SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission File Number 333-08305
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 Identification No.)
incorporation or organization)
17 Cattano Avenue, Morristown, New Jersey 07960
Address of principal executive offices) (Zip Code)
(973) 644-3161
(Registrant's telephone number, including area code)
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 November 13, 1998, there were 1,523,190 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.
INDEX
Part I
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults upon Senior Securities
Item 4 Submission of Matters to a Vote of Security-Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signatures
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, March 31,
ASSETS 1998 1998
(unaudited)
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents (Note 1c) 75,294 $ 363,169
Accounts Receivable, Net of Allowance for Doubtful
Accounts at September 30, 1998 and March 31, 1998 of
$290,067 and $263,617 respectively 443,423 354,233
Other Receivables 1,069,938 902,563
Prepaid Expenses and Other Current Assets 548,787 74,318
----------- -----------
Total Current Assets 2,137,443 1,694,283
Property and Equipment, at cost, Net of Accumulated
Depreciation at September 30, 1998 and March 31, 1998 of
$1,644,840 and $1,184,547 respectively (Notes 1g and 2) 2,751,319 2,311,164
Organization Costs, at cost, Net of Accumulated
Amortization at September 30, 1998 and March 31, 1998
of $0 and $3,303 respectively (Note 1d) 3,789 10,162
Investment 54,544 --
Goodwill, at cost, Net of Accumulated Amortization
of $19,304 and $6,561 (Note 1e) 269,883 245,118
Customer Lists, at cost, Net of Accumulated Amortization
of $156,179 and $ 104,119 914,335 832,950
Deferred Taxes (Notes 1l and 5) -- --
Other Assets 78,675 78,665
----------- -----------
TOTAL ASSETS $ 6,209,988 $ 5,172,342
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Loan 371,250 --
Accounts Payable and Accrued Expenses 1,834,143 1,369,818
Capital Lease Obligation, Current (Note 6) 108,716 101,021
----------- -----------
Total Current Liabilities 2,314,109 1,470,839
Capital Lease Obligation, Long-Term (Note 6) 537,070 469,958
Commitments and Contingencies (Note 6) -- --
----------- -----------
TOTAL LIABILITIES $ 2,851,179 $ 1,940,797
----------- -----------
STOCKHOLDERS' EQUITY (Note 1)
Common Stock - $0.00001 Par Value Authorized
20,000,000 shares; 1,456,190 and 1,303,190
Issued and Outstanding at September 30, 1998 and
March 31, 1998 respectively 15 13
Additional Paid-in Capital 8,225,626 7,925,628
Accumulated Deficit (5,098,852) (4,551,224)
Cumulative Foreign Currency Translation Adjustment 232,019 (142,872)
Minority Interest (Note 3) -- --
----------- -----------
Total Stockholders' Equity 3,358,808 3,231,545
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 6,209,987 $ 5,172,342
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Quarter ended For the six months ended
September 30, September 30,
(unaudited) (unaudited)
--------- ----------- -----------------------------
1998 1997 1998 1997
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES 764,866 1,521,888 1,345,735 $ 2,839,289
COST OF SALES 494,130 1,571,006 797,387 2,552,520
--------- ----------- ----------- -----------
GROSS PROFIT 270,736 (49,118) 548,348 286,769
--------- ----------- ----------- -----------
SELLING AND TECHNICAL EXPENSES
Consulting Fees 43,111 6,930 118,672 28,269
Technical Fees 111,413 392,813 156,665 912,705
Sales Salaries 137,541 156,690 294,975 236,244
Other Selling Expenses 13,672 28,251 40,858 56,282
--------- ----------- ----------- -----------
Total Selling and Technical Expenses 305,737 584,684 611,170 1,233,500
--------- ----------- ----------- -----------
LOSS FROM OPERATIONS BEFORE GENERAL AND
ADMINISTRATIVE EXPENSES (35,001) (633,802) (62,822) (946,731)
--------- ----------- ----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES
Management and Consulting Fees -- 283,173 6,644 463,513
Salaries 31,527 209,092 57,554 411,463
Depreciation and Amortization 183,041 276,909 347,418 448,485
Professional Fees 79,977 80,223 127,752 157,060
Travel Expenses 22,926 8,215 24,312 34,148
Employment Agency Fees -- 1,196 -- 14,683
Rent Expenses 21,196 79,010 39,956 128,385
Insurance Expenses 8,650 20,899 8,650 29,653
Other Operating Expense 76,732 183,223 123,487 348,850
--------- ----------- ----------- -----------
Total General and Administrative Expenses 424,049 1,141,940 735,773 2,036,240
--------- ----------- ----------- -----------
LOSS FROM OPERATIONS (459,050) (1,775,742) (798,595) (2,982,971)
--------- ----------- ----------- -----------
OTHER INCOME (EXPENSES)
Interest Income 22 692 58 735
Interest Expense 1,360 (29,480) 1,206 (42,982)
Loss from Foreign Currency (Note 1i) (14,184) (12,799) (14,184) (33,339)
Other Expense (201) (77,028) (222) (35,266)
--------- ----------- ----------- -----------
Total Other Income (Expenses) (13,003) (118,615) (13,142) (110,852)
--------- ----------- ----------- -----------
NET LOSS BEFORE INCOME TAXES AND
MINORITY INTEREST (472,053) (1,894,357) (811,737) (3,093,823)
--------- ----------- ----------- -----------
NET LOSS BEFORE MINORITY INTEREST (472,053) (1,894,357) (811,737) (3,093,823)
--------- ----------- ----------- -----------
Extraordinary Income 282,296 -- 282,296 --
Closing Subsidiary Costs (1,049) -- (2,690) --
MINORITY INTEREST -- -- -- --
--------- ----------- ----------- -----------
NET LOSS $(190,806) $(1,894,357) $ (532,131) $(3,093,823)
========= =========== =========== ===========
LOSS PER COMMON SHARE (Note 1j) (0.12) (1.82) (0.37) (2.99)
========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Common Stock Additional Foreign Total
------------------- Paid-In Accumulated Currency Minority Stockholders'
Shares Amount Capital Deficit Adjustment Interest Equity
------------------- ---------- ----------- --------- --- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1998 1,303,154 13 $7,925,628 $(4,551,224) $(142,872) $-- $ 3,231,545
Net Loss - For the six months
ended September 30, 1998 -- -- -- $ (547,628) -- -- $ (547,628)
Issuance of Common Stock 150,000 2 299,998 -- -- -- 300,000
Minority Interest -- -- -- -- -- -- --
Cumulative Foreign Currency
Translation Adjustment -- -- -- -- 374,891 -- 374,891
--------- ---- ---------- ----------- --------- --- -----------
Balance at September 30, 1998 1,453,154 15 8,225,626 (5,098,852) 232,019 -- 3,358,808
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended
September 30, September 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss (532,131) (3,093,823)
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating Activities
Depreciation and Amortization 347,418 381,697
Changes in Certain Assets and Liabilities:
Increase in Restricted Cash -- (41,563)
Increase/Decrease in Accounts Receivable (89,190 (214,254)
Increase in Other Receivables (167,375) --
Increase in Prepaid Expenses (474,469) (70,322)
Decrease in Organization Costs 6,373 (10,411)
Increase in Other Assets (10) (10)
Change in Due From Affiliate -- --
Due To/From Related Party -- --
Increase in Bank Overdraft -- 83,883
Increase in Accounts Payable and Accrued Expenses 464,325 2,680,264
-------- ----------
Total Cash Used by Operating Activities (445,059) (284,539)
-------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets, Net (563,044) (957,331)
Investment for Subsidiary Establishment (54,544) --
Increase in Goodwill (24,765) (275,174)
Increase in Customer List (81,385) --
-------- ----------
Total Cash Used by Investing Activities (723,738) (1,232,505)
-------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Bonds 371,250 --
Increase in Capital Lease Payable 74,807 508,763
Contribution to Capital 299,998 840,000
Preceeds from Loan -- --
Offering Costs -- --
Minority Interest -- --
-------- ----------
Total Cash Provided By Financing Activities 746,055 1,348,763
-------- ----------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 374,891 32,357
NET INCREASE IN CASH AND CASH EQUIVALENTS (47,851) (135,924)
CASH AND CASH EQUIVALENTS - BEGINNING 123,145 388,198
-------- ----------
CASH AND CASH EQUIVALENTS - ENDING 75,294 252,274
======== ==========
CASH PAID DURING THE PERIOD FOR:
Interest Expense 1,206 (29,480)
======== ==========
Income Taxes (200) --
======== ==========
</TABLE>
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
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, 1998.
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) Starfon Telecom Services AG, ("Starfon"), formerly UTG Communications
Holding AG, incorporated under the laws of Switzerland on February 29,
1996 (owned 100% by the Company);
2) UTG Communications Belgium N.V., ("UTG Belgium"), incorporated under
the laws of Belgium on June 27, 1996 (owned 100% by UTG Holding);
3) Multicom N.V., ("Multicom"), incorporated under the laws of Belgium on
April 2, 1997 (owned 100% by UTG Belgium);
4) United Telecom GMBH, ("UTG GmbH"), incorporated under the laws of
Switzerland on May 28, 1996 (owned 100% by UTG Holding);
All significant intercompany accounts and transactions have been
eliminated in consolidation.
See also Management's Discussion and Analysis of Financial Condition
and Results of Operation for additional information regarding
organizational changes of the Company.
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.
<PAGE>
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) Customer lists
Customer list presents the costs of the acquisition of subscriber
names at their fair market value. Amortisation is being computed
using the straight line method over a period of three years.
g) 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.
h) Bank Overdraft
The Company maintains overdraft facilities at certain banks. Such
overdraft positions are included in current liabilities.
i) 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.
j) 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.
k) 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
<PAGE>
period. Weighted average common shares outstanding were 1,418,194.
Average common equivalent shares outstanding have not been included,
as the computation would not be dilutive.
l) 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.
m) 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.
n) Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", encourages, but does not require
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue
to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
Interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock.
o) Long-Lived Assets
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", was issued (SFAS No. 121).
SFAS No.121 requires that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. The Company has adopted this statement and determined
that no impairment loss need be recognized for applicable assets of
continuing operations.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows at September 30, 1998:
Telecommunications Equipment $ 4,396,159
Computer Equipment & Software
Furniture and Fixtures
Less: Accumulated Depreciation (1,644,840)
-----------
$ 2,751,319
===========
<PAGE>
Depreciation expense for the three months ended September 30, 1998 was
$316,154.
NOTE 3 - MINORITY INTEREST
At September 30, 1998 there are no longer any minority interests in
the Company or any of its subsidiaries.
NOTE 4 - 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, Belgium and the United
Kingdom.
NOTE 5 - 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%
==========
At September 30, 1998, the Company had net carryforward losses of
approximately $5,067,588. 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 September 30, 1998 are as follows:
<PAGE>
Deferred Tax Assets
Loss Carryforwards $ 5,067,588
Less: Valuation Allowance (5,067,588)
-----------
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 6 - 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:
1999 51,238
2000 51,238
2001 51,238
2002 51,238
2003 and thereafter 51,238
-------
Total Minimum Lease Payments 256,190
=======
Less: Amounts Representing Interest 0
Present Value of Future Minimum
Lease Payments
Less: Current Maturities 0
-------
Total 256,190
Rent expense under operating leases for the six months ended September 30,
1998 was $39,956.
b) 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 7 Subsequent Events
None.
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 September 30, 1998.
This information should be read in conjunction with the Company's consolidated
<PAGE>
financial statements appearing elsewhere herein. 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 at various times since February 1996.
The Company has received an aggregate of approximately $8,085,628 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.
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
small and medium-sized companies located in Switzerland, Belgium and the United
Kingdom. 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 permits the Company to own
international facilities such as circuits, thereby enabling the Company to gain
a cost advantage by eliminating leased line charges. The IFL license application
has been granted during the quarter ended September 30, 1998.
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, including the purchase of Multicom NV
("Multicom"), a long distance reseller headquartered in Antwerp, Belgium, in
June 1997.
Following the regulatory opening of the Swiss and European Telecommunications
markets on January 1, 1998, it is no longer necessary to route all outgoing
calls via London. Applicable telecommunications regulations now permit
interconnection with all European countries. This revision is expected to save
the Company a considerable amount of fixed overhead costs, and management
believes that this development is likely to facilitate economical
self-sustaining operations for the Company within a shorter period of time than
originally contemplated.
In Germany, the Company has undertaken the development of an international
calling card project for a large bank and insurance company. In its efforts to
focus on profitable markets, the Company is in the process of evaluating this
project to determine whether future investment or divestment is appropriate. The
Company is currently exploring several opportunities in its core markets and in
Germany as well as in other countries. The Company will carefully evaluate
expansion of its operations into other European countries as and when business,
market and regulatory conditions permit.
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 focus on its current operations and, under the new management, to streamline
costs and to target optimal network capacity utilization.
Financial Condition
<PAGE>
At September 30, 1998, the Company had a working capital deficit of $176,666 and
an accumulated deficit of $5,067,588, as compared to a positive working capital
and accumulated deficit of $223,444, and $4,551,2246, respectively, at March 31,
1998.
Effective September 30, 1998, the Company exercised a call option under a
subscription agreement, dated January 17, 1998 and sold to an accredited and
sophisticated investor 70,000 shares of common stock. As of September 30, 1998,
the Company had received $140,000 for such shares and warrants.
The Company believes that its network has adequate switching capacity to serve
projected volume of traffic through March 1999. The Company initially designed
its network to take advantage of deregulation across Europe. It can perform
distributive least cost routing by using its hub sites in European cities to
direct traffic to carriers within a country, across the UTG network to another
country for termination, or back to the switch in London for routing.
The selected path is based on the least cost. This provides a large amount of
flexibility to the Company, and to ensure the quality of the connections and
lowest cost. With this distributive architecture the capacity of UTG's main
switch is not expected to be a limiting factor with regard to expansion. The
opening of the European telecommunications markets allows the Company to take
full advantage of its network flexibility.
Based upon the Company's plan of operation, the Company estimates that its
existing financing resources (including the available resources pursuant to the
call right under the above-mentioned subscription agreement) together with funds
generated from operations, will be sufficient to fund the Company's current
working capital requirements. However, there can be no assurance in that regard.
Accounts payable and accrued expenses amounted to approximately $1,834,143 at
September 30, 1998 compared to $1,369,818 at March 31, 1998.
Results of operations
During the quarter ended September 30, 1998, the Company continued its revised
management program under which it has implemented a system of controls and
assessments to more closely monitor gross profits, expenses and costs. In
addition, the Company is applying principles of lean management. Pursuant to
these management changes, the Company expects to realize significant savings and
further expects that its operations can be profitable within a reasonable period
of time, however there can be no assurance in this regard.
Sales
During the quarter ended September 30, 1998, the Company recorded net sales of
$764,866 compared to $1,521,888 during the quarter ended September 30, 1997.
Compared to the sales of $580,869 for the quarter ended June 30, 1998, the
Company recorded an increase of 31.7% resulting from significant internal
growth. Sales in the 6 months ending September 30, 1998 were $1,345,735 compared
to $2,839,289 in the equivalent period in 1997. In the wholesale division the
Company's services to carriers continued to be interrupted during the quarter
ended September 30, 1998 because of the relocation and upgrading of the
Company's switches in the United Kingdom. Due to technical difficulties, these
switches in the United Kingdom are not operational at this time. However, the
Company expects these switches to be fully operational in the next quarter and
to have orders from carriers in place.
The gross margin for the three months ended September 30, 1998 increased to
$270,736
<PAGE>
or 36.4% of the Company sales as compared to the same period in 1997 which was
negative ($ 49,118) or minus 3.2 % of the Company sales. For the 6 months ended
September 1998, the gross margin increased to $548,348 compared to $286,769 of
the same period in 1997. This increase in gross profit reflects the fact that
the Company's cost of sales have decreased.
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. The Company's wholesale customers presently comprise
international telecom carriers and national telecom companies. Management
anticipates that the allocation between wholesale and retail customers will
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 $494,130 for the quarter ended September 30, 1998, as compared
to $1,571,005 for the equivalent period in 1997, of which approximately 50%
being for carrier charges and the balance being attributable to costs for leased
lines and related activities whereas the cost of sales for the 6 months period
ended September 30, 1998 was $797,387, compared to $2,552,520 for the same
period in 1997. Carrier charges and transport (leased lines) charges per unit
are ultimately dependent on the Company's ability to generate high volumes of
traffic. This decrease is the result of the Company's new management and
business strategy and the Company's ability to purchase services from carriers
at competitive rates. Cost of sales have also decreased because of the
relatively smaller proportion of fixed costs related to leased lines, which are
incurred regardless of the amount of traffic carried, compared to the carrier
costs, which vary depending on the amount of traffic carried.
Selling and Technical Expenses
Selling and technical expenses for the quarter ended September 30, 1998 were
$337,264,compared to $584,684 for the quarter ended September 30, 1997 and
$668,724 for the 6 months period ended September 30, 1998, compared to
$1,233,500 for the same period in 1997. The decrease is the result of the
Company's restructuring process in which a program of cost cutting measures has
been implemented to limit expenses.
General and Administrative Expenses
General and administrative expenses for the quarter ended September 30, 1998
were $392,522, compared to $1,141,940 for the quarter ended September 30, 1997
and $678,219 for the 6 months period ended September 30, 1998, compared to
$2,036,240 for the same period in 1997. These expenses decreased because of the
reduction of overhead costs, including management and consulting fees, salaries,
travel expenses and other operating expenses.
Net Income/Loss
The Company realized net sales of $764,866 in the quarter ended September 30,
1998 and a net loss for the three months ended September 30, 1998 of $472,053
compared to sales of $1,521,888 and a net loss of $1,894,357 during the quarter
ended September 30, 1997. Net sales in the six months period ended September 30,
1998 were $1,345,735 and the net loss during this period amounted to $811,737,
compared to sales of $2,839,289 and a net loss of $3,093,823 for the same period
in 1997. The relative decrease of the net loss is reflecting the different
nature of the Company's operations with less overhead, personnel expenses,
depreciation and other operating expenses. Significant contributing factors to
the Company's loss during the quarter ended September 30, 1998 were depreciation
and amortization expenses of $183,041, consultancy fees and a depreciated
investment for building up new systems in an estimated amount of $150,000, as
well as the strongly reduced revenues from the wholesale business in the United
Kingdom due to the relocation and upgrading of the Company's switches there.
<PAGE>
The Management expects higher revenue in the near future, although no assurances
can be given in this regard.
Year 2000
The Company is in the process of reviewing its computer systems to insure it
will not suffer catastrophic failures in connection with the change in the
calendar on January 1, 2000, but has not expended material amounts in this
respect. The Company does not believe that it has material exposure with respect
to the year 2000 issue concerning its computer applications and equipment. The
Company licenses most of the software it uses in various functions. Although
this practice has minimized the Company's effort and cost needed to make the
Company year 2000 compliant, it does place greater reliance on the outside firms
that provide the software. Because most of the Company's software is licensed,
the Company's main internal compliance tasks are auditing hardware and software,
reviewing internal and external applications, prioritizing applications by risk,
creating a communications program to raise awareness levels and enable
correction of all existing application solutions, and installation of
vendor-provided year 2000 software fixes. At this time, the Company's assessment
of potential year 2000 problems is not complete. Currently, the Company is not
aware of any material year 2000 issues. In the event that year 2000 issues were
to disrupt the Company, such disruption may have a material impact on the
Company and its results of operations. Since to date the Company has not become
aware of any material year 2000 issues, the Company does not have a contingency
plan to address any such issues. Such contingency plan, if required, will be
developed immediately upon completion of the Company's year 2000 risk
assessment.
FORWARD-LOOKING STATEMENTS
Investment in the Company's securities involves a high degree of risk. In
evaluating an investment in the Company's securities, Company stockholders and
prospective investors should carefully consider the risk factors discussed in
the Company's Registration Statement on Form SB-2, Registration No. 333-8305 and
the information detailed in the Company's Form 10-KSB for the fiscal year ended
March 31, 1998 and this Form 10-QSB under Item 2 Management's Discussion and
Analysis of Financial Condition and Results of Operations, as well as
information contained in the Company's other filings with the Securities and
Exchange Commission.
Certain statements in this Report under Item 1 and Item 6 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 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. Forward-looking statements speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information future events
or otherwise. Risk factors include, among others, 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,
<PAGE>
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, Registration No. 333-8305, which was
declared effective on September 6, 1996.
Part II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No changes have occurred in the status of legal proceedings previously disclosed
by the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective September 30, 1998, the Company exercised a call option under a
subscription agreement, dated January 16, 1998 and sold to an accredited and
sophisticated investor 70,000 shares of common stock at a price of $ 2.00 and,
for no additional consideration, warrants to purchase an additional 70,000
shares of common stock at 3.00, 4.00, 4.50 per share. As of September 30, 1998,
the Company had received an amount equal to $140,000 for such shares and
warrants. In connection with this issuance, Interfinance Investment Ltd., an
affiliate of the Company controlled by the Company's Chief Executive Officer
acted as placement agent and is entitled to a placement fee of 3% of the gross
proceeds to the Company. Under the terms of the subscription agreement, as
amended, the Company has the right, subject to certain conditions, to request
the subscriber to purchase up to an additional 275,000 shares of Common Stock
upon the same terms and purchase price on or prior to December 30, 1998. These
transactions were exempt from the registration requirements of the Securities
Act of 1933 by reason of the exemption provided by Section 4(2) thereunder and
on the basis of certain representations provided by the subscriber including
that it is an "accredited investor."
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
Part II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<PAGE>
(a) Exhibits
10.32 Loan Agreement, dated August 13, 1998 (to be filed by Amendment)
10.33 Agreement dated September 25, 1998 between Medfield and the Company
(to be filed by Amendment)
10.34 Interconnection Agreement dated August 21, 1998 between the Company
and Swisscom (to be filed by Amendment)
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
September 30, 1998.
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.
Date: November 14, 1998 By: /s/ Ueli Ernst
------------------------------------
Ueli Ernst, Chairman and CEO
(Principal Executive Officer)
<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-31-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 75,294
<SECURITIES> 0
<RECEIVABLES> 1,513,361
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,137,443
<PP&E> 2,751,319
<DEPRECIATION> 183,041
<TOTAL-ASSETS> 6,209,988
<CURRENT-LIABILITIES> 2,851,179
<BONDS> 371,250
0
0
<COMMON> 15
<OTHER-SE> 8,225,626
<TOTAL-LIABILITY-AND-EQUITY> 6,209,987
<SALES> 764,866
<TOTAL-REVENUES> 764,866
<CGS> 494,130
<TOTAL-COSTS> 1,210,913
<OTHER-EXPENSES> (13,003)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,360
<INCOME-PRETAX> (472,053)
<INCOME-TAX> 0
<INCOME-CONTINUING> (472,053)
<DISCONTINUED> 0
<EXTRAORDINARY> 282,296
<CHANGES> (1,049)
<NET-INCOME> (190,806)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.07)
</TABLE>
