SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
{x} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 333-8305
UTG COMMUNICATIONS INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3895294
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17 Cattano Avenue, Morristown, New Jersey 07960
(Address of principal executive offices) (Zip Code)
(201) 644-3161
(Registrant's telephone number, including area code)
Not Applicable
(Former Name, former Address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
At August 12, 1997, there were 13,246,000 shares of Common Stock, par
value $.00001 per share, outstanding.
Transitional Small Business Disclosure Format (check one): Yes No x
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED) 1
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) 2
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) 3
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Part II. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents (Note 1c) $ 246,765 $ 388,198
Subscription Receivable (Note 2) 45,000 670,000
Accounts Receivable, Net of allowance for doubtful
accounts at June 30, 1997 and March 31, 1997 of
$75,250 and $75,925, respectively 1,067,159 815,106
Prepaid Expenses and Other Current Assets 318,478 167,508
----------- -----------
Total Current Assets 1,677,402 2,040,812
Property and Equipment, at cost, Net of Accumulated
Depreciation at June 30, 1997 and March 31, 1997 of
$561,371 and $401,898, respectively (Notes 1f & 3) 1,689,817 1,618,316
Organization Costs, at cost, Net of Accumulated
Amortization at June 30, 1997 and March 31, 1997 of
$8,595 and $6,795, respectively (Note 1d) 27,480 27,286
Goodwill, at cost, Net of Accumulated Amortization of
$1,835 (Note 1e) 289,465 --
Deferred Taxes (Notes 1k & 6) -- --
Other Assets 12,109 12,218
----------- -----------
TOTAL ASSETS $ 3,696,273 $ 3,698,632
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank Overdraft (Notes 1g & 7) $ 243,810 $ 132,237
Accounts Payable and Accrued Expenses (Note 7) 4,240,650 3,208,711
Due to Related Party 44,679 --
Capital Lease Obligation, Current (Note 7) 10,710 13,013
----------- -----------
Total Current Liabilities 4,539,849 3,353,961
Capital Lease Obligation, Long-Term (Note 7) 13,387 14,132
Commitments and Contingencies (Note 7) -- --
----------- -----------
TOTAL LIABILITIES 4,553,236 3,368,093
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT) (Notes 1,2,8 & 9)
Common Stock - $0.00001 Par Value Authorized
20,000,000 shares; 13,291,000 and 13,246,000
Issued and Outstanding at June 30, 1997 and
March 31, 1997, respecitvely 133 132
Additional Paid-in Capital 7,225,508 7,180,509
Accumulated Deficit (7,911,277) (6,712,669)
Cumulative Foreign Currency Translation Adjustment ( 170,486) ( 137,450)
Minority Interest ( 841) 17
----------- -----------
Total Stockholders' Equity (Deficit) ( 856,963) 330,539
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 3,696,273 $ 3,698,632
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 1 -
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For The Three Months Ended
June 30,
--------------------------
1997 1996
----------- -----------
NET SALES $ 1,317,401 $ 25,243
COST OF SALES 981,514 62,640
----------- -----------
GROSS PROFIT 335,887 ( 37,397)
----------- -----------
SELLING AND TECHNICAL EXPENSES
Consulting Fees 21,339 112,665
Technical Fees 519,892 46,695
Sales Salaries 79,554 29,011
Other Selling Expenses 28,031 9,183
----------- -----------
Total Selling and Technical Expenses 648,816 197,554
----------- -----------
LOSS FROM OPERATIONS BEFORE GENERAL AND
ADMINISTRATIVE EXPENSES ( 312,929) ( 234,951)
----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES
Management and Consulting Fees 180,340 96,586
Salaries 202,371 156,559
Depreciation and Amortization 171,576 59,900
Professional Fees 76,837 58,182
Travel Expenses 25,933 93,138
Employment Agency Fees 13,487 22,337
Rent Expense 49,375 10,310
Insurance Expense 8,754 14,061
Other Operating Expenses 165,627 25,734
----------- -----------
Total General and Administrative Expenses 894,300 536,807
----------- -----------
LOSS FROM OPERATIONS (1,207,229) ( 771,758)
OTHER INCOME (EXPENSES)
Interest Income 43 9,470
Interest Expense ( 13,502) ( 19,453)
Loss From Foreign Currency (Note 1h) ( 20,540) 407
Other Income 41,762 --
----------- -----------
Total Other Income (Expenses) 7,763 ( 9,576)
----------- -----------
NET LOSS BEFORE INCOME TAXES AND
MINORITY INTEREST (1,199,466) ( 781,334)
INCOME TAXES (Notes 1k and 5) -- --
----------- -----------
NET LOSS BEFORE MINORITY INTEREST (1,199,466) ( 781,334)
MINORITY INTEREST 858 --
----------- -----------
NET LOSS $(1,198,608) $ (781,334)
=========== ===========
LOSS PER COMMON SHARE (Note 1j) $( .09) $( .08)
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
- 2 -
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Common Stock Additional Foreign Total
-------------------- Paid-In Accumulated Currency Minority Stockholders'
Shares Amount Capital Deficit Adjustment Interest Equity (Deficit)
---------- -------- ---------- ------------ --------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 13,246,000 $ 132 $7,180,509 $(6,712,669) $(137,450) $ 17 $ 330,539
Net Loss - For the Three Months
Ended June 30, 1997 -- -- -- (1,198,608) -- -- (1,198,608)
Issuance of Common Stock 45,000 1 44,999 -- -- -- 45,000
Minority Interest -- -- -- -- -- ( 858) ( 858)
Cumulative Foreign Currency
Translation Adjustment -- -- -- -- ( 33,036) -- ( 33,036)
---------- ------- ---------- ----------- --------- -------- -----------
Balance at June 30, 1997 13,291,000 $ 133 $7,225,508 $(7,911,277) $(170,486) $( 841) $( 856,963)
========== ======= ========== =========== ========= ======== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 3 -
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For The Three Months Ended
June 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,198,608) $( 781,334)
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating Activities
Depreciation and Amortization 171,576 59,900
Changes in Certain Assets and Liabilities:
Increase in Accounts Receivable ( 252,053) --
Increase in Prepaid Expenses ( 150,970) ( 195,493)
Increase in Organization Costs ( 194) ( 16,187)
Increase/Decrease in Other Assets 109 ( 174,822)
Due To/From Related Party 44,679 ( 10,761)
Increase in Bank Overdraft 111,573 --
Increase in Accounts Payable and Accrued Expenses 1,031,939 1,057,181
----------- -----------
Total Cash Used by Operating Activities ( 241,949) ( 61,516)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in Goodwill ( 289,465) --
Purchase of Fixed Assets, Net ( 230,974) (1,256,219)
----------- -----------
Total Cash Used by Investing Activities ( 520,439) (1,256,219)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in Capital Lease Payable ( 3,048) --
Contribution to Capital 670,000 3,088,574
Proceeds from Loan -- 1,000,000
Minority Interest ( 858) 17
----------- -----------
Total Cash Provided By Financing Activities 666,094 4,088,591
----------- -----------
EFFECTS OF EXCHANGE RATE
CHANGES ON CASH ( 45,139) ( 43,528)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ( 141,433) 2,727,328
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 388,198 --
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 246,765 $ 2,727,328
=========== ===========
CASH PAID DURING THE PERIOD FOR:
Interest Expense $ 13,502 $ 19,453
=========== ===========
Income Taxes $ -- $ --
=========== ===========
</TABLE>
NON-CASH FINANCING ACTIVITIES:
The Company issued common stock in exchange for a stock subscription
agreement as of June 30, 1997, the receivable on the agreement totalled
$45,000 for 45,000 shares.
The accompanying notes are an integral part of the consolidated financial
statements.
- 4 -
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-QSB and Regulation S-B. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation
have been included.
For further information refer to the consolidated financial
statements and footnotes included in Form 10-KSB for the year ended
March 31, 1997.
The accompanying consolidated financial statements include the
accounts of UTG Communications International, Inc. ("The Company"),
a holding company organized under the laws of the state of Delaware
on April 17, 1996 and its majority-owned and/or controlled
subsidiaries:
1) UTG Communications Holding AG, ("UTG Holding"), incorporated
under the laws of Switzerland on February 29, 1996 (owned
99.9% by the Company);
2) UTG Communications (Europe) AG, ("UTG Europe"), incorporated
under the laws of Switzerland on March 28, 1996 (owned 100% by
UTG Holding);
3) UTG Communications Belgium N.V., ("UTG Belgium"), incorporated
under the laws of Belgium on June 27, 1996 (owned 100% by UTG
Holding);
4) Multicom N.V., ("Multicom"), incorporated under the laws of
Belgium on July 4, 1996 (owned 100% by UTG Belgium). See also
Note 8;
5) United Telecom GMBH, ("UTG GmbH"), incorporated under the laws
of Switzerland on May 28, 1996 (owned 100% by UTG Holding);
6) UTG Communications (Network), Ltd., ("UTG NET") incorporated
under the laws of the United Kingdom on October 22, 1996
(owned 100% by UTG Holding);
7) UTG Communications Hungary, Ltd., ("UTG Hungary"),
incorporated under the laws of Hungary on April 2, 1997 (owned
100% by UTG Holding).
8) Tibesta Corporation N.V., ("Tibesta"), incorporated under the
laws of Curacao on December 24, 1996, (owned 49% by UTG
Holding) See also Note 8; and
9) Metatel Telemarketing B.V., ("Metatel"), incorporated under
the laws of Amsterdam on February 5, 1979, (owned 100% by
Tibesta) See also Note 8.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
- 5 -
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b) Line of Business
The Company is a switch-based provider of private voice, fax and
data management telecommunication services throughout Europe and
Canada.
c) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
d) Organization Costs
Organization costs consist of legal and other administrative costs
incurred relating to the formation of the Company. These costs have
been capitalized and will be amortized over a period of five years.
e) Goodwill
Goodwill represents the cost in excess of the fair market value of
the acquisitions of certain subsidiaries. Amortization is being
computed using the straight-line method over a period of forty
years.
f) Property and Equipment
Property and equipment is stated at cost. Depreciation is computed
using the straight-line method based upon the estimated useful lives
of the various classes of assets. Maintenance and repairs are
charged to expense as incurred.
g) Bank Overdraft
The Company maintains overdraft positions at certain banks. Such
overdraft positions are included in current liabilities.
h) Translation of Foreign Currency
The Company translates the foreign currency financial statements of
its Swiss, Belgium and United Kingdom subsidiaries, in accordance
with the requirements of Statement of Financial Accounting Standards
No. 52, "Foreign Currency Translation". Assets and liabilities are
translated at current exchange rates, and related revenues and
expenses are translated at average exchange rates in effect during
the period. Resulting translation adjustments are recorded as a
separate component in stockholders' equity. Foreign currency
transaction gains and losses are included in the statement of
operations.
- 6 -
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
i) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
j) Loss Per Share
Loss per share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the
period. Weighted average common shares outstanding were 13,268,500.
Average common equivalent shares outstanding have not been included,
as the computation would not be dilutive.
k) Income Taxes
Income taxes are provided for based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes". The liability method
requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences
between the reported amount of assets and liabilities and their tax
basis.
l) Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses, approximates fair
value due to the relatively short maturity of these instruments.
NOTE 2 - SUBSCRIPTION RECEIVABLE
On January 15, 1997, the Company entered into a subscription
agreement to sell 2,000,000 shares of its common stock to
Interfinance Inv. Co., Ltd. ("IIC") for an aggregate price of
$2,000,000. As of June 30, 1997, $1,955,000 was received relating to
the agreement. (See also Note 10).
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
June 30,
--------------------------
1997 1996
----------- -----------
Telecommunications Equipment $ 1,885,415 $ 1,105,637
Computer Equipment & Software 254,664 58,674
Furniture and Fixtures 111,109 91,908
----------- -----------
2,251,188 1,256,219
Less: Accumulated Depreciation ( 561,371) ( 58,109)
----------- -----------
$ 1,689,817 $ 1,198,110
=========== ===========
Depreciation expense for the three months ended June 30, 1997 and
1996 was $161,021 and $58,109, respectively.
- 7 -
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 4 - MINORITY INTEREST
Minority interest represents the following:
a) Less than a 1% share of the common equity of the Company's
subsidiary UTG Holding.
b) A 51% share of UTG Holding's subsidiary Tibesta and its 100% owned
subsidiary Metatel (controlled by the Company).
NOTE 5 - FOREIGN OPERATIONS
As described in Note 1b, substantially all of The Company's
operations take place throughout Europe and Canada and the majority
of its identifiable assets are located in Switzerland and the United
Kingdom.
NOTE 6 - INCOME TAXES
The components of the provision for income taxes is as follows:
Current Tax Expense
U.S. Federal $ -
State and Local -
--------
Total Current -
--------
Deferred Tax Expense
U.S. Federal $ -
State and Local -
--------
Total Deferred -
--------
Total Tax Provision from Continuing
Operations $ -
========
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
Federal Income Tax Rate ( 34.0)%
Deferred Tax Charge (Credit) -
Effect on Valuation Allowance 34.0%
State Income Tax, Net of Federal Benefit -
--------
Effective Income Tax Rate 0.0%
========
- 8 -
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 6 - INCOME TAXES (Continued)
At June 30, 1997, the Company had net carryforward losses of
approximately $7,911,000. Because of the current uncertainty of
realizing the benefit of the tax carryforward, a valuation allowance
equal to the tax benefit for deferred taxes has been established.
The full realization of the tax benefit associated with the
carryforward depends predominantly upon the Company's ability to
generate taxable income during the carryforward period.
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and amounts used for
income tax purposes. Significant components of the Company's
deferred tax assets and liabilities at June 30, 1997 are as follows:
Deferred Tax Assets
Loss Carryforwards $ 2,690,000
Less: Valuation Allowance (2,690,000)
-----------
Net Deferred Tax Assets $ -
===========
Net operating loss carryforwards expire starting in 2007 through
2011. Per year availability is subject to change of ownership
limitations under Internal Revenue Code Section 382.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
a) The Company's future minimum annual aggregate rental payments
required under operating and capital leases that have initial or
remaining non-cancelable lease terms in excess of one year are as
follows:
Operating Capital
Leases Leases
---------- ----------
1998 $ 108,118 $ 15,500
1999 108,118 11,606
2000 100,835 -
2001 72,918 -
2002 64,158 -
2003 and thereafter - -
---------- ----------
Total Minimum Lease Payments $ 454,147 27,106
==========
Less: Amounts Representing Interest ( 3,009)
----------
Present Value of Future Minimum
Lease Payments 24,097
Less: Current Maturities ( 10,710)
----------
Total $ 13,387
==========
Rent expense under operating leases for the three months ended June
30, 1997 was $49,375.
- 9 -
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
b) On June 9, 1997, Metatel, a company wholly owned by Tibesta, entered
into an agreement to form UTG Communications France S.A. ("UTG
France"), a 96.6% owned company with an office located in Paris.
Metatel's initial investment in UTG France was 750,000 FRF or
approximately $129,500 of which 49% was paid by the Company. The
Company was incorporated on July 22, 1997 under the laws of France.
c) The Company is a party to claims and lawsuits arising in the normal
course of operations. Management is of the opinion that these claims
and lawsuits will not have a material effect on the financial
position of the Company. The Company believes these claims and
lawsuits should not exceed $50,000 and accordingly has established a
reserve included in accounts payable and accrued expenses.
NOTE 8 - ACQUISITIONS
a) On April 2, 1997 UTG Belgium acquired a 100% interest in Multicom NV
("Multicom"), an existing telecommunications company operating in
the areas of direct dial and indirect dial. Per the purchase
agreement, the purchase price of 11,101,043 BEF or approximately
$317,000 was based upon a due diligence report from KPMG
Bedrijfsrevisoren. As of June 30, 1997, the entire purchase price
was paid.
b) During February 1997, UTG Holding entered into an agreement to
purchase 49% of Tibesta Corporation N.V. ("Tibesta"), a Curacao
incorporated company. Tibesta is the 100% parent of Metatel
Telemarketing B.V., ("Metatel"), an Amsterdam incorporated company.
The purchase price for the Company's 49% interest in Tibesta was
$10,551 of which $2,940 represents their 49% ownership of Metatel.
The agreement was consumated by UTG Holding on April 9, 1997.
NOTE 9 - STOCK OPTIONS
In connection with the subscription agreement dated January 15, 1997
(See Note 2), the Company granted IIC an option to purchase up to an
additional 1,200,000 shares of common stock at $2.00 per share for a
two year period commencing on the completion of the purchase of the
full 2,000,000 shares subscribed for.
On March 25, 1997, the Company granted nonqualified stock options to
purchase up to 100,000, 100,000 and 300,000 shares, respectively, to
each of Ron Kuzon, David Schlecht and Fritz Wolff. The options are
exercisable at $1.00 per share, vest in equal installments on the
first, second and third anniversaries of the date of grant, and
expire five years from the date of grant.
- 10 -
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 10 - SUBSEQUENT EVENTS
During July 1997, the remaining $45,000 receivable on the 2,000,000
share stock subscription agreement with IIC was received by the
Company.
- 11 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis relates to the financial condition
and results of operations of the Company for the quarter ended June 30, 1997.
This information should be read in conjunction with the Company's consolidated
financial statements appearing elsewhere herein. Although a comparison is made
to the corresponding quarter of the prior fiscal year, the Company's activities
during that period were primarily focused on establishing its European
communications network and only minimal revenue was generated during that
period. All references herein to the Company shall, unless the context otherwise
requires, be deemed to include UTG Communications International, Inc. and its
subsidiaries.
General
The Company commenced operations in April 1996 and is a holding company
for a number of operating subsidiaries organized or acquired at various times
since February 1996. To date, the Company has received an aggregate of
approximately $6,400,000 in equity capital. Since inception, the Company's
operations have been focused on establishing and enhancing its switch-based
European communications network and expanding its European customer base. In
implementing its network, the Company experienced significant technical problems
with multiplexers and transmission equipment. The equipment has been upgraded by
the supplier at the supplier's own expense. This has resulted in a lag in the
realization of revenue, as reflected in the fact that the Company generated only
minimal revenue in 1996.
The Company's revenue to date has been generated from long distance
telecom services provided to retail corporate customers and wholesale customers.
The Company's wholesale customers presently comprise international telecom
carriers and national telecoms, and the Company's retail customers presently
comprise medium-sized companies located in Switzerland. As previously reported,
the Company has been granted an International Simple Resale ("ISR") license from
the United Kingdom Secretary of State for Trade of Industry. The ISR license
permits the Company to engage in the international resale of telecom services.
The Company has filed an application to the United Kingdom Department of Trade
and Industry for the issuance of an International Facility License ("IFL"). The
IFL would permit the Company to own international facilities such as circuits,
thereby enabling the Company to gain a cost advantage by eliminating leased line
charges.
While the Company's retail operations were initially limited to
Switzerland, the Company has begun to expand its operations through subsidiaries
and joint ventures into other European countries. In June 1997, the Company
consummated the purchase of Multicom NV ("Multicom"), a leading long distance
reseller headquartered in Antwerp, Belgium with a base of more than 280 direct
and indirect dial customers. The purchase price for Multicom was 11,101,043
Belgium Francs (approximately $317,000). In April 1997, the Company purchased a
49% interest in Tibesta Corporation N.V. ("Tibesta"), a company seeking to
offer, through a 99.6% indirectly owned subsidiary, UTG Communications France
S.A., direct and indirect dial services as well as calling card services in
France. To date, the Company has provided approximately $75,000 in funds in
connection with the capitalization of Tibesta and its subsidiaries. See Notes 7
and 8 of Notes to Consolidated Financial Statements.
In Germany, the Company is in the process of establishing a subsidiary to
prepare a commercial
- 12 -
<PAGE>
basis for future partnership operations in that country. The Company is in
discussions regarding a joint venture which would offer voice and data telecom
services to large corporations, as well as telecom services for credit cards,
debit cards and customers cards.
In Hungary, UTG Magyar Kommunikacios Kft ("UTG Hungary") has entered into
a cooperation agreement (the "Cooperation Agreement") with BKV Trafficom
Hirkozlesi Szolgalato Kft ("Trafficom") which allows the Company to utilize a
275 km fiber optic network spanning the Budapest region to offer Internet
backbone service to Internet service providers as well as high speed data and
fax communications. The fiber optic network is managed by Trafficom and owned by
Budapesti Kozlekedesi Reszvenytarsasag, the Budapest Public Transport System.
The Cooperation Agreement, which has an initial term of ten years, contemplates
that separate leased line agreements will be entered into between the Company
and Trafficom on the basis of each customer which UTG connects to the network.
Each leased line agreement would provide for a separately negotiated connection
fee and monthly lease fee.
There can be no assurance that the Company's efforts in any of the
foregoing countries will result in successful commercial operations. The
Company's goal is to continue to expand its operations into other European
countries as and when business, market and regulatory conditions permit.
Financial Condition
At June 30, 1997, the Company had a working capital deficit of $2,862,447,
and an accumulated deficit of $7,911,277, as compared to a working capital
deficit and accumulated deficit of $1,313,149 and $6,712,669, respectively, at
March 31, 1997.
The Company has a bank overdraft facility with Credit Suisse in
Switzerland of CHF 300,000 (approximately $205,000), which bears interest at 6
1/4% per annum plus 1% on average overdraft in excess of fixed limit. The
overdraft is personally guaranteed by Mr. Fritz Wolff, and its outstanding
balance at June 30, 1997 was CHF 262,152 (approx. $179,000). Furthermore, the
Company has an overdraft position with the Union Bank of Switzerland that it is
in the process of reducing. At June 30, 1997, the balance outstanding was CHF
93,773 (approx. $64,100). The balance bears interest of 7% per annum plus a
commission on highest outstanding balance of 1/4%.
Although the Company's network currently has adequate switching capacity,
the Company does not believe that its network has adequate switching capacity to
serve projected volume of traffic beyond calendar 1997. Although the Company
presently has no commitments to acquire a new switch, the Company may be
required to do so in fiscal 1998.
Subsequent to the end of fiscal 1997, the Company entered into a financing
arrangement with Ericsson Belgium to fund the Company's equipment requirements
in Belgium. Under the terms of the contract, the Company's operating subsidiary
in Belgium, Multicom, leases equipment over a period of 5 years at an annual
lease payment (including imputed interest) of approximately $70,000. Multicom
- 13 -
<PAGE>
has a purchase option of 3% of the value of the contract at the end of the 5
years. The approximate total value of the contract is BEF 8,600,000
(approximately $239,000).
Based upon the Company's plan of operation, the Company estimates that
existing resources, together with funds generated from operations, will not be
sufficient to fund the Company's working capital requirements beyond the next
few months. The Company is actively seeking additional equity financing and is
engaged in negotiations with a number of parties. There can be no assurance that
sufficient financing will be available on terms acceptable to the Company or at
all. If the Company is unable to obtain such financing during the time
indicated, the Company may be required to scale back operations which would have
a significant adverse effect on the Company's financial condition and results of
operations.
Of accounts payable and accrued expenses in the amount of approximately
$4,241,000 owing at June 30, 1997 ($1,057,181 at June 30, 1996), approximately
$1,315,000 represented amounts due to TeleMedia International, Inc. ("TMI") ,
the Company's largest creditor, for leased lines. The Company has proposed an
extended payment plan to TMI which the Company believes has been favorably
received and is expected to be formally accepted. In the United Kingdom, the
Company is also utilizing a switch and certain other equipment owned by TMI. The
switch and equipment was formerly leased from TMI by UTK, a company with which
the Company shared a common director and which the Company believes has ceased
operations. The Company has had discussions with TMI regarding purchase by the
Company of the switch and equipment, although no formal arrangement has been
reached.
Results of operations
Sales
During the quarter ended June 30, 1997, the Company recorded net sales of
$1,317,401, in comparison with net sales for the entire year ended March 31,
1997 of $1,743,377. The gross margin as a percentage of sales has increased from
- -4.4% to 25.5%, respectively, for such periods, reflecting more cost-effective
network utilization due to higher volume of traffic. During the quarter period
ended June 30, 1996, the Company recorded revenue of $25,243 relating to one
customer that was using the first leased lines operated by the Company.
The Company's revenue has been generated primarily from long distance
telecom services provided to retail corporate customers in Switzerland and
Belgium and wholesale customers. For the quarter ended June 30, 1997, the
allocation between retail corporate customers and wholesale customers was
approximately 42% and 58%, respectively, compared to 11% and 78%, respectively,
for the year ended March 31, 1997. The shift in the allocation is primarily due
to the fact that the Company's Swiss customer base has increased, as well as to
the acquisition of Multicom whose customers are 100% retail. The Company's
wholesale customers presently comprise international telecom carriers and
national telecom companies, and the Company's retail customers presently
comprise small and medium-sized companies located in Switzerland and Belgium.
Management anticipates that the allocation between wholesale and
- 14 -
<PAGE>
retail customers will continue to shift in favor of retail customers consistent
with the Company's goal of expanding its corporate retail customer base.
Cost of Sales
Cost of sales was $981,514 for the quarter ended June 30, 1997, consisting
of approximately $394,000 for carrier charges and the balance being attributable
to costs for leased lines and related activities. Carrier charges and transport
(leased lines) charges per unit are ultimately dependent on the Company's
ability to generate high volumes of traffic.
Selling and Technical Expenses
Selling and technical expenses for the quarter ended June 30, 1997 were
$648,816, compared to $197,554 for the quarter ended June 30 1996. The increase
primarily results from increases in the number of selling and technical
personnel and related travel and other expenses, increases in the number of
customer installations, and network maintenance expenses.
General and Administrative Expenses
General and administrative expenses for the quarter ended June 30, 1997
were $894,300, compared to $536,807 for the quarter ended June 30, 1996. The
increase primarily results from increases in the number of management and
administrative personnel and related travel, office and other expenses and
increased depreciation expense resulting from the purchase of additional
equipment.
Net Loss
The Company's net loss for the quarter ended June 30, 1997 was $1,198,608,
primarily resulting from the continuing effect of initial delays and cost
overruns in setting up the Company's network and resulting lag in the
realization of revenues. The net loss for the quarter ended June 30, 1996 was
$781,334, reflecting the more limited nature of the Company's operations at that
time with less overhead, personnel expenses, depreciation and other operating
expenses.
FORWARD-LOOKING STATEMENTS
Certain statements in this Report regarding the Company's estimates,
present view of future circumstances or events and statements containing words
such as "estimates," "anticipates," "intends" and "expects" or words of similar
import, constitute "forward-looking statements" within the meaning
- 15 -
<PAGE>
of the Private Securities Litigation Reform Act of 1995, including, without
limitation, statements regarding the Company's ability to meet future working
capital requirements and future cash requirements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: delays in
expanding the Company's network; need for additional financing; failure to
receive or delays in receiving regulatory approval; general economic and
business conditions; industry capacity; industry trends; demographic changes;
competition; material costs and availability; the loss of any significant
customers; changes in business strategy or development plans; quality of
management; availability, terms and deployment of capital; business abilities
and judgment of personnel; availability of qualified personnel; changes in, or
the failure to comply with, government regulations including changes in industry
regulations; and other factors referenced in this Report. For a more detailed
description of these and other factors, see the section entitled "Risk Factors"
in the Company's Registration Statement on Form SB-2, No. 333-8305, which was
declared effective on September 6, 1996.
- 16 -
<PAGE>
Part II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 -- Cooperation Agreement dated August 6, 1997 between Traffficom
and UTG Hungary
27 -- Financial Data Schedule
(b) Reports on Form 8-K
No reports on form 8-K were filed by the Company during the quarter
ended June 30, 1997.
- 17 -
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UTG COMMUNICATIONS INTERNATIONAL, INC.
By: /s/ Fritz K. Wolff
-----------------------------------------------------
Fritz K. Wolff, President and Chief Executive Officer
By: /s/ Keith Rhea
-----------------------------------------------------
Keith Rhea, Chief Operating Officer
Date: August 14, 1997
- 18 -
COOPERATION AGREEMENT
concluded between
(1) BKV Trafficom Hirkozlesi Szolgaltato Kft (registered office: Orczy ut 34,
1089 Budapest, Hungary), represented by Zoltan Ferenczy, Managing
Director, hereinafter: "Trafficom"
and
(2) UTG Magyar Kommunikacios Kft (registered office: Bem Jozsef u. 5 II/2,
1027 Budapest, Hungary), represented by Fritz K Wolff, Managing Director,
hereinafter: "UTG"
on the date indicated below pursuant to the following terms and conditions.
1 The Agreement
1.1 In accordance with the provisions of the present Agreement ,
Trafficom shall allow UTG the use of the fibre optic cable network
owned by Budapesti Kozlekedesi Reszvenytarsasag (hereinafter: "BKV
Rt") and managed by Trafficom (hereinafter the "Network").
1.2 A map, valid at the time of signing the present Agreement, of the
Network is attached to the present Agreement as Schedule No 1.
Trafficom undertakes to send an updated map of the Network to UTG on
a quarterly basis which contains all developments and modifications
to the Network since the issuance of the previous map.
2 Providing traffic services through the Network by UTG
2.1 UTG is entitled to provide, through its access to the Network,
traffic services to third persons ("Customers").
2.2 Traffic services include services for:
- public-purpose data transmission,
<PAGE>
- public-purpose fax transmission,
- own-circuit and special-circuit voice transmission and
- public-purpose Internet.
2.3 The provision of traffic services to Customers will be accomplished
by UTG and Customers entering into customer contracts. UTG is
entitled to enter into these costumer contracts without obtaining
any declaration or consent of Trafficom, apart from the technical
conciliation obligation set forth in clause 3.1 below.
2.4 UTG and Trafficom undertake to enter into separate contracts with
each other for the lease of lines and connected services on the
basis of each customer contract concluded by UTG and any Customer,
in accordance with the Standard Contract for Lease of Lines and
Connected Services contained in Schedule No 2 of the present
Agreement. The Contracts for Lease of Lines and Connected Services
shall be finalized and concluded by UTG and Trafficom in each case
by filling the gaps indicated with "| |" in the Standard Contract
and making the amendments as necessary in the given situation.
2.5 UTG and Trafficom undertake to cooperate with each other and act in
good faith during the negotiations for the finalization of the
Standard Contracts for Lease of Lines and Connected Services.
2.6 Within the framework set forth in clause 2.2 of the present
Agreement, UTG may use the Network for its own purposes.
2.7 If the laws in force in the Republic of Hungary ever allow that UTG
provide other services on the Network of Trafficom in addition to
those set out in clause 2.2 of the present Agreement, without any
licence or on the basis of an appropriate licence, a specific
agreement between UTG and Trafficom shall be necessary.
2.8 UTG shall comply with all effective and relevant laws of the
Republic of Hungary while providing traffic services.
3 Technical Conciliation
3.1 UTG and Trafficom undertake to hold technical conciliation meetings
as necessary, but at least quarterly, regarding the technical
possibilities of the traffic services provided by UTG on the
Network. At these technical conciliation meetings UTG shall inform
Trafficom about the expectable development of its clientele and
Trafficom shall inform UTG of the technical possibilities of the
Network and of the developments to be made on the
<PAGE>
Network.
4 Consideration
4.1 Under the present Agreement no separate consideration is due to
Trafficom for the services provided. Instead, the consideration will
be included in the consideration to be paid by UTG to Trafficom as
stipulated in the Contracts for the Lease of Lines and Connected
Services to be concluded between UTG and Trafficom in accordance
with clause 2.4 of the present Agreement.
5 The right of Trafficom to dispose of the Network
5.1 Trafficom warrants that it has all authorizations required for the
conclusion of the present Agreement.
5.2 By signing the present Agreement, BKV Rt acknowledges the provisions
of the present Agreement and expressly gives its consent to hereto.
6 Term of the Agreement
6.1 The term of the present Agreement shall commence on the date when it
is signed by the representatives of UTG and Trafficom and is also
signed by the representative of BKV Rt according to clause 5.2.
6.2 The term of the present Agreement shall be a definite period of 10
years.
6.3 The present Agreement shall not terminate at the time of the expiry
of the period set out in clause 4.1, but shall automatically be
transformed into an agreement concluded for an indefinite period of
time which may be terminated by either of the parties by 12 month
ordinary notice (hereinafter: "Ordinary Notice"). The Parties may
exercise their right of termination by Ordinary Notice from the
beginning of the tenth year of the term of the present Agreement at
the earliest.
7 Confidentiality
7.1 UTG and Trafficom undertake to keep all information obtained
regarding each other, the business activities of each other and each
other's customers, as well as connected enterprises, their
activities and business partners, strictly confidential and will
require the same from their employees.
8 Miscellaneous
<PAGE>
8.1 The parties agree that they will attempt to settle amicably all
disputes arising out of or in connection with the present Agreement.
If settlement fails, they stipulate the exclusive competence of the
permanent Arbitration Court organized within the Hungarian Chamber
of Commerce and Industry (Budapest) with the provision that the
Arbitration Court shall proceed pursuant to its own procedural
rules.
8.2 An amendment to the present Agreement shall be made only by the
express written agreement of UTG and Trafficom to the present
Agreement. An amendment to the present Agreement does not require
the consent of BKV Rt.
8.3 The present Agreement shall be governed by Hungarian law.
8.4 The present Agreement shall be signed in Hungarian, in 5 copies.
8.5 The Schedules of the present Agreement form an integral part hereof.
Schedules:
Schedule No 1: the map of the Network
Schedule No 2: the Standard Contract for the Lease of Lines and Connected
Services to be concluded
/s/ Zoltan Ferenczy
- --------------------------------------
Zoltan Ferenczy, Managing Director
on behalf of BKV Trafficom Hirkozlesi
Szolgaltato Kft
/s/ Fritz K Wolff
- --------------------------------------
Fritz K Wolff, Managing Director
on behalf of UTG Magyar
Kommunikacios Kft
<PAGE>
Budapest, 6 August 1997 Budapest, 6 August 1997
- --------------------------------------
Name:
Position:
on behalf of Budapesti Kozlekedesi Rt
Budapest, _______ August 1997
<PAGE>
Schedule No 2 of the Cooperation Agreement
STANDARD CONTRACT FOR THE LEASE OF LINES AND
CONNECTED SERVICES
concluded between
(1) BKV Trafficom Hirkozlesi Szolgaltato Kft (registered office: Orczy ut 34,
1089 Budapest, Hungary), as lessor and service provider, represented by
Zoltan Ferenczy, Managing Director, hereinafter: "Trafficom"
and
(2) UTG Magyar Kommunikacios Kft (registered office: Bem Jozsef u. 5. II/2,
1027 Budapest, Hungary) as lessee and principal, represented by Fritz K
Wolff, Managing Director, hereinafter: "UTG"
on the date indicated below pursuant to the following terms and conditions.
1 Subject of the present Contract
1.1 The object of the present Contract is a telecommunications link
through a 2,048 Mbit/s leased line between the following two access
points, on a coax interface:
[ ]
and
BKV Trafficom Hirkozlesi Szolgaltato Kft, Orczy ut 34, Budapest,
Hungary.
1.2 The above section (hereinafter: the "Leased Line") is a part of the
telecommunications network owned by Budapesti Kozlekedesi
Reszvenytarsasag (hereinafter: "BKV Rt") and managed by BKV
Trafficom Hirkozlesi Szolgaltato Kft.
1.3 Trafficom undertakes to establish the telecommunications link
between the access points defined in clause 1.1 above within 90 days
of the signing of the present Contract.
2 The lease
2.1 Trafficom leases to UTG and UTG leases from Trafficom the Leased
Line for the purpose of
- public purpose data transmission,
<PAGE>
- public purpose facsimile transmission,
- own purpose and special purpose voice transmission and
- public purpose Internet services.
2.2 The two drivers necessary for the telecommunications link to be
established on the Leased Line are provided by Trafficom. Trafficom
will install the drivers at the access points, one of the drivers at
[ ] and the other one at Orczy ut 34. These drivers are also the
subject of the present Contract.
2.3 The term of the lease commences when the telecommunications link to
be established on the Leased Line is established by the deadline set
forth in clause 1.3 of the present Contract and continues until the
Contract is terminated in accordance with the provisions in clauses
9.1, 9.3 and 9.4 hereof (hereinafter: the "Term of the Lease").
3 Services connected to the lease
3.1 In order to secure the operation of the telecommunications link
established on the Leased Line in accordance with the purposes set
forth in clause 2.1, Trafficom undertakes, during the Term of the
Lease, to provide for the supervision of the telecommunications
link, the maintenance of the Leased Line and the avoidance of
malfunctions as set out in the present Contract.
3.2 During the Term of the Lease, Trafficom will observe the function of
the Leased Line and will maintain a 24 hour inspection service on
every day of the year.
3.3 In the case of any malfunction of the Leased Line, Trafficom will
commence the repair of the malfunction within 30 minutes of noticing
the malfunction. Trafficom undertakes to repair any malfunctions in
a manner such that the telecommunications link established on the
Leased Line will not be interrupted for more than 10 hours and the
operative index of the telecommunications link will not be below 99%
on a yearly basis.
4 Obligations of UTG
4.1 UTG shall pay HUF [ ] (i.e., [ ] Hungarian Forints) + VAT as a one
time connection fee (hereinafter "Connection Fee") to Trafficom.
4.2 Before the establishment of the telecommunications link within the
period set forth in clause 1.3, UTG shall pay the Connection Fee to
UTG on the basis of the invoice issued by Trafficom.
4.3 For the Term of the Lease UTG shall pay to Trafficom a monthly lease
fee in the amount of HUF [ ] (i.e., [ ] Hungarian Forints) + VAT
(hereinafter "Monthly Lease Fee").
<PAGE>
4.4 The Monthly Lease Fee also includes the lease fee for the drivers
defined in clause 2.2 and the consideration for all services
provided by Trafficom in connection with the lease.
4.5 Trafficom shall send to UTG an invoice for the Monthly Lease Fee
quarterly, at least 15 days before the end of the quarter, the
amount of which shall be transferred by UTG to Trafficom within 15
days of the end of the relevant quarter.
4.6 If UTG is in default of its payment obligations defined in the
present Agreement, it shall pay late interest at a rate equal to 20%
per year to Trafficom.
4.7 If UTG does not perform its payment obligations defined in the
present Agreement, Trafficom is obliged to give an additional period
of at least 15 days in a notice to pay. If UTG does not perform its
payment obligations during the additional period, Trafficom has the
right to terminate the present Agreement by extraordinary notice
with immediate effect.
4.8 UTG may not transfer to any third person its right to use the Leased
Line arising from the lease defined in the present Contract.
However, this provision does not affect the right of UTG to provide
traffic services to third parties arising form the Cooperation
Agreement concluded between UTG and Trafficom.
5 Suspension of the telecommunications link
5.1 For any period of suspension of the telecommunications link, UTG is
exempt from its obligation to pay the proportionate part of the
Monthly Lease Fee.
5.2 If the suspension of the telecommunications link is due to the
maintenance, renovation, replacement or renewal of the network,
Trafficom is obliged to inform UTG of the anticipated start date and
the anticipated length of the suspension and to obtain the consent
of UTG to these two matters at the latest 14 days before the
commencement of the suspension. The telecommunications link may be
suspended for the reasons set out in this clause only once per year.
5.3 Suspension of the telecommunications link as set out in clause 5.2
shall not be considered an interruption to the telecommunications
link when calculating the operative index as set out in clause 3.3.
6 Force majeure
6.1 The parties agree that the following events shall be considered as a
force majeure in the context of the present contract: war, sabotage,
terrorism, natural catastrophe, strike, measures taken on the basis
of the Act on State Defense and damage caused by third persons.
<PAGE>
6.2 If the above force majeure events hinder Trafficom in fulfilling its
obligations defined in the present Contract, Trafficom is exempt
from such obligations.
7 Defective performance
7.1 If Trafficom breaches the present Contract, Trafficom is liable for
any loss in the value of the assets of UTG.
7.2 If Trafficom breaches the present Contract, Trafficom is not liable
for damages in the form of lost profits incurred by UTG.
7.3 Trafficom is exempt from liability for breach of contract if it can
prove that in order to avoid its breach of contract it has acted as
it is generally expected in the given situation.
8 Penalty
8.1 Trafficom shall pay a penalty in the case of its late performance,
performance not complying with the technical requirements
(hereinafter: "Faulty Performance"), and in the case of its
non-performance.
8.2 If Trafficom is late in establishing the telecommunications link the
penalty shall amount to double the amount of the Monthly Lease Fee
for the period of delay, but maximum 12 times the Monthly Lease Fee.
8.3 In the case of Faulty Performance, Trafficom shall pay to UTG a
penalty of double the Monthly Lease Fee for the period of the Faulty
Performance (from the beginning of the non-compliance with the
technical requirements until the reestablishment of the appropriate
state), in proportion to the decrease of the performance level of
the telecommunications link.
8.4 If the telecommunications link is interrupted for more than 10
hours, the penalty payable by Trafficom shall be equal to 1 times
the Monthly Lease Fee calculated from the time when the link is
interrupted and payable thereafter for every 24 hour period or part
thereof up to a maximum of 12 times the Monthly Lease Fee.
8.5 If Trafficom is obliged to a pay penalty hereunder, it shall pay
such penalty to UTG based on an invoice received from UTG within 15
days of the event giving rise to the obligation to pay the penalty.
If Trafficom is in defaulf of its obligation to pay a penalty, it
shall pay late interest at a rate equal to 20% per year.
8.6 If Trafficom fails to comply with its obligation to pay a penalty,
UTG is entitled to set off its claim for penalty against any amount
owed by UTG to Trafficom either on the basis of the present Contract
or any other legal relationship with Trafficom.
<PAGE>
9 Terms of the present Agreement
9.1 The term of the present Contract shall commence on the date of its
signing and shall continue for a definite period of 10 years.
9.2 During the defined term, the parties may not terminate the present
Contract except as set out in clause 9.5.
9.3 The present Contract shall not terminate at the time of the expiry
of the period defined in clause 9.1 but shall automatically be
transformed into a contract concluded for an indefinite period of
time.
9.4 The parties may terminate the present Contract with 12 months
ordinary notice. The parties may exercise their right of termination
by ordinary notice from the beginning of the tenth year of the Term
of the Lease, at the earliest.
9.5 Before the expiry of the term defined under clause 9.1, the Parties
may terminate the present Agreement by an extraordinary notice of 6
months, if
- one of the principal obligations of a party under the present
Agreement becomes impossible owing to a binding decision of
any authority or court of justice,
- the other party does not perform any principal obligation
arising from the present Agreement. The non-performance of
UTG's payment obligations shall not be governed by this clause
but by clause 4.7.
9.6 At the time of termination of the present Contract, all payment
obligations arising from the present Contract become due.
10 Miscellaneous
10.1 Once in a year UTG and Trafficom agree that they will amend the
amount of the Monthly Lease Fee only by mutual agreement. However,
the Monthly Lease Fee may not be increased by more than the
industrial price index published by the Central Statistical Office.
10.2 Trafficom warrants that is has all necessary authorizations and all
regulatory licences which are necessary for the conclusion of the
present Contract.
10.3 The parties agree that they will attempt to settle amicably all
disputes arising out of or in connection with the present Contract.
If settlement fails, they stipulate the exclusive competence of the
permanent Arbitration Court organized within the Hungarian Chamber
of Commerce and Industry (Budapest) with the provision that
<PAGE>
the Arbitration Court shall proceed pursuant to its own procedural
rules.
10.4 Any amendment to the present Contract may be made only with the
express written consent of the Parties to the Contract.
10.5 The present Contract shall be governed by Hungarian law.
10.6 The present Contract will be signed in Hungarian, in 5 copies.
Budapest, [ ] [ ] 1997
- ------------------------------------------
Zoltan Ferenczy, Managing Director
on behalf of BKV Trafficom Hirkozlesi
Szolgaltato Kft
- ------------------------------------------
Fritz K Wolff, Managing Director
on behalf of UTG Magyar Kommunikacios Kft
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UTG
COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 246,765
<SECURITIES> 0
<RECEIVABLES> 1,067,159
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,677,402
<PP&E> 1,689,817
<DEPRECIATION> 561,371
<TOTAL-ASSETS> 3,696,273
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 133
<OTHER-SE> 7,225,508
<TOTAL-LIABILITY-AND-EQUITY> 3,696,273
<SALES> 1,317,401
<TOTAL-REVENUES> 1,317,401
<CGS> 981,514
<TOTAL-COSTS> 1,543,116
<OTHER-EXPENSES> (7,763)
<LOSS-PROVISION> 75,250
<INTEREST-EXPENSE> 13,502
<INCOME-PRETAX> (1,199,466)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,199,466)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,198,608)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> 0
</TABLE>
