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, 2000
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)
Limmattalstr. 10, Geroldswil Switzerland 8954
---------------------------------------- ----
(Address of principal executive offices) (Zip Code)
(011) 411 749 31 03
-------------------
(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 of September 30, 2000, there were 5,199,216 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 (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
<PAGE>
<TABLE>
<CAPTION>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Sept 30, March 31,
ASSETS 2000 2000
------------ ------------
CURRENT ASSETS
<S> <C> <C>
Cash and Cash Equivalents $ 1,287,719 $ 29,580
Restricted Cash -- --
Accounts Receivable, net of Allowance for doubtful
Accounts of $309,811 and $372,314 4,212,752 2,825,312
Inventory 1,135,004 1,269,166
Other Receivables 6,423 --
Due from related Parties 175,338 337,802
Prepaid License Costs -- 649,724
Prepaid Expenses and Other Current Assets 920,746 278,034
------------ ------------
TOTAL CURRENT ASSETS 7,737,982 5,389,622
Property and Equipment, at cost, net of accumulated
depreciation of $3,687,274 and $2,929,618 831,809 1,505,181
Investments 1,636,431 20,016
Organization Costs, at cost, net of accumulated
amortization of $0 and $0 63,600 --
Goodwill, at cost, net of accumulated amortization
of $322,972 and $238,582 5,862,518 6,379,160
Customer Lists, at costs, net of accumulated
amortization of $601,397 and $517,000 247,308 356,352
Product License Costs, net of accumulated
amortization of $247,910 and $163,217 465,761 535,191
Equity Investments 157,091 --
Other Assets 7,617 37,010
------------ ------------
TOTAL ASSETS $ 17,010,117 $ 14,222,532
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank Overdraft $ 1,401,978 $ 1,696,148
Accounts Payable and Accrued Expenses 7,346,103 6,428,538
Due to Related Party -- 808,702
Notes Payable -- 210,983
Capital Lease Obligation, Current 178,266 213,661
Deferred Revenue 200,166 176,564
Due to Affiliates 1,088,336 --
------------ ------------
Total Current Liabilities 10,214,850 9,534,596
Loans payable 557,217 371,250
Capital Lease Obligation, long-term 283,792 386,970
------------ ------------
TOTAL LIABILITIES 11,055,858 10,292,816
------------ ------------
Commitments and Contingencies -- --
STOCKHOLDERS' EQUITY
Preferred stock - $.091 par value, authorized
10,000,000 shares; none issued and outstanding -- --
Common Stock - $.00001 par Value, authorized
60,000,000 shares; 5,199,216 and 3,848,299
issued and outstanding 51 38
Additional Paid-in Capital 18,202,146 14,373,497
Treasury Stock (300,000) (300,000)
Accumulated Deficit (10,472,379) (10,868,039)
Net Income (Loss) (1,755,381) --
Cumulative Foreign Currency Translation Adjustment 278,057 724,220
Minority Interest -- --
Legal Reserves 1,664 --
------------ ------------
Total Stockholders' Equity 6,254,259 3,929,716
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT) $ 17,010,117 $ 14,222,532
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Quarter ended For the Six Months ended
September 30, September 30,
(unaudited) (unaudited)
-----------------------------------------------------
2000 1999 2000 1999
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 6,937,167 $ 3,502,659 $ 11,601,821 $6,201,695
COST OF SALES 4,746,285 2,687,984 8,646,501 4,814,895
------------ ----------- ----------- ---------
GROSS PROFIT 2,190,882 814,675 2,955,320 1,386,800
------------ ----------- ----------- ---------
SELLING AND TECHNICAL EXPENSES
Consulting Fees -- -- -- --
Technical Fees 56,574 150,322 77,875 190,909
Sales Salaries 56,254 33,898 69,268 74,964
Other Selling Expenses -- -- -- --
------------ ------------ ----------- ----------
Total Selling and Technical Expenses 112,828 184,220 147,143 265,873
------------ ------------ ----------- ----------
PROFIT/LOSS FROM OPERATIONS BEFORE GENERAL AND
ADMINISTRATIVE EXPENSES 2,078,054 630,455 2,808,177 1,120,927
------------ ------------ ----------- ----------
GENERAL AND ADMINISTRATIVE EXPENSES
Management and Consulting Fees 526,860 76,420 609,427 83,399
Salaries 233,991 526,351 746,009 879,183
Bad Debt Expenses (28,196) 4,601 62,918 4,601
Depreciation and Amortization 621,373 359,406 1,057,656 655,086
Professional Fees 98,870 108,955 144,781 212,204
Travel Expenses 27,817 3,500 76,400 37,952
Employment Agency Fees 6,841 26,800 8,838 76,537
Rent Expenses 91,790 56,586 150,694 86,099
Association Fees 2 11,209 601 11,209
Insurance Expenses 1,892 (4,738) 4,827 4,828
Other Operating Expenses 1,156,575 293,178 1,568,964 444,991
Advertising 36,839 -- 36,839 --
------------ ------------ ----------- ---------
Total General and Administrative Expenses 2,774,654 1,462,268 4,467,954 2,496,089
------------ ------------ ----------- ----------
LOSS FROM OPERATIONS (696,600) (831,813) (1,659,777) (1,375,162)
------------ ------------ ----------- ----------
OTHER INCOME (EXPENSES)
Interest Income 17,845 32 (26,021) 112
Interest Income I/C -- -- -- --
Gain (Loss) on Sale of Subsidiaries -- 29,104 -- 29,104
Interest Expenses 129,766 (21,364) 129,831 (43,054)
Net Leasing Expense (173,024) -- (173,024) --
Loss from Foreign Currency -- (123,786) -- (130,732)
Loss/Profit from FX 132,969 -- 132,969 --
Other Income 43,181 (804) 11,309 14,432
------------ ------------ ----------- ----------
Total Other Income (Expenses) (150,737) (116,818) (52,446) (130,138)
------------ ------------ ----------- ----------
INCOME/(LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST (847,337) (948,631) (1,712,223) (1,505,300)
INCOME TAXES 37,005 -- 43,158
------------ ------------ ----------- ----------
INCOME/(LOSS) BEFORE MINORITY INTEREST (884,342) (948,631) (1,755,381) (1,505,300)
Extraordinary Item -- --
------------ ------------ ----------- ----------
Extraordinary Income (884,342) 1,174,590 (1,755,381) 1,174,590
Closing Subsidiary Cos -- --
MINORITY INTEREST -- 31,044 -- 57,948
------------ ------------ ----------- ----------
NET INCOME / (LOSS) $ (884,342) $ 257,003 (1,755,381) (272,762)
============ ============ ============ ==========
PROFIT/LOSS PER COMMON SHARE $ (0.19) $ 0.12 (0.38) (0.13)
============ ============ ============ ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
For the Six Months Ended
September 30,
---------------------------
2000 2000
----------- -----------
COMPREHENSIVE INCOME (Loss)
<S> <C> <C>
Net Loss $(1,755,381) $ (272,762)
Foreign Currency Translation Adjustment 278,057 (180,459)
----------- -----------
COMPREHENSIVE INCOME (LOSS) $(1,477,324) $ (453,221)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
Common Stock Additional Foreign Total
----------------- Paid-In Treasury Accumulated Currency Minority Legal Stockholders'
Shares Amount Capital Stock Deficit Adjustment Interest Reserves Equity
------ ------ ------- ----- ------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 2000 3,848,299 38 14,373,497 $ (300,000) $(10,868,039) $ 724,220 $ -- $ 3,929,716
Net Loss - For the six months
Ended September 30, 2000 -- -- -- (1,755,381) (1,755,381)
Issuance of Common Stock 1,350,917 13 3,945,728 -- -- -- 3,902,675
Offering Costs (117,079) (117,079)
Minority Interest -- -- -- -- -- -- --
Cumulative Foreign
Currency Translation Adjustment -- -- -- -- (446,163) -- -- (446,163)
Legal Reserves 1,664 1,664
--------- ----- ----------- -------- ----------- --------- ------- -------- -----------
Balance at September 30, 2000 5,199,216 51 $18,202,146 (300,000) $(12,842,184) $ 278,057 $ -- $ 1,664 $6,254,259
========= ===== =========== ======== =========== ========= ======= ======== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six Month ended
September 30, 2000
----------------------------
2000 1999
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $(1,755,381) $(272,762)
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating Activities:
Cumulative Effect of an Accounting Change -- --
Gain on Sale of Subsidiary -- --
Increase in Bad Debt -- --
Depreciation and Amortization 1,057,656 665,086
Changes in Certain Assets and Liabilities:
Increase in Accounts Receivable (1,387,440) (314,669)
Increase in Other Receivables (6,423) (268,641)
Increase in Due From Related Parties 279,634 (210,246)
Decrease in Prepaid License Costs 7,012 (144,074)
(Increase) Decrease in Prepaid Expenses and
Other Current Assets -- --
(Increase) Decrease in Inventory 134,162 86,943
Increase in Organization Costs (63,600) --
Decrease in Other Assets 29,393 84,464
Increase in Deferred Revenue -- --
Increase in Accounts Payable and Accrued Expenses 917,565 (244,706)
Increase in Due to Related Party -- --
Increase in Bank Overdraft
Deferred Revenue 23,602 --
----------- ---------
Total Cash Used by Operating Activities (763,820) (628,605)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase/Decrease in Fixed Assets, net (1,057,656) --
Increase in Goodwill 84,390 --
Purchase of Property and Equipment, net -- (43,254)
Increase in Product License Costs (157,091) --
Increase Investments (1,616,415) --
Copyright (69,430) --
Customer Base (178,474) --
----------- ---------
Total Cash Used by Investing Activities (2,994,676) (43,254)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Bonds -- --
(Increase) Decrease in Restricted Cash -- --
Decrease in Bank Overdraft (294,170) 68,520
Increase in Loans Payable -- --
Increase in Capital Lease Obligation, net --
Increase(Decrease)in Capital Lease Payable (138,573) (78,778)
Contribution to Capital 3,828,749 410,364
Proceeds from Loan (25,016) 142,898
Minority Interest -- (104,993)
----------- ---------
Total Cash Provided By Financing Activities 3,370,989 438,011
----------- ---------
EFFECTS OF EXCHANGE RATE
CHANGES ON CASH (446,163) (180,459)
----------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,258,139 (104,875)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 29,580 402,925
----------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 1,287,719 $ 298,050
=========== =========
CASH PAID DURING THE YEAR FOR:
Interest Expense $ (129,831) $ (43,054)
=========== =========
Income Taxes $ -- $ --
=========== =========
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Year Ended March 31, 2000:
On July 5, 1999, the Company sold its 100% investment in Multicom (see note
6a).
On November 15, 1999, the Company acquired 51% of Music Line AG's common
stock for 1,750,000 shares of the Company's common stock and the assignment
of approximately $789,000 of accounts receivable (see Note 6c).
Year Ended March 31, 1999:
The Company received 23,077 shares of its common stock as consideration for
payment of a $300,000 receivable due from a former officer of the Company.
The common stock is recorded as treasury stock as of March 31, 1999 (see
Note 17).
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) BASIS OF PRESENTATION The accompanying financial statements have been
prepared in accordance with generally accepted accounting principles
and with the instructions to Form 10-KSB and Regulation S-B. In the
opinion of management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation,
have been included.
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 subsidiaries:
1) Starfon Telecom Services AG, ("Starfon"), 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
Starfon);
3) Multicom NV ("Multicom"), incorporated under the laws of Belgium
(owned 100% by UTG Belgium) (see Note 6 for disposition);
4) United Telecom GmbH, ("UTG GmbH"), incorporated under the laws of
Switzerland on May 28, 1996 (owned 100% by Starfon);
5) Telelines International SA, ("Telelines"), incorporated under the
laws of Panama on July 28, 1997 (owned 100% by Starfon) (see Note
6);
6) Starpoint Card Services LTD, ("Starpoint"), incorporated under
the laws of the United Kingdom on November 18, 1998 (owned 51% by
Telelines);
7) Star Global LTD, ("Star Global"), incorporated under the laws of
Jersey, Channel Islands on November 24, 1998 (owned 100% by
Telelines);
8) Music Line AG ("Musicline"), incorporated under the laws of
Switzerland on July 16, 1998, owned 51% by the Company (see Note
6 for Acquisitions);
9) SSC Selected Sound Carrier AG, ("SSC"), incorporated under the
laws of Switzerland on July 1, 1998 (owned 100% by Musicline)
(see Note 6 for acquisition); and
10) JM Sontel AG, ("JM"), incorporated under the laws of Switzerland
on December 12, 1991 (owned 100% by Musicline) (see Note 6 for
Acquisitions).
All significant intercompany accounts and transactions have been
eliminated in consolidation.
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
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 is engaged in the resale of international Telecom services
in the United Kingdom.
The Company is also engaged in the sale and distribution of music
compact discs ("CDs") and other music to wholesale and retail
customers throughout Europe.
c) 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 revenue
and expenses during the reporting period. Actual results could differ
from those estimates.
d) REVENUE RECOGNITION
Revenue from switch based services are recognized when billed based on
the number of minutes provided to customers. Revenue from the sale of
phone cards is recorded at the time of sale.
Revenue from the sale of CDs is recognized at the time of shipment.
e) CONCENTRATION OF CREDIT RISK
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances exceeded FDIC insured
levels at various times during the year.
f) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
g) INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis.
h) PREPAID LICENSE COSTS
Prepaid license costs are recorded at cost as of the date of purchase.
These costs represent various expenses related to the production of
the CDs. These costs are expensed in relation to volume of sales,
usually over a period of one year.
i) 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.
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
j) ORGANIZATION COSTS
Organization costs consist of legal and other administrative costs
incurred relating to the formation of the Company. These costs were
capitalized and amortized over a period of five years.
As of April 1, 1999, these costs totaling $106,547 were expensed per
Statement of Position No. 98-5, "Accounting for Start-Up Costs".
k) GOODWILL
Goodwill represents the cost in excess of the fair market value of the
Company's acquisitions. Amortization is being computed using the
straight-line method over a period of fifteen years.
l) CUSTOMER LISTS
Customer lists represents the cost 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.
m) PRODUCT LICENSE COSTS
Product license costs are recorded at cost as of the date of purchase.
These costs represent various royalty, production and license fees the
Company must pay to utilize the licensed and copyrighted compositions.
Amortization is computed using the straight-line method over a period
of one to three years.
n) DEFERRED REVENUE
Deferred revenue represents advanced billings on sales not shipped.
o) BANK OVERDRAFT
The Company maintains overdraft positions at certain banks. Such
overdraft positions are included in current liabilities.
p) OFFERING COSTS
Offering costs consist primarily of professional fees. These costs are
charged against the proceeds of the sale of common stock in the
periods in which they occur.
q) ADVERTISING COSTS
Advertising costs are expensed as incurred and included in selling,
general and administrative expenses. For the years ended March 31,
2000 and 1999, advertising expense amounted to $150,992 and $57,047,
respectively.
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
r) TRANSLATION OF FOREIGN CURRENCY
The Company translates the foreign currency financial statements of
its Swiss, Belgian and United Kingdom subsidiaries, in accordance with
the requirements of Statement of Financial Accounting Standards
("SFAS") No. 52, "Foreign Currency Translation". Assets and
liabilities are translated at current exchange rates, and related
revenue 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.
s) INCOME TAXES
Income taxes are provided for based on the liability method of
accounting pursuant to 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.
t) 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.
u) LONG-LIVED ASSETS
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of", 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.
v) STOCK-BASED COMPENSATION
SFAS 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.
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
w) EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share" requires presentation of basic
earnings per share ("Basic EPS") and diluted earnings per share
("Diluted EPS").
The computation of basic earnings per share is computed by dividing
income available to common stockholders by the weighted average number
of outstanding common shares during the period. Diluted earnings per
share gives effect to all dilutive potential common shares outstanding
during the period. The computation of diluted EPS does not assume
conversion, exercise or contingent exercise of securities that would
have an anti-dilutive effect on earnings. The shares used in the
computations are as follows:
AS OF SEPTEMBER 30,
------------------------------
2000 1999
------------ -----------
Basic EPS 4,523,757 3,910,076
========== =========
Diluted EPS 4,523,757 3,910,076
========== =========
x) COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income", establishes standards
for the reporting and display of comprehensive income and its
components in the financial statements. The items of other
comprehensive income that are typically required to be displayed are
foreign currency items, minimum pension liability adjustments, and
unrealized gains and losses on certain investments in debt and equity
securities. As of March 31, 2000 and 1999, the Company has items that
represent comprehensive income, therefore, has included a statement of
comprehensive income.
y) SEGMENT INFORMATION
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information", changes the way public companies report information
about segments. SFAS No. 131 is based on the selected segment
information quarterly and entity-wide disclosures about products and
services, major customers and the material countries in which the
entity holds assets and reports revenue.
z) COMPUTER SOFTWARE COSTS
Statement of Position Number 98-1 (SOP 98-1), "Accounting for the Cost
of Computer Software Developed or Obtained for Internal Use" is
effective for fiscal years beginning after December 15, 1998.
Management believes that the Company is substantially in compliance
with this pronouncement and that the implementation of this
pronouncement will not have a material effect on the Company's
financial position, results of operations or cash flows.
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
aa) RECLASSIFICATION
As of March 31, 1999, certain prior year amounts have been
reclassified to conform with current presentation.
bb) IMPACT OF YEAR 2000 ISSUE
During the year ended March 31, 2000, the Company conducted an
assessment of issues related to the Year 2000 and determined that it
was necessary to modify or replace portions of its software in order
to ensure that its computer systems will properly utilize dates beyond
December 31, 1999. The Company completed Year 2000 systems
modifications and conversions in 1999. Costs associated with becoming
Year 2000 compliant were not material. At this time, the company
cannot determine the impact the Year 2000 will have on its key
customer or suppliers. If the Company's customers or suppliers don't
convert their systems to become Year 2000 compliant, the Company may
be adversely impacted. The Company is addressing these risks in order
to reduce the impact on the Company.
cc) RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 132, "Employers' Disclosures about Pension and Other Post
Employment Benefits," was issued in February 1998 and specifies
amended disclosure requirements regarding such obligations. SFAS No.
132 does not effect the Company as of March 31, 2000 or 1999.
In March 1998, Statement of Position No. 98-1 was issued, which
specifies the appropriate accounting for costs incurred to develop or
obtain computer software for internal use. The new pronouncement
provides guidance on which costs should be capitalized, and over what
period such costs should be amortized and what disclosures should be
made regarding such costs. This pronouncement is effective for fiscal
years beginning after December 15, 1998, but earlier application is
acceptable. Previously capitalized costs will not be adjusted. The
Company believes that it is already in substantial compliance with the
accounting requirements as set forth in this new pronouncement, and
therefore believes that adoption will not have a material effect on
financial condition or operating results.
Additional guidance is also provided to determine when hedge
accounting treatment is appropriate whereby hedging gains and losses
are offset by losses and gains related directly to the hedged item.
While the standard, as amended, must be adopted in the fiscal year
beginning after June 15, 2000, its impact on the Company's
consolidated financial statements is not expected to be material as
the Company has not historically used derivative and hedge
instruments.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
Sept. 30, 2000 March 31, 2000
------------- --------------
Telecommunications Equipment $ 4,270,847 $ 3,973,483
Computer Equipment and Software 195,263 150,303
Furniture and Fixtures 311,611 269,651
Auto 41,362 41,362
----------- -----------
4,819,083 4,434,799
Less: Accumulated Depreciation (3,987,274) ( 2,929,618)
------------ -----------
$ 831,809 $ 1,505,181
=========== ===========
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 3 - INCOME TAXES (Continued)
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 March 31, 2000 and 1999, the Company had net carry forward losses
of approximately $10,686,000 and $7,223,000, respectively. Because of
the current uncertainty of realizing the benefits of the tax carry
forward, valuation allowances equal to the tax benefits for deferred
taxes have been established. The full realization of the tax benefit
associated with the carry forward depends predominantly upon the
Company's ability to generate taxable income during the carry forward
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 are as follows:
AS OF MARCH 31,
--------------------------
2000 1999
------------ -----------
Deferred Tax Assets
Loss Carry forwards $3,695,120 $2,456,000
Less: Valuation Allowance (3,695,120) (2,456,000)
------------ -----------
Net Deferred Tax Assets $ - $ -
============ ===========
Net operating loss carry forwards expire starting in 2011 through
2015. Per year availability is subject to change of ownership
limitations under Internal Revenue Code Section 382.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
a) 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.
b) 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
---------- ----------------
2001 $ 81,898 $ 149,788
2002 167,320 212,248
2003 167,320 118,256
2004 150,495 24,860
2005 and thereafter 72,059 3,234
---------- ------------
Total Minimum Lease Payments $ 639,092 508,386
==========
Less: Amounts Representing Interest (51,585)
------------
Present Value of Future Minimum
Lease Payments 456,801
Less: Current Maturities (213,661)
-----------
Total $ 243,740
===========
Rent expense under operating leases for the year ended March 31, 2000
and 1999 was $245,547 and $85,645, respectively.
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 5 - STOCKHOLDERS' EQUITY
On January 10, 1998, the Company's Board of Directors authorized the
issuance of an additional 40,000,000 shares of common stock at $.0001
par value bringing the total authorized common shares to 60,000,000.
The Board also authorized the issuance of 10,000,000 preferred shares
at $.01 par value. At the same time, a reverse split of
one-for-thirteen shares was authorized to shareholders of record on
March 24, 1998. Shareholders' equity has been restated to give
retroactive recognition to the reverse stock split by reclassifying
from common stock to additional capital the reduced par value arising
from the reverse split.
On August 22, 1999, in connection with the Company's reverse stock
split of March 23, 1998, the Company issued 201,341 shares of common
stock as a stock dividend (see Note 14).
During the fiscal years ended March 31, 2000 and 1999, respectively,
an investor exercised warrants to purchase 185,768 and 408,036 shares
of common stock for net proceeds of $495,733 and $791,590,
respectively.
On November 15, 1999, in connection with the acquisition of Musicline,
the Company issued 1,750,000 shares of its common stock.
During the quarter ended September 30, 2000 various investors
exercised warrants to purchase 787,604 shares for net proceeds of
$2,614,443. In addition a hardware supplier sold two telecom switches
for the equivalent for cash, a leasing agreement and for 7600 shares
of common Stock for the net amount of $ 60,354.
NOTE 6 - STOCK OPTIONS
Effective September 30, 2000 the Company issued 5000 stock options to
a Investor for a services rendered without any compensation. Each
Options Allows the investor to purchase Common Stock at $15.-, The
Options will Expire 3 years from date of issuance.
NOTE 7 - MINORITY INTEREST
Minority interest represents the following:
a) a 49% share of the common equity of the Company's subsidiary StarPoint
as of March 31, 2000 and 1999 (see Note 5b); and
b) a 49% share of the common equity of the Company's subsidiary Musicline
as of March 31, 2000 (see Note 5c). Minority interest totaled $-0- as
of March 31, 2000 due to excess losses over the minority investment in
Musicline.
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
NOTE 8 - SUBSEQUENT EVENTS
As per October 1, 2000 the Companys subsidiary in Belgium has enlarged
the product line into the mobile business. It sells now very
successfully entire communications packages containing mobile,
fixline, internet and prepaid cards with agents and points of sales in
Belgium.
As of October 6, 2000 the Companys subsidiary Starfon Telecom Services
AG entered into a acquisitions agreement with FM Market SA to acquire
that company in various stages. They have an active E commerce shop
and a sales organisation to sell Telecom and Internet Services in
Switzerland.
On June 2, 2000, the Company's subsidiary J.M. Sontel AG, entered into
a five-year lease agreement beginning July 1, 2000 for office and
showroom space in Rotkreuz, Switzerland, at a yearly rental of
approximately $72,000 per year.
Subsequent to March 31, 2000, the Company has received an additional
commitment of $5,500,000 of equity financing.
The following discussion and analysis relates to the financial condition and
results of operations of the Company for the quarter ended September 30, 2000.
This information should be read in conjunction with the Company's consolidated
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATION
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.
From inception through September 30, 2000, the Company has received an aggregate
of approximately $18,202,246 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 long distance Telecom services provided
to retail corporate customers and wholesale customers and, through Musicline,
from the production, sale and distribution of music CD's to wholesale and retail
customers in Europe.
With respect to the Company's telecommunications business, the Company's
wholesale customers are comprisee of international telecom carriers and national
telecoms, and the Company's retail customers are 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. 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 through London. Management 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.
The Company holds an International Simple Resale ("ISR") license in the United
Kingdom and, during the fiscal year ended March 31, 1999, was granted an
International Facility License ("IFL") by the United Kingdom. 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 fiscal year ended March 31, 1999, the Company entered into a joint
venture agreement with eight individual distributors for the purpose of
establishing a distribution network for telecommunication cards in the United
Kingdom. The Company and its eight 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 addition, during
the fiscal year ended March 31, 1999, the Company formed StarGlobal Ltd., a
wholly-owned indirect subsidiary organized under the laws of the United Kingdom,
with the intent to resume the Company's wholesale and carrier-to-carrier
business. The Company believe that StarGlobal's new equipment can handle traffic
worth USD 25 million per year with a gross margin of about 5 to 8% depending on
the destination.
On July 5, 1999, the Company sold its subsidiary, Multicom Communication NV, to
an unaffiliated Liechtenstein investor for BEF 25,000 to streamline the
activities of UTG Belgium.
During the quarter ended September 30, 1999, the Company completed its
development of a credit card based phone service for the Swiss market. The
Company launched this product together with the Manor Group, a large department
store chain in Switzerland on July 19, 1999. This product allows holders of
credit cards issued by Manor to use the credit card as a post-paid phonecard and
to benefit from discounts for international and national long distance
telecommunication services.
<PAGE>
On November 15, 1999, the Company acquired a majority of the capital stock of
Musicline AG, a Swiss corporation ("Musicline"), pursuant to a Stock Purchase
Agreement, dated as of August 9, 1999 between the Company and Ueli Ernst, the
Company's Chairman and Chief Executive Officer, in consideration for 1,750,000
shares of the Company's common stock, the assignment to Mr. Ernst of a
receivables account in the principal amount of approximately $790,000, and, an
additional 350,000 shares of the Company's common stock if Musicline's net
profits reach at least $300,000 during the fiscal year ending March 31, 2000 or
March 31, 2001. At a stockholders meeting held on October 22, 1999, the
Company's stockholders other than Mr. Ernst or persons affiliated or associated
with him approved such stock purchase agreement by an affirmative vote of more
than two-thirds of the shares of common stock held by such stockholders. The
closing of this transaction occurred on November 15, 1999.
Musicline is a Swiss-based wholesale and retail music CD distribution and
production company with a European client base. Musicline has the rights to sell
approximately 20,000 music titles in CD format as well as on the Internet.
Musicline produces about 4,000 different music compilations per year. The
Company expects this acquisition to provide it with Internet opportunities,
specifically in the business-to-business and business-to-consumer e-commerce
sectors, although there can be no assurance in that respect.
On August 13, 1998, the Company issued two notes to Blacksea Investment Ltd. in
the principal amounts of $200,000 AND CHF250,000 (approximately $150,600),
respectively. Both notes are due June 30, 2003. The $200,000 note accrues
interest at a rate of 8% per annum, while the CHF 250,000 note accrues interest
at an annual rate of 5%. Such notes were issued by the Company in lieu of a loan
agreement, dated August 13, 1998, which provided for loans in the principal
amounts of the notes. In addition, the Company issued to Blacksea Investment
Ltd. 3,000 warrants to purchase shares of common stock of the Company at $30 per
share, 3,000 warrants to purchase shares of common stock of the Company at $45
per share, 3,000 warrants to purchase shares of common stock of the Company at
CHF50 (approximately 30) per share, and 3,000 warrants to purchase shares of
common stock of the Company at CHF75 (approximately $45) per share. All of such
warrants expire on June 30, 2001. The Company received no proceeds from such
issuance.
On August 22, 1999, the Company issued an aggregate of 201,341 shares of common
stock and 1,103,625 common stock purchase warrants exercisable at $15.00 per
share until August 22, 2003 to stockholders of record on March 20, 1998. This
issuance was made in connection with the Company's 13:1 reverse stock split
effected on March 23, 1998. In connection with the reverse stock split, the
Board of Directors of the Company authorized the issuance of one warrant for
each share of Company common stock held by each stockholder of record on March
20, 1998. In addition, the Board of Directors of the Company authorized the
distribution to stockholders who continuously held shares of Company common
stock from March 20, 1998 through September 21, 1998 of a number of shares of
Company common stock equal to not more than 20% of the amount of shares of
Company common stock continuously held by stockholders during that time period
to compensate such stockholders for a decrease in the market value of the
Company's shares of Common Stock following the reverse stock split.
In order to be able to continue to provide its customers with state of the art
communication services and to benefit from the opportunities created by the
Internet, the Company has developed an Internet strategy. The Company intends to
become an Internet services provider (ISP) to take advantage of the efficiencies
created by its existing switches and its access to the Internet backbone. The
Company intends to offer these services (and related consulting and support
services), to retail and other Internet services providers in Europe. The
Company also intends to diversify into e-commerce and to operate Internet
shopping platforms for its telecommunications services and other retail
industries, including music, media and software distribution.
The Company deems an expansion into Internet-related services, such as
E-commerce, with its expected high growth potential, a competitive necessity in
the markets in which it currently operates. The Company believes that
establishing an e-commerce business would synergistically supplement its
conventional telecommunications services and its newly developed Internet
services.
The Company is currently exploring several appropriate opportunities in its core
markets and in Germany as well as in other countries. The Company will carefully
evaluate expansion of its operation into other European countries as and when
business, market and regulatory conditions permit.
In the quarter ended September 30, 2000 the Company entered the mobile phone
market with various products and will have additional points of sales in
Belgium.
There can be no assurance that any of the Company's new activities commenced
during the quarter ended September 30, 2000 or any of its efforts to expand its
business in its core markets, any other countries or the Internet will result in
successful commercial operations.
The Company's financial statements for the quarter ended December 31, 1999 for
the first time reflect the financial condition and results of operations of
Musicline. The financial statements reflect Musicline's results of operations
for the entire quarter.
<PAGE>
The Company's goal is to supplement its current operations with Internet-related
services.
Effective September 30, 1997, the Company sold to a limited number of accredited
or sophisticated investors 30,769 shares of common stock at a price of $6.50 per
share and, for no additional consideration, warrants to purchase an additional
15,385 shares of common stock at a price of $7.80 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. As of September 30, 2000,
11,538 warrants have been exercised, with the Company receiving $90,000 from the
exercise of such warrants.
On March 23, 1998, the Company issued 250,000 shares of common stock (after 13:1
Reverse stock split) at a purchase price of $2.00 per share to an accredited
investor. In addition, for each share of common stock purchased, the investor
also received 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, as amended, the Company had the right, subject to
certain conditions, to request the subscriber to purchase an additional 500,000
shares of common stock upon the same terms and purchase price of the initial
purchase on or prior to December 31, 1998. During the fiscal year ended March
31, 1999, the Company issued an additional 408,036 shares to such subscriber on
the same terms and conditions as described above. Net proceeds received by the
Company in connection with such issuances was $1,276,590. During the fiscal year
ended March 31, 2000, the company issued an additional 185,768 shares to such
subscriber on the same terms and conditions as described above. Net Proceeds
received by the Company in connection with such issuance was $495,733.
On July 1, 2000, the Company entered into an employment agreement with Ueli
Ernst, President and Chief Executive Officer and Mr. Klaus Brenner, Secretary
and Treasurer of the Company. Pursuant to this employment agreement, Mr. Ernst
shall receive an annual salary of $120,000 and Mr. Brenner $24,000 and both will
receive options to purchase common stock following expiration of each of the
five years of employment in this agreement.
In October 2000, Starfon, a subsidiary of the Company, entered into an
agreement with FM Finance Market S.A., Mr. Massimo Scotti and Mr. Claudio
Zambon. Both Mr. Scotti and Mr. Zambon are controlling shareholders of FM
Finance Market S.A. ("FM"). Pursuant to this agreement, Starfon is to
acquire 95% of the outstanding common stock of FM at a price to be determined.
The stock shall be purchased on three separate dates: April 30, 2001;
October 31, 2001; April 30, 2002. FM Finance Market S.A. is a international
internet platform in four languages for E Commerce. It also has an active
marketing organization to sell telecom and internet products in Switzerland.
<PAGE>
FINANCIAL CONDITION
The Company believes that its network has adequate switching capacity to serve
projected volume of traffic through the year ending December 2000. 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 a switch in London for
routing. The selected path is based on the least expensive route. This provides
a large amount of flexibility to the Company, while ensuring the quality of the
connections at the 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.
Musicline expects to purchase and/or lease up to $1,500,000 in various equipment
including DVD production equipment. However, there can be no assurance as to
when or if Musicline will be able to obtain such equipment financing.
Based upon the Company's plan of operation, the Company estimates that its
existing financing 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.
At March 31, 2000, the Company had a working capital deficit of $4,144,974 and
an accumulated deficit of $10,868,039, as compared to working capital and
accumulated deficit of $1,380,693 and $7,222,639, respectively, at March 31,
1999.
At September 30, 2000, the Company's bank overdraft balance was CHF1,401,978
(approximately $854,049) compared to March 31, 2000 CHF2,832,567 (approximately
$1,696,148).
Accounts payable and accrued expenses amounted to approximately $7,346,103 at
September 30, 2000 compared to $6,428,538 at March 31, 2000. This increase is
the result of the increase in the Company's business volume and investments made
during the fiscal year ended March 31, 2000.
As a result of the expected growth of the Company's telecommunications, internet
and data business in Switzerland, Belgium and UK, the expected growth in
Musicline's music CD distribution and production business, the introduction of
Internet services and e-commerce business, and on-going reorganization of the
Company's wholesale business, management expects a further increase in revenues
during the quarter ending September 31, 2000 and a further reduction of the
Company's operating loss, although no assurances can be given in this regard.
RESULTS OF OPERATION
During the quarter ended September 30, 1999, the Company generally achieved the
expected gross margins in its business except from sales of the Company's
wholesale products which have not met managements expectations.
Quarter Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Sales $ 6,937,167 $ 3,502,659 $ 11,601,821 $ 6,201,695
During the quarter ended September 30, 2000, the Company recorded net sales of
$6,937,167, compared to $3,502,659 during the quarter ended September 30, 1999
and during the six-month period ended September 30, 2000, the Company recorded
net sales of $11,601,821 compared to $6,201,695 during the same period of the
previous year. This increase in net sales is the result of increased revenue in
Switzerland, Belgium and United Kingdom. Management expects an additional
increase in the Company's net sales as a result of the increase in revenues from
the new pre-paid and post-paid calling card services in Switzerland, and the
addition of internet services and the operations of MusicLine.
<PAGE>
QUARTER ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2000 1999 2000 1999
---- ---- ---- ----
Gross Profit $ 2,190,882 $ 814,675 $ 2,955,320 $ 1,386,800
Gross profit for the six months ended September 30, 2000 increased to $2,955,320
(or 25.5% of the Company's sales) as compared to a gross profit of $1,386,800
(or 22.4% of the Company's sales) during the same period in 1999 and gross
profit for the quarter ended September 30, 2000 increased to $2,190,882 (or
31.6%) of the Company's sales as compared to a gross profit of $814,675 (or
23.6% of sales) during the same period in 1999. The increase of the Company's
gross profit resulted from the increase of the Company's net sales. The relative
increase of the Company's gross profit is the result of the fact that a
significant part of the Company's sales had been margin.
The Company's revenue has been generated primarily from long distance and
international telecom services provided to retail corporate customers in
Switzerland and Belgium and its wholesale customers, as well as its prepaid card
distribution in the United Kingdom and the first sales of its pre-paid and
post-paid calling card products in Switzerland. As the Company's retail and
wholesale customer base grows and the Company's own prepaid and postpaid card
services as well as Internet and e-commerce services are added to the Company's
range of products and services, management believes its gross margin will
increase in line with the increase in sales from these products and services.
Quarter Ended Six Months Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
Cost of Sales $ 4,746,285 $ 2,687,984 $ 8,646,501 $ 4,814,895
Cost of sales was $4,746,285 for the quarter ended September 30, 2000 and
$8,646,501 for the six-month period ended September 30, 2000, as compared to
$2,687,984 and $4,814,895, respectively, for the same periods in 1999. Of such
costs approximately 79% 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. Management expects that
the relative amount of cost of sales will decrease with the introduction of its
new calling card services in Switzerland, Belgium and the United Kingdom.
Quarter Ended Six Months Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
Selling and
Technical Expenses $112,828 $184,220 $147,143 $265,873
Selling and technical expenses were $112,828 for the quarter ended September 30,
2000 and $147,143 for the six-month period ended September 30, 2000 compared to
$184,220 and $265,873, respectively for the corresponding periods in 1999. The
primary reasons for this decrease is the fact that the Company now employs
certain persons who previously had performed technical and sales services as
independent contractors to the Company. This shift resulted in a decrease in
technical and sales-related expenses paid to third parties.
Quarter Ended Six Months Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
General and
Administrative Expenses $2,774,654 $1,462,268 $4,467,954 $2,496,089
General and administrative expenses were $2,774,654 for the quarter ended
September 30, 2000 and $4,467,954 for the six-month period ended September 30,
2000 compared to $1,462,268 and $2,496,089, respectively, for the corresponding
periods in 1999. This increase is due to the increase in the Company's
activities, in particular the addition of new employees, increased depreciation
and amortization expenses related to newly acquired equipment and increased
travel and other administrative expenses.
However, the growth of the Company's sales during the quarter and the six-month
period ended September 30, 2000 exceeded the increase of general and
administrative expenses by approximately 10% and 8% respectively. The
depreciations increased for the quarter ended September 30,2000 to $621,373 from
$359,406 from the previews year.
Quarter Ended Six Months Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
Net Income/(Loss) $(884,342) $257,003 $(1,755,381) $(272,762)
In the quarter ended September 30, 2000, the Company realized net sales of
$6,937,167 and net income of $(884,342) compared to net sales of $3,502,659 and
a net loss of $257,003 during the quarter ended September 30, 1999. During the
six-month period ended September 30, 2000 the Company's net sales and net loss
were $11,601,821 and $(1,755,381), respectively, compared to $6,201,695 and
$(272,762), respectively, for the same periods in 1999. The net income and the
increase in the Company's net loss during the three-month period and the
six-month period ended September 30, 2000 is attributable to the higher
operating expenses and depreciations. The relative low net loss for the quarter
and the six months ended September 30,1999 is primarily attributable to the
extraordinary gain achieved from the sale of Multicom.
Year 2000
The change in the calendar on January 1, 2000 had no significant impact on the
Company's operations. The costs incurred to make the Company's systems year 2000
compliant were not material.
CAUTIONARY STATEMENTS
This report has been prepared by the management of the Company based on its
knowledge and access to the Company's records to the extent such records have
been kept at the Company's premises in Switzerland, the United Kingdom and
Belgium, as well as records made available to management. Because the Company's
new management was previously not actively involved in the management of the
Company, it is not in a position to ascertain whether or not such records are
complete or whether or not such records disclose all material facts required to
be disclosed in this report. Accordingly, material facts with respect to the
period covered by this report may exist which are not disclosed herein because
of management's current lack of affirmative knowledge of such facts.
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/A, Registration No. 333-8305,
which was declared effective on June 11, 1999, the information detailed in the
Company's Form 10-KSB for the fiscal year ended March 31, 1999 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.
<PAGE>
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 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, 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.
Part II -- OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
No changes have occurred in the status of the legal proceedings previously
disclosed by the Company.
ITEM 4. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective September 30, 2000, the Company exercised a call option under a
subscription agreement, dated January 16, 1998 and sold to an accredited and
sophisticated investor 783,666 shares of common stock. Various investors
exercised options for 11,538 shares under a subscription agreement, dated
September 20, 1997. As of September 30, 2000, the Company had received an amount
equal to $2,674,797 from the exercise of the options. In connection with this
issuance of such options, Interfinance Investments Co. 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% or $ 80,243, which has been paid.
UTG entered into a agreement to purchase telecom switches March 29, 2000. The
purchase price of approximately USD150,877 and was paid as follows: $60,354 in
cash, a leasing agreement worth of USD30,177 and 7600 shares of common stock
valued at $60,354.
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.
ITEM 5. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 6. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not Applicable
ITEM 7. OTHER INFORMATION
Not Applicable
<PAGE>
Part II
ITEM 8. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
Not Applicable
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 20, 2000 By: /s/ Ueli Ernst
----------------------------------------
Ueli Ernst, Chairman and CEO
(Principal Executive Officer)
By: /s/ Klaus Brenner
----------------------------------------
Klaus Brenner, Tresurer, Director
<PAGE>
Reference is made below to exhibits indicated with the following footnotes which
are incorporated herein by reference thereto:
(1) Filed with the U.S. Securities and Exchange Commission (the "Commission")
as an exhibit to the Registration Statement on Form SB-2 (No. 333-8305)
filed on July 17, 1996 (the "SB-2").
(2) Filed with the Commission as an exhibit to Amendment No. 1 to the SB-2
filed on August 16, 1996.
(3) Filed with the Commission as an exhibit to Amendment No. 2 to the SB-2
filed on August 30, 1996.
(4) Filed with the Commission as an exhibit to the Company's Form 10-QSB for
the quarterly period ended December 31, 1996.
(5) Filed with the Commission as an exhibit to the Company's Form 10-KSB for
the fiscal year ended March 31, 1997.
(6) Filed with the Commission as an exhibit to the Company's Form 10-QSB for
the quarterly period ended June 30, 1997.
(7) Filed with the Commission as an exhibit to the Company's Form 10-QSB for
the quarterly period ended September 30, 1997.
(8) Filed with the Commission as an exhibit to the Company's Form 10-KSB for
the fiscal year ended March 31, 1998.
(9) Filed with the Commission as an exhibit to the Company's Form 10-QSB for
the quarterly period ended September 30, 1998.
(10) Filed with the Commission as an exhibit to the Company's Form S-3 filed on
February 3, 1999.
(11) Filed with the Commission as an exhibit to the Company's Form 10-QSB for
the quarterly period ended December 31, 1998.
(12) Filed with the Commission as an exhibit to the Company's Form 10-KSB for
the fiscal year ended March 31, 1999.
(13) Filed with the Commission as an exhibit to the Company's Form 10-QSB for
the quarterly period ended June, 1999.
(14) Filed with the Commission as an exhibit to the Company's Form 10-QSB for
the quarterly ended September 30, 1999.
(15) Filed with the Commission as an exhibit to the Company's Form 10-QSB for
the quarterly ended December 31, 1999.
(16) Filed with the Commission as an exhibit to the Company's Form 10-KSB for
the fiscal year ended March 31, 2000
(17) Filed with the Commission as an exhibit to the Company's Form 10-QSB for
the quarterly period ended June 30, 2000.
<PAGE>
Exhibits indicated with footnote are executive contracts or compensatory plan
arrangements filed in the Form 10QSB.
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of the Company (1)
3.1(a) Amendment to Certificate of Incorporation of the Company (2)
3.1(b) Amendment to Certificate of Incorporation of the Company (3)
3.1(c) Amendment to Certificate of Incorporation of the Company (8)
3.2 By-laws of the Company (1)
10.1 Stock Purchase Agreement dated April 30, 1996 between
Registrant and Tom Combrinck (2)
10.2 Subscription Agreement dated April 30, 1996 between Registrant
and Interfinance Inv. Co. Ltd. for the purchase of 183,333
shares of Common Stock (2)
10.3 Subscription Agreement dated April 30, 1996 between Registrant
and Interfinance Inv. Co. Ltd. for the purchase of 2,566,667
shares of Common Stock (2)
10.4 Promissory Note in the principal amount of $2,799,974, dated
April 30 1996, by Interfinance Inv. Co. Ltd. in favor of
Registrant (2)
10.5 Security and Pledge Agreement dated April 30, 1996 between
Registrant and Interfinance Inv. Co. Ltd. (2)
10.6 Registration Rights Agreement dated April 30, 1996 between
Registrant and Interfinance Inv. Co. Ltd. (2)
10.7 Agreement dated December 21, 1995 between Registrant and
Telemedia International, together with Assignment dated July 1,
1996 (2)
10.8 Lease beginning April 1, 1996 between Registrant and Guido M.
Renggli (2)
10.9 Management Agreement dated March 14, 1996 between Registrant
and Andreas Popovici (2), (11)
10.10 Management Agreement dated April 4, 1996 between Registrant and
Franco Reinschmidt (2), (11)
10.11 Form of Customer Contract of Registrant (2)
10.12 Subscription Agreement dated August 15, 1996, between
Registrant and Interfinance Inv. Co. Ltd., for the purchase of
400,000 shares of Common Stock (2)
10.13 Promissory Note in the principal amount of $990,000 dated
August 15, 1996, by Interfinance Inv. Co. Ltd., in favor of
the Registrant (2)
10.14 Security and Pledge Agreement dated August 15, 1996 between
Registrant and Interfinance Inv. Co. Ltd. (2)
10.15 Subscription Agreement dated as of January 15, 1997 between the
Company and Interfinance Inv. Co. Ltd. (4)
10.16 Subscription Agreement dated as of November 21, 1996 between
the Company and Interfinance Inv. Co. Ltd. (4)
10.17 Joint Instructions of Registrant and Thomas Combrinck and
Interfinance Inv. Co. Ltd. dated January 16, 1997 (5)
10.18 Consultancy Agreement effective September 1, 1996 between UTG
Communications (Europe) AG and Birand Ltd. (5), (11)
10.19 Share Purchase Agreement among UTG Communications Belgium N.V.,
Messrs. Luc and Tom Van den Bogart and UTG Communications
Holding AG. (5)
10.20 Pledge Agreement among UTG Communications Belgium N.V., Messrs.
Luc and Tom Van den Bogart and UTG Communications Holding AG.
(5)
10.21 Employment Agreement dated June 30, 1997 between the Registrant
and Keith Rhea (5), (11)
10.22 Cooperation Agreement dated August 6, 1997 between Trafficom
and UTG Hungary (6)
10.23 Consulting Agreement between the Company and Telepath, Ltd.
(7),(11)
10.24 Share Purchase Agreement dated December 29, 1997 between
Portmann Trading AG and UTG Communications Holding AG (8)
10.25 Share Purchase Agreement dated between Portmann Trading
AG and UTG Communications Holding AG (8)
10.26 Asset Purchase Agreement dated December 30, 1997 between UTG
Communications (Europe) AG and UTG Communications Holding AG
(8)
10.27 Subscription Agreement, dated as of January 16, 1998 by and
between the Registrant and Medfield Investment S.A.
("Medfield") (8)
10.28 Agreement between Medfield and the Registrant, dated May 16,
1998 (8)
10.29 Form of Warrant issued to Medfield (8)
10.30 Registration Rights Agreement, dated as of March 23, 1998
between the Registrant and Medfield (8)
10.31 Settlement Agreement among Fritz K. Wolff, Birand Ltd.,
TeleInvest Ltd. and UTG International, Inc., together with
Share Purchase Agreement dated as of May 31, 1998 among Fritz
K. Wolff, TeleInvest Ltd. and Interfinance Inv. Co. Ltd. (8)
10.32 Loan Agreement, dated August 13, 1998(9)
10.33 Agreement dated September 25, 1998 between Medfield and the
Company (9)
10.34 Interconnection Agreement dated August 21, 1998 between the
Company and Swisscom (9)
10.35 Shareholders Agreement, dated as of November 16, 1998 (10)
10.36 Co-operation and Purchase agreement with Mr. Scotti and others
to acquire FM Market AG.
10.37 Compensation agreement with Ueli Ernst dated July 1,2000
10.38 Compensation agreement with Klaus Brenner dated July 1,2000
21.1 List of Subsidiaries
23.1 Consent of Merdinger, Fruchter, Rosen & Corso, P.C.
27.1 Financial Data Schedule
