Form 10QSB for UTG COMMUNICATIONS INTERNATIONAL, INC.
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 December 31, 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 February 10, 1999, there were 1,644,652 shares of Common Stock, par
value $.00001 per share, outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
1
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UTG COMMUNICATIONS INTERNATIONAL, INC.
INDEX
PART I
Item 1 FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
2
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1998 1998
(unaudited)
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents (Note 1c) $ 606,234 $ 363,169
Accounts Receivable, Net of Allowance for
Doubtful Accounts at December 31, 1998 and
March 31, 1998 of $290,067 and $263,617 respectively 872,249 354,233
Other Receivables (Note 3) 1,285,089 902,563
Prepaid Expenses and Other Current Assets 772,127 74,318
----------- -----------
Total Current Assets 3,535,700 1,694,283
Property and Equipment, at cost, Net of Accumulated
Depreciation at December 31, 1998 and March 31, 1998 of
$1,644,840 and $1,184,547 respectively (Notes 1g & 2) 2,621,900 2,311,164
Organization Costs, at cost, Net of Accumulated
Amortization at December 31, 1998 and March 31, 1998
of $0 and $3,303 respectively (Note 1d) 149,903 10,162
Investment -- --
Goodwill, at cost, Net of Accumulated Amortization
of $19,304 and $6,561 (Note 1e) 546,419 245,118
Customer Lists, at cost, Net of Accumulated Amortization
of $156,179 and $104,119 (Note 1f) 935,475 832,950
Deferred Taxes (Note 1L & 5) -- --
Other Assets 83,540 78,665
----------- -----------
TOTAL ASSETS $ 7,872,937 $ 5,172,342
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank Overdraft (Notes 1h & 7) $ 347,369 $ --
Loan 371,250 --
Accounts Payable and Accrued Expenses 2,569,162 1,369,818
Capital Lease Obligation, Current (Note 6) 100,899 101,021
----------- -----------
Total Current Liabilities 3,388,680 1,470,839
Capital Lease Obligation, Long-Term (Note 6) 682,517 469,958
Commitments and Contingencies (Note 6) -- --
----------- -----------
TOTAL LIABILITIES 4,071,197 1,940,797
----------- -----------
STOCKHOLDERS' EQUITY (Notes 1 & 7)
Common Stock - $.00001 Par Value Authorized
20,000,000 shares; 1,644,652 and 1,303,190
Issued and Outstanding at December 31, 1998 and
March 31, 1998 respectively 16 13
Additional Paid-in Capital 8,525,625 7,925,628
Accumulated Deficit (5,453,041) (4,551,224)
Cumulative Foreign Currency Translation Adjustment 650,838 (142,872)
Minority Interest (Note 3) 78,302 --
----------- -----------
Total Stockholders' Equity 3,801,740 3,231,545
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT) $ 7,872,937 $ 5,172,342
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Quarter Ended For the Nine Months Ended
December 31, December 31,
(unaudited) (unaudited)
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 1,525,328 $ 1,425,649 $ 2,871,063 $ 4,264,938
COST OF SALES 1,045,461 1,413,259 1,842,848 3,965,779
----------- ----------- ----------- -----------
GROSS PROFIT 479,867 12,390 1,028,215 299,159
----------- ----------- ----------- -----------
SELLING AND TECHNICAL EXPENSES
Consulting Fees 14,412 225 133,084 28,494
Technical Fees 68,093 297,158 224,758 1,209,863
Sales Salaries 98,705 108,647 393,680 344,891
Other Selling Expenses 77,955 21,864 118,813 78,146
----------- ----------- ----------- -----------
Total Selling and Technical Expenses 259,165 427,894 870,335 1,661,394
----------- ----------- ----------- -----------
PROFIT/LOSS FROM OPERATIONS BEFORE GENERAL AND
ADMINISTRATIVE EXPENSES 220,702 (415,504) 157,880 (1,362,235)
----------- ----------- ----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES
Management and Consulting Fees -- 111,440 6,644 574,953
Salaries 183,247 187,305 240,801 598,768
Depreciation and Amortization 210,340 313,382 557,758 761,867
Professional Fees 40,139 105,475 167,891 262,535
Travel Expenses 695 14,154 25,007 48,302
Employment Agency Fees -- 117 -- 14,800
Rent Expenses 21,470 36,877 61,426 165,262
Insurance Expenses 1,027 10,036 9,677 39,689
Other Operating Expenses 146,431 42,596 269,918 391,446
----------- ----------- ----------- -----------
Total General and Administrative Expenses 603,349 821,382 1,339,122 2,857,622
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (382,647) (1,236,886) (1,181,242) (4,219,857)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES)
Interest Income 151 27 209 762
Gain on Sale of Fixed Assets 980,908 1,017,586
Gain on Sale of Subsidiaries 2,265,144 2,265,144
Interest Expenses (41,635) (38,785) (40,429) (81,767)
Loss from Foreign Currency (Note 1i) (258) (46,645) (29,930) (79,984)
Other Expenses (4,961) (14,957) (5,183) (86,901)
----------- ----------- ----------- -----------
Total Other Income (Expenses) (46,703) 3,145,692 (75,342) 3,034,840
----------- ----------- ----------- -----------
INCOME/(LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST (429,350) 1,908,806 (1,256,584) (1,185,017)
----------- ----------- ----------- -----------
INCOME/(LOSS) BEFORE MINORITY INTEREST (429,350) 1,908,806 (1,256,584) (1,185,017)
----------- ----------- ----------- -----------
Extraordinary Income 85,352 -- 367,648 --
Closing Subsidiary Costs (13,719) -- (16,409) --
MINORITY INTEREST 3'528 -- 3,528 --
----------- ----------- ----------- -----------
NET INCOME / LOSS $ (354,189) $ 1,908,806 $ (901,817) $(1,185,017)
=========== =========== =========== ===========
LOSS PER COMMON SHARE (Note 1j) $ (0.22) $ 0.14 $ (0.54) $ (0.09)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, September 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (901,817) $(1,185,017)
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating Activities
Depreciation and Amortization 557,758 619,364
Changes in Certain Assets and Liabilities:
Increase in Restricted Cash -- (73,748)
Increase/Decrease in Accounts Receivable (518,016) (247,311)
Increase in Other Receivables (382,526) (250,833)
Increase in Prepaid Expenses (697,809) 3,004
Increase in Organization Costs (139,741) 5,969
Increase in Other Assets (4,875) (18,255)
Change in Due From Affiliate -- --
Due To/From Related Party -- --
Increase in Bank Overdraft 347,369 132,237
Increase in Accounts Payable and Accrued Expenses 1,199,344 1,995,527
---------- -----------
Total Cash Used by Operating Activities (524,816) (3,274,519)
---------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of Fixed Assets, Net (686,519) (866,209)
Investment for Subsidiary Establishment (167,001) --
Sale of Subsidiaries -- 3,195,829
Increase in Goodwill (301,301) (1,241,768)
Increase in Customer Lists (102,525) --
---------- -----------
Total Cash Provided (Used) by Investing Activities (1,257,346) 1,087,852
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Bonds 371,250 --
Increase in Capital Lease Payable 212,437 507,421
Contribution to Capital 600,000 915,000
Preceeds from Loan -- --
Offering Costs (34,000) --
Minority Interest 81,830 --
---------- -----------
Total Cash Provided By Financing Activities 1,231,517 1,422,421
---------- -----------
EFFECTS OF EXCHANGE RATE
CHANGES ON CASH 793,710 663,206
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 243,065 (101,112)
CASH AND CASH EQUIVALENTS - BEGINNING 363,169 388,198
---------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 606,235 $ 287,086
========== ===========
CASH PAID DURING THE PERIOD FOR:
Interest Expenses 40,429 --
========== ==========
Income Taxes -- --
========== ==========
</TABLE>
5
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 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 Nine Months
Ended December 31, 1998 -- -- -- (901,817) -- -- (901,817)
Issuance of Common Stock 341,498 3 599,997 -- -- -- 600,000
Minority Interest -- -- -- -- -- 78,302 78,302
Cumulative Foreign
Currency Translation
Adjustment -- -- -- -- 793,910 -- 793,910
--------- -- ---------- ------------ ---------- ------- ----------
Balance at December 31, 1998 1,644,652 16 $8,525,625 $(5,453,041) $ 650,838 $78,302 $3,801,740
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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:
6
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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);
5) Telelines International SA, ("Telelines"), incorporated under the laws
of Panama on July 28, 1997 (owned 100% by the Company).
6) Starpoint Card Services Ltd ("Starpoint"), incorporated under the laws
of Great Britain on November 18, 1998, (owned 51% by Telelines
International SA).
7) Star Global Ltd, ("StarGlobal"), incorporated under the laws of Jersey,
Great Britain on November 24, 1998, (owned 100% by Telelines International
SA).
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.
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) Customer Lists
Customer lists present the costs of the acquisition of subscriber
names at their fair market value. Amortization is being computed
using the straight-line method over a period of three years.
g) Property and Equipment
7
<PAGE>
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
period. Weighted average common shares outstanding were 1,550,421.
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
8
<PAGE>
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:
December 31, 1998 March 31, 1998
Telecommunications Equipment $ 4,477,090 $ 3,495,711
Computer Equipment & Software
Furniture and Fixtures
Less: Accumulated Depreciation (1,855,190) (1,184,547)
----------- -----------
$ 2,621,900 $ 2,311,164
=========== ===========
Depreciation expense for the nine months ended December 31, 1998 and 1997 was
$557,758 and $210,340, respectively, for 1998, and $761,867 and $313,382,
respectively, for 1997.
NOTE 3 - MINORITY INTEREST
At December 31, 1998 there was a minority interest in the Company's
subsidiary, Starpoint Card Sales Ltd., of 49% of the total stockholders'
equity of $81,830.
NOTE 4 - FOREIGN OPERATIONS
As described in Note 1b, substantially all of the Company's
operations are located throughout Europe and the majority of its identifiable
assets are located in Switzerland, Belgium and the United Kingdom.
9
<PAGE>
NOTE 5 - INCOME TAXES
The components of the provision for income taxes are 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 December 31, 1998, the Company had net carryforward losses of
approximately $5,453,041. 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, 1998 are as follows:
Deferred Tax Assets
Loss Carryforwards $ 5,453,041
Less: Valuation Allowance (5,453,041)
-----------
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.
10
<PAGE>
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 nine months ended December 31,
1998 was $61,426.
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 - STOCK OPTIONS
Effective December 31, 1998, the Company issued 150,000 shares of
Common Stock to an investor for a purchase price of $2.00 per share. For each
share of Common Stock purchased, the investor received three warrants, each to
purchase one share of Common Stock at $2.00, $3.00 and $4.50, respectively. The
warrants will expire five years from date of issuance.
NOTE 8 - SUBSEQUENT EVENTS
The Company has completed its development of a credit card based phone service
for the Swiss market and is currently testing the system with a selected group
of users. The credit card holder can use the credit card as a post-paid
phonecard benefiting from discounts for international and national long distance
communication compared to the rates of Swisscom. The Company expects to be able
to launch this product and program in the near future.
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, 1998.
This information should be read in conjunction with the Company's consolidated
11
<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.
Through its operating subsidiaries, the Company is operating in Switzerland,
Belgium and the United Kingdom.
The Company has received an aggregate of approximately $8,525,625 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 is generated from telecom services provided to retail
corporate customers and wholesale customers. The Company's wholesale customers
comprise international telecom carriers and national telecoms, and the Company's
retail customers comprise small and medium-sized companies located in
Switzerland, Belgium and the United Kingdom. In Switzerland, the Company has
entered into an interconnection agreement with Swisscom, the national Swiss
telecommunications carrier, and the Company intends to enter into
interconnection agreements with telecommunications carriers in the United
Kingdom, Belgium and other European countries into which the Company may expand
in the future. The interconnection with national telecommunication carriers,
which became possible as a result of the deregulation of the European
telecommunications markets in January 1998, enables the Company to offer both
domestic and international telecommunications services to its customers and
eliminates the need to route all outgoing calls via London. Management of the
Company believes that entering into interconnection agreements with national
telecommunications carriers will result in an increase in traffic volume for the
Company and will allow the Company to reduce fixed overhead costs considerably.
In the United Kingdom, the Company is holding an International Simple Resale
("ISR") license and, during the quarter ended December 31, 1998, was granted an
International Facility License ("IFL"). The ISR license permits the Company to
engage in the resale of international telecom services in the United Kingdom and
the IFL license enables the Company to own facilities for international services
such as circuits. By operating its own facilities, the Company can avoid the
costs associated with leased line charges and, accordingly, reduce its operating
expenses.
During the quarter ended December 31, 1998, the Company entered into a joint
venture with 8 individual distributors for the purpose of establishing a
distribution network for telecommunication cards in the United Kingdom. The
Company and its 8 distribution partners formed StarPoint Card Services Ltd,
located in London with the Company holding 51% of StarPoint's equity and the
Company's partners holding the remaining 49%. In exchange for their 49%
interest, the 8 distributors contributed their existing businesses and customer
bases to StarPoint and agreed to work exclusively for StarPoint for a minimum of
24 months. UTG contributed cash in the amount of GBP 51,000 to the joint
venture. Under the joint venture agreement, UTG has a three-year call option to
acquire its partners' 49% interest for cash and/or UTG common stock. The
exercise price equals the average of 8 times StarPoint's EBIT and sales during
the three months preceding the exercise of the option.
The Company intends to distribute through StarPoint its own telephone card and
other card services currently under development. In addition, the Company plans
to increase the number of StarPoint's points of sale in the United Kingdom and
to expand into other areas if attractive opportunities arise. Management of the
Company expects that StarPoint will have a positive impact on the Company's
revenues and profit margin. Prior to the introduction of its own telephone card,
the Company believes that as a result of StarPoint's stronger buying
12
<PAGE>
power. StarPoint should benefit from an increased margin on the resale of the
card products previously sold by the 8 distributors.
In addition, during the quarter ended December 31, 1998, the Company
incorporated StarGlobal Ltd. as a wholly-owned subsidiary in the United Kingdom.
Through StarGlobal, the Company invested approximately $1 million in new
equipment. StarGlobal will be fully operational during the quarter ending March
31, 1999. StarGlobal's new equipment can handle traffic worth USD 25 million per
year beginning in 1999 with a gross margin of about 5 to 8% depending on the
destination.
In Switzerland, the Company began testing its credit card based phone services
with a limited group of users during the quarter ended December 31, 1998. The
Company's product is intended to enable a credit card holder to use the credit
card as a post-paid phonecard. As a result, users of the Company's services will
benefit from discounts for international and national long distance
telecommunications services compared to the rates being offered by Swisscom and
other major telecom service providers in Switzerland. Management of the Company
expects to be able to offer this product to the general public in the near
future.
The Company continues to constantly explore opportunities in its core markets
and other countries. The Company is carefully evaluating any expansion of its
operations as and when business, market and regulatory conditions permit.
There can be no assurance that any of the Company's new activities commenced
during the quarter ended December 31, 1998 or any of its efforts to expand its
business in its core markets or any other countries will result in successful
commercial operations. The Company's prinicipal goal remains to focus on its
existing operations and to maximize the efficiency and reach of its business
with the limited resources at its disposal.
Financial Condition
At December 31, 1998, the Company had a positive working capital of $147,020 and
an accumulated deficit of $5,453,041, as compared to a positive working capital
and accumulated deficit of $223,444, and $4,551,224, respectively, at March 31,
1998.
Effective December 31, 1998, the Company exercised a call option under the
subscription agreement, dated January 17, 1998 and sold to an accredited and
sophisticated investor 150,000 shares of common stock at a price of $ 2.00 and,
for no additional consideration, warrants to purchase an additional 150,000
shares of common stock at $3.00, $4.00 or $4.50 per share. As of September 30,
1998, the Company had received $285,000 for such shares and warrants. A
commission of $15,000 was paid to Interfinance Investment Ltd.
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.
An expansion of the Company's business through the acquisition of other
telecommunication providers or significant investments in infrastructure and
marketing would require additional debt or equity financing from third parties.
There can be no assurance that any such financing will be timely available.
Accordingly, the Company may have to forego opportunities for expanding its
business.
The Company believes that its network has adequate switching capacity to serve
projected volume of traffic through March 1999. The Company's network is
designed 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 its network to another
country for termination, or back to the switches in Zurich, Belgium and London
for routing to the desired destination. The selected path is based on the least
cost.
13
<PAGE>
This provides a large amount of flexibility to the Company and ensures the
quality of the connections and lowest cost. With this distributive architecture,
the capacity of the Company`s switches is not expected to be a limiting factor
for the expansion of the Company's business. The opening of the European
telecommunications markets is expected to allow the Company to take full
advantage of its network flexibility.
Accounts payable and accrued expenses amounted to approximately $2,569,162 at
December 31, 1998 compared to $1,369,818 at March 31, 1998.
Results of operations
During the quarter ended December 31, 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.
Quarter Ended Nine Months Ended
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
Sales $1,525,328 $1,425,649 $2,871,063 $4,264,938
During the quarter ended December 31, 1998, the Company recorded net sales of
$1,525,856 compared to $1,425,649 in 1997. Compared to sales of $764,866 for the
quarter ended September 30, 1998, the Company's sales increased by 99.4%
resulting from strong internal growth and the addition of Starpoint. Sales in
the 9 months ended December 31, 1998 were $2,871,063 compared to $4,264,938 in
the equivalent period in 1997. During the quarter ended December 31, 1998, the
Company's wholesale operations were reorganized as a separate legal entity,
StarGlobal Ltd. StarGlobal will become fully operational during the quarter
ending March 31, 1999 and management expects it to have a positive impact on the
Company's results beginning in the quarter ending March 31, 1999.
Quarter Ended December 31, Nine Months Ended
1998 1997 1998 1997
---- ---- ---- ----
Gross Margin $479,867 $12,390 $1,028,215 $299,159
The gross margin for the three months ended December 31, 1998 increased to $
479,867, or 31.5% of the Company's sales as compared to the same period in 1997
which was $12,390 or 0.08% of the Company's sales. For the 9 months ended
December 31, 1998, the gross margin increased to $1,028,215 compared to $299,159
for the same period in 1997. This increase in gross profit reflects the fact
that the Company's cost of sales have decreased because of a better buying
policy and a stronger negotiating power.
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
continue to shift in favor of retail customers consistent with the Company's
goal of expanding its corporate retail customer base.
Quarter Ended December 31, Nine Months Ended December 31,
1998 1997 1998 1997
---- ---- ---- ----
Cost of Sales $1,045,461 $1,413,250 $1,842,848 $3,965,779
14
<PAGE>
Cost of sales was $1,045,461 for the quarter ended December 31, 1998 and
$1,842,848 for the nine months ended December 31, 1998, as compared to
$1,413,250 and $3,965,779 for the equivalent periods in 1997, of which
approximately 85% was attributable to carrier charges and the balance was
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. 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.
Quarter Ended December 31, Nine Months Ended December 31,
1998 1997 1998 1997
---- ---- ---- ----
Selling and
Technical Expenses $259,165 $427,894 $870,335 $1,661,394
Selling and technical expenses were $259,165 for the quarter ended December 31,
1998 and $870,335 for the nine months ended December 31, 1998, compared to
$427,894 and $166,394 for the corresponding periods 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. In addition, during the quarter
ended December 31, 1998, the Company began to employ certain persons who
previously had performed technical and sales services as independent contractors
to the Company. This shift resulted in an additional decrease in technical and
sales-related expenses paid to third parties.
<TABLE>
<CAPTION>
Quarter Ended December 31, Nine Months Ended December 31,
1998 1997 1998 1997
----- ----- ---- ----
<S> <C> <C> <C> <C>
General and
Administrative Expenses $603,349 $821,382 $1,339,122 $2,857,622
</TABLE>
General and administrative expenses were $603,349 for the quarter ended December
31, 1998 and $1,339,122 for the nine months ended December 31, 1998, compared to
$821,382 and $2,857,622 for the corresponding periods in 1997. These expenses
decreased because of the reduction of overhead costs, including management and
consulting fees, salaries, travel expenses and other operating expenses. As the
Company began to employ certain persons who previously had performed technical
and sales services as independent contractors to the Company, the Company
experienced an increase in the amount of salaries paid by the Company during the
quarter ended December 31, 1998.
Quarter Ended December 31, Nine Months Ended December 31,
1998 1997 1998 1997
---- ---- ---- ----
Net Income/(Loss) ($354,189) $1,908,806 ($886,320) ($1,185,017)
In the quarter ended December 31, 1998, the Company realized net sales of
$1,525,328 and a net loss of $354,189 compared to sales of $1,425,649 and a net
profit of $1,908,806 during the quarter ended December 31, 1997. During the
nine-month period ended December 31, 1998, the Company had sales of $2,871,063
and a net loss of $901,817 compared to sales of $4,264,938 and a net loss of
$1,185,017 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. Compared to the
quarter ended September 30,
15
<PAGE>
1998, the Company's net loss also decreased by 26% from $472,053 to $354,189.
Significant contributing factors to the Company's loss during the quarter ended
December 31, 1998 were depreciation and amortization expenses of $210,340 and
consultancy fees as a depreciated investment for building up new systems in an
estimated amount of $125,000, as well as the continued lack of revenues from the
wholesale business in the United Kingdom due to the reorganization of the
Company's wholesale business which was only completed at the end of the quarter
ended December 31, 1998. As a result of the completion of the reorganization of
the Company's wholesale business, management of the Company expects an increase
in revenues in the quarter ending March 31, 1999, 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 S-3 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
16
<PAGE>
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, which was declared effective on September
6, 1996.
Part II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No changes have occurred in the status of the legal proceedings previously
disclosed by the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective December 31, 1998, the Company exercised a call option under a
subscription agreement, dated January 16, 1998 and sold to an accredited and
sophisticated investor 150,000 shares of common stock at a price of $ 2.00 and,
for no additional consideration, warrants to purchase an additional 150,000
shares of common stock at $3.00, $4.00 or $4.50 per share. As of December 31,
1998, the Company had received an amount equal to $285,000 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 5%, or $15,000,
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 125,000 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
17
<PAGE>
(a) Exhibits
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
December 31, 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: February 16, 1999 By: /s/ Ueli Ernst
----------------------------------------
Ueli Ernst, Chairman and CEO
(Principal Executive Officer)
18
<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> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 606,234
<SECURITIES> 0
<RECEIVABLES> 2,157,338
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,535,700
<PP&E> 2,621,900
<DEPRECIATION> 210,340
<TOTAL-ASSETS> 7,872,937
<CURRENT-LIABILITIES> 3,388,680
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 8,525,625
<TOTAL-LIABILITY-AND-EQUITY> 7,872,937
<SALES> 1,525,328
<TOTAL-REVENUES> 1,525,328
<CGS> 1,045,461
<TOTAL-COSTS> 1,845,775
<OTHER-EXPENSES> (62,200)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,635
<INCOME-PRETAX> (444,847)
<INCOME-TAX> 0
<INCOME-CONTINUING> (444,847)
<DISCONTINUED> 0
<EXTRAORDINARY> 85,352
<CHANGES> (13,719)
<NET-INCOME> (369,686)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
