United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended July 31, 1999
-----------
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 0-22636
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ARDIS Telecom & Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 75-2801677
- ------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8100 Jetstar Drive, Suite 100
Irving, Texas 75063
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(Address of principal executive offices) (Zip Code)
(972) 929-1920
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(Registrant's telephone number, including area code)
Canmax Inc.
150 W. Carpenter Freeway
Irving, Texas 75039
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(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 periods 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 September 14, 1999, 6,861,005 shares of common stock, $.001 par value per
share, were outstanding.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARDIS TELECOM & TECHNOLOGIES, INC.
AND SUBSIDIARIES
(Formerly Canmax Inc)
CONSOLIDATED BALANCE SHEETS
July 31, October 31,
1999 1998
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 2,800,307 $ 207,609
Trade accounts receivable, net of allowance of doubtful
accounts of $321 and $0 in 1999 and 1998, respectively 274,621 292,086
Accounts Receivable-Other 27,151 --
Inventory 116,522 229,672
Deposits 170,347 --
Prepaid expenses and other 111,041 29,002
Current portion of long-term receivable 267,555 177,845
Current assets of discontinued operations -- 2,305,502
------------ ------------
Total current assets 3,767,544 3,241,716
------------ ------------
PROPERTY AND EQUIPMENT, net 1,050,350 59,135
PROPERTY AND EQUIPMENT OF DISCONTINUED OPERATIONS, net -- 524,849
LONG-TERM RECEIVABLE, net of current portion 228,581 397,851
OTHER ASSETS 29,401 17,387
LONG-TERM ASSETS OF DISCONTINUED OPERATIONS -- 1,049,641
------------ ------------
TOTAL ASSETS $ 5,075,876 $ 5,290,579
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 179,951 $ 622,836
Accrued liabilities 117,240 227,578
Deferred revenue 12,743 46,033
Advances from shareholder -- 1,500,000
Current liabilities of discontinued operations -- 1,683,591
Note payable - current 162,000 --
------------ ------------
Total current liabilities 471,934 4,080,038
------------ ------------
LONG-TERM LIABILITIES
Note payable - long-term 602,500 --
Long-term payables of discontinued operations -- 146,693
------------ ------------
Total long-term liabilities 602,500 146,693
============ ============
SHAREHOLDERS' EQUITY
Common stock, 44,169,100 shares authorized; 6,861,005 and 6,611,005 shares,
no par value per share, issued and outstanding at July 31, 1999 and
October 31, 1998, respectively 24,938,974 24,858,809
Accumulated deficit (20,937,532) (23,794,961)
------------ ------------
Total shareholders' equity 4,001,442 1,063,848
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,075,876 $ 5,290,579
============ ============
See accompanying notes.
2
ARDIS TELECOM & TECHNOLOGIES, INC.
AND SUBSIDIARIES
(Formerly Canmax Inc)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
------------------------------ ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
REVENUES
Prepaid phone cards and other $ 500,107 $ 110,722 $ 2,888,846 $ 110,722
Prepaid phone cards - USCommunications -- 161,141 -- 709,525
----------- ----------- ----------- -----------
Total revenues 500,107 271,863 2,888,846 820,247
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Prepaid phone cards and other 535,869 226,630 2,691,738 226,630
Prepaid phone cards -- USCommunications -- 121,523 -- 565,151
Sales & marketing 323,088 126,775 802,879 126,775
General & administrative 566,919 85,488 1,513,271 85,488
Selling, general & administrative - USCommunications -- -- -- 499,970
Depreciation and amortization 16,183 84,716 38,080 84,716
----------- ----------- ----------- -----------
Total cost of revenues 1,442,059 645,132 5,045,968 1,588,730
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES)
Interest expense (23,138) (55,546) (81,187) (129,396)
Interest income 42,859 9,964 116,823 28,615
Loss on disposal of USCommunications -- (1,155,385) -- (1,155,385)
----------- ----------- ----------- -----------
Total other income (expenses) 19,721 (1,200,967) 35,636 (1,256,166)
----------- ----------- ----------- -----------
NET LOSS FROM CONTINUING OPERATIONS (922,231) (1,574,236) (2,121,486) (2,024,649)
DISCONTINUED OPERATIONS
Income (loss) from operation of software business,
net of income taxes of $0 -- 81,851 218,376 (829,666)
Gain on sale of software business, net of income
taxes of $0 1,378,525 -- 4,760,537 --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 456,294 $(1,492,385) $ 2,857,427 $(2,854,315)
=========== =========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations $ (0.13) $ (0.22) $ (0.31) $ (0.28)
Discontinued operations 0.20 0.01 0.73 (0.11)
----------- ----------- ----------- -----------
Net earnings (loss) $ 0.07 $ (0.21) $ 0.42 $ (0.39)
=========== =========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations $ (0.13) $ (0.22) $ (0.31) $ (0.28)
Discontinued operations 0.20 0.01 0.73 (0.11)
----------- ----------- ----------- -----------
Net earnings (loss) $ 0.07 $ (0.21) $ 0.42 $ (0.39)
=========== =========== =========== ===========
SHARES USED IN THE CALCULATION OF PER SHARE AMOUNTS:
Basic common shares 6,861,005 7,294,338 6,782,250 7,361,005
Dilutive impact of stock options and warrants -- -- -- --
----------- ----------- ----------- -----------
Diluted common shares 6,861,005 7,294,338 6,782,250 7,361,005
----------- ----------- ----------- -----------
See accompanying notes.
3
ARDIS TELECOM & TECHNOLOGIES, INC.
AND SUBSIDIARIES
(Formerly Canmax Inc)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
JULY 31,
----------------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,857,427 $(2,854,315)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) continuing operating activities:
Loss (income) from discontinued operations (218,376) 829,666
Gain on disposal of software business (4,760,537) --
Loss on disposal of USC -- 1,568,076
Stock issued for services 74,225 --
Warrants issued for services 5,942 --
Depreciation and amortization 27,559 12,000
Bad debt reserve 321 --
(Increase) decrease in:
Trade accounts receivable (10,007) (113,250)
Inventory 113,150 (30,425)
Prepaid expenses and other (82,039) (45,000)
Deposits and other assets (182,361) (10,000)
Increase (decrease) in:
Trade accounts payable and accrued liabilities (510,299) 626,676
Deferred revenue (33,290) 65,401
----------- -----------
Net cash provided by (used in) operating activities from
continuing operations (2,718,285) 48,829
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of software business 6,832,773 --
Purchase of property and equipment (1,018,774) (50,000)
Payments on note receivable 58,006 (696,961)
----------- -----------
Net cash provided by (used in) investing activities of continuing operations 5,872,005 (746,961)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible debenture - shareholder -- 1,500,000
Repayment of convertible debenture - shareholder (1,500,000) --
Proceeds from notes payable 805,000 --
Payments on notes payable (40,500) --
----------- -----------
Net cash provided by (used in) financing activities of continuing operations (735,500) 1,500,000
----------- -----------
Cash provided by (used in) discontinued operations 174,478 (769,768)
----------- -----------
NET INCREASE IN CASH 2,592,698 32,100
Cash at beginning of period 207,609 128,871
----------- -----------
Cash at end of period $ 2,800,307 $ 160,971
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES
Cash paid for interest $ 41,319 $ 116,935
=========== ===========
Offset of accounts payable against notes receivable $ 21,554 $ --
=========== ===========
See accompanying notes.
4
ARDIS TELECOM & TECHNOLOGIES, INC.
AND SUBSIDIARIES
(Formerly Canmax Inc)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for
the three month and nine month periods ended July 31, 1999 are not
necessarily indicative of the results that may be expected for the year
ending October 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K/A for the year ended October 31, 1998.
A predecessor to ARDIS Telecom & Technologies, Inc. (the "Company" or
"Ardis") was incorporated on July 10, 1986 under the Company Act of the
Province of British Columbia, Canada, and subsequently changed its name to
"International Retail Systems Inc." On August 7, 1992, this predecessor
company renounced its original province of incorporation and elected to
continue its domicile under the laws of the State of Wyoming, and on November
30, 1994, its name was changed to "Canmax Inc." On February 1, 1999 this
predecessor company reincorporated under the laws of the State of Delaware
and changed its name to "ARDIS Telecom & Technologies, Inc."
During 1998, the Company began competing in the telecommunications market
through its wholly-owned subsidiary, Canmax Telecom, Inc. ("Telecom").
Telecom's operations include mainly sales and distribution of prepaid
domestic and international calling cards to wholesale and retail customers
(the "Telecommunications Business"). In August 1998, the Company entered into
an agreement with PT-1 Communications, Inc. ("PT-1"). The agreement provides
for PT-1 to supply long distance telecom and debit services, for use in the
Company's marketing and distribution of domestic and international prepaid
long distance calling cards. The relationship with PT-1 continued through
July 31, 1999, until the Company established its own facilities based
operations.
The Company, through its wholly owned subsidiary Canmax Retail Systems, Inc.
("CRSI") developed and provided enterprise wide technology solutions to the
convenience store and retail petroleum industries, its "Software Business."
On December 7, 1998, the Company obtained shareholder approval for the sale
of, and sold, the assets of its Software Business (the "Software Business
Sale"). The results of operations of the Software Business through December
7, 1998 have been presented in the financial statements as discontinued
operations. Results of operations in prior years have been restated to
reclassify the Software Business as discontinued operations. The measurement
date for the sale is December 7, 1998, the date the shareholders approved the
transaction.
NOTE B - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Four customers accounted for approximately 25% of revenues during the nine
month period ended July 31, 1999 and, three of the four customers are
affiliates of PT-1. Three of those same four customers made up approximately
78% of the trade accounts receivable balance at July 31, 1999. The Company
generally does not require collateral for its trade accounts. The Company has
a note receivable and accrued interest from its former subsidiary, US
Communication Services, Inc. ("USC"), under which approximately $496,000 in
principal was outstanding at July 31, 1999. On August 17, 1999, USC commenced
voluntary bankruptcy proceedings under Chapter 11 of the Bankruptcy Code. See
Note J, Subsequent Events. The note is secured by a lien on all of USC's
assets, bears interest at 12% per annum, is payable in monthly installments
of principal and interest and matures June 15, 2001.
NOTE C - DEPOSITS
During the quarter, the Company paid $140,000 in security deposits related to
carrier contracts, and approximately $30,000 for building and trade show
deposits.
5
NOTE D - CONVERTIBLE DEBENTURES
On December 15, 1997, the Company executed a convertible loan agreement (the
"Original Agreement") with a shareholder, Founders Equity Group, Inc.
("Founders"), which provided financing of up to $500,000. Funds obtained
under the loan agreement were collateralized by all assets of the Company and
bear interest at 10%. Required payments were for interest only and were due
monthly beginning February 1, 1998. Borrowings under the loan agreement
originally matured January 1, 1999, unless otherwise redeemed or converted.
Under the terms of the loan agreement, Founders was entitled to exercise its
right at any time to convert all, or in multiples of $25,000, any part of the
borrowed funds into Common Stock at a conversion price of $1.25 per share.
The conversion price was subject to adjustment for certain events and
transactions as specified in the loan agreements. Additionally, the
outstanding principal amount was redeemable at the option of the Company at
110% of par.
On February 5, 1998, Founders and the Company entered into a financial
consulting agreement pursuant to which Founders agreed to provide financial
advisory and consulting services to the Company, and the Company agreed to
pay to Founders a fee equal to 3% of the value of the consideration received
in any sale or merger of any division or subsidiary of the Company. As a
result of this agreement, Founders received $120,000 of the initial proceeds
of the sale of the Software Business. Founders agreed to forego any further
payments that may be attributable to the Company's receipt of deferred
payments in connection with the sale.
On February 11, 1998, the Company and Founders executed a loan commitment
letter (the "Loan Commitment") which provided for multiple advance loans of
up to $2 million upon terms similar to the Original Agreement; however,
indebtedness outstanding under the Loan Commitment was convertible into
shares of Common Stock at a conversion price equal to the average closing
prices of the Common Stock over the five-day trading period immediately
preceding the date of each advance. As consideration for the Loan Commitment,
the Company paid a commitment fee of $10,000.
As of March 31, 1998, Founders (and certain of its affiliates) entered into
the First Restated Loan Agreement (the "Loan Agreement"), which consolidated
all rights and obligations of the Company to Founders under the Original
Agreement and the Loan Commitment. Amounts advanced under the Loan Agreement
bore interest at the rate of 12% per annum, were secured by a lien on all
other Company's assets and were convertible into shares of Common Stock, at
the option of Founders, at $0.80 per share. On August 25, 1998, Founders
agreed to release its lien on all of the Company's assets upon the
consummation of the sale of the Software Business. As consideration for the
release, the Company agreed, upon the consummation of the sale, to repay $1.0
million of the $1.5 million currently outstanding under the Loan Agreement,
and to allow Founders to convert, at the Company's option, the remaining $0.5
million plus accrued but unpaid interest outstanding under the Loan Agreement
into shares of Common Stock at a conversion price of $.50 per share.
On December 11, 1998, the Company and Founders executed Amendment No. 1 to
the Loan Agreement. As a result of the amendment, the Company agreed to defer
Founders' conversion of the remaining indebtedness outstanding under the Loan
Agreement in exchange for (a) Founders' waiver of any registration obligation
under the Registration Rights Agreement dated May 1, 1997 or under the Loan
Agreement until February 1, 1999 or the Company's earlier delivery of a
conversion notice with regard to the outstanding indebtedness, (b) the
adjustment of the conversion price for the remaining convertible indebtedness
outstanding under the Loan Agreement ($500,000) from $.50 per share to the
greater of $.50 per share or 75% of the average closing price of the Common
Stock over the ten trading days preceding the delivery of a conversion
notice, and (c) Founders' agreement to convert the remaining outstanding
principal amount under the Loan Agreement ($500,000) upon written notice from
the Company at the adjusted conversion agreed to price described above.
Further, the amendment to the Loan Agreement reduced the interest rate
payable on the outstanding principal amount under the Loan Agreement from 12%
to 9% per annum. The amendment also terminated any additional funding
obligations of Founders under the Loan Agreement. On March 31, 1999, the
Company and Founders extended the maturity date of the Founders Loan
Agreement from April 1, 1999 to July 1, 1999.
The Company used $1,000,000 from the Software Business Sale proceeds to pay
down the Founders debt. On May 4, 1999, the Company repaid the balance of the
amounts outstanding ($500,000) under the loan agreement with Founders and the
Company's obligations under the loan agreement were terminated.
Interest expense in connection with Founders debt was $35,777 for the nine
month period ended July 31, 1999.
6
NOTE E - NOTES PAYABLE
On April 13, 1999, the Company executed a loan agreement with Bank One for
$805,000. The loan bears interest at prime less .5%, is payable in monthly
installments of $13,500 plus interest beginning May 13, 1999, and matures
April 13, 2004. The loan is secured by cash equivalents of $900,000. The
purpose of this loan was to purchase the telephone switch and software to run
the switch.
NOTE F - DISCONTINUED OPERATIONS
On December 7, 1998, the Company sold substantially all of the assets of
CRSI. Pursuant to the terms of the Purchase Agreement, the Company sold the
assets and received $4,000,000 at closing and transferred certain liabilities
arising from the Software Business. On January 21, 1999, the purchaser and
the Company calculated the net working capital (generally current assets
other than cash minus current liabilities) as of the closing date, and the
purchaser received an amount equal to the negative difference between the net
working capital as of the closing of $230,083. The Company recorded an
initial gain on the sale of the Software Business of $2,015,494. The gain is
calculated as net proceeds of $3,769,917 less net assets of $1,693,259 less
legal and accounting fees related to the sale of $61,164. Ardis was entitled,
upon the sale of the software business, to receive additional deferred
payments of up to an additional $3,625,000 calculated at the end of each
calendar quarter during the twelve month period commencing on January 1,
1999. Each deferred payment is calculated based upon the cumulative level of
revenue attributable to the Software Business from January 1, 1999 through
the end of each three month period through December 31, 1999, and equals (a)
the sum of (i) 75% of all such revenues greater than $4 million and less than
or equal to $7 million plus (ii) 13.75% of all such revenues greater than $7
million or less than or equal to $17 million, minus (b) the sum of any
deferred payments previously made.
As of July 31, 1999, the Company has received total payments relating to the
additional consideration of approximately $3,063,000 and expects to earn out
the balance of the deferred payment of approximately $562,000 by its fiscal
year end of October 31, 1999. These payments have been recorded as additional
gain on the sale of the Software Business, reduced by costs associated with
the sale.
Summarized operating results of the discontinued Software Business operations
are as follows:
Period from
November 1, Nine months
Through Ended
December 7, July 31,
1998 1998
------------ ------------
Revenues $ 1,686,945 $ 5,762,274
Costs and expenses 1,468,569 6,591,940
------------ ------------
Net income (loss) $ 218,376 $ (829,666)
============ ============
NOTE G - SHAREHOLDERS' EQUITY
WARRANT ISSUANCES
On January 11, 1999, the Company retained a consultant to assist in its
strategic planning and investor relations activities by issuing warrants to
acquire 50,000 shares of Company common stock at an exercise price of $.29
per share. The right to acquire 25,000 shares under such warrant vests on
January 10, 2000, and the right to acquire the remaining 25,000 shares under
the warrant vests on July 10, 2000.
7
NOTE G - SHAREHOLDERS' EQUITY (Continued)
The Company recorded expense of $5,942 in January 1999 related to these
Warrants. This amount represents the Company's estimate of the fair value of
these warrants at the date of grant using a Black-Scholes pricing model with
the following assumptions: applicable risk-free interest rate based on the
current treasury-bill interest rate at the grant date of 6.0%; dividend
yields of 0%; volatility factors of the expected market price of the
Company's common stock of 1.02; and an expected life of the warrant of one
year.
COMMON STOCK ISSUANCES
On January 25, 1999 the Company issued 250,000 shares of the Company's common
stock to employees of the Company as compensation. In connection with the
issuance, the Company recorded $74,225 of compensation expense, such expense
being calculated as the difference between the trading price of the common
stock on the date of issuance and the proceeds received for the issuance.
NOTE H - COMMITMENTS
On April 15, 1999, the Company agreed to purchase from Simplified Telesys a
telecommunications services platform and switch software for approximately
$805,000, $200,000 of which was paid upon execution of the agreement. In
early June of 1999, Simplified Telesys substantially completed the
installation of the telecommunications platform and software and on June 4,
1999, the Company paid the second installment of the purchase price for the
equipment and software of approximately $525,000. The balance is due upon the
Company's full acceptance of the platform and software.
NOTE I - YEAR 2000
The Company has completed an assessment of the impact of Year 2000 issues on
its internal systems and determined that the cost for any modifications or
replacements will be immaterial and not exceed $50,000. The Company has
completed communications with all of its significant suppliers and customers
to determine the extent to which the Company's internal systems and developed
software products are vulnerable to those third parties failure. In
connection with the sale of the Software Business, the Company and the
purchaser of the Software Business conducted a Year 2000 compliance audit of
software and systems developed by the Company. Such audit did not reveal any
material items of noncompliance, and the Company does not expect to incur any
material expenses to cause its developed software and systems to become Year
2000 compliant.
NOTE J - SUBSEQUENT EVENTS
On August 17, 1999, USC commenced a voluntary Chapter 11 reorganization
proceeding before the United States Bankruptcy Court for the Southern
District of California. Upon the rescission of the Company's acquisition of
USC in June of 1998, USC consolidated its then existing debt obligations into
a promissory note, of which approximately $496,000 of principal remains
outstanding, as reflected on the books and records of the Company. At the
present time, the Company asserts a valid and perfected first lien security
interest in substantially all material assets of USC and full satisfaction of
the debt obligation is expected notwithstanding commencement of the
reorganization case. Further, USC has prepared a stipulation for filing with
the Bankruptcy Court which indicates its intent to make all payments due on
its debts to the Company during the pendency of the bankruptcy case when such
payments become due and payable in the ordinary course of its business
operations. At present, the Company believes the debt owed by USC is fully
secured by the assets, which are subject to its lien. However USC has not
provided any substantial post-petition financial information, and therefore
the actual realization of this debt obligation may still be impacted through
the course of subsequent events during the bankruptcy proceeding of USC.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Through December 7, 1998, the Company operated two distinct businesses, its
Software Business and its prepaid phone card and other telecommunications
business (the "Telecommunications Business"). On December 7, 1998, the
Company consummated the sale of the Software Business to Affiliated Computer
Services, Inc. ("ACS"). As a result of the Software Business Sale, the
Company will no longer engage in the Software Business, and, its business
will be focused solely on its Telecommunications Business. Therefore,
historic financial information attributable to the Software Business will be
reported as discontinued operations.
In August, the Company successfully completed the installation and testing of
its facilities-based telecommunications operations. Toward the end of August,
the Company began supplying small quantities of phone cards to the market
which it had produced and for which the Company provides all the services.
The quality of the service and the capacity of the system were closely
monitored, and once they were judged to be acceptable, around the first of
September, larger quantities of cards were supplied to the market. The
Company believes that its telecommunication switching facilities and its
enhanced services platform are now capable of supporting its aggressive
revenue growth expectations.
Additionally, subsequent to the quarter, the Company has implemented a
strategy to consolidate previously fragmented distribution in its
marketplace. By establishing key regional distribution centers, staffed
primarily by former wholesale suppliers with established markets and customer
bases, the Company believes it will be able to significantly enhance its
ability to control the movement of its product in targeted market areas
across the country. The Company has now opened four regional offices and
expects to add additional territories in the near future.
The following discussion should be read in conjunction with the Company's
Form 10-K/A and the consolidated financial statements for the years ended
October 31, 1998, 1997 and 1996; the Company's Form 10-Q/A for the quarter
ending July 31, 1998; and the consolidated financial statements and related
notes for the quarter ended July 31, 1999 found elsewhere in this report.
RESULTS OF OPERATIONS
In the later part of fiscal 1996, the Company decided that it was critical
that it expands its market beyond one vertical market and one large customer.
After evaluating a number of alternative strategies, the Company decided that
the rapidly expanding telecommunications market presented an opportunity to
utilize some of the technology and support capabilities that it had developed
through its Software Business. The Company chose to make its entry into the
telecommunications industry via the prepaid long distance market.
On January 30, 1998, the Company acquired USCommunications ("USC"). Effective
May 27, 1998, the Company and principals of USC agreed to rescind the USC
acquisition. Following its entry into the Telecommunications Business, the
Company formed Canmax Telecom, Inc.(now known as "RDST, Inc."), its
telecommunications operating company and a wholly-owned subsidiary, and has
established sales and marketing activities in four principle marketing
channels for its prepaid phone card program, including (a) wholesale and
retail sales through independent distributors, (b) direct sales to retail
stores, (c) telemarketing sales to retail stores, and (d) promotional and
specialty marketing sales to businesses. The initial product used to
introduce the Company's Telecom division to the market was referred to as the
Latino Card, as it was targeted to the long distance market for calls
originating within the continental United States to certain Latin American
countries. Services required to offer this card were provided by USC, and the
Company continued to purchase those services from USC following the
rescission of the acquisition.
The Company then established a strategic relationship with PT-1
Communications, Inc., the nation's largest prepaid card provider, and began
marketing prepaid phone cards with services provided by PT-1 in the latter
part of August, 1998. This relationship enabled the Company to pursue its
rapid growth plan in the prepaid market prior to the commitment of a large
facilities investment. At that time, the Company discontinued purchasing any
services from USC except those required to complete the operation of the
already distributed Latino Cards. The relationship with PT-1 continued
through July 31, 1999, until the Company established its own facilities based
operations. Although the relationship accomplished most of the Company's
objectives in the early stages, the financial attractiveness declined
considerably in the latter months. The products became uncompetitive before
the Company was able to release its own products to the market, and
consequently both revenues and margins suffered.
9
RESULTS OF OPERATIONS (Continued)
During the third fiscal quarter of 1999, the Company spent approximately $1.0
million for capital investments in its Telecommunications Business to
purchase and develop its telecommunications platform. In late July of 1999,
the Company began operating its own calling card platform and switch and
marketing its own calling cards. The Company expects that future revenues
will be primarily derived from its own calling cards, and that revenue
associated with the sale of the PT-1 calling cards will decrease. Although
the Company does not anticipate any substantial additional capital
expenditures, the dynamic nature and potential rapid growth of the Company's
Telecommunication business would require additional capital purchases during
fiscal 1999. The Company believes it will be able to internally fund
additional infrastructure development through operations. The
Telecommunications Business was launched during the second quarter of 1998.
The Company's interim financial statements for the three-month and nine-month
periods ended July 31, 1999 and management's discussion and analysis of the
results of operations for such period reflect the results of operations of
the Telecommunications Business only. The results of operations of the
Software Business have been condensed into the line item caption
"Discontinued Operations" in the Company's financial statements and, because
the Software Business has been discontinued, management has not discussed the
results of operations for the Software Business for the three month and nine
month periods ended July 31, 1999 as compared to the same period in 1998.
For the three months and nine months ended July 31, 1998, a large portion of
the Telecommunications Business revenues and expenses were generated as a
result of the acquisition of USC. During this period, revenue recognition
originated from customer usage of prepaid calling cards. The Company sold
cards to retailers and distributors at a fixed price, with the related cost
of the calls being determined as the cards were used and the calls were made.
When the retailer or distributor was invoiced, deferred revenue was recorded.
The Company recognized this deferred revenue as the customer utilized the
calling time and upon expiration of the cards containing unused calling time.
For the three months and nine months ended July 31, 1999, revenues and
expenses of the Telecommunications Business were generated solely through the
relationship with PT-1. Through July 31, 1999 the Company sold cards
purchased from PT-1 to retailers, distributors, and the Company's vending
machine routers in a simple buy/sell relationship. That is, the cost of the
cards is predetermined and the amount of revenue and related cost of the card
are known and earned at the time that the card is sold to the retailer.
Therefore, revenue and costs of that revenue are recognized at the time of
sale.
Due to the differences between the USC and PT-1 phone cards and their
appropriate revenue recognition treatments and the fact that the USC
acquisition was rescinded, the following discussion for the three and nine
month periods ended July 31, 1999 and 1998 presents the results of operations
separately.
REVENUE
PT-1 Revenues
Pre-paid calling card revenues from continuing operations for the three
months and nine months ended July 31, 1999 was approximately $500,000 and
$2,889,000, respectively. Sales for the three months and nine months ended
July 31, 1998 was approximately $111,000. These sales included the Latino
card and some PT-1 card sales.
USC Revenues
Due to the rescission of the USC acquisition in May 1998, there are no
revenues attributable to USC for the three months and nine months ended July
31, 1999. Revenues generated by USC for the three and nine months ended July
31, 1998 were $161,000 and $710,000 respectively.
EXPENSES
PT-1 Expenses
Costs of revenues from continuing operations for the three months and nine
months ended July 31, 1999 was approximately $536,000 and $2,692,000,
respectively. Included in the quarterly costs were approximately $69,000
related to non-activated and expired PT-1 calling cards that have been
destroyed. The remaining $466,000 costs of revenues are mainly composed of
pre-paid calling card activation costs, printing and freight costs. The
initial Latino and PT-1 phone card cost of revenues in the three months and
nine months ended July 31, 1998 was $227,000.
General and administrative costs attributable to continuing operations for
the three months and nine months ended July 31, 1999 was approximately
$567,000 and $1,513,000 respectively. These costs were primarily comprised of
management, accounting, legal and overhead expenses.
Sales and marketing costs attributable to continuing operations for the three
months and nine months ended July 31, 1999 was approximately $323,000 and
$803,000 respectively. Included in these costs are wages, travel and
promotional expenses.
Interest expense attributable to continuing operations for the three months
and nine months ended July 31, 1999 was approximately $23,000 and $81,000
respectively. The expense for the quarter solely is associated with
indebtedness outstanding under the loan agreement with Bank One. On May 4,
1999, the Company repaid the balance of the amounts outstanding ($500,000)
under the loan agreement with Founders and the Company's obligations under
the loan agreement were terminated.
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USC Expenses
Costs of revenues generated by USC for the three and nine months ended July
31, 1998 were approximately $122,000 and 565,000 respectively.
Selling, general and administrative costs related to USC for the three and
nine months ended July 31, 1998 were approximately $500,000.
As a result of the foregoing, the Company incurred a net loss from continuing
operations for the three and nine months ended July 31, 1999 of approximately
$922,000 and $2,121,000 respectively.
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LIQUIDITY AND CAPITAL RESOURCES
Upon consummation of the Software Business Sale on December 7, 1998, the
Company received its initial installment of $4.0 million from ACS,
approximately $1.1 million of which was used to repay amounts owed to
Founders under the Loan Agreement and $250,000 of which was used to pay
transaction expenses. During the third fiscal quarter of 1999, the Company
spent approximately $1.0 million for capital investments in the
Telecommunications Business to purchase and develop its telecommunications
platform. The investments were primarily financed through bank loans secured
by the Company's cash collateral. Although the Company does not anticipate
any additional substantial capital expenditures in fiscal 1999, the Company's
anticipated growth may require additional capital purchases in fiscal 1999.
The Company plans to internally fund any additional infrastructure
development through operations of the Telecommunications Business. The
Company believes existing capital resources and cash from operations will be
sufficient to meet the Company's capital and liquidity needs through fiscal
1999.
At July 31, 1999, the Company had cash and cash equivalents of approximately
$2,800,000, up from approximately $161,000 for the same period in 1998, an
increase of $2,639,000. This increase is primarily attributable to cash
proceeds received from the sale of the Software Business.
Cash used in continuing operating activities totaled $2,718,000 for the nine
months ended July 31, 1999, and was comprised of the Company's net income of
$2,857,000, adjusted for: gains from discontinued operations of $218,000;
gain on disposal of the Software Business of $4,761,000, issuance of common
stock to employees totaling $74,000; depreciation of $28,000; and net
changes in operating assets and liabilities of $705,000. Cash provided by
operating activities in the first nine months of 1998 totaled $49,000.
Cash provided by investing activities of continuing operations for the nine
months ended July 31, 1999 totaled $5,872,000 and was primarily comprised of
proceeds from the sale of the Software Business of $6,833,000, reduced by
purchases of property and equipment of $1,019,000, and payments of
approximately $58,000 on the USC note receivable. Cash used in investing
activities of continuing operations for the nine months ended July 31, 1998
totaled $747,000. The 1998 balance primarily reflects the funds provided to
USC in the form of a note receivable of approximately $697,000.
Cash used in financing activities for continuing operations for the nine
months ended July 31, 1999 totaled $736,000 reflecting $1,500,000 repayment
of borrowings under the Loan Agreement that was entered into during fiscal
1998 and proceeds from notes payable of $805,000. Cash provided by financing
activities for the nine months ended July 31, 1998 totaled $1,500,000. Due to
the sale of the Software Business, the Company was able to eliminate its
outstanding borrowings associated with the Founders Group, and, subsequently
secured a loan with Bank One for the purpose of purchasing the
telecommunications platform and software.
Current assets from continuing operations totaled $3,738,000 at the end of
the third quarter of 1999, resulting in net working capital from continuing
operations of $3,296,000. Accounts receivable trade totaled $275,000 at July
31, 1999 and represented 7.3% of current assets from continuing operations.
Accounts receivable includes three significant accounts, which comprised
approximately 78% of total trade accounts receivable from continuing
operations. Two of the three customers are affiliates of PT-1.
Net property and equipment from continuing operations totaled $1,050,000 at
the end of the third quarter of 1999. The majority of property and equipment
is comprised of the Company's telecommunication's platform acquired in the
current quarter.
Current liabilities from continuing operations totaled $472,000 at the end of
the third quarter of 1999, including balances in accounts payable of
$180,000, accrued liabilities of $117,000 and the current portion of the note
payable of $162,000.
In connection with the rescission of the Company's acquisition of USC, USC
executed a note payable to the Company in the amount of approximately
$725,000. The USC note matures on June 15, 2001, and is payable in monthly
installments on the fifteenth day of each month. Monthly payments through the
maturity date are approximately $22,000. The USC note is secured by a lien on
all of USC's assets. As of July 31, 1999, approximately $496,000 remained
outstanding under the USC note. The current portion of the note receivable
totaled $268,000 at July 31, 1999. On August 17, 1999, USC commenced
voluntary bankruptcy proceedings under Chapter 11 of the Bankruptcy Code. See
item 5, Other Information.
IMPACT OF YEAR 2000
The Company has completed an assessment of the impact of Year 2000 issues on
its internal systems and determined that the cost for any modifications or
replacements will be immaterial and not exceed $50,000. The Company has
completed communications with all of its significant suppliers and customers
to determine the extent to which the Company's internal systems and developed
software products are vulnerable to those third parties failure. In
connection with the Software Business Sale, the Company and ACS conducted a
Year 2000 compliance audit of software and systems developed by the Company.
Such audit did not reveal any material items of noncompliance, and the
Company does not expect to incur any material expenses to cause its developed
software and systems to become Year 2000 compliant.
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CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed in this
Quarterly Report on Form 10-Q include "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Forward-looking statements are statements other
than historical information or statements of current condition. Some
forward-looking statements may be identified by the use of such terms as
"expects", "will", "anticipates", "estimates", "believes" and words of
similar meaning. These forward-looking statements relate to business plans,
programs, trends, results of future operations, satisfaction of future cash
requirements, funding of future growth, acquisition plans and other matters.
In light of the risks and uncertainties inherent in all such projected
matters, the inclusion of forward-looking statements in this Form 10-Q should
not be regarded as a representation by the Company or any other person that
the objectives or plans of the Company will be achieved or that operating
expectations will be realized. Revenues and results of operations are
difficult to forecast and could differ materially from those projects in
forward-looking statements contained herein, including without limitation
statements regarding the Company's belief of the sufficiency of capital
resources and its ability to compete in the Telecommunications Business.
Actual results could differ from those projected in any forward-looking
statements for, among others, the following reasons: (a) increased
competition in the prepaid phone card business from existing and new
competitors, (b) the relatively low barriers to entry for start-up prepaid
operators, (c) the price-sensitive nature of consumer demand, (d) the
relative lack of customer loyalty to any particular prepaid card company, (e)
the Company's dependence upon favorable pricing from its suppliers to compete
in the prepaid phone card industry, (f) increased consolidation in the
telecommunication industry, which may result in larger competitors being able
to compete more effectively, (g) the failure to attract or retain key
employees, (h) continuing changes in governmental regulations affecting the
telecommunications industry and (i) the "Certain Business Factors" identified
in the Company's Annual Report on Form 10-K/A for the year ended October 31,
1998. The Company does not undertake to update any forward-looking statements
contained herein. Readers are cautioned not to place undue reliance on the
forward-looking statements made in, or incorporated by reference into, this
Quarterly Report on Form 10-Q or in any document or statement referring to
this Quarterly Report on Form 10-Q.
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On August 17, 1999, USC commenced a voluntary Chapter 11 reorganization
proceeding before the United States Bankruptcy Court for the Southern
District of California. Upon the rescission of the Company's acquisition of
USC in June of 1998, USC consolidated its then existing debt obligations into
a promissory note, of which approximately $496,000 of principal remains
outstanding, as reflected on the books and records of the Company. At the
present time, the Company asserts a valid and perfected first lien security
interest in substantially all material assets of USC and full satisfaction of
the debt obligation is expected notwithstanding commencement of the
reorganization case. Further, USC has prepared a stipulation for filing with
the Bankruptcy Court which indicates its intent to make all payments due on
its debts to the Company during the pendency of the bankruptcy case when such
payments become due and payable in the ordinary course of its business
operations. At present, the Company believes the debt owed by USC is fully
secured by the assets, which are subject to its lien. However, USC has not
provided any substantial post-petition financial information, and therefore,
the Company cautions that the actual realization of this debt obligation may
still be impacted through the course of subsequent events during the
bankruptcy proceeding of USC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are required to be filed with this quarterly
report on Form 10-Q:
11 Statement re Computation of Per Share Earnings (filed herewith).
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-k- None
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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.
ARDIS Telecom & Technologies, Inc.
(Registrant)
DATE: September 14, 1999 /s/ Debra L. Burgess
-------------------------- ----------------------------------
Debra L. Burgess
Executive Vice President,
Treasurer, Chief Operating
Officer and Chief Financial
Officer
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