<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 JUNE 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 Incorporation (I.R.S. Employer
or Organization) Identification No.)
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 _____ No X
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 AUGUST 11, 2000.
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
--------------------------------------------------------------------------------
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 - 26
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, 2000
--------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 637,953
Accounts receivable 69,776
Prepaid expenses 246,033
--------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 953,762
--------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 295,087
OTHER ASSETS 147,719
--------------------------------------------------------------------------------
$ 1,396,568
================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Convertible note payable with related party $ 1,500,000
Accounts payable and accrued expenses 1,042,598
Due to stockholder 35,000
--------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,577,598
--------------------------------------------------------------------------------
DEFERRED INCOME 253,076
CONVERTIBLE DEBENTURE
Debenture payable 2,250,000
Less debt discount (780,000)
--------------------------------------------------------------------------------
1,470,000
--------------------------------------------------------------------------------
REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK - none issued
STOCKHOLDERS' DEFICIENCY
Preferred stock, $.001 par value; 5,000,000 shares authorized -
Common stock, $.001 par value; 50,000,000 shares authorized;
6,467,808 issued and outstanding shares 6,468
Additional paid-in capital 15,611,926
Accumulated deficit during the development stage (18,522,500)
--------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIENCY (2,904,106)
--------------------------------------------------------------------------------
$ 1,396,568
================================================================================
</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)
THROUGH SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, ---------------------------- -------------------
2000 JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES $ 963,277 $ 509,431 $ 76,091 $ 285,340 $ 47,768
DIRECT COSTS 746,886 397,768 61,563 223,619 38,173
--------------------------------------------------------------------------------------------------------------------------------
REVENUES - NET 216,391 111,663 14,528 61,721 9,595
--------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Salaries and benefits 7,639,162 2,174,768 1,373,665 1,144,453 766,519
General and administrative 5,464,014 1,832,713 910,452 1,069,728 411,427
Professional and investment banking fees 2,851,561 418,763 172,731 269,674 46,942
--------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 15,954,737 4,426,244 2,456,848 2,483,855 1,224,888
--------------------------------------------------------------------------------------------------------------------------------
Operating loss (15,738,346) (4,314,581) (2,442,320) (2,422,134) (1,215,293)
--------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 132,273 60,669 26,306 27,052 16,889
Other income 74,220 - - - -
Interest expense and financing costs (3,543,303) (541,564) - (275,457) -
--------------------------------------------------------------------------------------------------------------------------------
Total other income (expense), net (3,336,810) (480,895) 26,306 (248,405) 16,889
--------------------------------------------------------------------------------------------------------------------------------
NET LOSS $(19,075,156) $(4,795,476) $(2,416,014) $ (2,670,539) $(1,198,404)
================================================================================================================================
NET LOSS PER COMMON SHARE - BASIC AND
DILUTED $ (.74) $ (.41) $ (.41) $ (.20)
============================================= ============================================================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 6,455,000 5,867,000 6,464,000 6,039,000
============================================= ============================================================
</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
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 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 DIRECTOR
FEES - - 48,750 - 48,750
STOCK OPTIONS EXERCISED FOR CASH 25,000 25 225 - 250
STOCK OPTION COMPENSATION - - 123,276 - 123,276
NET LOSS - - - (4,795,476) (4,795,476)
--------------------------------------------------------------------------------------------------------------------------
BALANCE, at June 30, 2000 6,467,808 $ 6,468 $ 15,611,926 $(18,522,500) $(2,904,106)
==========================================================================================================================
</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) SIX MONTHS ENDED
THROUGH -----------------------------------
JUNE 30, JUNE 30, JUNE 30,
2000 2000 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (19,075,156) $ (4,795,476) $ 2,416,014)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation of property and equipment 131,624 33,000 22,177
Amortization of deferred financing costs 72,500 - -
Amortization of debt discount 390,000 390,000 -
Noncash equity transactions charged to
operations 3,997,414 172,026 27,944
Changes in assets and liabilities
Increase in accounts receivable (69,776) (45,509) (51,710)
Increase in prepaid expenses (246,033) (219,664) (40,158)
Increase (decrease) in accounts payable and
accrued expenses 1,042,598 300,377 (207,388)
Increase in deferred income 253,076 151,791 63,419
-------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (13,503,753) (4,013,455) (2,601,730)
-------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (426,711) (143,933) (29,253)
Decrease (increase) in other assets (76,538) 304 (700)
-------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (503,249) (143,629) (29,953)
-------------------------------------------------------------------------------------------------------------------------
</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) SIX MONTHS ENDED
THROUGH -----------------------------------
JUNE 30, JUNE 30, JUNE 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 6,003,000 750,000 -
Stock subscription payable - - (110,252)
Repayment of notes payable (153,000) - -
Advances from stockholder 145,000 35,000 -
Repayment of advances (110,000) - -
Financing costs included in other assets (123,681) (123,681) -
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,644,955 661,569 3,322,924
----------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS 637,953 (3,495,515) 691,241
CASH AND CASH EQUIVALENTS, at beginning of period - 4,133,468 382,468
----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, at end of period $ 637,953 $ 637,953 $ 1,073,709
============================================================================================================================
</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 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", market the Company's access rights to the Telcom Service
Providers 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 and
retail centers, as well as the continued development of the Argentinean and
Brazilian operations. The Company is pursuing various sources of debt and/or
9
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
equity financing, including a potential private placement (Note 4(a)) and
interim bridge financing (Note 8), to fund its activities. 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 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"
and increasing the 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.
10
<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 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
11
<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 approximately
$1,213,000 and $284,000 for the six months ended June 30, 2000 and June 30,
1999, respectively, $667,000 and $158,000 for the three months ended June 30,
2000 and 1999, respectively, and $2,333,000 since inception.
3. CONVERTIBLE NOTES AND DEBENTURES
(a) 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 7%,
compounded annually. Interest under the Convertible Note is due and payable 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.
12
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Interest expense on this note payable was $52,214 and $26,106 for the six
months and three months ended June 30, 2000, respectively.
(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
($2,250,000 outstanding as of June 30, 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 drawn on December 28,
1999.
The Company drew an additional $750,000 on June 6, 2000 and the
remaining available balance of $750,000 on July 11, 2000. At the
time of both draws, the market price of the Company's common stock
was less than the conversion rate.
(ii) The sale of 384,615 shares of common stock at $6.50 per share, net
of expenses of $32,297.
13
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(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 $390,000 and $195,000 was amortized
for the six months and three months ended June 30, 2000, respectively.
(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.
14
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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
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.
15
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(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.
4. STOCKHOLDERS' EQUITY (DEFICIENCY)
(a) COMMON STOCK ISSUANCES
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.
16
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 June 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(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.
17
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
During the six months ended June 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 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
$123,681 at June 30, 2000 for professional fees incurred through
June 30, 2000 related to this private placement.
(ii) Stock options exercised - stock options for 25,000 shares were
exercised at $.01 per share (Note 5).
18
<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 374,500 $ 8.00 over three years December 2005 - 7
June 2000 Options issued under the Employee 10,000 $10.00 Exercisable ratably June 2006 - 8
----------- over three years
Equity Incentive Plan
Option shares 511,888
-----------
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 $ 5.25 December 2003
8,810
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
-----------
Warrant shares 1,573,096
-----------
Total options and warrant
shares 2,084,984
===========
</TABLE>
*Exercisable on issuance except as noted
19
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
At June 30, 2000, the Company has options and warrants for 1,668,887 shares of
common stock currently exercisable at a weighted average exercise price of $5.37
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 149,833 8.00
2006 128,166 8.05
2007 128,166 8.05
2008 3,335 10.00
-----------------------------------------------------------------------------
Total 2,084,984 $ 5.87
=============================================================================
</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) THROUGH SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, ---------------- ------------------
2000 JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <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) 231,164 123,276 19,444 53,728 9,722
Options issue to debenture holders for
debenture conversion (iv) 95,000 - - - -
Warrants issued for services (iv) 530,250 48,750 8,500 - -
---------------------------------------------------------------------------------------------------------------------------------
$3,997,414 $172,026 $ 27,944 $53,728 $ 9,722
=================================================================================================================================
</TABLE>
21
<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 in April 2000 and became a public reporting company effective June 19,
2000.
22
<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,
1997) THROUGH SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, ------------------- ------------------
2000 JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and benefits $ 353,914 $172,026 $ 19,444 $53,728 $ 9,722
Professional and
Investment
Banking fees 1,069,500 - 8,500 - -
Interest expense 2,574,000 - - -
---------------------------------------------------------------------------------------------------------
Total $3,997,414 $172,026 $ 27,944 $53,728 $ 9,722
=========================================================================================================
</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 411,500 (384,500 oustanding as of June 30, 2000) shares of
common stock under the Plan have been granted through June 30, 2000 at $8 and
$10 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 and $12 per share, the compensation expense related to
the favorable option price ($421,500) 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 June 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.
23
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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
=======================================================
Six months ended June 30,
2000
Granted 10,000 $ 10.00
Forfeited (27,000) $ 8.00
------------
Outstanding at June 30, 2000 511,888 $ 7.44 95,791 $ 5.60
=======================================================
</TABLE>
24
<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 June
30, 2000, no warrants were issued under the Program.
5. RELATED PARTY TRANSACTIONS
Consulting fees to one of the Company's directors amounted to $43,135 and
$43,500 for the six months ended June 30, 2000 and 1999, respectively, $23,735
and $12,000 for the three months ended June 30, 2000 and 1999, respectively, and
$138,135 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 4(a) and (b) for the issuance of a convertible note
payable with a related party and equity securities issued to related parties,
respectively. See also Note 8 for interim bridge financing with related parties.
25
<PAGE>
U.S. REALTEL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. RESTATEMENTS - 1999
Revenues - net were decreased and net loss was increased by $24,919 for the
three and six months ended June 30, 1999 to conform to the revenue recognition
policies adopted by the Company for the year ended December 31, 1999. Such
restatements increased the net loss per share $.01 for the three months ended
June 30, 1999 but did not change the net loss per share for the six months ended
June 30, 1999.
7. RECENT ACCOUNTING PRONOUNCEMENT
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. 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.
Accordingly, for the quarter ending September 30, 2000, the Company will
record additional compensation expense of approximately $327,000 for the
effect of the Interpretation.
8. SUBSEQUENT EVENT
On August 10, 2000, the Company received an interim bridge financing commitment
from related parties. This commitment consists of promissory notes in the
principal amount of $1,750,000 and warrants to purchase 638,462 shares of the
Company's common stock at an exercise price of $3.25 per share. One half of the
proceeds from the promissory notes will be received on or before August 15, 2000
with the balance to be funded at the election of the Company on September 13,
2000. The promissory notes bear interest at 12% per annum and are due December
14, 2000 (subject to acceleration as provided therein). The warrants are
exercisable through August 15, 2005.
26
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of our consolidated financial condition and
results of operations for the three and six months ended June 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 six months ended June 30, 2000 and 1999, we experienced net losses of
$4,795,476 and $2,416,014, respectively, and we have experienced $19,075,156 of
net losses since inception. As of June 30, 2000, we had a deficit in working
capital of $1,623,836.
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 telecom 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, as well as the continued development of our Argentinean and
Brazilian operations.
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 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 the 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 our ability to continue as a going concern. If we are unsuccessful
in raising capital though our current private offering, or through alternative
means, our current projections indicate we will run out of funds in the fourth
quarter of 2000 after receiving an interim bridge financing commitment in August
2000. On June 19, 2000, we became a public reporting company under the
Securities Exchange Act of 1934. We are currently registered on the NASDAQ OTC
Bulletin Board.
During the six months ended June 30, 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
telecom rights to Telecom Service Providers. In February 2000, we formed an 89%
owned subsidiary in Brazil, named RealTel do Brasil S.A.
27
<PAGE>
QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED JUNE 30, 1999.
Revenues
Revenues increased to $285,340 for the three months ended June 30, 2000
from $47,768 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".
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 $2,483,855 for the quarter ended June 30,
2000 from $1,224,888 for the quarter ended June 30, 1999. During the quarter
ended June 30, 2000, salaries and benefits increased to $1,144,453 from $766,519
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 June 30, 2000 to $1,069,728 from $411,427 in the second
quarter of 1999. This increase was for additional office space, insurance,
travel, recruiting and other operating costs, while marketing costs were
reduced. Professional and investment banking fees were $269,674 for the quarter
ended June 30, 2000 compared to $ 46,942 in the second quarter of 1999,
reflecting, in part, the costs for filing to become a public reporting company
and the costs of becoming a Delaware corporation in 2000.
Operating expenses include the costs to fund the operations in Argentina
and the startup of our subsidiary in Brazil, which were approximately $667,000
for the quarter ended June 30, 2000 compared to $158,000 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 June 30, 2000, interest expense and financing
costs increased by $275,457 from the comparable three months in 1999. The
increase is attributable to noncash interest charges of $195,000 in the quarter
ended June 30, 2000 relating to the amortized debt discount on the convertible
debenture and interest expense on the convertible debenture and convertible note
payable. There were no interest charges for the second quarter of 1999.
Interest Income
Interest income increased to $27,052 during the quarter ended June 30,
2000 from $16,889 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.
Net Loss
Our net loss increased for the three months ended June 30, 2000 to
$2,670,539 ($.41 per basic and diluted common share) from $1,198,404 ($.20 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.
28
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30,
1999.
Revenues
Revenues increased to $509,431 for the six months ended June 30, 2000
from $76,091 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".
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 $4,426,244 for the six months ended June
30, 2000 from $2,456,848 for the six months ended June 30, 1999. During the six
months ended June 30, 2000 salaries and benefits increased to $2,174,768 from
$1,373,665 for the first six months of 1999 as we hired additional personnel to
implement our business plan. General and administrative expenses increased
during the six months ended June 30 to $1,832,713 from $910,452 in the first six
months of 1999. This increase was for additional office space, insurance,
travel, recruiting and other operating costs, while marketing costs were
reduced. Professional and investment banking fees were $418,763 in the six
months ended June 30, 2000 compared to $172,731 in the same period of 1999,
reflecting, in part, the costs for filing to become a public reporting company
and the costs of becoming a Delaware corporation in the second quarter of 2000.
Operating expenses include the cost to fund the operations in
Argentina and the startup of our subsidiary in Brazil, which were
approximately $1,213,000 for the six months ended June 30, 2000 compared to
$284,000 for the six months in 1999 and $2,333,000 since inception. 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 six months ended June 30, 2000, interest expense and financing
costs increased $541,564 from the comparable six months in 1999. The increase is
attributable to noncash interest charges of $390,000 for the six months ended
June 30, 2000 relating to the amortized 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 six months in 1999.
Interest Income
Interest income increased to $60,669 during the six months ended June 30,
2000 from $26,306 for the first six 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.
Net Loss
Our net loss increased for the six months ended June 30, 2000 to
$4,795,476 ($.74 per basic and diluted common share) from $2,416,014 ($.41 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.
29
<PAGE>
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. 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 $4,013,455 for the six months ended
June 30, 2000 and $2,601,730 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 salaries and benefits.
Cash used in investing activities was $143,629 for the six months ended
June 30, 2000 and $29,953 for the six months ended June 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. Proceeds received from
financing activities were primarily used to fund our losses. During the second
quarter of 2000, we borrowed an additional $750,000 under the terms of the
$3,000,000 convertible debenture ($2,250,000 outstanding as of June 30, 2000).
On July 11, 2000, we borrowed the remaining $750,000. During the six months
ended June 30, 2000, we spent $123,681 for professional fees related to our
pending private placement.
On August 10, 2000 the Company received an interim bridge financing
commitment from related parties. This commitment consists of an obligation to
fund promissory notes in the principal amount of $1,750,000 evidenced by the
Company's promissory notes for which the lenders will receive warrants to
purchase 638,462 shares of the Company's common stock at an exercise price of
$3.25 per share upon full funding of the notes. One half of the proceeds from
the promissory notes will be received on or before August 15, 2000 with the
balance to be funded on September 13, 2000. The promissory notes bear interest
at 12% per annum and are due December 14, 2000 (subject to acceleration as
provided therein). The warrants are exercisable through August 15, 2005.
We anticipate that the interim bridge financing will be sufficient to
fund operating losses anticipated through October 2000. 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 $9,500,000 is
required to fund our current operations for the next twelve months. Our
investment banking firm is currently attempting, through a private placement,
to raise up to $25 million 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 issue will be convertible
into the Company's common stock and will have a redemption feature. 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.
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 needed 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 quarterly report, 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
30
<PAGE>
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. 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 date of grant rather than the value based upon the
Black-Scholes pricing model, the later being the accounting policy previously
followed by the Company.
Accordingly, for the quarter ending September 30, 2000, we will record
additional compensation expense of approximately $327,000 for the effect of
the Interpretation.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
By a letter dated March 22, 2000, the Company's predecessor
corporation, U.S. RealTel, Inc., an Illinois corporation ("Predecessor
Company"), solicited the written consent of the shareholders of Predecessor
Company to a proposal to reincorporate Predecessor Company in the State of
Delaware by merging with and into the Company on the terms and conditions of a
merger agreement. The written consent of the holders of at least two-thirds of
the outstanding shares of Common Stock of Predecessor Company were required to
approve the merger. As of May 7, 2000, Predecessor Company had received written
consents voting in favor of the merger from shareholders holding an aggregate
5,811,258 shares, which number of shares exceeded the number of shares required
to approve the merger. No shares dissented to the merger while an aggregate
631,550 shares did not respond and were considered abstentions and non-votes. A
written consent of the sole stockholder of the Company approving the merger was
executed as of March 14, 2000. The Merger occurred on May 8, 2000.
ITEM 5. OTHER INFORMATION.
Not applicable.
31
<PAGE>
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 (June 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
June 30, 2000.
32
<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: August 14, 2000 BY: /s/ John R. Glass
----------------------
John R. Glass, Chief Financial Officer
Date: August 14, 2000 BY: /s/ Jordan E. Glazov
----------------------
Jordan E. Glazov, President
33
<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 (June 30, 2000)
</TABLE>
*Incorporated by reference from Form 10-SB/A filed June 8, 2000
34
