<PAGE>
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 December 31, 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 333-08305
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)
(201) 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 January 31, 1998, there were 13,691,000 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.
INDEX
<TABLE>
<CAPTION>
Part I
<S> <C>
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED).........................................3
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)...............................5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED).....................................................................7
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED).............................. 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).................... 9 - 19
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................15
PART II OTHER INFORMATION
Item 1 Legal Proceedings..............................................................20
Item 2 Changes in Securities..........................................................20
Item 3 Defaults upon Senior Securities................................................20
Item 4 Submission of Matters to a Vote of Security-Holders............................20
Item 5 Other Information..............................................................20
Item 6 Exhibits and Reports on Form 8-K...............................................21
Signatures .............................................................................22
</TABLE>
-2-
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1997 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents (Note 1c) $ 287,086 $ 388,198
Restricted Cash 73,748 --
Subscription Receivable (Note 2) 0 670,000
Accounts Receivable, Net of allowance for doubtful
accounts at December 31, 1997 and March 31, 1997 of
$144,263 and $75,925, respectively 1,062,417 815,106
Other receivables 250,833 --
Prepaid Expenses and Other Current Assets 164,504 167,508
----------- -----------
Total Current Assets 1,838,588 2,040,812
Property and Equipment, at cost, Net of Accumulated
Depreciation at December 31, 1997 and March 31, 1997 of
$973,530 and $401,898, respectively (Notes 1f & 3) 2,484,525 1,618,316
Organization Costs, at cost, Net of Accumulated
Amortization at December 31, 1997 and March 31, 1997 of
$4,513 and $6,795, respectively (Note 1d) 21,317 27,286
Goodwill, at cost, Net of Accumulated Amortization of
$5,071 (Note 1e) 1,241,768 --
Deferred Taxes (Notes 1k & 6) -- --
Other Assets 30,473 12,218
----------- -----------
TOTAL ASSETS $ 5,616,671 $ 3,698,632
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank Overdraft (Notes 1g) $ -- $ 132,237
Accounts Payable and Accrued Expenses (Note 7) 1,213,184 3,208,711
Capital Lease Obligation, Current (Note 7) 86,223 13,013
----------- -----------
Total Current Liabilities 1,299,407 3,353,961
----------- -----------
Capital Lease Obligation, Long-Term (Note 7) 448,343 14,132
Commitments and Contingencies (Note 7) -- --
----------- -----------
TOTAL LIABILITIES 1,747,750 3,368,093
----------- -----------
STOCKHOLDERS' EQUITY (Notes 1,2,8 & 9)
Common Stock - $0.00001 Par Value Authorized
20,000,000 shares; 13,691,000 and 13,246,000
Issued and Outstanding at December 31, 1997 and
March 31, 1997, respectively 134 132
Additional Paid-in Capital 7,425,507 7,180,509
Accumulated Deficit (4,055,603) (6,712,669)
Cumulative Foreign Currency Translation Adjustment 498,833 (137,450)
Minority Interest -- 17
----------- -----------
Total Stockholders' Equity 3,868,921 330,539
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 5,616,671 $ 3,698,632
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For The Quarter Ended For The Nine Months Ended
December 31, December 31,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 1,425,649 $ 245,727 $ 4,264,938 $ 339,289
COST OF SALES 1,413,259 432,671 3,965,779 648,942
----------- ----------- ----------- -----------
GROSS PROFIT 12,390 (186,944) 299,159 (309,653)
----------- ----------- ----------- -----------
SELLING AND TECHNICAL EXPENSES
Consulting Fees 225 153,672 28,494 335,063
Technical Fees 297,158 447,822 1,209,863 798,899
Sales Salaries 108,647 134,007 344,891 221,261
Other Selling Expenses 21,864 45,250 78,146 76,224
----------- ----------- ----------- -----------
Total Selling and Technical Expenses 427,894 780,751 1,661,394 1,431,447
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS BEFORE GENERAL AND
ADMINISTRATIVE EXPENSES (415,504) (967,695) (1,362,235) (1,741,100)
----------- ----------- ----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES
Management and Consulting Fees 111,440 118,057 574,953 423,217
Salaries 187,305 238,616 598,768 501,249
Depreciation and Amortization 237,667 250,613 619,364 497,818
Professional Fees 105,475 91,481 262,535 206,960
Travel Expenses 14,154 23,915 48,302 140,578
Employment Agency Fees 117 16,248 14,800 83,991
Bad Debt Expense 75,715 -- 142,503 --
Rent Expense 36,877 47,045 165,262 67,800
Insurance Expense 10,036 (222) 39,689 18,659
Association Fees 5 13 616 24,425
Other Taxes 217 (17,114) 391 18,259
Other Operating Expenses 42,374 107,064 390,439 210,964
----------- ----------- ----------- -----------
Total General and Administrative Expenses 821,382 875,716 2,857,622 2,193,920
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,236,886) (1,843,411) (4,219,857) (3,935,020)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
For The Quarter Ended For The Nine Months Ended
December 31, December 31,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OTHER INCOME (EXPENSES)
Interest Income 27 9,631 762 26,406
Gain on Sale of Fixed Assets 980,908 -- 1,017,586 --
Gain on Sale of Subsidiaries 2,265,144 -- 2,265,144 --
Interest Expense (38,785) 43,982 (81,767) (25,375)
Loss From Foreign Currency (Note 1h) (46,645) 40,413 (79,984) (54,168)
Other Income (14,957) -- (86,901) --
----------- ----------- ----------- -----------
Total Other Income (Expenses) 3,145,692 94,026 3,034,840 (53,137)
----------- ----------- ----------- -----------
NET GAIN/(LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST 1,908,806 (1,749,385) (1,185,017) (3,988,157)
INCOME TAXES (Notes 1k and 6) -- -- -- --
----------- ----------- ----------- -----------
NET GAIN/(LOSS) BEFORE MINORITY INTEREST 1,908,806 (1,749,385) (1,185,017) (3,988,157)
MINORITY INTEREST -- -- -- --
----------- ----------- ----------- -----------
NET GAIN/(LOSS) $ 1,908,806 $ (1,749,385) $(1,185,017) $(3,988,157)
=========== =========== =========== ===========
GAIN/(LOSS) PER COMMON SHARE (Note 1j) $ .14 $ (.17) $ (.09) $ (.39)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-6-
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
<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, 1997 13,246,000 $132 $7,180,509 $(6,712,669) $(137,450) $ 17 $ 330,539
Net Loss - For the Nine months
Ended December 31, 1997 -- -- -- (1,185,017) -- -- (1,185,017)
Extraordinary item: sale 3,842,083 3,842,083
of Subsidiaries
Issuance of Common Stock 445,000 2 244,998 -- -- -- 245,000
Cancellation of minority interest (17) (17)
Cumulative Foreign Currency
Translation Adjustment -- -- -- -- 636,333 -- 636,333
---------- ---- ---------- ----------- --------- --- -----------
Balance at December 31, 1997 13,691,000 $134 $7,425,507 $(4,055,603) $498,883 $-- $ 3,868,921
========== ==== ========== =========== ========= === ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-7-
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For The Nine months Ended
December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,185,017) $(3,988,157)
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating Activities
Depreciation and Amortization 619,364 497,818
Changes in Certain Assets and Liabilities:
Increase in Restricted Cash (73,748) --
Increase in Accounts Receivable (247,311) (224,564)
Increase in Other Receivables (250,833) --
Increase in Prepaid Expenses 3,004 (122,694)
Increase in Organization Costs 5,969 (32,580)
Increase in Other Assets (18,255) (19,994)
Increase in Due From Affiliate -- (500,061)
Due To/From Related Party -- --
Increase (Decrease) in Bank Overdraft (132,237) 319,300
Inc./(Dec.) Accounts Payable and Accrued Expenses (1,995,527) 2,220,345
----------- -----------
Total Cash Used by Operating Activities (3,274,591) (1,850,587)
----------- -----------
CASH FLOWS FROM INVESTING / (DIVESTING) ACTIVITIES:
Purchase of Fixed Assets, Net (866,209) (2,387,819)
Sale of Subsidiaries 3,195,829 --
Increase in Goodwill (1,241,768) --
----------- -----------
Total Cash Used by Investing / (Divesting) Activities 1,087,852 (2,387,819)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Notes Payable -- 149,620
Increase in Capital Lease Payable 507,421 --
Contribution to Capital 915,000 4,420,181
Offering Costs -- (122,933)
Minority Interest -- 17
----------- -----------
Total Cash Provided By Financing Activities 1,422,421 4,446,885
----------- -----------
EFFECTS OF EXCHANGE RATE
CHANGES ON CASH 663,206 (208,479)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (101,112) --
CASH AND CASH EQUIVALENTS - BEGINNING 388,198 --
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 287,086 $ --
=========== ===========
CASH PAID DURING THE PERIOD FOR:
Interest Expense $ -- $ --
=========== ===========
Income Taxes $ -- $ --
=========== ===========
NON-CASH FINANCING ACTIVITIES:
None.
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-8-
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 at December 31, 1997:
1) UTG Telecom AG, ("UTG Holding"), 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).
See also Note 8;
4) United Telecom GMBH, ("UTG GmbH"), incorporated under
the laws of Switzerland on May 28, 1996 (owned 100% by
UTG Holding);
All other subsidiaries of the Company have been sold to third
parties at fair market value and the consolidated financial
statements of the Company have been adjusted accordingly. (See also
Note 8.)
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.
-9-
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 facilities 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.
-10-
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 13,468,550.
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
None. (See also Note 10).
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows at December 31,
1997:
Telecommunications Equipment $ 3,193,813
Computer Equipment & Software 207,786
Furniture and Fixtures 56,457
------------
3,458,056
Less: Accumulated Depreciation ( 973,531)
------------
$ 2,484,525
============
Depreciation expense for the nine months ended December 31, 1997 was
$611,282.
-11-
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 4 - MINORITY INTEREST
At December 31, 1997 there are no longer any minority interests in the
Company or any of its subsidiaries.
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, Belgium 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%
==========
-12-
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 6 - INCOME TAXES (Continued)
At December 31, 1997, the Company had net carryforward losses of
approximately $1,051,900. 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 December 31, 1997 are as
follows:
Deferred Tax Assets
Loss Carryforwards $ 1,051,900
Less: Valuation Allowance (1,051,900)
-----------
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 $ -- $ 170,317
1999 -- 170,317
2000 -- 170,317
2001 -- 170,317
2002 -- 101,527
2003 and thereafter -- --
------------ -----------
Total Minimum Lease Payments $ -- 782,795
============
Less: Amounts Representing Interest ( 151,139)
-----------
Present Value of Future Minimum
Lease Payments 634,656
Less: Current Maturities ( 548,433)
-----------
Total $ 341,268
===========
Rent expense under operating leases for the nine months ended December
31, 1997 was $128,385.
-13-
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
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 8 - ACQUISITIONS AND DISPOSITIONS
a) During the quarter ended December 31, 1997, the Company sold
at fair market value certain of its subsidiaries which were
no longer material to the operation of the Company's business.
b) 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.
NOTE 9 - STOCK OPTIONS
In connection with the subscription agreement dated January 15,
1997, the Company granted 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 an aggregate of 500,000 shares to certain of the Company's
officers. As such individuals have ceased to serve the Company in
their respective executive capacity before the first anniversary of
the above-mentioned grant, none of such options vested.
NOTE 10 - SUBSEQUENT EVENTS
The Company has signed a subscription agreement for the sale
of 250,000 shares of Common Stock at a purchase price of
$2.00 per share, such amount reflecting a thirteen-for-one
reverse stock split of the Company's Common Stock to be
effected as a closing condition immediately prior to the
issuance and sale of such stock. In addition, for each share
of Common Stock purchased, the subscriber will also receive
three warrants, each to purchase one share of Common Stock,
which warrants will expire five years from the date of
issuance and shall be exercisable at $2.00, $3.00 and $4.50
per share, respectively. Under the terms of the subscription
agreement the Company has the right, subject to certain
conditions, to request the Subscriber to purchase an
additional 500,000 shares of Common Stock (reflecting
adjustment for the contemplated post-reverse split) upon
the same terms and purchase price of the initial purchase. The
Company expects to close the foregoing transaction during
the first calendar quarter 1998.
-14-
<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 December 31, 1997.
This information should be read in conjunction with the Company's consolidated
financial statements appearing elsewhere herein. Although comparison is made to
the corresponding period 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 at various times since February 1996.
The Company has received an aggregate of approximately $7,425,500 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, United Kingdom
and the Netherlands. The Company recently entered the residential market in the
Netherlands and Italy. 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. As of the
quarter ended December 31, 1997, the processing of the IFL license application
was still under consideration and has not yet been granted.
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 at such time of more than 280
direct dial customers. During the quarter ended December 31, 1997, the Company
sold at fair market value several of its non-material subsidiaries so as to
dispose of non-performing assets, and to concentrate Company efforts and
resources on further development of market share in the areas of its established
operations. (See Notes 7 and 8 of Notes to Consolidated Financial Statements.)
During the quarter ended December 31, 1997, in order to permit full business
operations under Swiss law, UTG Communications Holding AG ("Holding") was
renamed UTG Telecom AG ("Telecom").
-15-
<PAGE>
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 reviewing this project to determine
whether future investment or divestment is appropriate.
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. The Company will
carefully evaluate expansion of its operations into other European countries as
and when business, market and regulatory conditions permit.
Financial Condition
At December 31, 1997, the Company had a positive working capital of $90,838,
and an accumulated deficit of $4'055'603, as compared to a working capital
deficit and accumulated deficit of $1,313,149 and $6,712,669, respectively, at
March 31, 1997. This improvement in the financial position was achieved by the
sale of five subsidiaries.
Effective September 30, 1997, the Company sold to a limited number of accredited
or sophisticated investors 400,000 shares of common stock at a price of $0.50
per share and, for no additional consideration, warrants to purchase an
additional 200,000 shares of Common Stock at a price of $0.60 per share. At
September 30, 1997, $125,000 of the total $200,000 had been received by the
Company, and the remaining $75,000 was fully paid by October 6, 1997.
The Company believes that its network has adequate switching capacity to serve
projected volume of traffic through 1998. 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, and it intends to do so during the
course of 1998.
Based upon the Company's plan of operation, the Company estimates that its
existing resources, 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. During the quarter ended December 31,
1997, the Company entered into an agreement for proposed equity financing. Such
financing did not materialize and the Company has taken the
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<PAGE>
position that it owes no obligations with respect to fees and/or penalties under
the contract governing such proposed financing due to material non-performance
by the other parties thereto.
Accounts payable and accrued expenses amounted to approximately $1,213,000 at
December 31, 1997 compared to $2,220,345 at December 31, 1996.
Results of operations
During the quarter ended December 31, 1997, the Company commenced a 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 December 31, 1997, the Company recorded net sales of
$1,425,649, in comparison with $245,727 during the quarter ended December 31,
1996. Sales in the nine months ending December 31, 1997 were $4,264,938 compared
to $339,289 in the equivalent period in 1996. The increase reflects the fact
that operations had not fully begun before November 1996. The gross margin for
the nine months ended December 31, 1997 increased to $299,159 as compared to the
same period in 1996 which was negative $309,653 reflecting the fact that the
Company's volume of operations has increased and is covering the fixed costs of
leased lines included in cost of sales with its revenues from operations.
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 $1,413,259 for the quarter ended December 31, 1997, as
compared to $432,671 for the equivalent period in 1996, of which approximately
67% being 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. Cost of sales was $3,965,779 for the nine
months ended December 31, 1997 as compared to $648,942 for the equivalent period
in 1996. The increase is due again to the fact that operations had not fully
begun in the latter period. Cost of sales remains high in proportion to revenues
because it includes relatively high fixed costs related to leased lines that are
incurred regardless of the amount of traffic carried. As the Company increases
its operations these fixed costs will become proportionately smaller.
Selling and Technical Expenses
Selling and technical expenses for the quarter ended December 31, 1997 were
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<PAGE>
$427,894, compared to $584,684 for the previous quarter and $780,751 for the
quarter ended December 31 1996. The decrease over the December 31, 1996 quarter
year and over the previous quarter is a result of the restructuring process the
Company is undergoing, in which a program of cost cutting measures has been
implemented to limit expenses. These expenses for the nine month period ended
December 31, 1997 were $1,661,394 as compared to $1,431,447 for the equivalent
period in 1996 (in which full-scale operations only began in November).
General and Administrative Expenses
General and administrative expenses for the quarter ended December 31, 1997 were
$821,382, compared to $875,716 for the quarter ended December 31, 1996 and
$2,857,622 for the nine months ended December 31, 1997, compared to $2,193,920
for the equivalent period in 1996. The increase in the nine month period
primarily results from increases in the number of management and administrative
personnel and related office and other expenses and increased depreciation
expense resulting from the purchase of additional equipment. The decrease in the
three month period results mainly from the fact that consulting fees have been
reduced in the last quarter of 1997 as opposed to the first six months, when
outside financial consultants were engaged to revise the business and operations
plan for the ongoing activities of the Company.
Other income/expenses
The Company realized an extraordinary gain of $2,265,144 related to the sale at
fair market value of certain of its subsidiaries which were deemed by the
Company to be no longer material to the Company's core market operations.
Net Income/Loss
The Company's net loss from operations for the quarter ended December 31, 1997
was $1,236,886 as compared to $1,843,411 for the equivalent period in 1996. The
decrease in the loss is due to the increase in the volume of the Company's
operations and the resulting decrease in the ratio of fixed costs to revenue.
The Company realized a net income of $1,908,806 in the quarter ended December
31, 1997 and a net loss for the nine months ended December 31, 1997 of
$1,185,017 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 December 31, 1996
was $1,749,385 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 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
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<PAGE>
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;
rapid technological 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.
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<PAGE>
Part II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal proceedings
On August 22, 1997, Discont-o-fon, a company which provided Multicom with
bandwidth prior to the Company's acquisition of Multicom, filed a claim with the
main court in Brussels, Belgium, to collect BEF 8,409,393 (approximately
$233,500) claimed to be owing for traffic services provided to Multicom. The
claim also seeks to prevent Multicom from transferring its clients to the
Company's network. On August 23, 1997, Multicom filed a suit in the same court
against this provider seeking BEF 9,000,000 (approximately $250,000) for loss of
customers due to poor quality of service. On August 27, 1997, two bank accounts
of Multicom's were frozen for a total of BEF 1,510,198 ($41,563). On October 5,
1997, a judgment on both cases was issued restraining Multicom from transferring
any more clients from the Discont-o-fon network to the Company's network. On
October 21, 1997, Multicom appealed to the Hofvan Beroeb, a higher court in
Brussels. A final decision is pending. The accounts remain frozen pending the
appeal. The amount claimed by the supplier is fully accrued as part of accounts
payable.
On October 20, 1997, Cermusoni & Wyder placed a claim in the Friedensrichter
court in Zug, Switzerland against UTG Europe. The claim is in respect of unpaid
invoices in the amount of CHF 39,656 (approximately $27,400) plus interest since
April 1997. The Company has informed the court that it desires the claim to be
processed by the court. The amount claimed, without interest, has been fully
accrued as part of accounts payable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective September 30, 1997, the Company sold to a limited number of accredited
or sophisticated investors 400,000 shares of common stock at a price of $0.50
per share and, for no additional consideration, warrants to purchase an
additional 200,000 shares of Common Stock at a price of $0.60 per share. At
September 30, 1997, $125,000 of the total $200,000 had been received by the
Company, and the remaining $75,000 was fully paid by October 6, 1997. The
Company relied on the exemption from registration provided by Section 4(2) under
the Securities Act of 1933, as amended. The proceeds from the foregoing offering
have been used for general operating purposes of the Company.
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
On January 3, 1998, Mr. Ron Kuzon resigned from the Board of Directors and as
Chairman and Chief Executive Officer of the Company, and Mr. Ulrich Ernst and
Mr. Klaus Brenner were duly appointed to the Board of Directors of the Company.
In addition, Mr. Ernst was duly appointed Chairman of the Board and CEO, and Mr.
Brenner was duly appointed as Treasurer. On January 12, 1998, Mr. Keith Rhea
resigned from the Board of Directors and from his position as Chief Operating
Officer of the Company.
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<PAGE>
Part II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.3 Subsidiary Sale Agreements*
27 Financial Data Schedule
* To be filed by Amendment.
(b) Reports on Form 8-K
No reports on form 8-K were filed by the Company during the quarter ended
December 31, 1997.
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<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.
Date: February 23, 1998 By: /s/ Ueli Ernst
---------------------------------------
Ueli Ernst, Chairman and CEO
(Principal Executive Officer)
Date: February 23, 1998 By: /s/ Klaus Brenner
---------------------------------------
Klaus Brenner, Treasurer
(Principal Financial and
Accounting Officer)
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<TABLE> <S> <C>
<PAGE>
<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> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 287,086
<SECURITIES> 0
<RECEIVABLES> 1,062,417
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,838,588
<PP&E> 2,484,525
<DEPRECIATION> 973,530
<TOTAL-ASSETS> 5,616,671
<CURRENT-LIABILITIES> 1,747,750
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 7,425,507
<TOTAL-LIABILITY-AND-EQUITY> 5,616,671
<SALES> 4,264,938
<TOTAL-REVENUES> 4,264,938
<CGS> 3,965,779
<TOTAL-COSTS> 3,965,779
<OTHER-EXPENSES> 3,034,242
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,982
<INCOME-PRETAX> (1,185,017)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,185,017)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,185,017)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
