<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
COMMISSION FILE NUMBER 0-30401
U.S. REALTEL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-4360426
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
555 WEST MADISON, ATRIUM LEVEL SOUTH, CHICAGO, ILLINOIS 60661
(Address of Principal Executive Offices)
(312) 775-8900
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date 6,467,808 SHARES OF PAR
VALUE $0.001 COMMON STOCK, AS OF
NOVEMBER 10, 2000.
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Changes in Stockholders'
Equity (Deficiency) 5 - 6
Condensed Consolidated Statements of Cash Flows 7 - 8
Notes to Condensed Consolidated Financial Statements 9 - 29
</TABLE>
2
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, 2000
-----------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 492,110
Accounts receivable 181,172
Prepaid expenses 249,426
-----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 922,708
NET PROPERTY AND EQUIPMENT 297,381
OTHER ASSETS 46,850
-----------------------------------------------------------------------------------------------------------
$ 1,266,939
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Interim bridge financing with related parties, net of debt discount of $394,000 $ 758,500
Convertible note payable with related party 1,500,000
Convertible debenture, net of debt discount of $585,000 2,415,000
Accounts payable and accrued expenses 1,032,383
Due to stockholder 35,000
-----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 5,740,883
-----------------------------------------------------------------------------------------------------------
DEFERRED INCOME 262,186
-----------------------------------------------------------------------------------------------------------
REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK - none issued --
-----------------------------------------------------------------------------------------------------------
STOCKHOLDERS' DEFICIENCY
Preferred stock, $.001 par value; 5,000,000 shares authorized - none issued --
Common stock, $.001 par value; 50,000,000 shares authorized;
6,467,808 issued and outstanding shares 6,468
Additional paid-in capital 16,561,630
Accumulated deficit during the development stage (21,304,228)
------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIENCY (4,736,130)
------------------------------------------------------------------------------------------------------------
$ 1,266,939
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<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) Nine Months Ended
Through -------------------------------------
September 30, September 30, September 30,
2000 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 1,487,667 $ 1,033,821 $ 248,398
Direct Costs 1,164,227 815,109 191,207
-------------------------------------------------------------------------------------------------------------------------------
Revenues - Net 323,440 218,712 57,191
-------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Salaries and benefits 8,734,352 3,269,958 2,160,011
General and administrative 6,059,699 2,428,398 1,358,842
Professional and investment banking fees 3,327,822 895,024 361,120
-------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 18,121,873 6,593,380 3,879,973
-------------------------------------------------------------------------------------------------------------------------------
Operating loss (17,798,433) (6,374,668) (3,822,782)
-------------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 143,002 71,398 31,886
Other income 74,220 - -
Interest expense and financing costs (4,049,673) (1,047,934) -
-------------------------------------------------------------------------------------------------------------------------------
Total other (expense) income, net (3,832,451) (976,536) 31,886
-------------------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting principle (21,630,884) (7,351,204) (3,790,896)
Cumulative Effect of Change in Accounting Principle (226,000) (226,000) -
-------------------------------------------------------------------------------------------------------------------------------
Net Loss $ (21,856,884) $(7,577,204) $(3,790,896)
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
Net Loss Per Common Share:
Loss before cumulative effect of change in accounting principle (1.14) (.64)
Cumulative effect of change in accounting principle (.03) -
------------------------------------------------------------------ ----------------------------------------
Net Loss Per Common Share - Basic and
Diluted $ (1.17) $ (.64)
------------------------------------------------------------------ ----------------------------------------
------------------------------------------------------------------ ----------------------------------------
Weighted Average Common Shares
Outstanding 6,459,000 5,931,000
------------------------------------------------------------------ ----------------------------------------
------------------------------------------------------------------ ----------------------------------------
<CAPTION>
Three Months Ended
-------------------------------------
September 30, September 30,
2000 1999
-------------------------------------------------------------------------------------------------------------
Revenues $ 524,390 $ 172,307
Direct Costs 417,341 129,644
-------------------------------------------------------------------------------------------------------------
Revenues - Net 107,049 42,663
-------------------------------------------------------------------------------------------------------------
Operating Expenses
Salaries and benefits 993,940 786,346
General and administrative 644,796 448,390
Professional and investment banking fees 427,150 188,389
-------------------------------------------------------------------------------------------------------------
Total operating expenses 2,065,886 1,423,125
-------------------------------------------------------------------------------------------------------------
Operating loss (1,958,837) (1,380,462)
-------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 10,729 5,580
Other income - -
Interest expense and financing costs (506,370) -
-------------------------------------------------------------------------------------------------------------
Total other (expense) income, net (495,641) 5,580
-------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting principle (2,454,478) (1,374,882)
Cumulative Effect of Change in Accounting Principle (226,000) -
-------------------------------------------------------------------------------------------------------------
Net Loss $(2,680,478) $(1,374,882)
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Net Loss Per Common Share:
Loss before cumulative effect of change in accounting principle (.38) (.23)
Cumulative effect of change in accounting principle (.03) -
-------------------------------------------------------------------------------------------------------------
Net Loss Per Common Share - Basic and
Diluted $ (.41) $ (.23)
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Weighted Average Common Shares
Outstanding 6,468,000 6,058,000
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<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 for Cash 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 - - 10,000 - 10,000
Financing
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 for Cash 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 for Cash 4,000 4 19,106 - 19,110
Stock Option Compensation - - 69,000 - 69,000
Noncash 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
Noncash 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>
5
<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 for Cash 963,115 963 5,782,638 - 5,783,601
Stock Options Exercised for Cash 24,548 25 117,253 - 117,278
Noncash 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
Noncash Issuance of Warrants for:
Directors Fees - - 376,000 - 376,000
Interim Bridge Financing - - 574,000 - 574,000
Stock Options Exercised for Cash 25,000 25 225 - 250
Stock Option Compensation - - 171,730 - 171,730
Net Loss - - - (7,577,204) (7,577,204)
--------------------------------------------------------------------------------------------------------------------------
Balance, at September 30, 2000 6,467,808 $ 6,468 $ 16,561,630 $ (21,304,228) $ (4,736,130)
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<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) Nine Months Ended
Through -------------------------------------
September 30, September 30, September 30,
2000 2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(21,856,884) $(7,577,204) $(3,790,896)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation of property and equipment 158,886 60,262 32,107
Amortization of deferred financing costs 72,500 - -
Amortization of debt discount 765,000 765,000 -
Noncash equity transactions charged to
operations 4,373,118 547,730 37,666
Changes in assets and liabilities
Increase in accounts receivable (181,172) (156,905) (79,675)
Increase in prepaid expenses (249,426) (223,057) (38,248)
Increase in accounts payable and accrued
expenses 1,032,383 290,162 47,716
Increase in deferred income 262,186 160,901 118,211
---------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (15,623,409) (6,133,111) (3,673,119)
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (456,267) (173,489) (36,969)
Increase in other assets (99,350) (22,508) (700)
---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (555,617) (195,997) (37,669)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<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) Nine Months Ended
Through -------------------------------------
September 30, September 30, September 30,
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 $ 8,883,636 $ 250 $3,433,176
Proceeds from issuance of notes
payable/debentures 6,753,000 1,500,000 1,500,000
Proceeds from issuance of interim bridge financing 1,152,500 1,152,500 -
Stock subscription payable - - (110,252)
Repayment of notes payable (153,000) - -
Advances from stockholder 145,000 35,000 -
Repayment of advances (110,000) - -
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 16,671,136 2,687,750 4,822,924
----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 492,110 (3,641,358) 1,112,136
CASH AND CASH EQUIVALENTS, at beginning of period - 4,133,468 382,468
----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, at end of period $ 492,110 $ 492,110 $1,494,604
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
8
<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 Brazilian development
stage 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
normal recurring 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 complete the
proposed sale of substantially all of its assets
relating to its U.S. business ("Sale") to Apex
Site Management, Inc., a wholly owned indirect
subsidiary of SpectraSite Holdings, Inc. (Note
8), to raise capital and attain profitable
international operations. Moreover, the Company
expects to continue to incur development costs
to generate significant international revenue to
achieve profitability. The Company expects to
retain all or a portion of the proposed Sale
proceeds to develop and expand its international
markets. The Company, however, can give no
assurance as to its ability to complete the
proposed Sale, which is subject to certain
approvals, conditions and consents, or attain
profitable international operations. These
factors give rise to substantial doubt as to the
ability of the Company to
9
<PAGE>
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, recruiting and
training personnel, adding properties to the
"USRT Telecom Grid," increasing the marketing of
these sites and developing its international
businesses. The Company has received immaterial
net 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 complete the proposed Sale or attain
profitable international operations.
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.
10
<PAGE>
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
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 primary 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 for placement of antenna networks in the
U.S. and internationally. During 1998, the
Company also established a separate wholly owned
finance subsidiary (inactive) and a 56%-owned
Argentinean subsidiary. In February 2000, the
Company established an 89%-owned Brazilian
subsidiary. The minority interests of both
international subsidiaries are substantially
owned by related parties. 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 unaudited condensed
consolidated financial statements. The net loss
of the Argentinean and Brazilian subsidiaries
included in the unaudited condensed consolidated
financial statements was approximately
$1,851,000 and $631,000 for the nine months
ended September 30, 2000 and 1999, respectively,
$638,000 and $347,000 for the three months ended
September 30, 2000 and 1999, respectively, and
$2,971,000 since inception.
11
<PAGE>
3. CONVERTIBLE NOTES (a) INTERIM BRIDGE FINANCING WITH RELATED PARTIES
AND DEBENTURES
In August 2000, the Company received an interim
bridge financing commitment from related
parties. This commitment consisted of promissory
notes in the principal amount of up to $1.75
million ($1.1525 million outstanding as of
September 30, 2000) and warrants to purchase
638,462 shares of the Company's common stock at
an exercise price of $3.25 per share. The
promissory notes bear interest at 12% per annum
and are due on December 14, 2000 (subject to
acceleration as provided therein). The warrants
are exercisable through August 15, 2005.
Based principally on the Black-Scholes pricing
model, the warrants issued through September 30,
2000 (404,614 warrants) were valued at $574,000,
which increased paid-in capital and decreased
the interim bridge financing (debt discount).
The debt discount is amortized over the term of
the financing.
Interest expense, including the amortized debt
discount, on this financing was $194,000 for the
three and nine months ended September 30, 2000.
On October 11, 2000, an additional $202,500 was
drawn on the financing commitment and 62,308
warrants were issued.
The Company intends to repay the entire
outstanding balance of this financing with a
portion of the proceeds received from the
proposed Sale (Note 8).
(b) CONVERTIBLE NOTE PAYABLE WITH 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 12% (7% through September 24, 2000),
compounded annually. Interest under the
Convertible Note is due and payable on January
2, 2001. The note may not be prepaid. The
principal amount of the Convertible Note is due
and payable on January 2, 2001, 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
12
<PAGE>
Note may, 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.
Interest expense on this note payable was
$79,000 and $27,000 for the nine months and
three months ended September 30, 2000,
respectively.
See Note 8.
(c) 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 ($3,000,000
outstanding as of September 30,
2000). This Convertible
Debenture carries interest at 15%
(12% through September 30, 2000),
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.
13
<PAGE>
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 original $1.5 million drawn
on December 28, 1999. The market
price of the Company's common
stock was less than the
conversion rate on the remaining
$1.5 million drawn in 2000.
(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.
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
$585,000 and $195,000 was amortized for the nine
months and three months ended September 30,
2000, respectively.
The holder of this Convertible Debenture has
exercised its right to accelerate the due date
upon completion of the proposed Sale (Note 8).
(d) CONVERTED DEBENTURES
On December 3, 1997, the Company completed a
Series A convertible debenture bridge financing
of $525,000 resulting in net proceeds of
14
<PAGE>
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.
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
15
<PAGE>
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.
(e) 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.
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.
16
<PAGE>
(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 September 30, 2000).
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(d))
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(c)). Expenses related to the
sale of common stock were $32,297.
17
<PAGE>
During the nine months ended September 30, 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 attempted to raise up to $25
million for the issuance of redeemable
Series A Convertible Preferred Stock.
As a result of the proposed Sale (Note
8), the private placement was
discontinued. Expenses of $123,681
related to the private placement that
were deferred as of June 30, 2000 were
charged to operations in the three
months ended September 30, 2000.
(ii) Stock options exercised - stock
options for 25,000 shares were at $.01
per share (Note 5).
18
<PAGE>
(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 351,000 $8.00 Exercisable ratably
Equity Incentive Plan over three years December 2005 - 7
June 2000 Options issued under the Employee Exercisable ratably
Equity Incentive Plan 10,000 $10.00 over three years June 2006 - 8
---------
Option shares 488,388
---------
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 Issued with Convertible Debenture 600,000 $8.00 December 2004
February 2000 Director fees 25,000 $8.00 February 2005
August/September In connection with interim bridge
2000 financing 404,614 $3.25 August 2005
---------
Warrant shares 1,977,710
---------
Total options and warrant
shares 2,466,098
---------
---------
</TABLE>
*Exercisable on issuance except as noted
19
<PAGE>
At September 30, 2000, the Company has options and
warrants for 2,073,501 shares of common stock
currently exercisable at a weighted average
exercise price of $4.96 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 641,848 7.89
2005 546,614 4.48
2006 120,333 8.06
2007 120,333 8.06
2008 3,334 10.00
-----------------------------------------------------------------------------
Total 2,466,098 $ 5.42
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
</TABLE>
20
<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, -----------------------------------
1997) Nine Months Ended
Through -----------------------------------
September 30, September 30, September 30,
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) 279,618 171,730 29,166
Options issue to debenture holders for
debenture conversion (iv) 95,000 - -
Warrants issued for services (iv) 857,500 376,000 8,500
---------------------------------------------------------------------------------------------------
$ 4,373,118 $ 547,730 $ 37,666
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
<CAPTION>
----------------------------------
Three Months Ended
----------------------------------
September 30, September 30,
2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
Interest expense related to conversion rate of
convertible debentures (i) $ - $ -
Revision of debt conversion rate (ii) - -
Common stock issued for cancellation of
investment banking agreement and debt
issuance (iii) - -
Stock option compensation (i) 48,454 9,722
Options issue to debenture holders for
debenture conversion (iv) - -
Warrants issued for services (iv) 226,000 -
-------------------------------------------------------------------------------------
$ 274,454 $ 9,722
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
(i) Value based on the 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 the 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 the 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 in April 2000 and became a public reporting
company effective June 19, 2000.
22
<PAGE>
<TABLE>
<S> <C>
The amounts above were charged to the following expense accounts:
<CAPTION>
Inception
(January 15,
1997) Nine Months Ended Three Months Ended
Through ----------------------------- -----------------------------
September 30, September 30, September 30, September 30, September 30,
2000 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and
benefits $ 503,618 $ 321,730 $ 29,166 $ 48,454 $ 9,722
Professional and
investment
banking fees 1,069,500 - 8,500 - -
Interest expense 2,574,000 - - - -
Cumulative effect of
change in
accounting
principle 226,000 226,000 - 226,000 -
-------------------------------------------------------------------------------------------------
Total $ 4,373,118 $ 547,730 $ 37,666 $ 274,454 $ 9,722
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
<S> <C>
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.
</TABLE>
23
<PAGE>
<TABLE>
<S> <C>
(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 411,500 (361,000 outstanding as of September 30,
2000 after forfeitures) shares of common stock under the Plan have been
granted through September 30, 2000 at $8 and $10 per share. These options
vest ratably over three years and expire five years after they become
exercisable. To the extent the market price on the date the options were
granted exceeded the option price, compensation expense is provided by
amortizing the excess ($351,000) 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 September 30, 2000.
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.
</TABLE>
24
<PAGE>
<TABLE>
<S> <C>
The following table summarizes the Company's employee stock option activity:
<CAPTION>
Exercisable
------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------------------------------------------------------------------
<C> <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
----------------------------------------
----------------------------------------
Nine months ended September
30, 2000
Granted 10,000 $10.00
Forfeited (50,500) $8.00
---------------
Outstanding at September 30,
2000 488,388 $7.42 95,791 $5.60
---------------------------------------------------
---------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<S> <C>
(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 September 30, 2000, no warrants were issued under the Program.
5. RELATED PARTY Consulting fees to one of the Company's directors amounted to $66,885 and
TRANSACTIONS $43,500 for the nine months ended September 30, 2000 and 1999, respectively,
$23,750 and $0 for the three months ended September 30, 2000 and 1999,
respectively, and $181,285 since inception.
In December 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, were exercised in April 2000.
In June 2000, a $35,000 noninterest-bearing short-term advance was made by a
stockholder to the Company.
See also Notes 3(a) and (b) and 4(a) and (b) for interim bridge financing and
a convertible note payable with related parties and equity securities issued
to related parties, respectively.
</TABLE>
26
<PAGE>
<TABLE>
<S> <C>
6. RESTATEMENTS - 1999 Revenues - net were decreased and net loss was increased by $24,124 and
$49,043 for the three and nine months ended September 30, 1999, respectively,
to conform to the revenue recognition policies adopted by the Company for the
year ended December 31, 1999 based on the guidance provided by Staff
Accounting Bulletin 101, Revenue Recognition in Financial Statements. Such
restatements increased the net loss per share $.01 each for the nine and three
months ended September 30, 1999.
7. RECENT ACCOUNTING In March 2000, the Financial Accounting Standards Board issued FASB
PRONOUNCEMENT Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation an interpretation of APB Opinion No. 25" ("Interpretation")
which, among other issues, requires that nonemployee directors be treated as
employees for stock compensation paid for service as directors. This
Interpretation was adopted as of July 1, 2000. As a result, warrants issued
to the Company's directors for services as directors are to be valued at the
excess of the market value of the Company's publicly traded common stock on
the grant date over the exercise price rather than the value based on the
Black-Scholes pricing model, the latter being the accounting policy previously
followed by the Company.
Accordingly, as of January 1, 2000, the Company has recorded additional
compensation expense of $226,000 for the three and nine months ended September 30,
2000, as a cumulative effect of change in accounting principle as of January 1,
2000, to value options granted to directors in prior years for services or
directors under APB 25, for the effect of the Interpretation. In addition,
compensation expense was increased by $101,250 for warrants issued to a
director in February 2000. This increase in compensation expense increased the
net loss per share $.02 for the first quarter ended March 31, 2000.
</TABLE>
27
<PAGE>
<TABLE>
<S> <C>
8. SUBSEQUENT EVENT On October 18, 2000, the Company executed an Asset Purchase Agreement to sell
substantially all of its assets relating to its U.S. business to Apex Site
Management, Inc., a wholly owned indirect subsidiary of SpectraSite Holdings,
Inc. For the nine months ended September 30, 2000, net revenues from the U.S.
assets sold represented approximately 95% of the consolidated net revenues.
The consideration related to the proposed Sale is expected to be $16.5 million
in cash plus up to an additional $250,000 in contingent consideration. In
addition, the acquirer will assume certain liabilities, primarily the
Company's corporate office lease. U.S. assets to be sold include certain
Facility Site Master Leases and Subleases related to the Company's U.S.
telecommunications rights, the Company's "USRT Telecom Grid" and "9-Stage
Tracking System" and certain other assets.
Part of the consideration includes an initial deposit of (i) $1.65 million
paid to an escrow agent upon the execution of the Asset Purchase Agreement,
and (ii) an additional deposit of $1.65 million which was paid to the Company,
with the remaining consideration due at closing. The initial deposit, under
certain circumstances, will be retained by the Company as liquidated damages
if the proposed Sale is terminated. Repayment to the acquirer of the
additional deposit and interest thereon is guaranteed by the Company's
directors, either individually or through their affiliates. The Company has
agreed to issue promissory notes together with warrants to purchase the
Company's common stock on the same terms used for the Company's interim bridge
financing (Note 3(a)) should the directors be required to fund any amounts
under the guarantee.
A portion of the proposed Sale proceeds are expected to be used to repay
approximately $5.855 million of debt outstanding consisting of the interim
bridge financing (Note 3(a)), the convertible note payable (Note 3(b)) and the
Convertible Debenture (Note 3(c)). A portion of the proceeds are expected to
be used to pay expenses of the proposed Sale and expenses of the Company prior
to and after the proposed Sale. The Company may use all or a portion of the
remaining proceeds to develop and expand its international markets, including
Argentina and Brazil.
</TABLE>
28
<PAGE>
<TABLE>
<S> <C>
The proposed Sale is contingent upon, among other things, securing certain
approvals and consents and the execution of nonsolicitation agreements and a
noncompete agreement. There can be no assurance that the conditions of the
proposed Sale will be satisfied or waived and that the proposed Sale will be
consummated. The closing is expected to take place on the first business day
following the completion of the Regulation 14C requirements of the Securities
Exchange Act of 1934, subject to extension under certain conditions, but in no
event later than February 15, 2001.
Since the proposed Sale involves the sale of certain U.S. assets, the Company
plans to continue to operate internationally after the proposed Sale.
</TABLE>
29
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of our consolidated financial condition
and results of operations for the three and nine months ended September 30,
2000 should be read in conjunction with our unaudited condensed consolidated
financial statements, including the related notes, included elsewhere in this
quarterly report. These unaudited financial statements should be read in
conjunction with the Company's 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.
The following discussion should also be read with reference to our
Form 10-SB/A2, filed June 28, 2000, which contains definitions of certain
capitalized terms used below.
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 nine months ended September 30, 2000 and 1999, we experienced net losses
of $7.6 million and $3.8 million, respectively, and we have experienced $21.9
million of net losses since inception. As of September 30, 2000, we had a
deficit in working capital of $4.8 million.
As more fully discussed in Note 8 to the unaudited condensed
consolidated financial statements, on October 18, 2000 we executed an Asset
Purchase Agreement to sell substantially all of the assets relating to our U.S.
business to Apex Site Management, Inc., a wholly-owned indirect subsidiary of
SpectraSite Holdings, Inc. for $16.5 million in cash plus up to an additional
$250,000 in contingent consideration and the assumption of certain liabilities.
The proposed asset sale is contingent upon, among other things, securing certain
approvals and consents and the execution of non-solicitation agreements and a
non-compete agreement between Apex and us and between Apex and certain members
of our management. There can be no assurance that the conditions of the proposed
asset sale will be satisfied or waived and that the proposed asset sale will be
consummated. The closing is expected to take place on the first business day
following the completion of the Regulation 14C requirements of the Securities
Exchange Act of 1934 (requiring delivery of an information statement concerning
the proposed asset sale to our stockholders), subject to extension under certain
conditions, but in no event later than February 15, 2001.
A portion of the proceeds from the proposed asset sale will be used to
repay approximately $5,855,000 of indebtedness to Brandywine Operating
Partnership, L.P., Jordan E. Glazov, Perry H. Ruda, Victor Chigas and Troon &
Co. In addition, a portion of the proceeds will be used for other corporate
purposes including the payment of (i) expenses incurred in connection with the
proposed asset sale, (ii) expenses incurred during the period prior to the
closing of the proposed asset sale in the operation and termination of our U.S.
business and (iii) expenses incurred in the operation of our remaining business
both prior to and after the closing of the proposed asset sale. Moreover, the
Company intends to evaluate a number of alternative uses for the remaining
proceeds, including using all or a portion of such proceeds both to develop and
expand our businesses in our existing international markets, specifically in
Argentina and Brazil through our subsidiaries located in those countries, as
well as to expand into selected new international markets. Our ability to
continue as a going concern is contingent upon our ability to complete the
proposed asset sale, to raise capital and to expand and attain profitability in
our international operations, which will remain following the proposed asset
sale. Management expects to continue to incur development costs to generate
significant international revenue to achieve profitability.
If we are not able to consummate the proposed asset sale and attain
profitable international operations, 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 annual consolidated financial statements contains a modification
concerning substantial doubt about
30
<PAGE>
our ability to continue as a going concern. The Company is currently
utilizing a $1.75 million commitment for interim bridge financing from
related parties (see Note 3 (a) to the unaudited condensed consolidated
financial statements) and a deposit of $1.65 million which was received upon
the execution of the Asset Purchase Agreement (see Note 8 to the unaudited
condensed consolidated financial statements) to fund operating activities.
Certain of our directors or their affiliates have agreed to repay such
deposit, plus interest, to Apex if the closing of the proposed asset sale
does not occur on the contemplated closing date under certain circumstances.
If and to the extent any such director or affiliate is required to repay such
deposit to Apex, we have agreed to issue to such person a promissory note and
warrants.
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED
SEPTEMBER 30, 1999.
Revenues
Revenues increased to $524,390 for the three months ended September
30, 2000 from $172,307 for the same period in 1999. The revenues 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" and initial
revenues which were received in Argentina.
Revenues-net
Revenues-net (after direct costs) also increased consistent with the
increased revenues. The margin percentage for the three months ended September
30, 2000 of 20.4% was less than the 24.8% for the three months ended September
30, 1999 because (a) the 1999 quarter included a sale of an easement right and a
fee for negotiating the termination of a third party contract, both related to
the site leasing business, and (b) the 2000 quarter included the cost of an
additional processing employee.
Operating Expenses
Operating expenses increased to $2.1 million for the quarter ended
September 30, 2000 from $1.4 million for the quarter ended September 30, 1999.
During the quarter ended September 30, 2000, salaries and benefits increased to
$993,940 from $786,346 for the comparable three months in 1999, as we hired
additional personnel to implement our business plan. General and administrative
expenses increased during the quarter ended September 30, 2000 to $644,796 from
$448,390 in the second quarter of 1999. This increase was for additional office
space, insurance, marketing and other operating costs. Professional and
investment banking fees were $427,150 for the quarter ended September 30, 2000
compared to $188,389 in the third quarter of 1999, reflecting the additional
expenses of the discontinued private placement (including $124,000 deferred as
of June 30, 2000) and costs to date relating to the proposed asset sale.
Operating expenses included the costs to fund the operations in
Argentina and the start-up of our subsidiary in Brazil, which were approximately
$638,000 for the quarter ended September 30, 2000 compared to $347,000 for the
comparable period in 1999. No foreign currency adjustments exist since the
Argentinean peso is equivalent to one U.S. dollar and the Brazilian expenses
were paid in U.S. dollars.
Interest Expense and Financing Costs
During the quarter ended September 30, 2000, interest expense and
financing costs increased by $506,370 from the comparable three months in 1999.
The increase is attributable to noncash interest charges of $375,000 in the
quarter ended September 30, 2000 relating to the amortized debt discount on the
interim bridge financing and the Convertible Debenture and interest expense on
the interim bridge financing, Convertible Debenture and convertible note
payable. There were no interest charges for the third quarter of 1999.
31
<PAGE>
Interest Income
Interest income increased to $10,729 during the quarter ended
September 30, 2000 from $5,580 for the comparable quarter in 1999 as a result of
short term investments of cash received from the 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.
Cumulative Effect of Change in Accounting Principle
As more fully discussed in Note 7 to the unaudited condensed
consolidated financial statements, our results of operations for the three
months ended September 30, 2000 included a $226,000 charge ($.03 per share) for
adopting Financial Accounting Standards Board Interpretation No. 44 "Accounting
for Certain Transactions Involving Stock Compensation, an interpretation of APB
Opinion No. 25" relating to the valuation of warrants issued in prior years to
the Company's directors.
Net Loss
Our net loss increased for the three months ended September 30, 2000
to $2,680,478 ($.41 per basic and diluted common share) from $1,374,882 ($.23
per basic and diluted common share) for the comparable period in 1999, primarily
due to increased operating expenses to support our growth, increased
professional fees related to our proposed asset sale and discontinued private
placement, interest expense on our debt, operating expenses of the Argentina
subsidiary and the start-up costs of the Brazilian subsidiary.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999.
Revenues
Revenues increased to $1,033,821 for the nine months ended September
30, 2000 from $248,398 for the same period in 1999. The revenues 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" and initial
revenues which were received in Argentina in the third quarter of 2000.
Revenues-net
Revenues-net (after direct costs) also increased consistent with the
increased revenues. The margin percentage for the nine months ended September
30, 2000 of 21.2% was less than the 23% for nine months ended September 30, 1999
because the 1999 nine months included a sale of an easement right and a fee for
negotiating the termination of a third party contract, both related to the site
leasing business.
Operating Expenses
Operating expenses increased to $6.6 million for the nine months ended
September 30, 2000 from $3.9 million for the nine months ended September 30,
1999. During the nine months ended September 30, 2000 salaries and benefits
increased to $3,269,958 from $2,160,011 for the first nine months of 1999 as we
hired additional personnel to implement our business plan. General and
administrative expenses increased during the nine months ended September 30,
2000 to $2,428,398 from $1,358,842 in the first nine months of 1999. This
increase was for additional office space, insurance, travel, recruiting and
other operating costs. Professional and investment banking fees were $895,024 in
the nine months ended September 30, 2000 compared to $361,120 in the same period
of 1999, reflecting, the additional expenses of the discontinued private
placement (including $124,000 deferred as of June 30, 2000), the costs to date
of the proposed asset sale and the costs, in the second quarter of 2000, for
filing to become a public reporting company and a Delaware corporation.
32
<PAGE>
Operating expenses included the cost to fund the operations in
Argentina and the start-up of our subsidiary in Brazil, which were approximately
$1,851,000 for the nine months ended September 30, 2000 compared to $631,000 for
the nine months in 1999 and $2,971,000 since inception. No foreign currency
adjustments exist since the peso is equivalent to one U.S. dollar, and the
Brazilian expenses were paid in U.S. dollars.
Interest Expense and Financing Costs
During the nine months ended September 30, 2000, interest expense and
financing costs increased $1,047,934 from the comparable nine months in 1999.
The increase is attributable to noncash interest charges of $765,000 for the
nine months ended September 30, 2000 relating to the amortized debt discount on
the interim bridge financing and Convertible Debenture and interest expense on
the interim bridge financing, Convertible Debenture and convertible note
payable. There were no interest charges for the first nine months of 1999.
Interest Income
Interest income increased to $71,398 during the nine months ended
September 30, 2000 from $31,886 for the first nine months in 1999 as a result of
short term investments of cash received from the 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.
Cumulative Effect of Change in Accounting Principle
Refer to the explanation above in the three month comparison.
Net Loss
Our net loss increased for the nine months ended September 30, 2000 to
$7,577,204 ($1.17 per basic and diluted common share) from $3,790,896 ($.64 per
basic and diluted common share) for the comparable period in 1999, primarily due
to increased operating expenses to support our growth, increased professional
fees related to our proposed asset sale, discontinued private placement and
filings to become a public reporting company and Delaware corporation, interest
expense on our debt, operating expenses of the Argentina subsidiary and the
start-up costs of the Brazilian subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
We continue to be 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 which, on an ongoing
basis, will be primarily in international markets. The proceeds from our
proposed asset sale, together with additional equity and debt financing, as
necessary, will be used to fund our cash requirements.
Net cash used in our operations was $6.1 million for the nine months
ended September 30, 2000 and $3.7 million for the same period in 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 operating expenses.
Cash used in investing activities was $195,997 for the nine months
ended September 30, 2000 and $37,669 for the nine months ended September 30,
1999. Cash used was primarily for the purchase of equipment. The Company has no
significant capital expenditure commitments.
Our primary sources of liquidity have been through the issuance of
common stock and borrowings through convertible debentures and interim bridge
financing. Proceeds received from financing activities were primarily used to
fund our losses. During the third quarter of 2000, we borrowed an additional
$750,000 under the terms of the
33
<PAGE>
$3,000,000 Convertible Debenture ($3,000,000 outstanding as of September 30,
2000) and $1,152,500 under a $1.75 million interim bridge financing
commitment from related parties. On October 11, 2000 an additional $202,500
was drawn under this commitment.
We anticipate that the proceeds from the proposed asset sale will be
sufficient to repay our indebtedness, fund the expenses of the proposed asset
sale and the expenses of the Company prior to the proposed asset sale and, if
our management elects to focus on expansion of our businesses in our existing
international markets, fund the expansion of the Argentinean and Brazilian
operations for the next twelve months. There can be no assurance, however, that
the conditions of the proposed asset sale will be satisfied or waived and that
the proposed asset sale will be consummated. Additional future international
expansion will likely require additional funding should the Company consider
such expansion.
We do not consider our business seasonal in nature causing any unusual
liquidity issues.
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 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.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No 44 "Accounting for Certain Transactions Involving Stock
Compensation an interpretation of APB Opinion No 25" ("Interpretation") which,
among other issues, requires that nonemployee directors be treated as employees
for stock compensation paid for service as directors. This Interpretation was
adopted as of July 1, 2000. As a result, warrants issued to the Company's
directors for services as directors are to be valued at the excess of the market
value of the Company's publicly traded common stock on the grant date over the
exercise price rather than the value based on the Black-Scholes pricing model,
the later being the accounting policy previously followed by the Company. See
Note 7 to the unaudited condensed consolidated financial statements for the
effect of this Interpretation on the three and nine months ended September 30,
2000.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
34
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 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 (September 30, 2000)
</TABLE>
*Incorporated by reference from Form 10-SB/A filed June 8, 2000
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the calendar year
quarter ended September 30, 2000.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
U.S. RealTel, Inc.
Date: November 14, 2000 BY: /s/ John R. Glass
---------------------------------------
John R. Glass, Chief Financial Officer
Date: November 14, 2000 BY: /s/ Jordan E. Glazov
---------------------------------------
Jordan E. Glazov, President
36
<PAGE>
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 (September 30, 2000)
</TABLE>
*Incorporated by reference from Form 10-SB/A filed June 8, 2000
37
