================================================================================
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 September 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
---------------
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 November 17, 2000 the Registrant had 7,925,494 shares of its no par value
Common Stock outstanding.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
INDEX
PART I FINANCIAL INFORMATION
Page
----
<S> <C>
Item 1. Financial Statements--USOL Holdings, Inc.
Report of Independent Public Accountants.......................... 3
Condensed Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999.......................... 4
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2000 and 1999........... 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999..................... 6
Notes to Condensed Consolidated Financial Statements.............. 7
Financial Statements--U.S. OnLine Communications, Inc.
Condensed Consolidated Statement of Operations for the Six
Months Ended June 30, 1999........................................ 12
Condensed Consolidated Statement of Cash Flows for the Six
Months Ended June 30, 1999........................................ 13
Notes to Condensed Consolidated Financial Statements.............. 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 15
Forward-Looking Statements........................................ 15
General........................................................... 15
Overview.......................................................... 15
Three Months Ended September 30, 2000 Compared to
Three Months Ended September 30, 1999............................. 15
Nine Months Ended September 30, 2000 Compared to
Nine Months Ended September 30, 1999.............................. 16
Liquidity and Capital Resources................................... 17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk....................................................... 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................. 19
Item 2. Changes in Securities............................................. 19
Item 3. Defaults Upon Senior Securities................................... 19
Item 4. Submission of Matters to a Vote of Security Holders............... 19
Item 5. Other Information................................................. 19
Item 6. Exhibits and Reports on Form 8-K.................................. 19
Signatures................................................................ 20
</TABLE>
2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders
USOL Holdings, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of USOL
Holdings, Inc. (an Oregon corporation) as of September 30, 2000, and the related
condensed consolidated statements of operations and cash flows for the
three-month and nine-month periods ended September 30, 2000 and 1999. We have
also reviewed the condensed consolidated statements of operations and cash flows
of the Company's predecessor (U.S. Online Communications, Inc.) for the
six-month period ended June 30, 1999. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of the Company as
of December 31, 1999 (not presented herein) and, in our report dated February
11, 2000, we expressed an unqualified opinion on that statement. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1999 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
has incurred significant operating losses and negative cash flows from
operations, and management believes that the Company may not be in compliance
with certain covenants contained in the Senior Credit Facility during the next
12-month period unless such covenants are amended. If a noncompliance is not
waived or the covenants are not favorably amended, the Company's ability to
borrow under the facility could be limited or the amount outstanding under the
facility could be called. As a result of these matters, the Company may be
unable to continue as a going concern. Management's plans to deal with these
conditions are also described in Note 1. The accompanying financial statements
do not include any adjustments that might be necessary should the Company be
unable to continue as a going concern.
Arthur Andersen LLP
Austin, Texas
November 15, 2000
3
<PAGE>
<TABLE>
<CAPTION>
USOL HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2000 and December 31, 1999
September 30, December 31,
ASSETS ----------------- -----------------
2000 1999
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 6,065,310 $ 13,637,511
Accounts receivable, net of allowance for doubtful
accounts of $294,457 and $146,721 at September 30, 2000
and December 31, 1999, respectively.......................... 1,006,609 535,262
Notes receivable, related parties.............................. 166,098 102,742
Supply inventory............................................... 1,184,513 818,837
Other current assets........................................... 783,975 221,609
---------------- ----------------
Total current assets................................... 9,206,505 15,315,961
Property and equipment, net...................................... 19,960,446 16,458,736
GOODWILL AND OTHER INTANGIBLES, net.............................. 35,058,608 35,159,285
DEFERRED LOAN COSTS, net......................................... 1,804,747 1,780,903
Other assets..................................................... 649,887 4,210,588
---------------- ----------------
Total assets........................................... $ 66,680,193 $ 72,925,473
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 757,669 $ 1,369,636
Accrued liabilities............................................ 1,536,224 2,416,239
Current portion of capital lease obligations................... 535,396 601,784
Preferred dividends payable.................................... 1,110,000 1,973,333
Deferred revenue............................................... 687,144 419,262
Note payable including accrued interest, related party......... 5,084,861 --
Related-party payable.......................................... -- 294,857
---------------- ----------------
Total current liabilities.............................. 9,711,294 7,075,111
---------------- ----------------
CAPITAL LEASE OBLIGATIONS, less current portion.................. 1,353,258 1,749,818
---------------- ----------------
SENIOR CREDIT FACILITY, including accrued interest............... 2,002,917 --
---------------- ----------------
OTHER LONG-TERM LIABILITIES...................................... 66,140 48,666
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST................................................ 89,346 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,
7,925,494 and 6,892,668 shares issued and outstanding
at September 30, 2000 and December 31, 1999, respectively. 42,749,393 36,735,911
Deferred compensation.......................................... (645,365) (344,201)
Accumulated deficit............................................ (22,910,590) (6,662,136)
---------------- ----------------
Total stockholders' equity............................. 53,457,238 63,993,374
---------------- ----------------
Total liabilities and stockholders' equity............. $ 66,680,193 $ 72,925,473
================ ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
USOL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three and Nine Months Ended
September 30, 2000 and 1999
(Note 2)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenue........................................ $ 2,705,243 $ 1,550,249 $ 7,427,343 $ 1,550,249
------------- ------------- --------------- -------------
expenses:
Operating.................................... 2,344,817 1,286,995 6,543,773 1,286,995
Selling, general and administrative.......... 2,296,107 1,347,581 6,351,151 1,347,581
Depreciation and amortization................ 1,679,013 567,191 4,879,290 567,191
Stock compensation expense................... 79,611 -- 431,059 849,575
Write-down of capitalized software costs..... -- -- 1,870,551 --
------------- ------------- --------------- -------------
Total operating expenses............. 6,399,548 3,201,767 20,075,824 4,051,342
------------- ------------- --------------- -------------
Loss from operations................. (3,694,305) (1,651,518) (12,648,481) (2,501,093)
------------- ------------- --------------- -------------
Other INCOME (EXPENSE):
Interest, net................................ (169,557) 71,941 (143,623) 71,941
Loss on disposal of assets................... (25,713) -- (81,857) --
------------- ------------- --------------- -------------
(195,270) 71,941 (225,480) 71,941
------------- ------------- --------------- -------------
LOSS BEFORE MINORITY INTEREST.................. (3,889,575) (1,579,577) (12,873,961) (2,429,152)
MINORITY INTEREST IN INCOME OF
SUBSIDIARY.................................... (15,534) (11,309) (44,493) (11,309)
------------- ------------- --------------- -------------
Net loss............................. $ (3,905,109) $ (1,590,886) $ (12,918,454) $ (2,440,461)
============= ============= =============== =============
PREFERRED STOCK DIVIDENDS...................... (1,110,000) (863,333) (3,330,000) (863,333)
------------- ------------- --------------- -------------
LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS................................. $ (5,015,109) $ (2,454,219) $ (16,248,454) $ (3,303,794)
============= ============= =============== =============
PER SHARE AMOUNTS:.............................
Basic and diluted loss per common share...... $ (.64) $ (.96) $ (2.16) $ (1.83)
============= ============= ============== =============
Basic and diluted weighted average
common shares.............................. 7,819,637 2,547,283 7,523,931 1,809,752
============= ============= =============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
USOL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 30, 2000 and 1999
(Note 2)
2000 1999
-------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (12,918,454) $ (2,440,461)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization........................ 4,879,290 567,191
Stock compensation expense........................... 431,059 849,575
Write-down of capitalized software costs............. 1,870,551 --
Loss on disposal of assets........................... 81,857 --
Minority interest.................................... 44,493 11,309
Changes in assets and liabilities--
Accounts receivable............................... (471,347) (157,760)
Other assets...................................... (904,342) (36,837)
Accounts payable and accrued liabilities.......... (1,699,059) 714,421
Deferred revenue and other........................ 285,356 46,944
-------------- -------------
Net cash used in operating activities........ (8,400,596) (445,618)
-------------- -------------
Cash flows from investing activities:
Purchases of property, equipment and other............... (6,497,069) (1,285,338)
Loans to related parties, net............................ (57,258) (100,000)
Cash paid for acquisitions, net of cash acquired......... -- (11,657,306)
-------------- -------------
Net cash used in investing activities........ (6,554,327) (13,042,644)
-------------- -------------
Cash flows from financing activities:
Principal payments under capital leases.................. (462,948) (2,160,715)
Proceeds from the exercise of stock options and
warrants............................................... 1,087,923 --
Proceeds from Note Payable, related party................ 5,000,000 --
Borrowings under Senior Credit Facility.................. 2,000,000 --
Deferred loan costs...................................... (242,253) (1,333,440)
Proceeds from sale of preferred stock, net of cash
offering costs of $2,590,000........................... -- 34,410,000
Proceeds from the sale of common stock................... -- 1,425
-------------- -------------
Net cash provided by financing activities.... 7,382,722 30,917,270
-------------- -------------
Net decrease in cash and cash equivalents.... (7,572,201) 17,429,008
Cash and cash equivalents, beginning of period............. 13,637,511 --
-------------- -------------
Cash and cash equivalents, end of period................... $ 6,065,310 $ 17,429,008
============== =============
Supplemental DISCLOSURE OF cash flow information:
Cash paid for interest................................. $ 539,041 $ 909,646
Deferred compensation.................................. 540,000 325,000
Accretion of dividends on preferred stock.............. 3,330,000 863,333
Issuance of common stock as payment of preferred
stock dividends..................................... 4,193,333 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
USOL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 notes 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 September 30, 2000, and
for the three and nine months ended September 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 nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000.
The Company has incurred significant operating losses and negative cash
flows from operations and management believes that the Company may not be in
compliance with certain covenants contained in the Senior Credit Facility during
the next 12-month period unless such covenants are amended. If a noncompliance
is not waived or the covenants are not favorably amended, the Company's ability
to borrow under the facility could be limited or the amount outstanding under
the facility could be called. The Company was not in compliance with one of the
covenants as of September 30, 2000, but the facility was amended to bring the
Company back into compliance as of that date. Management has been in discussion
with the facility's managing agent and fully anticipates that the covenants will
be favorably amended. However, there is no assurance that such covenants will be
favorably amended.
In addition, one of the Company's subsidiaries, TheResidentsClub, Inc.
("TRC"), must obtain additional financing in order to continue its development
activities and fund its operations during the next 12-month period. There is no
assurance that such financing will be obtained, but management has engaged a
firm to raise private equity. If such financing is not obtained, the carrying
value of TRC may be impaired.
See further discussions of these matters in Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this Quarterly Report.
(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 owns TRC, a business that develops Internet platforms that
provide a range of private-labeled online solutions for MDU communities and
other residential markets.
7
<PAGE>
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:
<PAGE>
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
=============
The purchase price allocation for the Merger is preliminary and further
refinements may be made in accordance with generally accepted accounting
principles.
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
("GMACC"). 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.
8
<PAGE>
<TABLE>
<CAPTION>
The table below reflects the unaudited combined results of US OnLine (the
Company's accounting predecessor), FirstLink and USOL Holdings for the nine
months ended September 30, 1999:
USOL
Holdings
(Post
US OnLine FirstLink US Online
(Preacquisition)1 (Premerger)2 Acquisition)3 Combined
---------------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Revenues.................................. $ 2,831,079 $ 1,024,329 $ 1,550,249 $ 5,405,657
Loss from operations...................... (1,650,765) (1,222,932) (2,501,093) (5,374,790)
Loss before minority interest............. (3,451,406) (1,178,393) (2,429,152) (7,058,951)
Net loss.................................. (3,448,992) (1,178,393) (2,440,461) (7,067,846)
<FN>
1. January 1, 1999 through June 30, 1999
2. January 1, 1999 through September 30, 1999
3. May 12, 1999 through September 30, 1999
</FN>
</TABLE>
Financial statements for the six months ended June 30, 1999 for US OnLine
are included elsewhere in this Form 10-QSB.
(3) GMAC Agreement
In August 2000, TRC entered into a four-year services and technology
agreement (the "GMAC Agreement") with GMAC Mortgage Corp. ("GMACM"). Under the
terms of the GMAC Agreement, TRC has agreed to provide the following services to
GMACM.
1. Development of one or more GMAC-labeled web sites.
2. Dial-up Internet access for unlimited users priced at a "cost plus"
basis.
3. Creation of GMAC-labeled content, if requested.
4. Broadband Internet access if mutually agreed upon.
Additionally, TRC has the exclusive right to market into MDU communities
certain products jointly developed by TRC and GMACM intended to facilitate the
transition from apartment living to home ownership. TRC would use such products
to aid its efforts in obtaining non-GMACM customers.
The GMAC Agreement requires certain milestones to be achieved within one
year after execution. Included in the milestones is a documentation period (the
"Documentation Period") to agree on specific services, processes and timeframes;
a deadline for TRC to enter into an agreement with an Internet Service Provider;
a Pilot Testing Period; and a minimum number of End Users (as defined in the
GMAC Agreement) be attained by the end of one year. If the milestones are not
achieved, or if GMACM deems during the Pilot Testing Period that the web site is
not commercially viable, GMACM may terminate the GMAC Agreement by reimbursing
TRC for its costs including approved capital expenditures and reasonable
out-of-pocket expenses incurred in connection with the GMAC Agreement. However,
if GMACM terminates the GMAC Agreement under the Pilot Testing provision, GMACM
would have to pay TRC $2,000,000, plus $500,000 per month, from the date of the
GMAC Agreement through the termination date. The GMAC Agreement also provides
GMACM an early termination right after three years by giving 180 days written
notice.
If the aforementioned milestones are achieved, GMACM would commit to a
minimum number of guaranteed End Users to TRC over a four-year period.
The GMAC Agreement also calls for TRC to grant GMACM 16 million warrants
(the "GMACM Warrants") to acquire shares of TRC's common stock at a weighted
average price of $4.03 per share over the life of the GMAC Agreement based on
achieving specific numbers of End Users. The GMAC Agreement calls for one
million warrants to be issued upon execution of the GMAC Agreement at an
exercise price of $.50 per share. The GMACM Warrants will be recorded at their
estimated fair market value based on the estimated fair market value of the TRC
common stock on the dates of grant.
9
<PAGE>
Until the Documentation Period is complete, it is possible that certain
terms of the GMAC Agreement could change.
As further discussed in MD&A, the costs to TRC of performing its
obligations under the GMAC Agreement are significant and will require additional
substantial capital resources. There is no assurance that the GMAC Agreement
will not be terminated by GMAC in accordance with its terms; that TRC or the
Company can raise sufficient capital on acceptable terms; or that the Company
will ultimately realize profitable activities under the GMAC Agreement.
As of September 30, 2000, TRC had 51,200,000 shares of common stock issued
and outstanding, all owned by the Company or management.
(4) Note Payable Related Party
In August 2000, Newman Financial Services, Inc. ("NFS"), a subsidiary of
GMACC, loaned $5 million to TRC under a secured promissory note agreement (the
"Note Payable"). The Note Payable matures on August 3, 2001 and bears interest
at 13% per annum payable semi-annually on February 3rd and August 3rd. The Note
Payable is secured by all of the common stock and assets of TRC. GMACC is a
significant shareholder of the Company.
(5) Senior Credit Facility
The Company has a senior credit facility (the "Facility") with a group of
lenders that provides for borrowings of up to $35 million. Under terms of the
Facility, the Company may borrow funds for a two-year period commencing January
1, 2000 and ending December 31, 2001, at which time the Facility will convert to
a five-year term loan. The Facility bears interest at the Company's option at an
annual rate of prime plus 2.75% or LIBOR plus 3.75% subject to certain discounts
based on leverage ratios. The Facility is secured by all assets of the Company,
excluding TRC. At September 30, 2000, the Company had drawn $2 million under the
Facility. At September 30, 2000, the Company was in technical default under the
Facility related to a financial covenant. The Facility was subsequently amended
to bring the Company back into compliance.
(6) 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.
(7) 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.
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.
10
<PAGE>
The operating results by business segment were as follows for the three and
nine months ended September 30, 2000:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------------ -------------------------------------------------
USOL, Inc. TRC Consolidated USOL, Inc. TRC Consolidated
--------------- ------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............... $ 2,703,942 $ 1,301 $ 2,705,243 $ 7,421,707 $ 5,636 $ 7,427,343
Segment net loss....... (2,759,106) (1,146,003) (3,905,109) (10,021,806) (2,896,648) (12,918,454)
Total assets........... 60,308,730 6,371,463 66,680,193 60,308,730 6,371,463 66,680,193
Capital expenditures... 1,256,097 271,638 1,527,735 5,332,691 1,164,378 6,497,069
Depreciation and
amortization......... 1,569,076 109,937 1,679,013 4,595,071 284,219 4,879,290
</TABLE>
(8) 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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Preferred stock shares as converted.... 18,500,000 18,500,000 18,500,000 18,500,000
Common stock warrants.................. 3,104,644 2,084,000 3,104,644 2,084,000
Stock options--
Shares............................... 2,236,002 1,536,000 2,236,002 1,536,000
Weighted average price............... $2.58 $2.29 $2.58 $2.29
</TABLE>
11
<PAGE>
U.S. ONLINE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Six Months Ended
June 30, 1999
(Note 2)
REVENUES............................... $ 2,831,079
------------
OPERATING EXPENSES:
Operating........................... 2,100,739
Selling, general and administrative. 1,554,807
Depreciation and amortization....... 826,298
--------------
Total expenses................ 4,481,844
------------
LOSS FROM OPERATIONS................... (1,650,765)
------------
OTHER:
Interest expense.................... (1,722,942)
Other expense, net.................. (77,699)
------------
Total other................... (1,800,641)
------------
LOSS BEFORE MINORITY
INTEREST............................. (3,451,406)
MINORITY INTEREST IN
LOSS OF SUBSIDIARY................... 2,414
------------
Net loss...................... $ (3,448,992)
============
See accompanying notes to condensed consolidated financial statements.
12
<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.
13
<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 ("Holdings") Annual Report on Form
10-KSB.
The financial statements and related notes as of June 30, 1999 and for the
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.
14
<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
Consolidated Financial Statements and the Notes thereto of the Company and US
OnLine, the Company's predecessor, included elsewhere in this Quarterly Report.
Overview
The Company has two operating subsidiaries. USOL provides 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
September 30, 2000, the Company passed 24,711 cable, 12,117 phone and 4,549
Internet units in Austin, Dallas/Ft. Worth, Denver, Houston, Portland, San
Antonio and Washington, D.C. compared to 15,043 cable and 7,173 telephone
passings at September 30, 1999. A passing is an apartment unit capable of
receiving a respective service. The Company had 16,391 cable, 5,402 telephone
and 310 Internet subscribers, respectively, as of September 30, 2000 compared to
9,883 cable and 2,773 phone subscribers at September 30, 1999. 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 nine months ended September 30, 1999 results are the combination
of the six months ended June 30, 1999 of the Company's predecessor, US OnLine,
and the three months ended September 30, 1999 of the Company. The three months
ended September 30, 1999 are those of the Company.
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
The Company reported a loss attributable to common shareholders of
$5,015,109 for the three months ended September 30, 2000 compared to a loss of
$2,454,219 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 $1,154,994 or 75% for the three months ended September
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. The revenue from these two markets represent approximately 71%
of the above mentioned increase.
Operating expense increased $1,057,822 or 82% for the three months ended
September 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, wholesale long-distance minutes and call center costs, all
associated with the increase in revenue. Operating expense was 87% of revenue
for the three-month period in 2000 compared to 83% in the same period of the
prior year.
15
<PAGE>
Selling, general and administrative expense increased $948,526 or 70% for
the three months ended September 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,
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. TRC accounted for approximately $209,000 or 22% of the above
mentioned increase. Selling, general and administrative expense was 85% of
revenue for the three months ended September 30, 2000 compared to 87% for the
same period of the prior year.
Depreciation and amortization expense increased $1,111,822 or 196% for the
three months ended September 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 62% of revenue for the three months ended September
30, 2000 compared to 37% for the same period of the prior year.
The Company had other expense of $195,270 during the three months ended
September 30, 2000 compared to other income of $71,941 during the same period of
the prior year. The increase in other expense between periods is primarily the
result of fees associated with its Senior Credit Facility as well as interest
expense on the Note Payable during 2000 compared to higher cash balances and
resulting interest income in 1999.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
The Company reported a loss attributable to shareholders of $16,248,454 for
the nine months ended September 30, 2000 compared to a loss of $6,752,786 for
the same period of the prior year. The increase in 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), increased selling, general and administrative expenses and preferred
stock dividends.
Revenue increased $3,046,015 or 70% for the nine months ended September 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 $3,156,039 or 93% for the nine months ended
September 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, wholesale long-distance minutes and call center costs, all
associated with the increase in revenue. Operating expense was 88% of revenue
for the nine-month period in 2000 compared to 79% in the same period of the
prior year.
Selling, general and administrative expense increased $3,448,763 or 119%
for the nine months ended September 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. TRC accounted for approximately $1,635,000 or 47% of the above
mentioned increase. Selling, general and administrative expense was 86% of
revenue for the nine months ended September 30, 2000 compared to 73% for the
same period of the prior year.
Depreciation and amortization expense increased $3,485,801 or 250% for the
nine months ended September 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 nine months ended September
30, 2000 compared to 32% for the same period of the prior year.
The Company had other expense of $225,480 during the nine months ended
September 30, 2000 compared to $1,728,700 during the same period of the prior
year. The reduction in other expense between periods is primarily the result of
the Company having certain interest bearing debt instruments in 1999 that were
not outstanding in 2000.
16
<PAGE>
Liquidity and Capital Resources
At September 30, 2000, the Company had $6,065,310 of cash and cash
equivalents compared to $13,637,511 at December 31, 1999. Net cash of $8,400,596
was used in operating activities for the nine months ended September 30, 2000,
which was a result of the Company's net loss for the period combined with using
approximately $2,789,000 of working capital, offset by noncash charges related
to depreciation, amortization, the write-down of certain capitalized software
costs and stock compensation expense. TRC accounted for approximately $2,700,000
of the cash used in operating activities.
Net cash of $6,554,327 was used in investing activities, which was
primarily the result of purchases of property and equipment related to acquiring
or building new passings. Of this amount, TRC used approximately $1,164,000,
primarily for web site and data base development.
Net cash of $7,382,722 was provided by financing activities, which
primarily consisted of proceeds from the Note Payable, borrowings under the
Facility, and 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. A separate discussion on the
liquidity of each business is as follows:
USOL. USOL had approximately $3,845,000 of cash on hand at September 30,
2000. We believe that our cash on hand and available proceeds from the Facility,
if available (see discussion below), should be sufficient to fund the activities
of USOL for 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%. The Facility is secured by all of the
assets of the Company, excluding TRC. As of September 30, 2000, we had borrowed
$2 million under the Facility.
We are dependent upon the Facility for our 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. At September 30,
2000, USOL was in technical default under the Facility related to a financial
covenant. The Facility was subsequently amended to bring USOL back into
compliance. 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. Additionally, the
amount that can be borrowed under the Facility is based on the number of cable
and telephone subscribers we have. As of September 30, 2000, we had the ability
to borrow up to approximately $11.1 million. Accordingly, in order to increase
the amount that can be borrowed under the Facility, we must continue to add
subscribers. Unless alternative financing sources are obtained, the inability to
borrow under the Facility or having insufficient borrowing capacity would have a
material adverse effect on USOL.
As described above, our ability to borrow under the Facility ends on
December 31, 2001. Accordingly, we will have to find additional financing
sources by that date. Alternatives include amending the Facility to extend the
time frame under which monies can be borrowed, obtaining a new credit facility,
and public or private equity offerings. We have currently retained BNP Paribas
to advise and assist us in raising the next round of financing for USOL. BNP
Paribas is one of the Facility lenders and is also a shareholder of the Company.
The retention of BNP Paribas supersedes the engagement letter previously signed
with Newman & Associates.
As discussed above, management believes that the Facility provides for
sufficient borrowing capacity to fund USOL's operations, as currently foreseen,
for the next 12 months. However, the ability to access the Facility is
contingent upon meeting the financial covenants. At this time, it is uncertain
as to whether the Company will be in compliance with such covenants during the
next 12-month period. The Company has been advised by its independent public
accountants that if this contingency has not been resolved prior to the
completion of their audit of the Company's financial statements for the year
ending December 31, 2000, their auditors' report on those financial statements
will be modified for this contingency.
USOL maintains 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
17
<PAGE>
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 September 30, 2000, the fixed minimum charges for all
noncancelable agreements over the life of the agreements was $2,054,004.
USOL is currently upgrading its headends in order to expand its cable
channel line-ups on existing properties. The cost of such upgrades, expected to
be completed by March 31, 2001, is approximately $550,000.
TRC. As more fully described in the Notes to the Company's Condensed
Consolidated Financial Statements included elsewhere in this Quarterly Report,
in August 2000 TRC received $5,000,000 under a note payable agreement with NFS.
After making a required repayment under the Facility to USOL and funding
operations, TRC had approximately $2,220,000 of cash on hand at September 30,
2000.
The costs to TRC of performing its obligations under the GMAC Agreement are
significant and will require additional substantial capital resources.
Management believes that approximately $10-$15 million will be required over the
next 15 to 18 months in order to execute the TRC business plan. Additionally,
inherent in the above mentioned TRC funding requirements, is the assumption that
TRC will be able to lease approximately $4 million in equipment and software
required to establish two colocation facilities. The colocation facilities are
required to establish the network necessary to executive its business plan and
fulfill its obligations under the GMAC Agreement. TRC will likely have to find a
guarantor(s) to successfully lease the colocation equipment. No assurance can be
given that TRC will be able to lease the above mentioned equipment. If TRC
cannot lease the colocation equipment, it would delay TRC's ability to roll out
its products and services as well as support End Users under the GMAC Agreement.
Further, if such colocation equipment cannot be leased, the amount of funding
TRC will require over the next 15 to 18 months may also increase.
Accordingly, TRC has engaged Newman & Associates, a subsidiary of GMACC, to
raise private equity to fund its business plan requirements. No assurance can be
given that TRC will be successful in raising sufficient capital on acceptable
terms. If TRC does not obtain the necessary capital in a timely manner, it would
have a material adverse effect on TRC. Management believes that current cash on
hand will be sufficient to fund TRC operations for only up to four or five
months.
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.
18
<PAGE>
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.
19
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 November 17, 2000
