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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to __________________
---------------
Commission File Number 01-14271
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USOL Holdings, Inc.
(Exact name of Registrant as specified in its charter)
Oregon 93-1197477
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10300 Metric Boulevard
Austin, Texas 78758
(Address of principal executive offices)
Registrant's telephone number, including area code: (512) 651-3767
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods 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 [ ]
As of August 10, 2000 the Registrant had 7,803,161 shares of its no par
value Common Stock outstanding.
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<PAGE>
<TABLE>
<CAPTION>
INDEX
Page
----
<S> <C> <C> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements--USOL Holdings, Inc.
Condensed Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999............................... 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2000 and 1999................. 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999........................... 5
Notes to Condensed Consolidated Financial Statements.............. 6
Financial Statements--U.S. OnLine Communications, Inc.
Condensed Consolidated Statement of Operations for the
Three and Six Months Ended June 30, 1999.......................... 9
Condensed Consolidated Statement of Cash Flows for the Six
Months Ended June 30, 1999........................................ 10
Notes to Condensed Consolidated Financial Statements.............. 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 12
Forward-Looking Statements......................................... 12
General............................................................ 12
Overview........................................................... 12
Three Months Ended June 30, 2000 Compared to
Three Months Ended June 30, 1999................................... 12
Six Months Ended June 30, 2000 Compared to
Six Months Ended June 30, 1999..................................... 13
Liquidity and Capital Resources.................................... 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk........................................................ 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 15
Item 2. Changes in Securities.............................................. 15
Item 3. Defaults Upon Senior Securities.................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................ 15
Item 5. Other Information.................................................. 15
Item 6. Exhibits and Reports on Form 8-K................................... 15
Signatures...................................................................................... 16
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
USOL HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999
June 30, December 31,
2000 1999
ASSETS ----------------- ------------------
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 3,570,881 $ 13,637,511
Accounts receivable, net of allowance for doubtful
accounts of $272,151 and $146,721 at June 30, 2000
and December 31, 1999, respectively.......................... 810,291 535,262
Notes receivable, related parties.............................. 162,657 102,742
Supply inventory............................................... 1,129,562 818,837
Other current assets........................................... 510,746 221,609
---------------- ----------------
Total current assets................................... 6,184,137 15,315,961
Property and equipment, net...................................... 19,493,297 16,458,736
GOODWILL AND OTHER INTANGIBLES, net 35,977,585 35,159,285
DEFERRED LOAN COSTS, net 1,670,150 1,780,903
Other assets..................................................... 345,166 4,210,588
---------------- ----------------
Total assets........................................... $ 63,670,335 $ 72,925,473
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 788,728 $ 1,369,636
Accrued liabilities............................................ 1,608,559 2,416,239
Current portion of capital lease obligations................... 527,317 601,784
Preferred dividends payable.................................... 1,110,000 1,973,333
Deferred revenue............................................... 631,613 419,262
Related-party payable.......................................... 294,857 294,857
---------------- ----------------
Total current liabilities.............................. 4,961,074 7,075,111
---------------- ----------------
CAPITAL LEASE OBLIGATIONS, less current portion.................. 1,500,033 1,749,818
---------------- ----------------
OTHER LONG-TERM LIABILITIES...................................... 59,298 48,666
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST................................................ 77,942 58,504
---------------- ----------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, no par value; 5,000,000 shares
authorized--
Series A, 1,325,000 shares issued and outstanding;
liquidation preference of $33,125,000..................... 30,675,361 30,675,361
Series B, 155,000 shares issued and outstanding;
liquidation preference of $3,875,000...................... 3,588,439 3,588,439
Common stock, no par value; 50,000,000 shares authorized,
7,675,376 and 6,892,668 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively...... 41,428,647 36,735,911
Deferred compensation.......................................... (724,977) (344,201)
Accumulated deficit............................................ (17,895,482) (6,662,136)
---------------- ----------------
Total stockholders' equity............................. 57,071,988 63,993,374
---------------- ----------------
Total liabilities and stockholders' equity............. $ 63,670,335 $ 72,925,473
================ ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
USOL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three and Six Months Ended
June 30, 2000 and 1999
(Note 2)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue........................................ $ 2,460,587 $ -- $ 4,722,100 $ --
------------- ------------- -------------- -------------
Expenses:
Operating.................................... 2,475,122 -- 4,198,956 --
Selling, general and administrative.......... 1,955,450 -- 4,055,044 --
Depreciation and amortization................ 1,632,349 -- 3,200,277 --
Stock compensation expense................... 149,020 849,575 351,448 849,575
Write-down of capitalized software costs..... -- -- 1,870,551 --
------------- ------------- -------------- -------------
Total operating expenses............. 6,211,941 849,575 13,676,276 849,575
------------- ------------- -------------- -------------
Loss from operations................. (3,751,354) (849,575) (8,954,176) (849,575)
------------- ------------- -------------- -------------
Other INCOME (EXPENSE):
Interest, net................................ (19,240) -- 25,934 --
Loss on disposal of assets................... (56,144) -- (56,144) --
------------- ------------- -------------- -------------
(75,384) -- (30,210) --
------------- ------------- --------------- -------------
LOSS BEFORE MINORITY INTEREST.................. (3,826,738) (849,575) (8,984,386) (849,575)
MINORITY INTEREST IN INCOME OF
SUBSIDIARY................................... (15,986) -- (28,960) --
------------- ------------- --------------- -------------
Net loss............................. $ (3,842,724) $ (849,575) $ (9,013,346) $ (849,575)
============= ============= ============== =============
PREFERRED STOCK DIVIDENDS...................... (1,110,000) -- (2,220,000) --
------------- ------------- -------------- -------------
LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS................................. $ (4,952,724) $ (849,575) $ (11,233,346) $ (849,575)
============= ============= ============== =============
PER SHARE AMOUNTS:.............................
Basic and diluted loss per common share...... $ (.65) $ (2.00) $ (1.50) $ (2.00)
============= ============= ============== =============
Basic and diluted weighted average
common shares.............................. 7,642,192 425,000 7,492,205 425,000
============= ============= ============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
USOL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 30, 2000 and 1999
(Note 2)
2000 1999
-------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (9,013,346) $ (849,575)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization........................ 3,200,277 --
Stock compensation expense........................... 351,448 849,575
Write-down of capitalized software costs............. 1,870,551 --
Minority interest.................................... 28,960 --
Changes in assets and liabilities--
Accounts receivable............................... (275,029) --
Other assets...................................... (568,454) --
Accounts payable and accrued liabilities.......... (1,388,587) --
Deferred revenue and other........................ 222,846 --
------------- -------------
Net cash used in operating activities........ (5,571,334) --
------------- -------------
Cash flows from investing activities:
Purchases of property, equipment and other............... (4,969,334) --
Loans to related parties, net............................ (57,258) --
------------- -------------
Net cash used in investing activities........ (5,026,592) --
------------- -------------
Cash flows from financing activities:
Principal payments under capital leases.................. (324,252) --
Proceeds from the exercise of stock options and
warrants............................................... 877,178 --
Deferred loan costs...................................... (21,630) --
Proceeds from the sale of common stock................... -- 425
------------- -------------
Net cash provided by financing activities.... 531,296 425
------------- -------------
Net decrease in cash and cash equivalents.... (10,066,630) 425
Cash and cash equivalents, beginning of period............. 13,637,511 --
------------- -------------
Cash and cash equivalents, end of period................... $ 3,570,881 $ 425
============= =============
Supplemental DISCLOSURE OF cash flow information:
Cash paid for interest................................. $ 368,612 $ --
Deferred compensation.................................. 540,000 --
Accretion of dividends on preferred stock.............. 2,220,000 --
Issuance of common stock as payment of preferred
stock dividends..................................... 3,083,333 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
USOL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(1) Unaudited condensed financial Statements
The financial statements included herein have been prepared by USOL
Holdings, Inc. (the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures
included herein are adequate to make the information presented not misleading. A
description of the Company's accounting policies and other financial information
is included in the audited financial statements as filed with the Securities and
Exchange Commission in the Company's Annual Report on Form 10-KSB.
The financial statements and related notes as of June 30, 2000, and for the
three and six months ended June 30, 2000 are unaudited but, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, which are necessary for a fair presentation of the financial
condition, results of operations and cash flows of the Company. The operating
results for the three and six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2000.
(2) Business Organization and Basis of Presentation
USOL Holdings, Inc. (formerly FirstLink Communications, Inc.), an Oregon
corporation, its wholly owned subsidiary USOL, Inc. ("USOL"), and USOL's 50
percent owned subsidiary, U.S. Austin Cable Association I, Ltd. ("USAC")
(collectively referred to herein as the "Company"), provide integrated
telecommunications services including local telephone, long distance telephone,
enhanced calling features, cable television and high-speed Internet access to
residents of multi-family apartment complexes and condominiums ("MDUs") in
Texas, Oregon, Virginia and Colorado. The services are provided to the tenants
in accordance with long-term operating agreements between the Company and the
property owners under which the property owners receive royalties from the
telecommunication revenues generated from their properties. The agreements
provide the tenants with the option to use either the Company or the local
telephone and long distance carriers for telephone services and Internet access.
Tenants desiring to subscribe to cable television are generally required to
subscribe to the Company's services.
USOL, Inc. also wholly owns TheResidentClub, Inc. ("TRC"), a business that
develops Internet platforms that provide a range of private-labeled online
solutions for MDU communities and other residential markets.
On December 15, 1999, the shareholders of FirstLink Communications, Inc.
("FirstLink") approved a merger (the "Merger") with USOL Holdings, Inc.
("Holdings"), a Delaware corporation, in a stock-for-stock transaction with
FirstLink as the legal survivor. Concurrent with the Merger, FirstLink changed
its name to USOL Holdings, Inc. The Merger was completed on December 22, 1999.
The Merger was accounted for as a reverse merger under the purchase method
of accounting. Accordingly, the legal form of the transaction has been ignored
and Holdings has been treated as the accounting acquirer. The excess of purchase
price over the fair market value of FirstLink's net assets has been recorded as
goodwill and is being amortized over a 10-year period. The purchase price of
$32,051,611 was allocated as follows:
Current assets.......... $ 2,466,584
Fixed assets............ 1,558,060
Current liabilities..... (802,968)
Capital leases.......... (177,277)
Other liabilities....... (50,700)
Goodwill................ 29,057,912
-------------
$ 32,051,611
=============
6
<PAGE>
Holdings was formed on May 12, 1999 for the purpose of acquiring entities
providing telecommunications, cable television, Internet access and other
services to residents of MDUs. On July 21, 1999, Holdings, through its
subsidiary USOL, Inc. ("USOL"), purchased substantially all of the assets and
certain liabilities of U.S. OnLine Communications, Inc. ("US OnLine"). US OnLine
provided telecommunications and cable television services to residents of MDUs
in Texas, Virginia and Colorado. Pursuant to the asset purchase agreement,
Holdings exchanged 750,000 shares of Holdings' common stock valued at $2.00 per
share, warrants to purchase 1,500,000 shares of Holdings' common stock at an
exercise price of $5.50 per share, and $845,000 of cash. The Company valued the
warrants, using the Black-Scholes pricing model, at approximately $1,324,800.
The Black-Scholes valuation was based on the warrant terms using Holdings' then
current stock price of $2.00 per share and a volatility percentage
representative of a public company operating in this industry. The total
purchase price was $3,669,800. The acquisition was accounted for under the
purchase method of accounting with the purchase price allocated as follows:
Current assets.......... $ 2,357,577
Fixed assets............ 13,648,334
Other assets............ 1,029,117
Current liabilities..... (16,823,702)
Minority interest....... (236,413)
Goodwill................ 3,694,887
-------------
$ 3,669,800
=============
Also on July 21, 1999, Holdings through its subsidiary TRC, purchased
certain assets and contract rights from GMAC Commercial Mortgage Corporation
("GMACCM"). Pursuant to the asset purchase agreement, the purchase price of
$2,843,800 consisted of cash of $2,500,000 and a warrant to purchase 325,000
shares of Holdings' common stock at an exercise price of $2.00 per share.
Holdings' valued this warrant, using the Black-Scholes pricing model, at
approximately $343,800. The Black-Scholes valuation was based on the warrant
terms using Holdings' then current stock price of $2.00 per share and a
volatility percentage representative of a public company operating in this
industry. The acquisition was accounted for as a purchase with the entire
purchase price being recorded as goodwill.
The purchase price allocation for these acquisitions is preliminary and
further refinements may be made in accordance with generally accepted accounting
principles.
The table below reflects the unaudited combined results of US OnLine, the
Company's accounting predecessor, and FirstLink for the six months ended June
30, 1999:
<TABLE>
<CAPTION>
US OnLine FirstLink
(Preacquisition) (Premerger) Combined
---------------- ------------ -------------
<S> <C> <C> <C>
Revenues.................................. $ 2,831,079 $ 676,415 $ 3,507,494
Loss from operations...................... (1,650,765) (803,926) (2,454,691)
Loss before minority interest............. (3,451,406) (754,188) (4,205,594)
Net loss.................................. (3,448,992) (754,188) (4,203,180)
</TABLE>
Financial statements for the three and six months ended June 30, 2000 for
US OnLine are included elsewhere in this Form 10-QSB.
(3) Write-down of Capitalized Software Costs
On March 31, 2000, the Company signed a five-year agreement with CSG
Systems, Inc. to outsource its billing and customer care system. As a result,
the Company wrote off $1,870,551 of previously capitalized software development
costs associated with the in-house build of the Company's next generation
billing and customer care system, which will not be utilized.
(4) Segment Disclosure
The Company's operations are classified into two reportable business
segments: USOL and TRC. The Company's two reportable business segments are
managed separately based on fundamental differences in their operations.
7
<PAGE>
USOL provides integrated telecommunications services including local and
long-distance telephone, enhanced calling features, cable television and
high-speed Internet access to residents of multi-family apartment complexes and
condominiums in Texas, Oregon, Virginia and Colorado.
TRC develops Internet platforms that provide a range of private labeled
online solutions for MDU communities and other residential markets.
The operating results by business segment were as follows for the six
months ended June 30, 2000:
<TABLE>
<CAPTION>
USOL, Inc. TRC Consolidated
------------- ------------- -------------
<S> <C> <C> <C>
Revenues........................... $ 4,717,765 $ 4,335 $ 4,722,100
Segment net loss................... (7,262,701) (1,750,645) (9,013,346)
Total assets....................... 59,754,676 3,915,659 63,670,335
Capital expenditures............... 4,076,594 892,740 4,969,334
Depreciation and amortization...... 3,025,995 174,282 3,200,277
</TABLE>
(5) loss Per Common Share
Basic and diluted loss per common share is calculated by dividing the net
loss by the weighted average number of shares outstanding. The calculation of
basic and diluted loss per common share does not assume conversion, exercise or
contingent issuance of securities that would have an anti-dilutive effect on
earnings per share. The following common stock equivalents were excluded from
diluted net loss per share calculations, as their net effect would have been
antidilutive:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Preferred stock shares as converted.... 18,500,000 -- 18,500,000 --
Common stock warrants.................. 3,106,863 -- 3,106,863 --
Stock options--
Shares............................... 2,234,667 -- 2,234,667 --
Weighted average price............... $2.21 -- $2.21 --
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three and Six Months Ended
June 30, 1999
(Note 2)
Three Months Six Months Ended
Ended ----------------
June 30, 1999 June 30, 1999
------------- ----------------
<S> <C> <C>
REVENUES............................... $ 1,420,164 $ 2,831,079
------------ ------------
OPERATING EXPENSES:
Operating........................... 1,052,216 2,100,739
Selling, general and administrative. 763,623 1,554,807
Depreciation and amortization....... 414,557 826,298
------------ ------------
Total expenses................ 2,230,396 4,481,844
------------ ------------
LOSS FROM OPERATIONS................... (810,232) (1,650,765)
------------ ------------
OTHER:
Interest expense.................... (667,949) (1,722,942)
Other expense, net.................. (56,823) (77,699)
------------ ------------
Total other................... (724,772) (1,800,641)
------------ ------------
LOSS BEFORE MINORITY
INTEREST............................. (1,535,004) (3,451,406)
MINORITY INTEREST IN
(INCOME) LOSS OF
SUBSIDIARY.......................... (237) 2,414
------------ ------------
Net loss...................... $ (1,535,241) $ (3,448,992)
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 30, 1999
(Note 2)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................................... $ (3,448,992)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization................................................... 1,411,538
Minority interest............................................................... (2,414)
Accretion of deferred compensation.............................................. 51,563
Changes in operating assets and liabilities-
Restricted cash............................................................... 352,071
Accounts receivable, net...................................................... 164,585
Other current assets.......................................................... (60,229)
Accounts payable and accrued expenses......................................... 876,327
Deferred revenue.............................................................. (25,966)
-------------
Net cash used in operating activities................................. (681,517)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................................. (443,515)
-------------
Net cash used in investing activities................................. (443,515)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt....................................................... (145,100)
Proceeds from short-term notes payable........................................... 1,475,000
-------------
Net cash provided by financing activities............................. 1,329,900
-------------
INCREASE IN CASH AND CASH EQUIVALENTS............................................... 204,868
CASH AND CASH EQUIVALENTS, beginning of period...................................... 1,007,988
-------------
CASH AND CASH EQUIVALENTS, end of period............................................ $ 1,212,856
=============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
10
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(1) unaudited condensed financial Statements
The financial statements included herein have been prepared by U.S. OnLine
Communications, Inc. ("US OnLine") pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although US OnLine believes that the disclosures included
herein are adequate to make the information presented not misleading. A
description of US OnLine's accounting policies and other financial information
is included in the audited financial statements as filed with the Securities and
Exchange Commission in USOL Holdings, Inc.'s Annual Report on Form 10-KSB.
The financial statements and related notes as of June 30, 1999 and for the
three and six months ended June 30, 1999 are unaudited but, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, which are necessary for a fair presentation of the financial
condition, results of operations and cash flows of US OnLine.
(2) Business Organization and Basis of Presentation
US OnLine and its 50% owned subsidiary, U.S.-Austin Cable Associates I, Ltd.
("USAC") (collectively referred to herein as "US OnLine"), provided integrated
telecommunications services including local telephone, long distance telephone,
enhanced calling features and cable television to residents of multifamily
apartment complexes and condominiums in Texas, Virginia and Colorado. The
services were provided to the tenants in accordance with long-term operating
agreements between US OnLine and the property owners under which the property
owners received royalties from the telecommunication revenues generated from
their properties. The agreements provided the tenants with the option to use
either US OnLine or the local telephone and long-distance carriers for telephone
services. Tenants who subscribed to cable television had to utilize US OnLine.
In July 1999, the Company sold substantially all its assets and certain
liabilities. As such, US OnLine is no longer providing the services described
above.
US OnLine was incorporated March 5, 1998, by the management of U.S. OnLine
Communications L.L.C. (the "LLC") for the purpose of acquiring substantially all
of the assets and certain of the liabilities of the LLC. This transaction was
consummated on July 21, 1998. US OnLine issued 800,000 shares of its common
stock and a $3 million note to acquire certain assets and liabilities of
approximately $17,166,000 and $17,985,000, respectively, of the LLC. The assets
acquired included the 50 percent interest held by the LLC in USAC. In accordance
with generally accepted accounting principles, US OnLine recorded the purchased
assets and liabilities at the LLC's historical cost since US OnLine and the LLC
were entities under common control.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The statements contained in this Form 10-QSB ("Quarterly Report") of the
Company which are not historical in nature are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include statements in this Item 2., Management's
Discussion and Analysis of Financial Condition and Results of Operations,
regarding intent, belief or current expectations of the Company or its officers
with respect to the development or acquisition of new business.
Such forward-looking statements involve certain risks and uncertainties
that could cause actual results to differ materially from anticipated results.
These risks and uncertainties include regulatory developments, the ability of
the Company to acquire or build passings on economical terms and conditions, the
risk of insufficient cable and phone penetrations, the ability of the Company to
effectively manage growth, general and local market conditions including the
presence of competing companies, as well as other factors as may be identified
from time to time in the Company's filings with the Securities and Exchange
Commission or in the Company's press releases.
General
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Condensed
Financial Statements and the Notes thereto of the Company and US OnLine, the
Company's predecessor, included elsewhere in this Quarterly Report.
Overview
Through USOL, we provide bundled telecommunications services to residents
of multi-family apartment and condominium complexes. Services provided include
cable television and enhanced local and long-distance telephone services and
high-speed Internet access. As of June 30, 2000, the Company passed 24,521
cable, 12,027 phone and 4,197 Internet units in Austin, Dallas/Ft. Worth,
Denver, Houston, Portland, San Antonio and Washington, D.C. A passing is an
apartment unit capable of receiving a respective service. The Company had 16,056
cable, 5,111 telephone and 286 Internet subscribers, respectively. Through TRC,
we develop Internet platforms to provide a range of private labeled online
solutions for MDU communities and other residential markets. To date, TRC
revenues have been nominal.
For purposes of management's discussion and analysis of results of
operations, the results for the six months ended June 30, 1999 are those of the
Company's predecessor, US OnLine.
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
The Company reported a net loss of $4,952,724 for the three months ended
June 30, 2000 compared to a net loss of $1,535,241 for the same period of the
prior year. The increase in net loss is attributable to increased depreciation
and amortization expenses (primarily amortization of goodwill) as well as
increased selling, general and administrative expenses.
Revenue increased $1,040,423 or 73% for the three months ended June 30,
2000 compared to the same period of the prior year. The increase in revenue is
due to an increase in operational passings, which is primarily the result of the
Company operating in two additional markets (Portland and Houston) in 2000
compared to 1999.
Operating expense increased $1,422,906 or 135% for the three months ended
June 30, 2000 compared to the same period of the prior year. The increase in
operating expense between periods is primarily due to the addition of two new
markets between periods, as well as increases in cable programming, leased local
telephony circuits and wholesale long-distance minutes, all associated with the
increase in revenue. Operating expense was 101% of revenue for the three-month
period in 2000 compared to 74% in the same period of the prior year.
Selling, general and administrative expense increased $1,191,827 or 156%
for the three months ended June 30, 2000 compared to the same period of the
prior year. The increase in selling, general and administrative expense was
primarily the result of increases in payroll costs, travel expense, royalties,
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costs associated with TRC, and increases in other costs directly related to the
Company's public status in 2000 such as legal, accounting, investor relations
and insurance. Selling, general and administrative expense was 79% of revenue
for the three months ended June 30, 2000 compared to 54% for the same period of
the prior year.
Depreciation and amortization expense increased $1,217,792 or 294% for the
three months ended June 30, 2000 compared to the same period of the prior year.
The increase in depreciation and amortization expense resulted primarily from
goodwill amortization in 2000 that was not incurred in 1999. Depreciation and
amortization expense was 66% of revenue for the three months ended June 30, 2000
compared to 29% for the same period of the prior year.
The Company had other expense of $75,384 during the three months ended June
30, 2000 compared to $724,772 during the same period of the prior year. The
decrease in other expense between periods is primarily the result of the Company
having certain interest bearing debt instruments outstanding in 1999 that did
not exist in 2000.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
The Company reported a net loss of $9,013,346 for the six months ended June
30, 2000 compared to a net loss of $3,448,992 for the same period of the prior
year. The increase in net loss is attributable to a one-time write-down of
capitalized software costs in 2000 of $1,870,551, increased depreciation and
amortization expenses (primarily amortization of goodwill) and increased
selling, general and administrative expenses.
Revenue increased $1,891,021 or 67% for the six months ended June 30, 2000
compared to the same period of the prior year. The increase in revenue is due to
an increase in operational passings, which is primarily the result of the
Company operating in two additional markets (Portland and Houston) in 2000
compared to 1999.
Operating expense increased $2,098,217 or 100% for the six months ended
June 30, 2000 compared to the same period of the prior year. The increase in
operating expense between periods is primarily due to the addition of two new
markets between periods, as well as increases in cable programming, leased local
telephony circuits and wholesale long-distance minutes, all associated with the
increase in revenue. Operating expense was 89% of revenue for the six-month
period in 2000 compared to 74% in the same period of the prior year.
Selling, general and administrative expense increased $2,500,237 or 161%
for the six months ended June 30, 2000 compared to the same period of the prior
year. The increase in selling, general and administrative expense was primarily
the result of increases in payroll costs, travel expenses, royalties, costs
associated with TRC, and increases in other costs directly related to the
Company's public status in 2000 such as legal, accounting, investor relations
and insurance. Selling, general and administrative expense was 86% of revenue
for the six months ended June 30, 2000 compared to 55% for the same period of
the prior year.
Depreciation and amortization expense increased $2,373,979 or 287% for the
six months ended June 30, 2000 compared to the same period of the prior year.
The increase in depreciation and amortization expense resulted primarily from
goodwill amortization in 2000 that was not incurred in 1999. Depreciation and
amortization expense was 68% of revenue for the six months ended June 30, 2000
compared to 29% for the same period of the prior year.
The Company had other expense of $30,210 during the six months ended June
30, 2000 compared to $1,800,641 during the same period of the prior year. The
reduction in other expense between periods is the combined result of the Company
having higher cash balances in 2000 when compared to 1999 (resulting in interest
income), as well as the Company having certain interest bearing debt instruments
in 1999 that were not outstanding in 2000.
Liquidity and Capital Resources
At June 30, 2000, the Company had $3,570,881 of cash and cash equivalents
compared to $13,637,511 at December 31, 1999. Net cash of $5,571,334 was used in
operating activities for the six months ended June 30, 2000, which was a result
of the Company's net loss for the period combined with using approximately $2
million of working capital, offset by noncash charges related to depreciation,
amortization, the write-down of certain capitalized software costs and stock
compensation expense.
Net cash of $5,026,592 was used in investing activities, which was
primarily the result of purchases of property and equipment related to acquiring
or building new passings.
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Net cash of $531,296 was provided by financing activities, which primarily
consisted of proceeds from the exercise of stock options and warrants offset by
principal payments under capital leases.
As more fully described elsewhere in this Form 10-QSB, we have two separate
and distinct businesses with USOL and TRC. We believe that our cash on hand and
available proceeds from the Company's credit facility (the "Facility") should be
sufficient to fund the activities of USOL for at least the next 12 months.
However, an integral part of the USOL business plan is to grow through
acquisitions. Should we find acquisition opportunities that are either larger in
magnitude or in number than our business plan anticipates, then additional
funding may be required sooner than planned.
The Facility allows us to borrow up to $35 million for a two-year period
commencing January 1, 2000 and ending December 31, 2001, at which time it will
convert to a five-year term loan. The Facility bears interest at our option at
an annual rate of prime plus 2.75% or LIBOR plus 3.75%. Borrowings cannot take
place under the Facility until we have used all of the proceeds from the
preferred stock sale. We anticipate that this will occur in the third quarter of
2000. The Facility is secured by all of the assets of the Company, excluding
TRC. At June 30, 2000, there were no borrowings under the Facility.
After the first draw under the Facility, USOL will be dependent upon the
Facility for its liquidity requirements. Our ability to borrow under the
Facility will be dependent upon USOL's ability to meet the quarterly financial
covenants set forth therein or, in the event(s) of noncompliance, obtain waivers
or amendments from the lenders. No assurance can be given that USOL will be able
to maintain compliance with the financial covenants of the Facility or, in the
event of a default, that the lenders will agree to waive the default. Unless
alternative financing sources were obtained, the inability to borrow under the
Facility would have a material adverse effect on USOL.
The Facility limits the amount of funding that can be provided to TRC from
the preferred stock and Facility proceeds to an aggregate of $2 million, which
was temporarily increased to $3 million through August 31, 2000. As of June 30,
2000, we had provided approximately $3.3 million of funding to TRC under an
intercompany note agreement resulting in a technical default under the Facility.
Accordingly, TRC will require funding from other sources in order to execute its
business plan. The amount of funding required to execute the TRC business plan
is still being determined and is dependent upon numerous variables. Management
expects that approximately $20 million to $30 million in funding will be
required over the next 18 to 24 months to execute the TRC business plan. Any
delays in raising the required funding will delay executing the TRC business
plan, which could adversely impact TRC and the Company.
In August 2000, we signed an engagement letter (the "Agreement") with
Newman & Associates, Inc. ("Newman"), a subsidiary of GMACCM, to assist us in
obtaining financing for TRC and/or the Company. Pursuant to the terms of the
Agreement, Newman will loan, subject to certain conditions, $5 million to TRC
under a secured promissory note (the "Note"). The Note bears interest at 13% per
annum, payable semi-annually on February 3 and August 3. The Note matures on
August 3, 2001 and is secured by the stock and assets of TRC.
On August 4, 2000, Newman advanced $2.5 million under the Note. Pursuant to
the terms of the Facility, we utilized approximately $1.7 million of the
proceeds to repay the intercompany note between USOL and TRC, thus reducing the
amount funded to TRC by USOL to $2 million. As a result of the repayment, we
remedied the technical default under the Facility mentioned above, bringing the
Company into compliance. The ability to draw the remaining $2.5 million is
subject to satisfying certain conditions.
We believe that the remaining proceeds from the Note (assuming the ability
to fully draw) should be adequate to fund TRC's operations for at least the next
six months, at which time additional financing will be required. As previously
mentioned above, we have retained Newman to assist us in obtaining such
financing.
We maintain various cancelable and noncancelable service agreements for
telecommunications services with several LECs and one IXC that commit us to the
LECs' and IXCs' services. These agreements require minimum monthly charges
ranging from $340 to $25,000 per month and have terms ranging from one year to
five years. We also have agreements with certain cable providers to purchase
bulk cable signal at some of our properties. The agreements provide for us to
pay fixed monthly amounts regardless of the number of customers we have at the
properties. As of December 31, 1999, the fixed minimum charges for all
noncancelable agreements over the life of the agreements was $2,515,635.
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Year 2000
The "Year 2000" issue is a general term used to describe the various
problems that may have resulted from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the Year 2000
was approached and reached. These problems arise from hardware and software
unable to distinguish dates in the "2000's" from dates in the "1900's" and from
other sources, such as the use of special codes and conventions in software that
make use of a date field. We did not experience any significant hardware or
software failures as a result of the Year 2000 date change.
Preferred Stock Dividends
The Series A and Series B Preferred Stock accrete dividends from the date of
issuance at the rate of 12% per year, payable quarterly in arrears on the last
day of March, June, September and December. We have the option of paying the
dividend in cash or in shares of common stock. The Facility prohibits the paying
of such dividends in cash.
Adoption of New Accounting Standards
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
adopted SAB 101 as required in the first quarter of 2000. The adoption of SAB
101 did not have a material impact on the Company's results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material existing or pending legal proceedings to which the
Company is a party.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------------
27 - Financial Data
Schedule
(b) Reports
No reports on Form 8-K were filed during the quarter for which this
report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
USOL HOLDINGS, INC.
By: /s/ Robert G. Solomon
----------------------
Robert G. Solomon, CEO
Dated August 10, 2000
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