<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 September 30, 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 September 30, 1996, 5,161,152 shares of common stock, $0.01 per share par
value, and 2,675 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 SEPTEMBER 30, 1996
PAGE
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
USTN Holdings, Inc. Consolidated Balance Sheet - September 30, 1996 2
USTN Holdings, Inc. Consolidated Statement of Operations -
Three Months and Nine months ended September 30, 1996 and 1995 4
USTN Holdings, Inc. Consolidated Statement of Cash Flows -
Nine months ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements - September 30, 1996 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS 8
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 15
ITEM 2: CHANGES IN SECURITIES 15
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS 15
ITEM 5: OTHER INFORMATION 15
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 15
1
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PART I
FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
USTN HOLDINGS, INC.
Consolidated Balance Sheet (Unaudited)
September 30
ASSETS 1996
------ ----
Current assets:
Cash and cash equivalents $ 11,201,866
Accounts receivable, net of allowance
for doubtful accounts of $308,000 20,025,272
Prepaid expenses and other 380,291
----------
Total current assets 31,607,429
----------
Property and equipment:
Land 911,765
Building and leasehold improvements 6,904,917
Equipment and furniture 2,980,301
Network assets 21,488,825
Capitalized network costs 8,080,518
Computer hardware and software 15,052,963
----------
55,419,289
Less: Accumulated depreciation and amortization 25,050,173
----------
Total property and equipment 30,369,116
----------
Computer software product costs, net of
accumulated amortization of $673,000 2,186,004
Other assets, net of accumulated
amortization of $200,000 3,173,289
----------
$ 67,335,838
==========
See accompanying notes to consolidated financial statements.
2
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USTN HOLDINGS, INC.
Consolidated Balance Sheet (Unaudited), Continued
September 30
LIABILITIES AND STOCKHOLDERS' EQUITY 1996
- ------------------------------------ ----
Current liabilities:
Trade accounts payable $ 3,310,833
Accrued expenses 2,139,921
Due to customers 19,276,908
Due to dissenting shareholders 406,153
Current portion of long-term debt 1,811,388
----------
Total current liabilities 26,945,203
----------
Long-term debt, excluding current portion 19,425,236
----------
Stockholders' equity:
Series A Convertible Preferred Stock,
par value $.01 per share, authorized
4,416 shares, outstanding 2,675 shares 27
Preferred Stock, par value $.01 per share,
authorized 14,995,584 shares, none outstanding -
Common Stock, par value $.01 per share,
authorized 30,000,000 shares, outstanding
5,161,152 shares 51,611
Additional paid-in capital 10,369,724
Retained earnings 10,544,037
----------
Total stockholders' equity 20,965,399
----------
$ 67,335,838
==========
See accompanying notes to consolidated financial statements.
3
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USTN HOLDINGS, INC.
Consolidated Statement of Operations (Unaudited)
<TABLE>
<S>
Three Months Ended Nine months Ended
September 30, September 30,
1996 1995 1996 1995
------------------ ----------------
<C> <C> <C> <C>
Revenues $ 11,464,336 $ 4,479,214 $ 27,827,910 $ 11,974,961
--------- --------- ---------- ---------
Expenses:
Operating 2,600,475 2,497,482 7,233,698 7,400,190
Selling, general
and administrative 2,188,914 1,869,415 6,160,592 4,716,261
Depreciation and
amortization 1,670,436 653,780 4,367,816 2,024,039
Network operating
expenses 2,625,708 - 6,480,217 -
Merger expense - 12,233 350,067 470,783
---------- --------- ---------- ----------
Total expenses 9,085,533 5,032,910 24,592,390 14,611,273
---------- --------- ---------- ----------
Operating income (loss) 2,378,803 (553,696) 3,235,520 (2,636,312)
Interest income 121,542 67,323 331,399 190,458
Interest expense (362,688) (118,319) (920,765) (309,241)
---------- --------- ---------- ----------
Income (loss) before
income taxes 2,137,657 (604,692) 2,646,154 (2,755,095)
Income tax benefit - (205,595) - (936,732)
---------- --------- ---------- ----------
Net income (loss) $ 2,137,657 $ (399,097) $ 2,646,154 $(1,818,363)
========== ========= ========== =========
Weighted average
common shares 5,161,152 3,726,610 4,847,019 3,729,564
========= ========= ========= =========
Primary earnings (loss)
per common share $ 0.41 $ (0.11) $ 0.55 $ (0.49)
========== ========= ========== =========
Fully diluted earnings
(loss)per common share $ 0.38 $ (0.11) $ 0.55 $ (0.49)
========== ========= ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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USTN HOLDINGS, INC.
Consolidated Statement of Cash Flows (Unaudited)
Nine months ended
September 30,
1996 1995
-------------------
Cash flows from operating
activities:
Cash received from customers $ 114,617,300 $ 86,748,119
Interest received 332,479 185,145
Cash paid to customers, suppliers
and employees (103,139,122) (85,474,350)
Income tax refund 173,795 -
Interest paid (1,034,555) (327,674)
---------- ----------
Net cash provided by
operating activities 10,949,897 1,131,240
---------- ----------
Cash flows from investing activities:
Cash acquired in acquisition of Independent
Telecommunications Network, Inc. 613,086 -
Investment in Authentix, Inc. (650,000) -
Capitalized software development - (623,745)
Capital expenditures (4,623,228) (1,538,718)
---------- ----------
Net cash used by investing activities (4,660,142) (2,162,463)
---------- ----------
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 (881,400) (406,487)
Acquisition of common stock - (19,911)
Payments to dissenting stockholders (1,198,695) -
---------- -----------
Net cash provided (used) by
financing activities (2,080,095) 1,978,002
---------- -----------
Net increase in cash and cash equivalents 4,209,660 946,779
Cash and cash equivalents at:
Beginning of period 6,992,206 4,126,159
---------- ----------
End of period $ 11,201,866 $ 5,072,938
========== ==========
See accompanying notes to consolidated financial statements.
5
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USTN HOLDINGS, INC.
Notes to Consolidated Financial Statements
September 30, 1996 (Unaudited)
(1) BASIS OF PRESENTATION
The consolidated financial statements of USTN Holdings, Inc. ("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. These consolidated
financial statements should be read in conjunction with the unaudited
consolidated financial statements and the notes thereto included in
USTN's 10-QSB for the quarter ended March 31, 1996 as filed with the
Securities and Exchange Commission on May 15, 1996.
(2) EARNINGS (LOSS) PER COMMON SHARE
Primary earnings (loss) per common share is computed using the weighted
average number of common shares outstanding during each period. Fully
diluted earnings (loss) per share is computed as primary earnings (loss)
per share including the dilutive effect, if any, of outstanding
convertible USTN Series A Preferred Stock and USTN Debentures.
(3) ACQUISITION
USTN was 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
("Merger"). 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 for the three
month and nine month period ended September 30, 1995, and of cash flows
for the nine month period ended September 30, 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.
6
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Assuming that the acquisition of ITN had taken place on January 1, 1995,
unaudited pro forma results of operations from continuing operations would
have been as follows:
Nine months Ended September 30,
----------------------------
1996 1995
---- ----
Revenues $31,637,137 $28,263,656
========== ==========
Net income (loss) $ 2,559,674 $(1,106,219)
========== ==========
Income (loss) per common share $ 0.50 $ (0.21)
========== ==========
7
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATIONS
BASIS OF PRESENTATION
USTN Holdings, Inc., and its wholly-owned subsidiary, Illuminet, Inc.
("Illuminet", formerly named 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
("Merger").
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
for the three month and nine month period ended September 30, 1995, and of
cash flows for the nine month period ended September 30, 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
Nine months Ended September 30, 1996 and 1995
REVENUES. Revenues increased $15,852,949, or 132%, from $11,974,961 for the
nine months ended September 30, 1995 to $27,827,910 for the comparable 1996
period. The increase reflects seven months of revenues resulting from the
Merger with ITN that accounted for $14,706,979 or 93% of the increase. Toll
Clearinghouse ("TCH") revenues increased $1,314,415, or 33%, from $3,966,849
for the 1995 period to $5,281,264 for the comparable period in 1996, reflecting
a 24.0% increase in messages processed from 40.0 million in 1995 to 49.7
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
$451,725, or 10%, from $4,488,861 to $4,037,136 for the 1995 and 1996 periods,
respectively, reflecting a 10% decrease in queries processed from 135.2 million
in 1995 to 121.7 million in 1996 due to increased market penetration by
competing call card service providers. Revenues from the sale of the Company's
SS7 network traffic tracking and measurement software products AMAT7 (TRADEMARK)
and CDR7 (TRADEMARK) were $521,632 for the 1996 period reflecting sales of the
products that began in late 1995. Caller Name Delivery ("CNAM") revenues
increased $301,108, or 339%, from $88,813 for the 1995 period to $389,921 for
the comparable period in 1996, reflecting growing market acceptance of the
service introduced in 1995. Personal Communications Services ("PCS") services
revenues decreased $193,064, or 56%, from $345,929 for the 1995 period to
$152,865 for the comparable period in 1996 resulting from a change in focus
from PCS limited partnership sponsorship activities, with the completion of the
FCC Block C broadband radio spectrum license auction, to new service offerings.
Independent calling card revenues decreased $184,431, or 44%, from $420,298 for
the 1995 period to $235,867 for the comparable period in 1996, reflecting the
maturity of the calling card market. The Company's independent customer survey
program which generated revenues of $145,676 in the 1995 period was discontinued
in late 1995 as its market cycle ended. In September 1996, the Company's
contract to provide voice messaging services for the State of Washington as
anticipated was not renewed. Voice messaging contributed revenues of $609,435
and $548,520 for the 1995 and 1996 periods, respectively.
8
<PAGE> 10
On a pro forma basis, revenues increased $3,373,481, or 12%, from $28,263,656
for the nine months ended September 30, 1995 to $31,637,137 for the comparable
1996 period. In addition to the changes noted in the preceding paragraph,
recurring network connectivity revenues increased $594,412, or 11%, from
$5,253,499 for the 1995 period to $5,847,911 for the comparable period in 1996,
primarily due to growth in chargeable customer links. LIDB Switch and Transport
revenues decreased $1,122,369, or 27%, from $4,203,334 to $3,080,965 for the
1995 and 1996 periods, respectively, primarily due to reduced prices brought on
by competition. Cellular Switch and Transport revenues increased $1,301,629,
or 115%, from $1,134,815 in the 1995 period to $2,436,444 for the comparable
1996 period reflecting customer growth and increased utilization of the
network with message volumes increasing 250% from 249.1 million for the 1995
period to 872.9 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 $975,417, or 42%, from $2,326,402
to $3,301,819 for the 1995 and 1996 periods, respectively, as a result of
new customer growth. 800 Switch and Transport revenues increased $295,676,
or 10%, from $3,007,434 to $3,303,110 for the 1995 and 1996 periods,
respectively, reflecting growth by a significant customer.
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 increased
$9,981,117, or 68%, from $14,611,273 for the nine months ended September 30,
1995 to $24,592,390 for the comparable 1996 period. The increase reflects
seven months of expenses resulting from the Merger with ITN that accounted
for the majority of the increase.
On a pro forma basis, expenses decreased $1,184,987, or 4%, from $29,476,057 for
the 1995 period to $28,291,070 for the comparable 1996 period. Operating
expenses decreased $1,608,940, or 18%, from $9,198,439 for the 1995 period to
$7,589,499 for the comparable 1996 period. This decrease is caused primarily
by reduced 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 completion
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 related to the AMAT7 (TRADEMARK) and CDR7
(TRADEMARK) 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 decreased
$1,514,216, or 18%, from $8,512,501 to $6,998,285 for the 1995 and 1996 periods,
respectively, due to a reduction in personnel costs and litigation expenses
related to the protection of the Company's patent on a common channel signaling
usage measurement system. Network expenses increased $1,092,277, or 15%, from
$7,093,369 to $8,185,646 for the 1995 and 1996 periods, respectively, due to
increased leased network connectivity, ink, and LATA access charges incurred to
establish and maintain customer connectivity to the SS7 Network.
9
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Depreciation and amortization increased $990,733, or 26%, from $3,826,032 to
$4,816,765 for the 1995 and 1996 periods, respectively, primarily due to
depreciation and amortization of capitalized computer software costs associated
with the AMAT7 (TRADEMARK)and CDR7 (TRADEMARK) products, and of operating
hardware and software placed into production in the second half of 1995 and the
first half of 1996. Merger expenses decreased $144,841, or 17%, from $845,716
to $700,875 for the 1995 and 1996 periods, respectively, primarily due to the
completion of merger activities in the first quarter of 1996.
INTEREST INCOME/INTEREST EXPENSE. Interest income increased by $140,941, or
74%, from $190,458 for the nine months ended September 30, 1995 to $331,399 for
the comparable 1996 period, resulting primarily from an increase in available
cash balances over the two periods resulting from the Merger with ITN.
On a pro forma basis, interest income decreased by $35,732, or 9%, from
$384,536 for the 1995 period to $348,804 for the 1996 period resulting
primarily from a decrease in available cash balances over the two periods, on
a pro forma basis. The reduction in available cash was caused mainly by
purchases of fixed assets, merger activities including payments to dissenting
stockholders, and a $1,690,000 investment in Authentix, Inc. preferred stock, of
which $920,000, and $120,000 was made by ITN shortly before the Merger, and in
June 1995, respectively.
Interest expense increased $611,524, or 198%, from $309,241 for the 1995
period to $920,765 for the 1996 period. The increase reflects seven months of
interest expense resulting from the Merger with ITN and 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 decreased $68,671, or 6%, from $1,203,868
for the 1995 period to $1,135,197 for the comparable 1996 period.
INCOME 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 in various amounts from 2004 through 2011.
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 income increased $4,464,517 from a net loss of $(1,818,363) for the
nine months ended September 30, 1995 to net income of $2,646,154 for the
comparable 1996 period primarily reflecting an increase in TCH revenues,
Cellular Switch and Transport revenues, a decrease in PCS business development
costs, and the impact of the Merger on reducing costs as a percentage of
revenues.
10
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On a pro forma basis, USTN's net income increased $3,665,893 from a net loss of
$(1,106,219) to net income of $2,559,674 for the nine months ended September 30,
1995 and 1996, respectively, primarily resulting from positive revenue trends
offset by one-time Merger costs incurred in 1996. USTN's profitability for
three months ended September 30, 1996 is not believed to be indicative of near
term earnings trends. USTN believes that its primary existing services and
products will be profitable for the near term but at lower levels due to the
impacts of telecommunications traffic seasonality, downward pressure on pricing
due to competition, and the long sales and installation cycle associated with
the AMAT7 (TRADEMARK) and CDR7 (TRADEMARK) software products. Additionally,
future 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, and a general downward pressure on price
caused by increased competition. 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.
Three Months Ended September 30, 1996 and 1995
REVENUES. Revenues increased $6,985,122, or 156%, from $4,479,214 for the
three months ended September 30, 1995 to $11,464,336 for the comparable 1996
period. The increase reflects three months of revenues resulting from the
Merger with ITN that accounted for $6,638,864 or 95% of the increase.
TCH revenues increased $214,409, or 14%, from $1,580,051 for the 1995 period
to $1,794,460 for the comparable period in 1996, reflecting a 33% increase in
messages processed from 14.1 million in 1995 to 18.7 million in 1996. LIDB
services revenues decreased $91,635, or 6%, from $1,499,339 to $1,407,704 for
the 1995 and 1996 periods, respectively, reflecting a 10% decrease in
queries processed from 45.9 million to 41.4 million for the 1995 and 1996
periods, respectively, due to increased market penetration by competing call
card service providers. Revenues from the sale of the Company's SS7 network
traffic tracking and measurement software products AMAT7 (TRADEMARK) and CDR7
(TRADEMARK) were $521,632 for the 1996 period reflecting sales of the products
that began in late 1995. CNAM revenues increased $135,519, or 208%, from
$65,220 for the 1995 period to $200,739 for the comparable period in 1996,
reflecting growing market acceptance of the service introduced in 1995. PCS
services revenues decreased $278,429, or 89%, from $313,459 for the 1995 period
to $35,030 for the comparable period in 1996 resulting from a change in focus
from PCS limited partnership sponsorship activities, with the completion of the
FCC Block C broadband radio spectrum license auction, to new service offerings.
In September 1996, the Company's contract to provide voice messaging services
for the State of Washington as anticipated as not renewed. Voice messaging
contributed revenues of $193,113 and $134,815 for the 1995 and 1996 periods,
respectively.
11
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On a pro forma basis, revenues increased $1,235,322, or 12%, from $10,229,014
for the three months ended September 30, 1995 to $11,464,336 for the comparable
1996 period. In addition to the changes noted in the preceding paragraph, LIDB
Switch and Transport revenues decreased $320,860, or 25%, from $1,272,580 to
$951,720 for the 1995 and 1996 periods, respectively, primarily due to reduced
prices brought on by competition. Cellular Switch and Transport revenues
increased $544,982, or 111%, from $490,865 to $1,035,847 for the 1995 and 1996
periods, respectively, reflecting customer growth and increased utilization of
the network with message volumes increasing 207% from 130.3 million for the
1995 period to 399.9 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 $222,620, or 23%,
from $948,902 to $1,171,522 for the 1995 and 1996 periods, respectively, as a
result of new customer growth. 800 Switch and Transport revenues increased
$251,399, or 24%, from $1,037,268 to $1,288,667 for the 1995 and 1996 periods,
respectively, reflecting growth by a significant customer.
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 increased
$4,052,623, or 81%, from $5,032,910 for the three months ended September 30,
1995 to $9,085,533 for the comparable 1996 period. The increase was
primarily caused by three months of expenses resulting from the Merger with
ITN.
On a pro forma basis, expenses decreased $1,608,880, or 15%, from $10,694,413
for the three months ended September 30, 1995 to $9,085,533 for the comparable
1996 period. Operating expenses decreased $349,961, or 12%, from $2,950,436
for the 1995 period to $2,600,475 for the comparable 1996 period. This
decrease is caused primarily by reduced 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 completion 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 related to the AMAT7 (TRADEMARK) and CDR7 (TRADEMARK) 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 decreased $1,295,525, or 37%, from $3,484,439 to
$2,188,914 for the 1995 and 1996 periods, respectively, due to a reduction in
personnel costs and litigation expenses related to the protection of the
Company's patent on a common channel signaling usage measurement system.
Network expenses were comparable at $2,646,280 and $2,625,708 for the 1995 and
1996 periods, respectively. Depreciation and amortization increased
$390,798, or 31%, from $1,279,638 to $1,670,436 for the 1995 and 1996 periods,
respectively, primarily due to depreciation and amortization of capitalized
computer software costs associated with the AMAT7 (TRADEMARK) and CDR7
(TRADEMARK) products, and of operating hardware and software placed into
production in the second half of 1995 and the first half of 1996. No merger
expenses were incurred for the three months ended September 30, 1996 compared to
$333,620 incurred during the comparable 1995 period.
12
<PAGE> 14
INTEREST INCOME/INTEREST EXPENSE. Interest income increased by $54,219, or
81%, from $67,323 for the three months ended September 30, 1995 to $121,542 for
the comparable 1996 period, resulting primarily from an increase in available
cash balances over the two periods resulting from the Merger with ITN.
On a pro forma basis, interest income was comparable at $99,932 and $121,542
for the three months ended September 30, 1995 and, 1996, respectively.
Interest expense increased $244,369, or 207%, from $118,319 for the three
months ended September 30, 1995 to $362,688 for the comparable 1996 period.
The Merger with ITN accounted for the majority of the change.
On a pro forma basis, interest expense decreased $47,024, or 11%, from
$409,712 for the three months ended September 30, 1995 to $362,688 for the
comparable 1996 period. The decrease reflects a reduction in principal
balances and interest rates over the two periods.
EARNINGS
USTN's net income increased $2,536,754 from a net loss of $(399,097) for the
three months ended September 30, 1995 to net income of $2,137,657 for the three
months ended September 30, 1996 primarily reflecting an increase in revenues
related to the Merger with ITN.
On a pro forma basis, USTN's net income increased $2,701,840 from a net loss of
$(564,183) to net income of $2,137,657 for the three months ended September 30,
1995 and 1996, respectively, primarily resulting from the offset of positive
revenue trends by one-time Merger costs incurred in 1996. USTN's profitability
for the three months ended September 30, 1996 is not believed to be indicative
of near term earnings trends. USTN believes that its primary existing services
and products will be profitable for the near term but at lower levels due to the
impacts of telecommunications traffic seasonality, downward pressure on pricing
due to competition, and the long sales and installation cycle associated with
the AMAT7 (TRADEMARK) and CDR7 (TRADEMARK) software products. Additionally,
future 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.
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 periods before
subsequent revenues are generated, 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.
13
<PAGE> 15
USTN's working capital (current assets minus current liabilities) was
$4,662,226 as of September 30, 1996. USTN's cash and cash equivalent balances
include $7,726,331 required as working capital to service USTN's
billing-and-collection customers. Such funds are received and disbursed on a
monthly basis. The increase in working capital of $2,181,549 from September 30,
1995 reflects the increase in cash balances from operations offset by an
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.
USTN's expenditures for property and equipment, were $4,623,228 for the nine
months ended September 30, 1996. Expenditures for property and equipment were
primarily for network equipment and the Authentix, Inc. project. Authentix,
Inc., is a newly formed company which is developing a proprietary cellular
roaming fraud verification system. USTN and, prior to the Merger, ITN have
purchased a total of $1,690,000 of Authentix, Inc. preferred stock.
At September 30, 1996, USTN has a secured line of credit, expiring August 2001,
through its subsidiary Illuminet with RTFC that permits USTN to borrow up to
$7,300,000, not to exceed 80% of Illuminet's accounts receivable. This line of
credit is available on a month-to-month basis and will be automatically extended
for a term of five years upon completion of Merger-related documents. There
were no borrowings against the line of credit at September 30, 1996.
Additionally at September 30, 1996, USTN has $7,742,106 of unused loan
facilities established, or committed, with RTFC, maturing in the years 2000
and 2001, respectively.
14
<PAGE> 16
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 11 -Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended
September 30, 1996.
15
<PAGE> 17
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: November 13, 1996 By:Daniel E. Weiss
---------------
Daniel E. Weiss, Vice President -
Finance and Treasurer
(Principal Accounting Officer)
16
<PAGE>
EX-11
USTN HOLDINGS, INC.
Computation of Earnings Per Share
Three Months Ended Nine months Ended
September 30, September 30,
1996 1995 1996 1995
------------------ ------------------
Primary:
Average common shares
outstanding 5,161,152 3,726,610 4,847,019 3,729,564
========= ========= ========= =========
Net income (loss) $2,137,657 $(399,097) $2,646,154 $(1,818,363)
========== ========= ========== ===========
Per share amount $ 0.41 $ (0.11) $ 0.55 $ (0.49)
======== ========= ======== ===========
Fully diluted:
Primary average common shares
outstanding 5,161,152 3,726,610 4,847,019 3,729,564
Assumed conversion of USTN
7.5% Debentures 941,990 - 739,060 -
Assumed conversion of USTN
Series A Preferred Stock 22,770 - 17,784 -
--------- --------- --------- ---------
Totals 6,125,912 3,726,610 5,603,863 3,729,564
========= ========= ========= =========
Net income (loss) $2,137,657 $(399,097) $2,646,154 $(1,818,363)
Add USTN 7.5% Debenture
interest, net of federal
income tax effect 171,000 - 443,000 -
---------- --------- -------- -----------
Totals $2,308,657 $(399,097) $3,089,154 $(1,818,363)
========== ========= ========== ===========
Per share amount $ 0.38 $ (0.11) $ 0.55 $ (0.49)
========== ========= ======== ===========
<PAGE>
<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 SEPTEMBER 30,
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> Sep-30-1996
<EXCHANGE-RATE> 1
<CASH> 11,201,866
<SECURITIES> 0
<RECEIVABLES> 20,025,272
<ALLOWANCES> (308,000)
<INVENTORY> 0
<CURRENT-ASSETS> 31,607,429
<PP&E> 55,419,289
<DEPRECIATION> 25,050,173
<TOTAL-ASSETS> 67,335,838
<CURRENT-LIABILITIES> 26,945,203
<BONDS> 19,425,236
0
27
<COMMON> 51,611
<OTHER-SE> 20,913,761
<TOTAL-LIABILITY-AND-EQUITY> 67,335,838
<SALES> 0
<TOTAL-REVENUES> 27,827,910
<CGS> 0
<TOTAL-COSTS> 24,242,323
<OTHER-EXPENSES> 350,067
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 920,765
<INCOME-PRETAX> 2,646,154
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,646,154
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,646,154
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.55
</TABLE>
