QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the Quarterly period ended September 30, 1996
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ______ to ______
Commission File number 0-24098
UStel, Inc.
(Exact name of small business issuer as specified in its charter)
Minnesota 95-4362330
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
2775 South Rainbow Blvd., #102
Las Vegas, NV 89102
(Address of principal executive offices)(Zip codes)
(702) 247-7400
(Issuer's telephone number, including area code)
Check whether the Registrant (1) has filed all reports require to be filed by
Section 13 or 15(d) of the Securities Exchange Act 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
State the number of shares outstanding of each of issuer's classes of common
equity as of the latest practicable date.
Class Outstanding as of November 4, 1996
Common Stock, $.01 par value 2,126,851 shares
Transitional Small Business Disclosure Format (check one)
Yes______;No__X___
<PAGE>
USTEL, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended September 30, 1996
PART I - FINANCIAL INFORMATION
ITEM PAGE
NUMBER PART I - FINANCIAL INFORMATION NUMBER
1. Financial statements
Condensed Balance Sheets -
December 31, 1995 and September 30, 1996 2
Condensed Statements of Operations -
Three months and nine months ended September 30,
1996 and the three months and nine months
ended September 30, 1995. 4
Condensed Statement of Changes In
Stockholders' Equity For The Period
January 1, 1996 to September 30, 1996. 5
Statements of Cash Flows- Nine months ended
September 30, 1996 and September 30, 1995. 6
Notes to Condensed Financial Statements 7
2. Management's Discussion and Analysis 12
PART II - OTHER INFORMATION
Items 1 through 6 do not apply for the quarter ended September 30,
1996
<PAGE>
<TABLE>
UStel, Inc.
CONDENSED BALANCE SHEET
<CAPTION>
December 31, September 30,
1995 1996
ASSETS (Audited) (Unaudited)
CURRENT ASSETS ------------- -------------
<S> <C> <C>
CASH $ 1,200 $ 394,126
RESTRICTED CASH 3,133,433 0
ACCOUNTS RECEIVABLE LESS ALLOWANCE FOR
DOUBTFUL ACCOUNTS OF $329,000 and
$528,000, RESPECTIVELY 5,144,502 8,254,265
RELATED PARTY RECEIVABLE 348,519 293,817
PREPAID EXPENSES 506,824 551,320
------------- -------------
TOTAL CURRENT ASSETS 9,134,478 9,493,528
FIXED ASSETS
OFFICE FURNITURE & EQUIPMENT 1,440,294 2,398,192
LEASEHOLD IMPROVEMENTS 164,063 175,749
------------- -------------
1,604,357 2,573,941
LESS ACCUMULATED DEPRECIATION (241,176) (410,491)
------------- -------------
NET FIXED ASSETS 1,363,181 2,163,450
OTHER ASSETS
OTHER RECEIVABLES, NET 756,220 591,909
START-UP COSTS, OTHER ASSETS, LESS ACCUMULATED
AMORTIZATION OF $59,022 and $73,777, RESPECTIVELY 39,347 24,592
DEFERRED CHARGES 684,805 1,270,054
------------- -------------
TOTAL ASSETS $11,978,031 $13,543,533
============= =============
<FN>
See accompanying notes to condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
UStel, Inc.
CONDENSED BALANCE SHEET
<CAPTION>
December 31, September 30,
1995 1996
LIABILITIES AND STOCKHOLDERS' EQUITY (Audited) (Unaudited)
------------- -------------
CURRENT LIABILITIES
<S> <C> <C>
NOTES PAYABLE TO BANKS $ 2,900,000 $ 2,437,931
NOTES PAYABLE TO OTHERS 1,500,000 1,284,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2,192,479 3,776,737
ACCRUED REVENUE TAXES 1,097,779 250,229
------------- -------------
TOTAL CURRENT LIABILITIES 7,690,258 7,748,897
LONG-TERM LIABILITIES
CONVERTIBLE SUBORDINATED DEBENTURES 500,000 500,000
------------- -------------
TOTAL LIABILITIES 8,190,258 8,248,897
------------- -------------
STOCKHOLDERS' EQUITY
SERIES A & B CONVERTIBLE PREFERRED STOCK 6,450 5,500
COMMON STOCK 16,000 21,269
ADDITIONAL PAID-IN CAPITAL 6,291,178 7,710,562
ACCUMULATED DEFICIT (2,525,855) (2,442,695)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 3,787,773 5,294,636
------------- -------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $11,978,031 $13,543,533
============= =============
<FN>
See accompanying notes to condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
UStel, Inc.
CONDENSED STATEMENT OF OPERATIONS
<CAPTION>
Three Month Three Month Nine Month Nine Month
(Unaudited) Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1995 1996 1995 1996
--------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $4,313,267 $6,129,340 $11,310,018 $16,655,844
---------------------------------------------------
OPERATING EXPENSES
COST OF SERVICES SOLD 3,080,574 4,112,368 8,240,409 11,353,723
SELLING 353,605 601,986 900,960 1,676,705
GENERAL AND ADMINISTRATIVE 1,135,560 1,213,919 2,282,329 3,044,257
DEPRECIATION/AMORTIZATION 49,189 61,959 120,813 184,071
---------------------------------------------------
TOTAL OPERATING EXPENSES 4,618,928 5,990,231 11,544,511 16,258,756
---------------------------------------------------
INCOME FROM OPERATIONS (305,661) 139,110 (234,493) 397,088
RELOCATION COSTS (104,412) 0 (104,412) 0
OTHER (17,811) 0 0 0
INTEREST EXPENSE, NET (41,545) (127,916) (64,576) (313,928)
---------------------------------------------------
NET INCOME (LOSS) ($469,429) $11,193 ($403,481) $83,160
===================================================
EARNINGS (LOSS) PER SHARE AMOUNTS:
PRIMARY (0.293) 0.005 (0.252) 0.041
===================================================
FULLY DILUTED 0.004 0.028
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
PRIMARY 1,600,000 2,081,851 1,600,000 2,051,535
===================================================
FULLY DILUTED 3,020,331 2,987,298
============= =============
<FN>
See accompanying notes to condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
USTEL, INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1996 THROUGH SEPTEMBER 30, 1996
<CAPTION> ADDITIONAL
PFD STOCK COMMON STOCK PAID-IN ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
(000's) (000's)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BAL. 12/31/95 645 $6,450 1,600 $16,000 $6,291,178 ($2,525,855) $3,787,773
CONV. OF DEBT 160 1,600 773,400 775,000
CONV.SR.B PFD (95) (950) 95 950 0
PFD PLACEMENT 112 1,120 (47,120) (46,000)
ACQ.OF SWITCH 100 1,000 499,000 500,000
COST-RAISING CAPITAL 39 399 79,304 79,703
PAYMENT OF DEBT 20 200 114,800 115,000
NET INCOME 83,160 83,160
-----------------------------------------------------------------
BAL. 9/30/96 550 $5,590 2,127 $21,269 $7,710,562 ($2,442,695 $5,2294,636
-----------------------------------------------------------------
<FN>
See accompanying notes to condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
UStel, INC.
CONDENSED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH FLOW
<CAPTION>
Nine Months Ended September
1995 1996
(Unaudited) (Unaudited)
------------- -------------
CASH FLOW FROM OPERATING ACTIVITIES
<S> <C> <C>
NET INCOME (LOSS) ($403,481) $83,160
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH USED IN
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 120,813 184,070
PROVISION FOR LOSSES ON ACCOUNTS
RECEIVABLE 321,098 534,167
INCREASE / DECREASE FROM CHANGE IN:
ACCOUNTS RECEIVABLE (2,619,185) (3,643,930)
OTHER ASSETS 0 756,220
DUE FROM RELATED PARTIES (264,301) 54,702
OTHER RECEIVABLES 0) (591,909)
PREPAID EXPENSES (378,534) (44,496)
ACCOUNTS PAYABLE AND ACCRUED
EXPENSES 2,323,466 736,708
------------- -------------
NET CASH USED IN
OPERATING ACTIVITIES (900,124) (1,931,308)
------------- -------------
CASH FLOW FROM INVESTING ACTIVITIES:
PURCHASE OF EQUIPMENT (650,634) (969,584)
INCREASE IN DEFERRED CHARGES (277,507) (585,249)
------------- -------------
NET CASH USED IN INVESTMENT ACTIVITES (928,141) (1,554,833)
------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES:
RESTRICTED CASH (1,000,000) 3,133,433
PROCEEDS FROM NOTES PAYABLE 1,585,000 20,047,390
PAYMENT ON DEBT (120,000) (19,301,756)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 465,000 3,879,067
------------- -------------
NET DECREASE IN CASH (1,363,265) 392,926
CASH, BEGINNING OF PERIOD 2,207,034 1,200
------------- -------------
CASH, END OF PERIOD $ 843,769 $ 394,126
============= =============
SUPPLEMENTAL INFORMATION:
INTEREST PAID $ 160,271 $ 361,837
INCOME TAXES PAID 800 22,997
<FN>
See accompanying notes to condensed financial statements.
</TABLE>
<PAGE>
USTEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 1995 and September 30, 1996
1. Summary of Accounting Policies
The Company:
UStel, Inc. (the "Company") was formed on March 11, 1992 as a long distance
telephone service provider. The Company offers competitive discounted calling
plans which are available to customers in the United States and the
international marketplace. On January 12, 1994 the Company effected a
recapitalization of its capital stock in connection with its re-incorporation
merger to Minnesota. In connection with its recapitalization, the Company
exchanged all its outstanding common shares (1,000 shares) for 950,000 shares
of the reincorporated company's common shares.
Revenue Recognition:
Revenue is recognized upon completion of the telephone call.
Fixed Assets:
Equipment is stated at cost with depreciation provided over the estimated use-
ful lives of the respective assets on the straight-line basis ranging from five
to fifteen years.
Deferred Charges:
Deferred charges consist of loan fees, offering costs and certain costs
incurred in connection with expanding the Company's market position. Loan fees
are amortized over the life of the related loan. Offering costs will be charged
against paid-in capital if the proposed offering is consummated. If the
proposed offering is not consummated, such costs will be charged to operations
during the period it becomes evident that the above-mentioned transaction will
not be completed. Costs incurred to expand the Company's market position are
amortized over the period of benefit not to exceed twenty-four months. It is
the Company's policy to periodically review and evaluate that the benefit
associated with these costs are expected to be realized and, therefore,
deferral and amortization is justified.
Income Taxes:
Income taxes are accounted for under Financial Accounting Standards Board, FAS
No. 109, "Accounting For Income Taxes." Under this standard, deferred tax
assets and liabilities represent the tax effect, calculated at currently
effective rates, of future deductible taxable amounts attributable to events
that have been recognized on a cumulative basis in the financial statements.
Timing differences arise principally from using the cash method of accounting
for income tax purposes versus the accrual method for financial reporting.
<PAGE>
USTEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and September 30, 1996
1. Summary of Accounting Policies (Continued)
Earnings Per Share:
Earnings per share are computed based upon the weighted average number of
common shares outstanding during the periods. Earnings per share have been
computed in the accompanying financial statements after giving recognition to
common stock equivalents relating to stock options, warrants and convertible
preferred stock that have a dilutive effect on per share earnings. Common
stock equivalents relating to stock options, warrants and convertible preferred
stock were excluded from the computations in periods when the Company recorded
a net loss since their effect is anti-dilutive.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles required management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Significant Risks and Uncertainties:
The Company is primarily a non-facilities based inter-exchange carrier that
routes customers' calls over a transmission network consisting primarily of
dedicated long distance lines secured by the Company from a variety of other
carriers. One of these carriers provides the call record information from
which the Company bills approximately 75% of its customer base. Management
believes other carriers could provide the same services on comparable terms.
Concentration of Credit Risks:
The Company maintains a majority of its cash balances at one financial
institution. Deposits not to exceed $100,000 are insured by the Federal
Deposit Insurance Corporation. At September 30, 1996, the Company had uninsured
cash in that institution in the amount of $523,997.
New Accounting Pronouncements:
Statement of Financial Accounting Standards No. 121, "Accounting For The
Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of"
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after December
15, 1995. The new standard establishes new guidelines regarding when impairment
losses on long-lived assets, which include plant and equipment, certain
identifiable intangible assets and goodwill, should be recognized and how
impairment losses should be measured. The Company does not expect adoption to
have a material effect on its financial position or results of operations.
Statement of Financial Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) issued by the Financial Accounting Standards Board
(FASB) is effective for specific transactions entered into after December 15,
1995, while the disclosure requirements of SFAS No. 123 are effective for
financial statements for fiscal years beginning no later than December 15,
1995. The new standard establishes a fair value method of accounting for stock-
based compensation plans and for transactions in which an entity acquires goods
or services from non-employees in exchange for equity instruments. At the
present time, the Company has not determined if it will change its accounting
policy for stock-based compensation or only provide the required financial
statement disclosures. As such, the impact on the Company's financial position
<PAGE>
USTEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and September 30, 1996
1. Summary of Accounting Policies (Continued)
and results of operation is currently unknown.
Disclosure About Fair Value of Financial Instruments:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
a. Cash and Restricted Cash:
The carrying amount approximates fair value due to the short maturity of these
instruments.
b. Notes Payable:
The fair value of the Company's notes payable is based on quoted market prices
for similar debt with similar remaining maturities.
c. Convertible Debentures:
The fair value of the Company's Convertible debentures is estimated based on
current market borrowing rates for loans with similar terms and maturities.
Interim Financial Information:
The interim financial statements for the nine-month and three-month periods
ended September 30, 1996 and September 30, 1995, respectively, are unaudited.
In the opinion of management, such statements reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
representation of the results of the interim periods. The results of operations
for the nine-month and three-month periods ended September 30, 1996 and
September 30, 1995, respectively, are not necessarily indicative of the results
for the entire year.
2. Deferred Charges:
Deferred charges consist of the following:
December 31, September 30,
1995 1996
------------ ----------
Development costs $336,690 $233,787
Offering costs 164,792 724,010
Loan fees 35,000 129,608
Calling card program 118,157 138,109
Deposits and others 82,166 124,665
-------- ---------
736,805 1,350,179
Accumulated amortization (52,000) (80,125)
-------- ----------
$684,805 $1,270,054
======== ==========
<PAGE>
USTEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and September 30, 1996
3. Notes Payable:
In June 1995 and September 1995, the Company entered into a revolving credit
agreements with a bank that provided for secured borrowings aggregating $1.0
million and $2.1 million, respectively, expiring in July 1996. Borrowings
under the agreements bear interest at the bank's prime lending rate. The credit
agreements were collateralized by two certificates of deposit at that same bank
totalling $2.1 million. In July 1996, this outstanding credit line was paid
off in full from maturity of the certificates of deposit used as collateral.
In December 1995, the Company obtained a Senior Credit Facility ("Credit
Facility" and "Line") in the amount of up to $5 million with an asset-based
lender. Amounts drawn under the Credit Facility accrue interest at a variable
rate equal to the Bank of America Reference Rate plus 2% per annum. The Line
is secured by accounts receivable and all of the Company's other assets.
Under the Credit Facility, the Company can borrow up to an amount which is the
lesser of $5 million or 85% of the Company's eligible receivables. Subject to
the $5 million maximum borrowing, in addition to amounts supported by
receivables, the Company may borrow on a 36-month term loan basis up to the
lesser of $1.5 million or a formula amount based on the fair value of new
equipment and the liquidation value of existing equipment. Amounts outstanding
under the Credit Facility at September 30, 1996 were $2,437,931.
4. Short-term Borrowings:
During March 1996 the Company borrowed $400,000 from a related party. The notes
mature in March 1998 and bear interest at the annual rate of 8%. In June
1996 $116,000 of this borrowing was repaid. An additional repayment of
$200,000 was made in September 1996. Interest is payable at the earlier of
maturity or repayment of the full amount borrowed.
During June 1996 the Company borrowed $1,200,000 from an unrelated party. The
two-year note bears interest at the annual rate of 12% and is unsecured.
Interest is payable at maturity. In conjunction with this loan the Company
agreed to issue warrants for acquisition of up to 540,000 of its common shares
at a price of $5.00 per share. Warrants for purchase of 120,000 common shares
were issuable at the time the loan was funded. Additional warrants become
issuable in increments for 60,000 common shares each at intervals of ninety
days after funding of the loan so long as the loan remains unpaid.
5. Related Parties Payable:
In January, 1996 the Company completed a private placement of 160,000 Units
(consisting of 160,000 shares of Common Stock and 160,000 Redeemable Common
Stock Purchase Warrants) raising net proceeds of approximately $775,000. For
assisting the Company in connection with this private placement, the Company
paid Diener Financial Group the sum of $25,000. In November 1995, the Company
granted Mr. Diener 100,000 Warrants exercisable at $5.00 per share, expiring
November, 2000.
In January 1996, the Company entered into a supplemental consulting agreement
with IFC to provide the services of Mr. Andrew Grey as the chief financial
officer and as a director of the Company for up to 20 hours of service per week
for compensation of $12,500 per month. IFC agreed to defer payment of $7,500
per month until such time as the Company obtained certain additional financing
or underwent a change in control, as defined in the agreement, or IFC
terminated the services. In February, 1996, the Company agreed to cancel the
$95,000 note receivable in consideration of services rendered and to be
rendered by IFC and the payment by IFC of $5,000 to the Company.
In June 1996 the Company acquired title to a telecommunications switch owned
by Mr. Epling for aggregate consideration in the amount of $716,375.
Consideration was paid by crediting $500,000 as payment for the issuance of
100,000 shares of Common Stock to Mr. Epling pursuant to the exercise of
employee stock options, cancelling approximately $117,934 in interim
advances made by the Company to TYC, Inc., a corporation wholly-owned by Mr.
Epling, cancellation of interim advances of approximately $68,522 made by
the Company to Mr. Epling for upgrading the switch, and the issuance of an
additional 7,851 shares of Common Stock to Mr. Epling based on a $5.00 per
share market value. At the time the switching equipment was acquired, it
was appraised for approximately $716,000.
<PAGE>
USTEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and September 30, 1996
6. Other Events:
In July 1996, the Company's Board of Directors authorized the issuance of
20,000 shares of Common Stock to Consortium 2000, Inc. at $5.75 per share to
reconcile variances in commisisons owed to Consortium 2000, Inc. for July 1995
through March, 1996. Prior to the merger, these shares will be distributed as
a dividend to the shareholders of Consortium 2000, Inc.
On August 14, 1996, the Company, Consortium Acquisition Corporation (a wholly-
owned subsidiary created by the Company) and Consortium 2000, Inc. entered into
a Merger Agreement and Plan of Reorganization ("Merger Agreement"). Under the
terms of the Merger Agreement, (a) Consortium Acquisition Corporation will be
merged into Consortium 2000, Inc., with Consortium 2000, Inc. being the
surviving corporation in the merger and (b) all the capital stock of Consortium
2000, Inc. will be converted into an aggregate of 1,076,923 shares of the
Common Stock of the Company. As a result of the Merger Agreement, Consortium
2000, Inc. will become a wholly-owned subsidiary of the Company. The merger is
contingent upon the completion of the Company raising additional financing.
As of September 9, 1996, the Company was indebted to WilTel, the Company's
primary long distance carrier, in the amount of $5,595,963 before application
of certain volume discounts available under the contract for those services.
This amount was settled by payment of $1,000,000 by the Company on that date
and an agreement by the Company to remit $735,688 by September 27, 1996, and to
remit payment of its October 1, 1996 invoice from WilTel no later than October
31, 1996, and to provide WilTel with a second lien against all its assets and
customer base. WilTel agreed to allow the Company to defer the balance owing
in the amount of $3,860,275 (before application of volume discounts available
under the service contract between the Company and WilTel) to the earlier of
November 10, 1996 (amended to November 30, 1996) or the completion of an
offering.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company was formed in March 1992, although the Company did not commence
significant operations until January 1993. Since January 1993, the Company's
monthly revenues have grown from $10,134 to approximately $2,263,000 in
September 1996. In addition, the number of subscribers to the Company's long
distance telephone service has grown to approximately 16,500. The Company
anticipates a continuing expansion in its customer base and increasing revenues
from operations during the next twelve months.
The Company's primary cost is for local access services, which represents the
cost of originating and terminating calls through local networks owned and
operated by local exchange carriers (LEC) such as USWest and Pacific Bell,
combined with the cost of utilizing usage-sensitive long distance transmission
facilities and leasing dedicated long distance transmission lines from other
carriers. While these costs will continue to rise with UStel's growth, the
Company expects the increase as a percentage of revenue to drop as UStel
continues to benefit from the economies of scale that the growth brings.
The Company's profit margin depends, among other things, on the volume of its
operations and on the mix between use of usage-sensitive transmission
facilities and dedicated transmission lines. Initial increases in volume may
increase the use of usage-sensitive transmission facilities relative to fixed
dedicated transmission facilities. The Company does not expect this to have a
significant impact on profit margin due to volume discounts that are available
on usage-sensitive transmission facilities and the ability to shift to fixed-
rate dedicated transmission facilities at relatively low volumes of activity.
Comparison of Results of Operations - Nine Months Ended September 30, 1996
versus Nine Months Ended September 30, 1995:
During the nine-month period ended September 30, 1996 the Company reported
income from operations of $397,088 versus a loss from operations of $234,493
for the nine-month period ended September 30, 1995. During the nine-month
period ended September 30, 1996 the Company reported net income of $83,160
versus a net loss of $65,505 for the nine-month period ended September 30,
1995.
Revenues for the nine months ended September 30, 1996 were $16,655,844 as
compared to $11,310,018 for the nine months ended September 30, 1995. The
increase in revenues in 1996 is the result of expansion from a customer base of
6,000 at September 30, 1995 to a customer base in excess of 16,500 at September
30, 1996.
Cost of services sold for the nine months ended September 30, 1996 was
$11,353,723 as compared to $8,240,409 for the nine months ended September 30,
1995. The increase in cost of services sold, similar to the increase between
periods in revenue, is the result of the expansion in the Company's customer
base. Cost of services sold for the nine months ended September 30, 1996 was
68.17% of the revenues produced in the first nine months of 1996. Cost of
services sold for the nine months ended September 30, 1995 was 72.86% of the
revenues produced in the first nine months of 1995. The Company expects
continued improvement in this ratio over the next twelve months due to
increasing volume and the accompanying volume discounts from the Company's
suppliers.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Selling expenses for the nine months ended September 30, 1996 were $1,676,705
as compared to $900,960 for the nine months ended September 30, 1995. The
increase in selling expenses reflects the costs associated with recruiting the
expansion and retention of the Company's customer base from commencement
through September 30, 1996. During the next twelve months the Company expects
these costs to continue in a manner proportionate to increase as the customer
base expands.
General and administrative expenses for the nine months ended September 30,
1996 were $3,044,257 as compared to $2,282,329 for the nine months ended
September 30, 1995. The increase in general and administrative expenses is
the result of increased staff and related costs in support of increased
revenues being produced by the Company. These costs will continue to increase
but at a rate less than that of the increase in revenue.
Depreciation and amortization for the nine months ended September 30, 1996 was
$184,071 as compared to $120,813 for the nine months ended September 30, 1995.
Amortization of the Company's start-up cost asset was $14,756 for each of the
nine-month periods ended September 30, 1996 and September 30, 1995,
respectively. Depreciation for the nine months ended September 30, 1996 was
$169,315 as compared to $106,057 for the nine months ended September 30, 1995.
The increase in depreciation is the result of the Company's increasing
investments in telephone switching equipment and facilities to handle increased
telephone traffic and increased investment in the computer hardware and
software that supports the operations of the telephone equipment and related
billing activities. The Company's investment in these fixed assets increased
from approximately $1,475,000 at September 30, 1995 to approximately
$2,574,000 at September 30, 1996.
Interest expense for the nine months ended September 30, 1996 was $409,205 as
compared to $151,349 for the nine months ended September 30, 1995. The Company
continues to utilize short-term bank lines of credit to supplement its periodic
needs for cash in operations. In July 1996 those lines of credit were fully
repaid from the maturity of certificates of deposit that the Company had
previously held. In December 1995, the Company obtained a Senior Credit
Facility in the amount of up to $5 million. This Credit Facility bears
interest at the prime rate plus 2% per annum, with a minimum of $15,000
interest expense per month. Accordingly, interest expense charged for the nine
months ended September 30, 1996 was $183,573, including amortization of related
loan fees over thirty-six months.
Interest income for the nine months ended September 30, 1996 was $95,276,
principally from the Company's previous holdings of bank certificates of
deposit (redeemed in July 1996) and accrual of interest on officers loans, as
compared to $86,773 for the nine months ended September 30, 1995.
Comparison of Results of Operations - Three Months Ended September 30, 1996
versus Three Months Ended September 30, 1995:
During the three-month period ended September 30, 1996 the Company reported
income from operations of $139,110 versus a loss from operations of $305,661
for the three-month period ended September 30, 1995. During the three-month
period ended September 30, 1996 the Company reported net income of $11,193
versus a net loss of $469,429 for the three-month period ended September 30,
1995.
Revenues for the three months ended September 30, 1996 were $6,129,340 as
compared to $4,313,267 for the three months ended September 30, 1995. The
increase in revenues in 1996 is the result of expansion from a customer base of
6,000 at September 30, 1995 to a customer base in excess of 16,500 at
September 30, 1996.
Cost of services sold for the three months ended September 30, 1996 was
$4,112,368 as compared to $3,080,574 for the three months ended September 30,
1995. The increase in cost of services sold, similar to the increase between
periods in revenue, is the result of the expansion in the Company's customer
base. Cost of services sold for the three months ended September 30, 1996 was
67.09% of the revenues produced in the third quarter of 1996. Cost of services
sold for the three months ended September 30, 1995 was 71.42% of the revenues
produced in the third quarter of 1995. The Company expects continued
improvement in this ratio ver the next twelve months due to increasing volume
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
and the accompanying volume discounts from the Company's suppliers.
Selling expenses for the three months ended September 30, 1996 were $601,986 as
compared to $353,605 for the three months ended September 30, 1995. The
increase in selling expenses reflects the costs associated with recruiting the
expansion and retention of the Company's customer base from commencement
through September 30, 1996. During the next twelve months the Company expects
these costs to continue in a manner proportionate to increase as the customer
base expands.
General and administrative expenses for the three months ended September 30,
1996 were $1,213,919 as compared to $1,135,560 for the three months ended
September 30, 1995. The increase in general and administrative expenses is the
result of increased staff and related costs in support of increased revenues
being produced by the Company. These costs will continue to increase but at a
rate less than that of the increase in revenue.
Depreciation and amortization for the three months ended September 30, 1996 was
$61,959 as compared to $49,189 for the three months ended September 30, 1995.
Amortization of the Company's start-up cost asset was $4,919 for each of the
three-month periods ended September 30, 1996 and September 30, 1995,
respectively. Depreciation for the three months ended September 30, 1996 was
$57,040 as compared to $44,270 for the three months ended September 30, 1995.
The increase in depreciation is the result of the Company's increasing
investments in telephone switching equipment and facilities to handle increased
telephone traffic and increased investment in the computer hardware and
software that supports the operations of the telephone equipment and related
billing activities. The Company's investment in these fixed assets increased
from approximately $1,475,000 at September 30, 1995 and approximately
$2,574,000 at September 30, 1996.
Interest expense for the three months ended September 30, 1996 was $136,277 as
compared to $71,626 for the three months ended September 30, 1995. The Company
continues to utilize short-term bank lines of credit to supplement its periodic
needs for cash in operations. In July 1996 those lines of credit were fully
repaid from the maturity of certificates of deposit that the Company had
previously held. In December 1995, the Company obtained a Senior Credit
Facility in the amount of up to $5 million. This Credit Facility bears
interest at the prime rate plus 2% per annum, with a minimum of $15,000
interest expense per month. Accordingly, interest expense charged for the
three months ended September 30, 1996 was $62,188, including amortization of
related loan fees over thirty-six months.
Interest income for the three months ended September 30, 1996 was $8,361,
principally from loans to officers of the Company, as compared to $30,081 for
the three months ended September 30, 1995.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources
The Company's working capital position at September 30, 1996 was approximately
$1,744,631. Almost since its inception, the Company has experienced pressure
on its working capital position due to operating losses, the need to
continually invest in telecommunications equipment and a significant increase
in accounts receivable due to growth in operations.
During the first nine months of 1996 the Company utilized net cash of
$1,931,308 for operating activities and an increase in customer accounts
receivable. The Company is required to pay the costs of providing
communications services to its customers, consisting primarily of local access
charges for obtaining usage-sensitive transmission capacity or leasing fixed-
rate bulk transmission facilities, before the Company receives payment from its
customers relating to those costs. Typically, the Company's customers do not
pay the Company for its telecommunication services until approximately 85 days
following the month in which those services are provided. As a result, the
receipt of cash from operations typically lags substantially behind the payment
of the costs of providing those services.
At September 30, 1996, the Company's accounts receivable, net of allowance for
doubtful accounts, was approximately $8,254,000. In addition, through
September 30, 1996, the Company had invested approximately $2,398,000 in
switching and related equipment and in computer hardware and software.
To raise funds to meet the periodic cash needs for operations and fixed asset
acquisition, the Company has relied in the past on bridge financing in amounts
ranging from $100,000 to $1,500,000 at any particular time. Funds from the
initial public offering of common stock and the private placement of
convertible preferred stock in 1994 enabled the Company, generally, to avoid
these short-term bridge financings, other than arrangements with banks for
short-term lines of credit. While the Company had borrowings outstanding under
such lines of credit in the amount of $2,100,000 at June 30, 1996 after
repayment of $1,000,000 principal in March 1996, it also held short-term bank
certificates of deposit in the amount of $2,100,000 as of that same date, which
amounts were restricted. In July 1996 bank line of credit was fully repaid
through redemption of the certificates of deposit.
In October 1995 the Company borrowed $1,500,000 pursuant to the terms of a one-
year term loan. Borrowing under the agreement bears interest at 10% per annum
on a daily principal balance outstanding during the three calendar months prior
to each interest payment date on the first day of each calendar quarter. The
agreement calls for the issuance of warrants for the purchase of up to one
hundred shares of the Company's common stock at a price of $5.00 per share,
exercisable over the term of the loan. The loan is secured by the Company's
trade accounts receivable and certain other assets. Borrowings under the
credit agreement amounted to $1,500,000 at December 31, 1995. This loan was
repaid in January 1996 by the issuance of 160,000 common shares of the Company
plus $700,000.
In December 1995, the Company obtained a Senior Credit Facility ("Credit
Facility" and "Line") in the amount of up to $5 million with an asset-based
lender. Amounts drawn under the Credit Facility accrue interest at a variable
rate equal to the Bank of America Reference Rate plus 2% per annum. The line
is secured by accounts receivable and all of the Company's other assets.
Under the Credit Facility, the Company can borrow up to an amount which is the
lesser of $5 million or 85% of the Company's eligible receivables. Subject to
the $5 million maximum borrowing, in addition to amounts supported by
receivables, the Company may borrow on a 36-month term loan basis up to the
lesser of $1.5 million or a formula amount based on the fair value of new
equipment and the liquidation value of existing equipment. The amount
outstanding under the Credit Facility at September 30, 1996 was $2,437,931.
During March 1996 the Company borrowed $400,000 from a related party. The
notes mature in November 1996 and bear interest at the annual rate of 8%.
Payments of $116,000 in June 1996 and $200,000 in August 1996 were made on the
principal of this debt. Interest is payable at the earlier of maturity of the
notes of repayment of the full amount borrowed.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
During June 1996 the Company borrowed $1,200,000 from an unrelated party. The
two-year note bears interest at the annual rate of 12% and is unsecured.
Interest is payable at maturity. In conjunction with this loan the Company
agreed to issue warrants for acquisition of up to 540,000 of its common shares
at a price of $5.00 per share. Warrants for purchase of 120,000 common shares
were issuable at the time the loan was funded. Additional warrants become
issuable in increments for 60,000 common shares each at intervals of ninety
days after funding of the loan so long as the loan remains unpaid.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
USTEL, INC.
(Registrant)
DATE: November 14, 1996 Robert L. B. Diener
Robert L. B. Diener
President and Chief Executive Officer
DATE: November 14, 1996 Wouter van Biene
Wouter van Biene
Chief Financial Officer
DATE: November 14, 1996 Richard C. Ward
Richard C. Ward
Controller
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