------------------
Total liabilities and shareholders'
equity $23,042,582 $23,414,513
====================================
</TABLE>
<PAGE>
URSUS TELECOM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED Nine Months Ended
DECEMBER 31, December 31,
1998 1999 1998 1999
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $11,038,459 $7,239,299 $24,342,899 $25,799,476
Cost of revenues 7,042,150 5,106,902 15,667,530 17,322,185
-------------------------------------------------------------------
Gross profit 3,996,309 2,132,397 8,675,369 8,477,291
Operating expenses:
Commissions 1,004,052 629,735 2,803,169 2,074,625
Selling, general and administrative 2,472,321 3,089,978 5,025,665 8,157,017
expenses
Depreciation and amortization 339,683 416,150 569,557 1,220,492
-------------------------------------------------------------------
Total operating expenses 3,816,056 4,135,863 8,398,391 11,452,134
-------------------------------------------------------------------
Operating income (loss) 180,253 (2,003,466) 276,978 (2,974,843)
Other income (expense):
Interest expense (11,417) (48,407) (31,869) (134,196)
Interest income 41,987 36,259 273,966 85,244
Gain (loss) on sale of equipment (3,244) 1,650 (3,244) 3,426
Write down of investment - - - (75,390)
Other - - 1,649
-------------------------------------------------------------------
27,326 (10,498) 238,853 (119,267)
-------------------------------------------------------------------
Income (loss) before provision
(benefit) for income taxes 207,579 (2,013,964) 515,830 (3,094,110)
Provision (benefit) for income taxes 192,610 (348,642) 347,980 (703,242)
-------------------------------------------------------------------
Net income (loss) $ 14,969 $(1,665,322) $167,850 $(2,390,868)
===================================================================
Net income (loss) per common
share-basic and dilutive $.00 $(.21) $.03 $(.32)
===================================================================
Weighted average shares outstanding 6,512,500 7,750,327 6,199,407 7,365,935
===================================================================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
URSUS TELECOM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
1998 1999
------------------------------------
Operating activities
<S> <C> <C>
Net income (loss) $167,850 $(2,390,868)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 569,557 1,220,492
Allowance for doubtful accounts 80,281 314,082
Deferred taxes 17,173 12,096
Loss (gain) on sale of equipment 3,244 (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 554,771 235,982
Prepaid expenses 63,679 (51,935)
Other current assets 86,530 354,590
Income tax receivable - (749,682)
Accounts payable and accrued expenses (2,878,205) 613,396
Commissions payable 31,160 (66,501)
Other current liabilities 87,604 (123,153)
------------------------------------
Net cash used in operating activities (1,216,356) (559,537)
INVESTING ACTIVITIES
Purchase of equipment (527,116) (322,746)
Increase in advances to related parties (23,688) (191,847)
Cash used in the business acquisition, net of cash acquired (7,484,753) -
Increase in other assets (447,520) (325,872)
------------------------------------
Net cash used in investing activities (8,483,077) (840,465)
FINANCING ACTIVITIES
Repayments of long-term debt - (136,462)
Net proceeds from the sale of common stock 12,225,722 1,238,848
Repayments on capital leases (57,140) (265,180)
------------------------------------
Net cash provided by financing activities 12,168,582 837,206
Effect of foreign exchange rate changes on
cash and cash equivalents 15,328 -
------------------------------------
Net increase (decrease) in cash and cash equivalents 2,484,477 (562,796)
Cash and cash equivalents at beginning of period 1,035,149 2,406,643
------------------------------------
Cash and cash equivalents at end of period $3,519,626 $1,843,847
====================================
Supplemental cash flow information
Cash paid for interest $31,869 $134,196
====================================
Cash paid for income taxes $156,000 -
====================================
Assets acquired under capital leases and other financing $647,031 $966,098
====================================
Receivable applied as a deposit on acquisition $321,059 -
====================================
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 nine month periods ended December 31,
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 reflects 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>
<TABLE>
<CAPTION>
The following is a reconciliation of amounts used in the per share computations:
THREE MONTHS ENDED Nine Months Ended
DECEMBER 31, December 31,
------------------------------------------------------------
1998 1999 1998 1999
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss)-numerator basic computation $14,969 $(1,665,322) $167,850 $(2,390,868)
Effect of dilutive securities-None - - - -
------------------------------------------------------------
Net income (loss) as adjusted for assumed
conversion-numerator diluted computation $14,969 $(1,665,322) $167,850 $(2,390,868)
============================================================
Weighted average shares-denominator basic 6,512,500 7,750,327 6,199,407 7,365,935
computation
Effect of dilutive securities-none - - - -
------------------------------------------------------------
Weighted average shares as adjusted-denominator 6,512,500 7,750,327 6,199,407 7,365,935
============================================================
Net income (loss) per share:
Basic $(0.00) $(.21) $0.03 $(.32)
============================================================
Diluted $(0.00) $(.21) $0.03 $(.32)
============================================================
</TABLE>
(4) SEGMENT DISCLOSURES
The Company operates in one single industry segment, the international long
distance telecommunications industry. For the three and nine months ended
December 31, 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)
<TABLE>
<CAPTION>
The following is a summary of the components of comprehensive income (loss):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------------------------------------------
1998 1999 1998 1999
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $14,969 $(1,665,322) $167,850 $(2,390,868)
Other comprehensive income (loss)
foreign currency translation, net of tax 447 - 15,328 -
-------------------------------------------------------------------
Comprehensive income (loss) $15,416 $(1,665,322) $183,178 $(2,390,868)
===================================================================
</TABLE>
(6) RECLASSIFICATIONS
Certain previous period amounts have been reclassified to conform to the current
period's presentation.
(7) INTERNAL USE SOFTWARE
The Company capitalizes software costs incurred in the development of software
for internal use in accordance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position ("SOP") 98-1, "ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE."
Capitalization begins when the implementation stage has begun and ends when the
software is placed in service. Amortization of capitalized software is provided
using the straight-line method over the software's estimated useful life. As of
December 31, 1999, the Company has capitalized $635,138 of costs. For the three
and nine month period ended December 31, 1999, amortization expense was $17,642.
There was no amortization during the prior year as the software had not yet been
placed in service.
(8) 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 December 31, 1999, the balance due
under these agreements was $390,271 with $145,640 representing the current
portion. Pursuant to these agreements, interest and principal is payable monthly
and the notes are secured by the equipment.
(9) 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 nine months ended
December 31, 1999 was approximately $29,000 and is included in selling, general
and administrative expenses on the accompanying statement of operations.
At December 31, 1999, the Company had a total of 190,000 Warrants outstanding
with a weighted average exercise price of $13.05 per share as follows:
Weighted Average Number of
Exercise Prices Warrants
----------------------------------------
Outstanding at March 31, 1999 $15.20 150,000
Granted 7.53 150,000
Exercised 8.45 110,000
----------------------------------------
Outstanding at December 31, 1999 $13.05 190,000
========================================
Stock option activity for the nine months ended December 31, 1999 under the
Company's Stock Incentive Plan is shown below:
Weighted Average Number of
Exercise Prices Shares
----------------------------------------
Outstanding at March 31, 1999 $ 7.83 762,500
Granted 11.88 168,500
Exercised 4.24 66,500
----------------------------------------
Outstanding at December 31, 1999 $ 9.27 864,500
========================================
As of December 31, 1999, 671,000 options were exercisable under the Stock
Incentive Plan.
(10) 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 December 31, 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 as a partial payment of amounts owed to the Company
from the joint venture. As of December 31, 1999, the joint venture owed the
Company approximately $150,000.
(11) 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 merit, 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.
(12) SUBSEQUENT EVENT
On February 10, 2000, the Company entered into a purchase agreement to sell
615,115 shares of the Company's common stock for $7 million to an institutional
group of investors. The net proceeds to the Company after deducting expenses is
expected to be $6.6 million and is expected to close on February 15, 2000. The
Company also granted the investors 279,998 five year warrants to buy common
stock at $15.3956 per share. The Company has provided the investors with certain
anti-dilution protections for a maximum of 30 months with respect to the shares
sold and warrants issued. However, except for the warrents, the anti-dilution
protection period will end the completion of a firm commitment underwritten
primary public offering of stock during calendar year 2000. Under the terms of
the anti-dilution clause, the investors would receive a share price adjustment
in the event of a subsequent issuance of common stock at a price which is less
than the price they paid. Existing employee stock options, warrants and certain
other future issuances as defined in the purchase agreement would be excluded
from the antidilution adjustment.
In connection with the sale, the Company entered into a registration rights
agreement with the investors which provides for the registration of the common
stock and the common stock underlying the warrants with the SEC.
<PAGE>
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.
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 direct-dial
international service, Internet telephony and voice over the Internet protocol
("VOIP") 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 Authority, Inc. ("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),
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, PC
to phone, phone 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 by March
2000 in connection with the translation of the site into various languages.
Currently the site is operating without strong marketing support, and therefore
we have not generated significant revenues 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 nine months ended December 31, 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 63.8 70.5 64.4 67.1
Gross profit 36.2 29.5 35.6 32.9
Operating expenses:
Commission 9.1 8.7 11.5 8.1
Selling, general and administrative 22.4 42.7 20.7 31.6
Depreciation and amortization 3.1 5.7 2.3 4.7
Total operating expenses 34.6 57.1 34.5 44.4
Operating income 1.6 (27.6) 1.1 (11.5)
Other (expense) income 0.3 (0.2) 1.0 (0.5)
Income before income taxes 1.9 (27.8) 2.1 (12.0)
Net income 0.1 (23.0) 0.7 (9.3)
EBITDA(1) 4.7 (21.9) 3.5 (7.1)
</TABLE>
(1) As used herein "EBITDA" consists of earnings before interest, income taxes,
depreciation and amortization. EBITDA is a measure commonly used in the
telecommunications industry to analyze companies on the basis of operating
performance. EBITDA is not a measure of financial performance under generally
accepted accounting principles, is not necessarily comparable to similarly
titled measures of other companies and should not be considered as an
alternative to net income as a measure of performance nor as an alternative to
cash flow as a measure of liquidity.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AS COMPARED
TO THE THREE MONTHS ENDED DECEMBER 31, 1998:
REVENUES. Revenues decreased $3.8 million (34.4%) from $11.0 million for the
three months ended December 31, 1998 to $7.2 million for the three months ended
December 31, 1999. The decrease is primarily attributable to the lowering of our
retail and wholesale per minute rates in order to remain competitive and our
gradual exit from markets such as Russia, Ecuador and Lebanon. In addition,
wholesale and U.S. Armed Forces personnel traffic, which generate a lower
revenue per minute rate, became a larger percentage of our revenue during the
quarter due to a seasonal decline in revenue from our overall retail base. As a
result, revenue per minute declined from $0.41 per minute for the three months
ended December 31, 1998 to $0.25 per minute for the three months ended December
31, 1999. This significant decrease in revenue per minute was partially offset
by an increase in minutes sold from 26.7 million during the three months ended
December 31, 1998 to 28.9 million minutes for the same period in 1999 or a 8.3%
increase.
COST OF REVENUES. Cost of revenues decreased $1.9 million (27.4%), from $7.0
million for the three months ended December 31, 1998 to $5.1 million for the
three months ended December 31, 1999. The lower cost of revenues is due to our
decrease in revenues and is also attributable to the industry wide trend towards
lower prices. Cost of revenues as a percentage of revenues increased from 63.8%
to 70.5%. As a percentage of revenue cost of revenues increased due to the
higher percentage of wholesale and U.S. Armed Forces personnel traffic to our
total traffic mix, which historically has generated lower margins as compared to
our overall retail base. We were also impacted by larger volumes of cellular
phone traffic which also tend to generate lower margins in certain geographic
areas.
GROSS PROFIT. Gross profit decreased $1.9 million (46.6%) from $4.0 million for
the three months ended December 31, 1998 to $2.1 million for the three months
ended December 31, 1999. As a percentage of revenue, gross profit decreased from
36.2% during the three months ended December 31, 1998 to 29.5% for the three
months ended December 31, 1999. The decrease as a percentage of revenue was the
result of the increase in wholesale and U.S. Armed Forces personnel revenue. The
margin decrease was somewhat offset by a continued decrease in carrier and
circuit costs for the three months ended December 31, 1999 as compared to the
three months ended December 31, 1998. The decrease in average cost per minute
was 30.8% or an average of $0.08 per minute.
OPERATING EXPENSES. Operating expenses increased $0.3 million (8.4%) from $3.8
million for the three months ended December 31, 1998 to $4.1 million for the
three months ended December 31, 1999. The increase was due primarily to
increased costs associated with the expansion of theStream.com and the costs to
migrate traffic to Internet protocol (IP) telephony. As a percentage of
revenues, selling, general and administrative expenses, including commisson
expenses increased from 31.5% to 51.4%. This increase was primarily due to the
decrease in revenues.
Depreciation and amortization expense increased approximately $76,000 (22.6%)
from approximately $340,000 for the three months ended December 31, 1998 to
approximately $416,000 for the three months ended December 31, 1999 mainly as a
result of the expansion of the theStream.com and the deployment of Internet
protocol (IP) telephony equipment.
OPERATING INCOME (LOSS). Operating income (loss) decreased from approximately
$180,000 for the three months ended December 31, 1998 to a loss of approximately
$2.0 million for the three months ended December 31, 1999 primarily as a result
of a the 34.4% decrease in revenues and the 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 minutes through price reductions and to
accelerate our traffic migration to an Internet protocol (IP) based telephony
network and for funding the development of theStream.com telephony website, our
net income decreased approximately $1.7 million from net income of approximately
$15,000 for the three months ended December 31, 1998 to a net loss of
approximately $1.7 million for the three months ended December 31, 1999.
EBITDA. EBITDA decreased approximately $2.1 million from approximately $0.5
million for the three months ended December 31, 1998, to an EBITDA loss of
approximately $1.6 million for the three months ended December 31, 1999, as a
result of the foregoing factors.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1999 AS COMPARED TO
THE NINE MONTHS ENDED DECEMBER 31, 1998:
REVENUES. Revenues increased $1.5 million (6.0%) from $24.3 million for the nine
months ended December 31, 1998 to $25.8 million for the nine months ended
December 31, 1999. The revenue increase during that period is primarily
attributable to the Access acquisition in September 1998. Minutes sold increased
86.1% to 83.4 million from 44.8 million the prior year. This increase was also
attributable to the Access acquisition; however, this increase was offset by a
decline in revenue per minute of 42.6% or $0.23 from an average of $0.54 to
$0.31. Revenue per minute declined due to 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 and the decision to gradually leave the high
risk, but historically high margin markets of Russia, Ecuador and Lebanon.
COST OF REVENUES. Cost of revenues increased $1.7 million (10.6%), from $15.7
million for the nine months ended December 31, 1998 to $17.3 million for the
nine months ended December 31, 1999. Cost of revenues as a percentage of sales
increased from 64.4% to 67.1%. This increase in our costs is directly
attributable to the increased revenue associated with the acquisition of Access.
As a percentage of revenue cost of revenues increased due to the higher
percentage of wholesale and U.S. Armed Forces personnel traffic to our total
traffic mix, which generates lower margins as compared to our overall retail
base.
GROSS PROFIT. Gross profit decreased $0.2 million (2.3%) from $8.7 million for
the nine months ended December 31, 1998 to $8.5 million for the nine months
ended December 31, 1999. As a percentage of revenue, gross profit decreased from
35.6% during the nine months ended December 31, 1998 to 32.9% for the nine
months ended December 31, 1999. Gross profit decreased as a percentage of
revenue as result of the increase in wholesale revenue generated by Access. The
increase of wholesale traffic and low margin U.S. Armed Forces personnel traffic
resulted in decreased margins. The lower margins were partially offset by a
reduction in carrier costs as a percentage of revenue because the number of
minutes we purchased more than tripled, thereby increasing our volume-based
carrier discounts. For the nine months ended December 31, 1999 as compared to
the nine months ended December 31, 1998 average cost per minute has decreased
40.0% or an average of $0.14 per minute.
OPERATING EXPENSES. Operating expenses increased $3.1 million (36.4%) from $8.4
million for the nine months ended December 31, 1998 to $11.5 million for the
nine months ended December 31, 1999. The increase was due primarily to the
additional personnel and overhead expenses associated with the acquisition of
Access, the continued development of theStream.com and the costs to migrate
traffic to Internet protocol (IP) telephony. As a percentage of revenue,
selling, general and administrative expenses including commissions increased
from 32.2% to 39.7%.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
approximately $0.6 million (114.3%) from approximately $0.6 million for the nine
months ended December 31, 1998 to approximately $1.2 million for the nine months
ended December 31, 1999, primarily as a result of the expansion of our
infrastructure in connection with our internet and VOIP projects. In addition,
the acquisition of Access increased the amount of depreciable fixed assets and
resulted in approximately $434,000 in amortization expense on the intangibles.
OPERATING INCOME (LOSS). Operating income (loss) decreased from approximately
$277,000 in income for the nine months ended December 31, 1998 to a loss of
approximately $3.0 million for the nine months ended December 31, 1999,
primarily as a result of a 36.4% increase in operating expenses, a 2.7% decrease
in gross profit margins and a 6.0% increase in revenues 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 market share through price reductions and
due to increases expenses associated with our acceleration of our presence in
the Internet protocol (IP) and Voice over the Internet (VOIP) markets, as well
as the continued development of theStream.com, our net income decreased
approximately by $2.6 million from net income of approximately $0.2 million for
the nine months ended December 31, 1998 to a net loss of approximately $2.4 for
the nine months ended December 31, 1999.
EBITDA. EBITDA decreased approximately $2.6 million from approximately $0.8
million for the nine months ended December 31, 1998, to a EBITDA loss of
approximately $1.8 milloin for the nine months ended December 31, 1999,
primarily as a result of a decrease in revenue per minute resulting in lower
gross margins and increased operating expenses principally due to additional
expenditures relating to theStream.com and our VOIP initiaives.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements consist of capital expenditures in connection
with the acquisition and maintenance of switching capacity and circuits, 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 and the sale of
common stock.
Net cash used by operating activities was approximately $0.6 million for the
nine months ended December 31, 1999 as compared to $1.2 million for the same
period last year. The decrease was a result of improved timing of vendor
payments to coincide with collections from customers, offset by a decrease in
net income.
Net cash used in investing activities was approximately $0.8 million for the
nine months ended December 31, 1999 and approximately $8.5 million for the nine
months ended December 31, 1998. The decrease was caused by the acquisition of
Access in the nine months ended December 31, 1998. The primary use of cash was
for equipment purchases, for cost associated with theStream.com and the ongoing
migration to Internet protocol (IP) telephony.
Net cash provided by financing activities was approximately $0.8 million for the
nine months ended December 31, 1999 which reflects lease and note payments
offset by the sale of common stock due to stock option and warrant exercises.
For the nine months ended December 31, 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 December 31, 1999
approximately $0.8 million of the proceeds remain.
On February 10, 2000 we agreed to sell $7 million in stock to a group of private
institutional investors. The net proceeds to the Company from the sale after
deducting expenses are expected to be approximately $6.6 million.
We expect that the remaining proceeds from the initial public offering, together
with the sale of common stock and internally generated funds, will provide
sufficient capital for the Company to fund anticipated growth for the next 12
months. Based on our current business model, we will be actively seeking new
sources of equity or other financing to support our increased capital
requirements due to the continued development of theStream.com and the ongoing
development and migration to Internet Protocol (IP) telephony. There are no
guarantees that sufficient funding will occur in time to fulfill our business
model. If there is any delay in obtaining this additional financing we will
implement our contingency plans, which could affect our future growth. 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 from the sale of common
stock, 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, public and private 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 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.
<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.
RISKS ASSOCIATED WITH THE YEAR 2000
As a result of completing our Year 2000 readiness project prior to year end, we
were able to avoid any significant problems that may have resulted due to the
impact of the Year 2000. These problems which were widely reported in the media,
could have cause malfunctions in certain software and databases that use date
sensitive processing relating to the Year 2000 and beyond. To date we are not
aware of the occurrence of any significant Year 2000 problem.
We did not incur any significant costs in completing our Year 2000 readiness
project. No significant costs are expected as we continue to monitor our systems
for any undiscovered Year 2000 problems.
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.
<PAGE>
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 merit, 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 $2.5 million for working capital
purposes. Consequently, approximately $0.8 million of the net proceeds of such
offering remain as of December 31, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K --There were no reports on Form 8-K filed by the Company
during the three months ended December 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
URSUS TELECOM
By: /S/ JOHANNES SEEFRIED
Johannes S. Seefried
Chief Financial Officer
and authorized officer of registrant
Dated: FEBRUARY 14, 2000
-----------------
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER
27* Financial Data Schedule
* Filed herewith.
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