<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly period ended March 31, 1997
Commission File number 0-24098
UStel, Inc.
(Name of Small Business Issuer 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, Nevada 89102
(Address of principal executive offices) (Zip code)
(702) 247-7400
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed
Sections 13 or 15(d) of the Exchange Act during the past 12 months (or 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_____.
State the number of shares outstanding of each of issuers's classed of
common equity as of the latest practicable date.
Class Outstanding as of May 12, 1997
Common Stock, $0.01 par value per share 5,031,851 shares
Transitional Small Business Disclosure Format (check one)
Yes______; No___X__
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USTEL, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended March 31, 1997
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Balance Sheet -
December 31, 1996 and March 31, 1997.................. 2
Condensed Statement of Operations -
Three Months Ended March 31, 1996 and
March 31, 1997.........................................4
Condensed Statement of Changes In
Stockholders' Equity For The Period
January 1, 1997 to March 31, 1997......................5
Condensed Statement of Cash Flows -
Three Months Ended March 31, 1996 and
March 31, 1997.........................................6
Summary of Accounting Policies.........................7
Notes To Condensed Financial Statements...............10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS..................15
PART II - OTHER INFORMATION
Items 1 through 5 are not applicable for the quarter ended
March 31, 1997.
Item 6 No reports on Form 8-K were required to be filed during
the quarter ended March 31, 1997.
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<TABLE>
UStel, Inc.
Balance Sheets
<CAPTION>
December 31, March 31,
1996 1997
ASSETS
Current Assets
<S> <C> <C>
Cash $ 225,926 $ 736,902
Accounts receivable, less allowance for
doubtful accounts of $1,123,000 and
$893,000 6,876,465 6,909,943
Prepaid expenses 376,331 326,409
---------- ----------
Total current assets 7,478,722 7,973,254
---------- ----------
Property and equipment
Office furniture and equipment 2,537,268 2,718,977
Leasehold improvement 180,012 187,557
---------- ----------
2,717,280 2,906,534
Less accumulated depreciation (471,449) (552,405)
---------- ----------
Net property and equipment 2,245,831 2,354,129
---------- ----------
Related party receivables 301,475 321,382
Other receivables, less allowance for
doubtful accounts of $744,000 and
$529,000, respectively 138,936 143,871
Start-up costs less accumulated amortization
of $78,696 and $83,614 19,673 14,755
Deferred charges 1,182,308 550,222
----------- -----------
Total Assets $11,366,945 $11,357,612
=========== ===========
<FN>
See accompanying summary of accounting policies and notes to financial
statements.
</TABLE>
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<TABLE>
UStel, Inc.
Balance Sheets
<CAPTION>
December 31, March 31,
1996 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
<S> <C> <C>
Notes payable to bank $ 2,225,608 $ 1,418,041
Notes payable to related parties 84,000 0
Notes payable - others 4,907,239 0
Accounts payable 1,178,818 628,838
Accrued revenue taxes 232,999 101,451
---------- -----------
Total current liabilities 8,628,664 2,148,330
Convertible subordinated debentures 500,000 500,000
---------- -----------
Total liabilities 9,128,664 2,648,330
---------- -----------
Commitments and contingencies
Stockholders' equity
Series A Convertible Preferred Stock,
$.01 par value, 5,000,000 shares
authorized and 550,000 shares
outstanding (Liquidation
Preference $3,000,000) 5,500 5,500
Common stock, $.01 par value, 40,000,000
shares authorized; 2,126,951 and
5,031,851 shares issued and
outstanding 21,269 50,319
Additional paid-in capital 7,710,561 14,310,654
Accumulated deficit (5,499,049) (5,657,191)
----------- -----------
Total stockholders' equity 2,238,281 8,709,282
----------- -----------
Total Liabilities and Stockholders'
Equity $11,366,945 $11,357,612
=========== ===========
See accompanying summary of accounting policies and notes to financial
statements.
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</TABLE>
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<TABLE>
UStel, Inc.
Condensed Statements of Operations
(Unaudited)
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1997
------------ -----------
<S> <C> <C>
Revenues $ 4,903,267 $5,887,745
----------- -----------
Operating expenses
Cost of services sold 3,384,533 4,359,838
Selling 457,825 611,219
General and administrative 906,996 815,106
Depreciation and amortization 60,989 85,875
----------- ----------
Total operating expenses 4,810,343 5,872,038
----------- ----------
Income from operations 92,924 15,707
Interest expense, net of interest income (91,525) (173,849)
----------- ----------
Net Income (Loss) $ 1,399 $ (158,142)
=========== ==========
Net Income (Loss) per share:
Primary $ 0.001 $ (0.044)
======== =========
Fully Diluted $ 0.0005
========
Weighted average number of common
shares outstanding:
Primary 1,737,778 3,578,851
========= =========
Fully Diluted 3,084,265
=========
<FN>
See accompanying summary of accounting policies and notes to financial
statements.
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</TABLE>
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<TABLE>
UStel, Inc.
Statements of Changes in Stockholders' Equity
For The Period January 1, 1997 to March 31, 1997
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
<C> <C>
Balance, January 1, 1997 550,000 $ 5,500 2,126,851 $ 21,269 $ 7,710,561 $(5,499,049) $ 2,238,281
Public Offering of
Common Stock and
Warrants 2,905,000 29,050 8,685,950 8,715,000
Costs of Public
Offering (2,085,857) (2,085,857)
Net Loss For Period (158,142) (158,142)
------- ------- --------- -------- ----------------------- -----------
Balance, March 31, 1997 550,000 $ 5,500 5,031,851 $ 50,319 $14,310,654 $(5,657,191) $ 8,709,282
======= ======= ========= ======== ======================= ===========
<FN>
See accompanying summary of accounting policies and notes to financial statements.
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</TABLE>
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<TABLE>
UStel, Inc.
Condensed Statements of Cash Flows
Increase (Decrease) in Cash
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1997
------------ ------------
<S> <C> <C>
Net Income (Loss) $ 1,399 $ (158,142)
Adjustments to reconcile net income
(loss) to net cash
used in operating activities:
Depreciation and amortization 60,989 85,875
Provisions for losses on accounts
receivable 116,832 145,186
Change in operations-assets and
liabilities:
Accounts receivable (342,140) (178,663)
Due from related parties 16,429 (19,906)
Other receivables 0 (4,935)
Prepaid expenses and other (9,135) 49,923
Accounts payable and accrued expenses (572,379) (681,530)
Other (539,201) (59,587)
----------- -----------
Net cash used in operating
activities (1,267,206) (821,779)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (60,360) (189,254)
----------- -----------
Net cash used in investing activities (60,360) (189,254)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable - related
parties 200,000 24,500
Proceeds from notes payable - others 5,571,663 5,850,274
Public offering of common stock and
warrants, net 0 7,368,815
Payments on debt-related parties 0 (108,500)
Payments on debt-others (5,397,420) (11,613,080)
----------- -----------
Net cash provided by financing
activities 374,243 1,522,009
----------- -----------
Net increase (decrease) in cash (953,323) 510,976
Cash, beginning of period 1,024,628 225,926
----------- -----------
Cash, end of period $ 71,305 $ 736,902
=========== ===========
Supplemental information:
Interest paid $ 159,355 $ 365,493
Income taxes paid 2,018 1,973
See accompanying summary of accounting policies and notes to financial statements.
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</TABLE>
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UStel, Inc.
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, Puerto Rico, and
the Virgin Islands. On January 12, 1994, the Company effected a recapital-
ization of its capital stock in connection with its re-incorporation in
Minnesota. In connection with the recapitalization, the Company exchanged
all its outstanding common shares (1,000 shares) for 950,000 shares of the
reincorporated company's common shares. Accordingly, the financial statements
were retroactively restated.
Revenue Recognition
Revenue is recognized upon completion of the telephone call.
Property And Equipment
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. Leasehold improvements are amortized over the shorter
of the estimated life of the asset or the term of the lease.
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 are
charged against paid-in capital if the offering with which they are associated
is consummated. If the offering is not consummated, such costs are charged
to operations during the period when it becomes evident that the offering 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
benefits associated with these costs are expected to be realized and
therefore deferral and amortization are 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 effects, 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.
Earnings Per Share
Earnings per share are computed based upon the weighted average number of
common shares outstanding during the periods. Common stock equivalents
relating to stock options, warrants and convertible preferred stock are not
included in the computation at times when their effect is anti-dilutive.
Use of Estimates
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UStel, Inc.
Summary of Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles requires 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.
Concentrations of Credit Risks
The Company maintains cash balances at one financial institution. Deposits
not to exceed $100,000 are insured by the Federal Deposit Insurance
Corporation. At March 31, 1997, the Company has uninsured cash in the
amount of approximately $676,483.
Stock-based Compensation
Statements of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123) 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. The Company adopted this accounting standard on January 1, 1996.
SFAS 123 also encourages, but does not require companies to record compensation
cost for stock-based employee compensation. The Company has chosen to continue
to account for stock-based compensation utilizing the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, compensation cost for stock options
is measured as the excess, if any, of the fair market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire
the stock.
New Accounting Pronouncements
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS No. 125) issued by the Financial Accounting Standards Board (FSAB) is
effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. The
new standard provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. The Company
does not expect adoption to have a material effect on its financial position
or results of operations.
On March 3, 1997, the FASB issued Statement of Financial Accounting Standards
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UStel, Inc.
Summary of Accounting Policies
No. 128, "Earnings Per Share" (SFAS No. 128). This pronouncement provides a
different method of calculating earnings per share than is currently used in
accordance with APB No. 15, "Earnings Per Share". SFAS No. 128 provides for
the calculation of Basic and Diluted earnings per share. Basic earnings per
share includes no dilution and is computed by dividing income available to
common shareholders by the weighted average number of shares outstanding for
the period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted earnings per share. This pronouncement is effective for fiscal years
and interim periods ending after December 15, 1997; early adoption is not
permitted. The Company has not determined the effect, if any, of adoption on
its earnings per share computations.
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:
Cash, Restricted Cash, Accounts Receivable and Accounts Payable
The carrying amount approximates fair value due to the short maturity of
those instruments.
Notes Payable
The fair value of the Company's notes payable is based on quoted market prices
for similar issues of debt with similar remaining maturities.
Convertible Debenture
The fair value of the Company's convertible debentures is estimated based upon
current market borrowing rates for loans with similar terms and maturities.
Reclassifications
Certain financial statement items have been reclassified to conform to the
current year's presentation.
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UStel, Inc.
Notes to Financial Statements
Note 1 - Deferred Charges
Deferred charges consist of the following:
December 31, March 31,
1996 1997
Development costs $ 131,437 $ 199,938
Offering costs 739,672 0
Loan fees 183,153 183,153
Calling card program 138,108 138,108
Deposits and other 128,202 176,426
---------- ----------
1,320,572 697,625
Accumulated amortization (138,264) (147,403)
---------- ----------
$1,182,308 $ 550,222
========== ==========
Note 2 - Notes Payable to Bank
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 up to 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 December 31, 1996 and March 31, 1997
were $2,225,608 and $1,418,041, respectively.
Note 3 - Related Party Transactions
(a) Related Parties Receivables
At December 31, 1996 and March 31, 1997, the Company has amounts due from
various related parties relating to loans as follows:
December 31, March 31,
1996 1997
Loans:
Related entities..........................$ 26,371 $ 26,884
Officers and former officers ............. 274,330 292,873
Employees................................. 774 1,624
---------- ----------
$ 301,475 $ 321,381
========== ==========
(b) Related Parties Payable
During February, 1996 the Company borrowed $400,000 from a related party.
The note was payable on demand and bore interest at 12% per annum. In June,
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UStel, Inc.
Notes To Financial Statements
Note 3 - Related Party Transactions (Continued)
1996, $116,000 of this borrowing was repaid. An additional repayment of
$200,000 was made in August 1996. Interest was payable at the earlier of
maturity or repayment of the full amount borrowed. The amount outstanding at
December 31, 1996 was $84,000. This loan was repaid in February, 1997.
(c) Shares Issued to Officer/Employee
On January 1, 1996 the Company issued warrants for the purchase of up to
200,000 shares of the Company's common stock in connection with the employ-
ment of the Company's Vice-President and General Counsel. Also in September
1996 the Company issued warrants for the purchase of up to 100,000 shares of
the Company's stock in connection with the employment of the Company's
representative in Israel. These warrants are issued at an exercise price
of $5.00 per share, which was the fair value at the date of the grant, and
are exercisable upon issuance.
(d) Sales Agent
In August, 1994 the Company retained an independent sales representative,
Consortium 2000, Inc., on a commission basis. As part of the consideration
for its engagement, the Company agreed to issue the sales agent warrants to
purchase up to 300,000 shares of common stock. These warrants are
exercisable in increments of 50,000 shares upon the Company reaching certain
monthly revenue milestones for four years from the date of issuance. The
minimum exercise price of warrants is $7.50 per share and increases depending
on when specified monthly revenue milestones are met. On August 14, 1996, the
Company and Consortium 2000, Inc. entered into a Merger Agreement and Plan of
Reorganization. Under the terms of the Agreement (a) the Company will merge
with Consortium 2000, Inc., with the Company being the surviving corporation
in the merger, and (b) all of 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 Agreement, Consortium 2000, Inc. will become a
wholly-owned subsidiary of the Company. The transaction is expected to be
completed in mid-1997. The previously mentioned 300,000 warrants will be
canceled upon consummation of the merger. Royce Diener is Chairman of the
Board of Consortium 2000, Inc.
(e) Financial Consultant
Effective as of September 1995, the Company engaged the Diener Financial
Group, a company wholly-owned by Robert L.B. Diener, who is the son of Royce
Diener, a director of the Company. For assisting the Company in connection
with a private placement, the Company paid Robert L. B. Diener 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. Robert L. B. Diener
is now Chief Executive Officer of the Company.
Note 4 - Notes Payable - Others
During June 1996 the Company borrowed $1,200,000 from an unrelated party. The
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UStel, Inc.
Notes To Financial Statements
Note 4 - Notes Payable - Others (Continued)
one year note bore interest at the annual rate of 12% and was 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 the purchase of 120,000 common
shares were issuable at the time the loan was funded. Additional warrants
were to become issuable in increments of 60,000 common shares each at intervals
of ninety days after funding of the loan so long as the loan remained unpaid.
The amount outstanding at December 31, 1996 was $1,200,000. This loan was
paid off in February 1997. Total warrants of 240,000 had been granted as
of the date this loan was paid off.
As of September 9, 1996, the Company was indebted for transmission service to
WilTel, its primary long distance carrier, in the amount of $5,595,963 (before
application of certain volume discounts available under the transmission
service contract). Payment of this amount was settled by payment of $1,000,000
on September 9, 1996, the Company's agreement to pay an additional $735,688 by
September 27, 1996, and the Company's agreement to execute a promissory note
in the amount of $3,860,275. In connection with this agreement, the Company
had further agreed to pay future WilTel invoices within 30 days of
presentation. The initial due date of the promissory note was November 14,
1996, and it was later extended to December 31, 1996 and February 28, 1997.
The note bore interest at the rate of 15% per annum through November 14, 1996
and 18% thereafter and was secured by a second lien on all the Company's
assets. The promissory note was also guaranteed by Consortium 2000 and secured
by certain assets of Consortium 2000. The amount outstanding on the promissory
note at December 31, 1996 was $3,707,239. On February 28, 1997, the principal
balance and accrued interest under the promissory note was paid in full from
proceeds of the Company's public offering.
Note 5 - Commitments And Contingencies
Operating Leases
The Company occupies certain office and switching facilities under operating
leases expiring on various dates through 1998 with options to renew on
switching facilities. Insurance and maintenance expenses covering these
facilities are the Company's obligations.
Future minimum lease commitments were as follows:
Years Ended Office Switching Total
December 31, Space Space Amount
1997 $ 26,948 $ 71,926 $ 98,874
1998 26,948 29,964 56,912
1999 26,948 -0- 26,948
2000 26,948 -0- 26,948
2001 4,491 -0- 4,491
-------- --------- ---------
$112,283 $ 101,890 $ 214,173
======== ========= =========
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UStel, Inc.
Notes To Financial Statements
Note 6 - Convertible Subordinated Debentures
In January 1994, the Company issued 12% Convertible Subordinated Debentures
("Debentures") in the aggregate amount of approximately $500,000. The
Debentures bear interest at the rate of 12% per annum, payable on the first
day of each calendar quarter. Principal and accrued interest will be due and
payable on or before December 30, 1998. At any time prior to the payment in
full, the Debentures can be converted into shares of the Company's common
stock at the rate of $7.00 per share, subject to adjustment (as defined).
Note 7 - Preferred Stock
During September 1994, the Company issued 550,000 shares of $.01 par value
Series A Convertible Preferred Stock ("Preferred"). Each share of Preferred
entitles its holder to receive dividends at the same rate paid to common
stockholders. Unless the Company pays or declares dividends with respect to
common shares, the Company has no obligation to declare or pay dividends with
respect to the Preferred. Each share of Preferred was initially convertible
into one share of common stock, as adjusted, for such things as stock splits,
stock dividends and other similar dilutive occurrences. At any time
subsequent to October 16, 1995, each holder of record of Preferred may, at
his or her option, convert all or part of the Preferred shares held into
fully paid common shares.
On January 24, 1997, the Company agreed to amend the terms of the Series A
Convertible Preferred Stock to change the conversion ratio from 1:1 to
1.3636:1. As a result of this change, the 550,000 shares of Series A
Convertible Preferred Stock will be convertible into 750,000 shares of the
Company's Common Stock.
Note 8 - Common Stock
During 1994, the Company completed an initial public offering ("IPO"), of
650,000 shares of the Company's common stock. In connection with the IPO
described above, the Company granted to the underwriter, warrants to acquire
65,000 shares of the Company's common stock. The warrants are exercisable for
a period of four years commencing one year after the date of the prospectus
(June 22, 1994) at an exercise price of $6.25 (125% of the public offering
price). This warrant is outstanding as of March 31, 1997.
In February 1997, the Company completed the sale of 1,452,500 units, each
unit consisting of two shares of common stock and one redeemable common stock
purchase warrant, for $6.00 per unit. The net proceeds to the Company were
approximately $6,629,000 after deduction of offering costs and expenses.
Each warrant entitles the registered holder thereof to purchase, at any time
until February 14, 2002, one share of common stock at a price of $4.00 per
share. The warrants are subject to redemption by the Company at $0.01 per
warrant on 30 days' prior written notice to the warrantholders if the closing
bid price of the common stock as reported on the Nasdaq SmallCap Market
averages or exceeds $6.00 for a period of 20 consecutive trading days ending
within 30 days prior to the date of notice of redemption.
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UStel, Inc.
Notes To Financial Statements
Note 9 - Income Taxes
At March 31, 1997, the Company has available net operating loss carry-
forwards of approximately $7,722,218 for income tax purposes, which expire
in varying amounts through 2011. Federal tax rules impose limitations on the
use of net operating losses following certain changes in ownership. Such a
change in control occurred during 1994. As a result, $3,208,000 of the net
operating loss carry-forwards are subject to limitation. The net operating
loss carryover may be utilized at a rate of approximately $402,000 per year.
The net operating loss carry-forward generated a deferred tax asset of
approximately $3,547,850. The deferred tax asset was not recognized since it
is more likely than not that they will not be realized accordingly, a 100%
valuation allowance was provided.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
General
The following discussion should be read in conjunction with the
Company's Financial Statements and the Notes thereto and the other financial
data included elsewhere in this report. This report contains forward-looking
statements that involve risks and uncertainties. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements.
On August 14, 1996, a change of control of UStel occurred as a result
of the purchase of a substantial portion of the shares owned by the founders
of the Company at an adjusted price of $5.00 per share by the Palisades USTL
Trust, an investment group principally comprising shareholders of Consortium
2000. Coincident with this transaction, a new management team was appointed.
Since its appointment, the new management team has undertaken to restructure
the Company's relationship with its underlying long distance carrier,
refocus marketing activities, implement a new network development strategy
which will convert the majority of the Company's traffic from switched
access to dedicated access, improve billing and collections and customer
service, reduce cost of operations and develop a viable strategy for the
future.
With the addition of the Consortium 2000 marketing organization,
the Company believes that it is well-positioned to continue to grow in
the future.
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 $10,000 to approximately
$2,000,000 in March, 1997. In addition, the number of subscribers to the
Company's long distance telephone service has grown to in excess of 20,000
at March 31, 1997.
On August 14, 1996, UStel, Consortium 2000, Inc. entered into a Merger
Agreement and Plan of Reorganization with the execution of a Letter of Intent.
Under the terms of the Letter of Intent (a) the Company will merge with
Consortium 2000, Inc., with the Company being the surviving corporation in the
merger, and (b) all of 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 Letter of Intent Consortium 2000, Inc., will
become a wholly-owned subsidiary of the Company. The transaction is
expected to be completed in mid-1997.
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 telephone companies such as USWest and Pacific Telesis,
combined with the cost of utilizing usage-sensitive transmission facilities
and leasing long-haul bulk transmission lines from facilities-based carriers.
The Company's profit margin depends, among other things, on the volume
of its operations, on the type of services provided and on the mix between use
of usage-sensitive transmission facilities and long-haul bulk transmission
-15-
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<PAGE>
lines. Initial increases in volume may increase the use of usage-sensitive
transmission facilities relative to fixed rate bulk 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 long-haul bulk transmission
facilities at relatively low volumes of activity.
Comparison of Results of Operations--Three Months Ended March 31, 1997 Compared
to Three Months Ended March 31, 1996.
Revenues for the three months ended March 31, 1997 were $5,887,745
as compared to $4,903,267 for the three months ended March 31, 1996. The
increase in revenues in 1997 was the result of expansion from a customer base
of 9,000 at January 1, 1996 to a customer base in excess of 20,000 at
March 31, 1997.
Cost of services sold for the three months ended March 31, 1997 was
$4,359,838 as compared to $3,384,533 for the three months ended March 31, 1996.
The increase in cost of services sold, similar to the increase between periods
in revenue, was the result of the expansion in the Company's customer base.
Cost of services sold for the three months ended March 31, 1997 was 74.0% of
the revenues produced in the three months ended March 31, 1997. Cost of
services sold for the three months ended March 31, 1996 was 69.0% of the
revenues produced in that period of 1996. This increase in the cost of
services sold, as a percentage of revenues, reflects the increasing competition
in the long distance telecommunications marketplace in the past fifteen months
and the Company's need to shift to products with less gross margin to enable
it to compete.
General and administrative expenses for the three months ended March 31,
1997 were $815,106 as compared to $906,996 for the three months ended March 31,
1996. The decrease in general and administrative expenses reflects the impact
of new management and its programs for cost reduction since August 1996.
Selling expenses for the three months ended March 31, 1997 were $611,219
as compared to $457,825 for the three months ended March 31, 1996. The
increase in selling expenses reflects the costs associated with the expansion
and retention of the Company's customer base from commencement through March
31, 1997.
Depreciation and amortization for the three months ended March 31, 1997
was $85,875 as compared to $60,989 for the three months ended March 31, 1996.
Amortization of the Company's start-up cost asset was $4,917 for both the
three month periods ended March 31, 1997 and March 31, 1996, respectively.
Depreciation for the three months ended March 31, 1997 was $80,958 as compared
to $56,072 for the three months ended March 31, 1996.
The increase in depreciation was 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 $1,604,000 at December 31, 1995 to approximately
$2,906,000 at March 31, 1997.
During the three months ended March 31, 1997 the Company reported income
-16-
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<PAGE>
from operations of $15,707 versus income from operations of $92,924 for the
three months ended March 31, 1996.
Interest expense for the three months ended March 31, 1997 was $185,741
as compared to $124,197 for the three months ended March 31, 1996. In December,
1995, the Company obtained a senior credit facility (the "Credit Facility")
from a finance company in the amount of up to $5,000,000. This Credit Facility
bears interest at the Bank of America Reference Rate plus 2% per annum, with a
minimum of $15,000 interest expense per month. Interest expense charged on the
Credit Facility for the three months ended March 31, 1997 was $71,415 including
amortization of related loan fees over thirty-six months.
Interest income for the three months ended March 31, 1997 was $11,892
principally from the Company's accrual of interest on related party loans, as
compared to $32,672 for the three months March 31, 1996, when interest income
also included earnings from certificates of deposit.
During the three months ended March 31, 1997, the Company reported a net
loss of $158,142 versus net income of $1,399 for the three months ended March
31, 1996.
Liquidity and Capital Resources
The Company's working capital position at March 31, 1997 was approximately
$5,825,000. During the three months ended March 31, 1997, the Company utilized
net cash of $821,779 for operating activities.
Because the Company has not yet completed installation of an in-house
billing system, it is dependent upon a third-party billing services provider
to send out bills to the Company's customers for usage of the services
provided by the Company. Because of the reliance on an outside billing
service it is uneconomical for the Company to render bills more frequently
than once a month. Typically, this results in bills for services being mailed
out between 10 to 20 days after the end of the month in which the services are
rendered. The Company is generally required to pay for the use of third-party
long distance lines within 30 days of the end of month in which the service is
rendered. This strains the Company's working capital as it is required to seek
sources for financing the differences between the payables and receivables.
At March 31, 1997, the Company's accounts receivable, net of
allowance for doubtful accounts, was $7,053,813. In addition, through
March 31, 1997, the Company had invested $2,718,977 in switching and
related equipment and in computer hardware and software.
To raise funds to meet cash needs for operations and fixed asset
acquisitions, the Company has relied upon an initial public offering of
units comprising common stock and warrants, a secondary public offering of
common stock, a private placement of Series A Preferred Stock, a private
placement of convertible subordinated debentures, a private placement of
units comprised of common stock and warrants, a revolving credit facility
and periodic bridge financings.
In December, 1995, the Company obtained the Credit Facility in the
amount of up to $5,000,000 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 Credit Facility is secured by
-17-
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<PAGE>
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 $5,000,000 or up to 85% of the Company's eligible
receivables. Subject to the $5,000,000 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 $1,500,000 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 March 31, 1997 was $1,418,041;
however, the line was only approximately 70% drawn at that point.
In February, 1996, the Company borrowed $400,000 from Kamel B. Nacif,
the holder of the Company's Series A Preferred Stock. This loan was payable
on demand and bore interest at the annual rate of 12%. At December 31, 1996,
the unpaid balance was $84,000. This loan was paid off in February 1997. In
addition, an 8% loan fee was paid at maturity.
In June, 1996, the Company borrowed $1,200,000 from an unrelated party.
The one-year note bore interest at the annual rate of 12% and was unsecured.
Interest was payable at maturity. In conjunction with this loan the Company
agreed to issue warrants for the acquisition of up to 540,000 shares of its
common stock at a price of $5.00 per share. Warrants for the purchase of
120,000 shares of common stock were issuable at the time the loan was funded.
This loan was paid off in February 1997. At the time of repayment the lender
was entitled to warrants to purchase 240,000 shares of the Company's common
stock.
As of September 9, 1996, the Company was indebted for transmission
service to WilTel, its primary long distance carrier, in the amount of
$5,595,963 (before application of certain volume discounts available under
the transmission service contract). Payment of this amount was settled by
payment of $1,000,000 on September 9, 1996, the Company's agreement to pay
an additional $735,688 by September 27, 1996 and the Company's agreement
to execute a promissory note in the amount of $3,860,275. In connection
with this agreement, the Company further agreed to pay future WilTel invoices
within 30 days of presentation. The initial due date of the promissory note
was November 14, 1996, and it was later extended to December 31, 1996 and
February 28, 1997. The note bore interest at the rate of 15% per annum
through November 14, 1996 and 18% thereafter and was secured by a second
lien on all of the Company's assets. The promissory note was also
guaranteed by Consortium 2000 and secured by certain assets of Consortium
2000. On February 28, 1997, the principal balance and accrued interest
under the promissory note was paid in full from the proceeds of a public
offering.
In February 1997 the Company successfully completed a public
offering of 1,452,500 Units (with each Unit consisting of two shares of the
Company's Common Stock plus one redeemable Common Stock Purchase Warrant) for
$6.00 per Unit less underwriters discount, commissions and offering costs.
The net proceeds to the Company were approximately $6,629,000. With the net
proceeds of this offering the Company was able to pay off all of its outstand-
ing notes payable, with the exception of its senior credit facility.
-18-
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<PAGE>
EXHIBITS INCORPORATED BY REFERENCE:
Exhibit
Number Exhibits
2 Merger Agreement and Plan of Reorganization by and among UStel,
Inc., Consortium Acquisition Corporation and Consortium 2000, Inc.
dated August 13, 1996(4)
3.1 Articles of Incorporation of the Company(1)
3.1-a,b (a) Statement of Designation of Preferences and Rights of Series
A Convertible Preferred Stock(2)
(b) Amendment to Statement of Designation of Preferences and
Rights of Series A Convertible Preferred Stock*
3.2 Bylaws of the Company(1)
4.1 Form of Certificate evidencing shares of Common Stock(l)
4.1-a Form of Warrant Agreement between the Company and American
Transfer & Trust, Inc.
4.2 Form of 12% Convertible Subordinated Debenture(1)
4.3 Form of Representative's Warrant between the Company and Barber
& Bronson Incorporated
4.4 Form of Warrant Certificate
4.5 Form of Unit Certificate
10.1 Federal Communications Commission Order, Authorization and
Certificate dated October 20, 1992(1)
10.3 Carrier Switched Services Agreement between the Company and
WilTel, Inc. dated March 10, 1993(1)
10.3.1 Collocate Agreement with WilTel, Inc., dated January 9, 1995(3)
10.5 Lease Agreement between the Company and California Mart, dated
June 11, 1993(1)
10.12-a,b,c (a) Leases for 3,400 square feet in Las Vegas, Rainbow Interim
Partners, dated June 19, 1995(3)
(b) NY Lease Forty-Seventh-Fifth Company, dated July, 1994(3)
(c) PacTel Meridian Systems, Equipment Agreement, dated April 15,
1994(3)
10.18 Employment Agreement between the Company and Noam Schwartz, dated
February 1, 1994(1)
10.19 Employment Agreement between the Company and Barry Epling,
dated December 1, 1993(1)
-19-
PAGE
<PAGE>
Exhibit
Number Exhibit
10.20 1993 Stock Option Plan(1)
10.21 Form of 1993 Option Agreement(1)
10.22 Stock Option Agreement between Noam Schwartz and Barry Epling,
dated December 1, 1993(1)
10.23 Stock Option Agreement between David Schwartz and Barry Epling,
dated December 1, 1993(1)
10.24+ Employment Agreement between the Company and Abe Sher, as of
January 4, 1996
10.24-a+ Modification to Employment Agreement between the Company and Abe
Sher.
10.25 Consulting Agreement between the Company and Integrated Financial
Consultants ("IFC"), dated November 10, 1995, and Supplement and
Cancellation of Indebtedness Agreement between the Company and
IFC dated January 10, 1996(3)
10.26 Coast Business Credit Agreement, dated as of December 21, 1995(3)
10.28 Consortium 2000 Agreement, dated as of August 5, 1994(3)
10.29 Subscription Documents, 160 Units, January 15, 1996, Form of(3)
10.30 Registered Consulting Group Agreement, dated June 20, 1994(3)
10.33 Robert L. Diener Consulting Agreements, dated November 1, 1995,
August 15, 1995(3)
10.34 Service Agreement between the Company and Cardservice
International, dated December 21, 1993(3)
10.35 Interconnect Agreement between the Company and Euronet
International, dated December 17, 1994(3)
10.37 Service Agreement between the Company and Digital Communications
of America, Inc., dated October 14, 1992(3)
10.38 Carrier Transport and Switched Services Agreement, dated December
15, 1993(4)
-20-
PAGE
<PAGE>
Exhibit
Number Exhibit
10.39 Telecommunication Services Agreement between the Company and
WilTel, Inc., dated July 25, 1994, Confidential Redacted
Version (3)
10.41 Registration Rights Agreement, dated August 14, 1996 between the
Company and Consortium 2000 Shareholders (exhibit 10.1 to the
Company's report on Form 8-K filed with the SEC on August 27,
1996)(4)
10.42 Registration Rights Agreement, dated August 14, 1996 between the
Company and Noam Schwartz, David Schwartz, the RGB 1993 Family
Trust and the TAD 1993 Family Trust (exhibit 10.2 to the Company's
report on Form 8-K filed with the SEC on August 27, 1996)(4)
10.43+ Promissory Note, and ancillary agreement, between the Company and
Kamel B. Nacif, dated February 29, 1996
10.44+ Beverly Hills Switching Equipment Letter Agreement, among the
Company, Barry Epling individually and d/b/a TYC and TYC, Inc.,
dated June 5, 1996
10.45+ Form of Employment and Non-Disclosure Agreement between the
Company and Danny Knoller, dated September 1, 1996
10.46+ Consulting Agreement between the Company and Vanguard
Consultants, Inc., dated August 1, 1996
10.47+ Indemnification Agreement between the Company and Noam Schwartz,
dated August 2, 1996
10.48+ Letter Agreement between the Company and Consortium 2000, Inc.,
dated August 7, 1996
10.49+ Amendment Number One to Loan and Security Agreement, Secured
Promissory Note and Amended and Restated Secured Promissory
Note between the Company and Coast Business Credit, dated
September, 1996
10.50+ WilTel, Inc. Extension Documents:
(a) promissory note, dated September 10, 1996
(b) security agreement, dated September 19, 1996
(c) letter agreement, dated December 27, 1996
10.51+ Sublease between Consortium 2000, Inc., and Primedex Corporation,
dated September 25, 1993
10.52+ Sales Agency Agreement between Consortium 2000, Inc., and
WorldCom, Inc., d/b/a/ LDDS WorldCom, dated June 1, 1995
Confidential Redacted Version
-21-
PAGE
<PAGE>
Exhibit
Number Exhibit
10.53+ Hertz Technologies, Inc., Marketing Agreement and Amendments No.
1 and 2 thereto, between Consortium 2000, Inc., and Hertz
Technologies, Inc., dated July 7, 1995 Confidential Redacted
Version
10.54+ Distributor Program Agreement and Amendment No. 1 and 2 thereto,
between Consortium 2000, Inc., and LCI International Telecom
Corp., dated November 3, 1994, January 31, 1996 and March 26,
1996, respectively, Confidential Redacted Versions
10.55+ Marketing Services Agreement between Consortium 2000, Inc. and
New Enterprise Wholesale Telephone Services, Limited Partnership,
dated August 15, 1994, Confidential Redacted Version
10.56+ Consortium 2000 and Call Points, Inc. Agreement between
Consortium 2000 and Call Points, Inc., dated September 7, 1995,
Confidential Redacted Version
10.57+ Client Contract among Consortium 2000, Inc., Verifications Plus
and Advanced Data Com, Inc., dated January 24, 1996, Confidential
Redacted Version
10.59+ Promissory Note, Commercial Security Agreement and Letter
Agreement between Consortium 2000, Inc., and City National Bank,
dated May 28, 1996, May 28, 1996 and May 30, 1996, respectively
10.60-a,b,c,d+(a) Letter Agreement between the Company and Jeflor, Inc.,
dated June 10, 1996
(b) Subordinated Convertible Debenture, dated June 19, 1996
(c) Warrant, dated June 21, 1996
(d) Guaranty of Loan by Noam Schwartz, Ronnie Schwartz and
Haskel Iny, dated June 17, 1996
10.61+ Form of Employment and Non-Disclosure Agreement between the
Company and Robert B. Diener, effective as of August 15, 1996
10.62+ Form of Employment and Non-Disclosure Agreement between the
Company and Jerry Dackerman, effective as of August 15, 1996
10.63+ Form of Employment and Non-Disclosure Agreement between the
Company and Wouter van Biene, effective as of August 15, 1996
10.64+ Form of Indemnification Agreement between the Company and Robert
B. Diener, effective as of August 15, 1996
10.65+ Form of Indemnification Agreement between the Company and Jerry
Dackerman, effective as of August 15, 1996
10.66+ Form of Indemnification Agreement between the Company and Wouter
van Biene, effective as of August 15, 1996
-22-
PAGE
<PAGE>
Exhibit
Number Exhibit
10.67+ Form of Financial Consulting Agreement between the Company and
BC Capital Corp.
11+ Computation of Earnings per Share
+ Previously filed as an exhibit and incorporated by reference to the
Company's Registration Statement and Amendments No. 1 through 3 on
Form SB-2 (Registration No. 333-12981) declared effective February
14, 1997.
(1) Incorporated by reference to the Company's Registration Statement and
Amendments No. 1 through No. 2 on Form SB-2 (Registration No.
33-75210-LA) declared effective June 21, 1994.
(2) Incorporated by reference to the Company's 10-KSB for the year ended
December 31, 1995, filed with the SEC on April 16, 1996 commission file
0-24098; same exhibit number.
(3) Incorporated by reference to the Company's Amendment No. 1 to 10-KSB
for the year ended December 31, 1995 filed with the SEC on August
27, 1996 commission file 0-24098.
(4) Incorporated by reference to the Company's report on Form 8-K, filed
with the SEC on August 27, 1996.
-23-
PAGE
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UStel, INC.
Date March 15, 1997 By: /s/ Robert L. B. Diener
Robert L. B. Diener
Chief Executive Officer
Date March 15, 1997 By: /s/ Wouter van Biene
Wouter van Biene
Chief Financial Officer
Date March 15, 1997 By: /s/ Richard C. Ward
Richard C. Ward
Controller
<PAGE>
/TEXT
<PAGE>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>ARTICLE 5 FIN. DATA SCHEDULE FOR MARCH 31, 1997 FORM 10-QSB
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Mar-31-1997
<CASH> 736902
<SECURITIES> 0
<RECEIVABLES> 8475814
<ALLOWANCES> 1422000
<INVENTORY> 0
<CURRENT-ASSETS> 7973254
<PP&E> 2906534
<DEPRECIATION> 552405
<TOTAL-ASSETS> 11347612
<CURRENT-LIABILITIES> 2148330
<BONDS> 500000
0
5500
<COMMON> 50319
<OTHER-SE> 8643463
<TOTAL-LIABILITY-AND-EQUITY> 11347612
<SALES> 5887745
<TOTAL-REVENUES> 5887745
<CGS> 4359838
<TOTAL-COSTS> 5872038
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (173849)
<INCOME-PRETAX> (158142)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (158142)
<EPS-PRIMARY> (0.044)
<EPS-DILUTED> 0
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