<PAGE> 1
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 June 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 required 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.
<TABLE>
<CAPTION>
Class Outstanding as of August 12, 1996
<S> <C>
Common Stock, $.01 par value 2,024,000 shares
</TABLE>
Transitional Small Business Disclosure Format (check one)
Yes ; No X
----- -----
<PAGE> 2
USTEL, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1996
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER PART I - FINANCIAL INFORMATION NUMBER
<S> <C> <C>
1. Financial statements
Condensed Balance Sheets -
December 31, 1994 and June 30, 1996 2
Condensed Statements of Operations -
Three months and six months ended June 30,
1996 and the three months and six months
ended June 30, 1996 and
June 30, 1995. 4
Condensed Statement of Changes In
Stockholders' Equity For The Period
January 1, 1996 to June 30, 1996. 5
Statements of Cash Flows - Six months ended
June 30, 1996 and June 30, 1995. 6
Notes to Condensed Financial Statements 7
2. Management's Discussion and Analysis 12
PART II - OTHER INFORMATION
Items I through 6 do not apply for the quarter
ended June 30, 1996
</TABLE>
-1-
<PAGE> 3
UStel, Inc.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
ASSETS (Audited) (Unaudited)
CURRENT ASSETS ----------- -----------
<S> <C>
CASH $ 1,200 $ 650,309
RESTRICTED CASH 3,133,433 2,110,005
ACCOUNTS RECEIVABLE LESS ALLOWANCE FOR
DOUBTFUL ACCOUNTS OF $652,000 and
$564,000, RESPECTIVELY 5,144,502 6,785,540
RELATED PARTY RECEIVABLE 348,519 289,789
PREPAID EXPENSES 506,824 707,967
OTHER ASSETS 756,220 899,585
----------- -----------
TOTAL CURRENT ASSETS 9,890,698 11,443,195
FIXED ASSETS
OFFICE FURNITURE & EQUIPMENT 1,440,294 2,204,771
LEASEHOLD IMPROVEMENTS 164,063 168,899
----------- -----------
1,604,357 2,373,670
LESS ACCUMULATED DEPRECIATION (241,176) (353,451)
----------- -----------
NET FIXED ASSETS 1,363,181 2,020,219
OTHER ASSETS
START-UP COSTS, OTHER ASSETS, LESS ACCUMULATED
AMORTIZATION OF $59,022 and $68,859, RESPECTIVELY 39,347 29,511
DEFERRED CHARGES 684,805 988,983
----------- -----------
TOTAL ASSETS $11,978,031 $14,481,908
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
-2-
<PAGE> 4
UStel, Inc.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
LIABILITIES AND STOCKHOLDERS' EQUITY (Audited) (Unaudited)
------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
NOTES PAYABLE TO BANKS $ 2,900,000 $ 4,025,691
NOTES PAYABLE TO OTHERS 1,500,000 1,484,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2,192,479 3,127,054
ACCRUED REVENUE TAXES 1,097,779 231,425
------------ ------------
TOTAL CURRENT LIABILITIES 7,690,258 8,868,170
LONG-TERM LIABILITIES
CONVERTIBLE SUBORDINATED DEBENTURES 500,000 500,000
------------ ------------
TOTAL LIABILITIES 8,190,258 9,368,170
------------ ------------
STOCKHOLDERS' EQUITY
SERIES A & B CONVERTIBLE PREFERRED STOCK 6,450 6,450
COMMON STOCK 16,000 19,720
ADDITIONAL PAID-IN CAPITAL 6,291,178 7,541,458
ACCUMULATED DEFICIT (2,525,855) (2,453,890)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 3,787,773 5,113,738
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 11,978,031 $ 14,481,908
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
-3-
<PAGE> 5
UStel, Inc.
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Three Month Six Month Six Month
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1995 1996 1995 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUES $3,854,239 $5,623,236 $6,996,751 $10,526,503
---------- ---------- ---------- -----------
OPERATING EXPENSES
COST OF SERVICES SOLD 2,807,630 3,856,822 5,159,835 7,241,355
SELLING 322,107 616,893 547,355 1,074,719
GENERAL AND ADMINISTRATIVE 638,721 923,343 1,165,074 1,830,340
DEPRECIATION AND AMORTIZATION 35,863 61,123 68,318 122,112
---------- ---------- ---------- -----------
TOTAL OPERATING EXPENSES 3,804,321 5,458,181 6,940,582 10,268,526
---------- ---------- ---------- -----------
INCOME FROM OPERATIONS 49,918 165,055 56,169 257,978
INTEREST INCOME, NET OF INTEREST EXPENSE (10,801) (94,488) (8,031) (186,013)
---------- ---------- ---------- -----------
NET INCOME $39,117 $70,567 $48,138 $71,965
========== ========== ========== ===========
PRIMARY PER SHARE AMOUNTS:
NET INCOME 0.024 0.039 0.030 0.041
========== ========== ========== ===========
FULLY DILUTED PER SHARE AMOUNTS:
NET INCOME 0.016 0.022 0.020 0.023
========== ========== ========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
PRIMARY 1,600,000 1,788,333 1,600,000 1,763,056
========== ========== ========== ===========
FULLY DILUTED 2,450,362 3,199,652 2,441,612 3,118,039
========== ========== ========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
-4-
<PAGE> 6
USTEL, INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1996 THROUGH JUNE 30,1996
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------- ------ -------- ------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 645,000 $6,450 1,600,000 $16,000 $6,291,178 ($2,525,855) $3,787,773
CONVERSION OF DEBT 160,000 1,600 798,400 800,000
COST OF PREFERRED STOCK PLACEMENT 112,000 1,120 (47,120) (46,000)
ACQUISITION OF SWITCHING EQUIPMENT 100,000 1,000 499,000 500,000
NET INCOME FOR PERIOD 71,965 71,965
------- ------ -------- ------- ---------- ----------- ----------
BALANCE, JUNE 30,1996 645,000 $6,450 1,972,000 $19,720 $7,541,458 ($2,453,890) $5,113,738
------- ------ -------- ------- ---------- ----------- ----------
</TABLE>
-5-
<PAGE> 7
UStel, INC.
CONDENSED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH FLOW
<TABLE>
<CAPTION>
Six Months Ended June 30,
1995 1996
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
NET INCOME $ 48,138 $ 71,965
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH USED IN
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 68,318 122,112
PROVISION FOR LOSSES ON ACCOUNTS
RECEIVABLE 134,965 244,466
INCREASE / DECREASE FROM CHANGE IN:
ACCOUNTS RECEIVABLE (635,558) (971,818)
OTHER ASSETS (756,220) (899,585)
OTHER RECEIVABLES (472,948) 58,730
PREPAID EXPENSES (126,620) (201,143)
ACCOUNTS PAYABLE AND ACCRUED
EXPENSES 699,326 78,048
OTHER (16,490) (17,473)
----------- -----------
NET CASH USED IN
OPERATING ACTIVITIES (1,057,089) (1,514,699)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
PURCHASE OF EQUIPMENT (345,312) (769,313)
----------- -----------
NET CASH USED IN INVESTMENT ACTIVITIES (345,312) (769,313)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
PROCEEDS FROM NOTES PAYABLE 1,450,000 10,868,933
CONVERSION OF NOTES PAYABLE 0 800,000
PAYMENT ON DEBT (120,000) (9,759,242)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,330,000 1,909,691
----------- -----------
NET DECREASE IN CASH (72,401) (374,320)
CASH, BEGINNING OF PERIOD 3,207,034 3,134,633
----------- -----------
CASH, END OF PERIOD $ 3,134,633 $ 2,760,313
----------- -----------
SUPPLEMENTAL INFORMATION:
INTEREST PAID $50,222 $242,533
INCOME TAXES PAID 800 12,638
</TABLE>
See accompanying notes to condensed financial statements.
-6-
<PAGE> 8
USTEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 1995 and June 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 reincorporation
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
useful 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.
-7-
<PAGE> 9
USTEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and June 30, 1996
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.
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 June 30, 1996, the Company had uninsured
cash in that institution in the amount of $2,640,760.
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
-8-
<PAGE> 10
USTEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and June 30, 1996
required financial statement disclosures. As such, the impact on the Company's
financial position 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 six-month and three-month periods
ended June 30, 1996 and June 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 six-month
and three-month periods ended June 30, 1996 and June 30, 1995, respectively,
are not necessarily indicative of the results for the entire year.
2. Deferred Charges
Deferred charges consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
----------- ---------
<S> <C> <C>
Development costs $336,690 $ 328,840
Offering costs 164,792 379,366
Loan fees 35,000 131,253
Calling card program 118,157 138,109
Deposits and others 82,166 82,165
-------- ---------
736,805 1,059,733
Accumulated amortization (52,000) (70,750)
-------- ---------
$684,805 $ 988,983
======== =========
</TABLE>
-9-
<PAGE> 11
USTEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and June 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 by offsetting the outstanding balance against the certificates of
deposit used as collateral. Borrowings under the remaining credit agreement
amounted to $2.1 million at June 30, 1996.
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 June 30, 1996 were $1,925,691.
4. Short-term Borrowings
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%. In
June 1996 $116,000 of this borrowing was repaid. 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 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 thousand 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 $725,000.
-10-
<PAGE> 12
USTEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and June 30, 1996
In June 1996 the Company acquired title to switching facilities in Beverly
Hills, CA from an officer of the company for $678,471. Consideration for the
switch was 100,000 shares of the Company's common stock and cancellation of
interim advances made by the Company in connection with the upgrading of the
switching equipment in the amount of $178,471. At the time the switching
equipment was acquired, it had been appraised for approximately $716,000.
-11-
<PAGE> 13
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 $1,978,000 in June
1996. In addition, the number of subscribers to the Company's long distance
telephone service has grown to approximately 12,500. 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 - SIX MONTHS ENDED JUNE 30, 1996 VERSUS SIX
MONTHS ENDED JUNE 30, 1995
During the six-month period ended June 30, 1996 the Company reported income
from operations of $257,978 versus income from operations of $56,169 for the
six-month period ended June 30, 1995. During the six-month period ended June
30, 1996 the Company reported a net income of $71,965 versus a net income of
$48,138 for the six-month period ended June 30, 1995.
Revenues for the six months ended June 30, 1996 were $10,526,503 as compared to
$6,996,751 for the six months ended June 30, 1995. The increase in revenues in
1996 is the result of expansion from a customer base of 3,400 at June 30, 1995
to a customer base in excess of 12,500 at June 30, 1996.
Cost of services sold for the six months ended June 30, 1996 was $7,241,355 as
compared to $5,159,835 for the six months ended June 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 six months ended June 30, 1996 was 68.79% of the revenues produced
in the first half of 1996. Cost of services sold for the six months ended June
30, 1995 was 73.75% of the revenues produced in the first half 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.
-12-
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Selling expenses for the six months ended June 30, 1996 were $1,074,718 as
compared to $547,355 for the six months ended June 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 June 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 six months ended June 30, 1996 were
$1,830,340 as compared to $1,165,074 for the six months ended June 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 six months ended June 30, 1996 was
$122,112 as compared to $68,318 for the six months ended June 30, 1995.
Amortization of the Company's start-up cost asset was $9,838 for each of the
six-month periods ended June 30, 1996 and June 30, 1995, respectively.
Depreciation for the six months ended June 30, 1996 was $112,274 as compared to
$58,480 for the six months ended June 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 $1,100,000 at June 30, 1995 and approximately $2,205,000 at
June 30, 1996.
Interest expense for the six months ended June 30, 1996 was $272,928 as
compared to $79,722 for the six months ended June 30, 1995. The Company
continues to utilize short-term bank lines of credit to supplement its periodic
needs for cash in operations. At June 30, 1996 the Company had outstanding
borrowings on such lines of credit in the amount of $2,100,000, after paydown
of $1,000,000 principal in March 1996, at interest rates that are tied to the
prime rate of interest. 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 six
months ended June 30, 1996 was $122,752, including amortization of related loan
fees over thirty-six months.
Interest income for the six months ended June 30, 1996 was $86,916, principally
from the Company's holdings of bank certificates of deposit and accrual of
interest on officers loans, as compared to $56,691 for the six months ended
June 30, 1995.
COMPARISON OF RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996 VERSUS
THREE MONTHS ENDED JUNE 30, 1995
During the three-month period ended June 30, 1996 the Company reported income
from operations of $165,055 versus income from operations of $49,918 for the
three-month period ended June 30, 1995. During the three-month period ended
June 30, 1996 the Company reported net income of $70,567 versus a net income of
$39,117 for the three-month period ended June 30, 1995.
Revenues for the three months ended June 30, 1996 were $5,623,236 as compared
to $3,854,239 for the three months ended June 30, 1995. The increase in
revenues in 1996 is the result of expansion from a customer base of 3,400 at
-13-
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
June 30, 1995 to a customer base in excess of 12,500 at June 30, 1996.
Cost of services sold for the three months ended June 30, 1996 was $3,856,822
as compared to $2,807,630 for the three months ended June 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 six months ended June 30, 1996 was 68.59% of the
revenues produced in the second quarter of 1996. Cost of services sold for the
second quarter of 1995 was 72.85% of the revenues produced in the second
quarter 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.
Selling expenses for the three months ended June 30, 1996 were $616,893 as
compared to $322,107 for the three months ended June 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 June 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 June 30, 1996
were $923,343 as compared to $638,721 for the three months ended June 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 June 30, 1996 was
$61,123 as compared to $35,863 for the three months ended June 30, 1995.
Amortization of the Company's start-up cost asset was $4,919 for each of the
three-month periods ended June 30, 1996 and June 30, 1995, respectively.
Depreciation for the three months ended June 30, 1996 was $56,204 as compared
to $30,944 for the three months ended June 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 $1,100,000 at June 30, 1995 and approximately $2,205,000 at
June 30, 1996.
Interest expense for the three months ended June 30, 1996 was $148,731 as
compared to $38,572 for the six months ended June 30, 1995. The Company
continues to utilize short-term bank lines of credit to supplement its periodic
needs for cash in operations. At June 30, 1996 the Company had outstanding
borrowings on such lines of credit in the amount of $2,100,000, after paydown
of $1,000,000 principal in March 1996, at interest rates that are tied to the
prime rate of interest. 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 June 30, 1996 was $60,201, including amortization of related
loan fees over thirty-six months.
Interest income for the three months ended June 30, 1996 was $54,243,
principally from the Company's holdings of bank certificates of deposit, as
-14-
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
compared to $27,771 for the three months ended June 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital position at June 30, 1996 was approximately
$2,550,000. 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 six months of 1996 the Company utilized net cash of $1,514,699
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 100 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 June 30, 1996, the Company's accounts receivable, net of allowance for
doubtful accounts, was approximately $6,785,000. In addition, through June 30,
1996, the Company had invested approximately $2,205,000 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. This bank line of credit was fully drawn at June 30,
1996.
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 $725,000.
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
-15-
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 June 30, 1996 was $1,925,691.
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%. In
June 1996 $116,000 of this borrowing was repaid. Interest is payable at the
earlier of maturity of the notes of 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.
-16-
<PAGE> 18
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, as amended.
USTEL, INC.
(Registrant)
DATE: August 16, 1996 /s/ BARRY EPLING
-----------------------------------
Barry Epling
Vice President & Chief Operating
Officer
DATE: August 16, 1996 /s/ ANDREW J. GREY
-----------------------------------
Andrew J. Grey
Chief Financial Officer
DATE: August 16, 1996 /s/ RICHARD C. WARD
-----------------------------------
Richard C. Ward
Controller
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET INCOME STATEMENT, STATEMENT OF CASH FLOWS, STATEMENT OF CHANGES IN
STOCKHOLDERS EQUITY (ALL STATEMENTS AS OF jUNE 30, 1996; ALL STATEMENTS IN
CONDENSED FORM) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,760,314<F1>
<SECURITIES> 0
<RECEIVABLES> 6,785,540
<ALLOWANCES> 564,000
<INVENTORY> 0
<CURRENT-ASSETS> 11,443,195
<PP&E> 2,373,670
<DEPRECIATION> (353,451)
<TOTAL-ASSETS> 14,481,908
<CURRENT-LIABILITIES> 8,868,170
<BONDS> 500,000
0
6,450
<COMMON> 19,720
<OTHER-SE> 5,087,568
<TOTAL-LIABILITY-AND-EQUITY> 14,481,908
<SALES> 0
<TOTAL-REVENUES> 10,566,503
<CGS> 0
<TOTAL-COSTS> 8,316,074
<OTHER-EXPENSES> 1,952,452
<LOSS-PROVISION> 244,466
<INTEREST-EXPENSE> 242,533
<INCOME-PRETAX> 71,965
<INCOME-TAX> 0
<INCOME-CONTINUING> 71,965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71,965
<EPS-PRIMARY> .041
<EPS-DILUTED> .023
<FN>
<F1>INCLUDES RESTRICTED CASH OF $2,110,005
</FN>
</TABLE>
