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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
COMMISSION FILE NO. 0-30124
SONUS COMMUNICATION HOLDINGS, INC.
A DELAWARE CORPORATION
IRS EMPLOYER IDENTIFICATION NO. 54-1939577
55 JOHN STREET, 2ND FLOOR, NEW YORK, NY 10038
TELEPHONE - (212) 285-4300
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, as
amended, during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Common stock $.0001 par value, 12,486,008 shares outstanding as of November 20,
2000
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Table of Contents
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PAGE(s)
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PART I. Financial Information: 3.
ITEM 1. Consolidated Financial Statements
Condensed Balance Sheets - September 30, 2000 (Unaudited)
and December 31, 1999 3.
Condensed Statements of Operations (Unaudited) -
Three and Nine Months Ended September 30, 2000 and 1999 4.
Condensed Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 2000 and 1999 5.
Condensed Notes to Interim Condensed Financial Statements (Unaudited) 6.
ITEM 2. Management's Discussion and Analysis of Financial Condition 9.
PART II. Other Information 15.
ITEM 2. Changes in Securities and Use of Proceeds 15.
ITEM 6. Exhibits and Reports on Form 8-K 16.
SIGNATURES 17.
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PART I. FINANCIAL INFORMATION:
ITEM I. CONSOLIDATED FINANCIAL STATEMENTS:
SONUS COMMUNICATION HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- ASSETS -
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 43,462 $ 234,688
Accounts receivable, net 1,438,205 31,936
Installment sales receivable, net of unearned
profit of $105,286 in 1999 - 187,430
Loan receivable - 150,000
Prepaid expenses and other 45,176 166,572
----------- ----------
TOTAL CURRENT ASSETS 1,526,843 770,626
PROPERTY AND EQUIPMENT, NET 1,061,919 721,905
GOODWILL, NET 7,690,571 -
SECURITY DEPOSITS 479,307 62,062
----------- ----------
TOTAL ASSETS $10,758,640 $1,554,593
=========== ==========
- LIABILITIES AND STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable $ 2,930,665 $ 382,045
Vendor equipment payable - 364,666
Convertible debentures, net of discount 36,496 -
Long-term debt, current portion 411,075 87,399
Due to shareholders 57,000 113,000
Accrued expenses 513,792 42,510
----------- ----------
TOTAL CURRENT LIABILITIES 3,949,028 989,620
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 424,633 109,550
Other noncurrent liabilities 43,000 43,000
----------- ----------
TOTAL LIABILITIES 4,416,661 1,142,170
----------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value; 100,000,000 shares
authorized; 7,098,071 and 4,598,850 shares issued
and outstanding in 2000 and 1999, respectively 710 460
Common stock to be issued, $.0001 par value; 4,512,993
shares pending issuance 451 -
Additional paid-in capital 12,330,332 2,476,488
Subscriptions received - 135,000
Accumulated deficit (5,989,514) (2,199,525)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 6,341,979 412,423
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,758,640 $1,554,593
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
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SONUS COMMUNICATION HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ --------------------------
2000 1999 2000 1999
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUE:
Telecommunication services $2,246,569 $ 392,924 $4,664,396 $1,022,296
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Direct expenses 1,674,213 470,161 4,125,521 1,228,688
General & administrative 1,648,963 309,731 3,888,864 761,997
Merger related costs - 25,000 - 279,045
Goodwill amortization 132,596 - 265,192 -
----------- ---------- ----------- ----------
3,455,772 804,892 8,279,577 2,269,730
----------- ---------- ----------- ----------
LOSS FROM OPERATIONS (1,209,203) (411,968) (3,615,181) (1,247,434)
----------- ---------- ----------- ----------
OTHER INCOME (EXPENSE):
Interest income (expense) (119,117) (5,225) (173,682) (3,634)
Other expense - - (1,125) -
----------- ---------- ----------- ----------
(119,117) (5,225) (174,807) (3,634)
----------- ---------- ----------- ----------
LOSS BEFORE INCOME TAXES (1,328,320) (417,193) (3,789,988) (1,251,068)
Provision for income taxes - - - -
----------- ---------- ----------- ----------
NET LOSS $(1,328,320) $ (417,193) $(3,789,988) $(1,251,068)
=========== ========== =========== ==========
LOSS PER SHARE:
Basic and diluted $ (.14) $ (.11) $ (.50) $ (.33)
=========== ========== =========== ==========
WEIGHTED AVERAGE SHARES 9,803,423 3,761,548 7,640,837 3,823,501
=========== ========== =========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
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SONUS COMMUNICATION HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
Nine Months Ended
September 30,
-------------------------
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,789,988) $(1,251,068)
Adjustments to reconcile net loss to net cash (used in)
operating activities
Depreciation and amortization 466,802 64,622
Provision for uncollectible accounts receivable 311,997 44,726
Amortization of debt discount 76,855 -
Common shares issued for services rendered - 127,500
Time contributed in lieu of salary 56,000 -
Changes in assets and liabilities:
(Increase) in accounts receivable (849,870) (75,079)
Decrease in installment sales receivable 1,934 31,398
Decrease (increase) in prepaid expenses 150,492 (92,657)
Increase in accounts payable 710,401 165,103
Increase in vendor equipment payable - 8,393
Increase in accrued expenses 181,523 98,435
----------- ----------
NET CASH (USED) IN OPERATING ACTIVITIES (2,683,854) (878,627)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment ( 44,461) (386,078)
Investment in purchased business, net of cash acquired ( 50,096) -
Deposits for equipment and circuits (268,296) (182,754)
----------- ----------
NET CASH (USED) IN INVESTING ACTIVITIES (362,853) (568,832)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Private placement of common shares, net 2,794,098 1,592,399
Repurchase of founder shares (56,000) (70,000)
Payment of lease obligation for network equipment (182,617) -
Issuance of convertible debentures and common stock 300,000 -
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,855,481 1,522,399
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (191,226) 74,940
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 234,688 1,002
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CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 43,462 $ 75,942
=========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Common stock issued to acquire Empire One $ 3,197,571 -
----------- ----------
Warrants issued to employees and non employees in
Connection with Empire One acquisition $ 3,407,808 -
----------- ----------
Common stock issued with convertible debentures $ 188,393 -
----------- ----------
Beneficial conversion discount recorded $ 75,111 -
----------- ----------
OTHER INFORMATION:
Cash payments for interest $ 129,521 $ 12,291
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</TABLE>
See notes to condensed consolidated financial statements.
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SONUS COMMUNICATION HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements apply to
the Company and its wholly-owned subsidiaries and reflect all
adjustments which are, in the opinion of management, necessary for a
fair presentation of the Company's consolidated financial position as
of September 30, 2000 and the results of operations and changes in cash
flows for the three and nine months ended September 30, 2000 and 1999.
The results of operations for such periods, however, are not
necessarily indicative of the results to be expected for a full fiscal
year. This Form 10-QSB should be read in conjunction with the Form
10-KSB for the fiscal year ended December 31, 1999.
During the third quarter, management reviewed the prior quarter results
and determined that certain adjustments were necessary to more fairly
present the balance sheets and income statements of the Company.
Accordingly, the Company is amending the previous two quarters'
10-QSBs. The adjustments primarily involve recognition of additional
purchase price consideration in connection with the acquisition of
Empire One Telecommunications, Inc., and allocation of fair value in
connection with convertible debt issued with common stock. The effect
of these adjustments on prior quarter results is summarized below, and
the adjustments are reflected in these financial statements as of
September 30, 2000:
<TABLE>
<CAPTION>
3/31/00 3/31/00 6/30/00 6/30/00
BALANCE SHEET: as reported restated as reported restated
<S> <C> <C> <C> <C>
Current assets $ 1,932,963 $ 1,932,963 $ 1,484,271 $ 1,484,271
Property and Equip. 1,140,873 1,140,873 1,148,670 1,120,969
Goodwill 4,514,058 8,068,485 4,438,824 7,823,167
Other assets 225,839 225,839 524,307 524,307
----------- ----------- ----------- -----------
Total assets $ 7,813,733 $11,368,160 $ 7,596,072 $10,952,714
----------- ----------- ----------- -----------
Current liabilities $ 2,314,446 $ 2,416,065 $ 3,743,836 $ 3,438,631
Long term liabilities 983,390 983,390 990,873 990,873
Common stock 710 710 740 740
Addn'l paid-in capital 7,498,381 10,906,189 7,611,073 11,183,663
Accumulated deficit (2,983,194) (2,983,194) (4,750,450) (4,661,193)
----------- ----------- ----------- -----------
Total liabilities
And equity $ 7,813,733 $11,323,160 $ 7,596,072 $10,952,714
----------- ----------- ----------- -----------
INCOME STATEMENT:
Operating revenue $ 167,817 $ 167,817 $ 2,250,009 $ 2,250,009
Direct expenses 372,394 372,394 2,078,915 2,078,915
Gen'l and admin.exp. 589,542 581,542 1,820,118 1,658,337
Goodwill amortization - - 75,254 132,616
Interest inc.(exp.) 10,450 2,450 (41,853) (57,015)
Other (exp.) - - (1,125) (1,125)
----------- ----------- ----------- -----------
Net loss $ (783,669) $ (783,669) $(1,767,256) $(1,677,999)
----------- ----------- ----------- -----------
Basic and diluted loss
Per common share $ (.13) $ (.13) $ (.24) $ (.23)
----------- ----------- ----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
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The Company currently has insufficient funds available for operations
and will be required to seek additional funds even though it has been
successful in completing the financings discussed in Note 2. As a
result, the Company is seeking to obtain a credit facility or other
financing arrangements, and is currently in negotiations with a
prospective lender. Management believes it will be successful in
obtaining the credit facility, although there can be no assurance that
it will do so. In the event that the Company is unable to raise
additional funds, the Company could be required to either substantially
reduce or terminate its operations. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
NOTE 2 - FINANCING:
In January 2000, the Company completed its offering of 1,851,504 shares
of common stock at $1.35 per share. The aggregate offering price was
$2.5 million with the Company realizing $2,246,000 in cash proceeds.
The offering was completed in three pieces with the first closing
occurring in November 1999 for 418,140 shares resulting in gross
proceeds of $564,000 and net proceeds to the Company of $502,000. The
second closing occurred on January 5, 2000 for 1,088,939 shares and net
proceeds to the Company of $1,327,000. The final closing occurred on
January 27, 2000 for 344,425 shares resulting in gross proceeds of
$465,000 and net proceeds to the Company of $417,000. The difference
between gross proceeds and net proceeds reflects expenses of
approximately $11,000 with the remaining being the cash portion of the
investment banking fees. At December 31, 1999, the Company had received
$135,000 of the proceeds which were shown as subscriptions received.
L. Flomenhaft & Co. ("Flomenhaft") acted as the Company's investment
banker for this financing. For the services rendered, Flomenhaft and a
nominee of Flomenhaft received cash fees of approximately $180,000 plus
five-year common stock purchase warrants to acquire a total of 257,762
shares of the Company's common stock at an exercise price of $1.35 per
share. The per share exercise price of the warrants was set at the same
value as the common shares sold in the offering.
In June 2000, the Company sold (and received proceeds of) $300,000 in
subordinated 8% convertible debentures. Each debenture holder received
one share of common stock for each dollar of debt. The 300,000 shares
of common stock have been recorded as common stock to be issued at
September 30, 2000, and were subsequently issued in November 2000. The
debentures will mature at the earlier of one year from the issue date
or upon the completion of an equity financing of $500,000 or more. Each
debenture, principal and accrued interest, is convertible, at the
holder's option, into one share of the Company's common stock at the
Exercise Price. If the holder elects not to convert, the Company is
obligated to redeem the debenture plus accrued interest at the rate of
8% per annum. If converted at the time of completion of an equity
financing of $500,000 or more, the holder is entitled to convert the
outstanding principal and interest into common shares based on the
price of the common stock sold in the equity financing. If converted at
the time of maturity, the holder is entitled to convert the outstanding
principal and interest into common shares based on a per share price of
$1.35.
As the debentures included one share of common stock for each dollar of
debentures, an allocation of fair value between debt and equity was
recorded based on their relative fair values on issue date. As a
result, a discount on the debentures of $188,393 was recorded, and this
value was ascribed to the common stock, based on the then market price
of $1.688. This discount on the debentures is being amortized over the
term of the loan. Additionally, in accordance with EITF 98-5, an
additional discount to the debentures was recognized to account for an
embedded beneficial conversion feature present at the time of issuance.
This beneficial conversion component was measured as the difference
between the
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market price of the common stock at issue date of $1.688 and the
conversion price of the debentures at $1.35. The resulting intrinsic
value of $75,111 has also been recorded as a discount at issue date,
and is being amortized over the term of the loan.
Since the latest private equity placement was closed at September 30,
2000, holders were eligible to convert their notes into common shares.
As of November 13, 2000, approximately 2/3 of the debenture holders
have elected to convert their notes, and 874,944 common shares were
issued on that date at a conversion price of $.24 per share.
In June 2000, the Company cancelled an existing stock option agreement
and replaced it with a warrant agreement for an officer. The warrants
entitle the holder to purchase 100,000 common shares with an exercise
price of $1.91, vested immediately upon issuance, and have a 5 year
term from issue date. In accordance with FASB Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation",
which became effective July 1, 2000, this effective modification
results in a variable award, which results in the recognition of
compensation expense during the life of the award, measured as the
difference between the closing market price at each measurement date
and the closing common stock price at July 1, 2000, times the number of
outstanding warrants. As of September 30, 2000, no compensation expense
was recognized under these warrants, as the market price was below the
July 1, 2000 market price.
In September 2000, the Company completed its latest offering. The
Company was seeking to provide net proceeds of $2.7 million after
banking, legal and accounting fees. The offering was for 5,000,000
units, with each unit consisting of two shares of the Company's common
stock and one common stock purchase warrant, with an exercise price of
$.60. The purchase price per Unit was $.60. The offering was completed
in various installments between July 1 and September 30, 2000, and the
total gross proceeds received were $1,263,898. After legal and
investment banking fees paid of $116,808, net proceeds were $1,147,090.
Additionally, warrants were issued as consideration for placement fees,
and the fair value of these warrants were $23,285. In connection with
this offering, common stock shares of 4,212,993 have been recorded as
common stock to be issued as of September 30, 2000, and were
subsequently issued in November 2000.
NOTE 3 - ACQUISITION:
On March 29, 2000, the Company merged with Empire One
Telecommunications Inc. ("EOT"). The Company exchanged 1,065,857 shares
of common stock in exchange for all the outstanding common shares of
EOT plus assumption of debt. The shares were valued at $3.00 per share.
The acquisition was accounted for as a purchase. The operations of EOT
are included with those of the Company prospectively, effective April
1, 2000. The value of consideration from the shares exchanged was
$3,197,571. Additional costs of the merger included legal and
investment banking fees paid of $122,174, warrants issued (in the
money) to EOT founders with a fair value of $1,863,810, and warrants
issued to investment bankers with a fair value of $1,543,998. The
adjusted book value of EOT at merger, which approximated fair value,
was $(1,228,210). As a result, the Company recorded $7,955,763 in
goodwill related to the merger, which is being amortized over 15 years.
The proforma results of operations for the three and nine month periods
ended September 30, 2000 and 1999, respectively, are shown below. These
statements do not purport to represent what the actual results of
operations would have been for the Company had the merger been
consummated at the beginning of the earliest period presented, is not
indicative of actual results and does not purport to represent what the
results of operations of the combined entity may be in the future.
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<TABLE>
<CAPTION>
Pro forma Pro forma
Three months ended Nine months ended
September 30, September 30,
----------------------- ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $2,246,569 $1,596,931 $5,890,608 $4,570,754
Direct expenses 1,674,213 1,120,046 5,067,545 3,210,677
Selling, general and administrative expenses 1,648,963 859,482 4,693,503 2,484,550
Goodwill amortization 132,596 132,597 397,788 397,788
Net loss (1,328,320) (552,691) (4,447,106) (1,826,581)
Net loss per share $(.14) $(.11) $(.56) $(.37)
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Private Securities Litigation Reform Act provides a "safe harbor" for
forward-looking statements. Certain statements included in this Form 10-QSB are
forward-looking and are based on the Company's current expectations and are
subject to a number of risks and uncertainties that could cause actual results
to differ materially from results expressed or implied in any forward-looking
statements made by, or on behalf of the Company. The Company assumes no
obligation to update any forward-looking statements contained herein or that may
be made from time to time by, or on behalf of, the Company.
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the financial statements and the
notes to those statements and the other financial information included elsewhere
in this Form 10-QSB.
OVERVIEW
We are currently a provider of telecommunications services that utilize the
public switched telephone network ("PSTN") as well as private internet networks
via a combination of owned facilities and those leased from third-party
providers. When we began offering long distance services in late 1998, our
strategy had been to establish routes into underserved geographic markets such
as countries that were formerly part of the Soviet Union (e.g. Republic of
Georgia) and developing countries in Asia, the Pacific Rim and the Caribbean.
This strategy involved establishing a relationship with a local organization in
the destination country that would own the necessary equipment in that country
as well as establish any necessary working relationships with the local phone
company or companies.
More recently, we have adjusted our strategy and are establishing ourselves as a
retail provider of "bundled" telecommunications services, including local, long
distance and Internet/data services, over a combination of our own facilities
and those leased from third-party providers, to targeted ethnic markets in the
U.S. As of September 30, 2000, we had decommissioned all of our international
circuits largely because of rapidly declining margins in the markets served by
those circuits, and have redirected our resources to our retail entity, Empire
One Telecommunications, Inc. ("EOT").
In furtherance of our retail strategy, we closed the acquisition of EOT on March
29, 2000. Headquartered in New York City, EOT has focused on the Chinese ethnic
markets in the metropolitan areas of New York City, San Francisco and Los
Angeles since its inception in 1996. In March 2000, we initiated a marketing
program targeted at the Russian communities in the U.S. under the EOT brand.
This initiative has resulted in significant revenue and subscriber growth for
the Company, particularly in the second quarter of 2000. We expect such growth
to continue, adjusted for seasonal fluctuations, as we continue to build our
brand equity in the Russian and Chinese markets, and until our penetration in
each market exceeds 5% of available households. We presently have less than 2%
market penetration in each of the Chinese and Russian markets.
This retail strategy has also led us to scale back the wholesale international
circuit portion of our business beginning in the second quarter of 2000. As of
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the end of the second quarter of 2000, we had decommissioned two of our three
international circuit operations. Decommissioning of the third circuit occurred
in July 2000. As a result, we no longer employ any personnel in our Virginia
office. We are in the process of negotiating settlements of open contracts for
that portion of our business and expect to conclude these negotiations in a
mutually-satisfactory manner by the end of 2000, but can provide no assurances
in that regard.
Throughout the third quarter of 2000, management has been refining the Company's
strategic growth plans. Most of this effort has been directed to addressing the
Company's ability to deliver value-added services, including high-speed data
services, over the "last mile" of the network--the method by which the Company
connects to its subscribers' premises. The Company has been working with its
existing equipment vendors as well as several other vendors to design and
implement a scalable, broadband "last mile" network that will take advantage of
the dense geographic clustering our markets generally exhibit. These efforts are
ongoing with initial deployment expected to begin by the end of the current
calendar year. Management believes these initiatives, in conjunction with the
brand-building efforts already underway, will result in significant revenue and
subscriber growth through 2001, but can provide no assurances in that regard.
Since initiating service offerings, we have incurred net operating losses and
expect to incur additional losses for the foreseeable future, primarily as a
result of increased sales and marketing efforts as well as the deployment of our
"last mile" network. As of September 30, 2000, we have accumulated net losses of
$5,989,514.
REVENUES
We began operations by offering wholesale long distance services through leased
circuits to other telecommunications service providers desiring to terminate
U.S.-originated voice, fax and data traffic to the countries in which our
circuits terminated or to "refile" such traffic through those countries to a
third country. As a result of international market conditions, we experienced
rapid deterioration in our ability to sustain this business particularly in
light of rapid and continuing erosion in the wholesale price for international
terminations for U.S.-originating traffic. As a result of this trend and the
addition of EOT, while revenues from such activities represented 100% of our
revenues for both the third quarter of 1999 and the first nine months of 1999
($392,924 and $1,022,296, respectively), these activities accounted for 0% of
the third quarter 2000 and only 13% ($597,256) of revenues for the first nine
months of 2000. As a result of the decommissioning of our international circuits
and the scaling back of our wholesale business, the Company no longer generates
significant revenues from these activities after June 2000.
Total revenues for the third quarter of 2000 were $2,246,569, an increase of
472% compared to the same period of 1999 ($392,924). For the first nine months
of 2000, total revenues were $4,664,396, an increase of 356% compared to the
same period of 1999 ($1,022,296). Between the second and third quarter of 2000,
revenues decreased slightly from $2,250,009 to $2,246,569, a .15% decrease
quarter-over-quarter. The flat revenue growth in the third quarter of this year
is indicative of the seasonality of the business, where the summer months (June
through and including August) have historically been slow growth months for
EOT's retail operations. Management expects, but cannot assure you, that growth
will continue, as adjusted for this seasonal fluctuation. We anticipate that
continued growth will be generated principally by continued development of EOT's
brand equity in its target markets and the deployment of the "last mile" network
which may enable the Company to offer an increasing array of value-added voice,
data and video services. Additionally, the Company is in the process of
developing an outside sales force to leverage its brand equity into the
commercial sector of the Company's target markets. We are also seeking
opportunistic service offerings we can make available to our markets by either
resale or over our own facilities. To this end, we are negotiating
interconnection agreements between us and Verizon New York and between us and
Verizon New Jersey, thereby enabling the Company to provide local services at
significantly higher margins than we currently enjoy. We cannot provide any
assurance that such negotiations will result in contracts
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with Verizon New York or Verizon New Jersey on terms favorable to the Company or
at all, and our ability to develop an outside sales force or increase our
service offerings is dependent on our ability to obtain additional financing.
DIRECT OPERATING EXPENSES
Direct operating expenses consist primarily of network costs associated with the
routing and termination of customers' traffic as well as interconnection fees
paid to third-party carriers for use of their networks. These include:
- amounts paid to carriers and internet service providers to carry our traffic
on their networks; and
- costs associated with leased circuits and net-leased equipment utilized in our
network.
Management expects that these expenses will continue to increase as the
Company's sales and marketing efforts continue to expand within its target
markets, resulting in increased subscriber counts generating an increasing
volume of traffic. At the same time, however, Management is actively seeking
new, lower cost carriers with high quality through which the Company route its
terminating traffic. Additionally, the Company finished deploying its long
distance switching facility based on the scalable DTI-manufactured tandem
switching platform, and this became operational in August 2000. With this
facility fully operational, the Company is able to substantially lower its
interconnection charges by routing traffic to and from the New York metropolitan
area (which traffic comprises the bulk of that routed by the Company) through
this facility. As a result, as these two related developments mature, Management
believes that, while overall direct operating expenses will increase, as a
proportion of revenues these increases will be smaller, but can provide no
assurances in that regard.
SALES, GENERAL AND ADMINISTRATIVE
Sales, general and administrative expenses include the costs associated with the
delivery of our marketing messages, salaries of our employees and associated
benefits, rent, professional fees including those of accountants, lawyers and
other business consultants, as well as ancillary costs such as insurance, office
equipment maintenance and office expenses. A portion of our general and
administrative expenses include the costs associated with technical support and
customer service ("Support and Service"), consisting primarily of employee
compensation. As the results discussed below illustrate, we have experienced
significant absolute and percentage increases in these categories. These have
primarily been due to growth in our Support and Service requirements necessary
to support our rapidly growing subscriber base, particularly the need to create
an entire Russian-language Support and Service organization to manage our
Russian-language subscribers. We expect that sales and general and
administrative costs will continue to increase as our subscriber base continues
to grow, however, at a slower rate than we have experienced in the third quarter
of 2000. We expect that this will be due to increased employee efficiency as
well as the incremental demands continued growth is expected to have on our
already established Support and Service organizations.
RESULTS OF OPERATIONS
At the end of the second quarter of 2000, the Company had approximately 23,248
subscribers. At the end of the third quarter of 2000, the Company's subscriber
base had grown to 25,693, an increase of 11%. This growth is a direct result of
sales/marketing efforts. Prior to the EOT acquisition, the Company's operations
were limited to providing wholesale international terminations to five
telecommunications services providers over three separate leased circuits
terminating in the Republic of Georgia, Pakistan and the Peoples' Republic of
China. As of the end of the second quarter of 2000 the Company had withdrawn
from all but the Pakistan circuit business, which circuit was decommissioned in
late July 2000. Since the EOT acquisition closed, the Company's primary focus
has been on growing its retail business under the EOT brand.
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For the third quarter of 2000, direct operating expenses totaled $1,674,213,
down 19% from the second quarter of the year ($2,078,915). For the nine months
ended September 30, 2000, these expenses totaled $4,125,521, an increase of 235%
from the same period in the prior year ($1,228,688). The current year quarterly
sequential decrease in direct operating expenses is attributable primarily to
cost savings from scaling back of international wholesale circuits noted
earlier. The year over year nine month increase reflects the acquisition of EOT
and its subscriber base. Management expects that direct operating expenses will
continue to increase as the Company's sales and marketing efforts continue to
expand within its target markets, resulting in increased subscribers generating
increased traffic through our network. Simultaneously, the Company is proactive
in its on-going cost-cutting efforts as to direct operating expenses including,
but not limited to, the following developments:
- the addition of higher quality, lower cost terminating carriers, including
several first-tier, foreign carriers; and
- renegotiating its nationwide originating contract with Global Crossing
resulting in a decrease of approximately 50% in our US access costs; and
- continuing the deployment of its cost-cutting DTI-based switching platform.
While Management believes that these three on-going cost-cutting efforts could
have significant and long-term positive effects on this expense category,
several factors could off-set these benefits. Among such factors are the
uncertainties of the wholesale termination costs available to the Company. While
these costs have historically decreased, they have fluctuated both up and down
in the past primarily for causes beyond the Company's control. In addition,
regulatory changes regarding inter-carrier network access charges could reduce
the benefit the Company expects to generate as a result of the newly
renegotiated contract with Global Crossing.
Sales, general and administrative costs for the third quarter of 2000 totaled
$1,648,963. This represents a 1% ($9,374) decrease from the $1,658,337 expense
for the second quarter of 2000, and a 432% increase from the second quarter of
1999. For the nine months ending September 30, 2000, total expenses in this
category were $3,888,864 up 410% ($3,126,867) from the same period in the prior
year. The current year quarterly sequential decrease reflects substantial cost
savings from post-merger rationalization of expenses, particularly those
expenses related to the international wholesale business of approximately
$310,000, partially offset by a provision for uncollectible installment sale
receivables of $185,495. Employee compensation during the third quarter
increased over the second quarter by approximately $118,000, reflecting
increased headcount for sales and administrative personnel (to 68 from 63), but
this was offset by an approximate $180,000 decrease in marketing expenses, which
is typical during the slow summer period. Management expects compensation to
increase in the fourth quarter, due to the addition of a Chief Financial Officer
and five commercial sales personnel. However, the operating expense structure of
the Company is under review, including compensation, for potential reductions in
order to further rationalize the cost structure and improve cash flow.
Initiatives to reduce operating expenses may not materially benefit the Company
until late fourth quarter or first quarter of 2001. Management does expect to
increase marketing expenses during the fourth quarter to fuel subscriber and
revenue growth. While Management does not expect the Company's low cost of
acquisition to be indefinitely maintainable, it does expect that it will be able
to maintain a very competitive cost per acquisition in its target markets until
it achieves a 5% household penetration in each of these markets. Currently, the
Company has less than 2% penetration in each of these markets.
Sales, general and administrative costs for the third quarter of 2000 compared
to the third quarter of 1999, as well as the nine month period ended September
30, 2000 compared to 1999 both reflect substantial increases year over year due
to the inclusion of EOT operating expenses in the year 2000 results.
In December of 1999, EOT took delivery of two telecommunications switches
manufactured by DTI, one long distance switch (the "Tandem") and one local
switch. Since that time, EOT has been commissioning both switches to be
interconnected into the public switched telephone network ("PSTN"). The Tandem
has been fully commissioned and on-line at the end of August 2000; the
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local switch was fully commissioned and operational at the end of September
2000, and is expected to be on-line by end of the fourth quarter of 2000. As the
Tandem is now fully operational, the Company expects to experience significant
reductions in its costs for terminating its subscribers' international traffic.
Management estimates these reductions to average about 10% for its most heavily
used routes. In addition, the Tandem may enable the Company to significantly
reduce its access costs paid to other telecommunications providers for using
their networks to originate and/or terminate our subscribers' calls. For long
distance traffic originating and/or terminating in the New York metropolitan
area (comprising the bulk of the Company's traffic), these costs are estimated
to be reduced by up to 50%. The Company expects that downward price pressure on
its retail services will continue to keep pace with its aggregate wholesale
price reductions, however, and therefore does not expect that significant
increases will be realized on gross profit margins for this traffic in the
future.
Bringing the local switch on-line and concluding our negotiations with the Bell
Atlantic companies in both New York and New Jersey are projected to
significantly increase the Company's ability to effectively market and sell
basic local voice services as well as value-added services such as call waiting,
3-way calling and caller ID. Presently, we strictly resell the local services of
the incumbent local exchange companies ("ILEC") in New York and New Jersey, the
two states where we currently offer local services. Under this model, our
wholesale cost for these services is, as set by regulation in each jurisdiction,
no more than 19.1% below the retail price offered by the ILEC in that
jurisdiction. As a result, and after giving a 5% discount to our local
subscribers and accounting for our associated costs, local services have not
effectively contributed to our gross margins. Once our interconnection
agreements are finalized and instituted, expected by late in the fourth quarter
of 2000, the Company will be able to provision local services through a
combination of unbundled network elements ("UNE") leased from the ILECs and
interconnected with the Company's local switch, and via a model known as
unbundled network element platform ("UNE-P"). In both cases, the Company expects
gross margins on its local services business to increase.
On March 4, 1999, Sonus Communications, Inc. merged with and into Sonus Park
Acquisitions, Inc., a newly formed wholly owned subsidiary of The Park Group,
Limited. Sonus Communications, Inc., which was the surviving entity, became a
wholly owned subsidiary of The Park Group, Limited and the only asset of The
Park Group, Limited. On April 7, 1999, The Park Group, Limited organized
Sonus Communication Holdings, Inc. as a Delaware corporation and a wholly
owned subsidiary of The Park Group, Limited. On April 16, 1999, Sonus
Communication Holdings, Inc. merged with and into The Park Group, Limited
leaving Sonus Communication Holdings, Inc. as the surviving corporation.
Shares of The Park Group, Limited were exchanged for shares of Sonus
Communication Holdings, Inc. on a one-for-one basis. The sole purpose of the
merger was to re-incorporate in Delaware. The total merger related costs of
$262,000 include $238,000 for costs related to the Park/Sonus merger consisting
of legal fees of approximately $121,000, investment banking fees of $104,000,
and accounting fees and other miscellaneous fees of $13,000.
As more fully described in Note 3 earlier, on March 29, 2000 the Company merged
with Empire One Telecommunications Inc. ("EOT"). The Company exchanged 1,065,857
shares of common stock in exchange for all the outstanding common shares of EOT
plus assumption of debt. The shares were valued at $3.00 per share.
The Company incurred a net loss of $1,328,320 in the third quarter of this year,
a 21% decrease from the net loss of $1,677,999 incurred in the second quarter of
2000. Compared to the third quarter 1999 net loss of $417,193 (which excluded
EOT operations), we experienced a 218% increase.
LIQUIDITY
At September 30, 2000 we had cash of $43,462, and negative working capital of
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$2,422,183. During the first quarter of 2000, the Company closed a $2.5 million
offering which commenced in the fourth quarter of 1999. In the second quarter of
2000, the Company sold $300,000 in subordinated 8% convertible debentures. In
the third quarter of 2000, the Company closed its latest private placement and
realized $1,147,090 in net proceeds. Additionally, the Company is currently
negotiating to obtain a credit facility or other financing. Assuming the Company
is successful in obtaining the additional financing, and combined with expected
growth in operating revenues, management believes this will be sufficient to
allow us to conduct our operations for the foreseeable future, however there is
no assurance the Company will be successful in obtaining the financing, or that
growth in operating revenues will continue at a rate sufficient to fund
operations adequately.
In January 2000, we received net proceeds of $1,744,000 on a total raise of
$1,935,068, representing the final traunche of a $2.5 million offering at $1.35
per share begun in the fourth quarter of 1999.
As more fully described in Note 2 earlier, in June 2000, we sold $300,000 in
subordinated 8% convertible debentures. Each $10.00 principal amount of
debenture included one share of Company common stock. Each debenture, principal
and accrued interest, is convertible, at the holder's option, into one share of
the Company's common stock at the exercise price. If the holder elects not to
convert, the Company is obligated to redeem the debenture plus accrued interest
at the rate of 8% per annum upon the next, subsequent placement of the Company's
common stock resulting in proceeds of at least $500,000. At September 30, 2000,
the latest private equity placement closed. As of November 13, 2000,
approximately 2/3 of the debenture holders have elected to convert their notes,
and 874,944 common shares were issued on that date.
In September 2000, the Company completed its latest offering. The Company was
seeking to provide net proceeds of $2.7 million after banking, legal and
accounting fees. The offering was for 5,000,000 units, with each unit consisting
of two shares of the Company's common stock and one common stock purchase
warrant, with an exercise price of $.60. The purchase price per Unit was $.60.
The offering was completed in various installments between July 1 and September
30, 2000, and the total net proceeds received were $1,147,090. In connection
with this offering, common stock shares of 4,212,993 have been recorded as
common stock to be issued as of September 30, 2000, and have been subsequently
issued in November 2000.
In May 1999, we filed a Form 10-SB with the Securities and Exchange Commission
to register our common stock under the Securities Exchange Act of 1934, as
amended. The Form 10-SB became effective in July 1999 and our stock began
trading publicly on the NASDAQ over the counter bulletin board in August 1999.
During the nine months ended September 30, 2000, we have not acquired any
significant additional equipment either through direct purchase or under lease.
As noted in the discussions above, the Company's plans call for significant
expansion of its network into the "last mile." As a result, Management expects
that it will undertake additional equipment deployment commencing in the first
half of 2001.
As noted above, the continued acquisition of subscribers and opportunistic
expansion of our network, particularly in the "last mile," requires substantial
investment of equipment, marketing exposure and personnel. We expect that we
will have to continue to raise funds in both the private and public markets to
have enough cash to pay for this expected expansion and to continue our
operations. We believe that our ability to raise money in the public sector will
enhance these efforts, although there can be no assurance that this will be the
case or that any public offering of our securities will be made.
The Company currently has insufficient funds available for operations and will
be required to seek additional funds even though it has been successful in
completing the financings discussed in Item 2. As a result, the Company is
seeking to obtain a credit facility or other financing arrangements, and is
currently in negotiations with a prospective lender. Management believes it
will be successful in obtaining the credit facility, although there can be no
assurance that it will do so. In the event that the Company is unable to raise
additional funds, the Company could be required to either substantially reduce
or terminate its operations.
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Part II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES
As reported previously, in June 2000, the Company sold (and received proceeds
of) $300,000 in subordinated 8% convertible debentures. Each convertible
debenture holder also received one share of common stock for each dollar in
principal amount of debentures purchased. The 300,000 shares of common stock
have been recorded as common stock to be issued at September 30, 2000, and were
subsequently issued in November 2000. The convertible debentures mature at the
earlier of one year from the issue date or upon the completion of an equity
financing of $500,000 or more.
If the convertible debenture holder elects not to convert upon the completion of
an equity financing of $500,000 or more, the Company is obligated to repay the
debenture plus accrued interest at the rate of 8% per annum. If converted at the
time of completion of an equity financing of $500,000 or more, the convertible
debenture holder is entitled to convert the outstanding principal and interest
into common shares at the price of the common stock sold in such equity
financing. If converted at the time of maturity, the convertible debenture
holder is entitled to convert the outstanding principal and interest into common
shares based on a per share price of $1.35.
Because, as reported below, a private equity placement was closed at September
30, 2000 in an amount in excess of $500,000, convertible debenture holders
became eligible to convert their debentures into common shares at a conversion
price equal to the price per share sold in the equity financing. As of November
13, 2000, approximately 2/3 of the convertible debenture holders have elected to
convert their debentures, and 874,944 common shares were issued on that date at
a conversion price of $.24 per share.
The convertible debentures and shares of common stock were offered only to
corporate and individual accredited investors and one director of the Company.
The Company relied upon representations and certifications as to accredited
investor status made by the investors in connection with the convertible
debentures purchased by them, and relied upon Section 4(2) of the Securities Act
and on Rule 506 of Regulation D promulgated under the Securities Act to provide
an exemption from the registration requirements of the Securities Act for the
offering and sale of the convertible debentures and shares. No commissions or
other fees were paid in connection with the offer and sale of the convertible
debentures, the shares of common stock issued together with the convertible
debentures, or the shares of common stock underlying the convertible debentures.
In June 2000, the Company cancelled an existing stock option agreement to
purchase 100,000 shares of common stock at an exercise price of $1.50 per share,
and issued warrants to an officer pursuant to an agreement with the officer. The
warrants entitle the holder to purchase 100,000 common shares with an exercise
price of $1.91, vested immediately upon issuance, and have a 5 year term from
issue date. The Company relied upon Section 4(2) of the Securities Act and on
Rule 701 promulgated under the Securities Act to provide an exemption from the
registration requirements of the Securities Act for the issuance of the
warrants. The Company received no proceeds from this transaction.
In September 2000, the Company completed a $3,000,000 equity offering. The
Company was seeking to provide net proceeds of $2.7 million after banking, legal
and accounting fees. The offering was for 5,000,000 units, with each unit
consisting of two shares of the Company's common stock and one common stock
purchase warrant, with an exercise price of $.60. The purchase price per Unit
was $.60. The offering was completed in various installments between July 1 and
September 30, 2000, and the total gross proceeds received were $1,263,898. After
legal and investment banking fees paid of $116,808, net proceeds were
$1,147,090. Additionally, warrants to purchase 116,000 shares of common stock
were issued to Quadrant Management Inc., and warrants to purchase 10,000 shares
were issued to GV Capital Corp., as consideration for placement fees. In
connection with this offering, 4,212,993 shares of common stock have been
recorded as common stock to be issued as of September 30, 2000, which were
subsequently issued in November 2000.
The units were offered only to corporate and individual accredited investors.
The Company relied upon representations and certifications as to accredited
investor status made by the investors in connection with the units purchased by
them, and relied upon Section 4(2) of
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the Securities Act and on Rule 506 of Regulation D promulgated under the
Securities Act to provide an exemption from the registration requirements of the
Securities Act for the offering and sale of the units.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
4.1 Form of Subscription Agreement for the purchase of equity units of
the Company, each equity unit consisting of two shares of common
stock and one common stock purchase warrant (the "Unit Placement").
4.2 Form of Warrant issued in Unit Placement.
27 Financial Data Schedule
(b) Reports on Form 8-K
(i) Report on Form 8-K filed July 17, 2000, reporting resignations of
certain board members and officers and certain other personnel
changes.
(ii) Report on Form 8-K filed August 25, 2000 reporting the dismissal of
Lazar, Levine & Felix LLP ("Lazar, Levine"), as amended by Form
8-K/A filed August 31, 2000 providing a letter from Lazar, Levine
stating that Lazar, Levine agreed with the statements contained in
Item 4 of the Form 8-K filed August 25, 2000.
(iii) Report on Form 8-K filed September 19, 2000 reporting that the
Company had engaged M.R. Weiser & Co. LLP as its independent
certifying accountant.
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Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Sonus Communication Holdings, Inc.
(Registrant)
DATE: November 20, 2000
BY: /s/ John K. Friedman
John K. Friedman, President and Chief Operating Officer, on behalf of
Registrant
/s/ Frank C. Szabo
Frank C. Szabo, Executive Vice President and Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
4.1 Form of Subscription Agreement for the purchase of equity units of
the Company, each equity unit consisting of two shares of common
stock and one common stock purchase warrant (the "Unit Placement").
4.2 Form of Warrant issued in Unit Placement.
27 Financial Data Schedule
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