<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ Quarterly report under Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended March 31, 1996
/ / Transition report under Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from to
COMMISSION FILE NUMBER 33-97876
USTN HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 36-4042177
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4501 Intelco Loop, Lacey 98503
Washington
(Address of principal executive office) (Zip code)
(360) 493-6000
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days. Yes /X/
No
At March 31, 1996, 5,161,152 shares of common stock, $0.01 per share par
value, and 2,676 shares of Series A convertible preferred stock, $0.01 per
share par value, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No /X/
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USTN HOLDINGS, INC.
INDEX TO 10-QSB FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 1996
PAGE
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
USTN Holdings, Inc. Consolidated Balance Sheet - March 31, 1996 2
USTN Holdings, Inc. Consolidated Statement of Operations -
Three Months ended March 31, 1996 and 1995 4
USTN Holdings, Inc. Consolidated Statement of Cash Flows -
Three Months ended March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements - March 31, 1996 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS 19
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 24
ITEM 2: CHANGES IN SECURITIES 24
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS 24
ITEM 5: OTHER INFORMATION 24
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURES 25
INDEX TO EXHIBITS 26
1
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PART I
FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
USTN HOLDINGS, INC.
Consolidated Balance Sheet
March 31, 1996
ASSETS 1996
------ ----
(Unaudited)
Current assets:
Cash and cash equivalents $ 9,449,850
Accounts receivable, net of allowance
for doubtful accounts of $244,000 18,454,883
Prepaid expenses and other 493,323
----------
Total current assets 28,398,056
----------
Property and equipment:
Land 911,765
Building and leasehold improvements 6,904,191
Equipment and furniture 2,836,488
Network assets 18,234,977
Capitalized network costs 8,002,701
Computer hardware and software 14,369,204
----------
51,259,326
Less: Accumulated depreciation and amortization 21,995,302
----------
Total property and equipment 29,264,024
----------
Computer software product costs, net of
accumulated amortization of $280,000 2,579,182
Other assets, net of accumulated
amortization of $202,000 2,529,311
----------
$ 62,770,573
==========
See accompanying notes to consolidated financial statements.
2
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USTN HOLDINGS, INC.
Consolidated Balance Sheet, Continued
March 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY 1996
- - ------------------------------------ ----
(Unaudited)
Current liabilities:
Trade accounts payable 1,386,076
Accrued expenses 3,235,934
Due to customers 16,670,850
Due to dissenting shareholders 1,161,485
Current portion of long-term debt 1,780,444
----------
Total current liabilities 24,234,789
----------
Long-term debt, excluding current portion 20,324,956
----------
Stockholders' equity:
Series A Convertible Preferred Stock,
par value $.01 per share, authorized
4,416 shares, outstanding 2,676 shares 27
Preferred Stock, par value $.01 per share,
authorized 14,995,584 shares, outstanding
0 shares -
Common Stock, par value $.01 per share,
authorized 30,000,000 shares, outstanding
5,161,152 shares 51,611
Additional paid-in capital 10,370,966
Retained earnings 7,788,224
----------
Total stockholders' equity 18,210,828
----------
$ 62,770,573
===========
See accompanying notes to consolidated financial statements.
3
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USTN HOLDINGS, INC.
Consolidated Statement of Operations
Three Months ended March 31, 1996 and 1995
1996 1995
---- ----
(Unaudited) (Unaudited)
Revenues $ 5,966,911 $ 3,452,520
--------- ---------
Expenses:
Operating 2,313,073 2,466,738
Selling, general and administrative 1,553,695 1,319,535
Depreciation and amortization 1,106,566 651,465
Network operating expenses 1,000,047 -
Merger expense 350,067 -
--------- ---------
Total expenses 6,323,448 4,437,738
--------- ---------
Operating loss (356,537) (985,218)
Interest income 89,090 55,211
Interest expense (180,070) (62,925)
--------- ---------
Loss before income taxes (447,517) (992,932)
Income tax benefit - 337,597
-------- --------
Net loss $ (447,517) $ (655,335)
========= =========
Weighted average shares of common
stock outstanding 4,215,300 3,731,951
========= =========
Net loss per share of common stock $ (0.11) $ (0.18)
========= =========
See accompanying notes to consolidated financial statements.
4
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USTN HOLDINGS, INC.
Consolidated Statement of Cash Flows
Three Months ended March 31, 1996 and 1995
1996 1995
---- ----
(Unaudited) (Unaudited)
Cash flows from operating
activities:
Cash received from customers $ 34,105,567 $ 28,630,094
Interest received 86,965 52,527
Cash paid to customers,
suppliers and employees (31,317,836) (27,662,130)
Income tax refund 173,795 -
Interest paid (152,370) (81,254)
----------- ----------
Net cash provided by
operating activities 2,896,121 939,237
Cash flows from investing activities:
Cash acquired in acquisition of
Independent Telecommunications
Network, Inc. 613,086 -
Capital expenditures and
software development (793,816) (454,789)
----------- ----------
Net cash used by investing
activities (180,730) (454,789)
----------- ----------
Cash flows from financing activities:
Purchase of subordinated capital
certificates related to notes
payable - (267,115)
Proceeds from issuance of
notes payable - 2,671,515
Principal payments on notes payable (257,747) (136,827)
--------- ----------
Net cash provided (used) by
financing activities (257,747) 2,267,573
--------- ---------
Net increase in cash and
cash equivalents 2,457,644 2,752,021
Cash and cash equivalents at:
Beginning of period 6,992,206 4,126,159
----------- ----------
End of period $ 9,449,850 $ 6,878,180
=========== ==========
See accompanying notes to consolidated financial statements.
5
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USTN HOLDINGS, INC.
Notes to Consolidated Financial Statements
March 31, 1996 (Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
USTN Holdings, Inc., and its wholly owned subsidiary USTN Services,
Inc., (collectively referred to as "USTN") were incorporated in the
State of Delaware on August 2, 1995 to effect the merger of U.S.
Intelco Holdings, Inc. ("U.S. Intelco") and Independent
Telecommunications Network, Inc. ("ITN"). In accordance with terms
of the merger, U.S. Intelco and ITN merged with and into USTN
Services, Inc. ("USTN Services") on February 23, 1996 (the
"Merger").
USTN is engaged in the business of developing, managing
and marketing a Signaling System 7 ("SS7") Network and related
products and services based on SS7 technology to the entire
telecommunications marketplace, including network services and other
products and services to the cellular market. SS7 is a
telecommunications industry-standard system of protocols and
procedures that is used to control telephone communications and
provide routing information in association with vertical calling
features, such as card validation, Advanced Intelligent Network
("AIN") services and cellular services, 800 Number Portability, and
Calling Name Delivery. Additionally, USTN provides advanced data
base services, billing and collection services, calling card
programs and integrated voice messaging and information services to
a range of telephone companies as well as interexchange carriers
("Carriers"), operator service providers ("OSPs") and other
telecommunications companies and providers of telecommunications
services. USTN primarily provides services to companies in the
telecommunications industry that are located throughout the United
States and considers all of its operations as one segment.
USTN has its corporate headquarters and a portion of its operations
located in Lacey, Washington, SS7 Signal Transfer Points located in
Rock Hill, South Carolina and Mattoon, Illinois, and a network
control center and related operations located in Overland Park,
Kansas.
6
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USTN HOLDINGS, INC.
Notes to Consolidated Financial Statements
March 31, 1996 (Unaudited)
(b) BASIS OF PRESENTATION
The consolidated financial statements of USTN presented in this Form
10-QSB are unaudited and reflect, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of USTN's financial position,
results of its operations and its cash flows for each period
presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. USTN believes that the disclosures made are
adequate to make the information presented not misleading. The
results of the interim periods are not necessarily indicative of
future results.
The unaudited consolidated financial statements of USTN reflect the
Merger accounted for as a purchase business combination in
accordance with generally accepted accounting principles with U.S.
Intelco designated as the acquiring company. Accordingly, the
consolidated statements of operations and cash flows for the three
month period ended March 31, 1995 presented in this Form 10-QSB
represent the stand-alone results of operations and cash flows of
U.S. Intelco. Under the purchase method, ITN's assets and
liabilities were recorded at estimated fair value as of the Merger
date, and the results of ITN's operations are included prospectively
from the date of the Merger (see Note 2).
(c) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial
statements of USTN and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(d) CASH EQUIVALENTS
USTN considers all highly liquid investments with original
maturities of three months or less at purchase to be cash
equivalents. Cash equivalents consist of money market funds and
repurchase agreements that are stated at cost which approximates
market value.
7
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USTN HOLDINGS, INC.
Notes to Consolidated Financial Statements
March 31, 1996 (Unaudited)
At March 31, 1996, such investments include an investment of
$6,137,756 in a Treasury Portfolio Fund, a money market fund,
consisting of direct obligations of the U.S. Treasury and repurchase
agreements collateralized by such obligations of the U.S. Treasury,
managed by Short-Term Investments Co. of Texas and administered
through U.S. Bank of Washington, and $1,700,000 in overnight
repurchase agreements with United Missouri Bank.
(e) ACCOUNTS RECEIVABLE
One of USTN's services involves providing a clearinghouse function
for toll collected by telephone companies on behalf of other
telecommunications service providers. At March 31, 1996, accounts
receivable includes $9,925,042 of such toll amounts due from
telephone companies, and due to customers includes $14,340,863 owed
to such service providers. Accounts receivable from these companies
are uncollateralized.
Concentration of credit risk with respect to trade receivables is
limited due to the diversity of the customer base and geographic
dispersion and is evidenced by a history of minimal customer account
write-offs.
(f) PROPERTY AND EQUIPMENT AND CAPITALIZED SOFTWARE
Property and equipment and capitalized software are stated at cost.
Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the assets. Estimated
useful lives for property and equipment are as follows:
Corporate headquarters building 31.5 years
Capitalized networks costs 10 years
Office equipment and systems 5 to 20 years
Furniture and fixtures 5 to 15 years
Computer equipment and software 3 to 5 years
Leasehold improvements 5 years
Included in property and equipment are $11,036,554 of capitalized
computer software costs, and related accumulated amortization of
$5,479,715 at March 31, 1996.
8
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USTN HOLDINGS, INC.
Notes to Consolidated Financial Statements
March 31, 1996 (Unaudited)
these costs relate to software used by USTN for internal purposes,
including support for the processing services provided by USTN.
Amortization expense for such capitalized computer software costs,
determined on a straight-line basis over the related estimated
lives, was $464,642 and $443,209 for the three months ended March
31, 1996 and March 31, 1995, respectively.
Computer software product costs represent costs incurred for
software development related to USTN's software products, which
became available for sale in December 1995.
Costs incurred after the technological feasibility of the product
was established have been capitalized. Costs incurred prior to that
date were expensed. For the three months ended March 31, 1996, USTN
recognized $178,700 of amortization expense for computer software
product costs. Capitalized computer software product costs are
amortized on a product-by-product basis. The annual amortization is
equal to the greater of the amount computed using (a) the ratio that
current gross revenues for a product bear to the total of current
and anticipated future gross revenues for that product or (b) the
straight-line method over the remaining estimated economic life of
the product including the period being reported on. Amortization
starts when the product is available for general release to
customers.
USTN evaluates the net realizable value of capitalized software
based on estimated future revenue and costs associated with the
service for which the software is utilized.
(g) OTHER LONG-TERM ASSETS
Capitalized merger costs are amortized using the straight-line
method over five years.
(h) REVENUE RECOGNITION
USTN's revenues are recognized when earned. Computer software
product revenues are recognized when all contractual obligations
have been fulfilled.
9
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USTN HOLDINGS, INC.
Notes to Consolidated Financial Statements
March 31, 1996 (Unaudited)
(i) INCOME TAXES
The Company provides for income taxes in accordance with Statement
of financial Accounting Standards No. 109 "Accounting for Income
Taxes."
(j) NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed using the weighted
average number of common shares and common share equivalents
outstanding during each period. Common share equivalents represent
the dilutive effect of outstanding convertible USTN Series A
Preferred Stock and USTN Debentures. Fully diluted net loss per
common share is not reflected in periods that report a net loss as
the earnings per share amounts are antidilutive.
(2) ACQUISITION
For purchase accounting purposes, the net assets of ITN, excluding
U.S. Intelco's 36% ownership of ITN on the date of the Merger, were
determined to have a preliminary fair value of $6,239,000. Costs in
excess of assets acquired totaling $37,000 are being amortized over
five years.
The purchase price was allocated to the following:
Net ITN assets and liabilities $5,210,000
Other intangible assets 37,000
Deferred income taxes 992,000
-------
$6,239,000
=========
10
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USTN HOLDINGS, INC.
Notes to Consolidated Financial Statements
March 31, 1996 (Unaudited)
Assuming that this acquisition had taken place on January 1, 1995,
unaudited pro forma results of operations from continuing operations
would have been as follows:
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
Revenues $ 9,694,448 $ 8,363,634
========= =========
Net loss $ (742,513) $ (602,943)
========= =========
Loss per common share $ (0.14) $ (0.12)
========= =========
As consideration for the sale, non-dissenting ITN shareholders, excluding
U.S. Intelco, received 1,532,542 shares of USTN Common Stock and 2,676
shares of USTN Series A Preferred Stock. ITN Debentures were converted
to USTN Debentures having the same amount of outstanding principal and
interest under the terms and conditions set forth in the Merger. The
amount reported as due to dissenting shareholders of $1,161,485
represents the estimated payments to be made to dissenting ITN
shareholders in exchange for ITN stock held by such dissenters on the
Merger date. The amount was accrued by ITN immediately before the Merger
as a reduction of additional paid-in capital. No payments have been made
to ITN dissenters as of March 31, 1996.
Subsequent to March 31, 1996, USTN paid all dissenting USIH shareholders
a total of $338,000 in exchange for USIH stock held by such dissenters on
the Merger date. The payments were recorded as a stock repurchase and
retirement transaction.
At March 31, 1996, other long-term assets includes $612,756 of
capitalized Merger transaction costs, net of amortization. For the three
months ended March 31, 1996, merger expense of $350,067 includes
non-capitalizable Merger transaction costs, and severance costs
associated with USIH and ITN personnel terminated as a direct result of
the Merger.
11
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USTN HOLDINGS, INC.
Notes to Consolidated Financial Statements
March 31, 1996 (Unaudited)
(3) LONG-TERM DEBT
Long-term debt at March 31, 1996 consists of the following:
Rural Telephone Finance Cooperative ("RTFC")
variable rate secured note, interest
rate at March 31, 1996 of 6.3% ,
payable in quarterly installments,
including interest, matures June 2010. $ 4,328,087
RTFC variable rate secured note, interest
rate at March 31, 1996 of 6.3%,
payable in quarterly installments,
including interest, matures March 2015. 1,140,880
RTFC variable rate secured note, interest
rate at March 31, 1996 of 6.3%,
payable in quarterly installments,
including interest, matures March 2015. 1,470,631
RTFC variable rate secured note, interest
rate at March 31, 1996 of 6.55%,
payable in quarterly installments,
including interest, matures February 2000. 1,001,985
RTFC variable rate secured note, interest
rate at March 31, 1996 of 6.25%,
payable in quarterly installments
including interest, matures October 2000. 2,799,159
RTFC variable rate secured note, interest
rate at March 31, 1996 of 6.25%,
payable in quarterly installments
including interest, $3,847,369 loan
available for draw at March 31, 1996,
matures October 2000. 842,105
12
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USTN HOLDINGS, INC.
Notes to Consolidated Financial Statements
March 31, 1996 (Unaudited)
7.5% convertible redeemable subordinated
debentures (net of original issue
discount of $258,089). 8,488,721
USTN convertible debenture interest payable 2,033,832
----------
Total long-term debt 22,105,400
Less: current portion 1,780,444
----------
Long-term debt, excluding current portion $ 20,324,956
==========
All of the RTFC notes have variable interest rates that are based on
RTFC's short-term funding costs. In accordance with the terms of the
loan agreements, USTN purchased lender-issued, non-interest-bearing
subordinated capital certificates based on a percentage of the gross loan
amount. Such certificates amortize over the terms of the respective
loans. Certificates purchased, net of amortization, related to the
mortgages totaled $944,034 at March 31, 1996, are carried at cost, and
are included in other long-term assets. The loan agreements contain
certain covenants, the most restrictive of which requires USTN to
maintain certain cash flow-to-debt service ratios.
All loans are currently secured by a first priority mortgage lien on
substantially all of ITN's and U.S. Intelco's assets, revenues and
property. USTN Services, as the surviving entity of the Merger, has
assumed all of the obligations related to the agreements between RTFC and
ITN, and U.S. Intelco, and has pledged as security all of its assets,
revenues and property, excluding cash collected and held on behalf of
others in the normal course of providing USTN's services. Cash and cash
equivalents not subject to the mortgage lien was $6,554,982 at March 31,
1996. RTFC and USTN Services have agreed to re-document, in the near
future, all loans and security agreements assumed by USTN Services from
ITN and U.S. Intelco as a result of the Merger.
At March 31, 1996, USTN has a secured line of credit through USTN
Services with RTFC that permits USTN to borrow up to $7,300,000, not to
exceed 80% of USTN Service's accounts receivable, through May 1996. This
line of credit will be automatically extended for a term of five years
upon completion of Merger-related documents. Additionally, USTN has a
$5,000,000 line of credit, secured with the stock of USTN Services,
through March 1998 from which proceeds are to be used specifically for
administrative matters associated with the Merger.
13
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USTN HOLDINGS, INC.
Notes to Consolidated Financial Statements
March 31, 1996 (Unaudited)
The lines of credit bear interest at the lesser of the prime
rate plus 1.5% or RTFC's monthly line of credit rate, and contain certain
similar covenants, the most restrictive of which requires USTN to
maintain a zero balance in the line at least five consecutive business
days every 360 days after the initial advance. There were no borrowings
outstanding against either line at March 31, 1996. RTFC has provided
USTN with a firm commitment to provide an additional five-year secured
loan in the amount of $3,894,737.
The terms of the note are expected to be similar to the terms of USTN's
other secured notes with RTFC. Finalization of the loan is pending
completion of related loan documents.
The USTN Debentures, formerly ITN Debentures converted in the Merger,
bear interest at 7.5% and are due August 15, 2001. Interest on the
debentures is payable in quarterly installments, in arrears, beginning
the first full quarter after December 31, 1995. Interest accrued for the
period prior to December 31, 1995 was deferred and will be paid ratably
on each interest payment date over the remaining term of the debentures.
The USTN Debentures are convertible into the number of shares of USTN
Common Stock equal to the principal amount of the USTN Debenture at the
time of conversion divided by the market price of USTN Common Stock at
the time of conversion (as defined in the Indenture), or if no market
price exists, on the basis of 90 shares of USTN Common Stock for each
$1,000 in principal amount. USTN Debentures are subordinated to all
senior debt. USTN Debentures are directly associated with USTN Series A
Preferred Stock in that these securities were issued as a unit("Unit").
Maturities of the long-term debt for the five years ending December 31
are scheduled as follows: 1997, $1,655,518; 1998, $1,751,069; 1999,
$1,853,490; 2000, $978,068; and 2001, $9,080,533.
(4) STOCKHOLDER'S EQUITY
At March 31, 1996, USTN is authorized to issue up to 45,000,000 shares of
capital stock consisting of (i) 30,000,000 shares of USTN Common Stock,
par value $.01 per share, and (ii) 15,000,000 shares of USTN Preferred
Stock, par value $.01 per share. Each share of USTN Common Stock and
USTN Series A Preferred Stock is entitled to one vote and 100 votes,
respectively.
14
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USTN HOLDINGS, INC.
Notes to Consolidated Financial Statements
March 31, 1996 (Unaudited)
Each share of USTN Series A Preferred Stock will be convertible into
85.12 shares of USTN Common Stock ("Conversion Amount"), at the option of
the holder thereof at any time that the holder elects to convert a USTN
Debenture issued as a unit with such a share. Each share of USTN Series
A Preferred Stock will be convertible, at the option of USTN, into the
Conversion Amount, at such time that the USTN Debenture issued as a unit
with such share is converted into shares of USTN Common Stock. In the
event of liquidation, USTN Series A Preferred Stock will be entitled to
$1,000 per share out of the assets of USTN available for distribution to
its stockholders, but before any payment or distribution is made to
holders of USTN Common Stock or any other series of preferred stock of
USTN. Payments of dividends are restricted under USTN's long-term debt
arrangements, as follows: (1) approval of RTFC is required unless USTN's
ratio of equity to total assets exceeds 40% and (2) dividends are
restricted to 75% of net income as defined in the indenture relating to
the USTN debentures. Dividends are not payable to USTN Series A
Preferred Stock unless dividends are declared, set aside or paid
simultaneously to holders of USTN Common Stock.
(5) INCOME TAXES
Components of the income tax benefit for the three months ended March
1996 and 1995 are as follows:
1996 1995
---- ----
Deferred tax benefit $ 152,156 $ 337,597
Valuation allowance for
deferred tax assets 152,156 -
Income tax benefit $ - $ 337,597
======= =======
USTN provides for deferred taxes based on the differences between the
bases of assets and liabilities for financial reporting purposes and
income tax purposes, calculated using enacted tax rates as of the balance
sheet date. At March 31, 1996, such differences primarily related to the
use of accelerated depreciation and amortization for tax purposes,
accruals for certain expenses that are not currently deductible for tax
purposes until paid, the tax basis of certain investments that have been
written off
15
PAGE> 17
USTN HOLDINGS, INC.
Notes to Consolidated Financial Statements
March 31, 1996 (Unaudited)
tax purposes that were capitalized for financial statement purposes and
the expensing of software development costs for USTN has established a
valuation reserve related to tax benefits associated with capital losses
recorded for financial statement purposes but not yet realized for tax
purposes. The primary reason the income tax benefit varies from the
statutory tax rate is due to the permanent differences recognized between
book and taxable income.
The components of the deferred tax asset (liability) as of March 31, 1996
are summarized as follows:
Future tax assets $ 915,770
Future tax liabilities (6,912,173)
Net operating loss carryforwards 10,059,694
Merger effect on deferred taxes 991,644
Valuation reserve (5,054,935)
----------
Net deferred taxes $ -
==========
At March 31, 1996, USTN has Federal income tax net operating loss
carryforwards available to offset future taxable income for Federal
income tax purposes totaling $26,968,000 that expire as follows: 2004,
$196,000; 2005, $1,277,000; 2006, $6,510,000; 2007, $5,772,000; 2008,
$3,841,000; 2009, $2,698,000; 2010, $4,223,000; and 2011, $2,451,000.
These loss carryforwards may be limited under certain provisions of the
Internal Revenue Code of 1986.
16
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USTN HOLDINGS, INC.
Notes to Consolidated Financial Statements
March 31, 1996 (Unaudited)
(6) STATEMENT OF CASH FLOWS
Reconciliations of net loss to net cash provided by operating activities
for the three months ended March 31, 1996 and 1995 are summarized as
follows:
1996 1995
---- ----
Net loss $ (447,517) $(655,335)
Adjustments to reconcile net
loss to net cash provided
by operating activities:
Depreciation and amortization 1,106,566 651,465
Deferred income taxes - (337,597)
Deferred merger costs (83,570) -
Change in:
Accounts receivable 1,166,674 323,185
Refundable income taxes 173,795 -
Other assets 106,096 (125,449)
Trade accounts payable (161,174) 237,332
Accrued expenses (1,411,237) 119,216
Due to dissenting shareholders 1,161,485 -
Due to customers 1,285,003 726,420
Net cash provided by operating
activities $ 2,896,121 $ 939,237
During the three months ended March 31, 1996 and 1995, USTN redeemed
$23,248 and $84,765 respectively, of lender issued, non-interest-bearing
subordinated capital certificates, which were deducted from the mortgage
loan principal balance. During the three months ended March 31, 1996,
USTN accrued expenses totaling $63,436 for subordinated debenture
interest and $4,023 for original issue discount, which were added to the
notes payable balance.
As a result of the Merger, USTN acquired $5,625,914 of net assets of ITN,
excluding cash, in exchange for USTN Common and Series A Preferred stock.
17
<PAGE> 19
USTN HOLDINGS, INC.
Notes to Consolidated Financial Statements
March 31, 1996 (Unaudited)
(7) COMMITMENTS AND CONTINGENCIES
USTN has agreed to acquire a thirty-five percent (35%) interest, in the
form of preferred stock, in Authentix, Inc., a newly formed company which
is developing a proprietary cellular roaming fraud verification system.
USTN's investment commitment is $1,690,000, of which $920,000 has been
paid and capitalized as of March 31, 1996. The investment is accounted
for by the cost method and is included in other long-term assets.
USTN is party to a contract with the subsidiary of one of its corporate
stockholders which supplies USTN with transmission facilities in the form
of private leased lines. Payments pursuant to this contract total
approximately $300,000 for each of the three month periods ended March
31, 1996 and 1995, respectively.
On February 6, 1996, one ITN shareholder filed a lawsuit in Delaware
Chancery Court against ITN and its board of directors alleging breaches
of fiduciary duty on the part of the ITN board of directors related to
their approval of the Merger into USTN. The lawsuit does not specify any
monetary damages and is in the preliminary pleading stage. USTN is
vigorously contesting this issue. This lawsuit is in the very early
stages and the ultimate outcome of this matter cannot be predicted at
this time and therefore no provision for any liability has been made in
these financial statements.
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<PAGE> 20
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATIONS
BASIS OF PRESENTATION
USTN Holdings, Inc., and its wholly-owned subsidiary, USTN Services, Inc.,
(collectively referred to as "USTN") were incorporated for the purpose of
effecting the Merger of U.S. Intelco Holdings, Inc. ("U.S. Intelco") and
Independent Telecommunications Network, Inc. ("ITN") that was consummated
effective February 23, 1996. The Merger was accounted for as a purchase
business combination in accordance with generally accepted accounting
principles with U.S. Intelco designated as the acquiring company.
Accordingly, the consolidated statements of operations and cash flows for the
three month period ended March 31, 1995 presented in this Form 10-QSB
represent the stand-alone results of operations and cash flows
of U.S. Intelco. The results of ITN's operations are included in the
consolidated financial statements prospectively from the date of the Merger.
The pro forma information presented in this Management's Discussion and
Analysis or Plan of Operations item reflects the combined activities of U.S.
Intelco and ITN as if the Merger had occurred effective January 1, 1995.
RESULTS OF OPERATIONS
REVENUES. Revenues for the three months ended March 31, 1996 increased
$2,514,391, or 73%, to $5,966,911 from $3,452,520 for the comparable 1995
period. The increase reflects one month of revenues resulting from the Merger
with ITN that accounted for $1,944,789 or 77% of the increase. Toll
Clearinghouse ("TCH") revenues increased $702,795, or 70%, from $1,009,638 for
the three months ended March 31, 1995 to $1,712,433 for the comparable period
in 1996, reflecting a 22% increase in messages processed from 11.8 million in
1995 to 14.4 million in 1996 due to the addition of a large customer in the
second quarter of 1995. Line Information Data Base ("LIDB") services revenues
decreased $109,784, or 8%, from $1,406,868 to $1,297,084 for the three months
ended March 31, 1995 and 1996, respectively, reflecting an 8% decrease in
queries processed from 42.7 million to 39.2 million for the three months
ended March 31, 1995 and 1996, respectively, due to a general decrease in
volumes processed.
On a pro forma basis, revenues for the three months ended March 31, 1996
increased $1,330,814, or 16%, to $9,694,448 from $8,363,634 for the comparable
1995 period. Recurring network connectivity revenues increased $260,482, or
16%, from $1,607,633 for the three months ended March 31, 1995 to $1,868,115
for the comparable period in 1996, primarily due to growth in chargeable
customer links. LIDB Switch and Transport revenues decreased $310,731, or
26%, from $1,176,540 to $865,809 for the three months ended March 31, 1995 and
1996, respectively, primarily due to reduced prices brought on by competition.
Cellular Switch and Transport revenues increased $295,358, or 126%, from
$234,793 to $530,151 for the three months ended March 31, 1995, respectively,
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<PAGE> 21
reflecting customer growth and increased utilization of the network with
message volumes increasing 362% from 40.0 million for the three months ended
March 31, 1995 to 184.6 million for the comparable 1996 period. The increase
in messages was offset by an approximate 60% decrease in price due to
competition. Trunk Signaling/CLASS revenues increased $424,025, or 71%, from
$595,190 to $1,019,215 for the three months ended March 31, 1995 and 1996,
respectively, as a result of new customer growth.
EXPENSES. USTN's primary costs are related to network expenses, followed by
personnel costs, depreciation and amortization of hardware, software and
facilities assets, and software maintenance expenses. Expenses for the three
months ended March 31, 1996 increased $1,885,710, or 42%, to $6,323,448 from
$4,437,738 for the comparable 1995 period. The increase reflects one month of
expenses resulting from the Merger with ITN that accounted for $1,921,321, or
102%, of the increase.
On a pro forma basis, expenses for the three months ended March 31, 1996
increased $1,051,881, or 12%, to $10,148,954 from $9,097,073 for the
comparable 1995 period. Operating expenses decreased $386,766, or 13%, from
$3,055,638 for the three months ended March 31, 1995 to $2,668,872 for the
three months ended March 31, 1996. This decrease is caused primarily by
reduced Personal Communications Services ("PCS") related business development
costs, software maintenance savings related to cost reduction projects
completed in 1995, and reduced personnel costs. The decrease in PCS business
development costs results from a change in focus from PCS limited partnership
sponsorship activities, with the beginning of the FCC Block C broadband radio
spectrum license auction, to new service offerings requiring a lower level of
resources. Operating expense savings are offset by increased operating costs
of the AMAT7 trademark and CDR7 computer software products for which
development was completed and introduction into the market occurred in
mid-1995 and the end of 1995, respectively. Selling, general and
administrative expenses were comparable at $2,458,520 and $2,449,906 for
the three months ended March 31, 1995 and 1996, respectively. Network
expenses increased $434,262, or 19%, from $2,339,524 to $2,773,786 for the
three months ended March 31, 1995 and 1996, respectively, due to increased
leased network connectivity, link, and LATA access charges incurred to
establish and maintain customer connectivity to the SS7 Network. Depreciation
and amortization increased $327,124, or 27%, from $1,228,391 to $1,555,515 for
the three months ended March 31, 1995 and 1996, respectively, primarily due to
depreciation and amortization of capitalized computer software costs
associated with the AMAT7 and CDR7 products, and of operating hardware and
software placed into production in the second half of 1995. Merger expenses
of $700,875, for the three months ended March 31, 1996, include
non-capitalizable Merger transaction costs, and severance costs associated
with USIH and ITN personnel terminated as a direct result of the Merger.
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<PAGE> 22
INTEREST INCOME/INTEREST EXPENSE. Interest income increased by $33,879, or
61%, to $89,090 for the three months ended March 31, 1996 from $55,211 for the
three months ended March 31, 1995, resulting primarily from an increase in
available cash balances over the two periods. The increase reflects one month
of interest income resulting from the Merger with ITN that accounted for
$8,979, or 27%, of the increase.
On a pro forma basis, interest income decreased by $63,172, or 37%, to
$106,495 for the three months ended March 31, 1996 from $169,667 for the three
months ended March 31, 1995 resulting primarily from a decrease in available
cash balances over the two periods. The reduction in available cash was
caused mainly by purchases of fixed assets, merger activities, and a $920,000
investment in Authentix, Inc. Interest expense increased $117,145, or 186%,
to $180,070 for the three months ended March 31, 1996 from $62,925 for the
three months ended March 31, 1995. The increase reflects one month of
interest expense resulting from the Merger with ITN that accounted for
$89,155, or 76%, of the increase. The remainder of the increase reflects a
higher aggregate outstanding debt balance resulting from two additional
twenty-year mortgage loans for a total of approximately $2.7 million obtained
by USTN from Rural Telephone Finance Cooperative ("RTFC") in March 1995 and a
loan obtained from RTFC in October 1995 for approximately $1.1 million.
On a pro forma basis, interest expense increased $23,134, or 6%, for the three
months ended March 31, 1996 over the comparable 1995 period due to a higher
outstanding debt balance.
INCOME TAXES. As USTN does not expect to receive current benefit from its net
operating loss for the three months ended March 31, 1995, the income tax
benefit was treated as an adjustment to long-term deferred taxes. USTN has
Federal income tax net operating loss carryforwards available to offset future
taxable income for Federal income tax purposes totaling $26,968,000 that
expire as follows: 2004, $196,000; 2005, $1,277,000; 2006, $6,510,000;
2007, $5,772,000; 2008, $3,841,000; 2009, $2,698,000; 2010, $4,223,000; and
2011, $2,451,000. USTN's ability to utilize such net operating loss
carryforwards is dependent on USTN's ability to generate sufficient taxable
income from its operations.
EARNINGS
USTN's net loss decreased $207,818 from $655,335 for the three months ended
March 31, 1995 to $447,517 for the three months ended March 31, 1996 primarily
reflecting an increase in TCH revenues and a decrease in PCS business
development costs.
21
<PAGE> 23
On a pro forma basis, USTN's net loss increased $139,570 from $602,943 to
$742,513 for the three months ended March 31, 1995 and 1996, respectively,
primarily resulting from the offset of positive revenue trends by one-time
Merger costs incurred in 1996. Although USTN believes that its primary
existing services and products will continue to show profit in 1996, overall
company profitability will be dependent upon successful deployment and sales
of new services and products. Initial revenues from new services and products
may not exceed related start-up costs.
Longer term, USTN anticipates that increased expenditures in the development
of services and products will continue over the next several years. USTN
believes that its primary existing services and products will continue to be
profitable; however, overall profitability in the immediate future could be
negatively impacted by delays in obtaining new product revenues coupled with
related increases in new product operating costs during the development,
introduction and implementation period. USTN believes that it will achieve
higher earnings in the future through new product and customer diversification
and expansion into related telecommunications markets as well as achieving a
reduction in selling, general and administrative expenses as a result of the
Merger.
LIQUIDITY AND CAPITAL RESOURCES
U.S. Intelco and ITN individually relied on a combination of cash generated
from operations, debt and equity to fund their service development and
expansion activities. Currently, USTN's operating activities are generating
positive cash flows. However, as USTN broadens its services and products to
those requiring larger investments coupled with longer payback periods, USTN
believes there may be an increased pressure on cash generated from operations.
USTN anticipates continued high levels of investment in the development of new
services and products over the next several years as USTN processes increased
volumes relating to its network, data base, and billing and collection
services and broadens its product base to keep pace with changing markets and
satisfy the needs of its customers.
USTN's working capital (current assets minus current liabilities) was
$4,163,267 as of March 31, 1996. USTN's cash and cash equivalent balances
include $6,554,982 required as working capital to service USTN's
billing-and-collection customers. Such funds are received and disbursed on a
monthly basis. The decrease in working capital of $768,339 from March 31,
1995 reflects the increase in liabilities assumed from the Merger with ITN
including accruals for network expenses and dissenting shareholders and the
current portion of long-term debt financing. USTN believes that its existing
cash balances, funds generated from its operations and borrowings available
under its existing credit facilities will be sufficient to meet existing
capital expenditure and working capital needs for the immediate future.
22
<PAGE> 24
USTN's expenditures for property and equipment including capitalized software
costs, were $793,816 for the three months ended March 31, 1996. Expenditures
for property and equipment were primarily for the Authentix, Inc. project.
Authentix, Inc., is a newly formed company which is developing a proprietary
cellular roaming fraud verification system. USTN has committed to a total
investment of $1,690,000 in Authentix, Inc. preferred stock. USTN and
Authentix, Inc. have agreed that USTN will develop a portion of the
authentication service system. USTN will be paid on a per query basis as the
authentication service becomes functional in the future.
At March 31, 1996, USTN has a secured line of credit through USTN Services
with RTFC that permits USTN to borrow up to $7,300,000, not to exceed 80% of
USTN Service's accounts receivable, through May 1996. This line of credit
will be automatically extended for a term of five years upon completion of
Merger-related documents. USTN has a $5,000,000 line of credit through March
1998, secured with the stock of USTN Services, from which proceeds are to be
used specifically for administrative matters associated with the Merger. There
were no borrowings outstanding against either line at March 31, 1996.
Additionally at March 31, 1996, USTN has $7,742,106 of unused loan facilities
established, or committed, with RTFC, maturing in the years 2000 and 2001.
23
<PAGE> 25
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On February 6, 1996, one ITN shareholder filed a lawsuit in Delaware
Chancery Court against ITN and its board of directors alleging
breaches of fiduciary duty on the part of the ITN board of directors
related to their approval of the Merger into USTN. The lawsuit does
not specify any monetary damages and is in the preliminary pleading
stage.
ITEM 2: CHANGES IN SECURITIES
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED TO BE FILED BY ITEM 601
OF REGULATION S-B
Exhibit Index is provided on page 26.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended
March 31, 1996.
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<PAGE> 26
SIGNATURES
In accordance with requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
USTN HOLDINGS, INC.
Date: May 10, 1996 By:Daniel E. Weiss
---------------
Daniel E. Weiss, Vice President -
Finance and Treasurer
(Principal Accounting Officer)
25
<PAGE> 27
USTN HOLDINGS, INC.
EXHIBIT INDEX
Exhibit no. Title Page
- - ---------- ----- ----
Ex-10.1 Pledge and Security Agreement dated March
25, 1996, between USTN Holdings, Inc., and
Rural Telephone Finance Cooperative
Ex-10.2 Secured Revolving Line of Credit Agreement
dated March 25, 1996, between USTN Holdings,
Inc., and Rural Telephone Finance Cooperative
Ex-27 Financial Data Schedule
Ex-10.1
PLEDGE AND SECURITY AGREEMENT
PLEDGE AND SECURITY AGREEMENT ("this Agreement" dated as of March
25, 1996, between USTN HOLDINGS, INC., a corporation duly organized and
validly existing under the laws of the State of Delaware ("Pledgor"),
and RURAL TELEPHONE FINANCE COOPERATIVE, a South Dakota cooperative
association (the "Lender").
Pledgor and the Lender are parties to a Secured Revolving Credit Agreement
dated as of March 25, 1996 (as modified and supplemented and in effect from
time to time, the "Loan Agreement"), providing, subject to the terms and
conditions thereof, for an extension of credit to be made by the Lender
to Pledgor in the principal amount of up to $5,000,000.00.
To induce the Lender to enter into the Loan Agreement, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged. Pledgor has agreed to pledge and grant a security interest
in the Collateral (as hereinafter defined). Accordingly, the parties
hereto agree as follows:
SECTION 1. DEFINITIONS. To the extent not inconsistent herewith,
capitalized terms defined in the Loan Agreement are used herein as
defined therein. In addition, as used herein:
"COLLATERAL" shall have the meaning ascribed thereto in Section
2 hereof.
"SECURED OBLIGATIONS" shall mean, collectively, all obligations of
Pledgor to the Lender hereunder and under the Loan Agreement.
"UNIFORM COMMERCIAL CODE: shall mean the Uniform Commercial Code as
in effect from time to time in the applicable jurisdiction.
SECTION 2. THE PLEDGE AND SECURITY INTEREST. As collateral security
for the prompt payment in full when the (whether at stated maturity, by
acceleration or otherwise) of the Secured Obligations, Pledgor hereby
pledges, grants, assigns, transfers, conveys and sets over to the Lender a
security interest in all of Pledgor's right, title and interest in the
property described in paragraph 1 of Schedule A hereto, whether now owned
by Pledgor or hereafter acquired and whether now existing or hereafter coming
into existence (all being collectively referred to herein as "COLLATERAL").
Schedule A attached hereto is an integral part of this Pledge Agreement and
contains both a description of and certain representations regarding the
Collateral. Pledgor Covenants and agrees with Lender that Pledgor will not,
directly or indirectly, without prior written consent of the Lender, transfer,
issue or sell any stock of USTN Services, Inc. ("Services"), or enter into any
agreement which may result in the transfer, issuance or sale of any stock of
Services, whether common or preferred.
SECTION 3. FURTHER ASSURANCES; REMEDIES. In furtherance of the grant
of the pledge and security interest pursuant to Section 2 hereof. Pledgor
hereby agrees with the Lender as follows:
3.01 Delivery and Other Perfection. Pledger shall:
(i) deliver to the Lender, endorsed in blank for transfer or
accompanied by duly executed stock powers or other instruments of
assignment and transfers in such form and substance as the Lender
may request, all stock certificates or other securities representing
any of the Collateral;
(ii) give, execute, deliver, file and/or record any financing
statement, notice, instrument, document, agreement or other papers
that may be necessary or desirable (in the judgment of the Lender)
to create, preserve, perfect or validate the security interest
granted pursuant hereto or to enable the Lender to exercise and
enforce its rights hereunder with respect to such pledge and security
interest; and
(iii) permit representatives of the Lender, upon reasonable
notice, at any time during normal business hours to inspect and make
abstracts from the books and records pertaining to the Collateral,
and permit representatives of the Lender to be present at Pledgor's
place of business to receive copies of all communications and
remittances relating to the collateral, all in such manner as the
Lender may require.
3.02 OTHER FINANCING STATEMENTS. Without the prior written consent
of the Lender, Pledgor shall not file or submit to be on file, or authorize
or permit to be filed or to be on file, in any jurisdiction, any financing
statement or like instrument with respect to the Collateral in which the
Lender is not named as the sole secured party for the benefit of the Lender.
3.03 PRESERVATION OF RIGHTS. The Lender shall not be required to
take steps necessary to enforce or preserve any rights under any contract,
instrument, or agreement included in the Collateral.
3.04 RIGHTS REGARDING COLLATERAL. So long as no Event of Default under
the Loan Agreement shall have occurred and be continuing, Pledgor shall have
the right to exercise all of its voting, consensual and other powers of
ownership pertaining to the Collateral for all purposes not inconsistent with
the terms of this Agreement, or the Loan Agreement, and shall be entitled to
receive, spend and otherwise utilize all dividends and other distributions
with respect to the Collateral; provided, however, that Pledgor agrees that
it will not vote the Collateral in any manner that is inconsistent with the
terms of this Pledge Agreement or the Loan Agreement. The Lender shall
execute and deliver to Pledgor or cause to be executed and delivered to
Pledgor all such proxies, powers of attorney, dividend checks (duly endorsed
to Pledgor), and other orders, and all such instruments, without recourse,
as Pledgor may reasonably request for the purpose of enabling it to exercise
its rights and powers which it is entitled to exercise pursuant to this
Section 3.04.
3.05 EVENTS OF DEFAULT, ETC. If during the period of Event of Default
under the Loan Agreement (as such term is defined thereunder) occurs and is
continuing, then, subject to applicable law and approvals, if necessary,
of regulatory agencies;
(i) the Lender shall have all of the rights and remedies with
respect to the Collateral of a secured party under the Uniform
Commercial Code (and to the extent permitted by applicable law, whether
or not said Code is in effect in the jurisdiction where the rights and
remedies are asserted;
(ii) the Lender in its discretion may, in its name or in the name
of Pledgor or otherwise, demand, sue for, collect or receive any money
or property at any time payable or receivable on account of or in
exchange for any of the Collateral, but shall be under no obligation to
do so; and
(iii) the Lender may, upon 15 business day prior written notice to
Pledgor of the time and place, with respect to the Collateral or any part
thereof which shall then be or shall thereafter come into the possession,
custody or control of the Lender or any of its agents, sell or otherwise
dispose of all of any part of such Collateral, at such place or places as
the Lender deems best, and for cash or on credit or for future delivery
(without thereby assuming any credit risk), at public or private sale,
without demand of performance or notice of intention to effect any such
disposition or of time or place of sale (except such notice as is
required above, or as is required by applicable statute and cannot
be waived) and the Lender or anyone else may be the purchaser or
recipient of any or all of the Collateral so disposed of at any public
sale ( or, to the extent permitted by law, at any private sale), and
thereafter hold the same absolutely, free from any claim or right or
whatsoever kind, including any right or equity of redemption (statutory
or otherwise) of Pledgor, any such demand, notice or right or equity
being hereby expressly waived and released. The proceeds of each
collection, sale or other disposition under this Section 3.05 shall
be applied in accordance with Section 3.09.
3.06 DEFICIENCY. If the proceeds of sale, collection or other
realization of or upon the Collateral are insufficient to cover the costs
and expenses of such realization and the payment in full of the Secured
Obligations, Pledgor shall remain liable for any and all deficiency for which
Pledgor is obligated under this Agreement.
3.07 PRIVATE SALE. The Lender shall incur no liability as a result
of the sale of the Collateral, or any part thereof, at any private sale
conducted in a commercially reasonable manner in accordance with applicable
law. Pledgor hereby waives any claims against the Lender arising by reason
of the fact that the price which the Collateral may have been sold at such
private sale was less than the price which might have been obtained at a
public sale or was less than the aggregate amount of the Secured Obligations,
unless the related sale was not conducted in a commercially reasonable
manner in accordance with applicable law.
3.08 REMOVALS, ETC. Without 30 days prior written notice to the
Lender, Pledgor shall not maintain any of its books and records with
respect to the Collateral at any office other than its office as provided
in Schedule A hereto as of the date hereof or maintain its office or its
principal place of business at any other place other than at such location.
3.09 APPLICATION OF PROCEEDS. Except as otherwise herein expressly
provided, the proceeds of any collection, sale or other realization of all
or any party of the Collateral, and any other cash at the time held by the
Lender under this Section 3, shall be applied by the Lender.
FIRST, to the payment of the costs and expenses of such collection,
sale or other realization, including reasonable compensation to the
Lender and its agents and counsel, and all expenses, and advances
made or incurred by the Lender in connection therewith;
SECOND, to the payment in full of the Secured Obligations
described in Section 1 hereof; and
FINALLY, to the payment to Pledgor, or its successors or assigns,
or as a court of competent jurisdiction may direct, of any surplus then
remaining.
As used in Section 3, "PROCEEDS" of Collateral shall mean cash, securities
and other property realized with respect to, and the distribution in kind of,
Collateral, including any thereof received under any reorganization,
liquidation or adjustment of debt of Pledgor or any issuer of or obligor on
any of the Collateral.
3.10 ATTORNEY-IN-FACT. Subject to the Lender having first obtained
any required approval from regulatory agencies, without limiting any rights
or powers granted by this Agreement to the Lender while no Event of Default
under the Loan Agreement has occurred and is continuing, upon the occurrence
and during the continuance of any Event of Default under the Loan Agreement
the Lender is hereby appointed the attorney-in-fact of Pledgor for executing
any instruments which the Lender may deem necessary or advisable to accomplish
the purposes hereof, which appointment as attorney-in-fact is irrevocable
and coupled with an interest, provided that the Lender shall not take any
action pursuant to the authority granted to it in this Section 3.10 without
first notifying Pledgor in writing thereof. Without limiting the generality
of the foregoing, so long as the Lender shall be entitled under this Section
3 to make collections in respect of the Collateral, the Lender shall have the
right and power to receive, endorse and collect all checks made payable to the
order of Pledgor representing any dividend, payment or other distribution in
respect of the Collateral or any part thereof and to give full discharge for
the same.
SECTION 4. MISCELLANEOUS.
4.01 INITIAL FINANCING STATEMENTS. Prior to or concurrently with the
execution and delivery of this Agreement, Pledgor shall file such financing
statements and other documents in such offices as the Lender may request to
perfect the pledge and security interest granted by this Agreement.
4.02 FURTHER ASSURANCES. Pledgor agrees that, from time to time
upon the written request of the Lender, Pledgor will execute and deliver such
further documents and do such other acts and things as the Lender may
reasonably request in order to fully effect the purposes of this Agreement.
4.03 NO WAIVER. No failure on the part of the Lender or any of its
agents to exercise, and no course of dealing with respect to, and no delay
in exercising, any right, power or remedy hereunder shall operate a waiver
thereof; nor shall any single or partial exercise by the Lender or any of its
agents of any right, power or remedy hereunder preclude any other further
exercise thereof or the exercise of any other right, power or remedy. The
remedies herein are cumulative and are not exclusive of any remedies provided
by law.
4.04 EXPENSES. Pledgor agrees to pay to the Lender all reasonable
out-of-pocket expenses (including reasonable expenses for legal services
of every kind) of, or incident to, the enforcement of any of the provisions
of this Agreement, or performance by the Lender of any obligations of Pledgor
with respect to the Collateral which Pledgor has failed or refused to perform,
or any actual or attempted sale, or any exchange, enforcement, collection,
compromise or settlement with respect to any of the Collateral, and for the
care of the Collateral and defending or asserting rights and claims of the
Lender in respect thereof, by litigation or otherwise and all such expenses
shall be Secured Obligations to the Lender secured under Section 2 hereof.
4.05 TAXES. Pledgor agrees to pay before delinquency any tax or other
governmental charge which is or can become through assessment, distraint or
otherwise a lien on the Collateral and to pay any tax or other governmental
charge with respect to which Pledgor is prosecuting in good faith appeal or
other proceedings, shall have been fully bonded, or otherwise effectively
stayed.
4.06 TERMINATION. When all Secured Obligations shall have been paid
in full and the Loan Agreement shall have terminated, this Agreement shall
terminate, and the Lender shall forthwith cause to be assigned, transferred
and delivered, against receipt but without any recourse, warranty or
representation whatsoever, any remaining Collateral and money received
in respect thereof, to or on the order of Pledgor.
4.07 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Virginia, provided that as
to Collateral located in any jurisdiction other than the Commonwealth of
Virginia, the Lender shall have all the rights to which a secured party
under the laws of such jurisdiction is entitled.
4.08 NOTICES. All notices, requests and other communications provided
for herein including, without limitation, any modifications of, or waivers,
requests or consents under, this Agreement shall be given or made in writing
(including, without limitation, by telecopy) and delivered to the intended
recipient at the "Address for Notices" specified below; or, as to any party,
at such other address as shall be designated by such party in a notice to
each other party. Except as otherwise provided in this Agreement, all such
communications shall be deemed to have been duly given when personally
delivered or, in the case of a telecopied or mailed notice, upon receipt,
in each case given or addressed as provided for herein. The Address for
Notices of the respective parties are on the last page of this Agreement.
4.09 WAIVERS, ETC. The terms of this Agreement may be waived, altered
or amended only by an instrument in writing duly executed by Pledgor and the
Lender.
4.10 HEADINGS. The headings and sub-headings contained in this
Agreement are intended to be used for convenience only and do not constitute
part of this Agreement.
4.11 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the respective successors and assigns of Pledgor,
the Lender and each subsequent holder of the Secured Obligations (provided,
however, that Pledgor shall not assign or transfer its rights hereunder
without the prior written consent of the Lender).
4.12 COUNTERPARTS. This Agreement may be executed in one or more
counterparts and all of such counterparts taken together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Pledge and
Security Agreement to be duly executed as of the day and year first above
written.
(SEAL)
USTN HOLDINGS, INC.
By: Daniel E. Weiss
---------------
Title: Vice President - Finance
Attest: Thomas E. Lafferty
------------------
Assistant Secretary
Address: 4501 Intelco Loop, S.E.
Lacey, WA 98507-0008
ATTN: Daniel Weiss
Telecopy: (360) 923-3440
(SEAL)
RURAL TELEPHONE FINANCING COOPERATIVE
By: Patrick Rinn
------------
for Chief Executive Officer
Attest: Lawrence Zawalick
------------------
Assistant Secretary-Treasurer
Address: Woodland Park
2201 Cooperative Way
Herndon, VA 22071-3025
Telecopy: 703-709-6776
<PAGE>
SCHEDULE A TO PLEDGE AND SECURITY AGREEMENT
1. "COLLATERAL", as defined and described in Section 2 of the Pledge
and Security Agreement, shall be:
(a) 1,000 Shares of Common Stock of USTN Services, Inc. As of
the date hereof, USTN Services, Inc. has issued and outstanding 1,000
shares of Common Stock and 0 Shares of Preferred Stock.
(b) without affecting any provision prohibiting such action
hereunder or under the Loan Agreement, in the event of any consolidation
or merger in which USTN Services, Inc. or any of its subsidiaries is not
the surviving corporation, all shares of each class of the capital
stock of the successor corporation formed by or resulting from such
consolidation or merger distributed in respect of the Pledged Stock; and
(c) all proceeds of and to any of the property described in
clauses (a) and (b) above in this Section 2 and, to the extent related
to any property described in said clauses or above in this clause (c),
all books, correspondence, credit files, records, invoices and other
papers.
(d) all dividends on USTN Services, Inc. or its subsidiaries'
stock, and any other distribution to its stockholders, relating to
said Stock that are paid with respect to earnings generated from and
after the merger of Independent Telecommunications Network, Inc. and
U.S. Intelco Holdings, Inc. with and into USTN Services, Inc.; provided,
however, that prior to the occurrence of an Event of Default under the
Loan Agreement so long as such an Event of Default is not continuing,
the Pledgor shall be entitled to receive, spend and otherwise utilize
free of the security interest granted hereby and all cash dividends
and other distributions with respect to the pledged stock to the extent
permitted by the terms and conditions set-forth in the Loan Agreement and
Pledge and Security Agreement.
The Pledgor represents and warrants that the Collateral is owned by the
Pledgor free and clear of any lien or encumbrance and that such
Collateral is not subject to any restrictions as to transfer, except
those specifically disclosed in writing to Lender or such as may be
imposed by applicable law affecting transfers generally.
2. Pledgor's office, as referred to in Section 3.08 of the Pledge and
Security Agreement is located at
4501 Intelco Loop, S.E.
Lacey, WA 98503
Ex-10.2
SECURED REVOLVING LINE OF CREDIT AGREEMENT
("Agreement")
USTN Holdings, Inc. ("Borrower"), a Delaware corporation, hereby applies
to RURAL TELEPHONE FINANCE COOPERATIVE ("RTFC"), a South Dakota cooperative
association, pursuant to the terms of this Agreement, dated as of March 25,
1996 for a revolving line of credit loan in an amount not to exceed five
million dollars ($5,000,000.) In consideration of their mutual premises
hereunder and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, RTFC and Borrower agree to the
following terms and conditions:
1. REVOLVING CREDIT AND TERM. RTFC agrees to make advances to the
Borrower pursuant to the terms of this Agreement ("Advances"). The
maximum principal amount outstanding at any point in time shall not
exceed $5,000,000.00. Within such limits, the Borrower may borrow,
repay and reborrow at any time or from time to time for a period up to
twenty-four (24) months from the date hereof (the "Maturity Date").
2. REQUISITIONS. The Borrower shall give RTFC such prior notice of
requests for Advances as RTFC may reasonably require from time to time.
3. INTEREST RATE AND PAYMENT. The Borrower unconditionally promises and
agrees to pay, as and when due, interest on all amounts advanced
hereunder from the date of each Advance and to repay all amounts advanced
hereunder with interest on the Maturity Date. Interest shall be due and
payable quarterly on the first day of each January, April, July and
October, commencing on the first date after such initial Advance; except
that if RTFC gives notice thereof to the Borrower before the first day of
any month, interest shall thereafter be due and payable on the 15th day
of such month and each month thereafter. RTFC shall invoice the Borrower
at least five days prior to the due date of any such interest payment.
All amounts shall be payable at RTFC's main office at Woodland Park, 2201
Cooperative Way, Herndon, Virginia 22071-3025 or at such other location
as designated by RTFC from time to time.
The interest rate on all Advances will be equal to the Prevailing Bank
Prime Rate (as defined herein), plus one and one-half percent per annum
or such lesser total rate per annum as may be fixed by RTFC from time to
time. Interest will be computed on the basis of a year of 365 days. The
interest rate will be adjusted as determined from time to time by RTFC,
provided that no such adjustment may be effective on a date other than
the first or sixteenth day of any month, and will remain in effect until
a subsequent change in rate occurs.
The "Prevailing Bank Prime Rate" is that bank prime rate published in the
"Money Rates" column of the Eastern edition of THE WALL STREET JOURNAL on
the day preceding the date on which an adjustment in the interest rate
hereof shall become effective. If such preceding day is not a
publication date for THE WALL STREET JOURNAL then the Prevailing Bank
Prime Rate shall be established by reference to such "Money Rates"
column as of the last publication day next preceding the day on which
such adjustment shall become effective; provided if THE WALL STREET
JOURNAL shall cease to be published, then the Prevailing Bank Prime Rate
shall be determined by RTFC by reference to another publication reporting
bank prime rates in a similar manner.
4. RTFC ACCOUNTS. RTFC shall maintain in accordance with its usual practice
an account or accounts evidencing the indebtedness of the Borrower
resulting from each Advance made from time to time and the amounts of
principal and interest payable and paid from time to time hereunder. In
any legal action or proceeding in respect of this Agreement, the entries
made in such account or accounts (whether stored on computer memory,
microfilm, invoices or otherwise) shall be presumptive evidence (absent
manifest error) of the existence and amounts of the Borrower's
transactions therein recorded.
5. CORPORATE AND REGULATORY APPROVALS. Borrower represents that it has
obtained any and all necessary corporate and regulatory approvals for
Borrower to execute and perform pursuant to this Agreement.
6. REPORTS. The Borrower will prepare and furnish not later than 60 days
from the six-month period ending June 30 and the twelve month period
ending December 31, or at more frequent intervals when reasonably
specified by RTFC, unaudited financial statements on its and any
subsidiaries' financial condition. The Borrower will cause to be
prepared and furnished to RTFC at least once during each 12-month period
during the term hereof, a full and complete consolidated report of it
and its subsidiaries' financial condition, including consolidating
financial statements, as of a date not more than one hundred twenty (120)
days after the close of the fiscal year, in form and substance reasonably
satisfactory to RTFC, audited and certified by independent certified
public accountants reasonably satisfactory to RTFC and accompanied by a
report of such audit in form and substance reasonably satisfactory to
RTFC.
7. FEES. If any amount outstanding and due hereunder shall not be paid when
due, Borrower agrees to pay on demand RTFC's reasonable costs of
collection or enforcement of this Agreement, or preparation therefor,
including reasonable fees of counsel. If payment of any principal and/or
interest due under the terms of this Agreement is not received at RTFC's
office in Herndon, Virginia, or such other location designated by RTFC
within 5 business days after the due date thereof (such unpaid amount of
principal and/or interest being herein called the "delinquent amount,"
and the period beginning after such due date being herein called the
"late-payment period"), Borrower will pay to RTFC, on demand, in addition
to all other amounts due under the terms of this Agreement, any late-
payment charge as may then be in effect pursuant to RTFC's then current
policy on the delinquent amount for the late payment period.
Notwithstanding the foregoing, the maximum late-payment charge shall not
exceed an amount equal to the Prevailing Bank Prime Rate (as defined
herein) plus three percent per annum on the delinquent amount computed
over the late-payment period on the basis of a 365-day year.
8. REDUCE BALANCE TO ZERO. In the event this Agreement is for a term of
more than twelve months, then within 360 days of the first Advance,
Borrower will reduce to zero for a period of at least five consecutive
business days, (the last day of such five day period being herein called
the "Zero Balance Date") amounts outstanding hereunder, and will reduce
to zero for a period of at least five consecutive business days (the last
day of such five business day period being called the "Subsequent Zero
Balance Date") amounts outstanding hereunder within 360 days from the
Zero Balance Date or Subsequent Zero Balance Date, as appropriate.
9. CREDIT SUPPORT. This Agreement may not be used as credit support for any
other financings without RTFC's prior written approval.
10. NOTICES, ACCELERATION OF DEBT AND WAIVERS. While any amount hereunder is
outstanding, Borrower agrees to notify RTFC of any material delinquency
or material default on any of its financial obligations, any material
adverse change in its financial or business conditions and if any
representation or warranty made in this Agreement has become untrue in
any respect having a material adverse effect on the financial condition
or business of the Borrower. RTFC may declare at any time all
outstanding amounts hereunder immediately due and payable in full with
accrued interest, without presentment or demand, and may withhold
advances of funds upon occurrence of any of the following Events of
Default: (i) any delinquency or default in payment of any sum due the
Lender under this Agreement; (ii) a court shall enter a decree or order
for relief with respect to Borrower or any subsidiary or guarantor in an
insolvency or bankruptcy or appoint a receiver, liquidator, trustee or
similar official and such order remains in effect for a period of ninety
(90) days; (iii) Borrower or any subsidiary shall commence a voluntary
case under bankruptcy, insolvency or similar law or consent to the
appointment of a receiver, liquidator, or trustee; (iv) the dissolution
or liquidation of Borrower or a subsidiary or guarantor of Borrower or
failure to forestall or remove any execution, garnishment or attachment
of such consequence as to impair its ability to continue business and
such execution, garnishment or attachment shall not be vacated within
thirty (30) days; (v) or any other event as a result of which any holder
of indebtedness of Borrower may declare the same due and payable shall
occur and continue for more than any applicable grace period.
If any representation or warranty herein shall become untrue, or Borrower
shall fail to comply with any term of this Agreement, or if the financial
condition of Borrower shall have changed to the extent that such change
in the reasonable judgment of RTFC, materially increases RTFC's risk
hereunder, then RTFC may withhold advances of funds. The Borrower waives
the defense of usury and all rights to setoff, counterclaim, deduction or
recoupment.
11. PURPOSE, REPAYMENTS AND DEPOSIT. Borrower agrees that any and all
Advances hereunder will be used only for the payment of dissenters'
appraisal rights pursuant to the merger by and between Independent
Telecommunications Network, Inc. and U.S. Intelco Holdings, Inc. with
and into USTN Services, Inc. (the "Merger"), and consistently with the
requirements of outstanding security documents of Borrower relating to
its operations.
12. DIVIDENDS AND ADDITIONAL INDEBTEDNESS. Until the earlier of the Maturity
Date or cancellation of this Agreement, Borrower agrees that it will not,
without the prior written consent of RTFC: (i) authorize dividends or
make distributions of cash to its shareholders, other than for appraisal
payments to those shareholders dissenting from the Merger, or (ii)
create, incur, assume, guarantee or otherwise become obligated for any
additional indebtedness, secured or unsecured, other than to RTFC except
that the Borrower may borrow against another loan previously approved by
RTFC and except that the Borrower may incur additional indebtedness for
the purpose of paying off in full the Advances incurred hereunder, and,
thereafter, this Agreement would be terminated pursuant to paragraph 24
hereunder.
13. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND PAYMENT OBLIGATIONS.
Borrower agrees that the representations and warranties made in this
Agreement shall survive the making of Advances hereunder. Any
unsatisfied payment obligation hereunder shall survive the maturity and
cancellation of this Agreement.
14. REPRESENTATIONS AND WARRANTIES. Except as set forth in writing and
attached hereto, Borrower represents and warrants as of the date of its
application and on the date of each and every Advance hereunder that:
a. The Borrower has and will meet all obligations and be in material
compliance with all instruments under which it is bound and that all
information submitted in support of its application is true, complete
and correct;
b. The Borrower has no outstanding loans from sources other than RTFC;
c. The Borrower is not in default in any material respect of any of its
obligations and no litigation is threatened or pending which would
have a material adverse impact on the Borrower's ability to perform
under this Agreement; and
d. The Borrower has no lines of credit with any other lender except as
permitted under paragraph 12 of this Agreement.
15. CONSENT TO PATRONAGE CAPITAL DISTRIBUTIONS. Borrower hereby consents
that the amount of any distributions with respect to Borrower's patronage
which are made in written notices of allocation (as defined in Section
1388 of the Internal Revenue Code of 1986, as amended ("Code") including
any other comparable successor provision) and which are received from
RTFC will be taken into account by Borrower at their stated dollar
amounts in the manner provided in Section 1385(a) of the Code in the
taxable year in which written notices of allocation are received.
16. LEGAL OPINION. As of the date of this Agreement, Borrower agrees to
deliver to RTFC a written opinion from Borrower's counsel, in form and
content satisfactory to RTFC, addressing such legal matters as RTFC or
its counsel shall reasonably require.
17. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF VIRGINIA.
18. SEVERABILITY. If any term, provision or condition, or any part thereof,
of this Agreement shall for any reason be found or held invalid or
unenforceable by any court or governmental agency of competent
jurisdiction, such invalidity or unenforceability shall not affect the
remainder of such term, provision or condition nor any other term,
provision or condition, and this Agreement shall survive and be construed
as if such invalid or unenforceable term, provision or condition had not
been contained therein.
19. SETOFF. RTFC is hereby authorized at any time and from time to time
without prior notice to the Borrower to exercise rights of setoff or
recoupment and apply any and all amounts held, or hereafter held, by RTFC
or owed to the Borrower or for the credit or account of the Borrower
against any and all of the obligations of the Borrower now or hereafter
existing hereunder. RTFC agrees to notify the Borrower promptly after
any such setoff or recoupment and the application thereof, provided that
the failure to give such notice shall not affect the validity of such
setoff, recoupment or application. The rights of RTFC under this section
are in addition to any other rights and remedies (including other rights
of setoff or recoupment) which RTFC may have. Additional Terms
and Conditions. Additional terms and conditions as set forth herein or
attached hereto are an integral part of this Agreement.
21. INTEGRATION. This Agreement and that certain Letter Agreement dated
February 23, 1996 among RTFC, the Borrower, Independent
Telecommunications Network, Inc. and U.S. Intelco Holdings, Inc. (the
"Letter Agreement"), and the matters incorporated by reference, contain
the entire agreement of the parties hereto with respect to the matters
covered and the transactions contemplated hereby, and no other agreement,
statement or promise made by any party hereto, or by any employee,
officer, agent or attorney of any party hereto, which is not contained
herein, shall be valid and binding. No amendment or waiver to this
Agreement, as amended by the Letter Agreement, shall be valid and binding
except if in writing and signed by both parties.
22. HEADINGS. The headings and sub-headings contained in this Agreement are
intended to be used for convenience only and do not constitute part of
this Agreement.
23. SECURITY. All Advances hereunder shall be secured by a security interest
in certain of Borrower's properties pursuant to a Pledge and Security
Agreement ("Pledge Agreement") by and between Borrower and RTFC entered
into as of even date herewith, which has been filed along with UCC-1
financing statements in all such locations necessary to provide RTFC with
a first priority, perfected lien on all of Borrower's Collateral (as
defined in the Pledge Agreement). Such Pledge Agreement and UCC-1
financing statements shall continually exist until the later of (i) all
Advances and fees hereunder having been repaid or (ii) the Maturity Date.
Borrower agrees that, with respect to the Collateral which is subject to
Article 9 of the Uniform Commercial Code, RTFC shall have but not be
limited to all the rights and remedies of a secured party under the
Uniform Commercial Code.
24. TERMINATION. When all Advances and all interest and other charges
hereunder related to such Advances shall have been paid in full, and the
Borrower shall have notified RTFC that it does not intend to request any
additional Advances hereunder, this Agreement shall terminate, and RTFC
shall forthwith cause to be assigned, transferred and delivered, against
receipt but without any recourse, warranty or representation, whatsoever
any remaining Collateral (as defined in the Pledge Agreement) and money
received in respect thereof to or on the order of Borrower.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
USTN HOLDINGS, INC.
(SEAL)
By: Daniel E. Weiss
---------------
Title: Vice President - Finance
ATTEST: Thomas E. Lafferty
------------------
Assistant Secretary
RURAL TELEPHONE FINANCE COOPERATIVE
(SEAL)
By: Patrick Rinn
------------
for Chief Executive Officer
ATTEST: Lawrence Zawalick
-----------------
Assistant Secretary-Treasurer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
Ex-27
USTN HOLDINGS, INC.
FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF USTN HOLDINGS, INC. AS OF MARCH 31, 1996,
AND FOR THE THREE MONTHS THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Mar-31-1996
<EXCHANGE-RATE> 1
<CASH> 9,449,850
<SECURITIES> 0
<RECEIVABLES> 18,698,883
<ALLOWANCES> (244,000)
<INVENTORY> 0
<CURRENT-ASSETS> 28,398,056
<PP&E> 51,259,326
<DEPRECIATION> 21,995,302
<TOTAL-ASSETS> 62,770,573
<CURRENT-LIABILITIES> 24,234,789
<BONDS> 20,324,956
0
27
<COMMON> 51,611
<OTHER-SE> 18,159,190
<TOTAL-LIABILITY-AND-EQUITY> 62,770,573
<SALES> 0
<TOTAL-REVENUES> 5,966,911
<CGS> 0
<TOTAL-COSTS> 5,973,381
<OTHER-EXPENSES> 350,067
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 180,070
<INCOME-PRETAX> (447,517)
<INCOME-TAX> 0
<INCOME-CONTINUING> (447,517)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (447,517)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
