<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to _____
Commission File Number: 0-22944
Capsule Communications, Inc.
----------------------------
(Exact name of Registrant as specified in its charter)
Delaware 22-3055962
------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2 Greenwood Square, 3331 Street Road, Suite 275
Bensalem, Pennsylvania 19020
- ---------------------- -----
(Address of principal executive offices) (Zip Code)
(215)-633-9400
--------------
(Registrant's telephone number, including area code)
US Wats, Inc.
-------------
(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
required 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 _____
---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Outstanding at
Common Stock May 8, 2000
------------ --------------------
$.001 20,728,444
<PAGE>
CAPSULE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page (s)
--------
<S> <C>
PART I
======
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2000 (unaudited) and December 31, 1999 3 - 4
Consolidated Statements of Operations
Three Months Ended March 31, 2000 and 1999 (unaudited) 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7 - 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 14
Item 3. Quantitative and Qualitative Disclosure about Market Risk 14
PART II
=======
OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE PAGE 16
</TABLE>
2
<PAGE>
PART I
======
Financial Information
Item 1.
- ------
Financial Statements
CAPSULE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 (unaudited) 1999
---------------- ----
Assets
------
Current Assets
Cash and cash equivalents $ 1,205,657 $ 827,048
Restricted cash 780,232 770,363
Accounts receivable, net of allowance for
doubtful accounts of $976,958 for 2000,
and $1,711,853 for 1999 5,751,887 5,772,799
Prepaid expenses and other 218,524 201,724
----------- -----------
Total Current Assets 7,956,300 7,571,934
----------- -----------
Property and Equipment
Telecommunications equipment 4,139,886 4,120,775
Equipment 1,948,569 1,863,177
Software 655,422 655,422
Office furniture and fixtures 174,272 161,282
Leasehold improvements 672,285 668,820
----------- -----------
7,590,434 7,469,476
Less accumulated depreciation and amortization 4,688,071 4,459,111
----------- -----------
Total Property and Equipment, net 2,902,363 3,010,365
----------- -----------
Other assets 522,151 323,914
----------- -----------
Total $11,380,814 $10,906,213
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CAPSULE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 (unaudited) 1999
--------------- ----
<S> <C> <C>
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Note payable $ 2,409,048 $ 1,036,507
Capital lease obligations, current portion 99,706 153,289
Accounts payable 5,035,550 5,085,368
Accrued commissions 777,732 643,321
Accrued expenses and other 1,129,822 1,162,975
State and Federal taxes payable 1,093,478 1,039,966
Deferred revenue 84,199 --
------------ ------------
Total Current Liabilities 10,629,535 9,121,426
------------ ------------
Common Shareholders' Equity
Common stock, $.001 par, authorized
100,000,000 shares; issued:
20,947,444 shares in 2000
20,925,944 shares in 1999 20,947 20,926
Additional paid-in capital 12,124,239 12,087,332
Accumulated deficit (11,393,688) (10,323,252)
------------ ------------
751,498 1,785,006
Common stock held in treasury
(219,000 shares in 2000 and 1999), at par value (219) (219)
------------ ------------
751,279 1,784,787
------------ ------------
Total $ 11,380,814 $ 10,906,213
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CAPSULE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31,
2000 1999
------------------------------
Revenues $ 8,733,562 $ 9,185,562
Cost of sales 6,170,011 6,269,743
------------ ------------
Gross profit 2,563,551 2,915,819
Selling, general and administrative expenses 3,608,208 3,557,231
------------ ------------
Loss from operations (1,044,657) (641,412)
Other income (expense)
Interest income 22,449 26,348
Interest expense (48,228) (48,749)
------------ ------------
Loss before income taxes (1,070,436) (663,813)
Income taxes -- --
------------ ------------
Net loss (1,070,436) (663,813)
Preferred dividends -- 6,750
------------ ------------
Net loss attributable to common shareholders $ (1,070,436) $ (670,563)
============ ============
Net loss per share attributable
to common shareholders $ (.05) $ (.04)
============ ============
Weighted average number of shares outstanding 20,719,796 19,049,233
============ ============
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CAPSULE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss before preferred dividends $(1,070,436) $ (663,813)
Adjustments to reconcile net loss to
net cash provided by (used-in) operating activities
Stock and stock options issued for services 10,403 --
Depreciation and amortization 259,380 374,435
Provision for bad debts 176,213 134,116
Changes in assets and liabilities which provided
(used) cash:
Accounts receivable (155,301) 73,486
Prepaid expenses and other (16,800) (1,441)
Other assets (228,657) 5,553
Deferred revenue 84,199 (1,217)
Accounts payable and accrued expenses 51,440 602,782
State and Federal Taxes payable 53,512 (110,746)
----------- -----------
Net cash provided by (used in) operating activities (836,047) 413,155
----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (120,958) (242,390)
Increase in restricted cash (9,869) --
----------- -----------
Net cash used in investing activities (130,827) (242,390)
----------- -----------
FINANCING ACTIVITIES
Proceeds from private placement -- 1,530,000
Proceeds from stock option exercises 26,525 2,080
Increase in notes payable net 1,372,541 (456,805)
Repayment of capital lease obligations (53,583) (57,579)
Preferred stock dividend -- (6,750)
----------- -----------
Net cash provided by financing activities 1,345,483 1,010,946
----------- -----------
Net increase (decrease) in cash 378,609 1,181,711
Beginning cash and cash equivalents 827,048 1,665,485
----------- -----------
Ending cash and cash equivalents $ 1,205,657 $ 2,847,196
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
CAPSULE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Background
- --------------
Capsule Communications, Inc. ("the Company"), formerly known as US WATS, Inc.,
formed a new wholly-owned subsidiary in the State of Delaware under the name of
Capsule Communications, Inc. At the Company's Annual Meeting of Shareholders
held on November 24, 1999, the shareholders voted to approve the reincorporation
of the Company in Delaware by merging US WATS, Inc. into the new Delaware
subsidiary. After receiving approval from the Public Utility Commissions of
various states in which US WATS, Inc. conducted business, the reincorporation
merger was effected under Delaware law on April 27, 2000. The Company now
operates as a Delaware corporation under the name Capsule Communications, Inc.
The Company is a switch-based interexchange carrier providing long distance
telephone communications services primarily to small and medium-size business
customers as well as residential customers. The Company also provides inbound
long distance services, as well as other telecommunications services such as
travel cards (calling cards), cellular, paging, internet service, dedicated
access, data services, pre-paid calling cards (debit cards), international
callback and carrier termination services. The Company uses its own switches and
facilities to originate, transport and terminate calls for customers generally
located between Maine and Norfolk, Virginia and California (on-net areas).
Approximately 89% of the calls billed by the Company are processed through the
Company's own switches as of March 31, 2000. For calls originating or
terminating outside the Company's own network (off-net area), the Company
utilizes the services provided by other long distance companies.
The Company's revenues are derived primarily from the transport of outgoing and
incoming calls, which are billed by the Company to end-users at specified rates.
Transport costs of these calls are billed to the Company from other carriers at
contractual rates. These carriers supply the Company with call detail
information, which enables the Company to bill its customers depending upon the
Company's individual rates. The combination of the efficiency of the Company's
network and facilities, and the purchase of long distance services in bulk from
other carriers allows the Company to offer competitive rates to small and
medium-sized businesses.
The Company differentiates itself from a price-only sales approach by offering
various value-added services for its customers, through the use of its
customized software. The Company's outbound long distance services, inbound
services, cellular, paging and internet services are provided on one combined
bill which includes various management reports. The Company believes its
consultative approach to meeting its customers' needs distinguishes it from its
larger competitors. All of the Company's customer support functions, such as
customer service, credit and collections, administrative services are centrally
located at the Company's offices at 2 Greenwood Square, 3331 Street Road, Suite
275, Bensalem, Pennsylvania 19020. The Company's telephone number at that
location is (215) 633-9400.
The accompanying unaudited interim consolidated financial statements and related
notes have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission and in the opinion of management, include all
adjustments necessary for a fair presentation of such financial statements. Such
adjustments consist only of normal recurring items. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations. Where appropriate, certain amounts in the prior period
financial statements have been reclassified to conform to the current period
presentation. The results of operations for the three months ended March 31,
2000 are not necessarily indicative of results to be expected for the full year.
7
<PAGE>
The accompanying unaudited interim consolidated financial statements and related
notes should be read in conjunction with the financial statements and related
notes included in the Company's Form 10-K and Form 10-K/A for the year ended
December 31, 1999.
2. Summary of Significant Accounting Policies
- ----------------------------------------------
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its four wholly-owned subsidiaries, USW Corporation, USW Enterprises, Inc.,
Carriers Group Inc., and US WATS of Virginia, Inc. after elimination of all
inter-company accounts, transactions and profits.
Business Segments
The Company's operations have been aggregated into a single reportable segment,
based on the similarity of its customer, products and methods of distribution,
as permitted under SFAS No. 131.
Revenue Recognition
The Company recognizes revenue based upon the customer's usage of services. The
Company bills its customers for service on a monthly basis. However, in some
instances, it bills certain customers on a more frequent basis.
Cash and Cash Equivalents
The Company considers cash in its bank and repurchase agreements with a maturity
of three months or less when purchased as cash and cash equivalents.
At certain times during the year, the Company has balances in its operating
accounts that in the aggregate exceed the $100,000 Federal Deposit Insurance
Corporation insurance limit.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated for
financial reporting purposes using the straight-line method over the estimated
useful lives of the assets:
Telecommunications equipment....................... 7 years
Furniture fixtures and other....................... 5 years
Deferred Financing Costs
Loan origination costs are amortized over the term of the related loan, and are
included in other assets.
Goodwill
The Company records the excess of purchase price over the fair market value of
net assets acquired as goodwill. Goodwill is amortized using the straight line
method over 3 years and is included in other assets.
8
<PAGE>
Accounts Payable
Accounts payable includes the cost of access charges due to local telephone
companies and long distance transport purchased from long distance carriers.
Marketing
All costs related to marketing and advertising the Company's products and
services are expensed in the period incurred.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Loss per Common Share Attributable to Common Shareholders
Loss per common share attributable to common shareholders is computed by
dividing net loss after deduction of preferred stock dividends, if any, by the
weighted average number of common shares outstanding during the period.
For the three months ended March 31, 2000 and 1999, the Company's potential
common stock equivalents had an anti-dilutive effect on loss per share
attributable to common shareholders and, therefore, diluted loss per common
share attributable to common shareholders has not been presented.
The following table summarizes those securities that could potentially dilute
loss per common share attributable to common shareholders in the future that
were not included in determining the fully diluted loss per common share
attributable to common shareholders as the effect is anti-dilutive.
<TABLE>
<CAPTION>
Three Months Ended March 31,
Potential Common Shares resulting from: 2000 1999
---- ----
<S> <C> <C>
Stock Options 1,006,926 662,052
Stock Warrants 0 0
Cumulative, Convertible, Redeemable Preferred Stock 0 300,000
--------- -------
1,006,926 962,052
========= =======
</TABLE>
Fair Value of Financial Instruments
The fair value of the Company's financial instruments such as accounts
receivable, accounts payable, and note payable approximate their carrying
amounts.
9
<PAGE>
Carrying Value of Long-Term Assets
The Company evaluates the carrying value of long-term assets, including
property, plant and equipment, and other intangibles, based upon current and
anticipated undiscounted cash flows, and recognizes an impairment when such
estimated cash flows are less than the carrying value of the asset. Measurement
of the amount of impairment, if any, is based upon the difference between
carrying value and fair value.
Reclassification of Accounts
Certain reclassifications have been made to conform prior years' balances to the
current year presentation.
3. Note Payable
- ----------------
The Company has a revolving $2,000,000 credit facility with Century Business
Credit Corporation, which is renewable for three successive one-year periods
beginning on May 11, 1999. Interest on the revolving credit facility is
currently calculated at the prime lending rate plus 2 3/4%, on a minimum loan
balance of $750,000. The loan is collateralized by accounts receivable and fixed
and intangible assets of the Company. As of March 31, 2000, the Company's
outstanding balance on its credit facility was approximately $909,000 leaving
approximately $1,091,000 available, based on collateral, for future borrowing
under the credit facility.
On March 22, 2000, the Company entered into a Loan Agreement with Gold & Appel
Transfer, S.A. ("G &A") and the Foundation for the International
Non-Governmental Development of Space, a non-profit organization ("FINDS"). Walt
Anderson, a director of the Company, is also the president and director of both
G&A and FINDS. The terms of the agreement call for the Company to borrow up to
$1,000,000 from G&A and $500,000 from FINDS at a rate of 10% per annum and due
and payable on March 1, 2001. The agreement permits the Company to convert any
or all portions of the loan amount to shares of the Company's Common Stock at
$2.50 per share. As of March 31, 2000, the Company's loan balance was $1,500,000
and is recorded in note payable.
During 1999, the Company obtained a letter of credit in the amount of $752,000
for the potential settlement of litigation related to Mr. Scully (see footnote
4).
10
<PAGE>
4. Litigation
- ---------------
On June 13, 1997, Mark Scully, a former President and Chief Operating Officer of
the Company, filed a complaint against the Company, Kevin O'Hare, Aaron Brown
and Stephen Parker in the United States District Court for the Eastern District
of Pennsylvania. Mr. Scully asserts various claims in connection with his
termination of employment with the Company on December 30, 1996. In particular,
he alleges, among other things, breach of contract in connection with the
termination of certain stock options, breach of the alleged contract for
employment, breach of an asserted duty of good faith and fair dealing,
fraudulent and negligent misrepresentation, and civil conspiracy. Mr. Scully
alleges damages of at least $1.6 million, plus attorneys' fees, costs and other
disbursements and the cost of COBRA payments and interest; $1 million of the
alleged damages claimed are punitive. The Company contests the allegations of
the complaint and intends to vigorously defend against the action. On June 9,
1999, the Court issued its decision and judgment was entered in favor of Mr.
Scully and against the Company and two former officers for the sum of
approximately $626,000, which was accrued during 1999, and required the Company
to establish an escrow account equal to 120% of the judgment. The balance in the
escrow account at March 31, 2000 was $780,232 and is recorded as restricted
cash. The Court denied Mr. Scully's claim for attorneys' fees and liquidated
damages. The Company has appealed the decision and maintains that the Court made
a number of errors of law and that the Court applied the wrong measure of
damages. Mr. Scully has appealed the judgment as well.
On November 5, 1999, the Company filed a civil action lawsuit against Cominex,
LLC ("Cominex"), a former customer, in the United States District Court for the
Eastern District of Pennsylvania, to recover approximately $835,000 for unpaid
telephone services. On February 4, 2000, the Court entered a stipulated judgment
in the Company's favor for approximately $835,000. Under the stipulated
judgment, the Company could not proceed to collect or execute on any assets of
Cominex for a period of 90 days from the entry of the judgment, which period
expired on May 5, 2000. Cominex has orally advised the Company that it has no
unencumbered assets. As of this date, there is no additional information
concerning the likely recovery, if any, on the judgment.
The Company is party, in the ordinary course of business, to other litigation
involving services rendered, contract claims and other miscellaneous causes of
action arising from its business. The Company has established reserves relating
to its legal claims and believes that potential liabilities in excess of those
recorded will not have a material adverse effect on the Company's consolidated
financial statements, however, there can be no assurances to this effect.
5. Acquisition
- ----------------
On March 17, 2000, the Company purchased certain assets of the business of Cam-
Comm, Inc. The Company acquired the customer base and accounts receivable of
approximately 70 private line customers from Cam-Comm, Inc. in exchange for a
cash payment of $150,000 and an agreement to pay an amount not to exceed an
additional $159,000 for an outstanding liability of Cam-Comm, Inc. The $150,000
is recorded as goodwill at March 31, 2000. Of the additional $159,000, $74,000
has been recorded in goodwill, which is the amount that the Company anticipates
to pay for the outstanding liability of Cam-Comm, Inc. The goodwill amount is to
be amortized over three years. The Company's Chairman, James M. Rossi, is also
the Chairman of Cam-Comm, Inc. Mr. Rossi has agreed to reimburse the Company one
half of any amount paid by the Company in excess of a total of $200,000.
11
<PAGE>
6. OTHER SALES INFORMATION
- ----------------------------
Net sales information by the Company's product groups for the quarters ended
March 31 are summarized as follows:
2000 1999
---- ----
Amount % Amount %
------ ------
Domestic 1+ $4,522,902 52 $4,807,680 52
International 1,322,572 15 1,372,782 15
Inbound 1,625,932 19 1,602,774 18
Wireless 200,874 2 295,304 3
Domestic Carrier Termination 1,061,282 12 1,107,022 12
---------- --- ---------- ---
Total $8,733,562 100% $9,185,562 100%
========== === ========== ===
12
<PAGE>
Item 2.
- ------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF OPERATIONS
Revenue for the quarter ended March 31, 2000 decreased approximately $452,000
(4.9%) versus the quarter ended March 31, 1999. Approximately $377,000 (83%) of
the decrease was due to a decrease in the Company's revenue derived from retail
sales through the agent and reseller channels. This was mainly attributed to
decreasing selling rates as a result of strong competition in the marketplace.
Competitive pressures resulted in a decline in the Company's average retail rate
per minute of $.025 from the quarter ended March 31, 1999 to the quarter ended
March 31, 2000. The Company has recently instituted several private internet web
sites from which its agents are generating new orders electronically. The
Company expects to continue its efforts to expand this strategy in order to
generate new business. The Company has recently issued a new selling plan with
aggressive pricing to the agents. This strategy is intended to allow the Company
to build the revenue base by adding additional minutes in order to offset the
decline in the retail rate per minute.
Revenue through the carrier sales channel decreased by approximately $46,000 for
the quarter ended March 31, 2000 or 10% of the overall revenue decrease. Similar
to the retail sales channel, in the carrier sales channel the average selling
price per minute decreased by approximately $.023 from the quarter ended March
31, 1999 to the quarter ended March 31, 2000 as a result of strong competition.
Also, in the third quarter of 1999, the Company lost a significant carrier
customer as a result of the customer's bankruptcy. The Company is in the process
of rebuilding the carrier sales channel to higher but controlled revenue levels.
For the quarter ended March 31, 2000, gross profit as a percentage of revenue
decreased to approximately 29% versus 32% for the quarter ended March 31, 1999.
The decrease in gross profit margin is attributed to an increase in cost of
sales in the quarter ended March 31, 2000. This increase was a result of
temporary duplication of network facilities associated with migrating the
network to the new switch in Philadelphia.
Selling, general and administrative ("SG&A") expenses for the quarter ended
March 31, 2000 increased approximately $51,000 versus the amount incurred in the
quarter ended March 31, 1999. The increase in SG&A expense is mainly due to a
increase in salary expense of approximately $256,000, as a result of the an
increase in headcount to support new direct sales programs. This increase was
offset by a decrease in commission expense of approximately $241,000, due to the
decline in revenues. The Company's bad debt expense was approximately (2%) of
revenue for the quarter ended March 31, 2000 compared with (1.5%) of revenue for
the quarter ended March 31, 1999. Bad debt expense increased by approximately
$42,000 for the quarter ended March 31, 2000. SG&A expense as a percentage of
revenue increased from approximately 39% for the quarter ended March 31, 1999 to
approximately 41% for the quarter ended March 31, 2000. This increase is mainly
due to the decrease in revenue.
Interest expense for the quarter ended March 31, 2000 remained relatively the
same as the quarter ended March 31, 1999.
The net loss for the quarter ended March 31, 2000 was approximately $1,070,000,
an increase of approximately $407,000 versus the quarter ended March 31, 1999.
The additional net loss is a result of decreased revenues as mentioned above.
Also, approximately $200,000 of the net loss for the quarter ended March 31,
2000 is associated with the temporary duplicated network costs incurred as a
result of the migration of the network to the new switch in Philadelphia. The
Company was forced to pay duplicate network costs to its underlying carriers
through March 31, 2000 as a result of decommissioning network facilities
connected to the old switch in Philadelphia. Also, approximately $232,000 in
salary
13
<PAGE>
and other SG&A expenses was incurred as a result of the implementation of a new
Affinity direct sales program. The program is designed to target customers from
Chambers of Commerce throughout the nation and their members. Finally,
approximately $136,000 in legal and marketing expenses was incurred as a result
of the Company's reincorporation merger and name change to Capsule
Communications, Inc.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, cash and cash equivalents were approximately $1,986,000. Cash
flow used in operations in the first quarter of 2000 was approximately $836,000.
Net cash used in investing activities was approximately $131,000, which
primarily resulted from the purchase of property and equipment.
Working capital deficiency at March 31, 2000 was approximately $2,673,000 as
compared to a deficiency of approximately $1,549,000 at December 31, 1999. The
decrease in working capital was primarily due to the net loss as mentioned
above.
The Company's working capital ratio decreased from .83:1.00 at December 31, 1999
to 75:1.00 at March 31, 2000. The Company's cash balance increased approximately
$379,000 from its balance at December 31, 1999. This was mainly due to the
increase in note payable associated with the loan agreements with Gold & Appel
and FINDS.
On March 22, 2000, the Company entered into a Loan Agreement with Gold & Appel
Transfer, S.A. ("G &A") and the Foundation for the International
Non-Governmental Development of Space, a non-profit organization ("FINDS"). The
terms of the agreement call for the Company to borrow up to $1,000,000 from G&A
and $500,000 from FINDS at a rate of 10% per annum and due and payable on March
1, 2001. As of March 31, 2000, the Company's loan balance was $1,500,000 and is
recorded in note payable. The agreement permits the Company to convert any or
all portions of the loan amount to shares of the Company's Common Stock at $2.50
per share. The Company intends to convert all loan amounts in the second quarter
of 2000 in order to meet the capital and surplus requirements for its Common
Stock to remain listed on Nasdaq SmallCap Market.
The Company believes that it will require additional funds in the near future to
continue its operations. Management will focus on obtaining additional financing
and raising additional equity in order to support future growth. The Company's
plans for growth include both substantial internal growth and the potential
acquisition of other long distance companies. Also, in order to achieve the
Company's plans for growth in the long distance business as well as its entry
into other communications services, the Company may require additional financing
and is currently seeking sources of funding. The Company cannot give assurance
as to the potential success of these efforts.
Item 3
- ------
Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
14
<PAGE>
PART II
=======
Other Information
Item 1. Legal Proceedings
For a discussion of pending legal proceedings, see Note 4 to the
Consolidated Financial Statements contained in this filing, which
Note 4 is incorporated by reference into this Item 1.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. 27, Financial Data Schedule
(b) Reports on Form 8-K:
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Capsule Communications, Inc.
(Registrant)
By: /s/ Michael McAnulty
------------------------------------------
Michael McAnulty
Chief Financial Officer
Dated: May 15, 2000
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS SET FORTH IN THIS FORM 10-Q FOR THE FISCAL QUARTER ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,205,657
<SECURITIES> 0
<RECEIVABLES> 6,728,845
<ALLOWANCES> 976,958
<INVENTORY> 0
<CURRENT-ASSETS> 7,956,300
<PP&E> 7,590,434
<DEPRECIATION> 4,688,071
<TOTAL-ASSETS> 11,380,814
<CURRENT-LIABILITIES> 10,629,535
<BONDS> 0
0
0
<COMMON> 20,947
<OTHER-SE> 730,332
<TOTAL-LIABILITY-AND-EQUITY> 11,380,814
<SALES> 0
<TOTAL-REVENUES> 8,733,562
<CGS> 0
<TOTAL-COSTS> 6,170,010
<OTHER-EXPENSES> 3,431,995
<LOSS-PROVISION> 176,213
<INTEREST-EXPENSE> 48,228
<INCOME-PRETAX> (1,070,435)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,070,435)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,070,435)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
