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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR 12(g)
OF THE SECURITIES EXCHANGE ACT OF 1934
U.S. REALTEL, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 36-4360426
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
555 WEST MADISON, ATRIUM LEVEL SOUTH, CHICAGO, ILLINOIS 60661
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
(312) 775-8900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities to be registered pursuant to Section 12(b) of the Act:
NONE
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
(TITLE OF CLASS)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
We have developed a package of property site access and usage
rights, which we call "Telecommunications Rights." We obtain
Telecommunications Rights from property owners under long-term, typically
exclusive "Master Lease" Agreements. Under our Master Leases, we receive the
rights to install communications infrastructure in a property and/or to
provide communications services to the property's tenants. In exchange, we
agree to share with the property owner a percentage of the revenues that we
receive from subleasing the Telecommunications Rights to multiple service
providers. We have created a proprietary database, the "USRT Telecom Grid",
which contains site information about the location, size, type and ownership
of our properties. As of April 1, 2000, there are more than 138,700 sites
(domestic and foreign) in the USRT Telecom Grid, 135,356 of which are being
marketed pursuant to Master Leases. We have executed agreements for
approximately 240 installations on 180 properties of which 54
telecommunications facilities have been installed and are operational as
of June 1, 2000.
We have two divisions, Site Leasing and RealTel Riser, the latter of
which is in an early stage of development. Our Site Leasing division enables
communications service by bringing together service providers and property
owners under long-term arrangements. We currently operate this business in
the U.S. and in Argentina through our subsidiary, RealTel de Argentina, S.A.,
and in February 2000 organized RealTel do Brasil, S.A. to serve the Brazilian
market. In our Site Leasing business, we sign "Master Subleases" with
telecommunications service providers ("Telecom Service Providers") that grant
us the right to install communications infrastructure and / or provide
communications services to the property's tenants. Each Master Sublease lays
out, up-front, the substantive business terms that define our arrangement
with each Telecom Service Provider and forms the base document for each
specific property sublease. As a result, Telecom Service Providers can access
thousands of sites via one document, significantly expediting access to
subscribers.
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Our RealTel Riser division will aim to improve access to broadband
services by installing advanced in-building centralized distribution systems
over which we will lease capacity to Telecom Service Providers. Through our
businesses, we serve tenants' communications needs, enhance the value of
property owners' assets and support Telecom Service Providers' business plan
execution, solidifying our position as a broadband distribution channel in
the "Last 100 Feet" -- the distance between the fiber networks outside
buildings to the end users within these properties.
Our portfolio of telecommunications access rights and our extensive
relationships with property owners and Telecom Service Providers comprise our
core assets and provide the platform for our existing and future businesses.
Since inception, we have received nominal revenues and accordingly, as of the
date hereof, we are considered to be in the development stage.
HISTORY AND FORMATION
U.S. RealTel, Inc., a Delaware Corporation, together with its
subsidiaries, is referred to herein as the "Company," "We" and "Us." The
Company has four subsidiaries: RealTel do Brasil, S.A., a majority owned
Brazilian Corporation, RealTel de Argentina, S.A., a majority owned
Argentinean Corporation, RealTel Consulting, Inc., a wholly owned Delaware
Corporation, and RealTel Finance, LLC, a wholly owned Illinois Limited
Liability Company.
We were organized in January 1997 under the name "AGILE, LLC," and
we incorporated in the State of Illinois under the name "U.S. RealTel, Inc."
in August 1997. In November 1997, we merged with and into a shell
corporation, Admiral Two Capital Corporation, and the surviving company's
name was changed to "U.S. RealTel, Inc." On May 8, 2000, we reincorporated
into the State of Delaware pursuant to a plan of merger under which U.S.
RealTel, Inc., an Illinois corporation ("U.S. RealTel-Illinois") merged into
the Company, a newly-formed Delaware corporation, and the shareholders of
U.S. RealTel-Illinois exchanged all of their shares of common stock of U.S.
RealTel-Illinois for a like number of shares of common stock of the Company.
We are based in Chicago, and we currently operate eight branch offices
throughout the United States. In
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addition, we established operations in Buenos Aires, Argentina in December
1998 and in Sao Paolo, Brazil in February 2000.
ORGANIZATION
We are led by a seven-member senior management team with experience
in communications and network services, real estate, property management, and
antenna site leasing. As of April 17, 2000, we employ 37 full-time employees
in eight cities in the United States.
- We have three active subsidiaries.
- We own 100% of RealTel Consulting, Inc., a small part of our
business, which provides strategic telecommunications consulting to
the real estate market and manages telecommunications license
agreements for property owners.
- We own 56% of RealTel de Argentina, S.A., a corporation organized
under the laws of Argentina. This subsidiary has acquired
telecommunications access rights to more than 130,000 sites and has
begun to implement our site leasing business in Argentina.
- We own approximately 89% of RealTel do Brasil, S.A., through which we
will develop our site leasing business in Brazil.
- We also own 100% of RealTel Finance, LLC, which has no significant
assets or operations.
BUSINESSES
We offer in-building communications solutions through our two
principal divisions: Site Leasing and RealTel Riser. Our portfolio of
telecommunications access rights and relationships with property owners and
Telecom Service Providers provide the platform for each of these businesses.
We will continue to develop and operate businesses designed to enhance
broadband service provision in the "Last 100 Feet."
SITE LEASING
Through our Site Leasing division, we introduce telecom services in
our portfolio of telecommunications access rights by subleasing our
Telecommunications Rights to Telecom Service Providers on a non-exclusive
basis. Such subleases permit Telecom Service Providers to: (i) deploy
equipment in a building in order to offer telephony, Internet, video and data
services to the building's tenants through our "Occupant Services"; or (ii)
place wireless communications antennas and equipment on rooftops and vacant
land through our "Antenna Site Leasing". Our Occupant Services and Antenna
Site Leasing programs are described below.
We believe we serve an important function for Telecom Service
Providers, property owners and tenants:
- For Telecom Service Providers, we expedite access to a nationwide grid
of properties from which providers can choose those properties that
best suit their siting and service needs. Each Telecom Service Provider
signs one Master Sublease with us that provides access rights to
multiple properties. By aggregating telecom access into a single
contract,
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- we eliminate the time-consuming process of negotiating and executing
leases one owner and one property at a time.
- For property owners, we manage the processes of negotiating with
multiple Telecom Service Providers - a process that owners typically
have neither the expertise nor the resources to handle effectively.
Each property owner signs one Master Lease with us that leases to us
the telecommunications access rights to the owner's properties. As part
of our services, we manage the review of the regulatory, legal,
engineering, logistical and construction processes required of an owner
before telecom services can be delivered. As a result, we significantly
accelerate the deployment process for Telecom Service Providers.
In the U.S., property owner approvals for all infrastructure
installation are necessary. In Argentina and Brazil, however, landlord
approvals are not required, thereby even further accelerating the
deployment process for Telecom Service Providers.
- For building tenants, we deliver a competitive telecommunications
environment that offers greater choice of Telecom Service Providers,
competitive pricing and state-of-the art technology.
The platform for our Site Leasing services is our Master Lease
program through which property owners agree to allow us to sublease their
Telecommunications Rights. Our standard Master Lease provides that our
Telecommunications Rights are exclusive. However, a number of our Master
Leases require that certain performance standards be achieved in order to
retain our exclusivity. Our leases do not require payment of a fixed minimum
rent. In the U.S., landlords retain approval rights for each proposed
telecommunications installation. In Argentina and Brazil, however, landlord
approvals are not required.
MASTER LEASE. Our standard Master Lease grants us the exclusive right
to sublet portions of the applicable landlord's properties to one or more
subtenants for the purpose of such subtenants' placing and maintaining
communications transmitting and/or receiving equipment on or in a property,
which may include the exclusive right of access for the purpose of connection
to all telecommunications risers and telecommunications systems (each
referred to as a "Facility"). The standard lease term is five years with four
additional consecutive five year option terms except for those relating to
RealTel de Argentina which have ten-year terms. To the extent a landlord's
property does not have a Facility placed thereon during the initial term the
landlord has the right upon notice to us to terminate our exclusive rights
with respect to such inactive property. The landlord is entitled to receive a
designated percentage of the rent paid by subtenants utilizing portions of
the landlord's property pursuant to subleases. Except for casualty or
condemnation, neither party has the right to terminate the lease, absent an
event of default, which is not cured as provided in the lease.
We sublease these Telecommunications Rights to Telecom Service
Providers through Master Subleases. Our Telecom Services Group, one of our
sales and marketing groups, as described below, actively markets these
Telecommunications Rights to Telecom Service Providers. Generally, Telecom
Service Providers first execute our Master Subleases on a non-exclusive and
non-site-specific basis. Our form Master Sublease complements our form Master
Lease but we negotiate specific terms with both the property owners and the
Telecom Service Providers.
MASTER SUBLEASE. Our standard Master Sublease is a non-exclusive,
non-site specific, master agreement which sets forth the terms and conditions
pursuant to which a telecommunications company may sublet rights to install a
Facility on a landlord's property. The standard term is five years with four
additional, consecutive periods of five years as renewal terms. The specific
terms covering a particular Facility which is to be installed on a landlord's
property (such as rent and the length of term with respect to such Facility)
are set forth in an addendum to the Sublease (each an "FSA"). The rights
granted under the Sublease are non-exclusive and the subtenant may terminate
the Sublease at any time provided that no FSA has been executed. An FSA may
be terminated by a Subtenant prior to the installation of a Facility if it
cannot obtain governmental approval to install such Facility or it otherwise
determines that it is not feasible to construct the Facility. In each
Sublease, the subtenant (other than those in Argentina) expressly
acknowledges that no FSA can be executed or any Facility installed without
the express written consent of the applicable landlord.
The USRT Telecom Grid is our proprietary database which contains
geographic and other pertinent site information to aid Telecom Service
Providers in selecting properties. Currently, we have more than 8,700
domestic sites in the USRT Telecom Grid. While the majority of these sites
are added to the USRT Telecom Grid pursuant to our Master Lease program, 381
multiple family residential properties were included at the inception of our
business under non-exclusive agency agreements. We market these properties
for Antenna Site Leasing only. In addition, 2,963 properties were added to
the USRT Telecom Grid pursuant to a servicing agreement to market the
property portfolio of a major discount retailer for antenna installations.
We enhance our Site Leasing program by use of the USRT Telecom Grid
-our database of pertinent information relating to our extensive portfolio of
Telecommunications Rights. We
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maintain information about each property in the USRT Telecom Grid, including
location, ownership, property type, building specifics and telecommunications
usage, which we can configure in multiple forms in order to create targeted
marketing material, maintain inventory control and facilitate reporting and
forecasting. The database contains telecom market information to assist
marketing personnel in forecasting their customers' deployment needs. Site
information can be provided to Telecom Service Provider customers in a
variety of formats in order to facilitate their selection process. Once a
Telecom Service Provider enters into a Master Sublease, it may select these
sites by the submission of a simple request form, which can be converted into
an amendment to its Master Sublease to allow for expedited deployment.
When a site is selected by a Telecom Service Provider for
deployment, the process is managed on the database through a "9-Stage
Tracking System." This 9-Stage Tracking System enables us to track and manage
the site deployment process from coordinating initial customer site visits
through income generation from an authorized installation. Our processing
department uses the tracking system in order to verify lease and sublease
compliance, schedule site visits, record completion dates and track rent
requirements.
Our personnel negotiate any unique terms between the property owners
and the Telecom Service Providers. The agreed upon terms are sent to our
legal department to prepare the site specific documentation and our
engineering consultants review the proposed plans. The database is also
utilized to track the receipt, review and approval of all prerequisites to
construction, including plans and specifications, engineering, zoning and
building permits, Federal Communications Commission approval, as well as any
special conditions imposed by a property owner or required by a Telecom
Service Provider. The database can be modified to address any unique needs of
a property owner or customer. Rental and construction commencement dates are
also tracked, so that payments and reports may be submitted to the property
owner.
OCCUPANT SERVICES. Occupant Services focus on providing Telecom
Service Providers with access to multi-tenanted office buildings. Small and
medium-sized businesses are target customers for broadband services typically
provided by Telecom Service Providers. We believe that such businesses
generally are under-served by incumbent providers. We target large,
multi-tenanted office buildings in central business districts and suburban
office parks, buildings where small and medium-sized businesses are typically
located. Properties that house many tenants with heavy demand for telecom
services are the most desirable properties and generate the highest rents.
Occupant services revenue takes two forms: fixed rent and revenue-sharing.
Telecom Service Providers that have entered into Master Subleases related to
our Occupant Services business include leading competitive local exchange
carriers, Internet service providers, and "Shared Tenant Service" providers.
ANTENNA SITE LEASING SERVICES. Antenna Site Leasing Services provide
site access to wireless communication companies and broadcasters. Antenna
Site Leasing customers typically pay a fixed, monthly rent based upon the
size, type of installation and location of the site. The demand for antenna
sites is driven by the build-out of new wireless networks and expansion of
existing networks to address the increased use of wireless communications for
telephony, data transmission, and Internet access. As part of the antenna
site leasing services we provide to property owners we review permits,
construction drawings, installation plans, and regulatory
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compliance. We believe that we have attractive properties for antenna siting,
including office buildings, retail centers, hotels and vacant properties in
high-traffic areas.
SALES AND MARKETING. Sales and marketing operations of our Site
Leasing division are currently comprised of two operating groups: the Site
Development Group and the Telecom Services Group.
- THE SITE DEVELOPMENT GROUP obtains Master Leases from property owners,
which serve as the foundation of each of our businesses. Our Senior
Vice President - Site Development presently supervises six employees
who are each responsible for a specific geographic region or property
owner type. Site Development Vice Presidents identify property
portfolios that are attractive master-lease opportunities and attempt
to secure Master Leases on them. All of the staff in the Site
Development Group are licensed real estate salespersons and seasoned
marketing professionals, with an average of 15 years of real estate and
sales experience.
- THE TELECOM SERVICES GROUP markets our portfolio of properties to
Telecom Service Providers. There are currently four marketing employees
in the Telecom Group called "Telecom Leasing Managers". Telecom Leasing
Managers have extensive backgrounds in telecommunications, having
worked either for Telecom Service Providers or site acquisition
companies.
We support the efforts of our Site Development Group and our Telecom
Services Group with national advertising, trade show marketing and other
marketing support. We also provide our personnel with ongoing in-house
training on the ever expanding opportunities to be offered to property owners
and Telecom Service Providers.
REALTEL RISER
Our RealTel Riser division will install in-building
broadband centralized distribution systems in office properties with
extensive telecommunications needs and then lease capacity on these systems
to Telecom Service Providers. Not all properties are suitable for centralized
distribution systems. A typical building candidate for a centralized
distribution system is 200,000 square feet or larger and is multi-tenanted.
We anticipate that in those buildings in which a centralized distribution
system is installed, our RealTel Riser division will provide immediate access
to competitively-priced broadband data, video and voice communication
services on a carrier-neutral basis. We anticipate that we will begin
installing such systems during the fourth quarter of 2000. We expect that the
installation of a centralized distribution system in a multi-tenanted
property of 200,000 square feet or more will require 60 to 90 days to
complete.
SYSTEM LICENSE AGREEMENT. Through our "System License" agreements
we intend to receive the exclusive right from property owners to install and
operate in-building centralized distribution systems in selected properties.
We expect to leverage existing relationships with owners developed through
our Site Leasing business to secure System License agreements on an expedited
and targeted basis. Pursuant to the standard System License Agreement, we
expect to obtain the exclusive right to install a centralized distribution
system consisting of a telecommunications riser and colocation room in the
applicable landlord's property. We will then enter into agreements with
Telecom Service Providers to utilize the centralized distribution system and
to install and maintain their equipment in the colocation room. The standard
term of a System License agreement will be ten years with a ten year renewal
option. The System License agreement may be terminated by either party in the
event of a casualty or condemnation event or in the event of a default which
is not cured as provided in the agreement. Each Telecom Service Provider will
agree to pay a uniform transport fee to utilize the centralized distribution
system and for the use of the colocation room based upon the square footage
utilized by such Telecom Service Provider. In consideration of the license,
the property owner is expected to be paid a percentage of the revenues
received from each Telecom Service Provider utilizing the centralized
distribution system. We expect, typically, to fund and own 100% of our system
within a particular property but, as certain contractors and property owners
have expressed a desire to participate
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financially, they may be offered the right to fund and partner in up to 50%
of individual in-building broadband centralized distribution systems.
Currently, we intend to construct systems primarily in
multi-tenanted properties of 200,000 square feet or greater. We will also
build facilities for Telecom Service Providers to co-locate their equipment
necessary to establish operations in buildings in which we operate systems.
Typically located in the basement, these "co-location" facilities provide a
secure, climate-controlled, environment for Telecom Service Providers.
RealTel Riser will directly address the bottleneck of broadband
connectivity in the "Last 100 Feet." As a result, we anticipate that Telecom
Service Providers will benefit from greater convenience, faster time to
market and significant cost-savings. For example, we expect to:
- relieve Telecom Service Providers of the inconvenience of providing
local access themselves by either contracting with the incumbent local
exchange carrier ("ILEC") or constructing their own system by
installing carrier-neutral in-building systems that offer access to
end-users;
- save Telecom Service Providers time by doing advance work, including
obtaining in-building permits, contracting for local access and
constructing the centralized distribution system;
- deliver a "Plug-and-Play" environment that is easily accessible;
- create a neutral transport system that does not favor any one Telecom
Service Provider, but instead establishes an open platform; and
- install a common in-building centralized distribution system that
delivers the scale economies of a shared asset to Telecom Service
Providers, who incur only a monthly expense for leased capacity, and
use less capital to extend their networks to access new potential
customers.
RealTel Riser will benefit property owners as well by:
- installing an in-building broadband centralized distribution system
that improves the building and increases the value of the property;
- sharing a percentage of the revenues derived from RealTel Riser with
owners; and
- enhancing a building's technology and delivering improved services to
tenants thereby providing such property owners with a competitive
advantage in attracting and retaining tenants in their property.
The in-building broadband riser infrastructure will run from the
basement of a building to the top floor through a building's vertical shaft
and will be designed with sufficient capacity to carry data, video and voice
communications service for all the building's tenants for the
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foreseeable future. Inside the building, typically in the basement, we will
establish a building point of presence. At each point of presence, the
fiber-optic cables that make up the infrastructure connect to routers,
switches and other equipment provided by the Telecom Service Providers that
enable the transmission of voice, data and video traffic and aggregate and
disseminate traffic to and from the fiber-optic cables. From the point of
presence, data, video and voice communications service is carried outside the
building over the Telecom Service Provider's local fiber lines. In many cases
we will arrange dual points of building access for security and redundancy.
Within a building site, the fiber infrastructure will likely have
interconnections to bolster network security and redundancy, comforting both
the Telecom Service Providers and the tenants that the backbone is secure and
"always on." In circumstances where a fiber infrastructure is impractical, we
will rely upon wireless, copper or other substitute technologies to create
our in-building broadband centralized distribution system.
We will monitor each in-building centralized distribution system 24
hours per day, seven days per week. The on-going monitoring of these systems
will be outsourced to independent contractors. Working together with our
operations personnel, our independent contractors will develop a proprietary
scalable database that will monitor work order entry for new centralized
distribution system-installed sites which come on line, coordinate billing
processes between the Telecom Service Providers and end users of their
services in each property site, and serve as a central repository of
information with respect to demand and usage patterns for Telecom Service
Providers and tenants who utilize their services to review performance and
plan capacity. In addition, customer service representatives will be on call
24 hours a day, 365 days a year to handle requests for service. Our
proprietary database will capture, track and save customer service orders,
enabling us to monitor and improve the quality of these services.
Additionally, the independent support staff will coordinate with a team of
field operations personnel to provision, activate, maintain, repair and
troubleshoot problems in each network 24 hours per day, seven days per week.
We will contract with independent entities with an expertise in the
deployment and management of centralized distribution systems, to design and
install our in-building broadband centralized distribution systems. These
independent contractors have experience in office building construction and
electrical engineering. We believe that the construction capabilities of our
independent contractors will allow us to rapidly and efficiently deploy our
broadband centralized distribution systems in targeted property sites within
our portfolio.
The independent contractors have developed standardized installation
drawings and details that can be applied to most of our construction projects
and result in high quality construction processes. These construction
practices are focused on ensuring compliance with applicable building and
industry codes and standards. The expertise of our third party contractors in
designing and constructing centralized distribution systems will allow us to
reduce the space and resources needed to support our infrastructure and
associated electronic systems in buildings.
Typically, after we have targeted a property in our USRT Telecom
Grid as a potential site for the installation of a centralized distribution
system and received the approval of the property owner, our independent
contractors will work with our operations team to undertake a site survey to
determine if installation of a centralized distribution system is
economically viable. This survey will include an analysis of the physical
characteristics of the building and other important
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data, such as the number of tenants in the site, the size of the building and
an evaluation of any pre-existing centralized distribution system in the
building. If the site survey concludes installation of a centralized
distribution system is economically viable, we will conclude negotiations and
execute a Systems License agreement with the property owner for construction
and operation of the centralized distribution system. A purchase order will
be issued to the independent contractor authorizing the building of the
centralized distribution system. The independent contractor will then develop
a specific design plan for the targeted property site and commence a process
of securing the necessary permits, licenses and building materials for that
site.
SALES AND MARKETING. Our portfolio of properties in the USRT Telecom
Grid contains many attractive candidates for the RealTel Riser division. Our
sales and marketing team for the Site Leasing division is building on its
existing relationships with property owners to develop the RealTel Riser
division and is also marketing RealTel Riser's benefits to many new potential
landlords under our Site Leasing division. By focusing on leveraging and
expanding the portfolio properties in our USRT Telecom Grid, we expect to be
able to attract new RealTel Riser opportunities.
FOREIGN OPERATIONS
Our operations in Argentina were established in December 1998.
Since its inception, RealTel de Argentina has concentrated on Master Leasing
properties. As of March 1, 2000, RealTel de Argentina had Master Leased over
130,000 properties, over 100,000 of which are geocoded and currently being
marketed primarily as antenna sites for wireless voice service. RealTel de
Argentina has entered into an exclusive alliance agreement with the Argentina
Building Managers Association, an organization whose members manage 65% of
all multi-tenant office and residential buildings in Argentina, including
over 7,500 premier commercial office properties in the commercial business
district of Buenos Aires. Pursuant to the alliance agreement, the Argentina
Building Managers Association has agreed to promote the contracting of all
properties managed by its membership and associates to RealTel de Argentina
and in consideration thereof, RealTel de Argentina has agreed to promote, on
a preferential basis, the utilization of properties managed by members of the
Argentina Building Managers Association. RealTel de Argentina has also agreed
to provide technical assistance regarding telecommunications technologies,
services and infrastructure and to monitor all infrastructure and new service
installations in the properties, as well as insurance coverages from the
telecommunications companies installing facilities on the properties. RealTel
de Argentina is currently in the process of signing Master Leases with the
individual managers. Currently, approximately 240 Master Leases have been
executed by RealTel de Argentina. RealTel de Argentina has also entered into
an oral teaming agreement with Lucent Technologies, which has contracts to
provide turnkey PCS telephone antenna networks for two carriers, to provide
sites throughout Argentina. RealTel do Brasil, the entity through which we
operate in Brazil, was incorporated in February 2000 and opened its office in
Sao Paulo in March 2000.
EMPLOYEES
As of April 17, 2000, we had 37 full-time employees and one
part-time employee. We have a sales and support staff, including
telecommunications, real estate, legal and financial personnel, located in
eight cities in the United States.
OVERVIEW OF INDUSTRY/COMPETITION
TELECOMMUNICATIONS INDUSTRY. The telecommunications industry is
being revolutionized by rapid technological advances in general and, more
specifically, the emergence of the Internet as a means of communication. The
entire retail business telecommunications market, currently
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at approximately 90 million lines, generates approximately $100 billion in
revenue. According to Lehman Brothers Research, this market is growing 7%-9%
per year, with data and Internet revenue growing in excess of 25%, resulting
in total market revenues of an estimated $200 billion in 10 years. In
particular, demand for the high-bandwidth capacity required to take advantage
of emerging Internet services, data and multimedia communications is
experiencing phenomenal growth.
Internet usage is the primary force driving this demand. The
Internet has emerged as one of the fastest growing communications media in
history and is dramatically transforming how businesses and individuals
communicate. International Data Corporation ("IDC") estimates that the number
of Internet users in the United States reached 76 million in 1998, and will
grow to approximately 200 million by 2003. More specifically, increased
popularity of broadband Internet applications such as audio, video, and data
files is fueling demand for high speed connectivity. According to Pioneer
Consulting, total broadband subscribers are estimated to grow from 470,000 in
1998 to over 15 million in 2003, a compound annual growth rate of over 99%.
In the business segment, Forrester Research estimates that the market for
dedicated broadband Internet access to businesses will grow from $8 billion
in 1999 to $42 billion in 2003. Of that total, 75% is expected to be spent on
broadband services.
Increasing applications and enhanced services utilizing the Internet
are driving demand for high speed Internet access by U.S. businesses. For
example, the Yankee Group estimates that the amount of electronic commerce
conducted by U.S. businesses was $138 billion in 1999 and will grow to
approximately $541 billion in 2003. According to IDC, business-to-business
commerce over the Internet totaled almost $26 billion in 1998 and is expected
to grow to $522 billion by 2003. Enhanced services, including web hosting,
data storage and retrieval, video conferencing, network security, and others,
are further driving revenues for Internet service providers. IDC estimates
that value-added services, which amounted to $5 million in 1999, will grow to
almost $24 billion by 2003. These enhanced services and increasing
applications will continue to drive demand for high-bandwidth connectivity.
Another phenomenon in the telecommunications industry is the rapid
growth in the use of wireless communications for mobile telephony, wireless
local loop and wireless data services. IDC expects that by 2004, the
subscriber base will be over 207 million and revenue will reach approximately
$76 billion. Demand for wireless services has been driven by advancements in
technology, such as the use of digital technologies to deliver higher quality
services and additional data features, and is expected to experience further
rapid growth.
UNDERSERVED SUBSCRIBER MARKETS. Based on this rapid increase in
demand for telecommunications, many emerging, competitive communications
companies, as well as traditional local and long distance communications
companies, are developing businesses and investing billions of dollars in new
infrastructure for the deployment of networks and in new antennas for
wireless traffic. Yet small and medium-sized businesses, which IDC expects to
represent as much as 93% of this demand, are currently under-served by such
companies. It is estimated that small and medium-sized businesses will
significantly increase their spending on telecommunications in the next
several years, but most of these companies still rely upon their ILEC for
services. As a result, these companies lack choice in service provision, pay
prices that are higher than those of a competitive provider and do not yet
have access to the
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full range of broadband services. For example, according to IDC, 89% of small
and 45% of medium-sized businesses currently access the Internet through
dial-up service versus only 15% of large businesses.
Small and medium-sized businesses are not the only underserved
customers. Regional mall tenants face a similar situation. This market is
perceived by competitive providers to be too small and too difficult to
service and therefore is currently primarily addressed by the ILECs. However,
tenants of regional malls and large retail centers have a growing demand for
broadband communications services, both for services they currently use,
including voice, Internet access, and data services for credit card
processing, intracompany reporting, inventory management and intra-chain
extranets, and for additional data and video services, for interactive, real
time merchandising, advertising and cybercasting of entertainment events.
The "Last 100 Feet" bottleneck in broadband connectivity lies at
the center of this service provision opportunity. While many carriers have
developed broadband long-haul and local fiber networks, the broadband network
rarely extends from the curb to the end user. Lehman Brothers Research
estimates that less than 3% of commercial office buildings are currently
equipped to provide broadband services to their tenants. Large corporations
have the resources to install and maintain their own infrastructure or the
traffic volume to induce ILECs to run the fiber network to their locations.
However, many multi-tenanted office buildings and retail centers that
typically house small and medium-sized businesses are bandwidth constrained.
Most smaller businesses cannot support their own dedicated fiber optic
infrastructure and are limited to services that can be provided over their
building's existing copper infrastructure.
Currently, this broadband need is only marginally being addressed.
Emerging Telecom Service Providers have identified small and medium-sized
businesses as underserved and are crafting business plans around providing
services to such customers in targeted multi-tenanted buildings. There is a
growing recognition that the "Last 100 Feet" is extremely valuable and
companies that can deliver access and transport to the "Last 100 Feet" have
an important role in releasing the bottleneck and ensuring broadband access
to a new and growing set of customers.
REAL ESTATE MARKET. The U.S. commercial real estate market is
characterized by fragmented ownership and poses a challenge to Telecom
Service Providers, who need to obtain access rights from property owners in
order to provide telecom services. The Department of Energy estimates that
the size of the domestic commercial real estate market is approximately 33
billion square feet. Of that, about 10 billion square feet are in office
properties, 13 billion square feet are retail space, about 4 billion square
feet are in lodging properties and the balance is in warehouse and industrial
properties. We believe that the best candidates for broadband service
provision are large, multi-tenanted office buildings in central business
districts and suburban office parks. Most of the commercial real estate in
the U.S., approximately 81% of total square footage, is located in
metropolitan areas. In the commercial real estate market, publicly traded
real estate companies are the largest owners of assets. The largest
concentration of ownership is of retail assets.
COMPETITION. We face significant competition in each of our business
divisions and the numerous companies that may seek to enter one or more of
our niche businesses may expose us to severe price competition for our
services and for building access rights. Our competitors may
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also be able to respond more quickly to technological developments and
changes in customers' needs.
- BUILDING OWNERS. Owners of buildings, malls and retail centers may
elect to either provide our services themselves or to partner with
other entities to do so. To the extent these owners elect to manage the
process of leasing or licensing access or placement directly to Telecom
Service Providers, which may include in-building competitors, such as
Allied Riser Communications, Broadband Office, or Cypress
Communications, we may face difficulty in expanding the properties in
our portfolio or in leveraging existing relationships to provide new
services under our RealTel Riser division.
- SITE LEASING COMPETITORS. Site Leasing competitors, such as APEX Site
Management, Devnet Communications, LLC, Riser Management Systems, L.P.,
and TRM either master lease or otherwise represent property owners in
negotiations with Telecom Service Providers. To the extent property
owners elect to enter into exclusive or other agreements with these
companies, we may face difficulty in expanding the properties in the
USRT Telecom Grid.
- REALTEL RISER COMPETITORS. Other companies such as Devnet, FiberNet
Telecom Group, Inc. and Riser Management Systems, L.P., are also
attempting to gain access to office buildings in order to construct
centralized distribution systems with co-location space in the same
target market as our RealTel Riser division. To the extent these
competitors successfully obtain the rights to construct centralized
distribution systems within our target buildings, we will be precluded
from expanding the RealTel Riser division into these buildings.
RISK FACTORS
OUR SHORT OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT OUR SUCCESS
Our business was founded in January 1997, and we have a short
operating history and limited historical financial and operating data with
respect to our business. We have limited commercial operations and have
recognized limited revenues since our inception.
OUR BUSINESS MODEL IS UNPROVEN AND MAY NOT SUCCEED
We have not validated our business model and strategy in the market,
particularly with respect to our RealTel Riser division. We believe that the
combination of our unproven business model and the highly competitive and
fast-changing communications market in which we compete makes it impossible
to predict the extent to which our business model, especially with respect to
RealTel Riser, will achieve market acceptance or our overall success.
Additionally, while we believe that RealTel Riser will become a significant
part of our overall business, this business line currently does not
contribute to our revenue stream. Our current business model anticipates that
a significant portion of the revenues generated under our agreements with
Telecom Service Providers to utilize our centralized distribution systems may
be shared with both property owners under our System Licenses and third party
contractors who install and maintain each centralized distribution system. We
cannot be assured that in order to ensure the successful deployment of our
RealTel Riser division we will not have to share a greater portion
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of these revenues than we currently anticipate with these parties. This
reduced revenue stream from our RealTel Riser division could have a material
adverse effect on our business.
To be successful, we must develop, market and implement our business
divisions at widely accepted prices that cover both our operating expenses
and our significant development costs. We may never be able to deploy our
business divisions, achieve significant market acceptance, favorable
operating results or profitability or generate revenues sufficient to cover
our capital and operating costs. We will continue to make substantial
expenditures before we know whether our business plan can be successfully
executed. As a result of these potential issues, there is a risk that our
business will fail. In addition, there is no assurance that our growth
strategies, including our future contemplated business lines, will be
deployed or achieve success in the marketplace.
DEMAND FOR OUR SERVICES IS UNCERTAIN
There is no assurance that all new technologies will be successful
in the marketplace or that the Telecom Service Providers introducing these
technologies will be successful in raising the capital necessary for
deployment. This inability of our Telecom Service Provider customers to
deploy their products could limit our ability to sustain current revenue
streams or to attract new customers to our Site Leasing or RealTel Riser
division. Additionally, there is no assurance that companies successfully
deploying these technologies will use our portfolio sites to the extent
projected by us for either our Site Leasing or our RealTel Riser division
lines, and if they do, there is no assurance that they will be successful and
not default on obligations to us. Our ability to be successful in all of our
divisions depends upon continued and growing demand by Telecom Service
Providers, the desirability of our portfolio and our services to Telecom
Service Providers and our ability to foster demand through our marketing of
our portfolio and our services. Failure to generate this demand will cause a
material adverse effect to our business.
WE ARE A DEVELOPMENT-STAGE COMPANY THAT HAS NOMINAL REVENUES AND MUST DEPEND
ON ADDITIONAL FINANCING TO STAY IN BUSINESS
Since inception, our efforts have been devoted to the development of
our principal businesses and to raising capital. We have received nominal
revenues and accordingly, as of the date hereof, we are considered to be in
the development stage. We may not achieve or sustain positive EBITDA
(earnings before non-cash equity transactions, interest, taxes, depreciation
and amortization), operating income or net income in the future. To date, we
have incurred increasing negative EBITDA, substantial losses and negative
cash flow on both an annual and quarterly basis. In 1999, we had negative
EBITDA of approximately $5,038,000 excluding noncash equity transactions, net
losses of approximately $5,744,000, and negative cash flow from combined
operating and investing activities of approximately $5,040,000. We expect our
negative EBITDA, net losses and negative cash flow to continue and to
increase. Our ability to continue as a going concern and to implement our
business plan is contingent upon our ability to raise capital, continue to
expand our property portfolio and obtain adequate revenues from operations.
We anticipate that our private placement of securities in December 1999,
including the convertible debentures issued and available, will be sufficient
to fund operating losses anticipated through August 2000. We estimate that
$8,000,000 is required to fund our operating losses for the next twelve months.
If we are unsuccessful in raising capital through our current private
offering or through alternative means, our current projections indicate we
will run out of cash in the third quarter of 2000. Our independent auditors'
report on our 1998 and 1999 consolidated financial
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statements contains a modification concerning substantial doubt about our
ability to continue as a going concern.
We expect that the actual amount and timing of our future capital
requirements will depend on the demand for our services and on regulatory,
technological and competitive developments, including additional market
developments and new opportunities, in our industry. We will seek additional
financing if market conditions allow us to raise public or privately financed
capital on attractive terms. We may be unsuccessful in raising sufficient
capital at all or on terms that we consider acceptable. If we are unable to
obtain adequate funds on acceptable terms, our ability to fund our expansion
or respond to competitive pressures would be significantly impaired. These
limitations could hinder our ability to become profitable. If we decide to
borrow funds in the future to fund our business, the terms of those
borrowings would likely contain restrictive covenants that would limit our
ability to incur additional indebtedness, pay dividends or undertake certain
other transactions. These instruments could also require us to pledge assets
as security for the borrowings. If we leverage our business by incurring
significant debt, we may be required to devote a substantial portion of our
cash flow to service that indebtedness. This could require us to modify our
business plan.
WE DEPEND HEAVILY ON A LIMITED NUMBER OF TELECOM SERVICE PROVIDER CUSTOMERS;
A SIGNIFICANT REDUCTION IN THE REVENUES RECEIVED FROM THESE CUSTOMERS WOULD
HARM OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We derive a large portion of our revenue from a limited number of
Telecom Service Provider customers. The current annualized rent received by
us from transactions with Teligent Communication, Inc., Sprint Spectrum and
AT&T Wireless accounts for approximately 25%, 18% and 13%, respectively, of
our projected annualized rent from all of our Telecom Service Providers. If
these customers or a significant number of our smaller Telecom Service
Provider customers default on their current commitments to us or elect not to
renew their sublease arrangements with us, this could result in a significant
reduction in revenues which would have a material adverse effect on our
financial condition and results of operations. Telecom Service Providers
providing occupant services in our properties may not contract enough
subscribers in each building to be profitable. In such cases, Telecom Service
Providers leasing such sites may have the right to terminate their Subleases
for such sites which could result in a significant reduction in revenues
which would have a material adverse effect on our financial condition and
results of operations. Our typical amendment to a Master Sublease, which
makes its terms site specific as to new properties has an initial term of
five years, with renewal options ranging from five to 20 years.
WE MUST OBTAIN ADDITIONAL AGREEMENTS WITH OFFICE BUILDING OWNERS AND OWNERS
OF LARGE RETAIL CENTERS OR OUR BUSINESS GROWTH WILL BE CONSTRAINED
A significant portion of our Site Leasing division depends upon our
ability to obtain telecommunications access rights leases from property
owners and to sublease these rights to Telecom Service Providers who will
provide occupant services. There are a finite number of tenants in our
current portfolio of property sites with whom the Telecom Service Providers
may contract. If Telecom Service Providers saturate the tenant market in our
current portfolio and we do not enter into new Master Leases with our current
and new property owners covering
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additional properties which we can then sublease, this could reduce our
potential for new revenue streams in connection with Site Leasing and have a
material adverse effect on our business.
We derive a large portion of our revenue from customers located
within the buildings of a limited number of real estate owners. We currently
have 645 Master Leases in effect in the United States and approximately 240
in Argentina. The current annualized base rent received by us in respect of
property sites covered under Master Sublease amendments to Master Leases with
The Rouse Company, The Simon Property Group and Brandywine Realty Trust
accounts for 37%, 20% and 8%, respectively, of our projected annualized base
rent in respect of all property sites under Master Leases. Many of our Master
Lease agreements give us exclusive rights with respect to the applicable site
and contain minimum performance criteria. If these Master Leases become
non-exclusive for failure to meet these performance criteria or if the Rouse
Company, The Simon Property Group or Brandywine Realty Trust or a significant
number of other property owners with whom we have Master Leases elect not to
renew our Master Leases, then we may lose our ability to sublease a
significant portion of our telecommunication access rights to Telecom Service
Provider customers, which could limit our potential for new revenue streams
from new or existing properties under Master Leases. Our typical Master Lease
agreement has an initial term of approximately two to five years, with
renewal options ranging from one to 20 years.
An important component of our RealTel Riser division is our ability
to leverage our expanding portfolio of telecommunications access rights to
allow us to install our centralized distribution system and to introduce our
System License agreements. Property owners with whom we have Master Leases
may decide not to permit us to install our centralized distribution system in
their buildings or, if installed, to engage or renew our System License
agreements. Moreover, non-renewal of Master Leases may further reduce our
ability to expand RealTel Riser which would reduce our potential revenues and
have a material adverse effect on our financial condition and results of
operations.
WE MAY BE UNABLE TO DELIVER SERVICES UNDER OUR REALTEL RISER BUSINESS IF OUR
CENTRALIZED DISTRIBUTION SYSTEMS ENCOUNTER TECHNICAL DIFFICULTIES
There may be disruptions in services provided to tenants by Telecom
Service Providers utilizing our centralized distribution systems under the
RealTel Riser program due to unauthorized access, computer viruses and/or
other disruptions. Remediating the effects of these technical and other
disruptions may require interruptions or cessation of services provided by
Telecom Service Providers to tenants. This loss of customers and/or revenue
could have a deleterious impact on these Telecom Service Providers' ability
to continue to use our centralized distribution systems in one or multiple
property sites. Our agreements with Telecom Service Providers to provide
services over centralized distribution systems may be terminated under
certain circumstances, including an inability of the Telecom Service
Providers to maintain certain thresholds of revenue or to achieve certain
performance criteria. If these agreements are terminated or are not renewed
and we are unable to secure replacement agreements with other Telecom Service
Providers, this will reduce our expected revenue from RealTel Riser. In
addition, when we install our centralized distribution systems for RealTel
Riser we will incur significant initial expenditures. These expenditures will
vary depending on the size of the building and whether we encounter any
construction-related difficulties. If agreements with
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Telecom Service Providers to utilize our centralized distribution systems are
terminated and we are unable to secure replacement agreements with
alternative Telecom Service Providers, this may preclude our ability to
recover infrastructure costs in connection with an installed centralized
distribution system.
OUR REALTEL RISER BUSINESS COULD SUFFER FROM A REDUCTION OR INTERRUPTION FROM
OUR EQUIPMENT SUPPLIERS OR OTHER THIRD PARTIES ON WHOM WE RELY FOR
INSTALLATION, MANAGEMENT AND PROVISION OF FIELD SERVICE
We anticipate that under our RealTel Riser division we will purchase
the equipment utilized in building centralized distribution systems in our
portfolio properties from various vendors. Any reduction in or interruption
of deliveries from our major equipment suppliers, such as a local cabling
company, could delay the build-out of the centralized distribution system in
any single or multiple property site(s) in our portfolio, impair our ability
to acquire or retain Telecom Service Provider customers under the RealTel
Riser business and harm this RealTel Riser business generally. In addition,
the price of the equipment we purchase may substantially increase over time,
increasing the costs we pay in the future. It could take a significant period
of time to establish relationships with alternative suppliers for each of our
technologies and substitute their technologies into our network.
In addition, we will outsource a significant portion of the
installation and ongoing monitoring, maintenance and repair service for the
RealTel Riser division to third parties. There are a limited number of such
companies providing these services and we will be seeking to secure
outsourcing agreements with these companies at the same time as our
competitors. We cannot be assured that in the event that we decide to replace
our existing third party contractors or to secure agreements with new third
party contractors for our RealTel Riser division that there will not be a
delay in the process of locating third party installers or field service
providers or securing agreements with these parties, or that we will be
successful in replacing or securing third party contractors at all. In
addition, we cannot be assured that we may not experience an interruption in
installation or ongoing service from any significant installer or field
service provider of our centralized distribution systems. Any of the
foregoing could impair our ability to acquire or retain Telecom Service
Provider customers under the RealTel Riser business and harm our RealTel
Riser business generally.
WE MUST ATTRACT AND RETAIN KEY PERSONNEL IN A TIGHT LABOR MARKET OR WE WILL
BE UNABLE TO MANAGE OUR GROWTH
There currently is intense competition for personnel with the
qualifications we require. The loss of the services of key personnel or the
failure to attract additional personnel as required could have a material
adverse effect on our ability to grow. We are highly dependent upon the
efforts of our existing senior management team. Although we have entered into
employment agreements with some members of our senior management team, these
agreements do not obligate the employees to remain with us for any length of
time. We believe that our future success will depend in large part on our
ability to attract and retain qualified technical and sales personnel.
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WE MAY NOT BE ABLE TO MANAGE OUR GROWTH, WHICH COULD HARM OUR BUSINESS
If we are successful in implementing our business plan, our
operations will expand rapidly. This rapid expansion could place a
significant strain on our management, financial and other resources. Our
ability to manage future growth, if it occurs, will depend on, among other
things, our ability to: (1) control expenses related to our business plan;
(2) maintain responsive customer service; (3) improve existing, and implement
new, billing and collections, operational support and administrative systems;
and (4) expand, train and manage our employee base, in particular qualified
sales, technical and managerial personnel. The failure to manage our growth
effectively would impair our business and operational performance. We may not
be able to maintain the quality of our operations, to control our costs, and
to expand our internal management, technical, information and accounting
systems in order to support our desired growth.
Sophisticated information processing systems are vital to our growth
and our ability to achieve operating efficiencies. We will rely on our USRT
Telecom Grid proprietary system and our RealTel Riser proprietary software
and database to provide services, send invoices and monitor our operations. A
failure of any of these systems could have a material adverse effect on our
operations and business. Our third party field service providers under the
RealTel Riser business will work with us to develop a proprietary software
and database system to monitor and operate each centralized distribution
system. We may be unable to implement these systems on a timely basis or at
all, and these systems may not perform as expected. This could materially
impact our ability to deploy and expand the RealTel Riser business. In
addition, there may be other systems we have not identified that are required
or in need of improvement both in our Site Leasing and RealTel Riser
divisions. We may also be unable to maintain and upgrade these systems as
necessary.
WE MAY FACE EXPOSURE TO REGULATORY AND GENERAL ECONOMIC CONDITIONS IN OUR
NON-U.S. OPERATIONS
The Argentine government exerts significant influence over its
economy. In the recent past, the Argentine government has provided
significant tax incentives and relaxed certain regulatory restrictions in
order to encourage foreign investment in certain sectors of the economy,
including the technology industry. Certain of these benefits that may
directly affect us include, among others, preferential rules on foreign
investment and repatriation. To be eligible for certain of these tax
benefits, we may be required to meet certain conditions and a failure to meet
such conditions could result in the unavailability of such benefits. Further,
there can be no assurance that such tax benefits will be continued in the
future at their current levels. Changes in the business or regulatory climate
of Argentina, or any other country in which we operate in the future,
including Brazil, could have a material adverse effect on our business.
Although wage costs in Argentina are significantly lower than in the U.S. and
elsewhere for comparably skilled professionals, wages in Argentina are
increasing at a faster rate than in the U.S. In the past, Argentina has
experienced significant inflation and shortages of foreign exchange, and has
been subject to civil unrest and acts of terrorism. Changes in inflation,
interest rates, taxation, unionization or other social, political, economic
or diplomatic developments affecting Argentina or any other country in which
we operate in the future, including Brazil, could have a material adverse
effect on our business.
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THE SECTOR IN WHICH WE OPERATE IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE
TO COMPETE EFFECTIVELY
We face competition from entities with significantly greater
financial resources, well-established brand names and larger customer bases
and property portfolios. Competitors to our Site Leasing Division include
Motorola, Inc., APEX Site Management and Devnet Communications. Competitors
to RealTel Riser include FiberNet Telecom Group, Inc. and Riser Management
Systems, L.P. Furthermore, the numerous companies that may seek to enter our
niche may expose us to greater price competition for our services and for
telecommunications access rights leases. We expect competition to intensify
in the future. We expect significant competition from traditional and new
in-building competitors. Some of these competitors have sought to develop
exclusive relationships with building owners. To the extent these competitors
are successful, we may face difficulties in expanding our portfolio of
properties, our ability to generate revenues from Master Subleases, and to
leverage new additions to our portfolio to introduce our services, such as
Occupant Services or our RealTel Riser business. Competition could also
result in a diminution of our net revenue margins.
REGULATION OF ACCESS TO OFFICE BUILDINGS COULD NEGATIVELY AFFECT OUR BUSINESS
There have been both federal and state proposals to require that
commercial office buildings give access to competitive providers of
telecommunications services. Several states have adopted such regulations at
the public utilities commission level and others may be adopted by state
legislators or public utilities commissions in the future. Recently, the
Federal Communications Commission, or FCC, initiated a regulatory proceeding
relating to utility shaft access in multiple tenant buildings, and a bill was
introduced in Congress regarding the same topic. Some of the issues being
considered in these developments include requiring building owners to provide
utility shaft access to telecommunications carriers, and requiring some
telecommunications providers to provide access to other telecommunications
providers. Many of our Master Leases currently afford us exclusivity with
respect to telecommunications access rights. In addition, we expect that our
Systems Licenses will afford the same exclusivity. We cannot predict whether
or in what form the access proposals will be adopted. If they are adopted and
regulatory or legal requirements change access rights to our target
buildings, these requirements could have a material adverse effect on all of
our lines of business.
OUR BUSINESS COULD BE ADVERSELY AFFECTED AS A RESULT OF LEGISLATION AND
GOVERNMENT REGULATION OF TELECOM SERVICE PROVIDERS
Changes in the regulatory environment could affect our operating
results by increasing competition, decreasing revenue, increasing costs or
impairing the ability of our Telecom Service Providers to offer services. The
provision of basic communications services is subject to significant
regulation at the federal and state level. The FCC regulates carriers
providing interstate and international communications services. State public
utilities commissions and municipalities exercise jurisdiction over
intrastate communications services but do not regulate most enhanced
services, which involve more than the pure transmission of customer provided
information. Many of our Telecom Service Provider customers are subject to
federal and state regulations. These regulations change from time to time in
ways that are difficult either for us or these other parties to predict.
Although we believe the services we provide today are not subject to
significant regulation by the FCC or the state public utilities commissions,
changes in
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regulation or new legislation may impose or eventually increase the
regulation of our current services or those we will offer under RealTel Riser
or future businesses.
ALTERNATIVE TECHNOLOGIES POSE COMPETITIVE THREATS
The communications industry is subject to rapid and significant
technological change, such as continuing developments in digital subscriber
line technology and alternative technologies for providing high-speed data
communications. In addition to fiber-optic technology, there are other
technologies, such as DSL and wireless technology, that provide more capacity
and speed than traditional copper wire transmission technology. These
technologies may be improved and other new technologies may develop that
provide more capacity and speed than the fiber-optic technology we will
employ in connection with our centralized distribution systems under the
RealTel Riser division. Such new technologies may be used in place of or
cause us to reconfigure or upgrade our centralized distribution system. In
addition, telecommunications technologies may be developed that replace those
that use antenna networks for which we have Master Subleases. Our success in
improving and expanding our Site Leasing and RealTel Riser divisions will
depend on our ability to anticipate or adapt to new technology on a timely
basis. We will rely on third parties, including some of our competitors and
potential competitors in the RealTel Riser business, to develop and provide
us with access to communications and networking technology. The development
of new technologies or the significant penetration of alternative
technologies into our target market may either reduce the demand for our
services, require us to devote important capital, human and technical
resources to upgrade, reconfigure or replace our current or future technology
or some combination of each of these, and consequently could have a material
adverse effect on our business.
WE MAY FACE SIGNIFICANT RISKS WITH RESPECT TO OUR NON-U.S. OPERATIONS
We plan to expand our operations in Argentina and Brazil and to
target additional foreign markets where the telecom, economic, regulatory and
real estate conditions support our business plan. There can be no assurance
that these non-U.S. operations will be profitable or support our growth
strategy. The risks inherent in our overseas business activities include but
are not limited to unexpected changes in regulatory environment, foreign
currency fluctuations, unionization, tariffs and other trade barriers,
difficulties in managing international operations and potential foreign tax
consequences, including repatriation of earnings and the burden of complying
with foreign laws and regulations. If we are unable to manage growth, attract
and retain personnel, manage major development efforts, or profitably deliver
services, this could have a material adverse impact on our ability to
successfully maintain and develop our international operations and could have
a material adverse effect on our business.
RETAINED CONTROL BY OUR PRINCIPAL STOCKHOLDERS MAY CREATE CONFLICTS OF
INTEREST
The concentration of ownership of our stock may have the effect of
delaying, deferring or preventing a change in control, merger, consolidation,
or a tender offer which could involve a premium over the price of our common
stock. Currently, our executive officers, directors and
greater-than-five-percent stockholders and their affiliates, in the
aggregate, beneficially own approximately 74% of the outstanding common stock
(not including shares issuable upon the conversion or exercise of convertible
debentures, warrants or options). If all of these stockholders were to vote
together as a group, they would have the ability to exert significant
influence over our board of directors and
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its policies as well as other significant corporate matters such as charter
and bylaw amendments and possible mergers or corporate control contests. A
number of our shareholders are parties to a shareholders agreement under
which, among other things, they have agreed to vote as a group on the
election of directors.
THERE IS A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK AND INVESTORS WILL
HAVE SIGNIFICANTLY LESS LIQUIDITY AND LIMITED AVAILABILITY OF QUOTATIONS IF
OUR COMMON STOCK IS NO LONGER ELIGIBLE FOR QUOTATION ON NASDAQ'S OTC BULLETIN
BOARD.
A limited public market currently exists for our common stock. As
of the date of this registration statement, our common stock is quoted on
Nasdaq's OTC Bulletin Board.
The OTCBB eligibility rule provides that no issuer may be quoted
on the Nasdaq OTC Bulletin Board unless it is required to make current
filings pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
1933. We did not meet this requirement by our required compliance date of
May 3, 2000, but we obtained a temporary stay to continue to have common stock
quoted on the Nasdaq OTC Bulletin Board.
During this time, we have appealed the NASD-scheduled removal of
our stock quotations from the Nasdaq OTC Bulletin Board. As part of that
effort, we applied to the Securities and Exchange Commission for a stay of
the removal, until our appeal could be resolved. On May 3, 2000, the SEC
issued an order temporarily staying the removal of our quotations from the
Nasdaq OTC Bulletin Board. Since that time, the SEC has accepted our appeal,
but has not yet set a schedule to hear the arguments of the parties. No
assurances can be given that our appeal will be successful or when the SEC
will continue the stay. If we are not successful in our appeal, our common
stock will not be eligible for quotation on the Nasdaq OTC Bulletin Board,
which could occur at any time without notice.
If our common stock is no longer quoted on the Nasdaq OTC
Bulletin Board, we believe our common stock quotations will be published in
the "pink sheets," which generally does not provide real time quotes. As a
result, we believe investors will have significantly less liquidity and
limited availability of quotations, which could have a material adverse
effect on the market price of our common stock. No assurance can be given
when, if ever, we will meet the Nasdaq OTC Bulletin Board qualifications to
permit our common stock to be quoted on the Nasdaq OTC Bulletin Board or when
our common stock will be listed on a national exchange.
THE CONVERSION AND EXERCISE OF OUTSTANDING SECURITIES MAY HAVE A DILUTIVE
EFFECT
We have outstanding convertible debentures, warrants and options
with conversion and exercise prices ranging from $0.01 per share to $8.00 per
share. The conversion or exercise of these securities could have a dilutive
effect with respect to holders of our common stock. As of March 31, 2000, the
total number of shares issuable by us under outstanding convertible
debentures, warrants and options was approximately 2,600,000.
FORWARD LOOKING STATEMENTS
This registration statement contains forward looking statements. We
believe that statements of past and existing facts contained in this
registration statement are accurate to the best of our knowledge, or are from
reliable sources, and that forward looking statements contained in this
registration statement are reasonable based upon present knowledge,
intentions and circumstances. However, we cannot and do not warrant, assure
or guarantee the accuracy or achievement of any forward looking statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of our consolidated financial condition and
results of operations for the quarter ended March 31, 2000 should be read in
conjunction with our unaudited condensed consolidated financial statements,
including the related notes, included elsewhere in this Registration
Statement. These financial statements and the discussions regarding the year
ended December 31, 1999 should be read in conjunction with our December 31,
1999 annual consolidated financial statements. Such annual consolidated
financial statements include our independent auditors' report, which contains
a modification concerning substantial doubt about our ability to continue as
a going concern.
OVERVIEW
We are in the development stage and have experienced recurring
losses since inception (January 15, 1997) and have negative cash flows from
operations. For the periods ended March 31, 2000 and 1999, we experienced net
losses of $2,124,937 and $1,217,610, respectively, and we have experienced
net losses of $16,404,617 since inception. As of March 31, 2000, we had
working capital of $1,697.
20
<PAGE>
Management is pursuing various sources of debt and equity financing.
Although we plan to pursue additional financing, there can be no assurance
that we will be able to secure financing when needed or obtain financing on
terms satisfactory to us. Failure to raise such financing could result in the
depletion of our available funds. Without such funds we would be unable to
compensate our employees or comply with our payment obligations under our
loan agreements or with our vendors.
Our ability to continue as a going concern is contingent upon our
ability to raise capital, expand the network of telecommunications access
rights, successfully market these rights to the Telecom Service Providers and
attain profitable operations. Management expects to continue to incur
significant development costs to generate sufficient revenues to achieve
profitability. These costs could increase as we pursue new sources of
revenues such as in-building communications networks and broadband transport
services in office buildings and retail centers.
In order to meet anticipated expenses for the next year and the near
term, we intend to seek additional capital through debt and equity financing.
On February 11, 2000, we retained an investment banking firm to pursue a
private placement of equity or equity-linked securities. We currently expect
the amount of the private placement to be up to approximately $25 million. No
assurance can be given that we will be able to sell securities or raise
additional money to meet our operating needs, or that, if available, such
financing could be effected on terms acceptable to us. If we are not able to
sell additional securities or raise additional financing to meet our future
operating expenses and expansion, there is a substantial doubt that we will
be able to continue as a going concern. Our independent auditors' report on
our 1998 and 1999 consolidated annual financial statements contains a
modification concerning substantial doubt about our ability to continue as a
going concern. If we are unsuccessful in raising capital through our current
private offering, or through alternative means, our current projections
indicate we will run out of cash in the third quarter of 2000. As of the date
of this report, our common stock is quoted on the Nasdaq OTC Bulletin Board.
We filed a Form 10-SB on April 19, 2000 to become a reporting company and
have filed and have been granted a temporary stay to continue trading on the
Nasdaq OTC Bulletin Board.
During the quarters ended March 31, 2000 and 1999, our activities were
primarily focused on the expansion of our organizational structure, raising
additional operating capital, recruiting and training personnel, adding
properties to the "USRT Telecom Grid" pursuant to our Master Lease program,
signing Master Subleases with Telecom Service Providers, and marketing our
telecommunications access rights to Telecom Service Providers. In February
2000 we formed an 89% owned subsidiary in Brazil, named RealTel do Brasil,
S.A.
QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED MARCH 31, 1999.
REVENUES. Revenues increased to $224,091 for the quarter ended
March 31, 2000 from $28,323 for the same period in 1999. The revenue
increased as we entered into more site specific subleases of our telecom
access rights with Telecom Service Providers on properties in the "USRT
Telecom Grid."
REVENUES-NET. Revenues-net (after direct costs) also increased
consistent with the increased revenues although margins on the initial leases
in 1999 were lower reflecting the startup nature of the business.
OPERATING EXPENSES. Operating expenses increased to $1,942,389 for
the quarter ended March 31, 2000 from $1,231,960 for the quarter ended March
31, 1999. In the 2000 quarter, salaries and benefits increased to $1,030,315
from $607,146 for the first quarter of 1999 as we hired additional personnel
to implement our business plan. General and administrative expenses increased
in the first quarter of 2000 to $762,985 from $499,025 in the first quarter
of 1999. This increase was for additional office space, insurance, travel and
other operating costs, while marketing costs were reduced. Professional and
investment banking fees were $149,089 in 2000 compared to $ 125,789 in the
first quarter of 1999.
Operating expenses include the cost to fund the operations in
Argentina and the startup of our subsidiary in Brazil, which were
approximately $546,000 for the quarter ended March 31, 2000 compared to
$126,000 for the same period in 1999 and $1,666,000 since inception. No
foreign currency adjustments exist since the peso is equivalent to one U.S.
dollar, and the Brazilian expenses were paid in US dollars.
INTEREST EXPENSE AND FINANCING COSTS. During the quarter ended
March 31, 2000, interest expense and financing costs increased by $266,107
from the comparable three months in 1999. The increase is attributable to
noncash interest charges of $195,000 in the first three months of 2000
relating to the debt discount on the convertible debenture and interest
expense on the convertible debenture and convertible note payable. There were
no interest charges for the first three months of 1999.
INTEREST INCOME. Interest income increased to $33,617 during the
quarter ended March 31, 2000 from $9,417 in 1999 as a result of short term
investments of cash received from the end of December 1999 funding of the
convertible debenture.
INCOME TAXES. No income tax benefit of our losses has been
recognized because of the uncertainty in realizing the benefit of our net
operating losses.
NET LOSS. Our net loss increased for the quarter ended March 31,
2000 to $2,124,937 ($.33 per basic and diluted common share) from $1,217,610
($.21 per basic and diluted common share)for the comparable period in 1999,
primarily because of increased salaries and benefits of personnel hired to
support our growth, interest expense on our debt, operating expenses of the
Argentina subsidiary and the startup costs of the Brazilian subsidiary.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
REVENUES. Revenues increased to $410,451 in 1999 from $43,395 in
1998. The revenue increased as we accelerated our efforts to enter into site
specific Subleases of our telecommunications access rights with Telecom
Service Providers on properties in the "USRT Telecom Grid."
21
<PAGE>
REVENUES-NET. Revenues-net (after direct costs) also increased
consistent with the increased revenues although margins on the initial leases
were lower reflecting the startup nature of the business. Revenues and
revenues-net included $50,000 and $20,000 respectively for the sale of an
easement right and a fee for negotiating the termination of a third party
contract in 1999. Both of these transactions are related to our site leasing
business.
OPERATING EXPENSES. Operating expenses increased to $5,623,323 for
the year ended December 31, 1999 from $4,795,538 for the year ended December
31, 1998. In 1999, salaries and benefits increased to $2,966,928 from
$1,944,780 in 1998 as we hired additional personnel to implement our business
plan. General and administrative expenses increased in 1999 to $1,960,156
from $1,271,984 in 1998. This increase was for additional office space,
marketing and travel costs. Professional and investment banking fees were
$696,239 in 1999 compared to $1,578,774 in 1998, because of noncash equity
charges for common stock and warrants issued for services in 1998 of
$899,000, primarily related to the cancellation of an investment banking
agreement, compared to $170,500 in 1999, and lower professional fees.
Operating expenses include the cost to establish the operations in
Argentina, which were approximately $1,061,000 in 1999 compared to $59,000 in
1998. No foreign currency adjustments exist since the peso is equivalent to
one U.S. dollar.
INTEREST EXPENSE AND FINANCING COSTS. In 1999, interest expense and
financing costs decreased to $254,871 from $2,715,982 in 1998. The decrease
is attributable to noncash equity charges of $2,349,000 in 1998, primarily
for favorable and revised conversion rates related to convertible debentures,
compared to $225,000 in 1999, and reduced interest expense in 1999 as a
result of decreased average indebtedness outstanding.
OTHER INCOME. Other income amounting to $71,020 in 1998 represented
a one-time fee relating to a nonrefundable loan application fee received.
INCOME TAXES. No income tax benefit of our losses has been
recognized because of the uncertainty in realizing the benefit of our net
operating losses.
NET LOSS. Our net loss decreased in 1999 to $5,743,673 ($.96 per
basic and diluted common share) from $7,401,299 in 1998 ($1.64 per basic and
diluted common share), primarily because of the reduced noncash equity
charges discussed above, partially offset by the startup costs of the
Argentina subsidiary and increased salaries of personnel hired to support our
growth.
LIQUIDITY AND CAPITAL RESOURCES
We are in the development stage. We have a substantial ongoing
investment in business development efforts and expenditures to build the
appropriate infrastructure to support our expected growth. Consequently, we
have been substantially dependent on private placements of our equity
securities and debt financing to fund our cash requirements.
Net cash used in our operations was $1,875,211 for the quarter ended
March 31, 2000 and $1,099,797 for the quarter ended March 31, 1999. The
increase in net cash used for operating activities in 2000 was primarily due
to the funding of the Argentinean subsidiary, the startup of the Brazilian
subsidiary, interest expense on our debt and increased salaries and benefits.
Net cash used in our operations was $4,915,428 for the year ended December
31, 1999 and $3,677,112 for the year ended December 31, 1998. The increase in
net cash used for operating activities in 1999 was primarily due to the
funding of the startup of the Argentinean subsidiary and increased salaries
and benefits.
22
<PAGE>
Cash used in investing activities was $66,750 in the quarter ended
March 31, 2000 and $18,820 in the quarter ended March 31, 1999. Cash used in
investing activities was $124,199 in the year ended December 31, 1999 and
$145,810 in the year ended December 31, 1998. Cash used was primarily for the
purchase of equipment and leasehold improvements. We have no significant
capital expenditure commitments.
Our primary sources of liquidity have been through the issuance of
common stock and borrowings through convertible debentures. Proceeds received
from financing activities were primarily used to fund our losses. In the
quarter ended March 31, 2000, we spent $98,619 for costs to prepare for a
private placement of our equity securities. Net cash provided from financing
activities was $8,790,627 for the year ended December 31, 1999 and $3,741,147
for the year ended December 31, 1998. The amounts in both 1999 and 1998 were
primarily from the proceeds from the issuance of common stock, as well as
from the issuance of convertible debentures.
In March 1998, we issued $1,550,000 of Series B convertible
debentures which had an interest rate of 9% per year. The debentures were due
on the earlier of December 31, 1998 or the date of funding of a secondary
equity offering as defined in the debentures. These debentures along with
$525,000 of Series A convertible debentures, which were issued in December
1997, were converted into 518,750 shares of our common stock at $4.00 per
share during the fourth quarter of 1998. On October 2, 1998, we sold 575,000
shares of our common stock at $4.00 per share in a private placement. The
proceeds from this sale totaled $2,118,000, net of expenses.
During 1999, we completed two private placements of our common
stock. We sold 578,500 shares of our common stock at $6.00 per share and
384,615 shares of our common stock at $6.50 per share and received net
proceeds (after expenses) of $5,783,601. In addition, stock options for
24,548 shares of our common stock were exercised resulting in net proceeds of
$117,278.
On September 24, 1999, we executed a $1,500,000 promissory
convertible note with a related party. The note bears interest at a rate of
7% annually. Interest is payable on March 30, 2000 and September 24, 2000.
The principal amount of the note is due and payable on September 24, 2000
unless the holder elects to exercise the right to convert the convertible
note into our common stock at $6.50 per share currently or into stock of our
Argentinean subsidiary.
On December 28, 1999, as part of our second private placement in
1999, we issued a $3,000,000 convertible debenture, which can be drawn upon
until December 28, 2000 ($1,500,000 was outstanding as of December 31, 1999
and March 31, 2000). The conversion price of this debenture is $7.50 per
share of common stock. This debenture carries interest at 12% and is due at
the earlier of July 1, 2001 or the completion of a public offering of our
common stock yielding proceeds of at least $10,000,000. The debenture holder
also has the option to convert the interest due to shares of the Company's
common stock, rather than cash, at $6.50 per share.
We anticipate that the private placement in December 1999, including
the convertible debentures issued and available will be sufficient to fund
operating losses anticipated through August 2000. The Company drew an
additional $750,000 on June 6, 2000 of the remaining $1,500,000 available
under the convertible debenture. The remaining additional $750,000 will be
drawn as needed. Future financings are anticipated in 2000 to fund the
operating losses, expansion and growth of our businesses such as providing
in-building communications networks and broadband transport services in
office buildings and retail centers and our Argentinean and Brazilian
subsidiaries. We estimate that we must raise $6,000,000 to fund our
operations through the end of 2000 and that $8,000,000 is required to fund
our operating losses for the next twelve months. Our investment banking firm
is currently attempting through a private placement to raise up to
$25,000,000 of redeemable Series A Convertible Preferred Stock, although no
assurance can be given that the firm will be successful in completing such
financing. The terms of the private placement are subject to negotiation,
however, it is anticipated that the preferred stock issue will be convertible
into the Company's common stock and will have a redemption feature.
23
<PAGE>
We do not consider our business seasonal in nature causing any
unusual liquidity issues.
YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Beginning in
Year 2000, these date code fields need to accept four digit entries in order
to distinguish 21st century dates. All of our computers comply with "Year
2000" requirements. As of the date of this Registration Statement, our
internal systems have not had any "Year 2000" failures. In addition, we have
had no interruption of service from any of our vendors.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000. We do
not expect the adoption of this statement to have a significant impact on our
consolidated results of operations, financial position or cash flows.
ITEM 3. DESCRIPTION OF PROPERTY
<TABLE>
<CAPTION>
SQUARE ANNUAL LEASE
LOCATION CITY GENERAL CHARACTER FEET RENT EXPIRATION
-------- ---- ----------------- ------ -------- ----------
<S> <C> <C> <C> <C> <C>
555 West Madison Atrium Chicago, Illinois Principal Executive 9,598 $171,780 September 30,
Level South Office 2004
</TABLE>
We lease the property that serves as our principal executive office
from an independent third party.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of March 31, 2000 by (1) each
person who beneficially owns 5% or more of a class of capital stock, (2) each
of our directors, (3) each of the named executive officers and (4) all of our
directors and executive officers as a group.
Unless otherwise noted the address for each of the persons listed
below is: c/o U.S. RealTel, Inc., 555 West Madison, Atrium Level South,
Chicago, Illinois 60661.
24
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK BENEFICIALLY OWNED (a)
-----------------------------------------
NAME OF BENEFICIAL OWNER NO. OF SHARES % OF CLASS (b)
------------------------ ------------- --------------
<S> <C> <C>
Craig M. Siegler (c)(d).................................. 1,784,383 27.02%
Ross J. Mangano (c)(e)................................... 1,664,272 24.16%
Gerard H. Sweeney (c)(f)................................. 1,209,615 16.70%
Brandywine Operating Partnership, L.P. (c)............... 1,084,615 14.98%
14 Campus Boulevard, Suite 100
Newtown Square, PA 19073
Jordan E. Glazov (c)(g).................................. 773,014 11.89%
Perry H. Ruda (c)........................................ 726,009 11.17%
Doerge-U.S. RealTel, L.L.C. (h).......................... 489,125 7.59%
30 South Wacker Drive, Suite 2112
Chicago, IL 60606
Mark J. Grant (c)(i)..................................... 168,651 2.56%
Ilene Dobrow Davidson (c)................................ 35,333 *
Burton Blinick (c)....................................... 33,333 *
Charles McNamee (c)...................................... 28,125 *
All executive officers and directors as a group (11 persons)
(c)(d)(e)(f)(g)(h)(i).................................... 6,422,735 76.84%
</TABLE>
*Represents less than one percent of the total.
(a) Except as otherwise noted, we believe that all persons have full voting
and investment power with respect to the shares indicated. Under the
rules of the Securities and Exchange Commission, a person (or group of
persons) is deemed to be a "beneficial owner" of a security if he or
she, directly or indirectly, has or shares the power to vote or to
direct the voting of such security, or the power to dispose of or to
direct the disposition of such security. Accordingly, more than one
person may be deemed to be a beneficial owner of the same security. A
person is also deemed to be a beneficial owner of any security which
that person has the right to acquire within 60 days, such as options or
warrants to purchase our common stock.
(b) The calculations in this table of the percentage of outstanding shares
are based on 6,442,808 shares of our common stock outstanding as of
March 31, 2000. Shares of our common stock subject to options that are
presently exercisable within 60 days of March 31, 2000 are deemed to be
outstanding and beneficially owned by the person holding such options
for the purpose of computing the percentage of ownership of such person
but are not treated as outstanding for the purpose of computing the
percentage of any other person.
(c) Includes unissued shares of our common stock subject to warrants
exercisable within 60 days of March 31, 2000, as follows: Mr. Ruda,
58,554; Mr. Glazov, 58,554; Mr. Siegler, 160,858; Mr. Grant, 60,002;
Mr. Mangano, 60,000; Mr. Sweeney, 25,000; Brandywine Operating
Partnership, L.P., 600,000 warrants and a convertible debenture
convertible into 200,000 shares of common stock. Includes unissued
shares of our common stock subject to options exercisable within 60
days of March 31, 2000, as follows: Ms. Davidson, 33,333; Mr.
McNamee, 28,125; Mr. Blinick, 33,333.
25
<PAGE>
(d) Does not include 11,000 shares held by Mr. Siegler's father, and 1,500
shares held by Mr. Siegler's brother. Includes 20,895 shares held by
the Florence Skolnik Siegler Foundation over which shares Mr. Siegler
has voting and dispositive control.
(e) Includes 285,960 shares held by trusts of which Mr. Mangano serves as
trustee: Joseph D. Oliver Trust - GO Cunningham Fund (62,500 shares),
Joseph D. Oliver Trust - James Oliver II Fund (62,500), Joseph D.
Oliver Trust - Joseph D. Oliver, Jr. Fund (62,500), Joseph D. Oliver
Trust - Susan C. Oliver Fund (62,500), C. Frederick Cunningham II rev.
trust 11/25/75 (24,460 shares), J. Oliver Cunningham Jr. rev. trust
5/24/77 (11,500 shares). Also includes warrants to purchase 116,667
shares held by such trusts; 525,000 shares and warrants to purchase
250,876 shares held by Jo & Co., a corporation for which Mr. Mangano
serves as President; 65,000 shares held by John S. Warriner and 37,500
shares and warrants to purchase 17,500 shares held by James Hart over
which, respectively, Mr. Mangano has voting and/or dispositive
control. Also includes 230,769 shares issuable upon the conversion
of a convertible debenture held by Troon & Co. and trusts of which
Mr. Mangano serves as trustee.
(f) Includes 384,615 shares held by Brandywine Operating Partnership, L.P.
and 600,000 unissued shares subject to warrants exercisable within 60
days of March 31, 2000 held by Brandywine Operating Partnership, L.P.
and 200,000 shares issuable upon the conversion of a convertible
debenture held by Brandywine Operating Partnership, L.P., of which
Mr. Sweeney disclaims any beneficial ownership. Mr. Sweeney is the
President and Chief Executive Officer of Brandywine Realty Trust,
the general partner of Brandywine Operating Partnership, L.P.
(g) Shares are held in joint tenancy with Mr. Glazov's wife. Does not
include 3,568 shares held by one of Mr. Glazov's sons, 3,568 shares
held by another of Mr. Glazov's sons and 2,318 shares held by Mr.
Glazov's daughter.
(h) Includes 25,000 unissued shares subject to warrants exercisable
within 60 days of March 31, 2000 held by David J. Doerge, the manager
of Doerge-U.S. RealTel, L.L.C.
(i) Includes 7,500 shares held by Access Financial Group, Inc. and 91,524
unissued shares subject to warrants exercisable within 60 days of March
31, 2000 held by Access Financial Group, Inc. Mr. Grant serves as the
President--Capital Markets for Access Financial Group, Inc.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of our
directors and executive officers as of March 31, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Perry H. Ruda(1) 57 Chairman of the Board, Director
Jordan E. Glazov 57 President, Director
Ross J. Mangano(1)(2) 54 Director
Craig M. Siegler(2) 49 Director
Mark J. Grant(1)(2) 49 Director
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Gerard H. Sweeney 43 Director
Charles McNamee 52 President, Business Development
Ilene Dobrow Davidson 49 Executive Vice President, General Counsel
John R. Glass 56 Chief Financial Officer
Burton Blinick 44 Senior Vice President , Site Development
Peter Gould 58 Senior Vice President, Telecom Leasing
</TABLE>
___________________________________________
(1) Member of Finance Committee
(2) Member of Compensation Committee
PERRY H. RUDA co-founded AGILE, LLC, the predecessor to the Company, in 1997.
He serves as a Director and Chairman of the Board and Chief Executive Officer
of the Company. In 1995 Mr. Ruda entered the telecommunications industry in
the site acquisition sector. From 1980 to 1996, he served as president of
Perry Ruda & Company, where he was responsible for negotiating corporate
facilities leases for Fortune 500 corporations and providing real estate
acquisition services for high profile properties and tenants. From 1995 to
1996, Mr. Ruda served as chief financial officer of Cellular Realty Advisors.
Mr. Ruda also has more than 25 years of experience in commercial real estate
and holds real estate licenses in Illinois, Florida, Alabama and
Pennsylvania. He attended the University of Maryland.
JORDAN E. GLAZOV has served as a director and President since he co-founded
the Company in 1997. From January 1997 to August 1997, Mr. Glazov co-managed
AGILE, LLC; from August 1990 to January 1997, he was the sole principal of
Jordan E. Glazov Real Estate Financial Services, which acted as an
acquisition and asset management consultant to institutional investors. From
January 1989 to August 1990, he was a vice president and manager of the
Financial Services Group of Cushman & Wakefield of Illinois. Mr. Glazov holds
a B.S. in accounting from the University of Illinois School of Commerce, a
J.D. from the Northwestern University School of Law, and a real estate
brokers license in Illinois.
ROSS J. MANGANO has been a director since October 1998. Mr. Mangano has
served as the Chairman of the Board of Directors of Cerprobe, a public
company, since February 1992 and as a director of Cerprobe since February
1988. Mr. Mangano has served as the President of Oliver Estate, Inc., an
investment management company located in South Bend, Indiana, since 1996.
Prior to that time, Mr. Mangano served in various management positions with
Oliver Estate, Inc., since 1971. Mr. Mangano also is an investment analyst
for Oliver Estate, Inc. Mr. Mangano has served on the Board of Directors of
BioSante Pharmaceuticals, Inc. a public company located in Lincolnshire,
Illinois since July 1999 and Orchard Software Corporation a privately held
27
<PAGE>
company which develops software for the medical industry located in Carmel,
Indiana since August 1998.
CRAIG M. SIEGLER has been a director since November 1997. Since April 1994,
Mr. Siegler has been president and owner of Siegler Corporation, a venture
capital and investment banking firm. From October 1991 until April 1994, Mr.
Siegler was employed as a managing director of Gruntal & Co., Incorporated,
an investment banking firm. From April 1990 until October 1991, he was
chairman of the board and chief executive officer of Discus Music World,
Inc., a wholesale and retail distributor of recorded music products. From
November 1985 until April 1990, Mr. Siegler was a managing director of
Ladenburg, Thalman & Co., Inc., an investment banking firm.
MARK J. GRANT has served as a director since October 1998. Mr. Grant has
served as a director and President of Capital Markets of Access Financial
Group, Inc. since October 1995. From September 1988 to January 1994, he
served as a director and Executive Vice President of Capital Markets of
Rodman & Renshaw, an investment banking firm. Prior to this position, Mr.
Grant held various positions at Stern Brothers & Co., including head of the
fixed income department, the syndicate department and a director.
GERARD H. SWEENEY has been a director since January 2000. Mr. Sweeney is
president and chief executive officer of Brandywine Realty Trust and was
elected a trustee of Brandywine Realty Trust in February 1996. Prior to
August 1994, Mr. Sweeney served as vice president of LCOR, Incorporated
("LCOR"), a real estate development firm. Mr. Sweeney was employed by The
Linpro Company (a predecessor of LCOR) from 1983 to 1994 and served in
several capacities, including financial vice president and general partner.
Mr. Sweeney is a member of NAREIT, the ULI, the American Institute of
Certified Public Accountants and the Pennsylvania Institute of Certified
Public Accountants.
CHARLES MCNAMEE is our President of Business Development since March 2000 and
served as the head of our Occupant Services Group from March 1998 until March
2000. Mr. McNamee has been employed in the telecommunications industry for
more than 20 years with ROLM Corporation, IBM and Siemens prior to 1989. He
co-founded and was president of RealCom Office Communications from 1989 until
1994, an entity acquired by Metropolitan Fiber Systems Communications Company
in 1994. From November 1994 to April 1995, Mr. McNamee served as senior vice
president of MFS Intelenet/Realcom. From April 1995 to July 1996, he was
president and chief executive officer of Communications Access, LLC. From
October 1995 to December 1996, Mr. McNamee served as president and chief
executive officer of Tie Communications, Inc., and he continued to serve as
chief executive officer of Tie Communications, Inc. until March 1998. Tie
Communications, Inc. filed a voluntary petition for bankruptcy in April 1998.
Mr. McNamee has a degree in Economics from the University of Michigan and an
MBA in Accounting and Finance from Michigan State University.
ILENE DOBROW DAVIDSON serves as our Executive Vice President and General
Counsel. Ms. Davidson began practicing law in 1975. She was a partner in
Sachnoff & Weaver, Ltd., a Chicago law firm, where she specialized in land
use and real estate from July 1983 to January 1991. She returned to the firm
in December 1992 where she remained until becoming General
28
<PAGE>
Counsel to the Company in October 1997. Ms. Davidson is a graduate of Tulane
University and received her J.D. from Washington University.
JOHN R. GLASS has served as our Chief Financial Officer since March 1999.
From January 1990 to March 1996, Mr. Glass was president and owner of J. R.
Glass & Associates, Inc. From March 1996 to December 1998, he was
vice-president and chief financial officer of Health Charge Corporation. Mr.
Glass served as a consultant, primarily to Health Charge Corporation, from
January 1999 to March 1999. He received his BBA in Accounting from Loyola
University, Chicago and has been a CPA since 1969.
BURTON BLINICK serves as our Senior Vice President of the Site Development
Group. Prior to joining U.S. RealTel, Inc. in 1998, he served as senior vice
president at Sheldon Good & Company, a national real estate auction company.
Mr. Blinick holds real estate licenses in Illinois, Georgia, New York,
Massachusetts, Rhode Island, New Jersey and Minnesota and holds a B.S. in
Business Administration from the University of Illinois.
PETER GOULD has served as our Senior Vice President of the Telecom Leasing
Group since January 1999. In November 1984, Mr. Gould founded Lincoln Mills
Associates where he was employed until he joined Advanced Radio Telecom in
June 1996 as their Eastern Region Director of Site Acquisitions until
December 1997. From January 1998 until December 1998, he was National
Portfolio Director of Teligent, Inc. He holds a B.A. in English and Business
Administration from Upsala College.
Each of our directors holds office until the next annual meeting of our
stockholders or until his successor has been duly elected and qualified.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth certain summary information
concerning the compensation earned during 1999 by our chief executive officer
and the four other most highly compensated executive officers. We use the
term "named executive officers" to refer to these people in this registration
statement. The table excludes certain perquisites and other personal benefits
received by a named executive officer that do not exceed the lesser of
$50,000 or 10% of any such officer's salary and bonus disclosed in the table.
29
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------------- ------------------
SECURITIES
UNDERLYING
FISCAL SALARY BONUS OTHER ANNUAL OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR ($) ($) COMPENSATION ($) (#)
------------------------------- -------- ------------ ----------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Perry H. Ruda 1999 $190,300 $50,000 $18,000 (1) 40,000
Chairman of the Board,
Chief Executive Officer
Jordan E. Glazov 1999 $190,481 $50,000 $18,000 (1) 40,000
President, Director
Ilene Dobrow Davidson 1999 $150,000 --- $8,400 (1) 30,000
Executive Vice President,
General Counsel
Charles McNamee 1999 $150,000 --- --- 67,500
President-Occupant
Services Division
Burton Blinick 1999 $150,000 --- $8,400 (1) 30,000
Senior Vice President
(1) Automobile allowance
</TABLE>
30
<PAGE>
OPTION GRANTS IN 1999
The following table sets forth information on grants of stock
options during 1999 to the named executive officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
PERCENT OF TOTAL AT ASSUMED RATES OF STOCK
OPTIONS GRANTED EXERCISE PRICE APPRECIATION FOR
OPTIONS TO EMPLOYEES PRICE EXPIRATION OPTION TERM
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
--------------------------- ------------ ---------------- --------- ----------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Perry H. Ruda 40,000 9.11% $8.00 (1) 109,171 248,619
Jordan E. Glazov 40,000 9.11% $8.00 (1) 109,171 248,619
Ilene Dobrow Davidson 30,000 6.83% $8.00 (2) 81,878 186,463
Charles McNamee 67,500 15.37% (3) (3) 165,036 375,840
Burton Blinick 30,000 6.83% $8.00 (2) 81,878 186,463
</TABLE>
(1) 13,333 of these options expire December 30, 2005, 13,333 December 30,
2006, and 13,334 December 30, 2007.
(2) 10,000 of these options expire on each of December 30, 2005, December 30,
2006, and December 30, 2007.
(3) Charles McNamee was granted 37,500 options with an excise price of $6.50
per share which expire on October 13, 2004 and 30,000 options with an
exercise price of $8.00 per share 10,000 of which expire on each of
December 30, 2005, December 30, 2006, and December 30, 2007.
DECEMBER 31, 1999 OPTION VALUES
The following table provides information on the value of named
executive officers' unexercised stock options as of December 31, 1999. There
were no option exercises in fiscal 1999 by such officers. The value of
unexercised in-the-money options in the following table is computed based on
the closing bid price of our common stock on December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
DECEMBER 31, 1999(#) DECEMBER 31, 1999($)
NAME EXERCISABLE/ UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------------- ---------------------------------
<S> <C> <C>
Perry H. Ruda 0/ 40,000 0/0
Jordan E. Glazov 0/ 40,000 0/0
Ilene Dobrow Davidson 33,333/41,111 58,333/19,444
Charles McNamee 18,750/48,750 9,375/9,375
Burton Blinick 22,222/52,222 38,889/8,889
</TABLE>
31
<PAGE>
COMPENSATION OF DIRECTORS
In consideration of Messrs. Mangano and Grant joining the board in
October 1998, they each received warrants to purchase 25,000 shares of our
common stock at an exercise price of $4.00 per share. These warrants, if not
sooner exercised, expire on October 2, 2003. In consideration of Mr. Sweeney
joining the Board in January 2000, he received warrants to purchase 25,000
shares of our common stock at an exercise price of $8.00 per share. These
warrants, if not sooner exercised, expire on February 14, 2005. All directors
are reimbursed for travel expenses incurred in connection with attending
board and committee meetings. Directors are not entitled to additional fees
for serving on committees of the board. From time to time, we may also grant
our non-employee directors options after reviewing the level of compensation
paid to non-employee directors to other companies similarly situated to us.
EMPLOYMENT AND STOCK OPTION AGREEMENTS
We have employment agreements with two officers, Messrs. Ruda and
Glazov. The agreements were entered into as of January 15, 1997 The
agreements each have an initial term of five years. The agreements were
amended as of April 20, 1999. Each of the agreements as amended provides for
a base salary of $200,000 per year. Each of the agreements as amended
provides for the payment of a $25,000 bonus payable on April 1, 1999 and a
$50,000 bonus payable upon the occurrence of certain transactions. All
bonuses under the agreements have been earned and paid prior to the date
hereof. Each of the agreements as amended provides for automatic three-year
rolling renewals. Our board of directors may terminate either of the
agreements as of April 1 of any year by providing written notice to the
employee not later than February 1 of such year. Each of the agreements
provide for the payment of the present value of the base salary for the
remaining term of the agreement in the event of any termination other than
for cause. The agreements contain certain provisions regarding the
non-disclosure of confidential information and non-competition.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We entered into an agreement with Siegler Corporation, an affiliate
of Craig M. Siegler, one of our directors, that provided that we pay a
minimum investment banking fee to Siegler Corporation of $100,000 per year
for a three-year period commencing July 28, 1997, extendable for an
additional nine years under certain conditions. The agreement also provided
for the reimbursement of certain expenses incurred by Siegler Corporation up
to $17,000 and for the issuance of 0.5% of our common stock (20,895 shares),
as defined, to a charitable foundation. In 1998, this agreement was canceled,
and we paid $150,000 and issued 83,395 shares of common stock (including
20,895 shares described in the preceding sentence) and 43,750 warrants with
an exercise price of $4 per share, expiring in October 2003, to Mr. Siegler,
Siegler Corporation and the charitable foundation. In 1998 and 1997, we paid
$225,000 and $75,000, respectively, to the Siegler Corporation for investment
banking services.
During 1998, we received and subsequently repaid advances of
approximately $110,000 from Jordan E. Glazov, our President and a director.
Interest on these amounts was paid at 9% per annum and aggregated $1,447.
In October 1998, we issued 13,750 shares of our common stock and
paid $152,000 to Access Financial Group, Inc. for services rendered in
connection with a private placement of securities. For services rendered in
connection with the sale of common stock and warrants in October 1998 and the
conversion of convertible debentures in October and December 1998, we issued
to Access Financial Group, Inc. warrants to purchase 9,625 shares of our
common stock at $4 per share and warrants to purchase 39,477 shares of our
common stock at $5.25 per share. For services rendered in connection with the
exercise of stock options by former holders of our Series A and Series B
convertible debentures in February, March and April 1999, we issued to Access
Financial Group, Inc. warrants to purchase 4,348 shares of our common stock
at $5.25 per share. In addition, we have paid Access Financial Group $28,643
for services rendered in the past two years. Mark J. Grant, one of our
directors, is a director and President of Capital Markets of Access Financial
Group, Inc.
On September 24, 1999, we executed a $1,500,000 convertible
promissory note with a partnership and certain trusts of which Ross J.
Mangano, one of our directors, is a partner or trustee. The note bears
interest at a rate of 7% annually. Interest is payable on March 30, 2000 and
September 24, 2000. The principal amount of the note is due and payable on
September 24, 2000 unless the holder
32
<PAGE>
elects to exercise the right to convert the convertible note into our common
stock at $6.50 per share currently or into stock of our Argentinean
subsidiary.
On December 28, 1999, as part of our second private placement in
1999, we issued to Brandywine Operating Partnership, L.P., of whose general
partner, Brandywine Realty Trust, Gerard H. Sweeney is President and Chief
Executive Officer, a $3,000,000 convertible debenture, which can be drawn
upon until December 28, 2000 ($1,500,000 was outstanding as of December 31,
1999). The conversion price of this debenture is $7.50 per share of common
stock. This debenture carries interest at 12% and is due at the earlier of
July 1, 2001 or the completion of a public offering of our common stock
yielding proceeds to the Company of at least $10,000,000. The debenture
holder also has the option to convert the interest due to shares of the
Company's common stock, rather than cash, at $6.50 per share. As part of the
same transaction, we sold to Brandywine Operating Partnership, L.P. 384,615
shares of common stock at $6.50 per share, for a total aggregate purchase
price of $2,500,000. In connection therewith, we issued to Brandywine
Operating Partnership, L.P. warrants to purchase 600,000 shares of the
Company's common stock at an exercise price of $8.00 per share.
Consulting fees to Mark J. Grant, one of our directors, amounted to
$81,500 in 1999 and $13,500 in 1998.
We believe that all transactions between us and the related parties
are on terms no less favorable to us than those terms we could have obtained
from unaffiliated third parties.
ITEM 8. DESCRIPTION OF SECURITIES
THIS SUMMARY CONTAINS A DESCRIPTION OF ALL OF THE MATERIAL TERMS OF
OUR CAPITAL STOCK. HOWEVER, IT DOES NOT DESCRIBE EVERY TERM OF THE CAPITAL
STOCK CONTAINED IN OUR CERTIFICATE OF INCORPORATION. WE REFER YOU TO THE
PROVISIONS OF DELAWARE CORPORATE LAW AND OUR CERTIFICATE OF INCORPORATION AND
BYLAWS, WHICH YOU CAN ACCESS THROUGH EDGAR AT WWW.SEC.GOV/EDGARHP.HTM.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Our certificate of incorporation authorizes us to issue 50,000,000
shares of common stock, $0.001 par value per share, and 5,000,000 shares of
preferred stock, $0.001 par value per share. The preferred stock is issuable
in series. On March 31, 2000, there were 6,442,808 shares of U.S. RealTel
common stock outstanding, held of record by 109 stockholders, and there were
no shares of preferred stock outstanding.
COMMON STOCK
VOTING RIGHTS. Holders of our common stock are entitled to one vote
per share on all matters to be voted upon by the stockholders. The holders of
common stock are not entitled to cumulative voting rights with respect to the
election of directors, and as a result, minority stockholders will not be
able to elect directors on the basis of their votes alone.
DIVIDEND RIGHTS. Subject to preferences that may be applicable to
any then outstanding shares of preferred stock, holders of common stock are
entitled to receive ratably such dividends as may be declared by the board
out of funds legally available therefor.
LIQUIDATION RIGHTS. In the event of our liquidation, dissolution or
winding up, holders of the common stock are entitled to share ratably in all
assets remaining after payment of liabilities
33
<PAGE>
and the liquidation preference of any then outstanding preferred stock.
Holders of common stock have no preemptive, conversion or other rights to
subscribe for additional securities of U.S. RealTel. No redemption or sinking
fund provisions apply to the common stock. All outstanding shares of common
stock are validly issued, fully paid and nonassessable.
PREFERRED STOCK
Our board has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms
of redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of such series. The
issuance of preferred stock could adversely affect the voting power of
holders of our common stock and could decrease the likelihood that such
holders will receive dividend payments and payments upon liquidation and
could have the effect of delaying, deferring or preventing a change of
control of the Company Accordingly, the issuance of shares of preferred stock
may discourage offers for our common stock or may otherwise adversely affect
the market price of our common stock. We may issue shares of preferred stock
in the near future.
REGISTRATION RIGHTS
We are a party to a registration rights agreement, as amended, with
Craig M. Siegler, Siegler Corp., Stanley Siegler, Steven Siegler, the
Florence Skolnik Siegler Foundation, Jordan E. Glazov, individually and as a
joint tenant with Sheila N. Glazov, Perry H. Ruda, Jo & Co., Access Financial
Group, Inc., Ross J. Mangano, James Hart, Joseph D. Oliver Trust - GO
Cunningham Fund, Joseph D. Oliver Trust - James Oliver II Fund, Joseph D.
Oliver Trust - Joseph D. Oliver, Jr. Fund, Joseph D. Oliver Trust - Susan C.
Oliver Fund, and Troon & Co. If we register our shares under the Securities
Act of 1933 (the "Securities Act"), the stockholders who are parties thereto
have the right to have their shares of our common stock registered. The
current number of shares as to which registration rights may be exercised
under this agreement is approximately 5,000,000, including shares issuable
upon the exercise of warrants or the conversion of convertible securities. In
addition, we are a party to a securities purchase agreement with Brandywine
Operating Partnership, L.P. and Brandywine Realty Services Corporation
(collectively, "Brandywine"). This securities purchase agreement grants the
holders of certain securities issued pursuant thereto rights to have their
shares of common stock registered if we register our shares under the
Securities Act or, after a time specified in the securities purchase
agreement, upon request by such holders. The current number of shares as to
which registration rights may be exercised under this agreement is
approximately 1,500,000, including shares issuable upon the exercise of
warrants or the conversion of convertible securities. The registration rights
under the registration rights agreement and under the securities purchase
agreement are subject to cutbacks in the event that it is determined that the
registration of shares otherwise registrable under such agreements would
materially and adversely affect the offering of our shares for sale and other
customary limitations.
SHAREHOLDERS' AGREEMENT
We are a party to a shareholders' agreement, as amended, with Craig
M. Siegler, Siegler Corp., Stanley Siegler, Steven Siegler, the Florence
Skolnik Siegler Foundation, Jordan E. Glazov, individually and as a joint
tenant with Sheila N. Glazov, Perry H. Ruda, Jo & Co., Access Financial
Group, Inc., Ross J. Mangano, James Hart, Joseph D. Oliver Trust - GO
Cunningham Fund, Joseph D. Oliver Trust - James Oliver II Fund, Joseph D.
Oliver Trust - Joseph D. Oliver, Jr. Fund, Joseph D. Oliver Trust - Susan C.
Oliver Fund, Troon & Co and Brandywine. The shareholders' agreement requires
each stockholder who is a party thereto to vote their shares in favor of the
following persons to serve as our directors: one individual designated by
each of Jordan E. Glazov, Perry H. Ruda, Craig M. Siegler, the Oliver Trusts,
34
<PAGE>
Access Financial Group, Inc. and Brandywine. This voting provision terminates
on the date the stockholders who are parties to the shareholders' agreement
no longer collectively own at least 40% of our issued and outstanding common
stock. The shareholders' agreement also requires the approval of 80% of our
directors for certain actions such as management compensation, financings,
incurrence of obligations in excess of a specified amount, mergers,
consolidations or sale of substantially all of our assets and the adoption of
business plans and budgets. Except for shares issued pursuant to registered
public offerings, exercise of options, to employees and consultants,
dividends and in connection with an acquisition, if we sell shares, we must
first offer to the shareholders who are parties to the shareholders'
agreement, the right to purchase their pro rata share of any such stock
issuance. This right of first refusal terminates if we receive at least $10
million in net proceeds from an underwritten public offering of our common
stock under the Securities Act. In addition, certain parties to the
shareholders' agreement are prohibited from selling their shares unless they
provide the other parties to the shareholders' agreement the right to sell
their shares on the same terms. The shareholders' agreement terminates on the
date the stockholders who are parties to the shareholders' agreement no
longer collectively own at least 30% of our issued and outstanding common
stock.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
DELAWARE ANTI-TAKEOVER STATUTE. We are subject to the provisions of
Section 203 of the Delaware General Corporation Law, an anti-takeover law.
Subject to certain exceptions, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless:
- prior to such date, the board of directors of the corporation
approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares
outstanding those shares owned (x) by persons who are directors
and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
- on or subsequent to such date, the business combination is
approved by the board of directors and authorized at an annual or
special meeting of stockholders, and not by written consent, by
the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
For purposes of Section 203, a "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to
the interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior to
the date of determination whether the person is an "interested stockholder,"
did own)
35
<PAGE>
15% or more of the corporation's voting stock. Section 203 could prohibit or
delay mergers or other changes in control with respect to U.S. RealTel and,
accordingly, may discourage attempts to acquire us.
CERTIFICATE OF INCORPORATION. Our certificate of incorporation
contains the following provisions which are intended to enhance the
likelihood of continuity and stability in the composition of the board and in
the policies formulated by the board and to discourage certain types of
transactions that may involve an actual or threatened change of control of
U.S. RealTel. These provisions provide:
- for the authorization of the board to issue, without further
action by the stockholders, up to 5,000,000 shares of preferred
stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof;
- that any action required or permitted to be taken by our
stockholders must be effected at a duly called annual or special
meeting of the stockholders and may not be effected by a consent
in writing;
- that special meetings of our stockholders may be called only by
the Chairman of the Board of Directors, the Chief Executive
Officer, the President or the board;
- that vacancies on the board, including newly created
directorships, can be filled only by a majority of the directors
then in office;
- that our directors may be removed only for cause and only by the
affirmative vote of holders of at least 66 2/3% of the outstanding
shares of voting stock, voting together as a single class;
- that cumulative voting is expressly prohibited;
- that certain provisions of the certificate of incorporation may be
amended only by a vote of 66 2/3% of the stockholders entitled to
vote; and
- that stockholders wishing to nominate directors and propose other
business to be conducted at stockholder meetings must meet certain
advance notice requirements.
These provisions are designed to reduce our vulnerability to an
unsolicited proposal for a takeover that does not contemplate the acquisition
of all of our outstanding shares, or an unsolicited proposal for the
restructuring or sale of all or part of the Company. Such provisions,
however, could discourage potential acquisition proposals and could delay or
prevent a change of control of the Company. Such provisions may also have the
effect of preventing changes in our management.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is LaSalle
National Bank and its address is 135 South LaSalle Street, Chicago, Illinois
60603.
36
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND OTHER SHAREHOLDER MATTERS.
MARKET INFORMATION
Our common stock has been quoted on the Nasdaq OTC Bulletin Board
under the symbol "USRT" since February 27, 1998. We filed a Form 10-SB on
April 19, 2000 to become a reporting company and have appealed the NASD's
scheduled removal of our stock quotations from the Nasdaq OTC Bulletin Board.
The SEC granted us a temporary stay, which may be discontinued at any time
without notice, to continue trading on the Nasdaq OTC Bulletin Board. If the
stay is discontinued, our common stock will be removed from quotation on the
Nasdaq OTC Bulletin Board.
Set forth below are the high and low closing bid quotations for our
common stock for the periods indicated as reflected on the electronic
bulletin board. Such quotations reflect interdealer prices without retail
mark-up, mark-down or commissions, and may not reflect actual transactions.
<TABLE>
<CAPTION>
2000 LOW ($) HIGH ($)
---- ------- --------
<S> <C> <C>
April 1, 2000 through April 14, 2000 11.75 14.75
January 1 through March 31, 2000 7 15
1999
----
October 1 through December 31, 1999 5.875 11.5
July 1 through September 30, 1999 5 9
April 1 through June 30, 1999 9 12
January 1 through March 31, 1999 7 13
1998
----
October 1 through December 31, 1998 8 13
July 1 through September 30, 1998 7 12
April 1 through June 30, 1998 9 14.5
February 27, 1998 (first available) 7.25 15.625
through March 31, 1998
</TABLE>
HOLDERS
As of March 31, 2000, there were approximately 109 record holders of
our common stock, although we believe that there are more than 500 beneficial
owners of our common stock. There are no shares of preferred stock currently
outstanding.
37
<PAGE>
DIVIDENDS
We have not paid any dividends on our common stock in the past, and
we do not expect to pay any dividends in the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS
We are not involved in any material legal proceedings.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1997, we have sold and issued the unregistered
securities listed below. These issuances were deemed exempt from registration
under the Securities Act in reliance on either (a) Section 4(2) of the
Securities Act, as transactions not involving a public offering, or (b) Rule
701 promulgated under the Securities Act.
In 1997, we issued 4,179,000 shares of common stock in connection
with a corporate formation and reorganization.
In November 1997, we issued founders warrants to purchase 58,554
shares of common stock at $1.92 per share to each of two of our directors and
founders warrants to purchase 117,108 shares of our common stock at $1.92 per
share to another of our directors.
In December 1997, we completed the sale of Series A convertible
debentures to accredited investors for an aggregate purchase price of
approximately $525,000. For services rendered in connection with this
transaction, we issued to Access Financial Group, Inc. warrants to purchase
54,375 shares of our common stock at $4 per share.
In December 1997, we sold 25,000 shares of common stock to
accredited investors at $4 per share, for an aggregate purchase price of
$100,000.
In December 1997, we issued 43,750 shares of common stock related to
the exercise of warrants at $4 per share to the placement agent in our Series
A debenture offering for an aggregate purchase price of $175,000.
In December 1997, we issued 5,000 shares to Craig M. Siegler upon
the conversion of a $25,000 debenture at $5 per share.
In March 1998, we sold Series B convertible debentures to accredited
investors for an aggregate purchase price of approximately $1,550,000. For
services rendered in connection with this transaction, we issued to Access
Financial Group, Inc. 7,500 shares of our common stock and warrants to
purchase 92,262 shares of our common stock at $4.75 per share.
In August 1998, we issued warrants to purchase 17,543 shares of
common stock at $4 per share to Jo & Co. in connection with bridge financing.
38
<PAGE>
In October 1998, we issued 83,395 shares of common stock and
warrants to purchase 43,750 shares of our common stock with an exercise price
of $4 per share to one of our directors and an affiliate of this director in
exchange for the cancellation of an investment banking agreement.
In October 1998, we sold 575,000 shares of our common stock at $4
per share and warrants to purchase 402,500 shares of our common stock at $4
per share to accredited investors in a private offering, for an aggregate
purchase price of $2,300,000. We issued 13,750 shares of common stock to
Access Financial Group, Inc. for services rendered in connection with this
private placement.
In October and December 1998, in connection with the conversion of
the Series A and Series B convertible debentures into 518,750 shares of
common stock, we issued options to purchase 175,190 shares of common stock at
$5.25 per share to the debenture holders as a part of the conversion. In
December 1998, these former debenture holders exercised certain of these
stock options to purchase 4,000 shares of common stock for an aggregate
purchase price of $21,000.
For services rendered in connection with the October 1998 sale of
common stock and warrants and the October and December 1998 conversion of
convertible debentures, we issued to Access Financial Group, Inc. warrants to
purchase 9,625 shares of our common stock at $4 per share and warrants to
purchase 30,667 shares of our common stock at $5.25 per share. In addition,
we issued to Access Financial Group, Inc. warrants to purchase 8,810 shares
of common stock at $5.25 per share upon a debenture conversion.
From January through April 1999, we sold 578,500 shares to
accredited investors at $6 per share, for an aggregate purchase price of
$3,471,000.
In February, March and April 1999, former holders of the Series A
and Series B convertible debentures exercised stock options to purchase
24,548 shares at $5.25 per share for an aggregate purchase price of $128,877.
For services rendered in connection with this transaction, we issued to
Access Financial Group, Inc. warrants to purchase 4,348 shares of our common
stock at $5.25 per share.
In September 1999, we issued 7% convertible promissory notes to
accredited investors for an aggregate purchase price of $1,500,000.
In December 1999, we issued a 12% convertible debenture to an
accredited investor for an aggregate purchase price of up to $3,000,000 and
sold to that accredited investor 384,615 shares of common stock at $6.50 per
share, for a total aggregate purchase price of $2,500,000. In connection
therewith, we issued to the accredited investor warrants to purchase 600,000
shares of the Company's common stock at an exercise price of $8.00 per share.
In December 1999, we issued warrants to purchase 25,000 shares of
our common stock at $0.01 per share to David J. Doerge for investment
advisory services.
Since February 1998, we have issued options to purchase 528,888
shares of our common stock to employees as compensation. 516,388 of these
options are still outstanding. 12,500 of these options have been forfeited.
None of these options have been exercised. We have also issued warrants to
purchase 25,000 shares of our common stock to each of three of our directors
in consideration of their service as directors.
39
<PAGE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
To the extent permitted by Delaware General Corporation Law, we have
included in our certificate of incorporation a provision to eliminate the
personal liability of directors for monetary damages due to their breach or
alleged breach of their fiduciary duties. Our charter does not, however,
provide for indemnification for liability due to a director's breach of his
or her duty of loyalty to us or our stockholders, for acts involving bad
faith or intentional misconduct or violations of law, or for any transaction
from which the director received an improper personal benefit. In addition,
our bylaws require us to indemnify our officers and directors under certain
circumstances, and we are required to advance to our officers and directors
certain of their expenses incurred in connection with the proceeding against
them. We intend to obtain directors' and officers' liability insurance.
40
<PAGE>
PART F/S
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
===========================================================
CONSOLIDATED FINANCIAL STATEMENTS
Form 10-SB - PART F/S
Period From Inception (January 15, 1997) Through
December 31, 1999
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
================================================================================
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT F-3
FINANCIAL STATEMENTS
Consolidated Balance Sheet at December 31, 1999 F-4
Consolidated Statements of Operations for each of the years ended
December 31, 1999 and 1998 and for the period from inception
through December 31, 1999 F-5
Consolidated Statements of Changes in Stockholders' Equity for
each of the years ended December 31, 1999 and 1998 and for
the period from inception through December 31, 1999 F-6 - F-7
Consolidated Statements of Cash Flows for each of the years ended
December 31, 1999 and 1998 and for the period from inception
through December 31, 1999 F-8 - F-9
Notes to Consolidated Financial Statements F-10 - F-30
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet at March 31, 2000 F-32
Condensed Consolidated Statements of Operations for each of the
three months ended March 31, 2000 and 1999 and for the period
from inception through March 31, 2000 F-33
Condensed Consolidated Statements of Changes in
Stockholders' Equity (Deficiency) for the three months
ended March 31, 2000 and for the period from inception
through March 31, 2000 F-34 - F-35
Condensed Consolidated Statements of Cash Flows for each of the
three months ended March 31, 2000 and 1999 and for the period
from inception through March 31, 2000 F-36 - F-37
Notes to Unaudited Condensed Consolidated Financial Statements F-38 - F-53
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
U.S. RealTel, Inc.
Chicago, Illinois
We have audited the accompanying consolidated balance sheet of U.S. RealTel,
Inc. (A Development Stage Company) as of December 31, 1999, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years ended December 31, 1999 and 1998, and for the period
from inception (January 15, 1997) through December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. RealTel, Inc.
at December 31, 1999, and the results of its operations and cash flows for each
of the years ended December 31, 1999 and 1998, and for the period from inception
(January 15, 1997) through December 31, 1999 in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, the
Company is in the development stage and has incurred losses since inception and
has negative cash flows from operations. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
BDO Seidman, LLP
Chicago, Illinois
January 21, 2000, except for
Note 11 which is as of
February 11, 2000
F-3
<PAGE>
FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,133,468
Accounts receivable 24,267
Prepaid expenses 26,369
----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,184,104
----------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT (Note 3)
Property and equipment 282,778
Less accumulated depreciation (98,624)
----------------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 184,154
----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS 24,342
----------------------------------------------------------------------------------------------------------------------
$ 4,392,600
======================================================================================================================
</TABLE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Convertible note payable with related party (Note 4(a)) $ 1,500,000
Accounts payable and accrued expenses (Note 5) 742,221
----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,242,221
----------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME 101,285
CONVERTIBLE DEBENTURE (Note 4(b))
Debenture payable 1,500,000
Less debt discount (1,170,000)
----------------------------------------------------------------------------------------------------------------------
330,000
----------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 6, 9 and 10)
STOCKHOLDERS' EQUITY (Notes 6 and 11)
Common stock, $.001 par value; 50,000,000 shares authorized;
6,442,808 issued and outstanding shares 6,443
Additional paid-in capital 15,439,675
Accumulated deficit during the development stage (13,727,024)
----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 1,719,094
----------------------------------------------------------------------------------------------------------------------
$ 4,392,600
======================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT.
F-4
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
CUMULATIVE
AMOUNTS FROM
DATE OF
INCEPTION
(JANUARY 15,
1997)
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1999 1998
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES (Note 10) $ 453,846 $ 410,451 $ 43,395
DIRECT COSTS 349,118 319,841 29,277
------------------------------------------------------------------------------------------------------------------------
Revenues - net 104,728 90,610 14,118
------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Salaries and benefits (Notes 6 and 9) 5,464,394 2,966,928 1,944,780
General and administrative (Note 9) 3,631,301 1,960,156 1,271,984
Professional and investment banking fees
(Notes 6 and 7) 2,432,798 696,239 1,578,774
------------------------------------------------------------------------------------------------------------------------
Total operating expenses 11,528,493 5,623,323 4,795,538
------------------------------------------------------------------------------------------------------------------------
Operating loss (11,423,765) (5,532,713) (4,781,420)
------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income (Note 7) 71,604 43,911 25,083
Other income 74,220 - 71,020
Interest expense and financing costs
(Notes 4, 6 and 7) (3,001,739) (254,871) (2,715,982)
------------------------------------------------------------------------------------------------------------------------
Total other expense - net (2,855,915) (210,960) (2,619,879)
------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (14,279,680) $ (5,743,673) $ (7,401,299)
========================================================================================================================
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.96) $ (1.64)
========================================================== ==========================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,962,000 4,509,000
========================================================== ==========================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT.
F-5
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
COMMON STOCK ADDITIONAL DURING THE
--------------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, at January 15, 1997 - $ - $ - $ - $ -
ISSUANCE OF SHARES OF COMMON STOCK (Note 1) 4,204,000 4,204 722,408 - 726,612
CONVERSION OF DEBT INTO COMMON STOCK
(Notes 1 and 4(d)) 5,000 5 24,995 - 25,000
WARRANTS EXERCISED (Note 1) 43,750 44 174,956 - 175,000
WARRANTS ISSUED TO PLACEMENT AGENT FOR
BRIDGE FINANCING - - 10,000 - 10,000
WARRANTS ISSUED TO HOLDER OF BRIDGE
FINANCING - - 10,000 - 10,000
NET LOSS - - - (1,134,708) (1,134,708)
NET LOSS OF LLC AND "S" CORPORATION PRIOR
TO BECOMING A "C" CORPORATION - - (552,656) 552,656 -
----------------------------------------------------------------------------------------------------------------------------
BALANCE, at December 31, 1997 4,252,750 4,253 389,703 (582,052) (188,096)
INTEREST EXPENSE RELATED TO CONVERSION RATE
OF CONVERTIBLE DEBENTURES (NOTE 6) - - 627,000 - 627,000
ISSUANCE OF SHARES OF COMMON STOCK (NOTE 6) 575,000 575 2,117,425 - 2,118,000
CONVERSION OF DEBENTURES INTO COMMON STOCK
(Note 4(c)) 518,750 519 3,418,266 - 3,418,785
STOCK OPTIONS EXERCISED (Notes 4(c) and 6) 4,000 4 19,106 - 19,110
STOCK OPTION COMPENSATION (Note 6) - - 69,000 - 69,000
ISSUANCE OF COMMON STOCK FOR (Notes 4(c)
and 6):
INVESTMENT BANKING SERVICES 13,750 13 (13) - -
CANCELLATION OF INVESTMENT BANKING
AGREEMENT 83,395 83 833,917 - 834,000
SERVICES RENDERED FOR ISSUANCE OF
DEBENTURES 7,500 8 54,992 - 55,000
ISSUANCE OF OPTIONS AND WARRANTS FOR
(Notes 4(c) and 6):
CANCELLATION OF INVESTMENT BANKING
AGREEMENT - - 65,000 - 65,000
BRIDGE FINANCING - - 26,000 - 26,000
DIRECTORS FEES - - 74,000 - 74,000
ISSUANCE AND CONVERSION OF DEBENTURES
INTO COMMON STOCK - - 241,000 - 241,000
NET LOSS - - - (7,401,299) (7,401,299)
----------------------------------------------------------------------------------------------------------------------------
BALANCE, at December 31, 1998 5,455,145 5,455 7,935,396 (7,983,351) (42,500)
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
COMMON STOCK ADDITIONAL DURING THE
-------------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, at December 31, 1998 5,455,145 $ 5,455 $ 7,935,396 $ (7,983,351) $ (42,500)
ISSUANCE OF SHARES OF COMMON STOCK
(Notes 4(b) and 6) 963,115 963 5,782,638 - 5,783,601
STOCK OPTIONS EXERCISED (Notes 4(c) and 6) 24,548 25 117,253 - 117,278
ISSUANCE OF WARRANTS FOR (Notes 4(b),
6 and 7):
INVESTMENT BANKING SERVICES - - 170,500 - 170,500
ISSUANCE OF CONVERTIBLE DEBENTURE - - 1,170,000 - 1,170,000
INTEREST EXPENSE RELATED TO CONVERSION
RATE OF CONVERTIBLE DEBENTURE (Note
4(b)) - - 225,000 - 225,000
STOCK OPTION COMPENSATION (Note 6) - - 38,888 - 38,888
NET LOSS - - - (5,743,673) (5,743,673)
--------------------------------------------------------------------------------------------------------------------------
BALANCE, at December 31, 1999 6,442,808 $ 6,443 $ 15,439,675 $ (13,727,024) $ 1,719,094
==========================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT.
F-7
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE
AMOUNTS FROM
DATE OF
INCEPTION
(JANUARY 15,
1997)
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1999 1998
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (14,279,680) $ (5,743,673) $ (7,401,299)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation of property and equipment 98,624 60,349 33,529
Amortization of deferred financing costs 72,500 - 60,417
Noncash equity transactions charged to operations
(Note 6) 3,825,388 434,388 3,391,000
Changes in assets and liabilities
Increase in accounts receivable (24,267) (19,736) (2,731)
Increase in prepaid expenses (26,369) (26,369) -
Increase in accounts payable and accrued
expenses 742,221 278,328 241,972
Increase in deferred income 101,285 101,285 -
--------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (9,490,298) (4,915,428) (3,677,112)
--------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (282,778) (132,944) (117,410)
Increase in other assets (76,842) (16,255) (3,400)
Decrease (increase) in note receivable - employee
(Note 7) - 25,000 (25,000)
--------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (359,620) (124,199) (145,810)
--------------------------------------------------------------------------------------------------------------------------
F-8
<PAGE>
<CAPTION>
CUMULATIVE
AMOUNTS FROM
DATE OF
INCEPTION
(JANUARY 15,
1997)
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1999 1998
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, stock
options and warrants exercised, net of related
costs $ 8,883,386 $ 5,900,879 $ 2,080,895
Proceeds from issuance of notes
payable/debentures 5,253,000 3,000,000 1,550,000
Stock subscription payable - (110,252) 110,252
Repayment of notes payable (153,000) - -
Advances from stockholder (Note 7) 110,000 - 110,000
Repayment of advances (Note 7) (110,000) - (110,000)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 13,983,386 8,790,627 3,741,147
---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,133,468 3,751,000 (81,775)
CASH AND CASH EQUIVALENTS, at beginning of year - 382,468 464,243
---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, at end of year $ 4,133,468 $ 4,133,468 $ 382,468
---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid $ 174,057 $ 22,569 $ 137,918
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Notes payable/debentures converted into
common stock $ 2,100,000 $ - $ 2,075,000
Noncash equity transactions charged to operations
(Note 6) 3,825,388 434,388 3,391,000
Warrants issued for financing costs 20,000 - -
Warrants related to Convertible Debenture (Note 4(b)) 1,170,000 1,170,000 -
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT.
F-9
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. THE COMPANY The Company was originally organized under the name of
AGILE, LLC on January 15, 1997. The Company was
subsequently incorporated on August 8, 1997 under the
name U.S. RealTel, Inc. ("Predecessor Corporation"). On
November 3, 1997, the Predecessor Corporation merged
into a shell corporation, Admiral Two Capital
Corporation (which had 4,179,000 shares outstanding
which were issued in 1997) and the surviving company's
name was changed to U.S. RealTel, Inc. ("Surviving
Corporation"). As of the date of the merger,
shareholders of the Predecessor Corporation were issued
2,214,870 common shares of the Surviving Corporation.
Also on the merger date, 2,214,870 common shares of the
Surviving Corporation held by a principal shareholder
were surrendered and returned to the Surviving
Corporation's authorized, but unissued, shares. The
merger transaction was accounted for as a reverse
acquisition into a public shell.
In addition to the merger in 1997, the Company issued
73,750 shares of common stock as follows:
- 43,750 shares related to the exercise of
warrants at $4 per share
- 25,000 shares sold at $4 per share
- 5,000 shares related to debenture conversion at
$5 per share
The Company's business is to lease telecommunication
rights from owners of real property for sublease to
telecommunications providers needing access to real
estate for their services to reach building occupants
and/or placement of antenna networks in the U.S. and
internationally. The Company is continuing the process
of adding sites through the use of its master leases and
other programs, to add to its network of sites for the
"USRT Telecom Grid." During 1998, the Company also
established a separate wholly owned finance subsidiary
(inactive) and a 56% owned Argentinean subsidiary. For
purposes of the accompanying consolidated financial
statements, the Company has expensed all amounts
advanced to the Argentinean subsidiary until it becomes
operational and such advances are considered
recoverable. Accordingly, no minority interest is
recognized in the consolidated financial statements. The
net loss of the Argentinean subsidiary included in the
consolidated financial statements was $1,061,000 in 1999
and $59,000 in 1998.
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-10
<PAGE>
Since its inception, the Company's efforts have been
devoted to raising capital, adding sites to the "USRT
Telecom Grid" and, beginning in 1999, substantially
increasing marketing of these sites. The Company has
received nominal revenues from the sale of its services
throughout the U.S. Accordingly, through the date of
these consolidated financial statements, the Company is
considered to be in the development stage and the
accompanying consolidated financial statements represent
those of a development stage enterprise. No assurance
can be given that the Company will be able to obtain
sufficient sites for its "USRT Telecom Grid" and
sublease the sites to its customers profitably. As of
the date of these consolidated financial statements, the
Company has acquired the rights to approximately 41,000
sites (unaudited). Certain site leases contain
performance standards which require a minimum (a) number
of telecommunication installations be constructed or (b)
revenue stream be generated within a specified time
period. If these performance standards are not achieved,
the landlord may elect to terminate the Company's
exclusive rights under such leases.
As reflected in the accompanying consolidated
financial statements, the Company has incurred losses
since inception and has negative cash flows from
operations. The Company's ability to continue as a
going concern is contingent upon its ability to raise
capital, continue to expand its "USRT Telecom Grid"
and attain profitable operations. Moreover, the
Company expects to continue to incur significant
development costs to generate significant revenue to
achieve profitability. These costs could increase as
the Company pursues other new sources of revenues
such as providing in-building communications networks
and broadband transport services in office buildings
and retail centers and communications services to
tenants of retail malls and large retail centers. The
Company is pursuing various sources of debt and/or
equity financing (Note 11). The Company, however, can
give no assurance as to its ability to raise capital
or attain profitable operations. These factors give
rise to substantial doubt as to the ability of the
Company to continue as a going concern. The
consolidated financial statements do not include any
adjustments that might result from the outcome of
this uncertainty.
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-11
<PAGE>
2. SUMMARY OF
SIGNIFICANT
ACCOUNTING POLICIES
PRINCIPLES OF
CONSOLIDATION The Company's subsidiaries are listed below:
<TABLE>
<CAPTION>
Percent
Location Owned Description
---------------------------------------------------------------------------
<S> <C> <C> <C>
RealTel de Argentina, Argentina 56% Development stage
S.A. foreign subsidiary
RealTel Finance, LLC Chicago, Illinois 100% Inactive subsidiary
</TABLE>
The consolidated financial statements include the
accounts of the Company and its subsidiaries that are
more than 50% owned.
All significant intercompany transactions and balances
between the companies included in the consolidation are
eliminated.
CASH AND CASH
EQUIVALENTS Cash equivalents consist of short-term, highly liquid
investments which are readily convertible into cash.
PROPERTY, EQUIPMENT
AND DEPRECIATION Property and equipment are stated at cost. Depreciation
is computed over the estimated useful lives of the
assets (three to seven years) by accelerated methods for
financial and income tax reporting purposes.
Depreciation of leasehold improvements is computed over
the lesser of the estimated useful lives of the assets
or the term of the lease by the straight-line method for
financial and income tax reporting purposes.
REVENUE RECOGNITION Monthly rent for leases containing fixed rental
increases during their term are recognized on a
straight-line basis over the term of the leases. For all
other leases, rents are recognized over the term of the
leases as earned.
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-12
<PAGE>
One-time initial license and review fees received, and
related direct costs incurred, at lease inception are
deferred and recognized on a straight-line basis over
the lease terms.
Contingent rentals, such as rentals based on sales
levels of sublessees, are recognized when earned, as
targeted levels are achieved.
Deferred income represents rental payments received in
advance and the deferral of one-time fees, net of costs.
STOCK-BASED
COMPENSATION The Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), became
effective in 1997. SFAS No. 123 encourages companies to
recognize expense for stock options and other
stock-based employee compensation plans based on their
fair value at the date of grant. As permitted by SFAS
No. 123, the Company has and will retain its prior
accounting policy under APB Opinion Number 25,
"Accounting for Stock Issued to Employees".
ADVERTISING COSTS Advertising costs, aggregating $96,000 in 1999, $55,000
in 1998 and $160,000 from inception to December 31,
1999, are expensed as incurred.
COSTS OF START-UP In April 1998, the American Institute of Certified
ACTIVITIES Public Accountants issued Statement of Position ("SOP")
98-5, "Reporting on the Costs of Start-up Activities".
This SOP requires that the costs of start-up activities,
including organization costs, be expensed as incurred.
The Company has followed this policy since its
inception.
TRANSLATION OF FOREIGN The Company follows the translation policy as provided
CURRENCY by SFAS No. 52. Accordingly, assets and liabilities are
translated at the rates of exchange on the balance sheet
date. Income and expense items are translated at the
average exchange rates prevailing throughout the years.
Since the Argentina peso is equivalent to one U.S.
dollar, no foreign currency translation adjustments
occurred.
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-13
<PAGE>
TAXES ON INCOME Prior to August 8, 1997, the Company was taxed as a
limited liability company and from August 8, 1997 to
November 3, 1997 the Company was taxed as an "S"
corporation. Any income or losses prior to November 4,
1997 are recognized on the individual stockholders'
income tax returns. Effective November 4, 1997, the
Company is taxed as a "C" corporation. The net loss of
$552,656 prior to November 4, 1997 was reclassified to
additional paid-in capital.
Income taxes are accounted for using the asset and
liability method under which deferred income taxes are
recognized for the estimated tax consequences of
temporary differences between the financial statement
carrying amounts and the tax bases of assets and
liabilities and for the benefits, if any, of tax credit
or loss carryforwards. The amounts of any future tax
benefits are reduced by a valuation allowance to the
extent such benefits are uncertain as to realization.
NET LOSS PER SHARE Net loss per share is calculated using the weighted
average number of common shares outstanding during the
period. Shares of common stock issuable upon the
exercise of options (528,888 and 262,078 shares in 1999
and 1998, respectively) and warrants (1,573,096 and
943,748 shares in 1999 and 1998, respectively) and the
conversion of debt (430,769 shares in 1999) are
antidilutive and are not included in the computation of
shares outstanding.
ESTIMATES The consolidated financial statements include estimated
amounts and disclosures based on management's
assumptions about future events.
RECENT ACCOUNTING In March 1998, the American Institute of Certified
PRONOUNCEMENTS Public Accountants ("AICPA") issued Statement of
Position ("SOP") 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal
Use" ("SOP 98-1"). SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998.
SOP 98-1 provides guidance over accounting for computer
software developed or obtained for internal use,
including the requirement to capitalize and amortize
specified costs. The adoption of this standard did not
have a material effect on the Company's capitalization
policy.
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-14
<PAGE>
In June 1998, the FASB issued SFAS No. 133, "Accounting
for Derivatives and Hedging Activities", which
establishes accounting and reporting standards for
derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities.
SFAS No. 133 is effective for fiscal years beginning
after June 15, 2000. The Company does not expect the
adoption of this statement to have a significant impact
on its consolidated results of operations, financial
position or cash flows.
RECLASSIFICATIONS Certain items in the 1998 consolidated financial
statements have been reclassified to conform to the 1999
classifications.
3. PROPERTY AND Property and equipment at December 31, 1999 consists of
EQUIPMENT the following:
<TABLE>
<S> <C>
---------------------------------------------------------------------
Equipment $ 245,181
Office furniture and fixtures 5,734
Leasehold improvements 31,863
---------------------------------------------------------------------
282,778
Less accumulated depreciation 98,624
---------------------------------------------------------------------
Net property and equipment $ 184,154
=====================================================================
</TABLE>
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-15
<PAGE>
4. CONVERTIBLE NOTES (a) CONVERTIBLE NOTE PAYABLE WITH RELATED PARTY
AND DEBENTURES
The Company executed a $1,500,000 promissory note on
September 24, 1999 ("Convertible Note") with a related
party. It bears interest at a rate of 7%, compounded
annually. Interest under the Convertible Note is due and
payable on March 30, 2000 and on September 24, 2000. The
note may not be prepaid. The principal amount of the
Convertible Note is due and payable on September 24,
2000, unless the holder of the Convertible Note elects
to exercise the right to convert the Convertible Note
into the Company's common stock or into stock of the
Company's Argentinean subsidiary. The holder of the
Convertible Note may, at any time after January 1, 2000
until the Convertible Note is paid in full, convert the
principal amount of the Convertible Note into the number
of shares of the Argentinean subsidiary which will
result in the holder owning 9% of the total shares of
such subsidiary or into shares of the Company's common
stock at a conversion price equal to the lowest price
per share paid for the Company's common stock (or other
security convertible into common stock) after September
24, 1999 in a sale of the common stock or any security
convertible into common stock.
Should the holder of the Convertible Note elect to
convert the Note into ownership of the Argentinean
subsidiary, the Company would maintain majority
ownership of the Argentinean subsidiary.
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-16
<PAGE>
(b) CONVERTIBLE DEBENTURE
On December 28, 1999, the Company completed a private
placement which included:
(i) The issuance of a Convertible Debenture
("Convertible Debenture"), which can be drawn
upon until December 28, 2000, up to $3,000,000
($1,500,000 outstanding at December 31, 1999).
This Convertible Debenture carries interest at
12%, payable quarterly, and is due at the
earlier of July 1, 2001 or the completion of a
public offering of at least $10 million (see
iii. below). This Convertible Debenture is
convertible into the Company's common stock, at
any time, at $7.50 per share. The convertible
debenture holder also has the option to receive
interest in shares of the Company's common
stock, rather than cash, at $6.50 per share.
The difference between the conversion rate of
$7.50 per share and the market price of the
Company's common stock of $8.625 per share
resulted in a favorable conversion rate interest
expense of $225,000 in 1999 related to the $1.5
million outstanding at December 31, 1999.
(ii) The sale of 384,615 shares of common stock at
$6.50 per share, net of expenses of $32,297.
(iii) The issuance of warrants, in connection with
the Convertible Debenture, to purchase 600,000
shares of the Company's common stock at an
exercise price of $8 per share. These warrants
are exercisable through December 31, 2004. The
Company has the option to extend the maturity of
the Convertible Debenture until the earlier of
October 1, 2001 or the completion of a public
offering of at least $10 million, which would
result in reducing the exercise price of these
warrants to $6.50 per share.
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-17
<PAGE>
Based on the Black-Scholes pricing model, the warrants
issued were valued at $1,170,000, which increased
additional paid-in capital and decreased the Convertible
Debenture (debt discount). The debt discount will be
amortized, commencing in 2000, over the maturity of the
Convertible Debenture.
(c) CONVERTED DEBENTURES
On December 3, 1997, the Company completed a Series A
convertible debenture bridge financing of $525,000
resulting in net proceeds of approximately $470,000
(after expenses of the offering). The debentures were
payable, together with interest at the rate of 9% per
annum, on the earlier of June 1, 1998 (which was amended
to December 31, 1998) or the date of funding of a
secondary equity offering, as defined. The debentures
were convertible at maturity into shares of the
Company's common stock with a conversion price of $5.25
per share. In connection with this financing, the
Company issued to its investment banking firm warrants
to acquire 54,375 shares of the Company's common stock
at an exercise price of $4 per share. These warrants are
exercisable through November 2000.
On March 5, 1998, the Company completed a Series B
convertible debenture bridge financing of $1,550,000
resulting in net proceeds of approximately $1,400,000
(after expenses of the offering). The debentures were
payable, together with interest at the rate of 9% per
annum, on the earlier of December 31, 1998 or the date
of funding of a secondary equity offering, as defined.
The debentures were convertible at maturity into shares
of common stock with a conversion price of $5.25 per
share. The Company also issued 7,500 shares of common
stock to its investment banking firm in connection with
this financing, which were recorded as financing costs
and subsequently as interest expense when the debentures
were converted.
While both the Series A and B debentures were
outstanding, the Company was precluded from paying cash
dividends on its common stock and the Company's ability
to redeem its common stock was limited.
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-18
<PAGE>
On October 2, 1998 and December 31, 1998, the Series A
and Series B convertible debenture bonds were converted
to 518,750 shares of common stock, at a $4 per share
conversion rate rather than the original $5.25 per share
conversion rate. The revision in the conversion rate was
accounted for in 1998 by an increase in additional
paid-in capital and interest expense of $1.4 million for
the additional shares issued. Costs associated with
these conversions were approximately $56,215 during
1998. These costs are netted against the principal
amount of debt converted in the accompanying
consolidated statement of stockholders' equity. The
Company also issued to an investment banking firm in
1998 92,262 warrants with an exercise price of $4.75 per
share, expiring in March 2001. The Company also issued
options to purchase 176,190 shares of common stock at
$5.25 per share to the debenture holders as a part of
the conversion, of which 4,000 options were exercised in
1998, 24,548 options were exercised in 1999 and the
balance expired.
(d) PROMISSORY NOTE
The Company had a promissory note payable to a
shareholder, due on the earlier of October 14, 1999 or
the funding of a secondary equity offering, as defined.
Interest, to be paid quarterly, was calculated at the
prime rate plus two percent. In December 1997, this note
was repaid through the conversion of this debt into
5,000 shares of the Company's common stock, pursuant to
the terms of the note.
5. ACCOUNTS PAYABLE Accounts payable and accrued expenses at December 31,
AND ACCRUED 1999 consist of:
EXPENSES
<TABLE>
----------------------------------------------------
<S> <C>
Accounts payable $ 274,575
Accrued professional fees 155,056
Accrued compensation 160,475
Interest 29,615
Other, including related party of $52,000 122,500
-----------------------------------------------------
$ 742,221
=====================================================
</TABLE>
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-19
<PAGE>
6. STOCKHOLDERS' EQUITY (a) COMMON STOCK ISSUANCES
In addition to the common stock issued through debt
conversions (Note 4) and the merger and other 1997
transactions discussed in Note 1, common stock was
issued as follows:
In 1998 -
(i) Sale of common stock - In connection with a
private placement, the Company sold 575,000
shares at $4 per share in October 1998. Expenses
related to this sale were approximately
$182,000. The Company also issued warrants,
which expire in October 2003, to purchase
402,500 shares of the Company's stock at an
exercise price of $4 per share in connection
with this private placement.
(ii) Stock options exercised - During 1998, one stock
option for 4,000 shares was exercised at $5.25
per share, less commissions of $1,890.
(iii) Services rendered - The Company issued 13,750
shares of common stock to an investment banking
firm for services rendered in connection with
the private placement discussed above.
The Company entered into an agreement with an affiliate
of one of its principal shareholders (the "Affiliate")
that provided that the Company pay a minimum investment
banking fee to the Affiliate of $100,000 per year for a
three-year period commencing July 28, 1997, extendable
for an additional nine years under certain conditions.
The agreement also provided for the reimbursement of
certain expenses incurred by the Affiliate up to $17,000
and for the issuance of .5% of the Company's common
stock (20,895 shares), as defined, to a charitable
foundation. In 1998, this agreement was canceled and the
Affiliate was paid $150,000 and issued 83,395 shares of
common stock and 43,750 warrants with an exercise price
of $4 per share, expiring in October 2003. In 1998, the
Company paid, in cash, $225,000 to the Affiliate for
investing banking services ($300,000 from inception to
December 31, 1999).
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-20
<PAGE>
In 1999 -
(i) Sale of common stock - In connection with a
private placement, the Company sold 578,500
shares at $6 per share in January through April
1999. Expenses related to this sale were
$155,102.
(ii) Stock options exercised - Stock options for
24,548 shares (Note 4(c)) were exercised at
$5.25 per share, less commissions of $11,599.
(iii) Sale of common stock, Convertible Debenture and
warrants - On December 28, 1999, the Company
sold 384,615 shares at $6.50 per share, received
$1.5 million for a Convertible Debenture of up
to $3 million and issued 600,000 warrants
exercisable at $8.00 per share until December
2004 (Note 4(b)). Expenses related to the sale
of common stock were $32,297.
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-21
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
(b) STOCK OPTIONS AND WARRANTS ISSUED
Exercise
Price
Per Date Expiration
Date Issued Description Shares Share Exercisable* Date
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Options:
February 1998 Company executives 88,888 $5.25 25% exercisable March 2003
on issuance, remainder
vests ratably over three
years
October 1999 Company executive 37,500 $6.50 50% exercisable October 2004
on issuance, remainder
over two years
April 1998 Employee 1,000 $4.00 April 2003
December 1999 Options issued under the Employee Exercisable ratably over
Equity Incentive Plan (Note 6(d)) 401,500 $8.00 three years December 2004 - 7
---------
Option shares 528,888
---------
Warrants:
November 1997 Three shareholders 234,216 $1.92 October 2003
December 1997 Investment banking fee -
Series A debentures
(Note 4(c)) 54,375 $4.00 November 2000
March 1998 Investment banking fee - Series
B debentures (Note 4(c)) 92,262 $4.75 March 2001
August 1998 In connection with bridge
financing 17,543 $4.00 August 2003
October 1998 Investment banking fee for sale
of common stock 30,667 $5.25 October 2003
October 1998 Issued with common stock sold 402,500 $4.00 October 2003
October 1998 Directors fees 50,000 $4.00 October 2003
October 1998 Cancellation of investment
banking agreement 43,750 $4.00 October 2003
October 1998 Investment banking fee for sale
of common stock 9,625 $4.00 October 2003
December 1998 Debenture conversion 8,810 $5.25 December 2003
March 1999 Investment banking services 4,348 $5.25 March 2004
December 1999 Investment banking services (Note 7) 25,000 $.01 December 2004
December 1999 Issued with Convertible Debenture
(Note 4(b)) 600,000 $8.00 December 2004
---------
Warrant shares 1,573,096
---------
Total options and warrant
shares 2,101,984
=========
</TABLE>
*Exercisable on issuance except as noted
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-22
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
At December 31, 1999, the Company has options and
warrants for 1,648,401 shares of common stock currently
exercisable at a weighted average exercise price of
$5.25 per share. The options and warrants expire as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
YEAR ENDING DECEMBER 31, Shares Price
----------------------------------------------------------------------------
<S> <C> <C>
2000 54,375 $ 4.00
2001 92,262 4.75
2003 886,999 3.63
2004 700,182 7.62
2005 133,833 8.00
2006 133,833 8.00
2007 100,500 8.00
----------------------------------------------------------------------------
Total 2,101,984 $ 5.78
============================================================================
</TABLE>
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-23
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(c) NONCASH EQUITY TRANSACTIONS
In connection with the noncash aspects of certain
issuances of common stock, options and warrants, the
Company valued such transactions as follows in 1999,
1998 and since inception:
<TABLE>
<CAPTION>
INCEPTION
(JANUARY 15,
1997)
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
Issuance 1999 1999 1998
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense related to
conversion rate of
convertible debentures (i) $ 852,000 $ 225,000 $ 627,000
Revision of debt conversion rate
(ii) 1,400,000 - 1,400,000
Common stock issued for
cancellation of investment
banking agreement and debt
issuance (iii) 889,000 - 889,000
Stock option compensation (i) 107,888 38,888 69,000
Options issued to debenture
holders for debenture
conversion (iv) 95,000 - 95,000
Warrants issued for services (iv) 481,500 170,500 311,000
-----------------------------------------------------------------------------------
Total $3,825,388 $ 434,388 $3,391,000
===================================================================================
</TABLE>
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-24
<PAGE>
(i) Value based on excess of market price of the
Company's publicly traded common stock over the
conversion or exercise price. The excess stock
option value is amortized over the vesting
period of the options.
(ii) Value based on increased common shares issued,
due to the reduced conversion rate, using the
market price of the Company's publicly traded
common stock.
(iii) Value based on market price of the Company's
publicly traded common stock.
(iv) Value based on Black-Scholes pricing model.
Based on current accounting practices for public
companies, the Company used the valuation methods above
rather than values of its common stock from recent
private placements. The Company's common stock has
limited public trading, which commenced in February
1998, on the OTC Bulletin Board.
The amounts above were charged to the following expense
accounts:
<TABLE>
<CAPTION>
INCEPTION
(JANUARY 15,
1997)
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1999 1998
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and benefits $ 181,888 $ 38,888 $ 143,000
Professional and
investment
banking fees 1,069,500 170,500 899,000
Interest expense 2,574,000 225,000 2,349,000
----------------------------------------------------------------------------------
Total $ 3,825,388 $ 434,388 $ 3,391,000
==================================================================================
</TABLE>
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-25
<PAGE>
The Company accounts for stock options under APB Opinion
Number 25, under which compensation is recorded to the
extent the exercise price is less than the quoted public
market at grant date. Had salary expense been determined
consistent with SFAS No. 123, the Company's net loss and
net loss per common share, basic and diluted, would not
have been materially different than the amounts
reported.
(d) EMPLOYEE EQUITY INCENTIVE PLAN
In April 1999, the Company's Board of Directors approved
a 10-year Employee Equity Incentive Plan ("Plan"),
subject to approval of its stockholders. The
stockholders ratified the Plan in September 1999. Under
the Plan, 484,655 shares of the Company's common stock
are reserved for issuance under various award plans
including stock options, restricted stock, bonus and
performance shares, etc. Options for 401,500 shares of
common stock under the Plan have been granted through
December 31, 1999 at $8 per share. These options vest
ratably over three years and expire five years after
they become exercisable. Since the market price on the
date the options were granted was $9.00 per share, the
compensation expense related to the favorable option
price ($401,500) will be amortized, commencing in 2000,
over the vesting period of the options.
The Company also granted an option for 37,500 shares at
$6.50 per share in October 1999. Similar to the options
mentioned above, the excess of the market price at grant
date over the option price ($84,375) will be amortized
as compensation expense over the vesting period
commencing in 2000.
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-26
<PAGE>
The following table summarizes the Company's employee
stock option activity:
<TABLE>
<CAPTION>
Exercisable
------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Granted and outstanding at
December 31, 1998 89,888 $5.24 34,333 $5.21
========================
1999:
Granted 439,000 $7.87
------------
Outstanding at December 31,
1999 528,888 $7.42 75,305 $5.54
================================================
</TABLE>
7. RELATED PARTY During 1998, the Company received advances and
TRANSACTIONS subsequently repaid those advances of approximately
$110,000 from one of its shareholders. Interest was paid
at 9% per annum and aggregated $1,447.
During 1998, the Company advanced $25,000 to an employee
pursuant to terms of an 8% note receivable that was paid
in November 1999.
Consulting fees to one of the Company's directors
amounted to $81,500 in 1999 and $13,500 in 1998.
During 1999, the Company issued warrants to a
stockholder to purchase 25,000 shares of the Company's
common stock at $.01 per share for investment banking
services. These warrants, valued at $162,000 using the
Black-Scholes pricing model, are exercisable immediately
and expire in December 2004.
See also Notes 4(a) and 6(a) and (b).
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-27
<PAGE>
8. INCOME TAXES Due to net operating losses and the uncertainty of
realization, no tax benefit has been recognized for
operating losses.
At December 31, 1999, net federal operating losses of
approximately $8.9 million are available for
carryforward against future years' taxable income and
expire in 2012 ($.4 million), 2018 ($4.5 million) and
2019 ($4.0 million). The Company's ability to utilize
its federal net operating loss carryforwards is
uncertain and thus a valuation reserve has been provided
against the Company's net deferred tax assets.
The net deferred tax assets consist of the following at
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------------
<S> <C> <C> <C>
Net federal operating
loss carryforwards $ 3,446,000 $ 1,904,000 $ 174,000
Other 86,000 2,000 -
Valuation allowance (3,532,000) (1,906,000) (174,000)
----------------------------------------------------------------------------
Net deferred tax assets $ - $ - $ -
============================================================================
</TABLE>
9. COMMITMENTS AND (a) LEASES - OFFICE SPACE
CONTINGENCIES
The Company is leasing office space in Illinois, Texas
and Maryland.
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-28
<PAGE>
Future minimum lease obligations are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
-----------------------------------------------------------------------------
<S> <C>
2000 $ 173,000
2001 186,000
2002 202,000
2003 219,000
2004 195,000
=============================================================================
Total $ 975,000
=============================================================================
</TABLE>
Rent expense for 1999 and 1998 was $157,000 and
$102,000, respectively.
(b) LEASES - SITE LEASES AND SUBLEASES
Rent sublease income on existing lease sites
approximates $949,000 annually through 2004, with rental
expense approximating $750,000 annually through 2004.
(c) EMPLOYMENT AGREEMENTS
The Company has employment agreements with two officers.
The agreements have automatic three-year rolling
renewals, unless terminated by the Board of Directors,
as of April 1 of any year in which event such
determination will be considered a termination without
cause. The agreements provide for a base annual salary
of $200,000 for each calendar year for each individual.
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-29
<PAGE>
10. CONCENTRATIONS OF Financial instruments which potentially subject the
CREDIT RISK AND Company to concentrations of credit risk consist
SIGNIFICANT principally of cash equivalents and trade receivables.
CUSTOMERS Concentrations of credit risk with respect to trade
receivables are limited due to the Company's customers
generally being of significant size and financial
stability. The Company's cash and cash equivalents are
primarily held by one bank.
In 1999, three telecommunications customers accounted
for approximately 54% of revenues. Also, 65% of revenue
is derived from buildings owned by three real estate
entities. There is a risk that these telecommunications
customers and real estate entities may not renew their
leases at the termination date (leases generally have
initial terms of five years with four renewal options by
the lessees of five years each).
11. SUBSEQUENT EVENT On February 11, 2000, the Company retained an investment
banking firm to pursue a private placement of equity or
equity-linked securities. The amount of the private
placement is expected to be up to approximately $20
million.
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
F-30
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
==================================
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
PERIOD FROM INCEPTION (JANUARY 15, 1997)
THROUGH MARCH 31, 2000
F-31
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
================================================================================
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,092,888
Accounts receivable 57,700
Prepaid expenses 111,611
----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,262,199
----------------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 230,245
OTHER ASSETS 122,791
---------------------------------------------------------------------------------------------------------------------
$ 2,615,235
----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Convertible note payable with related party $ 1,500,000
Accounts payable and accrued expenses 760,502
----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,260,502
----------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME 117,278
CONVERTIBLE DEBENTURE
Debenture payable 1,500,000
Less debt discount (975,000)
----------------------------------------------------------------------------------------------------------------------
525,000
----------------------------------------------------------------------------------------------------------------------
REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK - none issued -
STOCKHOLDERS' DEFICIENCY
Common stock, $.001 par value; 50,000,000 shares authorized;
6,442,808 issued and outstanding shares 6,443
Additional paid-in capital 15,557,973
Accumulated deficit during the development stage (15,851,961)
----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIENCY (287,545)
----------------------------------------------------------------------------------------------------------------------
$ 2,615,235
----------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-32
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
CUMULATIVE
AMOUNTS FROM
DATE OF
INCEPTION
(JANUARY 15,
1997) THREE MONTHS THREE MONTHS
THROUGH ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2000 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $ 677,937 $ 224,091 $ 28,323
DIRECT COSTS 523,267 174,149 23,390
------------------------------------------------------------------------------------------------------------------------
Revenues - net 154,670 49,942 4,933
------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Salaries and benefits 6,494,709 1,030,315 607,146
General and administrative 4,394,286 762,985 499,025
Professional and investment banking fees 2,581,887 149,089 125,789
------------------------------------------------------------------------------------------------------------------------
Total operating expenses 13,470,882 1,942,389 1,231,960
------------------------------------------------------------------------------------------------------------------------
Operating loss (13,316,212) (1,892,447) (1,227,027)
------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 105,221 33,617 9,417
Other income 74,220 - -
Interest expense and financing costs (3,267,846) (266,107) -
------------------------------------------------------------------------------------------------------------------------
Total other income (expense) - net (3,088,405) (232,490) 9,417
------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (16,404,617) $ (2,124,937) $ (1,217,610)
------------------------------------------------------------------------------------------------------------------------
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (.33) $ (.21)
---------------------------------------------------------- ------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 6,443,000 5,695,000
---------------------------------------------------------- ------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-33
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIENCY)
================================================================================
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
COMMON STOCK ADDITIONAL DURING THE
--------------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, at January 15, 1997 - $ - $ - $ - $ -
ISSUANCE OF SHARES OF COMMON STOCK 4,204,000 4,204 722,408 - 726,612
CONVERSION OF DEBT INTO COMMON STOCK 5,000 5 24,995 - 25,000
WARRANTS EXERCISED 43,750 44 174,956 - 175,000
WARRANTS ISSUED TO PLACEMENT AGENT FOR
BRIDGE FINANCING - - 10,000 - 10,000
WARRANTS ISSUED TO HOLDER OF BRIDGE
FINANCING - - 10,000 - 10,000
NET LOSS - - - (1,134,708) (1,134,708)
NET LOSS OF LLC AND "S" CORPORATION PRIOR
TO BECOMING A "C" CORPORATION - - (552,656) 552,656 -
----------------------------------------------------------------------------------------------------------------------------
BALANCE, at December 31, 1997 4,252,750 4,253 389,703 (582,052) (188,096)
INTEREST EXPENSE RELATED TO CONVERSION RATE
OF CONVERTIBLE DEBENTURES - - 627,000 - 627,000
ISSUANCE OF SHARES OF COMMON STOCK 575,000 575 2,117,425 - 2,118,000
CONVERSION OF DEBENTURES INTO COMMON STOCK 518,750 519 3,418,266 - 3,418,785
STOCK OPTIONS EXERCISED 4,000 4 19,106 - 19,110
STOCK OPTION COMPENSATION - - 69,000 - 69,000
ISSUANCE OF COMMON STOCK FOR:
INVESTMENT BANKING SERVICES 13,750 13 (13) - -
CANCELLATION OF INVESTMENT BANKING
AGREEMENT 83,395 83 833,917 - 834,000
SERVICES RENDERED FOR ISSUANCE OF
DEBENTURES 7,500 8 54,992 - 55,000
ISSUANCE OF OPTIONS AND WARRANTS FOR:
CANCELLATION OF INVESTMENT BANKING
AGREEMENT - - 65,000 - 65,000
BRIDGE FINANCING - - 26,000 - 26,000
DIRECTORS FEES - - 74,000 - 74,000
ISSUANCE AND CONVERSION OF DEBENTURES
INTO COMMON STOCK - - 241,000 - 241,000
NET LOSS - - - (7,401,299) (7,401,299)
----------------------------------------------------------------------------------------------------------------------------
BALANCE, at December 31, 1998 5,455,145 5,455 7,935,396 (7,983,351) (42,500)
</TABLE>
F-34
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIENCY)
================================================================================
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
COMMON STOCK ADDITIONAL DURING THE
--------------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, at December 31, 1998 5,455,145 $ 5,455 $ 7,935,396 $ (7,983,351) $ (42,500)
ISSUANCE OF SHARES OF COMMON STOCK 963,115 963 5,782,638 - 5,783,601
STOCK OPTIONS EXERCISED 24,548 25 117,253 - 117,278
ISSUANCE OF WARRANTS FOR:
INVESTMENT BANKING SERVICES - - 170,500 - 170,500
ISSUANCE OF CONVERTIBLE DEBENTURE - - 1,170,000 - 1,170,000
INTEREST EXPENSE RELATED TO CONVERSION
RATE OF CONVERTIBLE DEBENTURE - - 225,000 - 225,000
STOCK OPTION COMPENSATION - - 38,888 - 38,888
NET LOSS - - - (5,743,673) (5,743,673)
--------------------------------------------------------------------------------------------------------------------------
BALANCE, at December 31, 1999 6,442,808 6,443 15,439,675 (13,727,024) 1,719,094
ISSUANCE OF WARRANTS FOR DIRECTOR FEES - - 48,750 - 48,750
STOCK OPTION COMPENSATION - - 69,548 - 69,548
NET LOSS - - - (2,124,937) (2,124,937)
--------------------------------------------------------------------------------------------------------------------------
BALANCE, at March 31, 2000 6,442,808 $ 6,443 $ 15,557,973 $ (15,851,961) $ (287,545)
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-35
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
CUMULATIVE
AMOUNTS FROM
DATE OF
INCEPTION
(JANUARY 15,
1997) THREE MONTHS THREE MONTHS
THROUGH ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2000 2000 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (16,404,617) $ (2,124,937) $ (1,217,610)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation of property and equipment 119,453 20,829 12,247
Amortization of deferred financing costs 72,500 - -
Amortization of debt discount 195,000 195,000 -
Noncash equity transactions charged to operations 3,943,686 118,298 18,222
Changes in assets and liabilities
Increase in accounts receivable (57,700) (33,433) (6,552)
Increase in prepaid expenses (111,611) (85,242) -
Increase in accounts payable and accrued
expenses 760,502 18,281 53,296
Increase in deferred income 117,278 15,993 40,600
--------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (11,365,509) (1,875,211) (1,099,797)
--------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (349,698) (66,920) (18,820)
(Increase) decrease in other assets (76,672) 170 -
-------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (426,370) (66,750) (18,820)
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-36
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
CUMULATIVE
AMOUNTS FROM
DATE OF
INCEPTION
(JANUARY 15,
1997) THREE MONTHS THREE MONTHS
THROUGH ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2000 2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, stock
options and warrants exercised, net of related
costs $ 8,883,386 $ - $ 2,780,196
Proceeds from issuance of notes
payable/debentures 5,253,000 - -
Stock subscription payable - - (110,252)
Repayment of notes payable (153,000) - -
Advances from stockholder 110,000 - -
Repayment of advances (110,000) - -
Financing costs included in other assets (98,619) (98,619) -
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 13,884,767 (98,619) 2,669,944
---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,092,888 (2,040,580) 1,551,327
CASH AND CASH EQUIVALENTS, at beginning of period - 4,133,468 382,468
---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, at end of period $ 2,092,888 $ 2,092,888 $ 1,933,795
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-37
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. BASIS OF PRESENTATION The unaudited condensed consolidated
financial statements include U.S. RealTel,
Inc. (the "Company"), its inactive finance
subsidiary, its 56%-owned Argentinean
development stage subsidiary, its 89%-owned
development stage Brazilian subsidiary and
its wholly owned consulting subsidiary
(which was incorporated in October 1999 and
has limited activities). All intercompany
accounts and transactions have been
eliminated in consolidation.
The condensed consolidated financial
statements included herein are unaudited
and include all adjustments which, in the
opinion of management, are necessary for a
fair presentation of the consolidated
financial position and results of
operations of the interim periods. Certain
information and footnote disclosures
normally included in the consolidated
financial statements, prepared in
accordance with generally accepted
accounting principles, have been condensed
or omitted. These unaudited condensed
consolidated financial statements should be
read in conjunction with the Company's
December 31, 1999 annual consolidated
financial statements. The results of
operations for the interim periods are not
necessarily indicative of the operating
results for the whole year.
As reflected in the accompanying unaudited
condensed consolidated financial
statements, the Company has incurred losses
since inception and has negative cash flows
from operations. The Company's ability to
continue as a going concern is contingent
upon its ability to raise capital, continue
to expand its "USRT Telecom Grid" and
attain profitable operations. Moreover, the
Company expects to continue to incur
significant development costs to generate
significant revenue to achieve
profitability. These costs could increase
as the Company pursues other new sources of
revenues such as the Company's RealTel
Riser business to provide improved access
to broadband telecommunications services by
installing advanced in-building centralized
distribution systems in office buildings.
The Company is pursuing various sources of
debt and/or equity financing, including a
potential private placement (Note 4(a)), to
fund its activities. The Company, however,
can give no assurance as to its
ability to raise
F-38
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
capital or attain profitable operations.
These factors give rise to substantial
doubt as to the ability of the Company to
continue as a going concern. The unaudited
condensed consolidated financial statements
do not include any adjustments that might
result from the outcome of this uncertainty.
Since its inception, the Company's efforts
have been devoted to raising capital,
adding sites to the "USRT Telecom Grid" and
substantially increasing marketing of these
sites. The Company has received nominal
revenues from the sale of its services
throughout the U.S and internationally.
Accordingly, through the date of these
unaudited condensed consolidated financial
statements, the Company is considered to be
in the development stage and the
accompanying unaudited condensed
consolidated financial statements represent
those of a development stage enterprise. No
assurance can be given that the Company
will be able to obtain sufficient sites for
its "USRT Telecom Grid" and sublease the
sites to its customers profitably. Certain
site leases contain performance standards
which require a minimum (a) number of
telecommunication installations be
constructed or (b) revenue stream be
generated within a specified time period.
If these performance standards are not
achieved, the landlord may elect to
terminate the Company's exclusive rights
under such leases.
F-39
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. THE COMPANY The Company was originally organized under
the name of AGILE, LLC on January 15, 1997.
The Company was subsequently incorporated
on August 8, 1997 under the name U.S.
RealTel, Inc. ("Predecessor Corporation").
On November 3, 1997, the Predecessor
Corporation merged into a shell
corporation, Admiral Two Capital
Corporation (which had 4,179,000 shares
outstanding which were issued in 1997), and
the surviving company's name was changed to
U.S. RealTel, Inc. ("Surviving
Corporation"). As of the date of the
merger, shareholders of the Predecessor
Corporation were issued 2,214,870 common
shares of the Surviving Corporation. Also
on the merger date, 2,214,870 common shares
of the Surviving Corporation held by a
principal shareholder were surrendered and
returned to the Surviving Corporation's
authorized, but unissued, shares. The
merger transaction was accounted for as a
reverse acquisition into a public shell.
In addition to the merger in 1997, the
the Company issued 73,750 shares of common
stock as follows:
* 43,750 shares related to the exercise of
warrants at $4 per share
* 25,000 shares sold at $4 per share
* 5,000 shares related to debenture
conversion at $5 per share
In March 2000, the Company submitted to its
stockholders a plan to reincorporate the
Company in the State of Delaware. The
Company also authorized 5,000,000 shares at
$.001 par value for the Series A
Convertible Preferred Stock. The plan was
approved and became effective May 8, 2000.
The Company's business is to lease
telecommunication rights from owners of
real property for sublease to
telecommunications providers needing access
to real estate for their services to reach
building occupants and/or placement of
antenna networks in the U.S. and
internationally. The Company is continuing
the process of adding sites through the use
of its master leases and other programs, to
add to its network of sites for the "USRT
Telecom Grid." During 1998, the Company
also established a separate wholly owned
finance subsidiary
F-40
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(inactive) and a 56%-owned Argentinean
subsidiary. In February 2000, the Company
established a Brazilian subsidiary. For
purposes of the accompanying unaudited
condensed consolidated financial
statements, the Company has expensed all
amounts advanced to the Argentinean and
Brazilian subsidiaries until they become
operational and such advances are
considered recoverable. Accordingly, no
minority interest is recognized in the
condensed consolidated financial
statements. The net loss of the Argentinean
and Brazilian subsidiaries included in the
unaudited condensed consolidated financial
statements was $546,000 and $126,000 for
the three months ended March 31, 2000 and
March 31, 1999, respectively, and
$1,666,000 since inception.
3. CONVERTIBLE NOTES (a) CONVERTIBLE NOTE PAYABLE WITH
AND DEBENTURES RELATED PARTY
The Company executed a $1,500,000
promissory note on September 24, 1999
("Convertible Note") with a related party.
It bears interest at a rate of 7%,
compounded annually. Interest under the
Convertible Note is due and payable on
March 30, 2000 and on September 24, 2000.
The note may not be prepaid. The principal
amount of the Convertible Note is due and
payable on September 24, 2000, unless the
holder of the Convertible Note elects to
exercise the right to convert the
Convertible Note into the Company's common
stock or into stock of the Company's
Argentinean subsidiary. The holder of the
Convertible Note may, at any time after
January 1, 2000 until the Convertible Note
is paid in full, convert the principal
amount of the Convertible Note into the
number of shares of the Argentinean
subsidiary which will result in the holder
owning 9% of the total shares of such
subsidiary, or into shares of the Company's
common stock at a conversion price equal to
the lowest price per share paid for the
Company's common stock (or other security
convertible into common stock) after
September 24, 1999 in a sale of the common
stock or any security convertible into
common stock.
Should the holder of the Convertible Note
elect to convert the Note into ownership of
the Argentinean subsidiary, the Company
would maintain majority ownership of the
Argentinean subsidiary.
F-41
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(b) CONVERTIBLE DEBENTURE
On December 28, 1999, the Company completed
a private placement which included:
(i) The issuance of a convertible
debenture ("Convertible
Debenture"), which can be
drawn upon until December 28,
2000, up to $3,000,000
($1,500,000 outstanding at
March 31, 2000). This
Convertible Debenture carries
interest at 12%, payable
quarterly, and is due at the
earlier of July 1, 2001 or
the completion of a public
offering of at least $10
million (see iii. below).
This Convertible Debenture is
convertible into the
Company's common stock, at
any time, at $7.50 per share.
The Convertible Debenture
holder also has the option to
receive interest in shares of
the Company's common stock,
rather than cash, at $6.50
per share.
The difference between the
conversion rate of $7.50 per
share and the market price of
the Company's common stock of
$8.625 per share resulted in a
favorable conversion rate
interest expense of $225,000
in 1999 related to the $1.5
million outstanding at
December 31, 1999.
(ii) The sale of 384,615 shares of
common stock at $6.50 per
share, net of expenses of
$32,297.
(iii) The issuance of warrants, in
connection with the
convertible debenture, to
purchase 600,000 shares of the
Company's common stock at an
exercise price of $8 per
share. These warrants are
exercisable through December
31, 2004. The Company has the
option to extend the maturity
of the Convertible Debenture
until the earlier of October
1, 2001 or the completion of a
public offering of at least
$10 million, which would
result in reducing the
exercise price of these
warrants to $6.50 per share.
F-42
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Based on the Black-Scholes pricing model,
the warrants issued were valued at
$1,170,000, which increased additional
paid-in capital and decreased the
Convertible Debenture (debt discount). The
debt discount is amortized over the life of
the Convertible Debenture of which $195,000
was amortized for the three months ended
March 31, 2000.
(c) CONVERTED DEBENTURES
On December 3, 1997, the Company completed
a Series A convertible debenture bridge
financing of $525,000 resulting in net
proceeds of approximately $470,000 (after
expenses of the offering). The debentures
were payable, together with interest at the
rate of 9% per annum, on the earlier of
June 1, 1998 (which was amended to December
31, 1998) or the date of funding of a
secondary equity offering, as defined. The
debentures were convertible at maturity
into shares of the Company's common stock
with a conversion price of $5.25 per share.
In connection with this financing, the
Company issued to its investment banking
firm warrants to acquire 54,375 shares of
the Company's common stock at an exercise
price of $4 per share. These warrants are
exercisable through November 2000.
On March 5, 1998, the Company completed a
Series B convertible debenture bridge
financing of $1,550,000 resulting in net
proceeds of approximately $1,400,000 (after
expenses of the offering). The debentures
were payable, together with interest at the
rate of 9% per annum, on the earlier of
December 31, 1998 or the date of funding of
a secondary equity offering, as defined.
The debentures were convertible at maturity
into shares of common stock with a
conversion price of $5.25 per share. The
Company also issued 7,500 shares of common
stock to its investment banking firm in
connection with this financing, which were
recorded as financing costs and
subsequently as interest expense when the
debentures were converted.
While both the Series A and B debentures were
outstanding, the Company was precluded from
paying cash dividends on its common stock and
the Company's ability to redeem its common
stock was limited.
F-43
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
On October 2, 1998 and December 31, 1998,
the Series A and Series B convertible
debenture bonds were converted to 518,750
shares of common stock, at a $4 per share
conversion rate rather than the original
$5.25 per share conversion rate. The
revision in the conversion rate was
accounted for in 1998 by an increase in
additional paid-in capital and interest
expense of $1.4 million for the additional
shares issued. Costs associated with these
conversions were approximately $56,215
during 1998. These costs are netted against
the principal amount of debt converted in
the accompanying unaudited condensed
consolidated statements of changes in
stockholders' equity (deficiency). The
Company also issued to an investment
banking firm in 1998 92,262 warrants with
an exercise price of $4.75 per share,
expiring in March 2001. The Company also
issued options to purchase 176,190 shares
of common stock at $5.25 per share to the
debenture holders as a part of the
conversion, of which 4,000 options were
exercised in 1998, 24,548 options were
exercised in 1999 and the balance expired.
(d) PROMISSORY NOTE
The Company had a promissory note payable
to a shareholder, due on the earlier of
October 14, 1999 or the funding of a
secondary equity offering, as defined.
Interest, to be paid quarterly, was
calculated at the prime rate plus two
percent. In December 1997, this note was
repaid through the conversion of this debt
into 5,000 shares of the Company's common
stock, pursuant to the terms of the note.
F-44
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. STOCKHOLDERS' EQUITY (a) COMMON STOCK ISSUANCES
(DEFICIENCY)
In addition to the common stock issued
through debt conversions (Note 3) and the
merger and other 1997 transactions
discussed in Note 2, common stock was
issued as follows:
In 1998 -
(i) Sale of common stock - In connection
with a private placement, the Company
sold 575,000 shares at $4 per share
in October 1998. Expenses related to
this sale were approximately
$182,000. The Company also issued
warrants, which expire in October
2003, to purchase 402,500 shares of
the Company's stock at an exercise
price of $4 per share in connection
with this private placement.
(ii) Stock options exercised - During 1998,
one stock option for 4,000 shares was
exercised at $5.25 per share, less
commissions of $1,890.
(iii) Services rendered - The Company
issued 13,750 shares of common stock
to an investment banking firm for
services rendered in connection with
the private placement discussed above.
The Company entered into an agreement with
an affiliate of one of its principal
shareholders (the "Affiliate") that
provided that the Company pay a minimum
investment banking fee to the Affiliate of
$100,000 per year for a three-year period
commencing July 28, 1997, extendable for an
additional nine years under certain
conditions. The agreement also provided for
the reimbursement of certain expenses
incurred by the Affiliate up to $17,000 and
for the issuance of .5% of the Company's
common stock (20,895 shares), as defined,
to a charitable foundation. In 1998, this
agreement was canceled and the Affiliate
was paid $150,000 and issued 83,395 shares
of common stock and 43,750 warrants with an
exercise price of $4 per share, expiring in
October 2003. In 1998, the Company paid, in
cash, $225,000 to the Affiliate for
investment banking services ($300,000 from
inception through March 31, 2000).
F-45
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In 1999 -
(i) Sale of common stock - In connection
with a private placement, the Company
sold 578,500 shares at $6 per share in
January through April 1999. Expenses
related to this sale were $155,102.
(ii) Stock options exercised - Stock options
for 24,548 shares (Note 3(c)) were
exercised at $5.25 per share, less
commissions of $11,599.
(iii) Sale of common stock, Convertible
Debenture and warrants - On December
28, 1999, the Company sold 384,615
shares at $6.50 per share, received
$1.5 million for a Convertible
Debenture of up to $3 million and
issued 600,000 warrants exercisable
at $8.00 per share until December
2004 (Note 3(b)). Expenses related to
the sale of common stock were $32,297.
During the three months ended March 31, 2000 -
(i) In February 2000, the Company
retained an investment banking firm
to pursue a private placement of
equity or equity-linked securities.
The private placement is attempting
to raise up to $25 million for the
issuance of redeemable Series A
Convertible Preferred Stock. The
terms of the private placement are
subject to negotiation; however, it
is anticipated that the preferred
stock issued will be convertible into
the Company's common stock and will
have a redemption feature. There can
be no assurance that this private
placement will be successful. Other
assets includes $98,619 at March 31,
2000 for costs incurred related to
this private placement.
F-46
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(b) STOCK OPTIONS AND WARRANTS ISSUED
<TABLE>
<CAPTION>
Exercise
Price
Per Date Expiration
Date Issued Description Shares Share Exercisable* Date
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Options:
February 1998 Company executives 88,888 $5.25 25% exercisable March 2003
on issuance,
remainder vests
ratably over three
years
October 1999 Company executive 37,500 $6.50 50% exercisable October 2004
on issuance,
remainder
vests over two
years
April 1998 Employee 1,000 $4.00 April 2003
December 1999 Options issued under the Employee Exercisable ratably
Equity Incentive Plan 389,000 $8.00 over three years December 2005 - 7
-----------
Option shares 516,388
-----------
Warrants:
November 1997 Three shareholders 234,216 $1.92 October 2003
December 1997 Investment banking fee -
Series A debentures 54,375 $4.00 November 2000
March 1998 Investment banking fee - Series
B debentures 92,262 $4.75 March 2001
August 1998 In connection with bridge
financing 17,543 $4.00 August 2003
October 1998 Investment banking fee for sale
of common stock 30,667 $5.25 October 2003
October 1998 Issued with common stock sold 402,500 $4.00 October 2003
October 1998 Directors fees 50,000 $4.00 October 2003
October 1998 Cancellation of investment
banking agreement 43,750 $4.00 October 2003
October 1998 Investment banking fee for sale
of common stock 9,625 $4.00 October 2003
December 1998 Debenture conversion 8,810 $5.25 December 2003
March 1999 Investment banking services 4,348 $5.25 March 2004
December 1999 Investment banking services (Note 5) 25,000 $.01 December 2004
December 1999 Issued with Convertible Debenture 600,000 $8.00 December 2004
February 2000 Director fees 25,000 $8.00 February 2005
-----------
Warrant shares 1,598,096
-----------
Total options and warrant
shares 2,114,484
===========
</TABLE>
*Exercisable on issuance except as noted
F-47
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
At March 31, 2000, the Company has options and warrants for
1,693,887 shares of common stock currently exercisable at a
weighted average exercise price of $5.29 per share. The
options and warrants expire as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
YEAR ENDING DECEMBER 31, Shares Price
-----------------------------------------------------------------------------
<S> <C> <C>
2000 54,375 $ 4.00
2001 92,262 4.75
2003 886,999 3.63
2004 666,848 7.60
2005 154,666 8.00
2006 129,667 8.00
2007 129,667 8.00
-----------------------------------------------------------------------------
Total 2,114,484 $ 5.80
-----------------------------------------------------------------------------
</TABLE>
F-48
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(c) NONCASH EQUITY TRANSACTIONS
In connection with the noncash aspects of certain issuances
of common stock, options and warrants, the Company valued
such transactions as follows:
<TABLE>
<CAPTION>
INCEPTION
(JANUARY 15, THREE MONTHS THREE MONTHS
1997) THROUGH ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
Issuance 2000 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense related to
conversion rate of
convertible debentures (i) $ 852,000 $ - $ -
Revision of debt conversion
rate (ii) 1,400,000 - -
Common stock issued for
cancellation of
investment banking
agreement and debt
issuance (iii) 889,000 - -
Stock option compensation (i) 177,436 69,548 9,722
Options issued to debenture
holders for debenture
conversion (iv) 95,000 - -
Warrants issued for
services (iv) 530,250 48,750 8,500
-------------------------------------------------------------------------------------
Total $ 3,943,686 $ 118,298 $ 18,222
=====================================================================================
</TABLE>
F-49
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(i) Value based on excess of market price of the
Company's publicly traded common stock over the
conversion or exercise price. The excess stock
option value is amortized over the vesting period of
the options.
(ii) Value based on increased common shares issued, due
to the reduced conversion rate, using the market
price of the Company's publicly traded common stock.
(iii) Value based on market price of the Company's publicly
traded common stock.
(iv) Value based on Black-Scholes pricing model.
Based on current accounting practices for public
companies, the Company used the valuation methods above
rather than values of its common stock from recent private
placements. The Company's common stock has limited public
trading, which commenced in February 1998, on the OTC
Bulletin Board. The Company filed a Form 10-SB on April
19, 2000 to become a public reporting company. Since this
form is pending approval of the Securities and Exchange
Commission ("SEC"), the Company's common stock may be
quoted in the National Quotation Bureau's pink sheets,
commencing in May 2000, until SEC approval is obtained.
The Company has filed and been granted a temporary stay to
continue trading on the OTC Bulletin Board.
F-50
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The amounts above were charged to the following expense
accounts:
<TABLE>
<CAPTION>
INCEPTION
(JANUARY 15, THREE MONTHS THREE MONTHS
1997) THROUGH ENDED ENDED
MARCH 31, 2000 MARCH 31, 2000 MARCH 31, 1999
----------------------------------------------------------------------------------
<S> <C> <C> <C>>
Salaries and benefits $ 300,186 $ 118,298 $ 9,722
Professional and
Investment
Banking fees 1,069,500 - 8,500
Interest expense 2,574,000 - -
----------------------------------------------------------------------------------
Total $ 3,943,686 $ 118,298 $ 18,222
==================================================================================
</TABLE>
The Company accounts for stock options under APB Opinion
Number 25, under which compensation is recorded to the
extent the exercise price is less than the quoted public
market at grant date. Had salary expense been determined
consistent with SFAS No. 123, the Company's net loss and
net loss per common share, basic and diluted, would not
have been materially different than the amounts reported.
(d) EMPLOYEE EQUITY INCENTIVE PLAN
In April 1999, the Company's Board of Directors approved a
10-year Employee Equity Incentive Plan ("Plan"), subject
to approval of its stockholders. The stockholders ratified
the Plan in September 1999. Under the Plan, 484,655 shares
of the Company's common stock are reserved for issuance
under various award plans including stock options,
restricted stock, bonus and performance shares, etc.
Options for 401,500 shares of common stock under the Plan
have been granted through March 31, 2000 at $8 per share.
These options vest ratably over three years and expire
five years after they become exercisable. Since the market
price on the date the options were granted was $9.00 per
share, the compensation expense related to the favorable
option price ($401,500) is amortized over the vesting
period of the options. In March 2000, the Board of
Directors agreed to allocate an additional 64,000 shares
for stock options to be made available for new site
development vice presidents, none of which were issued as
of March 31, 2000.
F-51
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The Company also granted an option for 37,500 shares at
$6.50 per share in October 1999. Similar to the options
mentioned above, the excess of the market price at grant
date over the option price ($84,375) is amortized as
compensation expense over the vesting period.
The following table summarizes the Company's employee stock
option activity:
<TABLE>
<CAPTION>
Exercisable
------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Granted and outstanding at
December 31, 1998 89,888 $5.24 34,333 $5.21
------------------------
1999:
Granted 439,000 $7.87
------------
Outstanding at December 31,
1999 528,888 $7.42 75,305 $5.54
---------------------------------------------------
Three months ended March
31, 2000:
Granted - - - -
Forfeited (12,500) $8.00 - -
---------------------------------------------------
Outstanding at March 31,
2000 516,388 $7.41 95,791 $5.60
---------------------------------------------------
</TABLE>
F-52
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(e) WARRANT OFFERING PROGRAM
In March 2000, the Company's Board of Directors approved a
Warrant Offering Program ("Program") for the owners of
office building portfolios who meet certain criteria,
which program was modified in April 2000. The Program
provides for up to 400,000 warrants to be offered, at an
exercise price of $2.50 per share, upon either the
execution of a Master Lease or installation of a Riser
pursuant to a Riser Access Agreement. The number of
warrants issued will be determined by formula based on the
number of square feet committed. As of March 31, 2000, no
warrants were issued under the Program.
5. RELATED PARTY Consulting fees to one of the Company's directors amounted
TRANSACTIONS to $19,400 and $31,500 for the three months ended March 31,
2000 and 1999, respectively, and $114,400 since inception.
During 1999, the Company issued warrants to a stockholder
to purchase 25,000 shares of the Company's common stock at
$.01 per share for investment banking services. These
warrants, valued at $162,000 using the Black-Scholes
pricing model, are exercisable immediately and expire in
December 2004.
See also notes 3(a) and 4(a) and (b).
6. RECLASSIFICATIONS Certain items in the 1999 condensed consolidated
financial statements have been reclassified to
conform to the 2000 classifications.
F-53
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of
1934, the registrant caused this amendment to the registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized.
U.S. REALTEL, INC.
/s/ Jordan E. Glazov
----------------------
Date: June 8, 2000 Jordan E. Glazov
President
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 Form of Certificate of Merger
2.2 Plan and Agreement of Merger
3.1 Certificate of Incorporation
3.2 Bylaws
4.1 Form of Common Stock Certificate
4.2 Shareholders' Agreement dated October 2, 1998
4.3 Registration Rights Agreement dated October 2, 1998
4.4 Convertible Promissory Note dated September 24, 1999
4.5 Amendment dated September 24, 1999 to Shareholders
Agreement dated October 2, 1998
4.6 Amendment dated September 24, 1999 to Registration
Rights Agreement dated October 2, 1998
4.7 12% Convertible Debenture dated December 28, 1999
4.8 Amendment dated December 28, 1999 to Shareholders
Agreement dated October 2, 1998, as amended
10.1 Presidential Towers Office Lease dated October 6, 1999
10.2 Employment Agreement dated as of January 15, 1997
between the Company's predecessor and Perry H. Ruda
10.3 Employment Agreement dated as of January 15, 1997
between the Company's predecessor and Jordan E. Glazov
10.4 Amendment to Employment Agreement dated as of April 20, 1999
between the Company and Perry H. Ruda.
10.5 Amendment to Employment Agreement dated as of April 20, 1999
between the Company and Jordan E. Glazov
10.6 1999 Employee Equity Incentive Plan
10.7 Exclusive Telecommunications Strategic Cooperation
Agreement dated February 18, 2000
21.1 List of the Company's Subsidiaries
27 Financial Data Schedule (December 31, 1999)
27.1 Financial Data Schedule (March 31, 2000)
</TABLE>
