UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission File Number 0-22282.
USCI, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3702647
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6115-A Jimmy Carter Blvd., Norcross, Georgia 30071
(Address of principal executive offices) (Zip Code)
(770) 840-8888
(Registrant's telephone number including area code)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's
classes of Common Stock, as of the latest practicable date:
As of November 11, 1998, 12,006,827 shares of $.0001 par value
Common Stock were outstanding.
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This Amendment adds a section entitled "Year 2000 Compliance" to the Part
I Item 2 "Management's Discussion and Analysis of Finaicial Condition and
Results of Operations" which was filed as part of the Company's Form 10-Q
for the Quarter Ended September 30, 1998. Otherwise, Part I Item 2 is
unchanged.
Part I
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF USCI, INC.
The following discussion should be read in conjunction with the Financial
Statements and Notes set forth elsewhere in this Report.
OVERVIEW
The Company was organized as U.S. Communications, Inc. in 1991 and commenced
operations in mid-1993 as a cellular activation processing agent. Between 1993
and 1996 the Company expanded its operations as a sales, marketing and
activation processing agent for facilities-based cellular and paging carriers.
By late 1996, the Company had entered into agency agreements with cellular
carriers which enabled the Company to offer cellular activation service in
virtually all of the Metropolitan Statistical Areas ("MSAs") and a majority of
the Rural Service Areas ("RSAs") in the United States.
In the fourth quarter of 1996, the Company began a planned transition to
becoming a national reseller of wireless communications services. During 1997,
the Company entered into reseller agreements with a number of facilities-based
cellular and paging carriers to replace, on a market by market basis, its
carrier agency agreements.
Historically, the Company's revenues have consisted of commissions earned as an
activation agent for cellular and paging carriers and, since the last quarter
of 1996, revenues from the resale of cellular and paging services. For the
three months ended September 30, 1998, reseller revenues were $11.5 million.
The Company bills its resale customers for monthly access to the underlying
carrier's cellular or paging network, cellular usage based on the number, time
and duration of calls, the geographic location of both the originating and
terminating phone numbers, extra service features, the applicable rate plan in
effect and the time of the call.
The wholesale cost of subscriber service includes monthly access, usage (home
and roaming) and special features charges paid by the Company to the cellular
and paging carriers.
Subscriber acquisition and promotional costs includes commission payments made
by the Company to its channels of distribution (or to equipment suppliers on
their behalf) for each activation by their customers of a cellular telephone,
certain advertising costs incurred by the Company or its distribution channels
and reduced access and/or free airtime for a limited period to its cellular
subscribers. These costs are recoverable from the long-term revenue stream
created by the continuation of subscribers services. The Company's ability to
capture such revenue streams may be adversely affected by service cancellations
("churn") and by losses caused by fraudulent use of service by third persons
which, by law, are not recoverable from subscribers (access fraud). Under
existing agreements with the carriers providing the Company with cellular
service, the wholesale cost of access fraud is generally recoverable and
although not generally recoverable, subscriber fraud (a customer fraudulently
uses another person's identification to become a subscriber of the Company) is
also recoverable under certain circumstances. The Company is attempting to
mitigate churn through competitive pricing, and retention programs and has taken
steps to mitigate losses due to fraud through improved controls and the hiring
of additional personnel to monitor fraud and install fraud prevention
procedures.
Selling expense includes the costs of providing sales and other support
services for customers including salaries and commissions to salesforce
personnel and the Company's independent sales representatives. General and
administrative expense include the costs of the billing and information
systems, other administrative expenses, personnel required to support the
Company's operations as well as all amortization expenses.
The Company experienced significant growth in its resale operations in the
latter half of 1997 and the first half of 1998 and has experienced and continues
to experience significant operating and net losses and negative cash flow from
operations. The Company expects that operating and net losses and negative cash
flow from operations will continue until such point that the revenue from
subscribers exceeds the direct costs to carriers and the overhead that the
Company is rapidly reducing. At such time the Company may experience operating
and net profits and positive cash flow. There is no assurance that the Company
will be able to achieve revenue from subscribers that will exceed direct costs
to carriers and the reduced overhead it is attempting to achieve. See
"Liquidity and Capital Resources."
As a result of the Company's inability to obtain sufficient financing to fund
the rapid growth it experienced during the past 12 months, the Company was
unable to pay its principal vendors and customers the amounts owed by the
Company on a timely basis including the amounts due under the terms of a
Forbearance Agreement dated May 13, 1998, as amended, entered into with its
principal customer, RadioShack, a division of Tandy corporation, and to finance
the cost of doing future business with such customer, which accounted for
approximately 83% of the Company's revenues during the nine months ended
September 30, 1998. On October 13, 1998, RadioShack demanded payments of
claimed amounts due and advised the Company that because of purported defaults
in agreements between the Company and RadioShack, the agreement to supply
cellular radio service to the customers of RadioShack was terminated.
In order to reduce the operating costs and the acquisition costs of obtaining
new subscribers, the Company has reduced its staff from 270 in September 1998
to 105 employees currently and has substantially curtailed the enrollment of
new cellular subscribers. The Company is also actively seeking to negotiate
terms with its existing vendors and suppliers to extend the terms of payments
for the amounts due to such companies.
In order to substantially reduce the acquisition costs associated with
traditional sale of cellular service through the Company's channels of
distribution, the Company has elected to change its strategy and concentrate on
the sale of prepaid cellular service through existing channels of distribution
and on the Internet. To implement this new prepaid strategy, the Company has
entered into an agreement with a major manufacturer of cellular telephones and
is currently negotiating with channels of distribution to introduce the
Company's new prepaid cellular program. Successful implementation of this
strategy will depend, in part, upon the Company's ability to obtain the
financing necessary to implement the program and conclude agreements with the
channels of distribution for the introduction of the program. There is no
assurance and no representation is made that the Company will be successful in
either obtaining the necessary capital or concluding the necessary business
arrangements with the channels of distribution to sell the prepaid program.
RESULTS OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997
Revenues
Total revenues for the nine months ended September 30, 1998 ("1998 Nine
Months"), consisting primarily of subscriber sales, were $33,276,329 as
compared to $4,932,337 for the nine months ended September 30, 1997 ("1997 Nine
Months"). Total revenues for the three months ended September 30, 1998 ("1998
Quarter"), consisting primarily of subscriber sales, were $11,517,212 as
compared to $1,630,488 for the three months ended September 30, 1997 ("1997
Quarter").
The increased revenues for the 1998 Nine Months and 1998 Quarter are
attributable to increased sales of the Company's Ameritel brand cellular and
paging services. Cellular and paging subscriber revenues amounted to
$33,263,289 for the 1998 Nine Months compared to $1,845,051 for the 1997 Nine
Months and $11,514,911 for the 1998 Quarter compared to $1,202,822 for the 1997
Quarter.
Agency activation commissions, which the Company receives from other wireless
carriers for which it performs activation processing services, decreased
significantly from the 1997 Nine Months to the 1998 Nine Months due to the
Company's transition from agent to reseller. Agency commissions in the 1998
Nine Months were $13,040 as compared to $2,854,292 in the 1997 Nine Months.
Agency commissions for the 1998 Quarter were $2,290 as compared to $405,883 in
the 1997 Quarter.
Cost of Sales
Costs of subscriber services, which consist of direct charges from cellular and
paging carriers for access, airtime (including local, long distance and
roaming) and services resold to the Company's subscribers, amounted to
$19,163,868 and $6,464,521 for the 1998 Nine Months and 1998 Quarter,
respectively, and $964,944 and $673,489 for the 1997 Nine Months and 1997
Quarter, respectively. The gross margin for subscriber sales were $14,099,421
or 42% and $5,050,401 or 44% for the 1998 Nine Months and 1998 Quarter,
respectively, and $880,107 or 48% and $529,322 or 44% for the 1997 Nine Months
and 1997 Quarter, respectively. The increase in gross margin dollars from the
1997 to 1998 periods is due to the substantial increase in the number of
markets in which the Company operated as a reseller rather than as an agent.
Operating Expenses
Subscriber acquisition and promotional costs represent expenses incurred by the
Company in its efforts to acquire new subscribers for its cellular and paging
services. These costs consist primarily of commissions paid to retailers,
equipment suppliers and outside sales representatives, below cost discounts,
such as reduced monthly access charges and/or free airtime granted to
subscribers when utilizing the Company's cellular or paging services, rebates
issued to subscribers and certain advertising costs. Subscriber acquisition and
promotional costs amounted to $17,589,398 and $4,533,544 for the 1998 Nine
Months and 1998 Quarter, respectively and $2,633,076 and $1,584,441 for the
1997 Nine Months and 1997 Quarter, respectively.
Since the Company has substantially curtailed its acquisition of new
subscribers under existing programs, it believes that the subscriber
acquisition and promotional costs will be substantially reduced in future
quarters.
Selling, general and administrative expenses for the 1998 Nine Months
aggregated $19,482,410 as compared to $12,815,282 for the 1997 Nine Months and
$7,317,464 for the 1998 Quarter as compared to $4,572,856 for the 1997 Quarter,
reflecting the Company's growth. Salaries and related employee benefits
increased by 56% to approximately $7.8 million for the 1998 Nine Months from
approximately $5.0 million for the 1997 Nine Months and by 35% to approximately
$2.3 million for the 1998 Quarter from approximately $1.7 million for the 1997
Quarter, reflecting the Company's hiring of executive, managerial, customer
service and information systems personnel to support its growth.
Telecommunications expenses were unchanged at $1.4 million for the 1998 Nine
Months and Nine Months and decreased by 21% to $377,000 for the 1998 Quarter
from $474,000 for the 1997 Quarter. Billing and credit review services
increased to $1.8 million for the 1998 Nine Months from $129,000 for the 1997
Nine Months and increased to $695,000 for the 1998 Quarter from $95,000 for the
1997 Quarter. Bad debt expense increased to $3.1 million for the 1998 Nine
Months from $742,000 for the 1997 Nine Months and to $2.1 million for the 1998
Quarter from $318,000 for the 1997 Quarter. The increase in both billing and
credit review and provision for bad debt is due, in substantial part, to
increased activity and growth of the reseller business. As a percentage of
revenues, selling, general and administrative expenses exclusive of
depreciation and amortization and bad debt were 38% for the 1998 Quarter
compared to 54% in the first quarter of 1998 and 39% in the second quarter of
1998.
Interest Expense
Interest expense (net of income) aggregated approximately $7.3 million and $2.0
million in the 1998 Nine Months and 1998 Quarter, respectively, and interest
income (net of expense) aggregated approximately $400,000 and $31,000 for the
1997 Nine Months and 1997 Quarter, respectively. The increase in interest
expense during 1998 is related to approximately $6.3 million for the 1998 Nine
Months and $1.4 million for the 1998 Quarter of non-cash interest expense
attributable to the fair value of warrants issued in connection with three
private financings and to the Company's use of cash and cash equivalents and
the effect of borrowings to fund increased operating expenses and capital
expenditures discussed above. See "Liquidity and Capital Resources."
Net Loss
The Company incurred net losses of $30,298,997 and $12,395,351 for the 1998
Nine Months and 1997 Nine Months, respectively and incurred net losses of
$8,791,129 and $5,311,510 for the 1998 Quarter and 1997 Quarter, respectively.
Liquidity and Capital Resources
At September 30, 1998, the Company's working capital deficiency was $14,481,161
compared to a working capital deficiency of $12,643,491 at December 31, 1997.
Cash and cash equivalents totaled $700,604 (of which $677,101 was restricted) at
September 30, 1998 compared to $1,105,530 (of which $731,500 was restricted) at
December 31. 1997. The Company's stockholders' deficit was $10,643,804 at
September 30, 1998, compared to a stockholders' deficit of $6,312,978 at
December 31, 1997.
For the nine months ended September 30, 1998, the Company continued to
experience monthly negative cash flow from operations due to its growing
subscriber base which created a working capital deficiency due to the initial
acquisition costs and the other working capital needs associated with the high
rate of subscriber growth.
In order to fund its operations, the Company obtained additional financing
aggregating $3.1 million in October, 1997 through letter of credit financing
from an investment banking firm, an additional $23.5 million was raised in 1998
as follows: short term loans totaling $6.0 million from private individuals (of
which $500,000 was repaid in the first quarter of 1998, $1.5 million plus
accrued interest which was converted into a total of 462,637 shares of Common
Stock and $4.0 million was exchanged for 500 shares of 6% Series D Convertible
Preferred Stock) and entered into the Credit Facility (described below) in June
1998. In addition, the Company raised approximately $2.4 million from the
private sale of Common Stock and $15.0 million from the private sale of
Convertible Preferred Stock through July 31, 1998. The $3.1 million letter of
credit financing is collateralized by Common Stock of the Company pledged by
officers, directors and a stockholder of the Company. Subsequent to September
30, 1998, Letters of Credit aggregating $2.7 million (out of $3.1 million above)
have been drawn down and the issuer of the letter of credit has demanded payment
from the Company. Payment to the beneficiaries of these Letters of Credit
constitute payment of existing obligations and do not create liabilities that
would not otherwise be recorded in the Company's financial statements. The
Company has not made payment of any of the sums demanded by the issuer of the
letter of credit.
In connection with these financings, the Company also issued warrants to
purchase an aggregate of 5,462,284 shares of Common Stock as of July 31, 1998
at exercise prices ranging from $5.00 to $7.1875 per share. Reference is made
to Note 3 of the Notes to Condensed Consolidated Financial Statements included
as part of this Quarterly Report.
The Company is in default under both of the Convertible Preferred Stock
Agreements ("Agreements") above due to certain events such as failure to
register certain underlying securities, the delisting of the Company's common
stock from the NASDAQ National Market System along with other technical
noncompliance with the Agreements. The occurrence of these defaults and non
compliance gives the holders of the Preferred Stock the right to call for
redemption of part or all of the amounts of unconverted Preferred Stock. These
defaults have been waived by 89% of the holders through January 1, 1999. The
Company is negotiating to obtain a waiver for the remaining 11%.
In June 1998 the Company entered into an agreement providing for $20.0 million
revolving credit and term loan facility with Foothill Capital Corp.
Availability under this facility is dependent upon meeting certain formulas.
Reference is made to Note 4 of the Notes to Condensed Consolidated Financial
Statements included as part of this Quarterly Report.
As of November 12, 1998, the Company was indebted under the Foothill Credit
Facility for approximately $9.8 million. The Company is in default in the
performance of its obligations under the terms of the Credit Facility by failing
to pay amounts due and payable thereby creating an overadvance and by failing to
comply with other material performance obligations and financial covenants. On
November 18, 1998, the Company entered into a Forbearance Agreement with
Foothill which acknowledges 1) the aforementioned defaults, 2) provides for
forbearance by Foothill from exercising it's rights and remedies under the
Credit Facility on account of such defaults until December 4, 1998, and 3)
permits the Company an allowable overadvance of up to $750,000 through December
4, 1998 and continues to advance funds to the Company. There is no assurance
that the Forbearance Agreement will be extended beyond December 4, 1998.
Due to recurring losses from operations, a net capital deficiency and the
Company's inability to date to obtain sufficient financing commitments to
support current and anticipated levels of operations, the Company's independent
public accountants' audit opinion for the year ended December 31, 1997 stated
that these matters raise substantial doubt about the Company's ability to
continue as a going concern.
The Company currently requires substantial amounts of capital to meet past due
obligations and to fund current operations and is presently seeking to raise
funds privately and restructure outstanding obligations. There is no assurance,
however, and no representation is made that the Company will be successful in
raising funds privately. If the Company is not successful in obtaining adequate
financing and is unable to restructure or repay its indebtedness, it will be
required to cease all of its operations. In addition, if it experiences
unanticipated costs or pricing or other competitive pressures, if the Company is
unable to avail itself of additional amounts under the Foothill Credit Facility,
if Foothill Capital Corp. exercises its remedies under the Foothill Credit
Facility or if the Company's plans or assumptions change or otherwise prove to
be inaccurate, the Company will be required to curtail its planned changes in
marketing strategy reduce or cease all of its operations.
Year 2000 Compliance
Currently, many computer systems and software products are coded to accept
only two digit, rather than four digit, entries in the date code field.
Date-sensitive software or hardware coded in this manner may not be able to
distinguish a year that begins with a "20" instead of a "19," and programs
that perform arithmetic operations, make comparisons or sort date fields may
not yield correct results with the input of a Year 2000 date. This Year
2000 problem could cause miscalculations or system failures that could
affect our operations.
Our State of Readiness
We have evaluated the effect of the Year 2000 problem on our information
systems and we are implementing plans to ensure our systems and applications
will effectively process information necessary to support ongoing operations
in the Year 2000 and beyond. We believe our information technology, or IT,
and our other systems will be Year 2000 compliant by the end of 1999.
While we expect that all significant computer systems will be Year 2000
compliant by mid-1999, we cannot assure you that all Year 2000 problems will
be identified or that the necessary corrective actions will be completed in
a timely manner.
We have requested certification from our significant vendors and suppliers
demonstrating their Year 2000 compliance. We intend to continuously
identify critical vendors and suppliers and communicate with them about
their plans and progress in addressing Year 2000 problems. We cannot assure
you that the systems of these vendors and suppliers will be timely
converted. We also cannot assure you that any failure of their systems to
be Year 2000 compliant will not adversely effect our operations.
Our Costs of Year 2000 Remediation
We have not incurred material costs related specifically to Year 2000 issues
and do not expect to in the future. However, we cannot assure you that the
costs associated with Year 2000 problems will not be greater than we
anticipate.
Our Year 2000 Risk
Based on the efforts described above, we currently believe that our systems
will be Year 2000 compliant in a timely manner. We have completed the
process of identifying Year 2000 issues in our computer systems and expect
to complete any remediation efforts by mid-1999. However, we cannot assure
you that all Year 2000 problems will be successfully identified, or that the
necessary corrective actions will be completed in a timely manner. Failure
to successfully identify and remediate Year 2000 problems in critical
systems in a timely manner could have a material adverse effect on our
business, results of operations or financial condition.
In addition, we believe that there is risk relating to significant vendors'
and suppliers' failure to remediate their Year 2000 issues in a timely
manner. Although we are communicating with our vendors and suppliers
regarding the Year 2000 problem, we do not know whether these vendors' or
suppliers' systems will be Year 2000 compliant in a timely manner. If one
or more significant vendors or suppliers are not Year 2000 compliant, this
could have a material adverse effect on our business, results of operations
or financial condition.
Our Contingency Plans
We plan by mid-year 1999 to develop contingency plans to be implemented in
the event planned solutions prove ineffective in solving Year 2000
compliance. If it becomes necessary for us to implement a contingency plan,
such plan may not avoid a material Year 2000 issue.
INFLATION
To date, inflation has not had any significant impact on the Company's
business.
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FORM 10-Q/A FOR THE PERIOD ENDED SEPTEMBER 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf by the
undersigned thereunto duly authorized.
USCI, INC.
/S/ ROBERT J. KOSTRINSKY
---------------------------
Robert J. Kostrinsky,
Executive Vice President;
Chief Financial Officer
Date: JUNE 30, 1999
