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, 2000
COMMISSION FILE NUMBER: 0-29674
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 November 20, 2000, the number of the registrant's Common Shares of $.01
par value outstanding was 8,289,920
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URSUS TELECOM CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 1
Condensed Consolidated Balance Sheets
as of March 31, 2000 and September 30, 2000 1
Condensed Consolidated Statements of Operations
for the Three and Six Month Periods Ended
September 30, 1999 and 2000 1
Condensed Consolidated Statements of Cash Flows
for the Six Month Periods Ended
September 30, 1999 and 2000 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative disclosures
about market risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K.
Signatures 20
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
URSUS TELECOM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS MARCH 31, SEPTEMBER 30,
2000 2000
-----------------------------
Current assets:
Cash and cash equivalents $5,788,839 $2,017,510
Accounts receivable, net 4,397,429 3,444,685
Prepaid expenses 321,205 388,465
Advances and notes receivable related parties 157,475 220,475
Income tax receivable 680,000 659,168
Assets held for sale 1,264,946
Other current assets 13,317 8,230
---------------------------
Total current assets 11,358,265 8,003,479
Equipment, net 5,300,517 5,690,086
Intangible assets, net 9,579,670 19,806,157
Other assets, net 802,157 1,059,590
--------------------------
Total assets $27,040,609 $34,559,312
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $5,318,876 $7,664,389
Commissions payable 1,023,407 882,993
Deferred revenue 70,220 2,540,882
Current portion of capital lease obligations 402,464 706,527
Current portion of long-term debt 164,085 196,071
Notes payable 670,839
Other current liabilities 225,271 459,698
------------------------
Total current liabilities 7,204,323 13,121,399
Capital lease obligations 725,024 887,062
Long term debt 239,447 169,321
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,
7,506,815 and 8,289,920 issued and outstanding
at March 31, 2000 and September 30, 2000,
respectively. 75,068 82,899
Additional paid-in capital 20,980,207 27,863,317
Accumulated deficit (2,183,470) (7,564,696)
--------------------------
Total shareholders' equity 18,871,815 20,381,530
--------------------------
Total liabilities and shareholders' equity $27,040,609 $34,559,312
==========================
See accompanying notes.
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URSUS TELECOM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 2000 1999 2000
-------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 9,129,730 $10,790,875 $18,560,177 $19,438,664
Cost of services 5,892,611 7,413,061 12,215,283 12,855,796
(exclusive of
depreciation
and amortization shown
separately below)
Commissions 679,897 721,776 1,444,890 1,417,817
Selling, general and
administrative expenses 2,642,215 4,677,393 5,067,039 8,347,385
Depreciation and
amortization 405,509 1,088,323 804,342 1,733,460
--------------------------------------------------
Total operating expenses 9,620,232 13,900,553 19,531,554 24,354,458
--------------------------------------------------
Operating loss (490,502) (3,109,678) (971,377) (4,915,794)
Other income (expense):
Interest expense (50,962) (79,623) (85,790) (148,804)
Interest income 24,608 25,467 48,985 84,366
Write down of investment (75,390)
Gain on sale of equipment 1,026 3,426
Other expense (271,064) (263,414)
-------------------------------------------------
(25,328) (325,220) (108,769) (327,852)
-------------------------------------------------
Loss before provision(benefit)
for income taxes (515,830) (3,434,898) (1,080,146) (5,243,646)
Benefit for income taxes (120,136) 137,580 (354,599) 137,580
-------------------------------------------------
Net Loss $(395,694)$(3,572,478) $ (725,547)$(5,381,226)
=================================================
Net loss per common
Share-basic and dilutive $ (.05) $ (.43) $ (.10) $ (.67)
=================================================
Weighted average shares
outstanding 7,404,000 8,289,920 6,977,454 8,023,283
=================================================
See accompanying notes.
</TABLE>
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URSUS TELECOM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
1999 2000
-------------------
OPERATING ACTIVITIES
Net loss $ (725,547) $ (5,381,226)
Adjustments to reconcile net loss to net
cash provided by (used in)
operating activities:
Depreciation and amortization 804,342 1,733,460
Allowance for doubtful accounts 243,291 342,786
Deferred taxes 107,610
Amortization of consulting expense 141,838
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 (749,443) 634,385
Prepaid expenses 110,227 70,240
Other current assets 584,544 106,252
Income tax receivable (467,210) 137,580
Other assets (162,025) (194,519)
Accounts payable and accrued expenses 616,730 (125,121)
Commissions payable (145,925) 140,417
Other current liabilities (105,753) (112,040)
--------------------------
Net cash provided by (used in)
operating activities 182,805 (2,505,948)
INVESTING ACTIVITIES
Purchase of equipment (361,754) (951,239)
Cash provided by acquisitions,
net of cash acquired 182,824
--------------------------
Net cash used in investing activities (361,754) (768,415)
FINANCING ACTIVITIES
Repayments of long-term debt (72,852) (120,440)
Net proceeds from the sale of
common stock 170,248 8,250
Repayments on capital leases (188,474) (321,776)
Increase in advances to
related parties (176,460) (63,000)
---------------------------
Net cash used in financing activities (267,538) (496,966)
----------------------------
Net decrease in cash and cash equivalents (446,487) (3,771,329)
Cash and cash equivalents at
beginning of period 2,406,643 5,788,839
---------------------------
Cash and cash equivalents
at end of period $ 1,960,156 $ 2,017,510
===========================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 85,790 $ 148,804
===========================
Assets acquired under capital leases
and other financing $ 942,337 $ 653,495
===========================
Equipment acquired with common stock $ $ 272,250
===========================
Common stock and warrants
issued for acquisitions $ $ 6,468,603
===========================
See accompanying notes.
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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 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, 2000, as set forth in Form 10-K of Ursus Telecom Corporation.
The results for the three and six months ended September 30, 2000, are not
necessarily indicative of the results that may be expected for the year ending
March 31, 2001.
The condensed consolidated balance sheet at March 31, 2000 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) ISSUES AFFECTING LIQUIDITY
Ursus experienced net losses in fiscal 2000 and for the first six months
of fiscal 2001, and has an accumulated deficit and working capital deficit of
approximately $7.6 million and $5.1 million, respectively, at September 30,
2000. Ursus's results of operations and operating cash flows have been
negatively impacted primarily by a decline in gross margins and an increase in
selling, general and administrative expenses. The decline in gross margins
have resulted from competitive pressures whereby revenues per minute have
decreased relative to the cost per minute Ursus incurs to transmit calls.
Selling, general and administrative expenditures have increased primarily as a
result of expenditures related to the support and operation of Ursus's e-
commerce site, theStream.com, launched in fiscal 2000, and the integration
efforts for acquired businesses and customer bases. In response to these
matters, Ursus is in the process of implementing specific cost reduction
plans, which include headcount reductions, the cessation of development and
certain support of the theStream.com, as well as, a reduction in other
administrative expenses. In addition, Ursus's management has approved the sale
of theStream.com and is currently evaluating potential sale strategies.
Management began to implement the cost reduction measures in October, 2000 and
believes that these initiatives will enable Ursus to generate sufficient cash
flow from operations to meet obligations as they become due.
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In addition to the cost reduction initiatives, Ursus is seeking new
sources of debt or equity financing to ensure liquidity. It is uncertain,
however, whether Ursus will be successful in its attempts to reduce costs or
whether new financing will be available on terms acceptable to Ursus. Ursus's
operating cash flow is dependent on factors beyond management's control,
including general economic conditions and conditions in the markets Ursus
serves. If management's plans or assumptions change or prove to be inaccurate,
then continued expense reductions may be necessary, which could impact the
future growth of Ursus.
(3) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, Ursus 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, management believes that such amounts will not have a
material adverse affect on Ursus's financial condition or results of
operations.
In fiscal 2000, Ursus entered into an agreement with Global Crossing to
purchase over a three year period approximately $30 million in capacity on
undersea cables currently under construction Ursus and Global Crossing have
agreed to cancel the purchase contract with no cost to Ursus.
(4) NET LOSS PER COMMON SHARE
Following is a reconciliation of amounts used in the per share computations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 2000 1999 2000
----------------------------------------------------
<S> <C> <C> <C> <C>
Net loss-numerator basic
computation $ (395,694) $(3,588,621) $(725,547) $(5,381,226)
Effect of dilutive
securities-None
-------------------------------------------------
Net loss as adjusted for
assumed conversion-
numerator
Diluted computation $ (395,694) $(3,588,621) $(725,547) $(5,381,226)
=================================================
Weighted average shares-
denominator basic
computation 7,404,000 8,289,920 6,977,454 8,023,283
Effect of dilutive
securities-
Stock options
-------------------------------------------------
Weighted average shares as
adjusted-denominator 7,404,000 8,289,920 6,977,454 8,023,283
=================================================
Net loss per share:
Basic $ (0.05) $ (0.43) $ (0.10) $ (0.67)
=================================================
Diluted $ (0.05) $ (0.43) $ (0.10) $ (0.67)
=================================================
</TABLE>
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(5) SEGMENT DISCLOSURES
Ursus operates in one industry segment, the international long distance
telecommunications industry. For the quarters ended September 30, 1999 and
2000, a significant portion of Ursus's revenues were derived from traffic
transmitted through its primary switch facility located in Sunrise, Florida.
(6) RECLASSIFICATIONS
Certain previous period amounts have been reclassified to conform to the
current period presentation.
(7) ASSETS HELD FOR SALE
As indicated in Note 2 above, management has authorized the sale of
theStream.com. Statement of Financial Accounting Standards No. 121:
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS 121") requires that long-lived assets held for
disposal be carried at the lower of carrying value or fair value less costs of
disposal, once management has committed to a plan of disposal. Ursus is
actively seeking buyers for theStream.com and has classified certain related
assets, including equipment, internal use software and other assets as being
held for sale. Management is currently evaluating the fair values and costs to
sell these assets and expects that their evaluation will be complete in the
third quarter of fiscal 2001. If the results of the evaluation indicate that
carrying value exceeds fair value less costs to sell, Ursus will write-down
these assets.
The sale of theStream.com should have an immaterial impact on the revenue
of Ursus, as the revenue generated from theStream.com is insignificant when
compared to total revenue. As of September 30, 2000, Ursus has classified
approximately $1.3 million as assets held for sale. Ursus has approximately
$437,000 in capital lease obligations and equipment financing related to
these assets. Certain of these obligations are secured by the related assets.
Ursus has not yet determined whether or to what extent these obligations could
be transferred as a part of the asset sale and has classified these
obligations in the current and long term liabilities section of the
accompanying balance sheets.
(8) DEFERRED TAXES
For the six months ended September 30, 2000, Ursus's income tax provision
(benefit) was computed using an estimated annual effective tax rate of
approximately 38%. Because of the net losses experienced by Ursus, deferred
income taxes are primarily composed of net operating loss carryforwards.
Management has evaluated the recoverability of the deferred taxes arising in
the current period and determined that a full tax valuation allowance is
necessary to reduce the deferred tax assets to the amount that will more
likely than not be realized. After recording the valuation allowance, the
income tax benefit generated during the six months ending September 30, 2000
was fully offset and the net deferred tax assets and liabilities are zero.
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Additionally, in the three month period ended September 30, 2000, Ursus
filed for income tax refunds to carryback certain losses to prior taxable
periods and wrote-off approximately $137,580 of income tax receivables in
excess of amounts previously expected to be recovered. In October 2000, Ursus
received approximately $659,000 in tax refunds from the Internal Revenue
Service representing a carryback of the prior fiscal year's losses to prior
tax years.
(9) OTHER INCOME (EXPENSE)
Included in other income (expense) are foreign currency exchange losses
incurred by Ursus. Ursus has a contract with its South African agent whereby
Ursus has guaranteed a minimum exchange rate. As a result of the devaluation
of the South African Rand as compared to the US dollar, Ursus incurred an
exchange loss during the three month period ended September 30, 2000. Included
in other expense is an exchange loss of approximately $340,000, partially
offset by approximately $64,000 in commissions refunded to Ursus from its
South African agent as a result of the impact of the exchange rate differences
on the revenue base. Ursus is currently renegotiating the agreements with
its South African agent and does not expect significant foreign exchange
losses in the future.
(10) ACQUISITIONS
Latin American Enterprises
---------------------------
On June 13, 2000, pursuant to a Stock Purchase Agreement and Merger
Agreement (collectively, the "Agreements") dated as of June 1, 2000, Ursus
acquired Latin American Enterprises and purchased all the issued and
outstanding common stock of various affiliated companies (collectively "LAE").
Pursuant to the Agreements, the shareholders of LAE and the affiliated
Companies received aggregate consideration of 450,000 shares of Ursus's common
stock, $65,000 in cash and warrants to purchase 200,000 shares of Ursus's
common stock at an exercise price of $15.50 per share. Based upon the closing
price of Ursus's common stock on June 1, 2000, and the fair market value of
the other consideration given, the aggregate consideration was valued at
approximately $4.1 million. The acquisition has an effective date of June 1,
2000. As provided in the agreement 100,000 shares of the purchase price is
being held in an escrow account for a period of three years for the purpose
of protecting Ursus from any undisclosed liabilities. In the event that Ursus
exercises its rights under the escrow agreement, the final stock consideration
paid for the acquisition and the purchase price will be adjusted accordingly.
LAE is a provider of international long distance telecommunication
services, pimarily through the sale of prepaid calling cards in airports and
other highly visible locations in the United States, Latin America and Spain.
The prepaid calling cards are distributed through manned kiosks and vending
machines. LAE supports their marketing efforts through branch offices located
in 13 countries and operated a switching facility in Miami, Florida, which has
since been consolidated into our Sunrise, Florida hub.
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Ursus accounted for the LAE acquisition using the purchase method of
accounting. Accordingly, the results of operations of LAE are included in the
consolidated results of Ursus as of June 1, 2000, the date of acquisition.
Under the purchase method of accounting, Ursus has preliminarily allocated
the purchase price to assets and liabilities acquired based upon their
estimated fair values as follows:
Current assets $ 672,079
Property and equipment, net 653,327
Intangible assets 8,059,580
Current liabilities (5,281,486)
Total purchase price, including closing costs $ 4,103,500
The allocation of the purchase price and the intangible assets recorded
are preliminary, as Ursus is gathering additional information to value the
acquired assets and liabilities. The acquired intangible assets consist of
goodwill of approximately $7.3 million and a non-compete agreement valued at
approximately $0.8 million. The goodwill and non-compete are being amortized
on a straight-line basis over their estimated useful life and contract term of
ten and three years, respectively.
Customer base acquisition
--------------------------
On June 1, 2000, Ursus acquired the retail customer base and certain
assets of Justice Telecom Corporation ("Justice"), a United States based
carrier, for stock. The purchase price was 298,105 shares of Ursus's common
stock valued at approximately $2.5 million. Ursus is amortizing the customer
base using a method that approximates the estimated run-off of the underlying
customers over a period of five years.
Ursus also acquired a switch and other equipment from Justice for
approximately $95,000 in cash and 33,000 shares of Ursus's common stock valued
at $271,920 based on the closing price of Ursus's common stock on June 1,
2000. These assets are being depreciated over their remaining estimated useful
lives in accordance with Ursus's depreciation policy.
In connection with the transaction, Ursus will pay contingent
consideration of three times the excess of the average billed amounts to the
acquired customer base during the months of September, October, and November
2000, over the June billed amount, if any. Ursus has the option to pay the
excess consideration, if any, in cash or common stock and is required to pay
such amounts by December 31, 2000. Such contingent consideration, if any, will
be accounted for as additional purchase price when the amount is measurable
and will be amortized over the remaining useful life of the customer base.
Based on the billed amounts for September and October, Ursus does not expect
to pay a significant amount of additional consideration to Justice.
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(11) EQUITY
On August 3, 2000, Ursus terminated its relationship with Ameri-First
Securities Capital. Under this agreement, Ameri-First was to provide Ursus
with certain advisory and consulting services. Ursus was obligated to issue
warrants for the purchase of up to 100,000 shares of Ursus's common stock at
exercise prices ranging from $11.40 to $16.00 per share. As compensation for
entering into the termination agreement, Ursus granted five year warrants to
purchase 10,000 shares of Ursus common stock at an exercise price of $11.40
per share. The previous grant of warrants to purchase100,000 shares of Ursus
common stock was cancelled.
On August 4, 2000, Ursus executed a one-year agreement, cancelable upon
30 day notice, with Continental Capital & Equity Corporation to provide
investor relation expertise. The agreement provides for a monthly fee of
$10,000 plus the issuance of warrants to purchase up to 100,000 shares of
Ursus's common stock at exercise prices ranging from $7.00 to $12.00 per
share. The warrants will be exercisable for a period of one year subsequent to
Ursus's registration of such shares underlying the warrants. Ursus has agreed
to register such shares if the market value of the common stock is in excess
of the exercise prices noted above within 60 days of a written request by
Continental. As additional compensation for entering into the agreement,
Continental agreed to cancel a previous grant of warrants to purchase 105,000
shares of common stock.
The warrants issued to Ameri-First and Continental were fully vested at
the date of grant and were valued by Ursus using the Black-Scholes option
pricing model. Included in selling, general and administrative expenses for
the six month period ended September 30, 2000 is approximately $142,000 of
consulting expense related to these warrants.
Stock options
-------------
Ursus periodically grants options to employees. The exercise price of
options granted equals or exceeds the fair value of the underlying common
stock on the dates of grant. A summary of stock option activity for the six
months ended September 30, 2000 is as follows:
Weighted
Average
Exercise
Shares Price
-------------------------
Options outstanding March 31, 2000 775,300 $ 10.07
-------------------------
Granted 374,000 7.53
Exercised 2,000 20.23
Forfeitures 35,750 15.02
-------------------------
Options outstanding September 30, 2000 1,111,500 $ 9.04
-------------------------
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(12) LEGAL PROCEEDINGS
Jeffrey Chaskin
---------------
On October 27, 2000, the Chief Executive Officer of Ursus Telecom
Corporation asked the then President and Chief Operating Officer of Ursus,
Jeffrey Chaskin, to take a temporary leave of absence. Following this
request, on October 30, 2000, Mr. Chaskin resigned as President and Chief
Operating Officer of Ursus and on November 2, 2000 filed suit in the Circuit
Court in Broward County, Florida against Ursus alleging that Ursus had
breached the employment agreement between the parties. Mr. Chaskin is
demanding a judgement for $1,675,000 plus interest, costs and attorneys' fees.
Ursus has not yet responded to the suit filed by Mr. Chaskin; however,
Ursus denies the claims by Mr. Chaskin, intends to vigorously defend itself
and may file counterclaims against Mr. Chaskin. Management is unable to
estimate Ursus's potential range of monetary exposure, if any, or to predict
the ultimate outcome of the matter.
Other
-----
LAE, which Ursus acquired on June 1, 2000, is a defendant in a legal
action brought by Worldcom Technologies, Inc. in the Circuit Court of Dade
County, Florida. A non-jury trial has been scheduled to begin on December 11,
2000. Ursus has fully reserved what it believes is its maximum exposure under
the suit and; therefore, does not believe that this action will have a
material impact on its financial condition.
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 Ursus 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 management 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
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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 Ursus; (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; (xiii) vendor responses to potential delays or
defaults due to cash shortages Ursus may experience; (xiv) the ability to
successfully integrate new acquisitions; and (xv) other risk factors included
in Ursus's report on form 10-K, on file with the Securities and Exchange
Commission The foregoing review of the important factors should not be
considered as exhaustive. Other than as required under the securities laws of
the United States, 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
Ursus is a facilities-based provider of international
telecommunications services and offers a broad range of discounted
international and enhanced telecommunication services, including U.S.
originated long distance service and direct-dial international service,
Internet telephony and voice over the Internet protocol ("VOIP"), typically to
small and medium-sized businesses and travelers. Our primary service is call
reorigination; however, we have increasingly been migrating calls to direct
access, VOIP and other methods of transmission. We also sell services to
other carriers and resellers on a wholesale basis in the US as well as abroad.
Our retail customer base, which includes corporations and individuals, is
located in South Africa, Latin America, the Middle East (Lebanon and Egypt),
Europe (Germany and Spain), New Zealand and other parts of the world. We
operate a switched-based digital telecommunications network out of our primary
switching hub located in Sunrise, Florida. We installed our first switch in
Sunrise, Florida, which became fully operational in October 1993. As of March
31, 2000, we operated six NACT-STX digital tandem telecommunication switches
with a capacity of 8,064 ports out of our central hub in South Florida. During
the quarter ended September 30, 2000, we began to route traffic through our
New York point of presence.
From November 1993 until the current time, we have grown by marketing our
services through a worldwide network of independent agents and resellers,
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which, as of March 31, 2000, serves approximately 130,000 active registered
subscribers. Billed minutes of traffic have increased from 27.7 million
minutes in the three months ended September 30, 1999 to 36.5 million minutes
in the three months ended September 30, 2000.
RECENT EVENTS
We expanded our reach into Latin America and Spain through the
acquisition of Latin America Enterprises (and several affiliated companies
(collectively, "LAE") on June 1, 2000. LAE is provider of international long
distance telecommunication services, primarily through the sale of prepaid
calling cards in airports, railroad stations and other highly visible
locations in the United States, Latin America and Spain. The prepaid calling
cards are distributed through manned kiosks and vending machines. LAE
supports the marketing efforts through branch offices and affiliated companies
located in 13 countries. LAE operated a switching facility in Miami, Florida,
which has since been consolidated into our Sunrise, Florida hub.
We have expanded our retail customer subscriber base by purchasing a
customer base from Justice Telecom Corporation ("Justice"), a US based carrier
on June 1, 2000. This purchase also gave us points of presence in Los Angeles,
California, Nigeria and Gibraltar. At the date of the purchase, the customer
base consisted of approximately 12,000 customers that represented less than
10% of Ursus's consolidated customer base subsequent to the acquisition.
In late October of 2000 management made the decision, due to increasing
development, support and marketing costs and lower than expected revenue, to
scale back expenditures related to our e-commerce web site known as
theStream.com. The site continues to operate with no new development or
marketing support. Users can still purchase products offered by Ursus
including traditional long distance, PC to phone and prepaid calling cards.
We are actively seeking buyers for the site and the related assets, while
exploring other options that may be available to us. We believe that such a
sale will allow us to recover our costs. In the event that we are unable to
recover our costs we will be required to record an impairment loss, which may
be significant. See discussion in "Liquidity and Capital Resources" on page
16 regarding the effects of theStream.com.
OTHER OPERATING DATA
The following information for the three and six months ended September
30, 2000 and 1999 is provided for informational purposes and should be read in
conjunction with the unaudited Consolidated Financial Statements and Notes
provided in this 10-Q and the Consolidated Financial Statements presented with
Ursus's annual report for the fiscal year ended March 31, 2000.
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The following table sets forth income statement data as a percentage of
revenues for the periods indicated:
Three Months ended Six Months ended
September 30, September 30,
1999 2000 1999 2000
----------------------------------------------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of services
(exclusive of depreciation
and amortization shown
separately below) 64.5 68.7 65.8 66.1
Operating expenses:
Commission 7.5 6.8 7.8 7.4
Selling, general and
administrative 28.9 43.3 27.3 42.9
Depreciation and
amortization 4.4 10.0 4.3 8.9
Total operating expenses 105.3 128.8 105.2 125.3
Operating loss (5.3) (28.8) (5.2) (25.3)
Other expense (0.3) (3.0) (0.6) (1.7)
Loss before income taxes (5.6) (31.8) (5.8) (27.0)
Net Loss (4.3) (33.3) (3.9) (27.7)
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AS
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1999:
REVENUES. Revenues increased $1.7 million (18.2%) from approximately $9.1
million for the three months ended September 30, 1999 to approximately $10.8
million for the three months ended September 30, 2000. The revenue increase
is attributable to the acquisition of LAE and the Justice customer base
offset by continued decrease in revenue per minute. Revenue per minute
declined by approximately 15.2% for the three months ended September 30, 2000
as compared to the three months ended September 30, 1999. Minutes of billable
traffic for the quarter increased by 31.5% to approximately 36.5 million
minutes compared to 27.7 million minutes for the same period last year. The
direct retail traffic generated primarily through our network of exclusive and
non-exclusive agents and resellers grew by approximately 26.9% from
approximately 13.8 million minutes to 17.5 million minutes. The decrease in
revenue per minute is consistent with our entry into more mature European
markets, the ongoing deregulation process and open market policy in our core
markets of Latin America and with our increased wholesale sales, which
traditionally generate lower revenues per minute.
COST OF SERVICES. Cost of services increased $1.5 million (25.8%), from $5.9
million for the three months ended September 30, 1999 to $7.4 million for the
three months ended September 30, 2000. Cost of services as a percentage of
sales increased from 64.5% to 68.7%. This increase in our costs is
attributable to increased network capacity associated with our planned
expansion of our carrier wholesale division and VOIP business, as well as
higher than expected costs incurred at our Los Angeles Switch operation.
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GROSS PROFIT. Gross profit increased $0.2 million (4.3%) from $3.2 million
for the three months ended September 30, 1999 to $3.4 million for the three
months ended September 30, 2000. As a percentage of revenue, gross profit
decreased from 35.5% during the three months ended September 30, 1999 to 31.3%
for the three months ended September 30, 2000. Gross profit decreased as a
percentage of revenue as a result of higher network costs and higher than
expected costs incurred at our Los Angeles switch operation during the
integration of the Justice customer base acquired in June 2000, which resulted
in lower profit margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including commissions, increased $2.1 million (62.5%)
from $3.3 million for the three months ended September 30, 1999 to $5.4
million for the three months ended September 30, 2000. The increase was due
primarily to the expansion in personnel and overhead expenses associated with
the continued expansion of our switching and operational facilities, the
operation, support and marketing of theStream.com and additional costs
incurred to migrate traffic to Internet protocol (IP) telephony. In addition,
costs associated with our effort to accelerate our worldwide marketing efforts
and expand on our VOIP and direct access carrier to carrier service
capabilities led to increased selling, general and administrative expenses.
Finally, our recent acquisitions, which were included in the results of
operations for the entire quarter, resulted in increased payroll and other
costs. Bad debt expense, a component of selling, general and administrative
expenses increased $0.1 million (40.6%) from $0.2 million for the three months
ended September 30,1999 to $0.3 million for the three months ended September
30, 2000 as a result of increased risks associated with certain territories.
As a percentage of revenues, selling, general and administrative expenses,
including commissions, increased from 36.4% to 50.0%. We have substantially
increased our personnel and infrastructure in connection with our VOIP
initiatives and in connection with theStream.com and particularly with the
acquisitions of LAE and the Justice customer base.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
approximately $0.7 million (166.4%) from approximately $0.4 million for the
three months ended September 30, 1999 to approximately $1.1 million for the
three months ended September 30, 2000 primarily as a result of the expansion
of our infrastructure in connection with our internet and VOIP projects and
the ongoing deployment of our IP network. The increase is attributable to new
switches, servers and gateways, upgrades to existing switches, the purchase of
additional computer equipment and software, leasehold improvements, internal
use of software and the amortization of intangibles resulting from
acquisitions, which increased substantially with the acquisition of LAE and
the Justice customer base.
OPERATING LOSS. The operating loss increased from approximately $0.5 million
for the three months ended September 30, 1999 to 3.1 million for the three
months ended September 30, 2000 primarily as a result of a 62.5% increase in
selling, general and administration expenses, including commissions, a 166.4%
increase in depreciation and a decrease in gross profit , as described above.
OTHER EXPENSE. Other expense increased approximately $0.3 million (1,184.0%)
from approximately $25,000 to approximately $0.3 million primarily as a result
of foreign currency exchange losses as it relates to a contract with our
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<PAGE>
South Africa agent whereby Ursus has guaranteed an exchange rate for a period
of time. As a result of the devaluation of the South African currency as
compared to the US Dollar, Ursus incurred a loss of approximately $340,000,
offset in part by commissions refunded by the agent as a result of the impact
of the exchange rate loss to the revenue base.
NET LOSS. As a result of all of the foregoing factors, our net loss increased
approximately $3.2 million from approximately $0.4 million in the three months
ended September 30, 1999 to approximately $3.6 million for three months ended
September 30, 2000.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED
TO THE SIX MONTHS ENDED SEPTEMBER 30, 1999:
REVENUES. Revenues increased $0.8 million (4.7%) from approximately $18.6
million for the six months ended September 30, 1999 to approximately $19.4
million for the six months ended September 30, 2000. The revenue increase is
attributable to the acquisition of LAE and the Justice customer base , offset
in part by a continued decrease in revenues per minute. Revenues per minute
declined by approximately 23.5% since our year-end of March 31, 2000. Minutes
of billable traffic for the six months increased by 31.7% to approximately
71.9 million minutes compared to 54.6 million minutes for the same period last
year. The direct retail traffic generated primarily through our network of
exclusive and non-exclusive agents grew by approximately 18.1% from
approximately 28.6 million minutes to 33.8 million minutes. The decrease in
revenue per minute is consistent with our entry into more mature European
markets, the ongoing deregulation process and open market policy in our core
markets of Latin America and with our increased wholesale sales, which
traditionally generate lower revenue per minute.
COST OF SERVICES. Cost of Services increased $0.7 million (5.2%), from $12.2
million for the six months ended September 30, 1999 to $12.9 million for the
six months ended September 30, 2000. Cost of services as a percentage of
sales increased to 66.1% from 65.8%. This increase in our costs as a
percentage of sales is attributable to increased network costs associated with
our planned expansion of our carrier wholesale division and our VOIP business
as well as higher than expected costs incurred at our Los Angeles Switch
operation during the integration of the Justice customer base acquired in June
2000.
GROSS PROFIT. Gross profit increased $0.3 million (3.8%) from $6.3 million
for the six months ended September 30, 1999 to $6.6 million for the six months
ended September 30, 2000. As a percentage of sales gross profit decreased to
33.9% for the six months ended September 30, 2000 from 34.1% for the
comparable period last fiscal year. This is result of declining revenues per
minute as discussed above offset in part by declining costs per minute. For
the six months ended September 30, 2000 as compared to the six months ended
September 30, 1999 average cost per minute has decreased 18.2% or an average
of $.04 per minute.
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<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including commissions, increased $3.3 million
(50.0%) from approximately $6.5 million for the six months ended September 30,
1999 to $9.8 million for the six months ended September 30, 2000. The
increase was due primarily to the expansion in personnel and overhead expenses
associated with the continued expansion of our switching and operational
facilities, the development, operation, support and marketing of theStream.com
and additional costs to migrate traffic to Internet protocol (IP) telephony.
In addition, costs associated with our effort to accelerate our worldwide
marketing efforts and expand on our VOIP and direct access carrier to carrier
service capabilities led to increased selling, general and administrative
expenses. Finally, our recent acquisitions resulted in increased payroll and
other costs. Bad debt expense, a component of selling general and
administrative expenses increased $0.1 million (29.0%) from $0.3 million
during the six months ended September 30, 1999 to $0.4 million for the six
months ended September 30, 2000 as a result of increased risks associated with
certain territories. As a percentage of revenues, selling, general and
administrative expenses, including commissions, expenses increased from 35.1%
to 50.2%. We have substantially increased our personnel and infrastructure in
connection with our VOIP initiatives, in connection with theStream.com and the
acquisitions of LAE and the Justice customer base.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased approximately $0.9 million (115.5%) from approximately $0.8 million
for the six months ended September 30, 1999 to approximately $1.7 million for
the six months ended September 30, 2000 primarily as a result of the expansion
of our infrastructure in connection with our internet and VOIP projects and
the ongoing deployment of our IP network. The increase is attributable to new
switches, servers and gateways, upgrades to existing switches, the purchase of
additional computer equipment and software, leasehold improvements, internal
use of software and especially amortization of intangibles resulting from
acquisitions, which increased substantially with the acquisition of LAE and
the Justice customer base.
OPERATING LOSS. Operating loss increased from approximately $1.0 million for
the six months ended September 30, 1999 to approximately $4.9 million for the
six months ended September 30, 2000 primarily as a result of a 50.0% increase
in selling, general and administrative expenses, including commissions, and a
115.5% increase in depreciation and amortization, as described above.
OTHER EXPENSE. Other expense increased approximately $0.2 million (201.4%)
from approximately $0.1 million to approximately $0.3 million primarily as a
result of foreign currency transaction losses as it relates to a contract with
our South Africa agent where Ursus has guaranteed an exchange rate for a
period of time. As a result, with the devaluation of the South African
currency as compared to the US Dollar, Ursus has incurred a loss of
approximately $340,000, offset in part by commissions refunded by the agent as
a result of the impact of the exchange rate loss to the revenue base.
NET LOSS. As a result of all of the foregoing factors our net loss increased
by approximately $4.7 million from $0.7 million in the six months ended
September 30, 1999 to approximately $5.4 million for six months ended
September 30, 2000.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements consist of capital expenditures in connection
with the acquisition and maintenance of switching capacity and circuits,
maintenance of theStream.com and working capital requirements. Historically,
our capital requirements have been met primarily through funds provided by
operations, capital leases and vendor financing agreements and the sale of
common stock.
Net cash used by operating activities was approximately $2.5 million for
the six months ended September 30, 2000 as compared to net cash provided by
operating activities of $0.2 million for the six months ended September 30,
1999. Cash flow from operations was impacted by a $4.7 million increase in our
net loss partially offset by increased depreciation and amortization.
Net cash used in investing activities was approximately $0.8 million for
the six months ended September 30, 2000 compared with approximately $0.3
million for the six months ended September 30, 1999 reflecting increased
equipment purchases, offset in part by the cash we received as a result of our
acquisition of Latin American Enterprises.
Net cash used in financing activities was approximately $0.5 for the six
months ended September 30, 2000 as compared to $0.3 for the six months ended
September 30, 1999. The increase was primarily caused by increased capital
lease and long-term debt payments as a result of additional financing incurred
by Ursus.
We have experienced significant cash flow losses during this fiscal year
as a result of various factors. We have implemented certain cost reduction
initiatives, beginning in October 2000. These initiatives include a
substantial headcount reduction, the cessation of selling, general and
administrative expenditures related to Ursus's e-commerce site, theStream.com,
as well as, a reduction in other administrative expenses. We believe that
these changes, along with a refocus on our core telephony business will enable
us to return to cash flow breakeven. We will continue to seek new sources of
capital to ensure liquidity. It is uncertain, however, whether we will be
successful in our efforts to raise additional capital and whether we can
return to profitability. The amount of our future capital requirements will
depend upon many factors, including performance of Ursus's business, the rate
and manner in which it expands, staffing levels and customer growth, as well
as other factors not within our control, including competitive conditions and
regulatory or other government actions. If management's plans or assumptions
change or prove to be inaccurate, then continued expense reductions may be
necessary, which could impact the future growth of Ursus.
SEASONALITY
Ursus 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK. As a global enterprise, we face exposure to adverse
movements in foreign currency exchange rates, even though we bill primarily in
United States Dollars and are generally paid by customers outside of the
United States either in United States Dollars or in local currency at
predetermined rates. Our foreign currency exposure may change over time as
the level of activity in foreign markets changes and could have a material
adverse impact on our financial results.
INTEREST RATE RISK. 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
adverse impact on our financial performance.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings.
Access Authority, Inc., which Ursus acquired on September 17, 1998, is
involved as plaintiff and defendant in a legal action, as described below,
which is incident to its business. Management does not believe that this
action will have a material impact on Ursus's financial condition.
In February 1998, Access Authority 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 Authority, breached his sales agreement with Access Authority,
wrongfully diverted customers and business to Access Authority's competitors,
misappropriated Access Authority's trade secrets, breached fiduciary duties
and other duties owed to Access Authority and engaged in unfair competition.
Access Authority sought compensatory damages, injunctive relief and a
declaratory judgment. Alley denied the material allegations in Access
Authority's complaint and asserted a counterclaim in which he claimed breach
of contract by and unjust enrichment of Access Authority on account of Access
Authority's solicitation of customers located by Alley and to which Alley
claimed contractual rights.
Subsequent to the filing of the federal court action, Alley commenced a
parallel proceeding in the Circuit Court of the Sixth Judicial Circuit,
Pinellas County, Florida. In that action Alley asserted essentially the same
claims and sought the same relief as in his federal counterclaim. Access
Authority, as defendant, counterclaimed in the Pinellas County proceeding,
asserting the same claims as in its federal complaint. The Pinellas County
proceeding was stayed pending resolution of the federal action. Shortly
before trial in the federal action, the District Court determined that it
lacked jurisdiction to hear the action and dismissed the federal court
proceeding. The stay was thereupon lifted in the Pinellas County proceeding
and the parties have advised the court of their intention to file cross-
motions for summary judgment against one another.
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JEFFREY CHASKIN
On October 27, 2000 the Chief Executive Officer of Ursus Telecom
Corporation (the "Company") asked the then President and Chief Operating
Officer of Ursus, Jeffrey Chaskin ("Mr. Chaskin"), to take a temporary leave
of absence. Following this request, on October 30, 2000, Mr. Chaskin resigned
as President and Chief Operating Officer of Ursus and on November 2, 2000
filed suit in the Circuit Court in Broward County, Florida against Ursus
alleging that Ursus had breached the employment agreement between the parties.
Mr. Chaskin is demanding a judgement for $1,675,000 plus interest, costs and
attorneys' fees.
Ursus has not yet responded to the suit filed by Mr. Chaskin, however,
Ursus denies the claims by Mr. Chaskin, intends to vigorously defend itself
and may file counterclaims against Mr. Chaskin. Management is unable to
estimate Ursus's potential range of monetary exposure, if any, or to predict
the ultimate outcome of this suit.
OTHER
LAE, which Ursus acquired on June 1, 2000, is a defendant in a legal
action brought by Worldcom Technologies, Inc. in the Circuit Court of Dade
County, Florida. A non-jury trial has been scheduled to begin on December 11,
2000. Ursus has fully reserved what it believes is its maximum exposure under
the suit and therefore does not believe that this action will have a material
impact on its financial condition.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
(i) Current Report on Form 8-K/A filed on August 11, 2000
amending Ursus's Current Report on Form 8-K filed on
June 21, 2000 in connection with the acquisition of
Latin American Enterprises.
(ii) Current Report on Form 8-K filed on November 13, 2000
regarding the resignation of Ursus's President Jeffrey
Chaskin on October 27, 2000
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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/ Steven L. Relis
------------------------------
Steven L. Relis
Chief Accounting Officer
and authorized officer
of Registrant
Dated: November 21, 2000
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EXHIBIT INDEX
EXHIBIT
NUMBER
**27 Financial Data Schedule
**Filed herewith
