<PAGE>
USTEL, INC.
November 12, 1997
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders of
UStel, Inc. ("UStel") to be held at 10:00 a.m., local time, on December 19,
1997, at 6167 Bristol Parkway, Suite 100, Culver City, CA 90230.
At this meeting, you will be asked to consider and vote upon a proposal to
approve and adopt the Agreement and Plan of Merger dated September 25, 1997,
among UStel, Inc., Arcada Acquisition Corp. ("Merger Sub") and S.V.V. Sales,
Inc., d.b.a. Arcada Communications ("Arcada"), (the "Merger Agreement"), and
to approve the merger (the "Merger") of Merger Sub with and into Arcada
pursuant to the Merger Agreement. As a result of the Merger, Arcada
shareholders will receive between 2,100,000 and 6,300,000 shares of UStel
Common Stock, $5,000,000 in cash and $1,500,000 of Convertible Debentures. In
addition, $590,500 of outstanding Arcada shareholder loans will be exchanged
for a like amount of Convertible Debentures. The number of shares of UStel
Common Stock issuable in the Merger depends on the price performance of the
UStel Common Stock during the period from September 25, 1997 to the Closing.
For purposes of the calculations in the Proxy Statement/Prospectus, it is
assumed that 3,150,000 shares of UStel Common Stock will be issued in the
Merger and that the Average Price of a share of UStel Common Stock will be
between $2.50 and $2.00 per share during such period. As a result of the
Merger, Arcada will become a wholly-owned subsidiary of UStel.
You will also be asked to consider and vote upon a proposal to approve a
change of UStel's state of incorporation from Minnesota to California by a
merger with and into a newly formed, wholly-owned California subsidiary, which
merger (the "Reincorporation Merger") will be effected concurrently with the
Merger.
THE UStel BOARD OF DIRECTORS HAS APPROVED THE MERGER AND REINCORPORATION
MERGER AND RECOMMENDS THAT YOU VOTE FOR EACH OF SUCH PROPOSALS.
Details of the proposed Merger and other important information concerning
UStel and Arcada appear in the accompanying Proxy Statement/Prospectus. Please
give this material your careful attention.
Whether or not you plan to attend the Special Meeting, please complete, sign
and date the accompanying proxy card and return it in the enclosed prepaid
envelope. You may revoke your proxy in the manner described in the
accompanying Proxy Statement/Prospectus at any time before it has been voted
at the Special Meeting. If you attend the Special Meeting, you may vote in
person even if you have previously returned your proxy card. Your prompt
cooperation will be greatly appreciated.
Sincerely,
Robert L. B. Diener
Chairman and Chief Executive Officer
PAGE
<PAGE>
UStel, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
November 12, 1997
TO THE SHAREHOLDERS OF UStel, Inc.
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of UStel, Inc.
("UStel"), a Minnesota corporation, will be held at 10:00 a.m., local time, on
December 19, 1997, at 6167 Bristol Parkway, Suite 100, Culver City,
California, to consider and vote upon the following proposals:
1. To approve and adopt the Agreement and Plan of Merger dated as of
September 25, 1997, among UStel, Inc., Arcada Acquisition Corp. ("Merger Sub")
and S.V.V. Sales, Inc., d.b.a. Arcada Communications ("Arcada"), (the "Merger
Agreement"), and to approve the merger (the "Merger") of Merger Sub with and
into Arcada pursuant to the Merger Agreement. As a result of the Merger,
Arcada shareholders will receive between 2,100,000 and 6,300,000 shares of
UStel Common Stock, $5,000,000 in cash and $1,500,000 of Convertible
Debentures, in each case subject to certain resale restrictions and
adjustments under certain circumstances. In addition, $590,500 of outstanding
Arcada shareholder loans will be exchanged for a like amount of Convertible
Debentures. The number of shares of UStel Common Stock issuable in the Merger
depends on the price performance of the UStel Common Stock during the period
from September 25, 1997 to the Closing. For purposes of the calculations in
the Proxy Statement/Prospectus, it is assumed that 3,150,000 shares of UStel
Common Stock will be issued in the Merger and that the Average Price of a
share of UStel Common Stock will be between $2.50 and $2.00 per share during
that period. As a result of the Merger, Arcada will become a wholly-owned
subsidiary of UStel.
2. To approve a proposal to change UStel's state of incorporation from
Minnesota to California by a merger with and into a newly formed, wholly-owned
California subsidiary, which merger (the "Reincorporation Merger") will be
effected concurrently with the Merger.
3. To transact such other business as may properly come before the
meeting or any postponements or adjournments thereof.
Only shareholders of record at the close of business on November 11, 1997 are
entitled to notice of and to vote at the Special Meeting.
All shareholders are cordially invited to attend the meeting in person.
However, to ensure your representation at the meeting, you are urged to
complete, sign, date and return the enclosed proxy card as promptly as
possible in the postage-prepaid envelope enclosed for that purpose.
<PAGE>
YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE ACCOMPANYING PROXY
STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE SPECIAL
MEETING. ANY SHAREHOLDER ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON EVEN
IF HE OR SHE HAS RETURNED A PROXY.
Sincerely,
Robert L.B. Diener
Chairman, Chief Executive Officer
Culver City, California
November 12, 1997
PAGE
<PAGE>
UStel, INC.
PROXY STATEMENT
PROSPECTUS
This Proxy Statement/Prospectus is being furnished to holders of common stock,
par value $.01 per share, of UStel, Inc. ("UStel Common Stock"), a Minnesota
corporation ("UStel"), in connection with the solicitation of proxies by the
Board of Directors of UStel (the "UStel Board") for the use at the Special
Meeting of the Shareholders of UStel (the "UStel Shareholders"), to be held at
10:00 a.m., local time, on December 19, 1997, or at any adjournments or
postponements thereof, for the purposes set forth herein and in the
accompanying Notice of Special Meeting of Shareholders of UStel (the "UStel
Special Meeting"). The UStel Special Meeting will be held at 6167 Bristol
Parkway, Suite 100, Culver City, California 90230.
This Proxy Statement/Prospectus constitutes a prospectus of UStel with respect
to the shares of UStel Common Stock to be issued in connection with the merger
(the "Merger") of Arcada Acquisition Corp. a Washington corporation and
wholly-owned subsidiary of UStel ("Merger Sub"), with and into S.V.V. Sales,
Inc., a Washington corporation, d.b.a. Arcada Communications ("Arcada")
pursuant to the Agreement and Plan of Merger, dated September 25, 1997, among
UStel, Merger Sub and Arcada, substantially in the form attached hereto as
Appendix A (the "Merger Agreement"). As a result of the Merger, Arcada will
become a wholly-owned subsidiary of UStel . Upon the effectiveness of the
Merger, the outstanding shares of Arcada Common Stock will be converted into
the right to receive in the aggregate, between 2,100,000 and 6,300,000 shares
of UStel Common Stock, $1,500,000 of Convertible Debentures and $5,000,000 in
cash. In addition, $590,500 of outstanding Arcada shareholder loans will be
exchanged for a like amount of Convertible Debentures. The number of shares
of UStel Common Stock issuable in the Merger depends on the price performance
of the UStel Common Stock during the period from September 25, 1997 to the
Closing. For purposes of the calculations in the Proxy Statement/Prospectus,
it is assumed that 3,150,000 shares of UStel Common Stock will be issued in
the Merger and that the Average Price of a share of UStel Common Stock will be
between $2.50 and $2.00 per share during that period. All information
contained in this Proxy Statement/Prospectus relating to UStel has been
supplied by UStel and all information contained herein relating to Arcada has
been supplied by Arcada.
On June 3, 1997, the last trading day prior to announcement of the Merger, the
closing sale price on the Nasdaq Small Cap Market ("Nasdaq") of UStel Common
Stock was $4.125. On November 6, 1997, the closing sale price on Nasdaq
of UStel Common Stock was $1.50.
SEE "RISK FACTORS" COMMENCING ON PAGE 13 FOR A DESCRIPTION OF CERTAIN RISKS
INVOLVED IN THE MERGER.
This Proxy Statement/Prospectus, the accompanying form of proxy and the other
enclosed documents are first being mailed to shareholders of UStel on or about
November 12, 1997.
PAGE
<PAGE>
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Proxy Statement/Prospectus is November 12, 1997.
PAGE
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION 1
SUMMARY 2
THE COMPANIES 2
UStel and Arcada Acquisition Corp. 2
Arcada 2
Date and Place of the Meeting 3
Purpose of the Meeting 3
Vote Required 3
Security Ownership of Management 3
The Merger 4
Recommendations 5
MARKET PRICES 8
SUMMARY CONSOLIDATED FINANCIAL DATA
OF UStel, INC. 9
SUMMARY CONSOLIDATED FINANCIAL DATA
OF ARCADA COMMUNICATIONS 10
SUMMARY PRO FORMA CONDENSED FINANCIAL DATA 11
RISK FACTORS 14
THE UStel SPECIAL MEETING 20
THE MERGER 22
THE MERGER AGREEMENT 37
BUSINESS OF Ustel 42
BUSINESS OF ARCADA 62
UStel MANAGEMENT 77
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants) 81
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
(Individual Grants) 81
PRINCIPAL SHAREHOLDERS 82
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 84
ARCADA MANAGEMENT 87
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS OF ARCADA 88
MANAGEMENT AND OPERATIONS OF USTEL FOLLOWING THE MERGER 89
THE REINCORPORATION MERGER 90
DESCRIPTION OF UStel SECURITIES 94
SHARES ELIGIBLE FOR FUTURE SALE 98
DESCRIPTION OF CAPITAL STOCK OF ARCADA 99
EXPERTS 100
LEGAL MATTERS 100
OTHER INFORMATION AND STOCKHOLDER PROPOSALS 100
UStel, INC. INDEX TO FINANCIAL STATEMENTS F-1
UStel, INC. PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED) F-3
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-9
PAGE
<PAGE>
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY UStel OR ARCADA. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY, ANY SECURITIES, NOR DOES IT CONSTITUTE THE SOLICITATION OF
A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO
MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY
OF THE PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF UStel OR ARCADA SINCE THE DATE HEREOF OR THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
UStel is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended ("the 1934 Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and
other information can be inspected and copied at the public reference
facilities maintained by the Commission at its principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
Regional Offices of the Commission: in Denver, 1801 California Street, Suite
4800, Denver, Colorado 80202; in Chicago, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; in New York, Seven World Trade Center, Suite 1300,
New York, New York 10048. Copies of such materials can be obtained at
prescribed rates by written request addressed to the Commission, Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission also maintains a Web Site that contains reports, proxy and
information statements and other information regarding registrants, including
UStel that file electronically with the Commission at http://www.sec.gov.
UStel has filed with the Commission in Washington, D.C. a Registration
Statement on Form S-4 (together with all amendments, supplements, and exhibits
thereto, referred to as the "Registration Statement") under the Securities Act
of 1933, as amended, (the "1933 Act") with respect to the UStel Common Stock
and the UStel Common Stock issuable upon conversion of the Convertible
Debentures to be issued in the Merger. This Proxy Statement/Prospectus does
not contain all the information set forth in the Registration Statement and
the exhibits thereto. Such additional information may be obtained from the
Commission's principal office in Washington D.C. Statements contained in this
Proxy Statement/Prospectus or in any document incorporated in this Proxy
Statement/Prospectus by reference as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
PAGE
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
PROXY STATEMENT/PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN THIS
PROXY STATEMENT/PROSPECTUS AND THE APPENDICES HERETO. AS USED HEREIN, UNLESS
THE CONTEXT OTHERWISE REQUIRES, "UStel" MEANS UStel, INC. AND ITS CONSOLIDATED
SUBSIDIARIES AND, AFTER GIVING EFFECT TO THE REINCORPORATION MERGER, UStel
CALIFORNIA, "ARCADA" MEANS S.V.V. SALES, INC., WHICH DOES BUSINESS AS ARCADA
COMMUNICATIONS, AND "MERGER SUB" MEANS ARCADA ACQUISITION CORP., A
WHOLLY-OWNED SUBSIDIARY OF UStel.
UStel AND ARCADA SHAREHOLDERS ARE URGED TO READ THIS PROXY
STATEMENT/PROSPECTUS AND THE APPENDICES HERETO IN THEIR ENTIRETY.
SHAREHOLDERS OF EACH COMPANY SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION
SET FORTH BELOW UNDER THE HEADING "RISK FACTORS."
THE COMPANIES
UStel and Arcada Acquisition Corp.
UStel, Inc. ("UStel") provides long distance telecommunications services,
consisting primarily of direct dial long distance telephone transmissions, to
small and medium sized commercial and larger residential customers throughout
the United States. The Company also offers a variety of service options,
including "1+" dialing, "800" service, calling cards, operator services,
private line networks and data transmission. With the acquisition in July
1997 of Pacific Cellular, a Las Vegas-based reseller of wireless
communications, the Company also offers discount cellular and paging services
to commercial and residential customers. Since commencing operations in
January, 1993, UStel's subscriber base has grown to in excess of 25,000
customers as of June 1997, consisting primarily of medium-sized businesses.
In addition, the Company's monthly revenues have increased from approximately
$10,000 in January, 1993 to approximately $1,875,000 as of June 1997.
UStel was incorporated in California on March 11, 1992, as U.S. Tel, Inc. and
changed its corporate name to UStel, Inc. on April 20, 1992. The Company
commenced operations as a long distance carrier in January 1993. On January
4, 1994, the Company effected a recapitalization of its capital stock in
connection with its merger to reincorporate in Minnesota prior to its initial
public offering of Common Stock. Its corporate headquarters are located at
6167 Bristol Parkway, Suite 100, Culver City, California 90230 and its
telephone number is (310) 645-1770.
Merger Sub was organized as a Washington corporation in 1997 for the purpose
of consummating the Merger contemplated by the Merger Agreement. Merger Sub
has nominal assets and has not carried on any activities to date other than
incident to its formation and in connection with the Merger. Merger Sub's
corporate offices are located at 6167 Bristol Parkway, Suite 100, Culver City,
California 90230.
For additional information concerning UStel, see "AVAILABLE INFORMATION,"
"REINCORPORATION MERGER" "UStel MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS" and "UStel
MANAGEMENT."
Arcada
Arcada was organized under the laws of the State of Washington in 1987 as
S.V.V. Sales, Inc. It is currently engaged in the provision of long-distance
voice and data telecommunication services in 17 states. Arcada offers a broad
array of services designed for the telecommunications needs of small and
mid-sized commercial customers. Arcada believes that it can provide services
to its target market at rates for long distance below those typically charged
by the major carriers. Arcada also resells cellular air time, paging services
and cellular long distance telecommunications services. Arcada's executive
offices are located at 2001 Sixth Avenue, Suite 3210, Seattle, Washington
98121-2516, telephone (206) 441-5022.
For additional information concerning Arcada, see "BUSINESS OF ARCADA,"
"ARCADA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "ARCADA MANAGEMENT."
Date and Place of the Meeting
Time and Place. The UStel Special Meeting will be held at 10:00 a.m., local
time, on December, 1997, at the offices of UStel, 6167 Bristol Parkway, Suite
100, Culver City, California 90230.
Purpose of the Meeting
At the UStel Special Meeting, the UStel Shareholders will be asked to consider
and vote upon proposals (i) to approve and adopt the Merger Agreement
(included as Appendix A to this Proxy Statement/Prospectus incorporated herein
by reference), pursuant to which, among other things, Merger Sub will be
merged with and into Arcada, with Arcada as the surviving corporation and
continuing as a wholly-owned subsidiary of UStel, and to approve the Merger
and the issuance of shares of UStel Common Stock and UStel Convertible
Debentures in the Merger, (ii) to approve a proposal to change UStel's state
of incorporation from Minnesota to California by the merger of UStel with and
into a newly formed, wholly-owned California subsidiary ("UStel -
California"), which merger will be effected concurrently with the Merger, and
(iii) to transact such other business as may properly come before the UStel
Special Meeting.
Vote Required <PAGE>
The adoption and approval of the Merger Agreement and the approval of the
Merger requires the affirmative vote of the holders of a majority of the
combined, outstanding shares of UStel Common Stock and of the UStel Common
Stock into which the UStel Series A Preferred Stock is convertible. The
adoption and approval of the Reincorporation Merger requires the affirmative
vote of the holders of a majority of the combined, outstanding shares of the
UStel Common Stock and of the UStel Common Stock into which the UStel Series A
Preferred Stock is convertible.
See "THE UStel SPECIAL MEETING"
Shareholders Entitled to Vote. The Record Date for the determination of
holders of UStel Common Stock entitled to notice of and to vote at the UStel
Special Meeting is November 11, 1997. On that date, UStel had issued and
outstanding 6,872,778 shares of UStel Common Stock, held by approximately
1,430 beneficial holders. The UStel Series A Preferred Stock is entitled to
vote along with the UStel Common Stock on an as if converted basis.
Accordingly the total shares of capital stock (Common and Preferred) entitled
to vote is 7,247,768, consisting of 6,872,778 shares of UStel Common Stock and
374,990 shares of UStel Common Stock into which the 275,000 shares of Series
A Preferred Stock is convertible.
Security Ownership of Management
As of the Record Date, directors and executive officers of UStel and their
affiliates were beneficial owners of an aggregate of 1,677,154 shares of UStel
Common Stock or approximately 24.4% of the outstanding shares of UStel Common
Stock.
The executive officers and directors of UStel who are also shareholders of
UStel have agreed to vote their shares in favor of the proposals submitted to
shareholders at the UStel special meeting. In addition, the obligations of
UStel and Arcada under the Merger Agreement are conditioned on the directors
and officers of UStel agreeing to vote their shares of UStel in favor of the
Merger. Furthermore, UStel has agreed to recommend that its shareholders vote
in favor of the Merger.
The Merger
The Merger. The Merger Agreement provides for the Merger of Merger Sub with
and into, Arcada with Arcada as the surviving entity and wholly-owned
subsidiary of UStel. As a result of the Merger, all outstanding shares of
Arcada Common Stock will be converted into the right to receive an aggregate
of between 2,100,000 and 6,300,000 shares of UStel Common Stock, $5,000,000 of
cash and $1,500,000 of Convertible Debentures. In addition, $590,500 of
outstanding Arcada shareholder loans will be exchanged for a like amount of
Convertible Debentures. The number of shares of UStel Common Stock issuable
in the Merger depends on the price performance of the UStel Common Stock
during the period from September 25, 1997 to the Closing. For purposes of the
calculations in the Proxy Statement/Prospectus, it is assumed that 3,150,000
shares of UStel Common Stock will be issued in the Merger and that the Average
Price of a share of UStel Common Stock will be between $2.50 and $2.00 per
share during that period. See "THE MERGER - General."
The Convertible Debentures will bear interest at 10% per annum and for the
first six months will be payable interest only quarterly in arrears.
Thereafter, the Convertible Debentures will amortizable and payable over a
three year term. Beginning one year after issuance, the Convertible
Debentures will be convertible to UStel Common Stock at a conversion price
equal to 150% of the Average Price of UStel Common Stock as defined below.
The conversion price is subject to adjustment under certain circumstances.
See "Description of UStel Securities -- Convertible Subordinated Debentures."
The separate existence of Merger Sub will cease upon the effectiveness of the
Merger. The articles of incorporation and bylaws of Arcada will continue to be
the articles and bylaws of the surviving entity after completion of the Merger
which will continue as a wholly-owned subsidiary of UStel. Upon the
effectiveness of the Merger, UStel will appoint the entire Arcada board of
directors. Upon consummation of the Merger, all shares of Arcada Common Stock
will automatically be canceled and will cease to exist. Each holder of a
certificate representing any shares of Arcada Common Stock will cease to have
any rights with respect thereto, except the right to receive shares of UStel
Common Stock, the cash and Convertible Debentures to be issued upon surrender
of such certificate, as described below.
Based on the number of shares outstanding on the Record Date, upon
consummation of the Merger there will be between 8,972,778 and 13,172,778
shares of UStel Common Stock outstanding and the shares of UStel Common Stock
issued to stockholders of Arcada pursuant to the Merger Agreement will
comprise between 23.40% and 47.8% of the total number of shares of UStel
Common Stock then outstanding (without giving effect to conversion of the
Convertible Debentures issued in the Merger). See "SECURITY OWNERSHIP OF
MANAGEMENT AND CERTAIN BENEFICIAL OWNERS."
No certificates for fractional shares of UStel Common Stock will be issued as
a result of the Merger. Instead, each Arcada Shareholder otherwise entitled to
a fractional share will receive cash in lieu of such fractional share in an
amount equal to the product of the fraction multiplied by the Average Price.
The Reincorporation Merger
The Reincorporation Merger will be accomplished by the merger of UStel into a
wholly-owned California subsidiary, UStel Merger Corporation, which will be
the survivor corporation and will effective on such Reincorporation Merger
change its name to UStel, Inc. Each shareholder of UStel Common Stock and
Series A Preferred Stock will, effective upon such Reincorporation Merger,
become a shareholder of UStel Merger Corporation of the same number and type
of shares owned by such shareholder in UStel immediately prior to such
Reincorporation Merger. The articles of incorporation of UStel Merger <PAGE>
Corporation will be the continuing articles of incorporation and bylaws of the
surviving corporation. Such articles of incorporation and bylaws are
substantially similar to the existing articles of incorporation and bylaws of
UStel. The existing Board of Directors and officers of UStel will remain the
Board of Directors and offices of UStel Merger Corporation.
Recommendations
The UStel Board believes that the terms of the Merger are fair to and
advisable and in the best interests of UStel Shareholders and has approved the
Merger Agreement and the Reincorporation Merger. THE UStel BOARD RECOMMENDS
THAT UStel SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE AND ADOPT THE
MERGER AGREEMENT AND TO APPROVE THE REINCORPORATION MERGER. All the UStel
Directors approved the Merger. See "THE MERGER - Recommendations of the Board
of Directors; Reasons for the Merger."
Risk Factors
In determining whether to approve the Merger Agreement, UStel and Arcada
Shareholders should consider the risks set forth under "RISK FACTORS." The
telecommunications industry is extremely competitive and evolving rapidly.
There can be no assurance that UStel, Arcada or UStel and Arcada as a combined
company will be able to compete and operate profitably in the future.
Lock-Up
As part of the Merger Agreement, the Arcada Shareholders will be restricted
from selling shares of UStel Common Stock received in the Merger and upon
conversion of the Convertible Debentures, until February 14, 1999 (the
"Lock-up") except as follows: (i) an aggregate of 105,000 shares of UStel
Common Stock may be sold after six months from the Effective Date, and (ii) an
additional 210,000 shares may be sold after one year from the Effective Date.
After February 14, 1999, there will be no further restrictions on sales of
UStel Common Stock pursuant to the terms of the Lock-up. To the extent the
Representative of the Underwriters in the UStel February 1997 public stock
offering releases other shareholders from certain lock-up agreements entered
into in connection with such public offering, the Arcada shareholders are
entitled to a pro rata release from their Lock-Up.
Dissenters' Rights. UStel Shareholders who vote against the Merger or the
Reincorporation Merger may be entitled to certain dissenters' rights under
Minnesota law. Such dissenters' rights are described under "THE MERGER -
Dissenter's Rights".
Federal Income Tax Consequences. The Merger is intended to qualify as a
nontaxable reorganization under section 368(a) of the Internal Revenue Code of
1986, as amended and in effect on the date hereof (the "Code"). Accordingly,
for federal income tax purposes, neither UStel, nor Merger Sub will recognize
any taxable gain or loss as a result of the Merger and Arcada Shareholders
will not recognize any taxable gain or loss on the conversion of their Arcada
Common Stock into UStel Common Stock pursuant to the Merger. Arcada
shareholders will recognize taxable gain or loss in connection with the
Convertible Debentures and the $5,000,000 cash to be received by them in the
Merger.
EACH HOLDER OF ARCADA COMMON STOCK SHOULD CONSULT HIS OWN TAX ADVISOR
REGARDING THE TAX CONSEQUENCES OF THE MERGER IN LIGHT OF SUCH HOLDER'S OWN
SITUATION, INCLUDING THE APPLICATION AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
INCOME AND OTHER TAX LAWS.
Accounting Treatment. The Merger will be accounted for as a "purchase" in
accordance with generally accepted accounting principles. See "THE MERGER-
Anticipated Accounting Treatment" and "UNAUDITED PRO FORMA CONDENSED FINANCIAL
INFORMATION."
The Merger Agreement
Effective Time of the Merger. The Merger will become effective at the time of
the filing and acceptance of the Articles of Merger in Washington or such
later date as is specified in such Articles (the "Effective Time"). See
"MERGER AGREEMENT" - Conditions to the Consummation of the Merger."
Conditions to the Merger. The respective obligations of UStel, Merger Sub and
Arcada to consummate the Merger are subject to various conditions, including,
among others, (i) the approval of UStel and Arcada Shareholders of the Merger,
(ii) the performance by each party to the Merger Agreement of its respective
covenants and obligations set forth therein, (iii) the continued accuracy of
each party's representations and warranties set forth in the Merger Agreement,
(iv) the absence of any order or other legal restraint or prohibition
preventing the consummation of the Merger, (v) UStel using its best efforts to
induce its directors, and officers to agree in writing to vote their shares of
UStel Common Stock in favor of the Merger, (vi) UStel having on hand the
$5,000,000 cash portion of the Merger Consideration, and (vii) UStel
maintaining its NASDAQ Small Cap listing and that its stock price be no less
than $1.00. See "THE MERGER AGREEMENT - Conditions to the Consummation of the
Merger."
Termination of the Merger Agreement. The Merger Agreement may be terminated
and the Merger abandoned at any time prior to the Effective Time (i) by mutual
consent of UStel and Arcada, (ii) by either UStel or Arcada (a) if the Merger
shall not have been consummated on or before January 31, 1998 (other than due
to the failure of the party seeking to terminate the Merger Agreement to
perform its obligations under the Merger Agreement), or (b) if the required
shareholder approval is not obtained, and (iii) by UStel, if there is a
material adverse change in the financial condition of Arcada or any material
breach by Arcada if its covenants set forth in the Merger Agreement or (iv) by
Arcada, if there is a material adverse change in the financial condition of
UStel or any material breach of UStel of its covenants set forth in the Merger
Agreement or a failure of conditions to the Merger to occur. See "THE MERGER <PAGE>
AGREEMENT - Termination."
Management Services Fees. To compensate Arcada for certain management services
rendered by Arcada to UStel in anticipation of the Merger and pursuant to a
Management Services Agreement dated June 27, 1997, UStel has agreed to pay
Arcada $125,000 if the Merger agreement is terminated for any reason. See "THE
MERGER AGREEMENT - Management Services Fees."
Regulatory Filings and Approvals
Other than certain filings to be made and approvals obtained from the Federal
Communications Commission, state public utilities commissions and the filing
of the Proxy Statement Prospectus with the Securities and Exchange Commission,
there are no federal or state regulatory requirements that must be complied
with or obtained in connection with the Merger. See "THE MERGER - Governmental
and Regulatory Approvals."
PAGE
<PAGE>
Management and Operations after the Merger
Following the Effective Time, Frank Bonadio, currently the President of
Arcada, will become President and Chief Operating Officer and a director of
UStel. See "MANAGEMENT AND OPERATIONS OF UStel FOLLOWING THE MERGER."
The Merger will combine the two companies' current operations, focusing
substantially on both companies operations in the long distance switched and
unswitched telecommunications markets and on providing cellular air time and
long distance services. Arcada believes that as a result of the Merger, more
sources of financing and acquisition opportunities will be available to it as
a publicly-held company than may be available to it as a privately-held
company. UStel and Arcada both have a fiscal year end of December 31.
Comparative Rights of Shareholders
Arcada is a Washington corporation organized under the Washington Business
Corporations Act, RCW Chapter 23B ("WBCA"). UStel - California (effective upon
the Reincorporation Merger) is a California corporation organized under the
California Corporations Code ("CCC"). The rights of UStel - California
Shareholders will be governed by the CCC and of UStel - California's Articles
of Incorporation and Bylaws. The rights of Arcada Shareholders are governed by
the WBCA and Arcada's Articles of Incorporation and Bylaws. Upon consummation
of the Merger, and assuming completion of the Reincorporation Merger, UStel
and Arcada Shareholders will become shareholders of a newly formed California
corporation, UStel - California and their rights will be governed by the CCC
and the Articles of Incorporation and Bylaws of UStel - California. Certain
differences arise from this change of governing law as well as the
distinctions between UStel - California's Articles of Incorporation and Bylaws
and the Articles of Incorporation and Bylaws of Arcada. The Articles of
Incorporation and Bylaws of UStel - California are not materially different
than those of UStel - Minnesota and, accordingly, the rights of UStel
shareholders will not be materially affected after the Reincorporation Merger.
For a summary of certain differences between the rights of holders of UStel -
California Common Stock and holders of Arcada Common Stock. See "THE
REINCORPORATION MERGER -- COMPARISON OF CORPORATION LAWS OF MINNESOTA TO
CALIFORNIA."
Resales of UStel Common Stock
The shares of UStel Common Stock to be issued to Arcada Shareholders in
connection with the Merger have been registered under the 1933 Act. However,
of up to 6,300,000 shares issued in connection with the Merger, 105,000 of
such shares will be subject to a lock-up for six months after the Merger,
210,000 of such shares will be subject to a lock-up for a period of one year
and the balance of such shares will be subject to a lock-up until February 14,
1999. All of the shares issuable upon conversion of the Convertible
Debentures will be subject to a lock-up until February 14, 1999. See "THE
MERGER - Lock-up" and "THE MERGER - Resales of UStel Common Stock by Arcada
Shareholders" for a discussion of the limitations on transfer of UStel Common
Stock held by shareholders of Arcada.
PAGE
<PAGE>
MARKET PRICES
UStel's Common Stock has traded in the over-the-counter market since June 22,
1994 and is included in the Nasdaq Small Cap Market under the symbol "USTL."
The following table sets forth for the quarters indicated the high and low
closing sale prices per share of Common Stock as reported by the Nasdaq Small
Cap Market. Prices represent inter-dealer quotations, without adjustment for
retail mark-ups, markdowns or commissions and may not necessarily represent
actual transactions.
<TABLE>
<S> <C> <C>
1994
Second Quarter (from June 22) $5.625 $5.00
Third Quarter 6.75 5.125
Fourth Quarter 7.50 6.25
1995
First Quarter $7.50 $6.00
Second Quarter 7.00 5.00
Third Quarter 6.50 4.75
Fourth Quarter 6.25 4.75
1996
First Quarter $6.50 $5.00
Second Quarter 7.00 5.75
Third Quarter 6.75 6.00
Fourth Quarter 6.00 3.13
1997
First Quarter $3.38 $2.75
Second Quarter 4.50 3.50
Third Quarter 4.00 1.75
Fourth Quarter (through October 1997) 2.62 1.93
</TABLE>
There is no public market for Arcada Common Stock.
The closing price per share of UStel Common Stock as reported by Nasdaq Small
Cap Market on June 3, 1997, the day before the public announcement of the
Merger was $4.125. The closing price of the UStel Common Stock on September
25, 1997, the date that the Merger Agreement was signed, was $1.812. As of
October 15, 1997 the 6,872,778 shares of UStel Common Stock outstanding were
held by approximately 1,430 shareholders of record and beneficially.
<PAGE> <PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
OF UStel, INC.
The following table sets forth selected consolidated historical financial data
of UStel and has been derived from and should be read in conjunction with the
audited consolidated financial statements of UStel as of and for each of the
years ended December 31, 1995 and 1996 and the unaudited interim consolidated
financial statements of UStel as of and for the six months ended June 30, 1996
and 1997. In the opinion of UStel, all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation have been
included in the unaudited interim data. Unaudited interim results are not
necessarily indicative of results which may be expected for future periods.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31 ENDED JUNE 30
1995 1996 1996 1997
<S> <C> <C> <C> <C>
Revenues $16,127,575 $ 22,026,857 $10,526,503 $11,568,447
Net Income (Loss) $ (371,711) $ (2,973,194) $ 71,965 $ (803,978)
Net Income (Loss) Per Share $ (0.23) $ (1.54) $ 0.04 $ (0.19)
Dividends Per Shares $ --- $ --- $ --- $ ---
BALANCE SHEET DATA:
DECEMBER 31 JUNE 30
1995 1996 1996 1997
Total Assets $11,978,031 $11,366,945 $14,801,610 $11,618,877
Convertible Subordinated
Debentures $ 500,000 $ 500,000 $ 500,000 $ 500,000
Stockholders' Equity $ 3,787,773 $ 2,238,281 $ 5,433,440 $ 7,779,834
</TABLE>
PAGE
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
OF ARCADA COMMUNICATIONS
The following table sets forth selected consolidated historical financial data
of Arcada and has been derived from and should be read in conjunction with the
audited consolidated financial statements of Arcada as of and for each of the
years ended December 31, 1995 and 1996 and the unaudited interim consolidated
financial statements of Arcada as of and for the six months ended June 30,
1996 and 1997. In the opinion of Arcada management, all adjustments,
consisting of normal recurring adjustments, considered necessary for a fair
presentation have been included in the unaudited interim financial statements.
Unaudited interim results are not necessarily indicative of results which may
be expected for the entire fiscal year.
<TABLE>
Statement of Operations Data
<CAPTION>
FOR FOR
THE YEAR ENDED THE SIX MONTHS
DECEMBER 31 ENDED JUNE 30
1995 1996 1996 1997
<S> <C> <C> <C> <C>
Revenues $10,954,000 $ 12,646,000 $ 6,236,000 $ 6,576,000
Net Loss $ (559,000) $ (1,285,000) $ (127,000) $ (164,000)
Dividends $ (168,000) $ --- $ --- $ (164,000)
Net Loss Per Share $(13.31) $(30.9) $(3.02) $(4.43)
BALANCE SHEET DATA:
DECEMBER 31 JUNE 30
1995 1996 1996 1997
Total Assets $4,858,000 $4,405,000 $ 5,132,716 $ 4,376,000
Long Term Debt and Capital Lease
Obligations, Net of Current
Portion $1,115,000 $ 756,000 $ (1,624) $ 1,039,000
Notes Payable to Shareholders $ 456,000 $ 294,000 $ 1,923,935 $ 376,000
Shareholders' Equity (Deficit) $ 428,000 $ (857,000) $ 291,088 $(1,185,000)
</TABLE>
PAGE
<PAGE>
SUMMARY PRO FORMA CONDENSED FINANCIAL DATA
AS MORE FULLY DESCRIBED IN THE PRO FORMA CONDENSED FINANCIAL INFORMATION
APPEARING ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS, THE UNAUDITED PRO
FORMA CONDENSED BALANCE SHEET DATA GIVES EFFECT TO (I) THE MERGER OF A
WHOLLY-OWNED SUBSIDIARY OF UStel INTO ARCADA, RESULTING FROM THE EXCHANGE OF
ARCADA COMMON STOCK FOR 3,150,000 SHARES OF UStel COMMON STOCK AND, THE
PAYMENT OF $5,000,000 IN CASH TO THE ARCADA SHAREHOLDERS AND THE ISSUANCE TO
SUCH SHAREHOLDERS OF $1,500,000 IN CONVERTIBLE DEBENTURES AND (II) THE
ACQUISITION BY UStel OF CONSORTIUM 2000, INC. WHICH OCCURRED IN JULY 1997.
THE UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS DATA FOR THE YEARS
ENDED DECEMBER 31, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 INCLUDE THE
RESULTS OF OPERATIONS OF UStel, CONSORTIUM 2000, INC. AND ARCADA FOR THE
RESPECTIVE PERIODS PRESENTED AND GIVE EFFECT TO PRO FORMA ADJUSTMENTS AS IF
THE AFOREMENTIONED TRANSACTIONS HAD OCCURRED AT THE BEGINNING OF EACH PERIOD.
THESE PRO FORMA CONDENSED FINANCIAL STATEMENTS ARE NOT NECESSARILY INDICATIVE
OF FUTURE FINANCIAL POSITIONS OR RESULTS OF OPERATIONS. THE FOLLOWING
INFORMATION SHOULD BE READ IN CONJUNCTION WITH AND IS QUALIFIED IN ITS
ENTIRETY BY THE FINANCIAL STATEMENTS OF UStel, CONSORTIUM 2000, INC. AND
ARCADA AND THE UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION APPEARING
ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS. SEE "THE MERGER -ANTICIPATED
ACCOUNTING TREATMENT," AND "UNAUDITED PRO FORMA CONDENSED FINANCIAL
INFORMATION."
<TABLE>
<CAPTION>
Pro Forma Condensed Statements of Operations Data
Year Ended Six Months Ended
December 31, 1996 June 30, 1997
<S> <C> <C>
Revenues $35,900,000 $19,100,000
Cost of Services Sold 24,035,000 12,800,000
Excess of Revenues over Cost
of Services Sold 11,865,000 6,300,000
Other Operating Expenses:
Selling, general, administrative
and other 14,071,000 7,060,000
Depreciation and amortization 1,852,000 1,011,000
Loss Before Interest and Income Taxes (4,058,000) (1,771,000)
Interest Expense, Net of Interest Income 1,427,000 685,000
Loss Before Income Taxes (5,485,000) (2,456,000)
Provision (Benefit) for Income Taxes (125,000) 1,000
Net Loss $(5,360,000) $(2,457,000)
Net Loss per common share $ (0.54) $ (0.25)
Weighted Average Number of Shares
Outstanding 10,022,778 10,022,778
</TABLE>
PAGE
<PAGE>
<TABLE>
Pro Forma Condensed Balance Sheet
<CAPTION>
ASSETS June 30, 1997
(Unaudited)
<S> <C>
Current Assets
Cash $ 964,000
Accounts receivable net of allowance for doubtful
accounts of $1,202,000 8,671,000
Prepaid Expenses 818,000
-----------
Total Current Assets 10,453,000
Property and Equipment net of depreciation of
$2,253,000 4,295,000
Related Party Receivables 329,000
Other Receivables less Allowance for Doubtful Accounts
of $529,000 238,000
Goodwill less accumulated amortization of 18,329,000
Start-up Cost less accumulated amortization
of $169,000 72,000
Deferred Charges 592,000
-----------
Total Assets $34,308,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Notes Payable to Bank $ 2,532,000
Notes Payable to Related Parties --
Notes Payable Other --
Accounts Payable 3,336,000
Accrued Expenses 1,494,000
Accrued Revenue Taxes 180,000
-----------
Total Current Liabilities 7,542,000
Convertible Subordinated Debentures 7,912,000
Other Long-Term Liabilities 1,439,000
-----------
Total Liabilities 16,893,000
Stockholders' Equity
Series A Convertible Preferred Stock 56,000
Series B Convertible Preferred Stock 15,000
Common Stock 9,620,000
Additional Paid-In Capital1 4,027,000
Accumulated Deficit (6,303,000)
-----------
Total Stockholders' Equity 17,415,000
-----------
Total Liabilities and Stockholders' Equity $34,308,000
===========
</TABLE>
<PAGE> <PAGE>
Comparative Per Share Data
The following table sets forth certain historical per share data of UStel and
Arcada and combined per share data on an unaudited pro forma basis after
giving effect to the Merger on a "purchase" basis assuming that 3,150,000
shares of UStel Common Stock, $5,000,000 in cash and $1,500,000 in Convertible
Debentures are issued in exchange for all the shares of Arcada Common Stock in
the Merger. This data should be read in conjunction with the selected
historical financial information, the pro forma condensed financial
information and the separate historical financial statements of UStel, C-2000
and of Arcada and the notes thereto included elsewhere in this Proxy
Statement/Prospectus. The unaudited pro forma condensed financial data are not
necessarily indicative of the operating results or financial position that
would have been achieved had the Merger been consummated at the beginning of
the periods presented and should not be construed as representative of future
operations.
<TABLE>
<CAPTION>
AS OF AND FOR AS OF AND FOR
THE YEAR ENDED THE SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
<S> <C> <C>
Historical -- UStel:
Net loss per share ($1.54) ($0.18)
Book value per share 1.05 1.44
Cash dividends per share -0- -0-
Historical -- Arcada (1):
Net loss per share ($0.41) ($4.43)
Book value per share (.27) (32.03)
Cash dividends per share -0- .05
Pro forma combined UStel and Arcada (2):
Net loss per share ($0.53) ($0.25)
Book value per share 1.32 1.74
Cash dividends per share (3) -0- .02
Equivalent pro forma Arcada (4):
Net loss per share ($0.56) ($0.17)
Book value per share 2.35 2.25
Cash dividends per share -0- .05
</TABLE>
(1) Amounts calculated on the basis of 3,150,000 shares outstanding for
the year ended December 31, 1996 and 3,150,000 shares outstanding for
the six months ended June 30, 1997.
(2) Amounts calculated utilizing 10,022,778 shares on a pro-forma
combined per share basis (without giving effect to conversion of the
Convertible Debentures issued in the Merger).
(3) It is assumed as a public company, the combined company would not
have paid any dividends.
(4) Amounts calculated based on 3,150,000 shares of UStel Common
Stock exchanged for outstanding shares of Arcada Common Stock.
PAGE
<PAGE>
RISK FACTORS
In addition to the other information set forth in this Proxy
Statement/Prospectus, UStel and Arcada Shareholders should consider the
following risk factors.
WHEN USED IN THIS PROXY STATEMENT/PROSPECTUS, THE WORDS "ANTICIPATE,"
"ESTIMATE," "EXPECT," "PROJECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN
RISKS, UNCERTAINTIES AND ASSUMPTIONS. SHOULD ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT,
ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED, EXPECTED
OR PROJECTED. SEVERAL KEY FACTORS THAT HAVE A DIRECT BEARING ON UStel'S AND
THE COMBINED COMPANIES' ABILITY TO ATTAIN THEIR GOALS ARE DISCUSSED BELOW.
UStel WILL NOT UNDERTAKE AND SPECIFICALLY DECLINES ANY OBLIGATION TO PUBLICLY
RELEASE THE RESULT OF ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING
STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH
STATEMENTS OR TO REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED
EVENTS.
Past Financial Performance of UStel
UStel incurred net losses of $2,973,194 and $803,978 for the year ended
December 31, 1996, and six months ended June 30, 1997, respectively. There is
no assurance that UStel will be able to achieve or sustain profitability in
the future or that UStel will be able to continue to finance its losses. See
"UStel MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" and the Financial Statements included in this Joint Proxy
Statement/Prospectus.
Decline in Revenue per Minutes
Although volume usage of the telecommunication services provided by UStel have
increased for the six months ended June 30, 1997 as compared to the prior six
month period ended June 30, 1996, as a result of competitive pressures in the
industry, UStel has been experiencing a decline in revenue per minute. UStel
expects to off-set the decline in revenue per minute by diversifying its
products and by offering wireless communication, paging and other value-added
services to its customers. In addition, UStel expects to establish a network
of switches which will allow it to offer its services at a lower cost per
minute than it is presently able to offer. Although Arcada has been able to
provide a package pricing product to its customers and although UStel has
recently acquired Pacific Cellular, a wireless communications reseller in the
Las Vegas market, there can be no assurance that UStel will be successful in
its strategy of diversifying its products and providing value-added services
or that it will be able to establish a network of switches.
The Merger
Failure to Satisfy Closing Conditions. Arcada's obligation to consummate the
Merger is contingent upon UStel's satisfaction of certain closing conditions
set forth in the Merger Agreement among which is the condition that UStel have
on hand the $5,000,000 in cash to be paid to the Arcada Shareholders as part
of the Merger consideration. While UStel has engaged an investment banking
firm to raise the necessary funds through a private placement of its
securities, there can be no assurance that the investment banking firm will be
successful in its efforts to raise the required funds. Accordingly, even if
the UStel Shareholders approve the Merger Agreement, it may not be
consummated. See "THE MERGER AGREEMENT - Conditions to the Consummation of the
Merger."
Inability to Achieve Expected Benefits of Merger
Expected benefits of combined business may not be achieved. UStel anticipates
that benefits will occur as a result of the Merger as described under "THE
MERGER - Recommendation of the Board of Directors; Reasons for the Merger" and
"MANAGEMENT AND OPERATIONS OF UStel FOLLOWING THE MERGER." When, if ever, the
anticipated benefits of the Merger are ultimately achieved, however, will
depend on a number of factors, including the ability of UStel and Arcada as a
combined company (the "combined companies") to achieve cost savings at
projected levels within projected time frames, to obtain adequate financing to
pursue its growth strategy and, generally, the ability of the combined
companies to capitalize on their combined asset base and strategic position.
There can be no assurance that the expected benefits of the Merger relative to
the combined business will be achieved.
Concurrent Registration of UStel Common Stock
Concurrent with the filing of this Merger/Proxy statement, UStel intends to
file with the Securities and Exchange Commission a registration statement on
Form S-3 to register the 1,824,148 shares of UStel Common Stock including
1,076,923 shares which were issued to the former shareholders of Consortium
2000, Inc. in connection with the acquisition of Consortium 2000, Inc. by
UStel and 747,225 shares subject to certain registration rights. Although the
officers and directors of UStel and the other parties who have the
registration rights have agreed to certain lock-up provisions with respect to
their shares, such lock-up provisions expire in February 1999. Moreover,
approximately $450,000 worth of UStel common Stock owned by the Palisades USTL
Trust will be released from the lock-up provisions in February 1998; and
$450,000 of UStel Common Stock will be released from the lock-up provisions in
April 1998. Furthermore, of the 594,990 shares of UStel Common Stock which
include shares underlying the Series A Preferred Stock held by the owner of
the Series A Preferred Stock, 20,000 shares per month may be released from the
lock-up. Future sales of Common Stock released from the lock-up could have an
adverse effect on the market price of the UStel Common Stock and of the
ability of UStel to raise capital in the future.
<PAGE>
Outstanding Warrants
The 1,552,500 public Warrants which were issued in connection with the UStel
Units Public Offering in February 1997 may be exercised to purchase the same
number of UStel Common Stock at a price of $4.00 per share. The underwriter
in the February 1997 Public Offering received a Representative's Warrant to
purchase up to 125,000 Units of UStel Common Stock, which Units include
warrants to purchase 125,000 shares of UStel Common Stock. In addition, UStel
has issued 981,000 other warrants at prices ranging from $5.00 to $7.50 per
share and 620,000 stock options at prices ranging from $3.62 to $5.00 per
share. The existence of such outstanding warrants and options may have a
depressive effect on the price of outstanding UStel Common Stock. The
Representative's Warrants are exercisable at a price of $7.50 per Unit.
During the term of outstanding options and warrants, the holders are given the
opportunity to profit from a rise in the market price of the UStel Common
Stock, and their exercise may dilute the book value per share of UStel Common
Stock. The existence of outstanding options and warrants may affect adversely
the terms on which the UStel may obtain additional equity financing.
Moreover, the holders of such options and warrants are likely to exercise
their rights to acquire UStel Common Stock at a time when UStel would
otherwise be able to obtain capital on terms more favorable than could be
obtained from the exercise or conversion of such securities.
Working Capital Requirements
Because neither UStel nor Arcada own their own long-distance transmission
lines, both companies must lease long-distance lines at bulk rates from
third-party long-distance transmission providers. As a result of this, both
UStel and Arcada are required to pay for the use of third-party long-distance
lines in advance of the receipt of full payment by UStel and Arcada from their
customers for the use of the services provided by UStel and Arcada to its
customers. This condition requires UStel and Arcada to utilize their working
capital facilities to finance payables, pending collection of their
receivables.
Expected Charge to Earnings
UStel recently announced that as a result of a management review, certain
unprofitable services and products will be discontinued. As a result, UStel
will record a restructuring charge of approximately $1.7 million in its third
quarter 1997 results. The charge will comprise a write-down of discontinued
services and an increase in bad debt expense related to those operations and
the discontinued businesses and products and severance expenses. There can be
no assurance that charges to earnings will not occur in the future.
General
Long Distance Industry Customer Attrition. A level of customer attrition is
inherent in the long distance industry. Attrition (the average number of
customers from whom revenues have terminated or been terminated as a result of
non-payment or dropped to zero usage expressed as a percentage of the total
number of customers) has averaged approximately 2-4% per month in the long
distance industry. Although both UStel and Arcada employ various programs to
attempt to reduce the level of customer attrition, there can be no assurance
that this level will not continue or increase.
Dependence on Services Offered by Other Carriers. Neither UStel nor Arcada
owns any transmission facilities other than UStel's and Arcada's investments
in its switches, and its long distance services are dependent upon WilTel,
Sprint and other carriers ("underlying carriers") for the transmission of its
customers' calls. Accordingly, UStel's and Arcada's long distance operations
are subject to their continued ability to obtain such services at bulk rates.
Moreover, the switches owned by UStel are not network switches, meaning they
are limited to providing switching services to the customers in the facility
in which the switches are located, calling card service and certain other
special customer services.
Competition. The telecommunications industry is intensely competitive and is
significantly affected by the introduction of new services and the market
activities of major industry participants. Competition in the growing
telecommunications industry is based upon pricing, customer service, network
quality and value-added services. UStel and Arcada compete with AT&T, MCI,
Sprint and other national and regional long distance carriers. Most of UStel
and Arcada's competitors have greater name recognition, more extensive
transmission networks and greater engineering and marketing capabilities than
UStel or Arcada and have, or have access to, substantially greater financial
and personnel resources than those of UStel and Arcada. These resources may
permit certain of UStel and Arcada's competitors to offer pricing and
incentives below those which can be offered by Arcada or UStel. Various
regulatory factors can also have an impact on UStel or Arcada's ability to
compete. For example, the new Telecommunications Act has reduced the
competitive barriers facing all telecommunications companies, especially AT&T
and the regional Bell operating companies. Arcada and UStel's size makes it
difficult to have an impact on such regulations. Moreover, certain of Arcada
and UStel's larger competitors may have the ability to influence regulation of
the telecommunications industry in a manner unfavorable to small or more
recent market entrants such as UStel and Arcada.
The ability of UStel and Arcada to compete effectively in the
telecommunications industry will depend upon their continued ability to
provide high quality, market-driven services at prices generally similar to,
or less than, those charged by its competitors. There can be no assurance that
UStel or Arcada will be able to compete successfully with existing or future
companies.
Dependence on Effective Billing System. Both UStel and Arcada rely on their
information and billing systems to efficiently and effectively process bills
and produce information. UStel recently began implementing its own billing
system which is substantially similar to that of Arcada. UStel plans to <PAGE>
integrate the Arcada billing system with that of UStel's. The Arcada billing
system was installed in 1995. The successful operation of these systems is of
importance to the combined companies' growth and profitability and there can
be no assurance that the combined billing system will perform to expectations
in the future or that UStel's billing data can be smoothly integrated with
Arcada's billing system. Moreover, the ability of UStel and Arcada to bill
their customers is dependent upon their receipt of timely and accurate data
from the underlying carriers, a circumstance over which they have no control.
See "BUSINESS OF UStel - Billing Systems" and "BUSINESS OF ARCADA - Billing
Systems."
Risk of Service Interruption. Arcada does not have long-term service
commitments with its long distance service providers. While short-term
arrangements with long distance service providers reduces the risk of
committing to minimums at pricing levels which may become above market, the
risk that service providers will terminate service and interrupt Arcada
customer service is increased. Arcada believes that its relations with service
providers are excellent and that significant terminations will not occur;
however, if terminations occur and Arcada cannot reroute telecommunications
traffic, its business may be adversely affected.
Government Regulation. Federal and state regulations, regulatory actions and
court decisions have had, and may have in the future both positive and
negative effects on UStel and Arcada and their ability to compete. UStel and
Arcada are subject to regulation by the FCC and various state public service
or public utility commissions which typically impose obligations to file
tariffs containing the rates, terms and conditions of service. Neither the FCC
nor the relevant state utility commissions currently regulate a company's
profit levels, but they have the authority to do so. The vast majority of
states require long distance service providers to apply for authority to
provide telecommunications services and to make filings regarding their
activities. The multiplicity of state regulations make full compliance with
all such regulations a challenge for any multi-state provider. There can be no
assurance that regulators or third parties will not raise material issues with
regard to either UStel or Arcada's compliance with applicable regulations or
that regulatory activities will not have a material adverse effect on the
company. See "BUSINESS OF UStel - Regulation" and "BUSINESS OF ARCADA -
Regulation."
Risk of Liability for Local Utility Taxes. UStel and Arcada serve customers in
numerous localities throughout their service areas. UStel and Arcada currently
collect and remit local utility and other taxes only in jurisdictions where
they have offices or hold other assets. Arcada has made tax payments to one
locality where it does not have offices or hold assets and has agreed to pay
additional amounts based on a review of its billing to that locality while
preserving the right to challenge its obligation to make such payments. UStel
and Arcada have been contacted in the past by other localities where they have
customers but no other assets or operations requesting that they collect local
utility taxes in such jurisdictions. Arcada does not believe such local
utility taxes apply to their respective operations and they have not
historically collected such taxes. There can be no assurance that such
localities will not actively seek to collect taxes from UStel or Arcada in the
future or that UStel or Arcada will not be liable for failure to collect such
taxes in the past. In the event UStel or Arcada is found liable for such back
taxes it could have a material adverse effect on UStel and Arcada. See
"BUSINESS UStel - Regulation" and "BUSINESS OF ARCADA - Regulation."
Dependence on Agents. UStel, and to a lesser degree, Arcada, depend on
continuing relationships with their independent marketing agents to acquire
new customer accounts. Substantially all of UStel's current customer accounts
and approximately one-quarter of Arcada's accounts have been obtained through
their network of independent marketing agents. In general, UStel's agreements
with its independent marketing agents provide that all customers introduced to
UStel by the agents are the Company's customers. Most of these contracts
contain restrictions on the transfer of accounts sold by the independent
marketing agent, such as limitations on the selling of a competing long
distance service to customers placed on UStel's network by the independent
marketing agent, a right of first refusal to UStel on sale of residual
commissions and other similar restrictions. Although UStel cannot prevent an
existing agent from becoming a competitor and attempting to transfer UStel's
customers to a competing service, these contractual limitations limit an
independent marketing agent's ability to do so. UStel primarily uses
independent marketing agents to sell UStel's services through telemarketing
and direct sales efforts.
Obsolescence Due to Technological Change and New Services. The
telecommunications industry has been characterized by steady technological
change, frequent new service introductions and evolving industry standards.
UStel and Arcada believe that their future success will depend on their
ability to anticipate such changes and to offer on a timely basis services
that meet these evolving industry standards. There can be no assurance that
UStel will have sufficient resources to make the investments necessary to
acquire new technology or to introduce new services that would satisfy an
expanded range of customer needs.
Dependence on the Development of a Network Infrastructure. With the Arcada
merger, UStel will acquire network switches in Seattle, Portland and Denver.
UStel however believes that it will be necessary to augment this network of
switches in other markets in order to provide competitive cost effective
services. The future success of UStel's business will depend upon the
capacity, reliability and security of its proposed network infrastructure.
UStel will attempt to adapt its network infrastructure as the number of users
and the amount of information they wish to transfer increases, and so meet
changing customer requirements. The development and expansion of UStel's
proposed network infrastructure will require substantial financial,
operational and management resources. There can be no assurance that UStel
will be able to develop a network infrastructure to meet demand or its
customers' changing requirements on a timely basis, at a commercially
reasonable cost, or at all, or that UStel will be able to deploy successfully <PAGE>
any network expansion. Any failure of UStel to develop its network
infrastructure on a timely basis or to adapt it to changing customer
requirements or evolving industry standards could have a material adverse
effect on UStel's business, financial condition and results of operations.
Assets Pledged to Lender
Substantially all of the assets of UStel and Arcada are pledged as collateral
with their respective lenders, See "UStel - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources," and See "Arcada - Managements' Discussion and Analyses of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." Should UStel or Arcada default on their secured obligations,
they would be at risk that their assets could be foreclosed upon. Should such
an event occur, UStel or Arcada, as the case may be, would be unable to
conduct its business.
Limitation on Liability of Directors to Shareholders
UStel's Articles of Incorporation limit the monetary liability of its
directors in their capacity as directors to the fullest extent permitted by
the Minnesota Business Corporation Act. A similar provision will be in effect
in the articles of incorporation of UStel upon effectiveness of the
Reincorporation Merger. While such liabilities are covered by directors and
officer liability insurance, there can be no assurance that such insurance
will be adequate in the event a claim is made giving rise to indemnity.
PAGE
<PAGE>
THE UStel SPECIAL MEETING
Matters to Be Considered at the UStel Special Meeting
At the UStel Special Meeting, UStel Shareholders will consider and vote upon a
proposal to approve and adopt the Merger Agreement, the Merger and the
Reincorporation Merger. UStel Shareholders entitled to vote also will consider
and vote upon any other matter that may properly come before the UStel Special
Meeting.
THE UStel BOARD HAS APPROVED THE MERGER AGREEMENT, THE MERGER, THE
REINCORPORATION MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED THEREBY, AND
RECOMMENDS A VOTE "FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT, THE
MERGER AND THE REINCORPORATION MERGER. See "The Merger - Recommendation of the
Board of Directors; Reasons for the Merger."
Abstentions will be counted as shares present for purposes of determining the
presence of a quorum on all matters. See "-Revocability of Proxies; Quorum."
Abstentions will have the effect of votes against the approval and adoption of
the Merger Agreement, the Merger, the other transactions contemplated by the
Merger Agreement and the Reincorporation Merger.
As of the Record Date directors and executive officers of UStel were
beneficial owners of an aggregate of 1,677,154 shares of UStel Common Stock,
or approximately 24.4% of the outstanding shares of UStel Common Stock. The
directors and executive officers of UStel who are also stockholders of UStel
have advised UStel that they will vote their shares of UStel Common Stock in
favor of the matters submitted to stockholders of UStel at the UStel Special
Meeting or any adjournments or postponements thereof.
Voting of Proxies
A form of proxy is enclosed with this Proxy Statement/Prospectus for use by
UStel Shareholders.
Shares of UStel Common Stock represented by all properly executed proxies
received in time for the UStel Special Meeting and which have not been revoked
will be voted at such meeting in accordance with the instructions indicated
thereon. PROXIES WHICH DO NOT CONTAIN AN INSTRUCTION TO VOTE FOR OR AGAINST OR
TO ABSTAIN FROM VOTING ON A PARTICULAR MATTER DESCRIBED IN THE PROXY WILL BE
VOTED IN FAVOR OF THE MERGER AGREEMENT, THE MERGER AND THE REINCORPORATION
MERGER AND IN THE DISCRETION OF THE PROXY HOLDER AS TO ANY OTHER MATTER THAT
MAY PROPERLY COME BEFORE THE UStel SPECIAL MEETING.
Revocability of Proxies; Quorum
The grant of a proxy on the enclosed UStel form of proxy does not preclude a
stockholder from voting in person. A stockholder may revoke a proxy at any
time prior to its exercise by submitting a later dated proxy with respect to
the same shares, by filing with the Secretary of UStel a duly executed
revocation, or by voting in person at the meeting. Attendance at the UStel
Special Meeting will not in and of itself constitute a revocation of a proxy.
Only holders of record of UStel Common Stock at the close of business on the
Record Date will be entitled to receive notice of and to vote at the UStel
Special Meeting. On the Record Date, UStel had outstanding 6,872,778 shares of
UStel Common Stock. The holders of UStel Common Stock are entitled to one vote
per share on each matter submitted to a vote at the UStel Special Meeting. The
holders of a majority of the outstanding shares of UStel Common Stock entitled
to vote must be present in person or by proxy at the UStel Special Meeting in
order for a quorum to be present. Shares of UStel Common Stock represented by
proxies which are marked "abstain" or which are not marked as to any
particular matter or matters will be counted as shares present for purposes of
determining the presence of a quorum on all matters. Proxies relating to
"street name" shares that are voted by brokers will be counted as shares
present for purposes of determining the presence of a quorum on all matters,
but will not be treated as shares having voted at the UStel Special Meeting as
to any proposal as to which authority to vote is withheld by the broker.
In the event a quorum is not present in person or by proxy at the UStel
Special Meeting, the UStel Special Meeting is expected to be adjourned or
postponed.
Vote Required for Approval
The affirmative vote of the holders of at least a majority of the shares of
UStel Common Stock and Series A Preferred Stock, voting as if converted,
outstanding as of the Record Date voting in person or by proxy is necessary to
approve and adopt the Merger Agreement, the Merger and the Reincorporation
Merger.
Appraisal Rights
Holders of UStel Common Stock who vote against the Merger will be entitled to
appraisal rights under the Minnesota Business Corporation Act if the Merger is
consummated. See "THE MERGER - Dissenters' Rights" and Appendix B attached
hereto.
Solicitation of Proxies
UStel will bear the cost of the solicitation of proxies from its shareholders,
and UStel will pay the cost of printing and mailing this Proxy
Statement/Prospectus. In addition to solicitation by mail, the directors,
officers and employees of UStel may solicit proxies from shareholders of UStel
by telephone or telegram or in person. Such directors, officers and employees
will not be additionally compensated for such solicitation. Arrangements also
will be made with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of solicitation material to the beneficial
owners of shares held of record by such persons, and UStel will reimburse such <PAGE>
custodians, nominees and fiduciaries for their reasonable out-of-pocket
expenses in connection therewith.
PAGE
<PAGE>
THE MERGER
THE DESCRIPTION OF THE MERGER AND THE MERGER AGREEMENT CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER
AGREEMENT, A COPY OF WHICH IS INCLUDED AS APPENDIX A TO THIS PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE.
General
UStel, Merger Sub and Arcada have entered into the Merger Agreement, which
provides that, subject to the satisfaction or waiver of the conditions set
forth therein (see "THE MERGER AGREEMENT - Conditions to the Consummation of
the Merger"), Merger Sub will be merged with and into Arcada, and Arcada will
be the surviving corporation and a wholly-owned subsidiary of UStel. As soon
as practicable after the satisfaction or waiver (where permissible) of the
conditions under the Merger Agreement, the Articles of Merger will be filed
with the Secretary of State of the State of Washington, and the time of such
filing will be the Effective Time unless otherwise provided in the Articles of
Merger.
Upon consummation of the Merger, all shares of Arcada Common Stock will
automatically be canceled and retired and will cease to exist. Each holder of
a certificate representing any shares of Arcada Common Stock will cease to
have any rights with respect thereto, except the right to receive shares of
UStel Common Stock, the Convertible Debentures and a pro-rata portion of the
$5,000,000 in cash included in the Merger consideration. The total
consideration to be paid by UStel to the Arcada shareholders in connection
with the Merger will consist of (i) an aggregate of between 2,100,000 and
6,300,000 newly issued shares of UStel Common Stock, subject to adjustment,
(ii) an aggregate of $1,500,000 in principal amount of the Convertible
Debentures and (iii) an aggregate of $5,000,000 cash. In addition to the
$1,500,000 in Convertible Debentures, the Merger Agreement provides that
$590,500 of shareholder loans owed by Arcada to one of its shareholders, Keith
Leppaluoto, will be exchanged for a like amount of Convertible Debentures.
The number of UStel Shares of Common Stock to be issued in the Merger ("Merger
Shares") will be subject to adjustment as follows: If the Average Price, as
defined below, is less than $3.00 per share but greater than or equal to
$2.50 per share, then the aggregate number of Merger Shares issuable at
Closing will be increased over 2,100,000 by 420,000 shares; if less than $2.50
per share but greater than or equal to $2.00 per share, then the aggregate
number of Merger Shares issuable at Closing will be increased over 2,100,000
by 1,050,000 shares; if less than $2.00 per share but greater than or equal to
$1.50 per share, then the aggregate number of Merger Shares issuable at
Closing will be increased over 2,100,000 by 2,100,000 shares; and, if less
than $1.50 per share but greater than or equal to $1.00 per share, then the
aggregate number of Merger Shares issuable at Closing will be increased over
2,100,000 by 4,200,000 shares.
The Average Price is calculated by dividing (A) the sum of (i) the five day
trading average closing price of the UStel Common Stock for the five day
period beginning on September 25, 1997; (ii) the five day trading average
closing price of the UStel Common Stock for the five day period ending on the
second to last trading day prior to Closing; and (iii) the Interim Period
Average, by (B) three (3). The Interim Period Average is calculated by
dividing the sum of the closing prices of the UStel Common Stock on every
trading day from and including September 25, 1997 through and including the
second to last trading day prior to Closing, by the number of trading days in
such period.
The number of shares of UStel Common Stock to be received upon conversion of
the shares of Arcada Common Stock in the Merger, will be subject to adjustment
if, prior to the Effective Time, the shares of UStel Common Stock are changed
into a different number of shares by reason of any recapitalization, split up,
combination or exchange of shares, or if a stock dividend on such shares is
declared with a record date within such period, in which case the number of
shares to be issued to Arcada Shareholders will be adjusted accordingly.
The Convertible Debentures will bear interest at 10% per annum and will be
subordinated to all existing and future institutional debt. For the first six
months from Closing the Convertible Debentures will be payable interest only,
quarterly in arrears. Beginning six months from Closing, the Convertible
Debentures will be amortized over a three year term, with principal payments
paid quarterly in advance. Such principal payments will include all amounts
due thereunder, including the conversion of all Arcada shareholder loans.
Interest on the Convertible Debentures will continue to be paid quarterly in
arrears. Beginning one year after issuance, the Convertible Debentures will
be convertible dollar for dollar at a conversion price equal to 150% of the
Average Price as defined above. The number of shares of UStel Common Stock
issuable upon conversion of the Convertible Debentures will be proportionally
adjusted in the event of a change in the capitalization of UStel after the
Effective Time. UStel will have the right to prepay, in whole or in part,
without penalty, at any time, including the right to pay cash in lieu of
Convertible Debentures at Closing. In the event of a default under the
Convertible Debentures, the conversion price will be equal to the Average
Price.
No certificates or fractional shares of UStel Common Stock will be issued as a
result of the Merger. Instead, each Arcada Shareholder otherwise entitled to a
fractional shares will receive the cash value of such fractional share in an
amount equal to the fraction multiplied by the Average Price.
Background of the Merger
On March 12, 1997, Morris Fox, a consultant to UStel, wrote a memorandum to
Robert Diener of UStel detailing a meeting he had with Frank Bonadio of Arcada
Communications. Fox stated in the memorandum that Arcada had just terminated
a transaction wherein it had previously agreed to merge with Touch Tone
America and might be interested in a potential merger with UStel. Fox further <PAGE>
stated that he had met with Mr. Bonadio in Las Vegas and had traveled to
Seattle to meet with Bonadio and two other Arcada shareholders, Robert and
Keith Leppaluoto.
On March 27, 1997, Robert Diener and Jerry Dackerman traveled to Seattle to
meet with the principals of Arcada Communications. After touring Arcada's
facilities, the parties discussed in general terms the potential of a business
combination and reviewed the potential synergies incumbent in such a
transaction. The parties agreed that there was a basis for continuing
discussions. As a part of this meeting, the companies exchanged
confidentiality agreements and financial and operational information. A
follow-up meeting was held between Robert Diener, Jerry Dackerman and Frank
Bonadio in Phoenix, Arizona, during the first week of April, wherein the parties
further discussed the potential of a business combination and focused on the
synergies which might be achieved.
On April 7, 1997, UStel provided Arcada with a letter of interest setting
forth parameters of a proposed transaction. The letter proposed that UStel
exchange 3,250,000 shares of its Common Stock for all of the shares of
Arcada. This proposal was based on a then-current market value of UStel stock
of $3.75 per share and would have valued Arcada at approximately $12,200,000.
The total purchase price would be adjusted based on the excess (or deficit) of
Arcada current assets over current liabilities and the amount of any assumed
debt. The letter also proposed that UStel enter into an employment agreement
with Arcada's president, Frank Bonadio. Arcada responded by letter on April
16, 1997 which expressed interest in the potential transaction and suggested a
value for Arcada of approximately $14.5 million. Arcada also suggested that
one-third of the purchase price should be paid in cash. It was agreed that
the companies would work together toward reaching a definitive agreement.
In April 1997, UStel retained Barber & Bronson, Inc. as its financial advisor
in connection with the proposed business combination with Arcada. A further
follow-up meeting between the parties was held in Seattle on April 29, 1997.
Present from UStel were Robert Diener and Wouter van Biene and present from
Arcada were Frank Bonadio, Paul Milan and George Singer. Also joining the
group was Scott Salpeter on behalf of B C Capital, a financial consultant of
UStel who had been retained as a financial advisor to UStel in February 1997.
B C Capital is an affiliate of Barber & Bronson, Incorporated. See "Fairness
Opinion" below. During the meetings, the parties exchanged operational and
management information regarding both companies and the various business lines
of each company. Each party also did initial due diligence relative to
financial information which had been previously provided.
During the first half of May 1997, UStel worked to complete a financial
analysis of the proposed combination, with specific reference to the impact,
if any, on the proforma and projected results of UStel. The analysis included
projections related to the companies on a combined basis and looked
specifically at the operating and financial synergies which could be
achieved. On May 8, 1997, UStel prepared a Summary of Proposed Terms which
was presented in draft form to Arcada. Specifically, UStel proposed a merger
based on exchanging 57 shares of UStel Common Stock for each share of Arcada
stock (aggregating 2,850,000 shares of UStel Common Stock), together with
$3,500,000 10% subordinated convertible debentures. Such offer was based on
the price of UStel Common Stock on the determination date being between $3.00
and $4.00 per share. The proforma value of the transaction, depending on the
value of UStel Common Stock at the determination date, was between $12,200,000
and $14,500,000.
In mid-May 1997, Frank Bonadio visited UStel offices in Las Vegas and met with
senior executives of the company. In the course of this visit, he inspected
UStel customer service, billing and collections and operations facilities.
This meeting was followed by a visit by Frank Bonadio to the Los Angeles
offices of UStel on May 22, 1997. On May 19, 1997, UStel prepared and
delivered to Arcada the first draft of a proposed letter of intent. This
letter mirrored, in all material respects, the May 8 Summary of Proposed
Terms. Thereafter, negotiations between the parties continued and several
revised drafts of the letter of intent were prepared. While Arcada agreed in
principle to the consideration for the transaction, they took the position
that at least $5,000,000 of the purchase price had to be paid at closing in
cash. A final draft of the letter of intent was prepared on June 3, 1997.
Pursuant to the terms of this letter, UStel would deliver to Arcada 2,100,000
shares of UStel Common Stock together with $5,000,000 of Series A Debentures
and $1,500,000 of Series B Debentures. The terms assumed that the average
closing price of UStel's Common Stock during the fifteen days prior to closing
would be between $3.00 and $4.50. The terms of the Debentures were interest
only for the first six months from issuance and principal amortized over a
three year term thereafter. The Debentures were convertible into Common Stock
of UStel at any time beginning one year after issuance at a price equal to
150% of the average price of UStel Common Stock during the ten days prior to
closing. The letter of intent also provided for the execution of an Insider
Lock-up and Voting Rights Agreement and included an undertaking on UStel's
part to cause the shares issued to Arcada to be registered within six months
of closing. Finally, the letter of intent provided that UStel would enter
into an employment agreement with Frank Bonadio and that he would be appointed
to UStel's board of directors at closing. The letter of intent was executed
by both parties on June 4, 1997. The letter of intent was subject to
completion of due diligence by both parties, approval by the respective
shareholders and board of directors of both companies, receipt of audited
financials and receipt of all necessary regulatory consents.
Following the execution of the letter of intent, executives of UStel and
Arcada commenced an ongoing series of meetings focused on the integration of
the two companies following the completion of the merger. Specifically, these
meetings focused on the preparation of a strategic plan for the development of
a dedicated transmission network and the consolidation of offices and staff.
There was also extensive discussion relative to the roll-out of new products
and the sales and marketing of these products. In a meeting in Seattle on
June 26, 1997 attended by Messrs. Diener, Dackerman, van Biene of UStel and
Messrs. Bonadio and Singer of Arcada, the companies focused on a specific plan <PAGE>
prepared by Arcada relative to the development of a dedicated transmission
network. The consensus of the meeting was that this project would be given
the highest priority. Shortly after the execution of the letter of intent,
UStel constituted several due diligence teams which made visits to Arcada's
facilities to review operations and financials. UStel engaged legal counsel
to undertake certain legal due diligence, which included a review of all of
Arcada's material contracts.
On June 27, 1997, UStel and Arcada entered into a Management Services
Agreement wherein Arcada agreed to work with UStel in connection with the
development of a dedicated transmission network. In this Management Services
Agreement, UStel agreed that the plan was the intellectual property of Arcada
and that if the Merger did not consummate on an agreed time schedule, UStel
would pay Arcada a $125,000 fee for Arcada's services in connection with the
development of the network development plan.
Also in June, 1997, UStel commenced discussions with Sutro & Co. relative to
acting as financial advisor to the Company in conjunction with a proposed
offering of securities. The purpose of the offering was to fund the cash
portion of the Arcada purchase price, to provide funding for the development
of the dedicated transmission network and for working capital. Thereafter, on
July 22, 1997, UStel executed a letter agreement with Sutro wherein the
Company retained Sutro to act as its exclusive financial advisor with respect
to a private placement of securities.
In late June, 1997, attorneys for UStel and Arcada began work on the
preparation of a definitive Agreement for Merger between the companies.
Following extensive telephonic negotiations between Messrs. Diener and
Bonadio, the Agreement for Merger was executed by both parties on September
25, 1997. The primary points agreed to in these negotiations which varied
from the June 4, 1997 letter of intent were the following: (i) the merger was
made contingent upon UStel having on hand at the Closing $5,000,000 in cash
and (ii) UStel maintaining its NASDAQ Small Cap listing and a stock price of
at least $1.00. Furthermore, the parties agreed to a formula for increasing
the number of shares to be issued in the merger based on the Average Price of
the UStel Common Stock (as defined in the Agreement).
In preparation for the submission of the Agreement for Merger to the Board of
Directors of UStel, the Company engaged Barber & Bronson, Incorporated to
render an opinion as to the fairness of the proposed merger to UStel from a
financial point of view. On September 29, 1997, UStel's Board of Directors
met to consider the Agreement for Merger. Following Barber and Bronson's
presentation and delivery of its opinion that, as of the date of such opinion,
the transaction was fair from a financial point of view to UStel, UStel's
board unanimously approved execution of the Agreement for Merger. See
"Fairness Opinion" below.
The UStel Board believes that the Company must expand in order to receive the
substantial competitive benefits available to larger entities. These benefits
include significant price advantages to volume purchasers provided by long
distance carriers. Further, UStel believes that it must develop its own
dedicated transmission network in order to further reduce its cost of
service. UStel believes it can achieve substantive cost savings by routing
calls through its own switching equipment. With the acquisition of Arcada,
UStel will be able to include Arcada's switches in Seattle, Portland and
Denver in a network which UStel plans to create. Another goal of UStel has
been to diversify its product base by offering wireless communication
services, paging and a variety of "value-added" services which Arcada offers
to its customers. By acquiring Arcada, UStel will enhance its ability to
offer a broader variety of value-added products. Upon completion of the
Arcada acquisition UStel expects that many of the services which are now
provided at multiple locations can be consolidated.
The Merger Agreement is the result of arms-length negotiations between UStel
and Arcada. There is no affiliation between any of the directors officers or
principal shareholders of the respective entities.
Recommendation of the Boards of Directors; Reasons for the Merger
By the vote of the UStel Board of Directors at a meeting held on September 29,
1997, the UStel Board determined the Merger to be fair to and advisable and in
the best interests of UStel and its stockholders and approved the Merger and
the Merger Agreement.
At its meeting held on September 29, 1997, the UStel Board received the
presentation of management with respect to Arcada, including reviews of, among
other things, historical information relating to the business, financial
condition and results of operations of Arcada; information provided by Arcada
management and reviewed and adjusted by UStel management regarding the long
distance operations of Arcada; information regarding the management of Arcada;
and the possible effects of the Merger on UStel's financial condition and the
possible market effects of the announcement of the proposed Merger and the
consummation thereof on the UStel Common Stock.
During the course of its deliberations, the UStel Board of Directors, with the
assistance of management, considered a number of other factors, including the
following:
(i) The ability of the combined companies to generate additional long
distance revenues, reduce overhead and increase the number of
switches in the UStel transmission network, increase the variety
of products offered to UStel customers;
(ii) The consideration to be paid to Arcada shareholders in the Merger;
(iii) The terms and conditions of the proposed Merger, including the
right of UStel to terminate the Merger Agreement upon the
occurrence of a material adverse change in Arcada.
<PAGE>
In the course of its deliberations, the UStel Board reviewed and considered a
number of other factors relevant to the Merger, including among other things:
(i) information concerning UStel's and Arcada's respective businesses,
prospects, financial performance, financial conditions, operations and
technology; (ii) an analysis of the respective contributions to revenue,
operating profits and net profits of the combined company; and (iii) reports
from management as to the results of their due diligence investigation of
Arcada.
The UStel Board also considered a variety of the potentially negative factors
in its deliberations on the Merger, including (i) the potential disruption of
UStel's business that might result from the need to devote management
resources to integrate the Arcada operations, the impact on the UStel Common
Stock price resulting from the issuance of up to 6,300,000 shares of UStel
Common Stock in the Merger and the $1,500,000 plus $590,500 of Convertible
Debentures, the capital cost of the $5,000,000 in cash included in the Merger
consideration; (ii) the risk that the other benefits sought to be achieved in
the Merger will not be achieved; and (iii) the risks described under "RISK
FACTORS."
In view of the wide variety of factors, both positive and negative, considered
by the UStel Board, the UStel Board did not find it practical, and did not
quantify or otherwise assign relative weights to the specific factors
considered.
The UStel Board also received and took into account an opinion from its
investment banker described below, that the Merger consideration paid to the
Arcada shareholders was fair from a financial point of view to the UStel
shareholders.
Fairness Opinion
In connection with the Merger, UStel engaged Barber & Bronson Incorporated
("Barber & Bronson"), an affiliate of B C Capital (a financial advisor to
UStel in connection with the Merger), to render an opinion as to the fairness,
from a financial point of view, to UStel of the consideration to be offered to
the holders of Arcada Common Stock. On September 29, 1997, Barber & Bronson
delivered its written opinion to the Board of Directors of UStel that, as of
the date of such opinion, and based upon and subject to the assumptions made,
matters considered, and limitations on its review as set forth in the opinion,
Barber & Bronson concluded that from a financial point of view, the
consideration to be offered to the holders of Arcada Common Stock in the
Merger is fair to UStel.
The full text of the written opinion of Barber & Bronson dated September 29,
1997 is attached as Appendix D and is incorporated by reference (the "Barber &
Bronson Opinion"). UStel stockholders are urged to read the Barber & Bronson
Opinion carefully in its entirety for a description of the assumptions made,
matters considered, procedures followed and limitations on the review
undertaken by Barber & Bronson in rendering its opinion. The summary of the
Barber & Bronson Opinion set forth in this Proxy Statement/Prospectus is
qualified in its entirety by reference to the full text of such opinion.
No limitations were imposed by UStel on the scope of Barber & Bronson's
investigation or the procedures to be followed by Barber & Bronson in
rendering its opinion. Barber & Bronson was not requested to and did not make
any recommendation to the Board of Directors of UStel as to the form or amount
of consideration to be paid by UStel in the Merger, which was determined
through arms length negotiations between parties. In arriving at its opinion,
Barber & Bronson did not ascribe a specific range of value to Arcada, but
rather made its determination as to the fairness, from a financial point of
view, of the consideration to be offered to the holders of Arcada Common Stock
in the Merger on the basis of the financial and comparative analyses described
below. The Barber & Bronson Opinion is for the use and benefit of the Board
of Directors of UStel in connection with its consideration of the Merger and
is not intended to be and does not constitute a recommendation to any
stockholder of UStel as to how such stockholder should vote with respect to
the Merger. Barber & Bronson was not requested to opine as to, and its
opinion does not address, UStel's underlying business decision to proceed with
or effect the Merger.
In arriving at its opinion, Barber & Bronson, among other things: (i) reviewed
the Merger Agreement and the specific terms of the Merger; (ii) reviewed
publicly available financial information and other data with respect to UStel
and Arcada, including UStel's Form 10-KSB for the fiscal year ended December
31, 1996 and Form 10-QSB for the six months ended June 30, 1997, and certain
other relevant financial and operating data relating to UStel and Arcada made
available to Barber & Bronson from published sources and from the internal
records of UStel and Arcada; (iii) reviewed and discussed with representatives
of the managements of UStel and Arcada certain financial and operating
information furnished to Barber & Bronson by them, including financial
projections and related assumptions with respect to the business, operations
and prospects of UStel and Arcada; (iv) considered the financial terms, to the
extent publicly available, of certain other transactions that Barber & Bronson
deemed comparable; (v) considered the historical financial results and present
financial condition of each of UStel and Arcada with those of other companies
that Barber & Bronson deemed relevant; (vi) reviewed certain publicly
available information concerning the trading of, and the trading market for,
the common stock of UStel and other companies that Barber & Bronson deemed
comparable; (vii) inquired about and discussed the Merger and Merger Agreement
and other matters related thereto with UStel's counsel; and (viii) performed
such other analyses and examinations as Barber & Bronson deemed appropriate.
In arriving at its opinion, Barber & Bronson relied upon and assumed the
accuracy and completeness of all of the financial and other information that
was used by it without assuming any responsibility for any independent
verification of any such information and have further relied upon the
assurances of managements of UStel and Arcada that they were not aware of any
facts or circumstances that would make any such information inaccurate or <PAGE>
misleading. With respect to the financial projections of UStel and Arcada,
upon the advice of management of UStel, Barber & Bronson assumed that such
projections have been reasonably prepared on a basis reflecting the best
currently available estimates and judgements of the managements of UStel and
Arcada as to the future operating and financial performances of UStel and
Arcada, respectively, and such projections provide a reasonable basis upon
which Barber & Bronson could form an opinion. In addition, such projections
were based upon numerous variables and assumptions that are inherently
uncertain, including, without limitation, factors relating to general economic
and competitive conditions. Accordingly, actual results could vary
significantly from those set forth in such projections. Barber & Bronson
assumed no liability for such projections. In arriving at its opinion, Barber
& Bronson did not made a physical inspection of the properties and facilities
of UStel and Arcada, and had not made or obtained any evaluations or
appraisals of the assets and liabilities (contingent or otherwise) of UStel
and Arcada. Under the advice of UStel and its legal and accounting advisors,
Barber & Bronson assumed that the Merger will qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended and therefore, as a tax-free transaction to the holders of Arcada
Common Stock to the extent such holders receive UStel Common Stock. In
addition, Barber & Bronson assumed that the transaction will be consummated in
a manner that complies in all respects with the applicable provisions of the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, and all other applicable federal and state statutes, rules and
regulations. Barber & Bronson's opinion is necessarily based upon financial,
economic, market and other conditions as they existed and could be evaluated
on the date of its opinion. Accordingly, although subsequent developments may
affect its opinion, Barber & Bronson did not assume any obligation to update,
review or reaffirm its opinion.
In connection with the preparation and delivery of its opinion to the Board of
Directors of UStel, Barber & Bronson performed a variety of financial and
comparative analyses, as described below. The preparation of a fairness
opinion involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of these methods to
the particular circumstances, and, therefore, such an opinion is not readily
susceptible to summary description. Each of the analyses conducted by Barber
& Bronson was carried out in order to provide a different perspective on the
transaction, and to enhance the total mix of information available. Barber &
Bronson did not form a conclusion as to whether any individual analysis,
considered in isolation, supported or failed to support its opinion and did
not place any particular reliance or weight on any individual analysis, but
instead concluded that its analyses, taken as a whole, supported its
determination. Accordingly, Barber & Bronson believes that its analyses must
be considered as a whole and that selecting portions of its analyses or the
factors it considered, without considering all analyses and factors
collectively, could create an incomplete view of the process underlying the
analyses performed by Barber & Bronson in connection with the preparation of
its opinion. In its analyses, Barber & Bronson made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of UStel and Arcada. Any
estimates contained in these analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth therein. In addition, analyses
relating to the value of businesses do not purport to be appraisals or to
reflect the prices at which businesses actually may be sold.
Discounted Cash Flow Analysis. Barber & Bronson performed a discounted cash
flow ("DCF") analysis, aggregating (x) the present value of Arcada's projected
unlevered free cash flows over the five year forecast period with (y) the
present value of a range of terminal values described below. Free cash flow
represents the amount of cash generated and available for principal, interest
and dividend payments after providing for ongoing business operations; these
free cash flow figures were based upon operating and financial forecasts
provided to us by the managements of UStel and Arcada. The range of terminal
values represents the residual value of Arcada at the end of the forecast
period; this range of terminal values was calculated by applying a range of
implied multiples to Arcada's: (i) revenues; (ii) earnings before interest,
taxes, depreciation and amortization ("EBITDA"); (iii) earnings before
interest and taxes ("EBIT"); and (iv) perpetual growth rates, in the final
year of the forecast period.
As part of the DCF analysis, Barber & Bronson utilized discount rates of 17.5%
to 25.0%, which were chosen based upon several assumptions including interest
rates, the inherent business risk of Arcada and Arcada's estimated cost of
capital. The resulting range of implied enterprise values for Arcada was then
adjusted to account for net debt (debt minus cash), by subtracting
approximately $1.6 million, yielding a range of implied equity values for
Arcada.
Based upon a range of terminal multiples of revenue for fiscal year 2001 of
.50x to 2.00x, the implied enterprise value of Arcada ranged from
approximately $6.6 million to approximately $26.9 million; after subtracting
net debt, the implied equity value of Arcada ranged from approximately $5.0
million to approximately $25.3 million. Based upon a range of terminal
multiples of EBITDA for fiscal year 2001 of 8.0x to 20.0x, the implied
enterprise value of Arcada ranged from approximately $8.4 million to
approximately $23.9 million; after subtracting net debt, the implied equity
value of Arcada ranged from approximately $6.8 million to approximately $22.4
million. Based upon a range of terminal multiples of EBIT for fiscal year
2001 of 12.5x to 20.0x, the implied enterprise value of Arcada ranged from
approximately $9.3 million to approximately $18.4 million; after subtracting
net debt, the implied equity value of Arcada ranged from approximately $7.8
million to approximately $16.8 million. Based upon a range of terminal
multiples of perpetual growth rates for fiscal year 2001 of 10% to 13%, the
implied enterprise value of Arcada ranged from approximately $5.1 million to
approximately $16.3 million; after subtracting net debt, the implied equity
value of Arcada ranged from approximately $3.6 million to approximately $14.8
million. <PAGE>
Selected Comparable Transaction Analysis. Using publicly available
information, Barber & Bronson reviewed eight transactions since June, 1996
that have been announced or consummated involving telecommunication companies
(the "Comparable Transactions") that Barber & Bronson deemed to be reasonably
similar to Arcada. The Comparable Transactions include (acquirer/target): LCI
International/USLD Communications Corp.; Midcom Communication Inc./Phoenix
Network, Inc.; WorldPort Communication/Telenational Communications; Network
Long Distance/Eastern Telecom International; Network Long Distance/National
Teleservice; Tel-Save Holding/American Business Alliance; Network Long
Distance/United Wats, Inc; and Network Long Distance/Long Distance Telecom,
Inc.
Based on the information disclosed in the Comparable Transactions, Barber &
Bronson compared (i) the latest twelve month ("LTM") revenues, (ii) LTM
EBITDA, (iii) LTM EBIT, (iv) LTM net income, and (v) total assets of such
companies prior to the transaction with those of Arcada. Barber & Bronson
also calculated a range of enterprise value multiples for such transactions by
dividing the respective enterprise values by items (i) through (v) above for
each of the Comparable Transactions. After removing the highest and lowest
multiple for each of the aforementioned items in order to diminish the
multiple variance of the selected transactions, Barber & Bronson analyzed the
remaining multiples and computed the highest, lowest and mean multiple for
each of the selected items.
This analysis indicated that the approximate enterprise value multiple of
revenues ranged from .9x to 1.6x, with a mean of 1.4x; the approximate
enterprise value multiple of EBITDA ranged from 10.1x to 26.0x, with a mean of
18.5x; the approximate enterprise value multiple of EBIT ranged from 12.7x to
20.1x, with a mean of 16.4x; the approximate enterprise value multiple of net
income ranged from 21.0x to 25.2x, with a mean of 23.1x; and the approximate
enterprise value multiple of total assets ranged from 2.9x to 6.2x, with a
mean of 4.3x.
Barber & Bronson subsequently used the high, low and mean multiples derived
from the selected Comparable Transactions and applied such multiplies to the
corresponding financial information for Arcada, based on Arcada's LTM ended
June 30, 1997, to determine a range and mean for Arcada's implied enterprise
value. The resulting range of implied enterprise values for Arcada was then
adjusted to account for net debt (debt minus cash), by subtracting $1.6
million, yielding a range of implied equity values for Arcada.
Based upon a range of revenue multiples, the implied enterprise value of
Arcada ranged from approximately $11.7 million to approximately $20.8 million;
after subtracting net debt, the implied equity value of Arcada ranged from
approximately $10.1 million to approximately $19.2 million. Based upon a
range of EBITDA multiples, the implied enterprise value of Arcada ranged from
approximately $12.9 million to approximately $33.3 million; after subtracting
net debt, the implied equity value of Arcada ranged from approximately $11.4
million to approximately $31.7 million. Based upon a range of EBIT multiples,
the implied enterprise value of Arcada ranged from approximately $7.1 million
to approximately $11.2 million; after subtracting net debt, the implied equity
value of Arcada ranged from approximately $5.5 million to approximately $9.7
million. Based upon a range of net income multiples, the implied enterprise
value of Arcada ranged from approximately $7.6 million to approximately $9.1
million; after subtracting net debt, the implied equity value of Arcada ranged
from approximately $6.0 million to approximately $7.6 million. Based upon a
range of total asset multiples, the implied enterprise value of Arcada ranged
from approximately $12.8 million to approximately $27.3 million; after
subtracting net debt, the implied equity value of Arcada ranged from
approximately $11.2 million to approximately $25.8 million.
None of the Comparable Transactions, or other business combinations utilized
as a comparison, is identical to the Merger. Accordingly, an analysis of
comparable business combinations is not mathematical, rather it involves
complex considerations and judgements concerning differences in financial and
operating characteristics of the Comparable Transactions and other factors
that could affect the acquisition value of the comparable companies or company
to which they are being compared.
Selected Comparable Company Analysis. Using publicly available information,
Barber & Bronson reviewed certain financial information and ratios of each of
the following publicly-traded companies that Barber & Bronson deemed, through
experience and discussions with management of UStel, to be reasonably similar
(in type of business and size) to Arcada: Equalnet Holding Corp.; Group Long
Distance, Inc.; Midcom Communications, Inc.; Network Long Distance; Phoenix
Network, Inc.; SA Telecommunications, Inc.; Total Tel USA Communications,
Inc.; Touch Tone America, Inc.; and US Wats, Inc. (the "Publicly-Traded
Comparables").
Barber & Bronson compared (i) LTM revenues, (ii) LTM EBITDA, (iii) LTM EBIT,
(iv) LTM net income, and (v) total assets of the Publicly-Traded Comparables
with those of Arcada. Barber & Bronson also calculated a range of enterprise
value multiples for such companies by dividing the respective enterprise
values by items (i) through (v) above for each of the Publicly-Traded
Comparables. After removing the highest and lowest multiple for each of the
aforementioned items in order to diminish the multiple variance of the
selected population, Barber & Bronson analyzed the remaining multiples and
computed the highest, lowest and mean multiple for each of the selected items.
This analysis indicated that the approximate enterprise value multiple of
revenues ranged from .5x to 1.9x, with a mean of .9x; the approximate
enterprise value multiple of EBITDA ranged from 10.7x to 10.7x, with a mean of
10.7x; the approximate enterprise value multiple of EBIT was not available
because there was an insufficient number of comparable companies generating
positive EBIT; the approximate enterprise value multiple of net income was
not available because there was an insufficient number of comparable companies
generating positive net income; and the approximate enterprise value multiple
of total assets ranged from 1.0x to 2.6x, with a mean of 1.8x.
<PAGE>
Barber & Bronson subsequently used the high, low and mean multiples derived
from the Publicly-Traded Comparables and applied such multiplies to the
corresponding financial information for Arcada, based on Arcada's financial
statements for the LTM ended June 30, 1997, to determine a range and mean for
Arcada's implied enterprise value. The resulting range of implied enterprise
values for Arcada was then adjusted to account for net debt (debt minus cash),
by subtracting $1.6 million, yielding a range of implied equity values for
Arcada.
Based upon a range of revenue multiples, the implied enterprise value of
Arcada ranged from approximately $6.5 million to approximately $24.7 million;
after subtracting net debt, the implied equity value of Arcada ranged from
approximately $4.9 million to approximately $23.1 million. Based upon a
range of EBITDA multiples, the implied enterprise value of Arcada ranged from
approximately $13.7 million to approximately $13.7 million; after subtracting
net debt, the implied equity value of Arcada ranged from approximately $12.1
million to approximately $12.1 million. Based upon a range of total asset
multiples, the implied enterprise value of Arcada ranged from approximately
$4.4 million to approximately $11.4 million; after subtracting net debt, the
implied equity value of Arcada ranged from approximately $2.8 million to
approximately $9.8 million.
None of the Publicly-Traded Comparables utilized as a comparison is identical
to Arcada. Accordingly, an analysis of publicly-traded comparable companies
is not mathematical, rather it involves complex consideration and judgements
concerning differences in financial and operating characteristics of the
comparable companies and other factors that could affect the public trading of
the comparable companies or company to which they are being compared.
Pro Forma Analysis. Barber & Bronson reviewed and analyzed the projections
for the combined company based upon operating and financial projections
provided to it by the managements of UStel and Arcada and the terms of the
Merger. Barber & Bronson noted that under the terms of the Merger Agreement
the number of shares of UStel Common Stock issuable ranged from 2.1 million to
6.3 million, based on the Average Price, as defined in the Merger Agreement.
Furthermore, based upon discussions with management, Barber & Bronson assumed
funding costs of the cash consideration issued in the Merger would be 12% per
annum. The pro forma analysis does not take into account management's plans
to complete a $15 million private placement offering, the terms of which have
not yet been agreed.
Barber & Bronson reviewed, utilizing a range of Average Prices, certain pro
forma financial effects resulting from the Merger for each of the fiscal years
ending December 31 in the three year period ending December 31, 1999. Barber
& Bronson estimated, on a pro forma basis utilizing Average Prices of $2.00
and $2.50, the Merger would be accretive to the earnings per share ("EPS") of
UStel in each of such periods. Barber & Bronson estimated, on a pro forma
basis utilizing an Average Price of $1.50, the Merger would be accretive to
the EPS of UStel in fiscals 1997 and 1998 and 10.9% dilutive in fiscal 1999.
Such estimates were, in part, based upon management's plans for achieving at
least $.75 million, $1.5 million and $2.2 million for fiscal 1997, 1998 and
1999, respectively, of post-Merger savings or revenue enhancements.
Historical Stock Price Study. Barber & Bronson reviewed the closing daily
market price and trading volume of the UStel Common Stock for the period
beginning March 21, 1997 and ending September 19, 1997. In addition, Barber &
Bronson reviewed the closing weekly market price of the UStel Common Stock
during the same period. Barber & Bronson compared the weekly closing market
price performance of the UStel Common Stock for such period to: (a) the
Standard and Poor's 500 Composite Index ("S&P 500"); and (b) a
"telecommunications related index" developed by Barber & Bronson comprised of
the Publicly-Traded Comparables, to provide perspective on the current and
historical price performance of the UStel Common Stock relative to such
indices. This analysis shows that, during such period, the UStel Common Stock
underperformed both the S&P 500 and the "telecommunications related index" of
the Publicly-Traded Comparables. In addition, Barber & Bronson observed that
the recent price of the UStel Common Stock represents: (a) a 35.3% discount
over the average closing price of the UStel Common Stock over the six month
period ended September 19, 1997; (b) a 50.0% discount over the high closing
price realized over such period; (c) a 37.5% discount over the median price of
the UStel Common Stock realized over such period; (d) the low closing price
over the same such period; and (e) a 47.0% discount over the closing price of
the UStel Common Stock on June 3, 1997, which is the day before the Merger was
announced.
Barber & Bronson used a price for a share of UStel Common Stock as of
September 19, 1997 ($2.188) in many of the calculations set forth herein to
reflect a price for such shares on a date very close in time to the time of
its opinion; however, Barber & Bronson recognizes in rendering its opinion
that at the time the Merger was announced (June 4, 1997) the closing price of
a share of UStel Common Stock was approximately $4.125 per share.
Historical Financial Data Study. Barber & Bronson reviewed and analyzed the
financial information for UStel including the Annual Reports on Form 10-KSB
and Quarterly Reports on Form 10-QSB. In addition, Barber & Bronson reviewed
and analyzed the financial information for Arcada including the audited
financial statements as of and for the years ended December 31, 1996 and 1995,
the unaudited financial statements as of and for the six months ended June 30,
1997 and 1996, and the related unaudited pro-forma private company adjustments
schedules as prepared by UStel and Arcada management.
Other Factors and Analysis. In the course of preparing its opinion, Barber &
Bronson performed certain other analyses and reviewed certain other matters,
including, among other things: (i) the businesses and operations of UStel and
Arcada; and (ii) other factors it deemed relevant.
Barber & Bronson is an investment banking and advisory firm, which as part of
its investment banking business, is regularly engaged in the valuation of
businesses and their securities in connection with mergers, acquisitions, <PAGE>
underwritings, sales and distributions of securities, private placements and
valuations for corporate and other purposes. In February 1997, Barber &
Bronson underwrote a public offering of UStel securities. B C Capital, an
affiliate of Barber & Bronson, has since February 1997, acted as a financial
consultant to UStel and is acting as financial advisor to UStel in connection
with the Merger.
Pursuant to an engagement letter dated September 22, 1997, UStel agreed to pay
Barber & Bronson a fee of $50,000 upon delivery of the Barber & Bronson
Opinion. In addition, UStel has agreed to indemnify Barber & Bronson to the
full extent lawfully permitted from and against certain liabilities that may
arise out of its engagement by UStel and in the rendering of its opinion. As
compensation for its services as financial advisor, UStel has agreed to pay B
C Capital a fee, upon consummation of the Merger, of approximately $505,000,
reimburse B C Capital for reasonable out-of-pocket expenses, and indemnify B C
Capital for liabilities that may arise out of its engagement by UStel. For
the various advisory and investment banking services previously performed for
UStel, both Barber & Bronson and B C Capital have received customary fees and
warrants to acquire UStel common stock. In the ordinary course of its
business, Barber & Bronson may actively trade in the equity securities of
UStel for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such
securities. UStel also is obligated to pay a finder's fee to Mr. Fox based on
a sliding scale formula, for introducing Arcada to UStel. The fee is
contingent on Closing and is equal to 5% of the first million dollars, 4% of
the second million dollars, 3% of the third million dollars, 2% of the fourth
million dollars and 1% of the balance of the purchase price paid on UStel for
Arcada. Based on 3,150,000 shares of UStel Common Stock being issued in the
Merger, the fee to Mr. Fox is estimated to be $243,750. This fee is payable
half in cash and half in stock of UStel.
Interests of Certain Persons in the Merger
The Merger Agreement provides that from and after the Effective Time, UStel
will obtain directors insurance for the Arcada directors against liabilities
arising prior to the Effective Time. See "THE MERGER AGREEMENT - DIRECTOR'S
INSURANCE."
Also, at the Effective Time, Frank Bonadio, currently the President of Arcada,
will enter into an employment agreement with UStel and will become President
and Chief Operating Officer and a Director of UStel.
Governmental and Regulatory Approvals
Certain aspects of the Merger will require notification to, and filings with,
authorities in certain states, the Federal Communications Commission and state
public utilities commissions where Arcada and UStel currently operate long
distance services.
The obligations of UStel and Arcada to consummate the Merger are subject to
the approval of governmental or regulatory authorities.
Federal Income Tax Consequences
The following discussion is based upon the Internal Revenue Code, existing and
proposed regulations thereunder, reports of congressional committees, judicial
decisions and current administrative rulings and practices. Any of these
authorities could be repealed, overruled or modified at any time after the
date hereof. Any such change could be retroactive and, accordingly, could
modify the tax consequences discussed herein. No ruling from the Internal
Revenue Service (the "IRS") with respect to the matters discussed herein has
been requested and there is no assurance that the IRS would agree with the
conclusions set forth in this discussion.
This discussion is for general information only and does not address the
federal income tax consequences that may be relevant to particular
stockholders of Arcada in light of their personal circumstances or to certain
types of stockholders of Arcada (such as dealers in securities, insurance
companies, foreign individuals and entities, financial institutions and
tax-exempt entities) who may be subject to special treatment under the federal
income tax laws. This discussion also does not address any tax consequences
under state, local or foreign laws.
Exchange of Arcada Common Stock Pursuant to the Merger. The Merger is intended
to qualify as a reorganization under section 368(a) of the Code. Accordingly,
no gain or loss would be recognized by Arcada, UStel or Merger Sub as a result
of the Merger. Furthermore, no gain or loss would be recognized by Arcada
shareholders upon the conversion of their Arcada Common Stock into shares of
UStel Common Stock. However, gain or loss may have to be recognized by Arcada
shareholders with respect to the portion of the Merger consideration received
by such shareholders to the extent the Merger consideration consists of the
Convertible Debentures and the $5,000,000 of cash. The aggregate tax basis of
the shares of UStel Common Stock received in exchange for shares of Arcada
Common Stock pursuant to the Merger should be the same as the aggregate tax
basis for such shares of Arcada Common Stock at the time of the Merger and the
holding period for shares of UStel Common Stock received in exchange for
shares of Arcada Common Stock pursuant to the Merger should include the
holding period of such shares provided that they were held as capital assets
as of the Effective Time.
If the Merger does not qualify as a reorganization for federal income tax
purposes, no gain or loss would be recognized by UStel, Merger Sub or Arcada.
However, an Arcada shareholder would recognize gain or loss upon the
conversion of Arcada Common Stock into UStel Common Stock pursuant to the
Merger in an amount equal to the difference between the fair market value of
UStel Common Stock received by such stockholder pursuant to the Merger and its
adjusted tax basis in the Arcada Common Stock surrendered in exchange
therefore. Such gain or loss would be capital gain or loss if the shares of
Arcada Common Stock were held as a capital asset and would be long-term gain <PAGE>
or loss if such shares had been held for more than one year as of the
Effective Time.
ARCADA SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF PARTICIPATING IN THE MERGER, INCLUDING
THE APPLICABILITY OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, CHANGES IN
APPLICABLE TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION.
Anticipated Accounting Treatment
In accordance with generally accepted accounting principles, the recorded
assets and liabilities of UStel will be carried forward at recorded book
values. The assets and liabilities of Arcada will be recorded through
allocation of the purchase price based upon estimated fair values of such
assets and liabilities. Goodwill will be recorded as a result of purchase
accounting for this Merger and costs associated with the Merger will be
recorded as a component of the purchase price. See "UNAUDITED PRO FORMA
CONDENSED FINANCIAL INFORMATION."
Dissenters' Rights
UStel Shareholders have the right to dissent from the Merger and, in certain
circumstances, to receive payment for their shares in accordance with the
terms of Minnesota Business Corporation Act ("MBCA"). The following discussion
is not a complete statement of the law pertaining to dissenters' rights under
the MBCA and is qualified in its entirety by the full text of the relevant
provisions of MBCA, which is reprinted in its entirety as Appendix C to this
Proxy Statement/Prospectus.
APPENDIX B SHOULD BE REVIEWED CAREFULLY BY ANY UStel SHAREHOLDER WHO WISHES TO
EXERCISE DISSENTERS' RIGHTS ("SHAREHOLDER") OR WHO WISHES TO PRESERVE THE
RIGHT TO DO SO, SINCE FAILURE TO COMPLY WITH THE PROCEDURES OF THE STATUTE
WILL RESULT IN THE LOSS OF DISSENTERS' RIGHTS.
If the shares of UStel Common Stock of a Shareholder are held in street name,
either the beneficial owner or the broker in whose name the shares are
registered may dissent from the Merger by following the following procedures.
In addition, the beneficial owner must provide the written consent of the
registered holder to such dissent with or prior to the assertion of
dissenters' right. The record shareholder may dissent with respect to all
shares held by one beneficial owner and must provide written notice to UStel
of the name and address of each such dissenting beneficial owner.
Under the MBCA, any Shareholder who (i) files with UStel before the Special
Meeting written notice of his or her intent to demand the fair value for his
or her shares of UStel Common Stock if the Merger is consummated and becomes
effective and (ii) does not vote his or her shares of UStel Common Stock at
the Special Meeting in favor of the proposal to approve the Merger shall be
entitled, if the Merger is approved and effected, to receive a cash payment
equal to the fair value of such Shareholder's shares of UStel Common Stock
upon compliance with the applicable statutory procedural requirements. While
a Shareholder who votes for the Merger will have no dissenters' rights under
the MBCA, the failure by any Shareholder to vote against the proposal to
approve the Merger will not in and of itself constitute a waiver of such
rights.
Written notice of a Shareholder's intent to demand payment for such
Shareholder's shares of Common Stock must be filed with UStel: 6167 Bristol
Parkway, Suite 100, Culver City, California 90230, Attn: Corporate Secretary,
before the vote on the Merger at the Special Meeting. A vote against the
Merger at the Special Meeting will not constitute the notice required under
the MBCA. A Shareholder who does not satisfy each of the requirements of
Sections 302A.471 and 302A.473 of the MBCA is not entitled to payment for such
Shareholder's shares of UStel Common Stock under the dissenters' rights
provisions of the MBCA and will be bound by the terms of the Merger Agreement
if the Merger is consummated.
If the Merger is approved at the Special Meeting, UStel must send written
notice to all Shareholders who have given written notice of dissent and not
voted in favor of the Merger, a notice containing: (i) the address where the
demand for payment and Certificates must be sent and the date by which they
must be received, (ii) any restrictions on transfer of uncertified shares that
will apply after the demand for payment is received, (iii) a form to be used
to certify the date on which the Shareholder or the beneficial owner on whose
behalf the Shareholder dissents, acquired the shares (or an interest in them)
and to demand payment, and (iv) a copy of the provisions of the MBCA set forth
in the Annex with a brief description of the procedures to be followed under
those provisions. A Shareholder who is sent such a notice and who wishes to
assert dissenters rights must demand payment and deposit his or her
Certificates with UStel within 30 days after such notice is given. Prior to
the Effective Time, a Shareholder exercising dissenters' rights retains all
other rights of a Shareholder. From and after the Effective Time, dissenting
Shareholders will no longer be entitled to any rights of a Shareholder,
including, but not limited to, the right to receive notice of meetings, to
vote at any meetings or to receive dividends, and will only be entitled to any
rights of appraisal as provided by the MBCA.
After the Effective Time or upon receipt of a valid demand for payment,
whichever is later, UStel must remit to each dissenting Shareholder who
complied with the requirements of the MBCA the amount the Company estimates to
be the fair value of such Shareholders' shares of Common Stock, plus interest
accrued from the Effective Time to the date of payment. The payment also must
be accompanied by certain financial data relating to UStel , UStel's estimate
of the fair value of the shares and a description of the method used to reach
such estimate, and a copy of the applicable provisions of the MBCA with a
brief description of the procedures to be followed in demanding payment. If a
dissenting Shareholder believes that the amount remitted is less than the fair
value of such shares plus interest, such dissenting Shareholder may give <PAGE>
written notice to UStel of his or her own estimate of the fair value of the
shares, plus interest, within 30 days after UStel mails its remittance, and
demand payment of the difference.
If UStel receives a demand from a dissenting Shareholder to pay such
difference, it shall, within 60 days after receiving the demand, either pay to
the dissenting Shareholder the amount demanded or agreed to by the dissenting
Shareholder after discussion with the Company or file in court a petition
requesting that the court determine the fair value of the shares.
The court may appoint one or more appraisers to receive evidence and make
recommendations to the court on the amount of the fair value of the shares.
The court shall determine whether the dissenting Shareholder has complied with
the requirements of Section 302A.473 of the MBCA and shall determine the fair
value of the shares, taking into the account any and all factors the court
finds relevant, computed by any method or combination of methods that the
court, in its discretion, sees fit to use. The fair value of the shares as
determined by the court is binding on all dissenting Shareholders.
Costs of the court proceeding shall be determined by the court and assessed
against UStel, except that part or all of the costs may be assessed against
any dissenting Shareholders whose actions in demanding supplemental payments
are found by the court to be arbitrary, vexatious or not in good faith.
If the court finds that UStel did not substantially comply with the relevant
provisions of the MBCA, the court may assess the fees and expenses, if any, of
attorneys or experts as the court deems equitable against UStel. Such fees
and expenses may also be assessed against any party in bringing the
proceedings if the court finds that such party has acted arbitrarily,
vexatiously or not in good faith, and may be awarded to a party injured by
those actions. The court may award, in its discretion, fees and expenses of
an attorney for the dissenting Shareholders out of the amount awarded to such
Shareholders if any.
A Shareholder of record may assert dissenters' rights as to fewer than all of
the shares registered in such Shareholder's name only if he or she dissents
with respect to all shares beneficially owned by any one beneficial
Shareholder and notifies the Company in writing of the name and address of
each person on whose behalf he or she asserts dissenters' rights. The rights
of such a partial dissenting Shareholder are determined as if the shares as to
which he or she dissents and his or her other shares were registered in the
names of different Shareholders.
Under Subdivision 4 of Section 302A.471 of the MBCA, a Shareholder has no
right, at law or in equity, to set aside the approval of the Merger Agreement
or the consummation of the Merger except if such adoption or consummation was
fraudulent with respect to such Shareholder or UStel.
Resale of UStel Common Stock
The UStel Common Stock and any shares of UStel Common Stock obtained upon
conversion of the Convertible Debentures issued pursuant to the Merger will be
subject to a "lock-up" restricting sales of UStel Common Stock for up to
February 14, 1999. See "THE MERGER AGREEMENT - Lock-up."
PAGE
<PAGE>
THE MERGER AGREEMENT
THE FOLLOWING IS A SUMMARY OF CERTAIN PROVISIONS OF THE MERGER AGREEMENT,
WHICH APPEARS AS APPENDIX A TO THIS PROXY STATEMENT/PROSPECTUS AND IS
INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING SUMMARY INCLUDES THE MATERIAL
TERMS OF SUCH AGREEMENT BUT IS NOT NECESSARILY COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT.
Effective Date and Time of the Merger
The Merger will become effective at the time of the acceptance of the Plan of
Merger by the Secretary of State of the State of Washington. As used herein,
the term "Effective Date" means the day on which the Effective Time occurs.
The parties anticipate filing the Articles of Merger as soon as practicable
after the approval of the Merger by the shareholders of UStel and Arcada.
However, the parties are unable to predict when or if the Effective Time will
occur.
Conditions to the Consummation of the Merger
The obligations of UStel and Arcada to consummate the Merger are subject to,
among other things, the satisfaction of the following conditions: (i) the
approval of the Merger and the Merger Agreement by the requisite vote of the
shareholders of UStel and Arcada; (ii) the receipt of all applicable
regulatory and governmental approvals and consents and the expiration of all
statutory and regulatory waiting periods; (iii) the absence of any order,
decree or injunction of a court or agency of competent jurisdiction that
enjoins or prohibits the consummation of the Merger; (iv) the effectiveness of
the Registration Statement and the absence of any stop order suspending the
effectiveness thereof or any proceedings for that purpose initiated by the
Commission concerning the issuance of the UStel Common Stock to be issued in
the Merger and upon conversion of the Convertible Debentures and the
qualification of such shares under applicable blue-sky laws, if necessary,
and; (v) UStel having on hand $5,000,000 in cash for payment of the cash
portion of the Merger consideration.
The obligation of UStel to consummate the Merger is subject to the
satisfaction or waiver of certain additional conditions, including, without
limitation, the following: (i) the continued accuracy of representations and
warranties of Arcada and the performance by Arcada of its covenants and
agreements made in the Merger Agreement, except where the failure of such
representations and warranties to be accurate or the failure to perform such
covenants or agreements would not have a material adverse affect on UStel;
(ii) the receipt of all regulatory and governmental consents, waivers,
clearances, approvals and authorizations required in connection with the
transactions contemplated by the Merger Agreement without the imposition of
any condition that has not normally been imposed in such transactions and
would have a material adverse effect on Arcada or UStel; (iii) the receipt of
an opinion, dated the date of the closing, from Cairncross & Hempelmann,
counsel to Arcada; (iv) the absence of any material adverse change in the
overall financial condition, businesses or results of operations of Arcada;
(v) the receipt of a certificate of officers of Arcada and such other
documents necessary to evidence fulfillment of the conditions precedent to the
closing of the Merger; (vi) that certain outstanding severance obligations to
former employees of Arcada are assumed by the Arcada shareholders; (vii) that
the shareholders of Arcada have entered into lock-up agreements; and (ix) that
the executive officers and directors of Arcada entered into agreements to vote
their shares of Arcada in favor of the Merger in any shareholder vote of the
Arcada Shareholders.
The obligation of Arcada to consummate the Merger is subject to the
satisfaction or waiver of certain additional conditions, including, without
limitation, the following: (i) the continued accuracy of the representations
and warranties of UStel and Merger Sub and the performance by each of UStel
and Merger Sub, of its covenants and agreements made in the Merger Agreement,
except where the failure of such representations and warranties to be accurate
or the failure to perform such covenants and agreements would not have a
material adverse effect on UStel, (ii) the receipt of an opinion, dated the
date of closing, from Freshman, Marantz, Orlanski, Cooper & Klein, counsel to
UStel and Merger Sub, including an opinion as to the tax aspects of the
Merger; (iii) UStel having cash of at least $5,000,000 at the Effective Time
for payment of the cash portion of the Merger consideration; (iv) the absence
of any material adverse change in the overall financial condition, businesses
or results of operations of UStel; (v) the directors and executives, officers
of UStel agree in writing to vote their shares of Common Stock in favor of the
Merger and to use their best efforts to cause institutions they represent, if
any, to vote their shares in favor of the Merger; (vi) the receipt of a
certificate of officers of UStel and Merger Sub, and other such other
documents necessary to evidence fulfillment of the conditions precedent to the
closing of the Merger; (vii) the receipt of all regulatory and governmental
consents, waivers, clearance, approvals and authorizations required in
connection with the transactions contemplated by the Merger Agreement and
without the imposition of any condition that has not normally been imposed in
such transaction and would have a material adverse effect on UStel or Arcada,
and; (viii) UStel shall be in compliance with all quantitative and qualitative
maintenance criteria required for continued listing of the UStel Common Stock
on the NASDAQ Small Cap Market, and the five day trading average closing price
of the UStel Common Stock for the period ending on the second to the last day
prior to the Closing shall be greater than $1.00.
Business of Arcada Pending the Merger
Under the Merger Agreement, until the Effective Time, Arcada is generally
obligated to conduct its business in the ordinary course and consistent with
past practice and prudent business practice. In addition, Arcada has agreed to
use its best efforts to preserve its business organizations, keep available
the present services of its employees and preserve the goodwill of its
customers and other business relationships. The Merger Agreement also provides
that, prior to the Effective Time, except as otherwise consented to by UStel, <PAGE>
as permitted by the Merger Agreement or as required by law, Arcada will not:
(i) change any provisions of its articles of incorporation or bylaws; (ii)
change the number of shares of its authorized or issued capital stock, (iii)
issue, grant or amend any options, warrants or other rights to purchase
capital stock; (iv) split, combine or reclassify any shares of its capital
stock; (v) declare, set aside or pay any dividends or other distributions on
its capital stock; (vi) redeem or otherwise acquire any shares of its capital
stock; (vii) grant any severance or termination pay to or enter into or amend
any employment agreement with or increase the amount of payments or fees to
its employees, officers or directors except as consistent with past practice;
(viii) make capital expenditures in excess of $25,000 per project or $200,000
in the aggregate; (ix) change in any material manner its pricing policies or
any other business or customer policies; (x) guarantee the obligations of any
other person except in the ordinary course of business consistent with past
practice; (xi) acquire, sell, transfer, assign, encumber or otherwise dispose
of assets other than in the ordinary course of business; (xii) enter into,
amend or terminate certain contracts having a term of one year or more or
calling for the payment of $25,000 or more; (xiii) engage or participate in
any material transaction or incur or sustain any material obligation except as
one in the ordinary course of business consistent with past practice; (xiv)
make any contributions to any benefit plans except in an amount consistent
with past practice; (xv) increase the number of Arcada's full-time employees;
(xvi) acquire any real property.
Waiver and Amendment
At any time prior to the consummation of the Merger, the parties to The Merger
Agreement may (i) amend the Merger Agreement, (ii) extend the time for the
performance of any of the obligations or other acts of any other party
thereto, (iii) waive any inaccuracies in the representations and warranties of
any other party contained therein or in any document delivered pursuant
thereto, or (iv) waive compliance with any of the agreements or conditions
contained therein; provided, however, that after any approval of the Merger by
the UStel and Arcada Shareholders, there may not be, without further approval
of such shareholders, any amendment or waiver of the Merger Agreement that
reduces the amount or changes the form of the Merger consideration to be
delivered to the Arcada Shareholders.
Termination
The Merger Agreement may be terminated at any time prior to The Effective
Time, whether before or after approval of the Merger by the UStel and Arcada
Shareholders:
(a) by mutual written consent of all the parties to the Merger
Agreement;
(b) by any party to the Merger Agreement (i) if the Effective Time
has not occurred on or prior to January 31, 1998 unless the failure of such
occurrence is due to the failure of the party seeking to terminate the Merger
Agreement to perform or observe its agreements and conditions set forth in
the Merger Agreement; or (ii) 10 days after written certification of the vote
of the UStel Shareholders is delivered to Arcada indicating that the UStel
Shareholders failed to approve the Merger at the Special Meeting (or any
adjournment thereof);
(c) by UStel if Arcada (i) at the time of such termination there has been
a material adverse change in the consolidated financial condition from that
set forth in Arcada's financial statements for the year ended December 31,
1996; (ii) there has been any material breach of any covenant of Arcada under
the Merger Agreement and such breach has not been remedied within 45 days
after receipt by Arcada of notice in writing from UStel specifying the nature
of such breach and requesting that it be remedied; (iii) if holders of more
than ten percent of the shares of UStel capital stock entitled to notice of
and to vote at the UStel Special Meeting exercise their dissenters rights in
connection with the Special Meeting.
(d) by Arcada if (i) if the Average Price is less than $1.00 per share; (ii) at
the time of such termination there has been a material adverse change in the
consolidated financial condition of UStel from that set forth in UStel's
financial statements for the year ended December 31, 1996; (iii) there has
been any material breach of any covenant of UStel under the Merger Agreement
and such breach has not been remedied within 45 days after receipt by UStel of
notice in writing from Arcada specifying the nature of such breach and
requesting that it be remedied.
Break-Up Fees
To compensate Arcada for certain costs incurred in connection with the
rendition of the following services pending the Closing pursuant to a
Management Services Agreement, UStel agreed to pay Arcada a fee of $125,000,
in the event the Merger is terminated for any reason.
Lock-Up
As part of the Merger Agreement, the Arcada Shareholders will be restricted
from selling shares of UStel Common Stock received in the Merger (the
"Lock-up") until February 14, 1999 except as follows: (i) an aggregate of
105,000 shares of Stock may be sold within six months of the Closing, (ii) an
additional 210,000 shares may be sold within one year of the Closing. All the
shares issuable on conversion of the Convertible Debentures will be subject to
a lock-up until February 14, 1999. After February 14, 1999, there will be no
further restrictions under the terms of the Lock-up. To the extent that the
Representative of the Underwriters in UStel's February 1997 public offering
releases other shareholders from certain lock-up agreements entered into in
connection with such public offering, the Representative is obligated to
release the Arcada shareholders from their lock-up as to a pro rata amount.
Exchange of Stock Certificates <PAGE>
Promptly after the Effective Date, an agreed-upon exchange agent (the
"Exchange Agent") will mail written transmittal materials concerning the
exchange of stock certificates to each record holder of shares of Arcada
Common Stock outstanding at the Effective Date. The transmittal materials will
contain instructions with respect to the proper method of surrender of
certificates that immediately prior to the Effective Date represented shares
of Arcada Common Stock.
Upon surrender to the Exchange Agent of certificates formerly representing
shares of Arcada Common Stock for cancellation, together with properly
completed transmittal material, an Arcada Shareholder will be entitled to
receive the number of shares of UStel Common Stock, the Convertible Debentures
and a portion of the $5,000,000 in cash (and cash in lieu of any fractional
shares of UStel Common Stock) to which such holder is entitled as Merger
consideration. Arcada Shareholders will not be entitled to receive interest on
any cash payment received in the Merger.
Until surrendered, each certificate that, prior to the Effective Date,
represented Arcada Common Stock will be deemed for all corporate purposes to
evidence ownership of the number of whole shares of UStel Common Stock into
which the shares of Arcada Common Stock formerly represented thereby were
converted. All certificates so surrendered will be canceled. After the
Effective Date, there will be no further registration or transfers on the
records of Arcada of outstanding certificates representing shares of UStel
Common Stock.
If any new certificate for UStel Common Stock is to be issued in a name other
than that in which the certificate surrendered in exchange therefore is
registered, the new certificate will not be issued unless the certificate
surrendered in exchange is properly endorsed and otherwise in proper form for
transfer. In addition, the person requesting such transfer must pay any
transfer or other taxes required by the issuance of a new certificate for
shares of UStel Common Stock to a person other than the registered holder of
the certificate surrendered, or must establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not payable.
Fractional shares of UStel Common Stock will not be issued in the Merger.
Instead, each Arcada Shareholder who would otherwise be entitled to a
fractional share will receive cash in lieu thereof.
Expenses
All legal and other costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby will be borne by the party
incurring such costs and expenses unless otherwise specified in the Merger
Agreement.
Post-Merger Dividend Policy
Dividends may be paid out on the UStel Common Stock as and when declared by
the UStel Board out of funds legally available for the payment of dividends.
UStel is restricted by its Credit Facility from paying dividends. UStel has
not ever paid cash dividends on its Common Stock. The Boards of Directors of
UStel does not anticipate paying cash dividends in the foreseeable future
after the Merger as they intend to retain future earnings to finance the
growth of the business.
The payment of future cash dividends will depend on such factors as earnings
levels, anticipated capital requirements, the operating and financial
conditions of UStel and other factors deemed relevant by the UStel Board.
UStel is presently restricted in the payment of dividends under its Credit
Facility.
<PAGE>
BUSINESS OF UStel
UStel provides long distance telecommunications services, consisting primarily
of direct dial long distance telephone transmissions to small and medium sized
commercial and larger residential customers throughout the United States. The
Company also offers a variety of service options, including "1+" dialing,
"800" service, calling cards, operator services, private line networks and
data transmission. With the acquisition in July 1997 of Pacific Cellular, a
Las Vegas-based reseller of wireless communications, the Company also offers
discount cellular and paging services to commercial and residential
customers. Since commencing operations in January, 1993, the Company's
subscriber base has grown to in excess of 25,000 customers in June 1997,
consisting primarily of medium-sized businesses located predominantly in the
State of California. In addition, the Company's monthly revenues have
increased from approximately $10,000 in January, 1993 to approximately
$1,875,000 in June 1997.
General
The Company owns two switch centers located in Los Angeles and Beverly Hills,
California, and leases switch capacity in New York, New York from WilTel, a
national telecommunications service provider. The Company is seeking to
increase its customer base and usage of its switches in order to attain the
volume levels necessary to realize the economic advantages from routing such
traffic through its owned or leased switch capacity. The UStel switches are
non-network switches, meaning that they are only capable of switching calls
for customers in the facility in which the switches are located, calling card
service and other special customer services. The following table provides
certain information concerning the Company's switching centers:
<PAGE>
<TABLE>
<CAPTION>
Ports utilized at Percentage utilized
Location Available ports Dec. 31, 1996 Dec. 31, 1996
<S> <C> <C> <C>
110 East Ninth Street,
Los Angeles CA 15,000 788 5.3%
9560 Wilshire Boulevard
Beverly Hills, CA 15,000 1,364 9.1%
60 Hudson Street
New York, NY (1) 38,400 648 1.7%
(1) This switch is leased from and is shared with WilTel.
</TABLE>
The Company is primarily a non-facilities based interexchange carrier that
routes its customers' calls over a transmission network consisting primarily
of long distance lines secured by the Company from a variety of other
carriers. This enables the Company to avoid the substantial capital
requirements of building and maintaining its own extensive transmission
facilities. The terms of these lease arrangements vary from month-to-month to
longer term arrangements and the lease costs may be priced on a usage
sensitive basis or at a fixed monthly rate. Because the amount the Company
charges its customers for long distance telephone calls is not based on the
cost to transmit such calls, long distance calls transmitted over facilities
leased on a fixed cost basis generally are more profitable to the Company than
long distance calls transmitted over usage sensitive circuits, assuming a
sufficient volume of calls is routed over the fixed-cost route.
Accordingly, the Company's strategy is to reduce overall transmission costs
by development of its own dedicated switch network and leasing dedicated
lines at fixed monthly rates and to route as many of its customers' calls as
possible over such lines. The success of this strategy depends on the
Company's ability to generate a sufficient volume of its customers' calls over
such facilities to exceed the fixed costs of leasing such facilities.
PAGE
<PAGE>
Recent Developments
Consortium 2000. In July 1997, UStel completed the acquisition of Consortium
2000, Inc., for the issuance of an aggregate of 1,076,923 shares of the Common
Stock of UStel and Consortium 2000 became a wholly-owned subsidiary of UStel.
Consortium 2000 formerly had a marketing agreement with UStel pursuant to
which it marketed telephone services on behalf of UStel. Royce Diener, Wouter
van Biene and Jerry Dackerman, executive officers and directors of UStel were
former principal shareholders of Consortium 2000. Consortium 2000 is a
telecommunications marketing and consulting services provider which refers
telecommunications customers to long distance carriers, regional carriers,
interexchange carriers, resellers and other aggregators. It derives its
revenues from sales agent commissions paid by the carriers to whom it refers
its customers. Consortium 2000 obtains customers by offering to analyze the
customer's long distance calling patterns, usage volume and the specialized
telecommunications needs of its individual customers. Utilizing network
analysis software and the expertise of its employees, Consortium 2000 provides
its customers with recommendations as to which long distance carrier is best
suited to provide the particular and specialized telecommunication needs of
its individual clients at the lowest possible costs.
Consortium 2000 has independent sales agent agreements with many of the major
long distance carriers and is able to recommend an array of carriers to its
customers or it can recommend a division of the customer's business among
several carriers in order to avoid excessive concentration with a single
carrier. Consortium 2000 also provides its customers with ongoing
telecommunications services and technical support by monitoring any changes in
client needs as well as developments in the telecommunications industry which
may provide new opportunities for service to its clients. Consortium 2000 is
not a long distance carrier, reseller, rebiller or representative for any
particular long distance provider and does not operate a telecommunications
network. It does, however, utilize the purchasing power and
economies-of-scale of its client base in order to negotiate with a variety of
long distance providers for special pricing and enhanced services for its
clients.
In mid-1994, UStel entered into a non-exclusive sales agent agreement with
Consortium 2000. As of December 31, 1996, approximately 90% of UStel's
customers base had been referred to the Company by Consortium 2000.
Conversely, approximately 70% of Consortium 2000's revenues during the twelve
months ended December 31, 1996 consisted of sales commissions resulting from
referrals of customers to UStel. Subsequent to the acquisition of Consortium
2000 by UStel, Consortium 2000 has functioned as a wholly-owned subsidiary of
UStel and as an independent communication services management consultant with
the ability to place members with a broad range of carriers. Based upon its
knowledge of comparative tariffs among alternative carriers, Consortium 2000
believes that UStel frequently represents the low-cost alternative and will
accordingly continue, where appropriate to its clients' needs, to refer its
customers to UStel. However, where a customer's needs are better served by
another carrier, Consortium 2000 will refer such customer to the appropriate
carrier and UStel will earn a sales agent commission with respect to such
business.
Pacific Cellular. In July 1997 UStel acquired substantially all of the
assets of the Wireless Division of Pacific Communications, Inc. operating
under the name "Pacific Cellular", for an aggregate consideration consisting
of 304,014 shares of UStel, Common Stock (the "Transaction"). During the
period between January 23, 1998 and April 23, 1998 the shareholders of Pacific
Communications, Inc. have the right to put, i.e., to sell back to UStel up to
50% of the shares of UStel Common Stock which such shareholders received from
UStel in the Transaction. The price at which the shares must be purchased by
UStel upon exercise of the put option is $3.81 per share. If the UStel Common
Stock received by the shareholders in the Transaction has not been registered
by UStel with the Commission by April 23, 1998, the put option extends to 100%
of the 304,014 shares of UStel Common Stock.
Pacific Cellular is a reseller of wireless telecommunications services
located in Las Vegas, Nevada which currently serves approximately 2,450
customers. Pacific Cellular has a reseller agreement with AT&T and a bulk
sales agreement with 360 Communications. Clients have a choice of carriers
when they contract for services. Pacific Cellular is also a sales agent for
Nextel.
Sutro Private Placement. In July 1997, UStel retained Sutro & Co., (the
"Sutro Private Placement") to use its best efforts to effect a private
placement of UStel securities. The terms of the private placement have not
yet been determined. If the Sutro Private Placement is completed, UStel will
be required to pay Sutro & Co. a cash placement fee of 6% of the aggregate
dollar amount of securities placed plus a warrant to purchase 2% of the
outstanding UStel Common Stock on a fully diluted basis. The warrant would be
exercisable for five years at an exercise price, subject to adjustment, equal
to the average closing price of the UStel Common Stock 10 trading days prior
to the closing of such financing. In addition, UStel is required to reimburse
Sutro & Co., for its out-of-pocket expenses in acting as placement agent.
Although UStel is seeking to raise up to $15,000,000 by means of the Sutro
Private Placement, there can be no assurance that this or any amount will be
raised in the Sutro Private Placement.
Discontinued Services and Products. During September 1997, UStel management
undertook a review of certain of the Company's services and products. This
analysis focused on profitability, growth potential and consistency with the
Company's strategic direction. On this basis, the Company determined that it
was appropriate to terminate a shared-tenant services arrangement which it had
operated for several years in Los Angeles, California. At the same time, the
Company decided to discontinue certain marketing programs which were not
producing desired results and were resulting in higher than normal customer
attrition and bad debt expense.
<PAGE>
Business Strategy
The Company's strategy is to achieve continued growth and profitability by
focusing its marketing efforts on small- to mid-sized businesses and by
reducing its overall cost of delivering long distance telecommunications
services. The Company's specific objectives are as follows:
Continue to Market Long Distance Telecommunications Services through its
Agent Network. The Company believes that direct sales are the most effective
means of adding customers who will have long-term loyalty to the Company. In
this regard, primarily utilizing the Consortium 2000 agent network, the
Company believes that it can access new customers by continuing to market
itself as a low-cost alternative compared to other long distance carriers,
marketing wireless, paging and other services through its marketing channels
and bundling of various telecommunications services.
Development of Dedicated Transmission Network. Using its current switches
as a base, the Company intends to develop a nationwide network of low-cost
telecommunications switches. This will enable the Company to convert a
substantial portion of its Switchless Traffic to lower cost Switched Traffic.
See "Transmission Network" below. The Company expects that this will
substantially improve operating margins overall. The Company also hopes to
negotiate more favorable rates with other long distance carriers relative to
Switchless Traffic.
Increase Name Recognition. The Company believes that its name is
well-recognized in the industry as providing reliable, low-cost
telecommunications services together with excellent customer service. The
Company will seek to increase customer awareness by targeting its products to
affinity purchasers and other groups which the Company believes will provide
it access to large customer bases.
Complete Installation of In-house Billing System. The Company believes
that it can achieve significant cost-savings and reduce reliance on its
working capital facility as a result of the recent installation of its own
dedicated billing system. The Company believes that the system will enable it
to improve cash flow by producing billings on a more timely basis and
permitting multiple billing cycles per month. The Company also believes that
the system will enhance customer service and reduce billing errors.
Make Strategic Acquisitions. The Company believes that opportunities
exist to acquire other small to mid-sized long distance carriers. Typically,
smaller carriers face difficulty reaching a critical mass of business and
accessing capital for expansion. The Company believes that it can achieve
attractive operating margins by placing the traffic of acquired companies on
UStel's transmission network and eliminating duplicative overhead.
The Long Distance Industry
On January 1, 1984, AT&T's divestiture of the Bell System went into effect.
As a result of the divestiture consent decree (the "AT&T Divestiture Decree"),
AT&T was forced to divest its 22 Bell Operating Companies ("BOCs"), which were
reorganized under seven regional holding companies known as RBOCs, such as
Pacific Telesis and US West. The RBOCs own and are responsible for operations
of the BOCs in each of their regions. The BOCs, as well as other independent
companies which provide local telephone service, are characterized as local
exchange carriers or "LECs". The LECs are responsible for providing dial
tone, local lines and billing for local service as well as local access for
long distance traffic.
The AT&T Divestiture Decree also required the RBOCs to provide all
inter-exchange carriers, such as the Company, with access to the local
telephone exchange facilities that is "equal in type, quality and price" to
that provided to AT&T. In addition, the BOCs were required to conduct a
subscription process allowing consumers to select their long distance
carrier. This development, known as "equal access," enabled consumers to
complete calls using their selected long distance carrier by simply dialing
"1" plus the area code and number. Prior to equal access, consumers using an
interexchange carrier other than AT&T had to dial a local number, then an
access code, then the area code and number of the call destination to complete
a call. With equal access, all inter Local Access and Transport Area ("LATA")
calls are routed automatically to the consumer's long distance carrier of
choice. The AT&T Divestiture Decree and the implementation of equal access
constitute the fundamental regulatory developments that allow interexchange
carriers other than AT&T, such as the Company, to enter and compete in the
long distance telecommunications market. A separate consent decree imposed
similar equal access requirements in areas in which GTE is the local exchange
carrier.
All interexchange carriers, including AT&T and the Company, pay charges to the
LECs for access to local telephone lines at both the originating and
terminating ends of all long distance calls, unless the Company is able to
install a dedicated line providing direct access from the customer to one of
the Company's switch centers. As is the case with most interexchange
carriers, access charges represent the single largest component of the
Company's cost of revenues. One element of the Company's strategy is to focus
on the development of "shared tenant services" and "shared services
providing," where the Company can install dedicated lines from commercial
customers concentrated in a single location such as a high rise building to
the Company's switch centers thereby bypassing the local access cost.
Since the AT&T Divestiture Decree, the long distance industry has experienced
rapid technological development. Prior significant technological change was
the advent of digital transmission technology, which represented an
improvement over analog technology. Because the BOCs and many LECs converted
rapidly to digital switches, digital technology was necessary for
interexchange carriers to connect to the LECs for equal access. Accompanying
the movement toward digital switching was the rapid development and
implementation of fiber optic circuitry, which also requires digital <PAGE>
technology. While AT&T had once been the only source of high quality
transmission facilities, several other companies, including MCI and Sprint,
entered the business of building transmission facilities using primarily fiber
optic circuits.
The construction of these additional transmission facilities created two
distinct groups in the long distance industry facilities-based carriers
(entities which own their own transmission network) and non-facilities-based
carriers (such as the Company). The surge in construction of new long-haul
facilities has created excess transmission capacity for long distance calls.
This excess capacity and the resultant decline in transmission rates have both
raised the break-even traffic volume for facilities-based carriers and
increased the difficulty of obtaining that volume through their internal
customer bases. Accordingly, facilities-based carriers have become both
wholesalers and retailers, selling their transmission capacity to both
non-facilities-based carriers and consumers. Non-facilities-based carriers
such as the Company have benefitted from the wider availability and the lower
cost of transmission services, as it has become possible for them to lease
circuits on attractive terms, particularly as their volume of business
increases to significant levels.
The AT&T Divestiture Decree and related developments prompted several hundred
new entrants into the long distance industry, including the Company. The
industry, however, has experienced rapid consolidation, primarily due to the
technological changes described above. Facilities-based carriers, many of
which were initially unprofitable due to their sizable capital outlays, began
acquiring other carriers to increase traffic for their networks in an effort
to cover fixed costs. Similarly, larger non-facilities-based carriers began
buying smaller carriers to build their traffic, improve their networking, and
increase their leverage in leasing transmission facilities from
facilities-based carriers.
Long Distance Services
The Company provides its customers with 24-hour long distance telephone
services to all points in the United States and to foreign countries. In
providing long distance telephone services, the Company offers a variety of
service options, including "1+" dialing (which avoids the need to dial a
separate access code to access the Company's long distance service), inbound
"800" service, "800" travel service, operator services, private line networks
and data transmission services. Under most of its service options, the
Company charges its customers a flat rate per minute, based upon whether the
call is to an intrastate, interstate or international destination, as well as
local access costs for long distance traffic.
A subscriber may access the Company's telecommunications transmission network
in several ways. If a subscriber is located in a given service origination
area that has been converted to equal access and such subscriber has selected
the Company as its primary long distance carrier, then access is gained by
dialing "1" plus the area code and number desired. A second method of access
is through dedicated access lines, which are private leased lines dedicated to
one or more customers and which provide a direct connection between the
customer's premises and the Company's long distance transmission network.
Another method of access available in both equal access and non-equal access
areas requires a subscriber to dial a seven- or ten-digit access number to
reach the Company s switch. Following the switch's signal, the subscriber
then enters his authorization code, area code and the telephone number of the
call destination. If the switch determines that the subscriber's
authorization code is valid, the switch directs the call to the desired
destination through the most cost-effective intercity transmission circuits
then available. The installation of automatic dialers at a subscriber's
location reduces the number of digits a subscriber must dial to complete a
long distance telephone call by automatically dialing the local seven- to
ten-digit access number and the subscriber's authorization code. The use of
dedicated access lines or dialers, which are used for high-volume subscribers,
also eliminates the need to enter an authorization code. At December 31,
1996, approximately 51% of the Company's revenues were derived from customers
that utilize dedicated access lines and approximately 48% of such revenues
were derived from customers that utilize the direct dial method of access.
Less than 1% of such revenues were derived from customers that were required
to use access numbers and authorization codes.
Other Services
The Company makes available to its customers a variety of other service
options. The inbound "800" service, for example, permits the customer to be
billed for long distance calls made to the customer by that customer's
clients. The Company's "800" travel service permits customers to utilize the
Company's network from locations outside of their own service areas. Operator
assistance services provided through a third-party contractor permit broad
based usages of the Company's system from business establishments and
residences. The Company contracts with US Long Distance Inc., for operator
services where the call is answered in the name of the Company. The Company's
experience with third-party service providers has been positive. Private line
networks offer specialized point-to-point services, including transmission of
data, on a fixed cost basis. The TELCard calling card offers international
calling capabilities in addition to convenient long distance usage. The
Company also offers its customers special access options for dedicated long
distance lines.
Billing System
Each retail customer of the Company receives a detailed monthly call report
and invoice for services from the Company setting forth the date, number
called, duration of call and time and charges for each call. While billing
services were historically primarily provided through an outside contractor,
the Company recently installed an in-house billing system to achieve greater
control, decreased collection periods and increased profitability.
<PAGE>
Each month UStel receives invoices from its underlying carriers. Due to the
multitude of billing rates and discounts which must be applied by carriers to
the calls completed by UStel's customers, and due to discrepancies in
information contained in suppliers' bills when compared with UStel's records,
UStel periodically has disagreements with its carriers concerning the sums
invoiced for its customers' traffic. These disputes have generally been
resolved on terms favorable to UStel, although there can be no assurance that
this will continue to be the case. No dispute over billing discrepancies or
failure to meet volume commitments has had a material adverse effect on UStel
to date, but there could be no assurance that this will continue to be the
case.
Customer Service
The Company's long distance telecommunications services are available 24 hours
a day, seven days a week. To assist subscribers with questions regarding
services, billing and other matters, the Company maintains a customer service
department and staff which is accessible to subscribers by telephone 24 hours
a day, 365 days a year.
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Consulting Services
Consortium 2000 provides telecommunications consulting services to a
diversified client base. Consortium 2000 analyzes a customer's long distance
calling patterns, usage volume and specialized telecommunications needs and
recommends equipment requirements, calling plans and carriers to be utilized
to achieve the most effective result. Consortium 2000 also acts as a sales
agent for a broad base of long distance carriers, including the Company, and
is compensated in the form of commissions for business placed with each such
carrier.
Call Switching Equipment
The Company owns certain computerized network digital switching equipment that
routes certain of its customers' calls. Other customers' calls are routed
through facilities which are leased by the Company from a variety of other
carriers. A switch is a computer controlled digital processor designed
primarily to route and track telephone calls. Switching equipment operates
like an electronic "toll booth," routing each call to its destination and
tracking the length of the call for billing purposes. A secondary function of
a switch is to determine and effect the least expensive route for each call
among a variety of routing options. Currently the Company owns two digital
switching centers and leases additional switch capacity from WilTel. Two of
the switching centers are located in Southern California and one is located in
New York, New York. The Company's subscribers access call switching equipment
through equal access, which only requires dialing "1", plus the area code and
telephone number, by using a dedicated line, or by dialing a seven- or
ten-digit number, authorization code, identification number (for billing),
area code and telephone number. Once a customer accesses the switching
equipment, the equipment "answers" the telephone call, verifies the caller's
billing status, routes the call to the dialed destination and monitors the
call's duration for billing purposes. In addition to networking, the
switching equipment verifies customers' pre-assigned authorization codes,
records billing data and monitors system quality and performance. The
Company's switches are non-network switches, meaning that they are capable of
performing their switching function only for the customers in the facility in
which the switches are located, calling card service and other special
customer services.
Transmission Network
A call may be completed by using either (a) switches controlled by the Company
which are connected by fixed-cost, long-haul circuits, connecting the call at
a switch center to the destination city where the call is terminated by a LEC
which directs it to the called party ("Switched Traffic") or (b) utilizing the
transmission facilities of another long distance carrier ("Switchless
Traffic").
Switchless Traffic is "usage sensitive" because the rates paid may vary with
the day, time, frequency and duration of telephone calls transmitted through
such circuits. In contrast, many of the rates paid by the Company for switch
traffic are fixed and therefore do not vary with usage or time of day. As a
result, Switched Traffic is less expensive over routes which the Company
carries high volumes of long
distance traffic. Because the amount the Company charges for long distance
telephone calls is not based on the cost to transmit such calls, long distance
calls transmitted over high volume, fixed-cost routes generally are more
profitable to the Company than long distance calls transmitted over usage
sensitive circuits, assuming a sufficient volume of calls is routed over the
fixed-cost route. Consequently, to the extent possible, the Company attempts
to connect calls through transmission facilities which are not usage
sensitive. Profitability of the Company's operations depends largely on
utilizing transmission circuits on a cost effective basis. Accordingly, the
Company's strategy is to reduce overall transmission costs by developing its
own dedicated switching network to maximize Switched Traffic and eliminating
Switchless Traffic.
Except for certain pricing agreements, the dedicated lines used by the Company
are generally leased on a month-to-month basis. While these month-to-month
arrangements may be terminated upon notice by the Company, they may not be
terminated under current law by the carrier unless the Company fails to comply
with the terms of the lease or unless the service is terminated for the
Company and all other long distance telephone carriers. Generally, rates
charged under these leases may be increased or decreased by the carriers upon
notice after filing with the FCC for interstate circuits, or applicable state
public utilities commissions ("PUCs") for intrastate circuits, provided the
rates charged apply equally to all similarly situated users of the services.
The FCC has required the detariffing of most interstate service offerings no
later than September 1997, though the order has been stayed by a federal
appeals court. If the order becomes effective, revisions to such rates by
carriers will no longer be required to be pre-filed with the FCC, but will be
governed by contracts between the Company and the carriers.
It is therefore the Company's strategy to continue to develop its own
dedicated switching network in order to continue to reduce its cost of
service. The Company will also continue to attempt to access Switchless
Traffic services on a wholesale basis at the lowest available cost.
Rates and Charges
The Company charges customers on the basis of minutes or partial minutes of
usage at flat rates, based upon whether the call is to an intrastate,
interstate or international destination. The rates charged are not affected
by the cost to the Company to transmit the particular call. Discounts are
available to customers that generate higher volumes of monthly usage. The
Company continually evaluates the rates and fees charged for its services and,
under appropriate circumstances, may implement different pricing arrangements
for existing or new services.<PAGE>
The Company endeavors to charge rates that are generally lower than
competitive long distance carriers. The rates offered by the Company may be
adjusted in the future as other interexchange carriers continue to adjust
their rates.
Once a customer has submitted the proper paperwork and is approved by the
Company's credit department, all pertinent information, e.g., telephone
numbers, calling card data, address, contact person, billing address, etc. is
entered into the Company's information system and the Company's computer
network. The Company's information system then generates the appropriate
electronic instructions which connect the customer to the Company's network.
Data regarding calls made by the client come from several sources: the
Company's switches; its calling card system; or WilTel, AT&T, Sprint and/or
MCI. After receiving the records of the calls, the Company inputs the data
into the billing system for processing.
Processing by the Company's information system includes: checking for
duplicate call records, confirming that calls to and from numbers that are not
in the Company's system are flagged for further research, verifying that the
origination and termination of calls are from valid telephone numbers and
circuits, and verifying that valid rates exist for each call. Calls which
fail any initial processing checks are placed in a rejected call file for
additional analysis.
All approved calls are rated, taxed and a bill is generated for the individual
client.
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Marketing
The Company's marketing efforts have been and continue to be directed
principally at small- to mid-sized business and larger residential users. The
Company derives the majority of its revenues from the sale of long distance
telecommunications services to commercial subscribers. Commercial subscribers
typically use higher volumes of telecommunications services than residential
customers and concentrate usage on weekdays and business hours when rates are
highest. Consequently, commercial customers, on average, generate higher
revenues per account than residential customers. While the Company's focus is
on commercial customers in major metropolitan areas, it can provide long
distance services to customers in any area of the United States. The largest
concentration of the Company's customers is in Southern California.
The Company principally markets long distance services through independent
sales agents. These agents are not restricted to specific territories and
their sales efforts are not directed, as to location, by the Company. Through
Consortium 2000, a network of approximately 1,000 agents have actively
marketed the Company's services over the past three years. The majority of
the Company's new accounts over this period have been procured by Consortium
2000-affiliated agents. The Company also has a number of agreements with
telemarketing agents and affiliate groups which sell UStel services through
new organizations.
Consortium 2000 maintains agent relationships with various long distance
carriers. The acquisition of Consortium 2000 results in marketing synergy in
that the Company will have the flexibility to place customers with carriers
other than the Company who might be in a better position to service that
customer's particular needs, while still benefitting from the customer
relationship through receipt of agent fees paid by the third-party carrier.
From the customer's perspective, this flexibility represents a value-added
element of the client relationship. The Company also has the ability to
divide a customer's business between several carriers, including the Company,
thereby avoiding the problem of risk concentration resulting from very large
accounts. In the case of such large accounts, as long as the Company is
managing the customer's long distance traffic, over time, additional traffic
can be directed to the Company as the situation warrants.
Competition
As a result of the AT&T Divestiture Decree and related developments, numerous
competitors, in addition to AT&T, have entered the long distance
telecommunications market, resulting in profound changes in the competitive
aspects of the industry. The Company competes directly with a number of
facilities based common carriers, including AT&T, MCI and Sprint, all of which
have substantially greater financial, marketing and product development
resources than the Company. In addition, the Company competes with hundreds
of smaller regional and local non-facilities based carriers and resellers.
AT&T remains the leading company providing domestic long distance telephone
service, and its pricing and services largely determine the prices and
services offered by resellers and other long distance telephone carriers.
Because the regulation and operations of AT&T and the BOCs are undergoing
considerable change, it is difficult to predict what effects the future
operations and regulation of AT&T and the BOCs will have on the Company's
existing and prospective business operations. Among other things, the BOCs
are permitted, under the Telecommunications Act of 1996, to immediately offer
long distance service outside the regions in which they provide local exchange
service, and will be permitted to offer long distance service within those
regions once they satisfy a checklist of conditions set forth in that Act.
In recent years, increased competition among long distance carriers has
resulted in an overall reduction in long distance telephone rates. The impact
on net income of these reductions has been offset somewhat by networking
efficiencies, declining costs in access charges and readily available
transmission facilities, largely due to the expansion of circuit capacity
through the installation of fiber optic transmission facilities. The advent
of fiber optic technology has resulted in another major impact on the long
distance market. Initially, long distance carriers competed with AT&T based
strictly on price. Discounts of 25% to 35% from AT&T rates were typical,
because long distance carriers were attempting to build market share and
because their transmission quality was generally inferior to that of AT&T.
The introduction of fiber optic facilities, however, effectively eliminated
AT&T's transmission quality advantage. Gradually, the industry and consumers
begin to recognize the importance of quality service as well as price, and the
price differential has decreased. Recognition that competition is not solely
based on price has led to a greater emphasis on customer service, with many
companies adding product variety, customized billing and other value-added
services.
Unlike the Company's larger facilities based competitors which own their own
transmission facilities, the Company is vulnerable to changes in rates charged
by facilities based carriers for use of their facilities. The Company has
attempted to minimize its vulnerability to cost increases through the
long-term leasing of fiberoptic and other digital transmission circuits.
While cost or concessions paid to customers may, in certain cases, be the
primary consideration for a customer's selection of long distance telephone
service, the Company believes that other factors are significant, including
ease of obtaining access to the long distance network, quality of the
telephone connection format and management information presented in the
specialized billing data generated by the carrier, and enhanced services such
as "800" service, repair service and automated collect calling.
Although volume usage of the telecommunication services provided by UStel have
increased for the six months ended June 30, 1997 as compared to the prior six
month period ended June 30, 1996, as a result of competitive pressures in the
industry, UStel has been experiencing a decline in revenue per minute. UStel
expects to off-set the decline in revenue per minute by diversifying its
products and by offering wireless communication, paging and other value-added
services to its customers. In addition, UStel expects to establish a network <PAGE>
of switches which will allow it to offer its services at a lower cost per
minute than it is presently able to offer. Although Arcada has been able to
provide a package pricing product to its customers and although UStel has
recently acquired Pacific Cellular, a wireless communications reseller in the
Las Vegas market, there can be no assurance that UStel will be successful in
its strategy of diversifying its products and providing value-added services
or that it will be able to establish a network of switches.
Under current industry conditions, both the interexchange carriers and local
exchange carriers have access to information regarding UStel's customers for
which they provide the actual call transmission. Because these interexchange
and local exchange carriers are potential competitors of UStel, they could use
information about UStel's customers, such as their calling volume and pattern
of use, to their advantage in attempts to gain such customers' business,
although UStel believes that the FCC would find such practices to be
unlawful. In addition, UStel's future success will depend, in part, on its
ability to continue to buy transmission services from these carriers at a
significant discount below the rates these carriers otherwise make available
to UStel's target customers.
Government Regulation
General
The Company competes in an industry that, to a large degree, continues to be
regulated by federal and state government agencies. At approximately the same
time as the required divestiture of the Bell telephone companies by AT&T in
1984, the FCC announced rules that were created to foster a self-regulating
interstate telecommunications industry, relying upon competitive forces to
keep rates and services in check.
The FCC has regulatory jurisdiction over interstate and international
telecommunications common carriers, including the Company. Under Section 214
of the Federal Communications Act, the FCC must certify a communications
common carrier before it may provide international services. The Company has
obtained Section 214 authorization to provide international services by means
of resale.
UStel has been authorized to provide domestic interstate and international
telecommunications services. The FCC conditions the authority to continue to
conduct interstate and international telecommunication services upon
compliance with the FCC's rules and regulations. The FCC reserves the right
to condition, modify or revoke the authority it has granted.
At December 31, 1996, the Company had obtained a certificate of public
convenience and necessity or equivalent documents from 41 states to provide
long distances services within those states. Regulations within each of these
states, as they pertain to completing direct dial long distance calls for the
Company's customers within the state, are subject to change. As the Company
expands the geographic scope of its direct dial long distance business, it
will be required to obtain additional state regulatory approvals to provide
intrastate long distance service.
Federal Regulation
In 1981, the FCC substantially deregulated the interstate activities of
terrestrial non-dominant interexchange resale carriers such as the Company.
The FCC later extended this deregulatory policy to resellers of satellite
services, resellers affiliated with independent telephone companies and
facilities based carriers (such as MCI and Sprint) which compete with AT&T.
It retained its jurisdiction over customer complaint procedures and basic
statutory common carrier obligations to provide nondiscriminatory services and
rates. The FCC ruled that interstate carriers subject to these deregulatory
actions were no longer subject to certification by the FCC or to tariff filing
requirements under the Communications Act. Subsequently, however, a federal
appeals court overturned the FCC's rulings and interstate carriers, including
resellers are currently required to file tariffs.
These changes in FCC policy, as well as substantial deregulation of AT&T, have
had the effect of lowering the rates of AT&T, the dominant provider of long
distance telephone service and pricing model for the Company, and other
providers and resellers of long distance services. The potential continued
deregulation of AT&T may have a material adverse effect on the Company's
ability to compete effectively with AT&T.
In connection with the 1984 divestiture by AT&T of the RBOCs, the RBOCs, and
subsequently, in a separate proceeding, GTE Corporation ("GTE") were required
to provide all long distance carriers and resellers the same high quality
access and technical interconnection that was previously provided solely to
AT&T. The FCC determined that the access charges to be paid by long distance
carriers such as the Company and other carriers not receiving access equal to
that afforded AT&T would be set initially at a rate offering a substantial
discount from the access charges paid by AT&T. Under equal access, the
Company's subscribers enjoy the convenience of a universal and simple dialing
plan and the Company is provided with equal access to the local exchange.
Within the Company's primary marketing areas, the equal access conversion
process is virtually complete; therefore, the Company no longer receives the
above mentioned discount and must pay the same access charges as are paid by
AT&T.
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Interstate Access Proceeding
In an effort to encourage competition in the provision of interstate access
service, in 1993 the FCC developed interim rules for the pricing of "access
transport" service. Access transport service refers to the connection
provided by LECs between long distance carriers' long distance facilities and
the customer's telephone. These interim rules were designed to: 1) align the
transport charges more closely to the way costs are incurred by reflecting
both flat rate elements and usage sensitive elements; and 2) remain in effect
through October 31, 1995.
The FCC extended the interim rules indefinitely, in part, in anticipation of
the Telecommunications Act of 1996. Several carriers appealed the interim
rules to the US Circuit Court of Appeals for the District of Columbia which
found that the FCC failed to justify important elements of the interim rules.
The Court remanded the matter back to the FCC.
In response to the Court and the Telecommunications Act of 1996, the FCC has
developed a new interim formulation of access pricing which is set to expire
no later than June 30, 1997. On December 23, 1996 the FCC instituted a
rulemaking proceeding designed to comprehensively reform access charges and
increase competition. In this proceeding the FCC is considering how best to
regulate access and associated transport rate structures, so that prices for
access and various access elements will become, by competition or other means,
more reflective of economic costs. While the Company cannot now predict the
outcome of the proceeding, the charges assessed to both the Company and its
competitors are likely to be affected. The rulemaking is expected to be
resolved in 1997, but implementation of new cost structures may be phased in
by region or service. In the event that this rulemaking proceeding has not
concluded by June 30, 1997, the FCC may extend the interim formulation date.
FCC Forbearance Policy
In 1983, the FCC exempted "non-dominant" long distance carriers from being
required to publicly file rates with the FCC. As a result of the FCC's
"forbearance" policy, non-dominant long distance carriers such as the Company
were permitted to enter into individual contracts with customers without
disclosing in public tariffs the rates charged to such customers to their
competitors or its other customers. In November, 1992, however, the U.S.
Court of Appeals for the D.C. Circuit found the FCC's "forbearance" policy to
be unlawful, ruling that the forbearance policy violated federal
communications law governing the FCC. In response to the ruling by the
federal appeals court, MCI and the U.S. Justice Department, on behalf of the
FCC, filed separate appeals with the U.S. Supreme Court requesting that the
appeals court ruling be overturned. In June, 1994, the U.S. Supreme Court
upheld the ruling in the case. As a result, all long distance carriers,
including the Company, are required to publicly file with the FCC the rates
charged for their long distance services.
Subsequently, the Telecommunications Act of 1996 amended the Communications
Act of 1934 to allow the FCC to forbear from applying any provision of the
Communications Act if enforcement of the provision: (1) is not necessary to
ensure that charges are just, reasonable and non-discriminatory; (2) is not
necessary to protect consumers; and (3) is consistent with the public
interest. On October 31, 1996, the FCC released an order finding that the
statutory conditions of the Telecommunications Act of 1996 were met with
regard to most tariff requirements for nondominant long distance carriers.
The FCC's order required all nondominant carriers to cancel their tariffs for
interstate, domestic, interexchange services on file with the FCC no later
than September 22, 1997, and not file any such tariffs thereafter.
International services, however, would continue to be tariffed. However, in
February the Court of Appeals for the D.C. Circuit stayed the effectiveness of
the FCC's order and, accordingly, interstate services too are required to be
tariffed at present. The appeal remains pending.
Recent Legislation
In February, 1996, the Telecommunications Act was signed into law. The
purpose of the Telecommunications Act is to promote competition in all aspects
of telecommunications. The Telecommunications Act requires telecommunications
carriers to interconnect with other carriers and requires local exchange
carriers to provide for resale, number portability, dialing parity, access to
rights-of-way and compensation for reciprocal traffic. Additionally,
incumbent local telephone companies are required to provide nondiscriminatory
unbundled access, resale at wholesale rates and notice of changes that would
affect interoperability of facilities and networks. The FCC is to adopt
mechanisms to ensure that essential telecommunications services are
affordable.
The Telecommunications Act also provides that RBOCs may provide long distance
service upon enactment that is out-of-region or incidental to: (i) audio/video
programming; (ii) internet services for schools; (iii) mobile services; (iv)
information or alarm services; and (v) telecommunications signaling. In order
for a RBOC to provide in-region long distance service, the Telecommunications
Act requires the RBOC to comply with a comprehensive competitive checklist and
provides an advisory role for the U.S. Justice Department in the FCC's
determination of whether the entry of a RBOC into the competitive long
distance market is in the public interest. Additionally, there must be a real
facilities based competitor for residential and business local telephone
service (or the failure of the potential providers to request access) prior to
a RBOC providing in-region long distance service. RBOCs must provide long
distance services through a separate subsidiary for at least three years.
Until the RBOCs are allowed into long distance or three years have passed,
long distance carriers with more than 5% of the nation's access lines may not
jointly market RBOC resold local telephone service, and states may not require
RBOCs to provide intra LATA dialing parity except for single LATA states and
states that had earlier required an RBOC to implement such parity.
Telecommunications companies may also provide video programming and cable <PAGE>
operators may provide telephone service in the same service area under certain
circumstances. The Telecommunications Act prohibits telecommunications
carriers and cable operators from acquiring more than 10% of each other,
except in rural and other specified areas.
The impact of the Telecommunications Act on UStel is unknown because a number
of important implementation issues (such as the nature and extent of continued
subsidies for local rates) still need to be decided by state or federal
regulators. However, the Telecommunications Act offers opportunities as well
as risks. The new competitive environment should lead to a reduction in local
access fees, the largest single cost in providing long distance service
today. The removal of the long distance restrictions on the RBOCs is not
anticipated to have an immediate significant impact on UStel because of the
substantial preconditions that must be met before the RBOCs can provide most
in-region long distance services. However, the entry of these local telephone
companies into long distance telecommunications services could result in new
competition and there is a possibility that the local telephone companies will
be able to use local access to gain a competitive advantage over other long
distance providers such as the Company.
On August 1, 1996, the FCC announced the adoption of rules relating to the
manner in which and the price at which potential competitors in the local
services market will be able to obtain local facilities and services from the
incumbent telephone company. Subsequently, the FCC's rules adopted in the
August 1, 1996 Order were published and challenged in federal court. Pending
the outcome of this challenge to the FCC's rules, the U.S. Court of Appeals
for the Eighth Circuit stayed the implementation of the relevant rules adopted
by the FCC under the Telecommunications Act of 1996. Iowa Utilities Board et
al. v. Federal Communications Commission, Order Granting Stay Pending Judicial
Review, 4 C.R. (P&F) 1360 (8th Cir. 1996). As this case is still pending, it
is unclear how any court decision and its subsequent impact on the FCC's rules
will affect the Company.
State Regulation
In most states, the Company may be required to obtain state regulatory
certification prior to commencing operations. At December 31, 1996, the
Company had received authorization to provide telecommunications services to
its customers in approximately 41 states, and is applying for authorization to
provide telecommunications services to customers in other states. In
addition, the Company is required to maintain on file at the state regulatory
commissions in those states a tariff or schedule of its intrastate rates and
charges. Various state legislatures and public utility commissions are
considering a variety of regulatory policy questions which could adversely
affect the Company. At this time, however, it is impossible to determine what
effect, if any, such regulations, including the cost of compliance with such
regulations, may have on the operations of the Company.
Employees
At June 30, 1997, the Company had 49 full-time employees, including four
executives, five network, technical and operations personnel, and 41
administrative and support personnel. None of the Company's employees are
represented by a union. The Company believes that its employee relations are
good. As of June 30, 1997, Consortium 2000 employed 13 persons full time,
including two executives and 11 operations and accounting personnel.
Properties
The Company leases from a third party approximately 5,000 square feet of
office space in Las Vegas, Nevada, which it uses as its operations center.
The facilities are leased for a term expiring in July, 1998. Rental of
approximately $7,500 per month is subject to adjustment based on changes in
various cost of living indices. Consortium 2000 subleases from a third party
approximately 4,900 square feet of office space in Culver City, California,
which are used as UStel's corporate headquarters and for Consortium 2000's
marketing and consulting activities. The facilities are leased for a term
expiring in June, 1998. The monthly rental payment is approximately $5,000.
The Company also is subject to several operating leases relating to properties
in which its switching facilities are located expiring on various dates
through 1998. See Note 5 of Notes to Financial Statements.
Legal Proceedings
The Company is a party from time to time to litigation or proceedings incident
to its business.
UStel MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR UStel SHOULD BE READ IN CONJUNCTION WITH THE UStel FINANCIAL STATEMENTS
AND NOTES THERETO ATTACHED HERETO.
RECENT DEVELOPMENTS; DECREASE REVENUES PER MINUTE; CHARGE-OFFS; ACQUISITIONS
As a result of competition in the industry, UStel has since the beginning of
1997 experienced a decline in operating margins due to a decline in revenue
per minutes of usage from its customer base. While management of UStel
expects to reverse this trend by achieving greater cost efficiency from the
acquisition of additional switches and providing a broader range of value -
added services which may allow for higher pricing, there can be no assurance
that UStel will be successful in these efforts.
UStel also recently announced that as a result of a management review, certain
unprofitable services and products will be discontinued. As a result, UStel
will record a restructuring charge of approximately $1.7 million in its third
quarter 1997 results. The charge will comprise a write-down of discontinued <PAGE>
services and an increase in bad debt expense related to those operations,
services and products and severance expenses. There can be no assurance that
charges to earnings will not occur in the future. It should be noted in this
regard that UStel took a $2,860,000 write-off for the period ended September
30, 1996.
In July 1997 UStel completed the acquisition of Consortium 2000, Inc. and its
marketing organization and the acquisition of the Pacific Cellular wireless
services assets. These acquisitions, when combined with the acquisition of
Arcada are consistent with the UStel's strategy to evolve from its historic
emphasis on long distance service into a full-service telecommunications
company.
Results of Operations
UStel'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.
UStel'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
lines. 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.
PAGE
<PAGE>
Quarterly Financial Data (Unaudited)
The following table sets forth certain quarterly financial information
for 1996 and for 1997.
<TABLE>
<CAPTION>
1996 - Three Months Ended
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Revenues $4,903,267 $5,623,236 $5,639,841 $5,860,513
Total Operating Expense 4,810,345 5,458,181 8,361,599 5,919,940
Income (Loss) From Operations 92,922 165,055 (2,721,758) (59,427)
Net Income (Loss) 1,398 70,567 (2,849,674) (195,485)
1997 - Three Months Ended
March 31 June 30
Revenues $5,887,745 $5,680,702
Total Operating Expense 5,872,038 6,220,022
Income (Loss) From Operations 15,707 (539,320)
Net Loss (158,142) (645,836)
</TABLE>
Comparison of Results of Operations--Six Months Ended June 30, 1997 Compared
to Six Months Ended June 30, 1996.
Revenues for the six months ended June 30, 1997 were $11,568,447 as compared
to $10,526,503 for the six months ended June 30, 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 25,000 at June 30, 1997,
offset in part by 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. The
growth in the Company's customer base accounted for approximately $2.9 million
in incremental revenues. This growth in revenues was offset by approximately
$1.9 million due to a reduction in revenues per minute charged.
Cost of services sold for the six months ended June 30, 1997 was $8,844,107 as
compared to $7,241,355 for the six months ended June 30, 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 six months ended June 30, 1997 was 76.4% of the revenues
produced in the six months ended June 30, 1997. Cost services sold for the
six months ended June 30, 1996 was 68.8% 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.
This shift to products with a lower gross margin resulted in a decrease in
gross margin of approximately $1.9 million or 11%. This reduction in gross
margin was partially offset by an approximate $350 increase in gross margin
due to a reduction in the underlining cost to provide long distance services.
General and administrative expenses for the six months ended June 30, 1997
were $1,830,875 as compared to $1,830,339 for the six months ended June 30,
1996. The relatively flat position reflects the Company's ability to absorb
increased operations within the existing staff and facilities.
Selling expenses for the six months ended June 30, 1997 were $1,233,754 as
compared to $1,074,719 for the six months ended June 30, 1996. The increase
in selling expenses reflects the costs associated with the expansion and
retention of the Company's customer base from commencement through June 30,
1997.
Depreciation and amortization for the six months ended June 30, 1997 was
$183,324 as compared to $122,112 for the six months ended June 30, 1996.
Amortization of the Company's start-up cost asset was $9,834 for both the six
month periods ended June 30, 1997 and June 30, 1996, respectively.
Depreciation for the six months ended June 30, 1997 was $173,490 as compared
to $112,278 for the six months ended June 30, 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 $3,072,000 at
June 30, 1997.
During the six months ended June 30, 1997, the Company reported a loss from
operations of $523,613 versus income from operations of $257,978 for the six
months ended June 30, 1996.
Interest expense for the six months ended June 30, 1997 was $298,912 as
compared to $272,928 for the six months ended June 30, 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 six months ended June 30, 1997 was
$148,473 including amortization of related loan fees over thirty-six months.
Interest income for the six months ended June 30, 1997 was $18,548 principally
from the Company's accrual of interest on related party loans, as compared to
$86,915 for the six months ended June 30, 1996, when interest income also
included earnings from certificates of deposit.<PAGE>
During the six months ended June 30, 1997, the Company reported a net loss of
$803,978 versus net income of $71,965 for the six months ended June 30, 1996.
Comparison of Results of Operations--Year Ended December 31, 1996 Compared to
Year Ended December 31, 1995.
Revenues for the year ended December 31, 1996 were $22,026,857 as compared to
$16,127,575 for the year ended December 31, 1995. The increase in revenues in
1996 was the result of expansion from a customer base of 9,000 at December 31,
1995 to a customer base in excess of 18,000 at December 31, 1996.
Cost of services sold for the year ended December 31, 1996 was $16,225,354 as
compared to $11,539,874 for the year ended December 31, 1995. The increase in
the cost of services expense was partially caused by claims against other
carriers which resulted in an additional expense of $652,665. Prior to this
adjustment the cost of services expense for the year ended December 31, 1996
amounted to $15,572,689. 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 year ended
December 31, 1996 was 70.7% of the revenues produced in the year in 1996.
Cost of services sold for the year ended December 31, 1995 was 71.6% of the
revenues produced in that period of 1995.
General and administrative expenses for the year ended December 31, 1996 were
$5,654,625 as compared to $3,074,289 for the year ended December 31, 1995.
The increase in general and administrative expenses is due to an increase in
the reserve for bad debts of $1,269,704 and the write-down of certain deferred
offering costs of $424,000. The additional increase of $875,557 was the
result of increased staff and related costs in support of the increased
revenues being produced by the Company.
Selling expenses for the year ended December 31, 1996 were $2,420,139 as
compared to $1,460,009 for the year ended December 31, 1995. The increase in
selling expenses reflects the costs associated with the expansion and
retention of the Company's customer base from commencement through December
31, 1996.
Depreciation and amortization for the year ended December 31, 1996 was
$249,947 as compared to $177,971 for the year ended December 31, 1995.
Amortization of the Company's start-up cost asset was $19,674 for both the
year ended December 31, 1996 and December 31, 1995, respectively.
Depreciation for the year ended December 31, 1996 was $230,273 as compared to
$158,297 for the year ended December 31, 1995.
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
$2,717,000 at December 31, 1996.
During the year ended December 31, 1996 the Company reported a loss from
operations of $2,523,208 versus a loss from operations of $124,568 for the
year ended December 31, 1995. This loss includes additional general and
administrative expenses of $2,569,261 resulting from a review by new
management, as discussed above.
Interest expense for the year ended December 31, 1996 was $551,920 as compared
to $260,437 for the year ended December 31, 1995. The Company historically
utilized a short-term bank line of credit ("Bank Line") to supplement its
periodic needs for cash in operations. In July, 1996 the Bank Line was repaid
from the application of proceeds from certificates of deposit which secured
this obligation. 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 year ended
December 31, 1996 was $272,185 including amortization of related loan fees
over thirty-six months.
Interest income for the year ended December 31, 1996 was $101,934 principally
from the Company's holdings of bank certificates of deposit and accrual of
interest on related party loans, as compared to $124,060 for the year ended
December 31, 1995.
During the year ended December 31, 1996, the Company reported a net loss of
$2,973,194 versus a net loss of $371,711 for the year ended December 31,
1995. The Company's new management, which took control on August 15, 1996,
conducted a thorough review of the Company's assets and as a result, the
Company incurred a non-cash charge of $2,860,869 in the three-month period
ended September 30, 1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
During the year ended December 31, 1995 the Company reported an operating loss
of $124,568 versus an operating loss of $863,571 for the year ended December
31, 1994.
Revenues for the year ended December 31, 1995 were $16,127,575 as compared to
$6,118,480 for the year ended December 31, 1994. The increase in revenues in
1995 was the result of expansion from a customer base of 2,240 at December 31,
1994 to a customer base in excess of 9,000 at December 31, 1995.
Cost of services sold for the year ended December 31, 1995 was $11,539,874 as
compared to $4,696,106 for the year ended December 31, 1994. The increase in
cost of services sold, similar to the increase in revenues, was the result of
the expansion in the Company's customer base. Cost of services sold for the
year ended December 31, 1995 was 71.6% of the revenues produced in that period <PAGE>
of 1995. Cost of services sold for the year ended December 31, 1994 was 76.8%
of the revenues produced in that period of 1994.
Selling expenses for the year ended December 31, 1995 were $1,460,009 as
compared to $785,933 for the year ended December 31, 1994. The increase in
selling expenses reflected the costs associated with the expansion of the
Company's customer base from commencement through December 31, 1995. Because
of the increased revenues from the Company's expanding customer base, selling
expenses as percentage of revenues decreased from approximately 12.8% in the
year ended December 31, 1994 to approximately 9.1% in the year ended December
31, 1995.
General and administrative expenses for the year ended December 31, 1995 were
$3,074,289 as compared to $1,412,649 for the year ended December 31, 1994.
The increase in general and administrative expenses includes $515,000 of
provisions for losses on receivables plus increased staff and related costs in
support of increased revenues produced by the Company.
Depreciation and amortization for the year ended December 31, 1995 was
$177,971 as compared to $87,363 for the year ended December 31, 1994.
Amortization of the Company's start-up cost asset $19,694 for both the year
ended December 31, 1995 and December 31, 1994, respectively. Depreciation for
the year ended December 31, 1995 was $158,297 as compared to $67,689 for the
year ended December 31, 1994. The increase in depreciation was the result of
the Company's investments in telephone switching equipment and facilities to
handle increased telephone traffic and investments in 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 $824,172 at December 31, 1994 to $1,604,357 at December 31, 1995.
Interest expense for the year ended December 31, 1995 was $260,437 as compared
to $152,063 for the year ended December 31, 1994. Interest income for the
year ended December 31, 1995 was $124,060 as compared to $34,283 for the year
ended December 31, 1994. In each period, interest income was earned from the
Company's holdings of bank certificates of deposit.
Liquidity and Capital Resources
UStel's working capital position at June 30, 1997 was approximately
$4,436,000. During the six months ended June 30, 1997, UStel utilized net
cash of $939,011 for operating activities.
Because UStel has just recently completed installation of an in-house billing
system, it was for most of 1997 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. This reliance on an outside billing service
made it uneconomical for the Company to render bills more frequently than once
a month. Typically, bills for services were being mailed out between 10 to 20
days after the end of the month in which the services were 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. With the
recent installation of an in-house billing system, this situation should
improve.
At June 30, 1997, UStel's accounts receivable, net of allowance for doubtful
accounts, was $7,080,043. In addition, through June 30, 1997, the Company had
invested $2,883,677 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, UStel 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 accounts
receivable and all of the Company's other assets.
Under the Credit Facility, UStel can borrow up to an amount which is the
lesser of $5,000,000 or up to 85% of the Company's eligible receivables and
unbilled calling records. 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 June 30, 1997
was $2,278,585; however, the line was only approximately 70% drawn at that
point.
In February, 1996, UStel 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, UStel 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 <PAGE>
stock.
As of September 9, 1996, UStel 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, UStel'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, UStel 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 UStel'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 the 1997 public offering.
In February 1997, UStel 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
underwriter's discount, commissions and offering costs. The net proceeds to
UStel were approximately $6,346,000. With the net proceeds of this offering
UStel was able to pay off all of its outstanding notes payable, with the
exception of its Credit Facility.
In the fall of 1997, UStel retained Sutro & Co. to raise up to $15,000,000 via
a private placement of UStel securities for the purpose of financing the
$5,000,000 cash Merger consideration, to expand UStel's switch network and for
working capital. There can be no assurance that such placement will be
accomplished.
Impact of New Accounting Standards
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" issued by the FASB 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
applications are 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
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.
Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130) issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general purpose financial statements. The Company has not determined the
effect on its financial position or results of operations, if any, from the
adoption of this statement.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by
the FASB is effective for financial statements beginning after December 15,
1997. The new standard requires that public business enterprises report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate and their major customers. The Company
does not expect adoption of SFAS No. 131 to have a material effect, if any, on
its Results of Operations.
As of December 31, 1996 and June 30, 1997, the Company had available net
operating loss carry-forwards of approximately $7,722,000 and $8,526,000 for
income tax purposes, which expire in varying amounts through 2012. Federal
tax rules impose limitations on the use of net operating losses following
certain changes in ownership. As of June 30, 1997 the net operating loss
carry-forward may be utilized at a rate of approximately $402,000 per year
(subject to the Company generating sufficient income from operations.) The
loss carry-forward generated deferred tax assets of approximately $3,547,850
and $3,917,000 at December 31, 1996 and June 30, 1997. The deferred tax
assets were not recognized since it is not likely that they will be realized;
accordingly, a 100% valuation was provided.
PAGE
<PAGE>
BUSINESS OF ARCADA
Introduction
Arcada is a growing provider of long distance voice and data telecommunication
services in 17 states. In 1996, Arcada began reselling cellular airtime and
other services to cellular telephone users. Arcada offers a broad array of
services designed to provide discount telecommunications services to small and
medium-sized commercial customers and residential users.
Arcada targets commercial customers with telecommunications usage of under
$2,000 per month. Arcada believes that it is able to offer rates for basic
long distance that are between 30% and 40% less than the rates commercial
customers of the size targeted by Arcada typically are charged by the major
carriers. In addition to basic "1 plus" and "800" long distance, Arcada offers
its customers a number of other telecommunication services including data
transmission, debit cards, calling cards, and wireless products and services,
such as cellular phones and pagers. Arcada strives to be flexible, innovative
and responsive to the needs of its customers. Outside its target market and
without any significant advertising, Arcada has developed a base of
residential customers which for the six months ended June 30, 1997 represented
approximately 48% of Arcada's revenues. Like Arcada's target market, the
residential market has grown primarily through referrals from other Arcada
customers.
In 1994, Arcada began providing long distance service to cellular telephone
users. Arcada entered the wireless market in 1994 by offering discount paging
services. In June 1994, Arcada was selected to be one of the long distance
service choices for customers of AT&T/McCaw Communications, Inc., as required
by the June 15, 1994 U.S. Department of Justice consent decree signed by AT&T.
Arcada was chosen by approximately 19,000 new customers, representing
significantly less than 1% of the AT&T/McCaw customers. Arcada has leveraged
its participation in the AT&T/McCaw consent decree process to expand its sales
of cellular airtime and long distance services.
Company Strategy
Arcada's principal objective is to achieve continued growth by providing small
to medium-sized commercial users and residential customers with a variety of
innovative products, a high quality digital network, competitive pricing and a
level of service not generally provided to these customers directly from the
major long distance carriers. Key elements of Arcada's strategy include:
Retain and Increase Customer Base. Arcada believes that its direct sales force
is effective at acquiring its target customer while its Customer Care Group
focuses on the care and retention of customers. Arcada emphasizes customer
support and service in order to minimize attrition and to expand the volume of
business from its existing customers. Arcada intends to continue to grow its
inside sales force supplemented by strong customer support and service
operations, and to augment its direct sales efforts with outside sales
representatives. The customer service functions are important to Arcada, in
that Arcada believes that in 1995, for example, it acquired as much a 70% of
its new customers through referrals from other customers.
Expand and Leverage Cellular Products. Arcada believes that significant growth
opportunities exist in the cellular telecommunications industry. Arcada
intends to grow its cellular division and leverage its customer base to sell
additional Arcada cellular and long distance products.
Expand Long Distance Product Line. Arcada packages a variety of innovative and
cost-effective telecommunications services to meet the needs of its customers.
Arcada intends to continue its efforts to acquire, develop and market products
and services that meet the expanding needs of its target customers by
utilizing different suppliers and adding switching facilities. Arcada is able
to customize its service offerings while optimizing call routing by purchasing
its network transmissions services from several vendors.
Leverage Billing System. Arcada believes that a sophisticated and reliable
billing system is a key element for growth and success in the
telecommunications industry. In order to meet this challenge, Arcada
implemented a billing system, portions of which Arcada developed and in which
Arcada claims a proprietary interest. Subsequent to the initial installation,
Arcada worked closely with the billing system's developer to enhance and
refine the billing system. Arcada's goal is to establish a reliable and
integrated billing and management information system providing sophisticated
billing information tailored to the requirements of each customer, prompt and
accurate responses to customer queries and needs and support for Arcada's
operations and collection efforts.
Acquire Additional Switching Facilities. Arcada continually evaluates
opportunities to install switches in selected markets where the volume of its
customers' traffic makes such an investment economically beneficial. In
addition, utilization of its switches allows Arcada to route customers' calls
over multiple networks to minimize costs. Arcada currently operates switches
for its call traffic in three locations.
Expand Retail Sales Offices. Arcada has opened retail stores in Phoenix,
Arizona and Vancouver, Washington. Arcada's retail stores are located in
high visibility shopping malls with the goal of helping Arcada to develop
brand recognition to reach additional regional markets, and to provide region
wide support to customers and sales forces. Each retail store is designed as
a "one stop" telecommunications sales and service location. At each store
customers can purchase wireless products and services, long distance services,
internet products and services, pay bills, and discuss billing, general
service, and technical issues with trained service and sales
representatives. Each retail location doubles as a "home base" for Arcada's in
side sales force and Agent sales force, each of whose primary sales activity
is visiting customers and potential customers at the customer's place of
business. Arcada is in the process of acquiring additional leases for a <PAGE>
second retail store in Vancouver Washington and a store in Scottsdale,
Arizona.
Develop Internet Product Line. Arcada has executed an Internet Resale
Agreement with Epoch Networks, Inc., d.b.a. Epoch Internet ("Epoch"), of
Irvine, California. Under the contract Arcada, after an installation period
and ramp-up period under the contract, is obligated to purchase from Epoch a
minimum of $50,000 per month of internet services for resale to the public.
Under the contract, Epoch will provide Arcada "branded" services, such that
Epoch will handle all customer service under the Arcada brand name. Further,
all advertising and other presentation of the products and services to the
public will be presented as an Arcada product or service. Arcada will be able
to sell dial-up service, dedicated service (i.e., T-1, T-3 connections),
e-mail services, newsgroup access, web-page hosting, and internet
consultation. Arcada will purchase internet dial-up and certain dedicated
access from Epoch at a price that is fixed for the duration of the contract.
Arcada will receive a percentage commission on other services sold by Arcada.
Marketing and Sales
Arcada markets its services through two distinct channels: direct sales and
independent agents. Arcada targets commercial customers with
telecommunications usage of under $2,000 per month. Arcada believes that AT&T,
MCI and Sprint historically have chosen not to concentrate their direct
selling efforts on this segment of the market and that Arcada's target
customers generally do not qualify for the major carriers' volume discounts or
for the level of support services made available to higher volume users.
Direct Sales. Arcada relies heavily on its direct sales force, Arcada's
Account Executives. Typically, businesses become customers of Arcada by
purchasing long distance service from Arcada's Account Executives. Thereafter,
Account Executives and customer service representatives follow up with
existing customers by offering them new value-added services. Arcada believes
that direct sales activities are more effective than advertising for securing
and maintaining the business of small to medium-sized commercial customers.
Account Executives are compensated with a base salary supplemented by a
commission based on 10% of customer collections over six months. In June 1997,
Arcada had nine Account Executives, together with two managerial and
administrative employees who also engage in long distance sales. Arcada
intends to expand its direct sales force in the near term. 37% of Arcada's
revenues for the six months ended June 30, 1997 resulted from this sales
channel.
Independent Agents. Arcada supplements its direct sales efforts by marketing
through a network of approximately 100 independent agents, which are typically
equipment consultants and distributors of interconnect equipment or other
office equipment and supplies. Such firms generally enter into agreements
providing for commissions on business generated for Arcada. Arcada typically
grants a nonexclusive right to solicit customers and pays commissions of 10%
on amounts collected for the term of the agreement between the agent and
Arcada. Approximately 5% of Arcada's revenues for the six months ended June
30, 1997 resulted from this sales channel.
Residential Sales. In Arcada's main sales offices, two individuals are
responsible for taking orders from new residential customers. Arcada is not
aggressively marketing its services to the residential market, but does
cultivate sales through direct mail and financial incentives for referrals.
Customer Service
Arcada strives to provide superior customer service and believes that personal
contact with potential and existing customers is a significant factor in
customer acquisition and retention. Arcada believes that as the
telecommunications industry becomes more competitive, customer service will
become an even more important component of the sales and customer retention
effort.
New customer accounts are processed by Arcada's Customer Care department
located at Arcada's corporate offices. There, Arcada's staff is dedicated to
providing new customers with a smooth transition to its services. Arcada
obtains account information from new customers, which it processes and
forwards to the applicable LEC or interexchange carrier. In areas where Arcada
operates switches, it has on-line access to the local exchange carrier's
database system to expedite the account transfer process.
Arcada believes that proactive customer service is helping Arcada retain
customers. Arcada's customer service team, in addition to responding to
customer questions, makes phone calls to new customers two to three weeks
after they join the Arcada system and after the first bill is sent. Arcada is
also implementing a system whereby each customer will be contacted several
months into its relationship with Arcada to address any problems, to attempt
to "upsell" Arcada's other products and generally try to reinforce the
business relationship and cut down on customer turnover. The Customer Care
department also serves as a "first stage" collections department in order to
try to collect past due accounts in a way that will maintain the customer
relationship.
Customer questions about bills and services are directed to Arcada's Customer
Care department, which had a combined staff of six customer service
representatives as of June 30, 1997. Arcada has expanded its Customer Care
department's hours to 7:00 A.M. to 8:00 P.M., Monday through Friday to better
serve its customers. Arcada is in the process of expanding customer service
to a 24 hour a day 7 day a week program.
During 1995, 1996, and 1997 no one customer accounted for more than 3% of
Arcada's revenues. Arcada believes that the loss of any single customer would
not have a material adverse effect on its results of operations.
<PAGE>
Wireless Operations
In 1994, AT&T acquired McCaw Communications, Inc. ("Cellular One"). As a
condition of approving that transaction, the U.S. Department of Justice
("DOJ") required that AT&T agree in a Consent Decree that long distance
service for cellular customers of Cellular One must be offered on an "equal
access" basis nationally. To comply with the DOJ Consent Decree, AT&T/McCaw
gave each Cellular One customer an opportunity to select their long distance
service provider by marking and returning a ballot. Arcada was accepted on the
ballot in every one of the 17 states it requested. Arcada, AT&T, MCI and
Sprint were the only long distance carriers named on ballots in every one of
those states. Since 1994, Arcada was chosen to provide long distance service
by 19,000 Cellular One customers; approximately 12,000 remain customers of
Arcada as of June 1997.
In 1994, Arcada entered the wireless telecommunications business by offering
discount paging services. In 1995, Arcada began reselling cellular airtime
under a resale agreement with AT&T in the Portland, Oregon market. Arcada has
since added the Denver, Colorado and Seattle, Washington markets and has
entered into a reseller agreement with U.S. West/AirTouch Cellular. Arcada is
in the process of implementing a national cellular reseller program.
Marketing and Sales. Arcada markets and sells its cellular airtime and long
distance products through its Wireless Communications division. The Wireless
Communications division has five sales professionals, which includes one
management employee who also engages in sales.
Arcada is leveraging its success in being listed on the Cellular One ballots
by focusing on selling cellular airtime to cellular long distance customers.
Additionally, Arcada's current "wired" long distance customers are good target
for future cellular airtime sales.
Arcada intends to expand its sales efforts in the future by: (i) retaining
independent agents to sell Arcada products on a commission basis; (ii)
contracting with retail stores which market cellular phones to sell Arcada
products "packaged" with cellular phones; and/or (iii) opening one or more
retail stores to sell cellular phones and services. (SEE COMPANY STRATEGY)
Arcada has also negotiated with Motorola to become one of the few wireless
resellers classified as a "Signature Dealer" permitting it to obtain wireless
hardware at favorable prices and participate in joint marketing efforts.
Arcada is aggressively pricing its cellular products and management believes
that its prices are up to 40% less than Arcada's major cellular phone
competitors. To date, revenues from cellular airtime and cellular long
distance sales have been approximately 10% of total revenue for the six months
ended June 30, 1997. However, Arcada expects that both in absolute dollars and
on a percentage of revenues basis, cellular revenues will increase in the
future.
Products and Services
Through contractual arrangements with facilities-based carriers, Arcada
currently offers a wide variety of long distance telecommunication services to
small and medium-sized businesses. Historically, substantially all of Arcada's
revenues have been generated by provision of alternate access long distance.
Over the past three years this has changed and presently substantially all of
Arcada's long distance revenues are derived from basic "1 plus" and "800" long
distance services. Arcada offers switched and dedicated, inbound and outbound
long distance service carried by large national or regional interexchange
carriers. Arcada believes it has been successful as a provider of these basic
services because of the volume discounts it has been able to negotiate with
underlying carriers and its ability to route its customers' traffic over the
transmission networks of more than one carrier. In markets where it has
switches, Arcada can direct a single customer's calls among different
carriers' networks to take advantage of the most favorable rates.
In 1996 Arcada introduced cellular products. Arcada believes that revenue from
its cellular products will grow as a percentage of total revenues and it will
become a significant factor in Arcada's future business. At present, the
"wireless" products offered by Arcada include:
- -CELLULAR AIRTIME. Arcada offers cellular service as a reseller of AT&T
Wireless Services.
- -ONE NUMBER "FOLLOW ME" SERVICE. Arcada offers the ability for customers to
link their telephone, cellular phone and pager together so that a customer
needs only one telephone number for any call, at any time, anywhere in the
world.
- -PAGING. Arcada currently offers digital and alphanumeric paging in Colorado,
Washington and Oregon.
- -CELLULAR TELEPHONES, PAGERS, ACCESSORIES. Arcada has begun retail sales of
cellular telephones, pagers, pager watches and related accessories to
complement its wireless operations.
Arcada also offers enhanced cellular and long distance billing reports. Arcada
believes that its value-added billing capabilities and other customer support
services enable its customers to manage their telecommunications costs more
effectively.
For example, Arcada's customers can choose from many different features
available in the Arcada billing system, including summaries of calls by
authorization code, project code, area code, longest call, and most-called
number.
Arcada believes that its customers typically realize significant savings from
the rates they would have been charged directly by the major carriers for <PAGE>
basic long distance service. Actual savings vary depending on the service the
customer was using prior to becoming a customer of Arcada.
Billing System
Arcada believes that maintaining sophisticated and reliable billing and
customer service information systems capable of integrating billing, accounts
receivable and customer support is a core capability necessary to record and
process the massive amounts of data that are generated by a telecommunications
service provider. Arcada currently processes approximately 2,300,000 call
records per month.
In order to process, organize and analyze this volume, in June 1995 Arcada
implemented a new billing system designed to Arcada's specifications by EXL,
Inc. ("EXL"), a Canadian software manufacturer specializing in information
systems. This system was put in place to replace Arcada's original long
distance billing and report-generating system which had become outdated due to
the increase volume of call records being generated by Arcada's customers.
After an initial phase-in period, Arcada was able to generate customer bills
utilizing the new systems. Since that time, Arcada and EXL have worked closely
to increase the system's reliability and versatility. Arcada believes the
system is currently operating within industry standards. See "RISK FACTORS -
Dependence on Effective Billing System."
While the billing system has accommodated Arcada's increased billing volume,
Arcada and EXL have worked to enhance the system's ability to generate
sophisticated reports and to provide collections, customer and administrative
support. To this end, Arcada and EXL have developed several additions and
modifications to the billing system. Arcada believes that the current billing
system is capable of accommodating increased growth and will, over time,
provide Arcada with a competitive advantage in administrative and customer
support matters. Arcada has a perpetual, non-exclusive license to use the
billing system and also claims a proprietary right in certain customized
aspects of the system, including the software allowing Arcada to bill
customers for specific "call packages" allowing flat monthly billing for a
specific number of calls of a specified duration during a given month. EXL
disputes Arcada's claim to a proprietary right in certain aspects of the
billing system. Arcada and EXL have not yet resolved their disagreement over
Arcada's claim. However, Arcada does not believe that the dispute will have a
material adverse affect on Arcada's ongoing operations.
In addition to its long distance billing system, Arcada also relies on an
independent, "in-house" billing and reporting system for its cellular
customers. Arcada owns all rights in this system.
Billing and Management Reports. Arcada is currently able to collect many call
data items for each phone call placed by a customer, including customer name,
call origination point, call destination point, billing code minutes, date,
time and rate code. From this data, Arcada can organize the customer's monthly
phone calls into a variety of report formats. Except for cellular call data,
which is collected from the underlying carriers on a monthly basis, Arcada
collects and processes all long distance call data on a daily basis.
Suppliers
Historically, Arcada has entered into two- to three-year supply contracts with
its major interstate long distance and cellular air time suppliers, such as
Frontier, Sprint and AT&T. In addition to its contracts with its major
interstate long distance and cellular air time suppliers, Arcada has entered
or otherwise acquired contracts with other suppliers for intrastate long
distance, including Electric Lightwave, Inc., ICG, TCG, GTE and US West. In
order to obtain favorable pricing from its interstate long distance carriers,
Arcada has committed to purchase minimum volumes of interstate long distance
services during stated periods whether or not such volumes are used. For
1997, these commitments total approximately $1,800,000.
Arcada utilizes "least cost routing" to minimize the cost of connecting
customers' calls. With this process, Arcada's switches are programmed to
automatically select the lowest cost long distance carrier from among Arcada's
underlying long distance carriers for each call carried through the switch.
This routing system serves to minimize Arcada's reliance on any one underlying
carrier by automatically selecting alternate service should one carrier
discontinue service.
Arcada is unable to use its "least cost routing" system in providing inbound
"800" calls. Arcada is dependent on Sprint to handle this traffic, which
constitutes approximately 10% of Arcada's total minutes billed. In the event
Sprint were to discontinue Arcada's "800" service without sufficient notice
for Arcada to make alternate arrangements, Arcada's "800" customers would
temporarily be without such service. Such a loss of service could have an
adverse effect on Arcada's business.
Arcada, like all other long distance providers, is dependent upon local
exchange carriers for call origination (carrying the call from the customer's
location to the long distance network of the interexchange carrier selected to
carry the call) and termination (carrying the call off the interexchange
carrier's network to the call's destination). FCC policy currently requires
most interexchange carriers to provide resale of the use of their transmission
facilities. The FCC also requires local exchange carriers to provide all
interexchange carriers, including Arcada, with equal access to the origination
and termination of calls. If either or both of these requirements were
relaxed, Arcada could be adversely affected. See "BUSINESS OF ARCADA -
Regulation."
Each month Arcada receives invoices from its underlying carriers. Due to the
multitude of billing rates, discount rates and discounts which must be applied
by carriers to the calls completed by Arcada's customers, and due to
discrepancies in information contained in suppliers' bills when compared with
Arcada's records, Arcada has disagreements with its carriers concerning the <PAGE>
sums invoiced for its customers' traffic. These disputes have generally been
resolved on terms favorable to Arcada, although there can be no assurance that
this will continue to be the case. No dispute over billing discrepancies or
failure to meet volume commitments has had a material adverse effect on Arcada
to date, but there can be no assurance that this will continue to be the
case.
Acquisition of Switching Facilities
Arcada owns switches for call traffic transmission in three locations:
Seattle, Portland and Denver. Use of a switch results in lower overall call
transmission costs. Arcada's ownership and potential future acquisition of
switching equipment can improve gross margins and provide greater control over
service to its customers. These increased margins are somewhat offset by costs
associated with operating its own switches. Because Arcada collects and
processes all long distance call data daily, regardless of whether Arcada owns
a switch, any particular area, Arcada can quickly access call records, and
implement differentiating features and billing enhancements without the
involvement of the underlying carrier. Arcada believes that the ability to
exercise direct control over a customer's calls and reduce their cost can be
an important competitive advantage.
Competition
The telecommunications industry is highly competitive and affected by
regulatory and rapid technological change. Arcada's competitors range from
nationally-recognized Fortune 500 companies (AT&T, MCI, SPRINT, WORLDCOM) to
small regional and local resellers. Many competitors have greater resources
than Arcada and barriers to entry are low. There can be no assurance that it
will remain competitive in this environment. Arcada believes that the principal
competitive factors in its business include pricing, customer service, network
quality, value-added services and the flexibility to adapt to changing market
conditions. While Arcada believes that AT&T, MCI and Sprint historically have
chosen not to concentrate their direct sales efforts on small to medium-sized
businesses, these carriers are dominant in the industry. In addition, AT&T,
MCI and Sprint have recently introduced new service and pricing options that
are attractive to smaller commercial users, and there can be no assurance that
they will not market to these customers more aggressively. A significant
number of large regional long distance carriers and newer entrants in the
industry compete directly with Arcada by concentrating their marketing and
direct sales efforts on small and medium-sized commercial users.
Arcada believes it competes favorably in its targeted market segment,
principally due to its pricing, personalized service and enhanced billing and
reporting. Arcada also believes that its success will increasingly depend on
its ability to offer on a timely basis new services based on evolving
technologies and industry standards. There can be no assurance that new
technologies or services will be made available to Arcada on favorable terms.
Regulatory trends have had and may have in the future, significant effects on
competition in the industry. See "BUSINESS OF ARCADA - Regulation." Under
current industry conditions, both the interexchange carriers and local
exchange carriers have access to information regarding Arcada's customers for
which they provide the actual call transmission. Because these interexchange
and local exchange carriers are potential competitors of Arcada, they could
use information about Arcada's customers, such as their calling volume and
patterns of use, to their advantage in attempts to gain such customers'
business, although Arcada believes that the FCC would find such practices to
be unlawful. In addition, Arcada's future success will depend, in part, on its
ability to continue to buy transmission services from carriers at a
significant discount below the rates these carriers otherwise make available
to Arcada's target customers.
Regulation
The terms and conditions under which Arcada provides communications services
are subject to government regulations. Federal laws and FCC regulations apply
to interstate telecommunications, while particular state regulatory
authorities have jurisdiction over intra state telecommunications. See also
Business of UStel - Government Regulation.
Federal. In early 1996, Congress passed the Telecommunications Act of 1996
(the "Act"). The Act is an extensive and broad revision of the
telecommunications rules and regulations. Under the Act, Congress set the
stage to dramatically reduce the competitive barriers facing all
telecommunications companies, especially AT&T and the RBOCs. Since 1984,
judicially imposed restrictions barred the RBOCs from providing inter-LATA
long distance. AT&T was barred from providing local exchange services. Under
the Act, after a transition phase, and subject to each RBOC meeting criteria
set forth in the Act and established by the FCC, each RBOC will be able to
provide both local and long distance services (intra and inter-LATA long
distance). Recently, certain FCC rules dictating pricing for the resale of
local service were held invalid. The United States Supreme Court has refused
to review the lower court's ruling. As a result, many state regulatory
agencies have actively intervened and are establishing pricing and rules under
which LECs must allow resale of local service.
It is difficult to estimate the resulting impact of the Act. However, Arcada
anticipates increased competition from the RBOC's as they are allowed to enter
the inter-LATA long distance markets. Further, Arcada anticipates additional
competition from AT&T as they are able to offer broader ranges of products and
services, such as local exchange services.
Many LECs have or are in the process of allowing equal access to their
intra-LATA long distance services. This means that Arcada's customers may be
able to dial 1+ to make intra-LATA calls. Presently, in order to make
intra-LATA calls, Arcada's customers, and all other long distance company's
customers, must first dial 10xxx, (in Arcada's case, 10644), prior to dialing
the called number. The "xxx" refers to the Carrier Identification Code <PAGE>
("CIC"). If a customer fails to dial the CIC prior to making intra-LATA calls,
the call is carried by the LEC. Dialing the CIC bypasses the local exchange
carrier's local long distance. Even if a customer has chosen Arcada as their
long distance company, the customer must dial the 10xxx to have the call
routed through Arcada's services. Arcada believes that many of its customers
do not use the 10xxx number prior to making intra-LATA calls, and therefore,
Arcada does not receive significant long distance revenue from its existing
customers. Allowing all IXCs equal access to the intra-LATA markets via 1+
dialing could result in significant additional price competition in the
intra-LATA markets. Since the incumbent LEC has access to all customers in its
region, and since the incumbent LEC owns and controls virtually all of the
equipment necessary to make intra-LATA calls, Arcada anticipates that the
incumbent LEC may have a significant competitive advantage in the intra-LATA
markets.
Arcada is classified by the FCC as a non-dominant carrier. Among domestic
carriers, only the LECs are classified as dominant carriers. The FCC has
recently classified AT&T as a non-dominant carrier. As a result, AT&T is
capable of competing much more effectively with Arcada because they are no
longer subject to certain pricing and regulatory restrictions. Further, by
order dated October 29, 1996, the FCC ruled under the new forbearance
authority granted to the FCC under the Act, that non-dominant carriers will no
longer be required to file tariffs for their interstate inter-LATA long
distance services, though the effectiveness of this order has been stayed by a
federal appeals court. After a nine month transition period, the relationship
between carriers and their customers will be set by contract. The FCC has
generally not chosen to exercise its statutory right to regulate the charges,
policies, classifications or procedures of non-dominant carriers, although it
has the power to do so. Further, it is unclear whether the Act contains
sufficient safeguards to prevent anti-competitive practices. Anti-competitive
practices can result from the RBOCs access to a large group of present
customers for local exchange services. Also, interexchange carriers such as
Arcada, heavily rely on the RBOCs for access to local exchange networks.
Problems arising from delays or errors caused by the local RBOC or any other
local exchange carrier's inability or difficulty to implement or repair
necessary services can severely impact Arcada's operations.
Despite the order phasing out tariff filings, all interchange carriers will be
required to retain and make available information as to the rates and terms of
their services. Consumers may still file complaints with the FCC regarding the
interexchange companies services. In addition, if and when complete
detariffing is implemented, consumers most likely will be able to take
advantage of state consumer protection laws and contract law. Previously,
consumer's legal rights over billings were often limited by the terms of the
tariff. The detariffing order will not change an interexchange carriers
obligations to charge rates that are just and reasonable and not unjustly or
unreasonable discriminatory. It is anticipated that the recent FCC detariffing
decisions could provide a competitive advantage to large interexchange
carriers, such as AT&T. In light of the recent FCC order, it is, and will
remain, difficult to determine the nature and extent of continued federal
rules, regulations, and oversight.
Arcada has been authorized to provide domestic interstate and international
telecommunications services. The FCC conditions the authority to continue to
conduct interstate and international telecommunication services upon
compliance with the FCC's rules and regulations. The FCC reserves the right to
condition, modify or revoke the authority it has granted.
Although tariffs are subject to FCC review and approval, they are presumed to
be lawful and seldom contested. In reliance on the FCC's practice of relaxed
enforcement of the rules and regulations of companies of the size of Arcada,
Arcada, like many of its competitors, have not continuously updated their
tariffs with the FCC and state regulatory agencies. Until the statute of
limitations expires, Arcada could be held liable for damages, a monetary
forfeiture or other sanctions, for its failure to strictly maintain its tariff
filing, although Arcada believes that such an outcome is unlikely and even if
it did occur, would not have a materially adverse effect on Arcada. In order
to recover damages, a competing telecommunications service provided would have
to show that Arcada's failure to strictly maintain its tariff caused the
complaining carrier to lose customers. The possible amount of any such
liability cannot be calculated by Arcada.
State. The intrastate long distance telecommunications operations of Arcada
are also subject to various state laws and regulations, including
certification and registration requirements. Currently, Arcada is authorized
to do business and is properly tariffed, or has commenced the process of doing
so, where required to provide intrastate services to customers. Arcada
monitors the regulatory developments in the states where it presently conducts
business. Arcada intends to continue to investigate whether it should conduct
business in additional states.
Arcada is currently subject to varying levels of regulation in the 17 states
in which it provides intrastate telecommunications services. The vast majority
of the states require Arcada to apply for certification to provide
telecommunications service, or at least to register or to be found exempt from
registration, prior to commencing services. The vast majority of states also
require Arcada to file and maintain detailed tariffs listing their rates for
intrastate service. Many states also impose various reporting requirements
and/or require prior approval for transfers of control, assignment of assets,
offering of securities, and the incurrence of significant debt. Certification
of authority to conduct business can be terminated, modified, conditioned, or
revoked by state regulatory authorities. Fines and other penalties, including
the return of all monies received for intrastate traffic from residents of a
state may be imposed for a violation. In certain states, prior regulatory
approval may be required for acquisition of telecommunications operations. In
the states in which Arcada conducts the vast majority of its business, Arcada
is exempt from many of the listed regulations. On one prior acquisition,
Arcada did not obtain such prior approvals for its acquisition. However,
Arcada does not believe that its prior failure to obtain regulatory approval <PAGE>
will have a materially adverse effect on Arcada.
Arcada currently collects and remits local utility and other taxes only in
jurisdictions where it has offices or holds other tangible assets. Arcada has
made tax payments to one locality where it does not have offices or hold assets
and has agreed to pay additional amounts based on a review of its billing to
that locality while preserving the right to challenge its obligation to make
such payments. Arcada has in the past been contacted by other localities where
it has customers but no other assets or operations requesting that it collect
and remit local utility taxes in such jurisdictions. Arcada does not believe
such local utility taxes apply to its operations and it has not historically
collected such taxes. Arcada believes that the vast majority of switched and
non-switched resellers do not collect or remit such taxes. There can be no
assurance that such localities will not actively seek to collect taxes from
Arcada in the future or that Arcada will be liable for failure to collect such
taxes in the past. In the event Arcada is found liable for such back taxes it
could have a material adverse effect on Arcada. See "RISK FACTORS - Risk of
Liability for Local Utility Taxes."
Employees
As of June 30, 1997. Arcada employed 65 persons on a full-time basis, with 19
in sales and marketing, 13 in customer service and provisioning, seven in
administration, seven in finance and accounting, ten in technical and eight in
information systems. None of Arcada's employees are members of a labor union
or are covered by a collective bargaining agreement.
Properties
Arcada's headquarters in Seattle consists of approximately 10,144 square feet
of office space under a lease that expires December 31, 1999, and required
minimum annual lease payments in 1996 of approximately $190,000. The Company
leases an additional 3,282 square feet in Seattle for network operations,
which required minimum annual lease payments of approximately $70,140 in 1996.
Arcada rents two Vancouver sales office locations with a total of 4385 square
feet of office space with an annual rent of approximately $55,622 in 1996.
In Portland, Oregon, and Denver, Colorado, Arcada leases space of 640 and 345,
square feet that required minimum annual lease payments at $9,484 and $6,900,
respectively, in 1996 for the operation of its Portland telecommunications
switch. In Denver, Colorado, Arcada leases additional sales office of 860
square feet that required minimum annual lease payments of $14,000, in 1996.
In Phoenix, Arizona, Arcada rents 930 square feet of retail sales space with
and an anticipated minimum lease obligation of approximately $15,345 on an
annualized bases.
Arcada believes its present office facilities are adequate for its current
operations; however, management does not expect to extend the lease for office
space in Denver after December 14, 1997. Additional space for both
administrative and retail functions will be procured as needed.
Certain Transactions
Commencing in 1994, Robert Leppaluoto and Keith Leppaluoto, shareholders and
directors of Arcada, loaned cash to Arcada pursuant to the terms of unsecured,
four-year promissory notes. Interest on such notes is payable at a rates
between 8% and 15% per annum. Interest expense related to these borrowings
approximated $74,000, $70,000, and $18,000 during the years ended December 31,
1995, 1996 and the six months ended June 30, 1997. The notes are subordinated
to borrowings under Arcada's line of credit. Keith Leppaluoto has assumed all
liability under the notes to Robert Leppaluoto and has agreed to indemnify and
hold Arcada Harmless against any and all claims by Robert Leppaluoto.
Pursuant the Merger Agreement, this debt will be included in UStel's
$1,500,000 of Convertible Debentures issued to Keith Leppaluoto upon
consummation of the Merger. See "Interests of Certain Persons in the
Merger."
In 1995 and 1996 Arcada entered into a severance agreement with two former
employees pursuant to which Arcada has agreed to make payments totaling an
aggregate of $1,260,000. Under one of the agreements, the balance of the
original $600,000 obligation is payable the event of a sale of Arcada or the
occurrence of certain other events, including the Merger. The two principal
shareholders of Arcada have agreed to assume their debt as part of the Merger
transaction in full satisfaction of Arcada's obligations to the two former
employees under the severance agreement.
Legal Proceedings
Arcada is involved in certain other disputes that arise in the ordinary course
of business. Arcada believes that no current dispute will have a material
adverse effect on its financial condition or results of operations.
PAGE
<PAGE>
ARCADA MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This following should be read in conjunction with the Arcada financial
statements and notes related thereto appearing elsewhere in this Proxy
Statement/Prospectus. Forward-looking statements are made throughout this
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
results of the Company to differ materially from those indicated by such
forward-looking statements, including those detailed in this section and in
"Risk Factors."
GENERAL
Due to the mix and composition of its customer base, Arcada experiences
general decreases in customer usage and revenue around national holidays and
traditional vacation periods. Accordingly, Arcada anticipates revenues from
customers to fluctuate throughout the year.
A high level of customer attrition is inherent in the long distance industry,
and Arcada's revenues are also affected by such attrition. Attrition is
attributable to a variety of factors including the initiatives of existing and
new competitors as they engage in, among other things, national advertising
campaigns, telemarketing programs and the issuance of cash or other forms of
incentives. Arcada is aware of the significance of attrition on its business,
and its attrition rate has decreased over the preceding three years. As
measured by customer number, Arcada's attrition rate has decreased from 4% per
month to 2% per month from 1995 to 1997. Arcada attributes this decrease in
attrition to improvements in customer service, billing, and a higher awareness
of customer needs.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Total revenues for the six months ended June 30, 1997 were $6.6 million,
compared to $6.2 million for the six month ended June 30, 1996, an increase of
5.4%. This increase was primarily attributable to an increase in Arcada's
long distance and wireless customer base and the expansion of Arcada's
products and services, including the introduction of cellular services in the
Seattle, Denver and Portland metropolitan areas.
Excess of revenues over line charges for the six months ended June 30, 1997
was $2.6 million, compared to $2.2 million for the six months ended June 30,
1996, an increase of 21.3%. Excess of revenue over line charges as a
percentage of revenue was 39.8% for the six months ended June 30,1997,
compared to 34.6% for the six months ended June 30, 1996. This increase in
percentage was primarily a result of a stronger product mix associated with
more wireless products and services and continued cost improvements to the
switched network.
Loss before interest and taxes for the six months ended June 30, 1997 was
$131,000 compared to $51,000 for the six months ended June 30, 1996. The
increase in loss before interest and taxes was primarily due to increase in
salary and expenses associated with the growth of wireless products and
services. Further expenses were attributable to additional legal and
accounting expenses from the termination of a proposed merger.
YEAR ENDED 1996 COMPARED TO YEAR ENDED 1995
Total revenues for the year ended December 31, 1996 were $12.6 million,
compared to $11.0 million for the year ended December 31, 1995, an increase of
15.4%. This increase was primarily attributable to an increase in Arcada's
core line of business, including equal access and the introduction of wireless
products and services.
Excess of revenues over line charges for the year ended December 31, 1996 was
$4.8 million, compared to $4.1 million for the year ended December 31, 1995,
an increase of 16.9%. Excess of revenue over line charges as a percentage of
revenue was 38.2% for the year ended December 31, 1996, compared to 37.8% for
the year ended December 31, 1995. This increase in percentage was primarily
due to stronger margins resulting from a favorable product mix on a number of
new products introduced during the period.
Loss before interest and taxes for the year ended December 31, 1996 was
$1,285,000 compared to $559,000 for the year ended December 31, 1995, an
increase of 129.8%. The increase was principally due to increase in other
operating expenses as a result of one time charges associated with terminated
merger costs, several non-recurring severance obligations, stepped-up
depreciation expense and a one-time accounts receivable write off.
LIQUIDITY AND CAPITAL RESOURCES
Historically Arcada has experienced growth, which has required substantial
cash to implement its business strategy. Given Arcada's billing and
collection cycle with its customers and suppliers, Arcada generally pays its
underlying suppliers from fifteen to thirty days prior to the time it is paid
by its customers for the same services. Arcada has financed its growth
primarily through vendor financing, capital leases and cash flow from
operations.
Net cash provided by operating activities was $308,000, $660,000, $448,000 and
$305,000 in 1995, 1996 and the first six months of 1996 and 1997,
respectively. The increase in cash provided by operating activities during
1996 as compared to 1995 results primarily from a decrease in accounts
receivable of $622,000 offset by an increase in net loss after non-cash
depreciation amortization and provisions for severance obligations of <PAGE>
$376,000. The decrease in net cash provided by operating activities in the
first six months of 1997 as compared to the corresponding period in 1996 is
primarily attributable to a slower increase in accounts payable of $245,000,
offset by a increase in non-cash depreciation and amortization expense of
$127,000.
Net cash used in investing activities approximated $661,000 and $338,000 in
1995 and 1996. The decrease in cash used resulted primarily from decreased
purchases of equipment of $71,000 and purchases of other assets of $152,000.
Cash provided by investment activities was $145,000 for the 6 months ended
June 30, 1996 as compared to cash used by investing activities of $331,000 for
the six months ended June 30, 1997.
Net cash provided (used) by financing activities was $127,000, $(361,000),
$41,000 and $59,000 in 1995, 1996 and the first six months of 1996 and 1997,
respectively. The increase in cash used by financing activities in 1996
results from increased repayment of notes and long-term debt, off-set in part
by increased line of credit borrowing.
The Company maintains line-of-credit borrowing agreements with banks. In
August 1996, the Company entered into a $400,000 line-of-credit agreement.
Borrowing availability approximated $300,000 and $400,000 during 1995 and
1996, respectively. Borrowings are secured by accounts receivable,
certificates of deposits, and personal guarantees of Company shareholders.
Line-of-credit agreements provide for interest, payable monthly at prime plus
2% during 1995 and at prime plus 1% during 1996. Additionally, on a periodic
basis the Company's shareholders have loaned cash to the Company. The Company
believes, based on its historical cash requirements and anticipated uses of
cash, that the Company's operating, investing and financing activities will be
sufficient to meet its cash requirements.
IMPACT OF INFLATION
The combined financial statements and related financial data presented herein
have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time due to inflation. The Company
believes that the effects of inflation have not had a significant effect on
its financial condition or results of operations and anticipates that the
level of inflation, if moderate, will not have a significant effect on
operations.
IMPACTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
Recently issued accounting standards having relevant applicability to the
Company consist primarily of Statement of Financial Accounting Standards
No.128 "Earnings per Share," Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income" and Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of An Enterprise and Related
Information," each of which relates to additional reporting and disclosure
requirements effective for financial statement periods beginning after
December 31, 1997. It is not expected the adoption of these accounting
pronouncements will have a material effect on the Company's operating results
or financial condition.
PAGE
<PAGE>
UStel MANAGEMENT
The following table sets forth, with respect to each person who is currently a
director or executive officer of UStel, the person's age and the person's
positions and offices with UStel. Individual background information concerning
each of such persons follows the table.
The directors and executive officers of the Company are as follows:
Name Age Position
Robert L.B. Diener 49 Chairman and Chief Executive Officer
Jerry Dackerman 47 President, Chief Operating Officer
and Director
Wouter van Biene 48 Executive Vice President, Secretary
and Director
Edmund C. King, Jr. 34 Vice President/Chief Financial Officer
Abe M. Sher 36 Vice President and General Counsel
Royce Diener(1) 79 Director
Ann Graham Ehringer, Ph.D.(1) 57 Director
Jordan Barness(1) 40 Director
(1) Member of Audit Committee and Compensation Committee.
Robert L. B. Diener served the Company as a consultant from July, 1995, to
January 1996, devoting a substantial portion of his time to the Company's
business. He became Executive Vice President in January, 1996, President and
Chief Executive Officer on August 14, 1996 and Chairman and Chief Executive
Officer on December 23, 1996. From its inception in 1986 through 1993, Mr.
Diener served as President and Chief Executive Officer of American Health
Properties, Inc., a New York Stock Exchange ("NYSE") listed real estate
investment trust specializing in health care. From 1976 through 1986, Mr.
Diener held various positions with American Medical International, Inc.,
("AMI"), a multinational hospital management company listed on the NYSE and
included in the S&P 500, most recently Group Vice President--Corporate
Development. For over seven years, he was a principal business development
officer in the international division of AMI, overseeing projects worldwide.
For four years prior to joining AMI, Mr. Diener was engaged in the private
practice of law with a law firm in Los Angeles, California, concentrating in
banking, real estate, corporate and securities law. Mr. Diener is the son of
Royce Diener.
Jerry Dackerman served the Company as Executive Vice President and Director
since August 14, 1996, and on December 23, 1996, was elected President and
Chief Operating Officer. Mr. Dackerman founded Consortium 2000 in 1988 as a
communications user group specializing in the design of large scale
telecommunications networks utilizing a group purchasing approach. Mr.
Dackerman is President and Chief Executive Officer of Consortium 2000 and will
continue to serve in such capacities after the Merger is completed. Mr.
Dackerman's initial experience in the telecommunications field was with
Executone, Inc. and RCA American Communications. In 1977, he founded Robin &
Dackerman, Inc., an international telecommunications consulting firm
specializing in the design and implementation of telecommunications networks.
Mr. Dackerman is also a director of New USA Growth Fund.
Dr. Wouter van Biene has been the Senior Vice President, Chief Financial
Officer and Secretary of Consortium 2000, Inc. since 1991. On August 14,
1996, he became Executive Vice President, Chief Financial Officer and
Secretary of UStel. On July 14, 1997 he relinquished the Chief Financial
Officer title and became Chief Information Officer. From 1986 to 1991, he was
a partner with Robin & Dackerman, Inc., a telecommunications consulting firm.
From 1972 to 1986, he was employed by AMI where he achieved the level of Group
Vice President-Information Systems and Chief Financial Officer for
International Operations. Dr. van Biene earned a doctorate in Economics and
Business Administration at the University of Amsterdam, the Netherlands.
Edmund C. King, Jr. joined the Company in May of 1997 and was appointed Vice
President and Chief Financial Officer in July of 1997. From 1995 through
1997, Mr. King served as Financial Analyst and Senior Associate at Trouver
Capital Partners, a West Los Angeles investment banking firm. During that
time, Mr. King also founded Infusion, LL.C., a capital management and resource
company. From 1990 to 1995, Mr. King was employed at ITT Fluid Technology
Corporation in various positions including: Sales Company Controller, Group
Financial Reporting Manager and Division Cost Accounting Manager, among
others. He is a Certified Management Accountant. Mr. King earned a Masters
Degree in Business Administration from Oregon State University.
Abe M. Sher was appointed by the Company as its General Counsel in January,
1996. From June, 1995 to January, 1996, Mr. Sher was an advisor to the
Company. From 1994 through 1996, Mr. Sher served as a corporate finance
consultant to Micro Bell, Inc., a telecommunications/paging hardware
manufacturer. From 1993 through 1995, Mr. Sher served as General Counsel for
SpaceWorks, Inc., an international service provider specializing in customized
on-line telecommunications applications for large corporations and
associations. From 1989 to 1991, Mr. Sher was also a principal and served as
General Counsel of Atria Corporation, a real estate development company based
in Southern California. From 1986 to mid-1995, Mr. Sher was also engaged in
the private practice of law in Los Angeles, California.
Royce Diener has served as an advisor to the Company since July, 1995, became
a director of the Company in January, 1996 and served as Chairman from August
14, 1996 to December 23, 1996. Mr. Diener served for over 18 years as
President, then Chairman and Chief Executive Officer of AMI. He serves on the
Board of Directors of Acuson, Inc. and American Health Properties, Inc., both
listed on the NYSE. Among private companies, Mr. Diener serves on the Board
of Directors of Harvard Medical International, an affiliate of Harvard
University. He recently completed a ten-year term as a director of Advanced
Technology Ventures, a registered investment firm located in Boston,
Massachusetts, and Palo Alto, California. Mr. Diener is the father of Robert <PAGE>
L. B. Diener.
Ann Graham Ehringer, Ph.D., became a director in May, 1997. Dr. Ehringer has
been a director of the Family and Closely-Held Businesses Program and
associate professor in the Entrepreneur Program in the Marshall School of
Business of the University of Southern California since July 1996. From 1990
to 1996 Dr. Ehringer has acted as a private consultant to the owners and
managers of small and mid-sized companies. From September 1992 to the present
she has also been Chairman and Chief Executive Officer of S.P. Land, Inc. and
S.P. Lodge, Inc., a real-estate holding business and a fine-dining business,
respectively. Dr. Ehringer has a Ph.D. in Management from the University of
Southern California, completed the Owner/President, Management Program at the
Harvard Business School, received a M.A. from Stanford University and a B.A.
from the University of Hawaii. She is a member of the Executive Advisory
Panel for the "Executive" a Publication of the Academy of Management and of
the National Association of Corporate Directors. She serves on the boards of
directors of other private and not-for-profit organizations.
Jordan Barness became a director in May, 1997. Mr. Barness is a founding
partner of the Los Angeles and New York-based law firm of Steinberg, Barness,
Glasgow & Foster, LLP. He serves as President to Trans International
Management Corporation, a domestic and international consulting, marketing and
management firm. He was a member of the law firm of Cordero, Glasgow &
Barness from 1986 to 1994 and a member of the law firm of Barness, Glasgow &
Barness from 1994 to 1996. Mr. Barness received his Bachelor of Arts Degree
in Political Economies of Industrial Societies from the University of
California at Berkeley in 1979. He received his Juris Doctor Degree from
Southwestern University School of Law in 1983. Mr. Barness is admitted to the
New York and California Bars. Mr. Barness' practice includes general
corporate, real estate and international law. Mr. Barness is the son of Amnon
Barness, a stockholder and warrant holder of UStel, a shareholder of
Consortium 2000 and one of the beneficiaries of the Palisades USTL Trust.
Board of Directors
Directors are elected annually to serve until the next annual meeting of
stockholders and until their successors are elected and qualified or until
their death, resignation or removal.
The Audit Committee of the Board of Directors, comprised of Royce Diener, Ann
Graham Ehringer and Jordan Barness, is responsible for making recommendations
concerning the engagement of independent certified public accountants,
approving professional services provided by the independent certified public
accountants and reviewing the adequacy of the Company's internal accounting
controls. The Compensation Committee, comprised of Royce Diener, Ann Graham
Ehringer and Jordan Barness, is responsible for recommending to the Board of
Directors all officer salaries, management incentive programs and bonus
payments. Neither the Audit or Compensation Committees met formally in 1996.
The Board of Directors met 18 times in 1996. Each director attended at least
75% of the aggregate of all meetings held by the Board in 1996 during such
director's tenure as a director. Currently, none of the directors receives
compensation for acting as a director. The Company anticipates that it may in
the future institute a compensation plan for outside directors which will
involve compensation for attending meetings and stock options.
Compensation Committee Interlocks and Insider Participation
Prior to August 1996, the Company did not have a Compensation Committee or
an Audit Committee. Former director, Noam Schwartz and Barry Epling
participated in deliberations concerning compensation of executive officers
during 1995. None of the executive officers of the Company have served on the
board of directors or on the compensation committee of any other related
entity, except for Consortium 2000.
Summary Compensation Table
The following table sets forth all compensation received by the Company's
Chief Executive Officer and its other most highly compensated executive
officers and key employees whose total cash and cash equivalent compensation
exceeded $100,000 for services rendered to the Company for the years ended
December 31, 1994, 1995 and 1996.
<PAGE>
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
Payouts
Annual Securities
Compensation Underlying
Name and Principal Position Year Salary Options/SAR's #
<S> <C> <C> <C>
Robert L.B. Diener(1)
Chairman, Chief Executive 1996 $ --- ---
Officer and Former 1995 --- ---
President 1994 --- ---
Jerry Dackerman(1) 1996 --- ---
President, Chief Operating 1995 --- ---
Officer and Director 1994 --- ---
Wouter van Biene(1) 1996 --- ---
1995 --- ---
1994 --- ---
Barry K. Epling 1996 102,440 100,000
Former Executive Vice 1995 93,000 ---
President, Assistant Secretary, 1994 93,000 ---
Former Director and Former
Chief Operating Officer
Noam Schwartz
Former President, Chief 1996 120,000 100,000
Executive Officer and Director 1995 100,000 210,000
1994 60,000 210,000
</TABLE>
(1) In January 1997, the Company entered into three-year employment
agreements, retroactive to August 15, 1996, with Messrs. Diener, Dackerman and
van Biene, at annual salaries of $200,000, $180,000, and $140,000,
respectively, with bonuses to be determined at the discretion of the Board of
Directors. The employment agreements for Messrs. Diener, Dackerman and van
Biene provide that, under certain circumstances, in the event of a change in
control of the Company, each employee shall be paid the amount of his
compensation as would be due for the balance of his term of employment, or for
the two year period from such change in control, whichever is longer.
The Company had entered into employment agreements with Noam Schwartz and
Barry Epling that provide for annual salaries of $120,000 (of which Mr.
Schwartz only drew $100,000 in 1995) and $93,600, respectively. Mr.
Schwartz's employment agreement provided for a three-year term ending March 1,
1997. Mr. Schwartz resigned effective December 15, 1996. Mr. Epling's
employment agreement provided for a five-year term commencing December 1,
1993, although the salary provided for in such agreement did not commence
until February 1, 1994. Each of the employment agreements also provided for
bonuses to be paid at the discretion of the Company's Board of Directors. In
July 1997, UStel terminated Mr. Epling's contract. UStel is currently
negotiating a severance arrangement with Mr. Epling.
The compensation of Robert L. B. Diener, in his capacity as the Company's
former Executive Vice President and Secretary, was payable by the Company as
consulting fees to Diener Financial Group, a company wholly-owned by Mr.
Diener, under a one-year consulting agreement effective September 1, 1995.
Pursuant to this arrangement, the Company agreed to pay Diener Financial Group
$7,500 per month. In addition, Mr. Diener was to personally receive $5,000
per month for a one year period starting November 1, 1995. The consulting
agreement further provided that Diener Financial Group and Mr. Diener were to
receive five-year warrants to purchase up to 100,000 shares each of Common
Stock at a price of $5.00 per share. On August 14, 1996, Mr. Diener became
President and Chief Executive Officer of the Company.
In September, 1996, the Company entered into a two-year employment agreement
with Abe M. Sher that provides for a monthly salary of $6,950. Mr. Sher's
employment commitment is for 50% of his working time. The Company previously
granted Mr. Sher five-year warrants to purchase up to 200,000 shares of Common
Stock at $5.00 per share and issued to him 32,000 shares of Common Stock. All
of such warrants are currently exercisable. The 32,000 shares of Common Stock
are restricted from transfer for two years from the date of grant and are
forfeitable to the Company if Mr. Sher elects to terminate his employment with
the Company during that two-year period.
1993 Stock Option Plan
The 1993 Stock Option Plan (the "Stock Option Plan") provides for the grant of
options to acquire the Company's Common Stock ("Options"), the direct grant of
shares of the Company's Common Stock ("Stock Awards"), the grant of stock
appreciation rights ("SARs"), or the grant of other cash awards ("Cash
Awards") (Stock Awards, SARs and Cash Awards collectively are referred to
herein as "Awards"). Options and Awards under Stock Option Plan may be issued
to executives, key employees and others providing valuable services to the
Company and its subsidiaries. The Options issued may be incentive stock
options or nonqualified stock options. A maximum of 1,450,000 shares of
Common Stock of the Company may be issued under the Stock Option Plan. Of
this amount, 730,000 options are available for grant. If any change is made
in the stock subject to the Stock Option Plan, or subject to any Option or SAR
granted under the Stock Option Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, split-up, combination of
shares, exchange of shares, change in corporate structure or otherwise), the <PAGE>
Stock Option Plan provides that appropriate adjustments will be made as to the
maximum number of shares subject to the Stock Option Plan and the number of
shares and exercise price per share of stock subject to outstanding options.
The 1993 Stock Option Plan is administered by the Board of Directors of the
Company or a committee appointed by the Board. The exercise price of all
options granted under the Stock Option Plan must be at least equal to the fair
market value of such shares at the date of grant. The maximum term of options
granted under the Stock Option Plan is 10 years. With respect to any
participant who owns stock representing more than 10% of the voting rights of
the Company's outstanding capital stock, the exercise price of any option must
be equal at least to 110% of the fair market value of such shares on the date
of grant.
Options granted under the 1993 Stock Option Plan are nontransferable other
than by will or by the laws of descent and distribution upon the death of the
option holder and, during the lifetime of the option holder, are exercisable
only by such option holder. Termination of employment at any time for cause
immediately terminates all options held by the terminated employee.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
Number of Securities Percent of Total
Underlying Options/SAR's
Options/SAR's Granted to
Granted # Employees In Exercise of Base
Name Fiscal Year Price ($/sh) Expiration Date
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
Robert L.B. Diener -0- -0- -0- N/A
Noam Schwartz 100,000 50 5.00 01/06
Barry Epling 100,000 50 5.00 01/06
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(Individual Grants)
Value of Unexercised
Number of Unexercised In-the-Money
Options/SAR's At Options/SAR's At
Shares Acquired FY-End (#) Exercisable FY-End($) Exercisable
Name On Exercise (#) Value Realized($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
Robert L.B. Diener -0- -0- -0- -0-
Noam Schwartz -0- -0- -0- -0-
Barry Epling 100,000 500,000 -0- -0-
</TABLE>
At December 31, 1995, there were outstanding options to acquire 210,000 shares
of the Company's Common Stock under the Stock Option Plan. These options were
granted in January, 1994 to Noam Schwartz, the Company's former President, at
an exercise price of $7.50 per share, one-third of which will vest each year
following the date of grant. As of December 31, 1995, no options had been
granted to any other executive officers of the Company and no options had been
exercised. In January, 1996, the Company's Board of Directors approved the
reduction of the exercise price of Mr. Schwartz's outstanding options to $5.00
per share. In January, 1996, the Company also granted to each of Noam
Schwartz and Barry Epling from the Stock Option Plan, options to purchase
100,000 shares of Common Stock at $5.00 per share. In June, 1996, Mr. Epling
exercised such options in connection with the Company's acquisition of a
switch owned by Mr. Epling. In 1997, Mr. Schwartz resigned as a Director
without exercising his options within the period provided for the exercise of
stock options by a former director or employee. UStel has notified Mr.
Schwartz of the cancellation of his options due to non-exercise within the
prescribed period of exercise ability but has not received a reply to its
notification. In July 1997, the Board granted 200,000 options to Robert L. B.
Diener, 120,000 options to Jerry Dackerman, 100,000 options to Wouter van
Biene and 100,000 options to Edmund King (collectively the "1997 Options").
The 1997 Options were granted at an exercise price of $3.62 per share, vest
over a four year term at the rate of 25% per year and are exercisable over 10
years.
In 1997, UStel recharacterized 100,000 warrants which had previously been
issued to an employee, Dan Knoller, as stock options under the Stock Option
Plan. The 100,000 stock options are exercisable at $5.00 per share, are fully
vested and expire in August 2001.
Limitation of Director's Liability and Indemnification
The Company's Articles of Incorporation limit the liability of its directors
in their capacity as directors to the fullest extent permitted by the Minnesota
Business Corporation Act. Specifically, directors of the Company will not be
personally liable for monetary damages for breach of fiduciary duty as
directors except liability for (i) any breach of the duty of loyalty to the <PAGE>
Company or its stockholders, (ii) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) dividends
or other distributions of corporate assets that are in contravention of
certain statutory or contractual restrictions, (iv) violations of certain
Minnesota securities laws, or (v) any transaction from which the director
derives an improper personal benefit.
The Minnesota Business Corporation Act requires that the Company indemnify any
director, officer or employee made or threatened to be made a party to a
proceeding, by reason of the former or present official capacity of the
person, against judgments, penalties, fines, settlements and reasonable
expenses incurred in connection with the proceeding if certain statutory
standards are met. "Proceeding" means a threatened, pending or completed
civil, criminal, administrative, arbitration or investigative proceeding,
including a derivative action in the name of the Company. Reference is made
to the detailed terms of the Minnesota Indemnification Statute (Minn. Stat.
SEC.302A.521) for a complete statement of such indemnification rights. The
Company's Bylaws also require the Company to provide indemnification to the
fullest extent of the Minnesota Indemnification Statute.
The directors and officers of the Company also are indemnified against certain
civil liabilities that they may incur under the Securities Act. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to officers, directors or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to beneficial
ownership of the UStel Common Stock as of September 30, 1997 and as adjusted
to give effect to the issuance of 3,150,000 shares in the Merger by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
Common Stock, (ii) each director of the Company owning Common Stock, (iii)
each executive officer of the Company owning Common Stock and (iv) all
executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Number of Shares Shares Beneficially
Beneficially Owned Owned After
Prior to the Merger(1) the Merger (1)
Name and Address(1) Number Percent Percent
<S> <C> <C> <C>
Robert L.B. Diener(2) 213,476 3.0 2.0
Jerry Dackerman 117,054 1.7 1.2
Wouter van Biene 124,107 1.8 1.2
Edmund C. King, Jr. -- -- --
Abe M. Sher(3) 232,000 3.3 2.3
Barry Epling(4) 202,851 2.9 2.0
Royce Diener(5) 632,676 9.2 6.2
Noam Schwartz(6)(7) 154,990 2.3 1.7
Kamel B. Nacif(8) 594,990 8.3 5.7
Ann Graham Ehringer, Ph.D. 5,000 * *
Jordan Barness -- -- --
All directors and officers
as a group (nine persons) 1,677,154 24.4 18.5
</TABLE>
* Less than one percent.
(1) In calculating percentage ownership, all shares of Common Stock which
the named stockholder has the right to acquire upon exercise of stock options
or conversion of convertible securities exercisable or convertible within 60
days of the Record Date, are deemed outstanding for the purpose of computing
the percentage of Common Stock owned by such stockholder, but are not deemed
to be outstanding for the purpose of computing the percentage of Common Stock
owned by any other stockholder. Percentages may be rounded. Each of such
persons may be reached through the Company at 6167 Bristol Parkway, Suite 100,
Culver City, California 90230.
(2) Consists of 8,476 shares of Common Stock and warrants to purchase up
to 100,000 shares of Common Stock owned by the Diener Financial Group, and
warrants to purchase up to an aggregate of 105,000 shares of Common Stock
owned by Robert L.B. Diener, individually.
(3) Consists of 32,000 shares of Common Stock and 200,000 shares of Common
Stock issuable upon the exercise of warrants.
(4) Consists of 107,851 shares of Common Stock and 95,000 shares that Mr.
Epling has the right to acquire pursuant to the exercise of an option granted
by Noam Schwartz and his father, David Schwartz. The terms of the options to
acquire these shares are provided in separate Stock Option and Repurchase
Agreements between Mr. Epling and Noam and David Schwartz. The Stock Option
and Repurchase Agreements provide that the shares may be purchased from such
individuals at an exercise price of $1.00 per share. The option is
exercisable immediately and may be exercised at any time on or before January
12, 1998, provided, however, that in the event Mr. Epling's employment is
terminated for reasons other than death or disability, the option shall
terminate immediately. Mr. Epling, formerly an executive officer of UStel,
currently is a consultant on a month-to-month basis.
(5) Includes 267,211 shares owned by the Palisades USTL Trust, a trust
established by a group of investors for which Royce Diener serves as trustee. <PAGE>
As trustee, Mr. Diener is vested with the authority to distribute any income
and/or the principal of the Trust to its beneficiaries in the future. Also
consists of 282,132 shares of Common Stock and warrants to purchase up to
83,333 shares of Common Stock held by Royce Diener individually.
(6) Consists of 154,990 shares held by RGB/TAD Investment Partnership of
which Mr. Schwartz is a partner.
(7) Does not give effect to the possible exercise of the option referred
to in footnote (4) above.
(8) Consists of 220,000 shares of Common Stock and 374,990 shares of
Common Stock underlying 275,000 shares of Series A Convertible Preferred stock
issued to Mr. Nacif. Mazliach Gamliel holds a general power of attorney for
Mr. Nacif which includes the right to vote his shares but Mr. Gamliel
disclaims beneficial ownership of Mr. Nacif's shares.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has advanced funds to Mr. Noam Schwartz, a founder and former
chief executive officer and director. At December 31, 1995 and 1996, Mr.
Schwartz owed the Company approximately $193,000 and $199,000, respectively.
In June, 1995, the Company obtained a revolving line of credit from Bank Leumi
in the amount of $3,000,000, secured by certificates of deposit held by the
bank and guaranteed by Noam Schwartz. This line of credit was fully repaid in
July 1996.
In August, 1995, the Company agreed to engage the Diener Financial Group as a
financial consultant for a period of one year commencing September 1, 1995 and
agreed to grant to the Diener Financial Group five year warrants to purchase
100,000 shares of the Company's Common Stock at $5.00 per share. The sole
principal of the Diener Financial Group is Robert Diener, who currently is the
Company's Chairman and Chief Executive Officer. Pursuant to the Diener
Financial Group engagement, the Company agreed to pay a consulting fee of
$7,500 per month to the Diener Financial Group and $5,000 a month to Mr.
Diener personally. The Company also agreed to additionally compensate the
Diener Financial Group in an amount equal to 1%, 2% and 3% of the senior debt,
subordinated debt and equity proceeds, respectively, raised by the Diener
Financial Group for the Company. As of August 14, 1996, the engagement
agreement with the Diener Financial Group was terminated with no additional
sums owing to the Diener Financial Group.
In October, 1995, the Company obtained a $1,500,000 term loan from a group of
investors introduced to the Company by the Diener Financial Group. Of the
$1,500,000 loaned to the Company by the investor group, $500,000 came from
Royce Diener. The loan bore interest at 10% per annum payable quarterly and
was due in one year. The loan was secured by the Company's accounts
receivable and unrestricted deposit accounts of the Company to the fullest
extent permitted by law and was convertible at the lenders' option, in whole
or in part, into shares of the Company's Common Stock at the rate of $5.00 per
share. The Company also issued to the members of the investor group five-year
warrants to purchase an aggregate of up to 100,000 shares of Common Stock at
$5.00 per share. The warrants are allocable among the members of the investor
group in proportion to the amount loaned to the Company, which means that
Royce Diener, who loaned one-third of the total term loan, is entitled to one
third of the warrants (i.e., warrants to purchase 33,333 shares of Common
Stock). In consideration for arranging the term loan in 1995, the Company
paid Robert Diener $15,000 (1% of the proceeds raised). The $1,500,000 term
loan was repaid by the Company in January, 1996 from proceeds drawn under its
new line of credit with Coast Business Credit.
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 Robert Diener the sum of $25,000. In November, 1995, the Company granted
Mr. Diener 100,000 warrants exercisable at $5.00 per share, expiring October,
2000.
In June, 1996, the Company acquired title to a telecommunications switch owned
by a former executive officer, Mr. Epling, for aggregate consideration in the
amount of $702,157. 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, canceling approximately $117,799 in
interim advances made by the Company to TYC, Inc., a corporation wholly-owned
by Mr. Epling, and a cancellation of interim advances of approximately $68,656
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 at approximately $716,000.
In consideration of services rendered and to be rendered to the Company and
$95,000 paid in the form of a promissory note due upon the earlier of
conversion or May 31, 2005, in November, 1995, the Company issued to
Integrated Financial Consultants, Inc., a company wholly-owned by Andrew J.
Grey, a former director, ("IFC") 95,000 shares of its Series B Convertible
Preferred Stock ("Series B Preferred"). In February, 1996, the Company
agreed to cancel the $95,000 note. In September, 1996, these shares converted
into 95,000 shares of Common Stock.
In January 1996, the Company entered into a supplemental consulting agreement
with IFC to provide the services of Mr. 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
experienced a change in control, as defined in the agreement, or IFC
terminated the services. The amount of deferred compensation is $166,000 and <PAGE>
was represented by a promissory note bearing interest at 10% per annum and was
paid from the 1997 secondary public offering proceeds. Effective August 14,
1996 this agreement was terminated.
In July, 1996, the Company's Board of Directors authorized the issuance of
20,000 shares of Common Stock to Consortium 2000 at $5.75 per share to
reconcile variances in commissions owed to Consortium 2000 for July, 1995
through March, 1996. These shares were distributed as dividends to the
shareholders of Consortium 2000 in 1997.
In August, 1996, the Company entered into a two-year consulting agreement with
Vanguard Consultants, Inc., a Nevada corporation owned by Ronnie Schwartz, to
provide consulting services in the areas of marketing, finance and business
development. Pursuant to this agreement, Vanguard Consultants, Inc. will
receive $7,500 per month for such services.
Noam Schwartz, and his brother, Ronnie Schwartz, personally guaranteed the
Company's credit facility with Jeflor, Inc. As of December 31, 1996, the
amount outstanding under this facility was $1,200,000. The loan was paid off
in February, 1997.
Under Minnesota law, officers and directors of the Company may enter into
transactions or contracts with the Company provided generally that (i) the
transaction is fair to the Company at the time it is authorized or approved;
(ii) the stockholders approve the transaction after disclosure of the
relationship or interest; or (iii) after disclosure to the Board of Directors,
a majority of the disinterested board members authorize the transaction. In
addition, any transaction involving a loan, guarantee or other financial
assistance by the Company to an officer or director requires approval of the
Board of Directors.
Related Party Transactions
The Company has entered into business transactions with Consortium 2000, an
entity which prior to its acquisition was owned or controlled by certain of
its principal stockholders. Although the Company may continue to enter into
such transactions in the future, its policy is not to enter into transactions
with related persons unless the terms thereof are at least as favorable to the
Company as those that could be obtained for unaffiliated third parties and are
approved by a majority of disinterested directors.
PAGE
<PAGE>
ARCADA MANAGEMENT
The following table sets forth, with respect to each person who is currently a
director or executive officer of Arcada, the person's age and the person's
positions and offices with Arcada. Individual background information
concerning each of such persons follow the table.
NAME AGE POSITION WITH ARCADA
Robert W. Leppaluoto 56 Chairman of the Board and Director
Frank J. Bonadio (1) 45 President, Chief Financial Officer and Director
Keith Leppaluoto 58 Director
(1) Will become a director of UStel at the Effective Time.
The directors of Arcada are elected to hold office until the next annual
meeting of shareholders and until their respective successors have been
elected and qualified. Officers of Arcada are elected by the Board of
Directors and hold office until their successors are elected and qualified.
Frank J. Bonadio. Mr. Bonadio has served as a Director of Arcada since August,
1993 and as President since May, 1996. Mr. Bonadio served as Secretary and
Treasurer of Arcada from July, 1994 until his appointment as President. Mr.
Bonadio has also served as Chief Financial Officer of Arcada from 1991 to
present and as Vice President of Operations and Controller from 1994 to 1996.
Keith Leppaluoto. Mr. Leppaluoto has served as a Director of Arcada since May,
1996. Mr. Leppaluoto also served as a Director of Arcada from August, 1993
until January 1, 1996. Mr. Leppaluoto has also been Vice President of
Leppaluoto Offshore Marine, a private maritime charter company, since 1990.
Mr. Leppaluoto's brother is Robert Leppaluoto, Director, the Chairman and a
shareholder of Arcada.
Robert Leppaluoto. Mr. Leppaluoto has served as a Director of Arcada since
January, 1996 and its Chairman since September, 1996. Mr. Leppaluoto also
served as a Director of Arcada from August, 1993 to July, 1994. Mr.
Leppaluoto has also been President of Leppaluoto Offshore Marine, a private
maritime charter company, since 1975. Mr. Leppaluoto's brother is Keith
Leppaluoto, a Director and shareholder of Arcada.
Indemnification of Arcada Officers and Directors
Arcada's Articles of Incorporation provide that Arcada shall indemnify its
officers and directors to the fullest extent required or permitted by the
WBCA, as the same may be amended and supplemented from time to time, except
that it is will not indemnify directors for (i) intentional misconduct or a
knowing violation of law; (ii) unlawful payment of dividends under RCW
23B.08.310 or (iii) any transaction in which the director personally received
a benefit to which he or she was not legally entitled. Any repeal or
modification of such provision of the Articles of Incorporation by Arcada's
stockholders shall be prospective only and shall not adversely affect any
right or protection of a director of Arcada existing at the time of such
repeal or modification. Pursuant to the Merger Agreement, UStel will obtain
director insurance to insure such indemnification as to acts or omissions
occurring prior to the Effective Time.
PAGE
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS OF ARCADA
The following table sets forth certain information regarding the beneficial
ownership of Arcada Common Stock as of the Effective Date by (i) each director
of Arcada, each executive officer of Arcada, all directors and executive
officers of Arcada as a group and each person known by Arcada to be the
beneficial owner of more than 5% of the Arcada Common Stock and (ii) the
beneficial ownership of UStel Common Stock after giving effect to the Merger
for each of the persons referred to in clause (i) above (without giving effect
to the conversion of the $1,500,000 Convertible Debenture issued in the Merger
and assuming that 3,150,000 shares of UStel Common Stock will be issued in the
Merger.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
NAME AND ADDRESS BENEFICIAL OWNERSHIP OF
OF OF USTEL COMMON STOCK
BENEFICIAL OWNER(1) ARCADA COMMON STOCK AFTER GIVING EFFECT TO THE MERGER
SHARES PERCENT SHARES PERCENT
<S> <C> <C> <C> <C>
Keith Leppaluoto 30,000 60% 1,896,000 18.6%
Frank J. Bonadio 19,000 38% 1,197,000 12.0%
All Directors & executive
officers of Arcada as
a group (3 persons) 1,000 2%
* *
Total 10,022,778 31.42%
*less than one percent
</TABLE>
(1) All of the individuals listed below have their principal place of
business at 2001 Sixth Avenue, Suite 3210, Seattle, Washington 98121.
PAGE
<PAGE>
MANAGEMENT AND OPERATIONS OF USTEL FOLLOWING THE MERGER
Operations
The Merger of UStel and Arcada will combine the two companies' current
operations. After the Effective Time, UStel will consolidate its Las Vegas
operations and executive offices with Arcada's current offices in Seattle,
Washington, and will maintain a marketing and sales operation and executive
offices at UStel's offices in Culver City, California. It is currently
intended that after the Effective Time, UStel and Arcada will also consolidate
sales and marketing activities.
After the Merger, UStel will likely seek to pursue acquisitions and strategic
combinations in the telecommunications industry. Such transactions could
require debt or equity financing, resulting in potential dilution to existing
UStel Shareholders. There can be no assurance, however, that such transactions
will be pursued, or the terms under which such transactions will be
consummated.
Management
UStel currently has indemnification agreements with certain of its directors
and executive officers. Effective as of the Effective Time, these
indemnification agreements will include Frank Bonadio. These agreements
provide that the directors and executive officers will be indemnified to the
fullest extent permitted by law against all expenses (including attorneys'
fees), judgments, fines, penalties, taxes and settlement amounts paid or
incurred by them in any action or proceeding, including any action by or in
the right of UStel or any of its subsidiaries or affiliates, on account of
their services as directors, officers, employees, fiduciaries or agents of
UStel or any of its subsidiaries or affiliates, and this service at the
request of UStel or any of its subsidiaries or affiliates as directors,
officers, employees, fiduciaries or agents of another corporation,
partnership, joint venture, trust, employer benefit plan or other enterprise.
In addition it is contemplated that UStel will obtain liability insurance for
directors and officers covering certain losses arising from claims or charges
made against them while acting in their capacities as directors or officers of
UStel.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers and controlling persons of UStel pursuant to
the foregoing provisions, or otherwise, UStel has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable.
Employment Agreement
Bonadio Employment Agreement. In connection with the Merger, UStel and Frank
Bonadio, a director and the President and Chief Operating Officer of Arcada,
have entered into an Employment Agreement (the "Bonadio Employment
Agreement"). The Bonadio Employment Agreement provides that commencing on the
Effective Date, and for five years thereafter, Mr. Bonadio will serve as
President of UStel. Mr. Bonadio will receive a salary of $150,000 per annum,
together with options to purchase an aggregate of 100,000 shares of UStel
Common Stock (the "Bonadio Options"). The Bonadio Options are to be granted at
the first meeting of the Compensation Committee of the UStel Board after the
Effective Time and will have an exercise price equal to the fair market value
of UStel Common Stock on the date of grant. The Bonadio Options vest ratably
over a three-year period, commencing on the first anniversary of the date of
grant.
PAGE
<PAGE>
THE REINCORPORATION MERGER
Introduction
For the reasons set forth below, the Board of Directors believes that the best
interests of the Company and its stockholders will be served by changing the
state of incorporation of the Company from Minnesota to California (the
"Reincorporation"). Stockholders are urged to read carefully the following
sections of this Proxy Statement/Prospectus, including the related exhibits,
before voting on the Reincorporation Merger. In this discussion of the
Reincorporation Merger, the term "UStel Minnesota" refers to the existing
Company, incorporated in Minnesota.
The Reincorporation Merger will be effected by merging UStel Minnesota into
UStel Merger Corporation (herein "UStel California", a wholly-owned subsidiary
of UStel Minnesota), which was incorporated for purposes of the
Reincorporation Merger. Upon completion of the Reincorporation Merger, the
name of the Company will remain UStel, Inc. Pursuant to the Agreement and Plan
of Merger, a form of which is attached hereto as part of Appendix C (the
"Reincorporation Merger Agreement"), upon the effective date of the merger
each outstanding share of UStel Minnesota $0.01 Common Stock, and each
outstanding share of $0.01 Series A Preferred Stock, will automatically be
converted into one share of UStel California Common Stock, no par value and
one share of Series A Preferred Stock of no par value, respectively. Each
certificate representing issued and outstanding shares of UStel Minnesota
$0.01 par value Common Stock will continue to represent the same number of
shares of Common Stock and each outstanding share of Series A $0.01 par value
will continue to represent the same number of shares of Series A Preferred
Stock. It will not be necessary for stockholders of UStel Minnesota to
exchange their existing stock certificates for stock certificates of UStel
California. However, stockholders may exchange their certificates if they so
choose, subject to normal requirements as to proper endorsement, signature
guarantee, if required, and payment of applicable taxes. After the
Reincorporation Merger, the shares of UStel Minnesota Common Stock will be
traded on the over-the-counter market and are expected to be listed on Nasdaq
SmallCap Market without interruption under the same symbol ("USTL") as the
shares of UStel Minnesota Common Stock are traded at present.
Under Minnesota law, the affirmative vote of a majority of the outstanding
shares of Common Stock and Series A Preferred Stock (voting together, and not
by class) is required for approval of the Reincorporation Merger Agreement and
the other terms of the proposed merger. The Reincorporation Merger has been
approved by UStel Minnesota's Board of Directors, which recommends a vote in
favor of such proposal. If approved by the stockholders at the upcoming
Special Meeting, it is anticipated that the merger of UStel Minnesota into
UStel California will be effective as soon as practicable thereafter. However,
pursuant to the Reincorporation Merger Agreement, the Reincorporation Merger
may be abandoned or the Reincorporation Merger Agreement may be amended
(except that the principal terms may not be amended without stockholder
approval) either before or after stockholder approval has been obtained and
prior to the effective date of the merger, if, in the opinion of the Board of
Directors of either corporation, circumstances arise which make it inadvisable
to proceed.
The discussion contained herein is qualified in its entirety by reference to
the Reincorporation Merger Agreement, the Amended and Restated Articles of
Incorporation of UStel California (the "Certificate of Incorporation") and the
Bylaws of UStel California, copies of which are attached hereto as Exhibits 2
and 3, respectively to Appendix C. The Certificate of Incorporation will be
filed with the California Secretary of State if the Reincorporation Merger is
approved by the shareholders of UStel, as provided in this Proxy
Statement/Prospectus. See "Vote Required for Reincorporation" below.
Principal Reasons for Reincorporation
For many years California has followed a policy of encouraging incorporation
in that state and, in furtherance of that policy, California adopted a General
Corporation Law, effective January 1, 1977 (the "CGCL"). The Board or
Directors of UStel has concluded that since almost all of the executive
officers of UStel Minnesota work at the office located in California,
including UStel's general counsel, and since the executive officers are more
familiar with California corporate law than with Minnesota's corporate law,
and since UStel Minnesota had no business assets in Minnesota, it would be
more practical and efficient to be governed by the California GCL.
Possible Disadvantages
Section 302A.671 of the Minnesota business corporation act contains provisions
which, among other things, provide that a person who acquires stock in excess
of certain thresholds beginning with 20% of the outstanding stock, may not
vote shares which exceed the thresholds, unless the affirmative vote of a
majority of the voting power of the corporation entitled to vote (excluding
all shares held by the acquiring person, any officer of the corporation and
any employee director of the corporation), permits such shares to have full
voting rights. The effect of this provision may be to give the Board more
bargaining power in the event of an unsolicited tender offer. California's
CGCL does not contain a similar provision.
No Change will be Made in the Name, Business or Physical Location of the
Company
The Reincorporation Merger will effect only a change in the legal domicile of
UStel and other changes of a legal nature, certain of which are described in
this Proxy Statement/Prospectus. The Reincorporation Merger will not result in
any significant change in the name, business, management, location of the
principal executive offices, assets or liabilities of the Company. All
employee stock option plans described elsewhere in this Proxy
Statement/Prospectus will be continued by UStel California, and each share of
Common and Preferred Stock outstanding or option issued pursuant to such <PAGE>
plans, as the case may be, will automatically be converted into the same
number of shares of UStel California Common or Preferred Stock or an option to
purchase the same number of shares of UStel California Common Stock at the
same option price per share, upon the same terms and subject to the same
conditions as set forth in such plans. Shareholders should note that approval
of the Reincorporation Merger will also constitute approval of the assumption
of the foregoing plans by UStel California. UStel Minnesota's other employee
benefit plans and arrangements will be continued by UStel California upon the
terms and subject to the conditions currently in effect. Moreover, as noted
above, after the merger the shares of Common Stock of UStel California will be
traded, without interruption, in the same principal markets and under the same
symbol as at present.
Comparison between Charters and Bylaws of UStel Minnesota and UStel California
The Charter and Bylaws of UStel Minnesota will become the Charter and Bylaws
of UStel California without any material adverse changes affecting the
stockholders of UStel Minnesota.
Comparison of Corporation Laws of Minnesota to California
The provisions of the Minnesota Business Corporation Act (the "MBCA") and the
California General Corporate Law (the "CGCL") differ in many regards.
Summarized below are certain of the principal differences affecting the rights
of stockholders of corporations incorporated in these two states. This summary
does not purport to be a complete statement of differences affecting
stockholders' rights under the MBCA and CGCL and is qualified in its entirety
by reference to the provisions of the general corporate law of those two
states.
Dissenter's Rights
Under the MBCA dissenting stockholders who follow prescribed statutory
procedures are entitled to obtain payment for the fair value of the
stockholder's shares in the event of certain enumerated corporate transactions
which materially and adversely effect certain stockholder rights or in
connection with certain mergers, exchanges, and sales of substantially all the
assets of the corporation. The CGCL provides similar rights and procedures in
the event of certain mergers and reorganizations. Even in those cases however,
such rights are not provided in certain circumstances, including transactions
in which shares of the corporation being voted in a merger or reorganization
are listed on a national securities exchange or listed on the list of
over-the-counter margin stocks ("Margin Stock") issued by the Board of
Governors of the Federal Reserve System and less than 5% of the outstanding
shares of the class of shares entitled to vote demand payment. UStel has
been advised that its shares of Common Stock qualify as Margin Stock.
Vote Required
Both the MBCA and CGCL require that certain mergers and exchanges be approved
by a majority of the outstanding shares entitled to vote thereon. Under the
MBCA, a vote of the stockholders of the surviving corporation is not required
where, in the case of a merger or exchange, there is no amendment of the
corporation's articles or where a change in the corporation's outstanding
stock is involved and the merger results in no more than a 20% increase in the
voting power of the outstanding common stock, or if the merger results in no
more than a 20% increase in the number of shares entitled to participate
without limitation in corporate distributions. Under the CGCL no approval of
the outstanding shares is required in the case of any corporation if such
corporation, or its shareholders immediately before the merger, shall own
equity securities, other than any warrant or right to subscribe to or purchase
such equity securities, of the surviving or acquiring corporation possessing
more than five-sixths of the voting power of the surviving or acquiring
corporation.
Loans to Directors
The MBCA permits loans to be made to a director of the corporation if the
Board of Directors finds that the loan may benefit the corporation. The CGCL
permits loans to be made to directors (i) as an advance for anticipated
reasonable expenses to be incurred in the performance or his or her duties,
(ii) with approval of a majority the shareholders, or (iii) by the board alone
if certain corporate procedures are followed.
Preemptive Rights
Under the MBCA, unless denied or limited in the articles of incorporation,
stockholders have preemptive rights to acquire a certain fraction
proportionate to the shares held when the corporation proposes to issue new or
additional shares or rights to purchase shares of the same series or class
held by the stockholder unless the shares are (i) issued for consideration
other than money; (ii) pursuant to a plan of merger; (iii) issued pursuant to
an employee incentive plan; (iv) issued pursuant to a reorganization; or (v)
issued as part of a public offering. There are no preemptive rights under the
CGCL, except to the extent that the corporation's articles of incorporation
provide for such rights.
Proxies
Under both the MBCA and the CGCL, shareholders may vote by proxy, such
appointment is valid for 11 months, unless otherwise agreed, or revoked prior
thereto. Irrevocable proxies must be coupled with an interest to be valid.
PAGE
<PAGE>
Voting Trusts
Voting trusts are permitted under both the MBCA and the CGCL.
Cumulative Voting
The MBCA prohibits cumulative voting unless the articles of incorporation
specifically provide otherwise or if the election to be made is to replace a
single director and the bylaws so permit. Shareholders are entitled to
cumulate votes under the CGCL.
Summary of Federal Income Tax Consequences of the Reincorporation
The Merger and Reincorporation Merger are intended to be a tax free
reorganization under the Internal Revenue Code. Accordingly, for federal
income tax purposes, no gain or loss should be recognized by the holders of
UStel shares as a result of the Reincorporation and no gain or loss should be
recognized as a result of the Merger and the Reincorporation Merger. Each
former holder of UStel Minnesota shares should have the same basis in the
UStel California stock received by such shareholder pursuant to the
Reincorporation Merger as such shareholder has in the UStel Minnesota shares
held by such shareholder at the time of consummation of the Reincorporation
Merger, and such shareholder's holding period with respect to such UStel
California stock should include the period during which he or she held the
corresponding UStel Minnesota shares, provided the latter were held by him or
her as capital assets at the time of consummation of the Reincorporation
Merger. Tax provisions are complex and subject to change and this summary does
not purport to be a complete discussion of all the possible tax consequences
of the Reincorporation Merger under federal law. No effort has been made here
to summarize the treatment of the Merger or Reincorporation Merger under the
various tax laws of states to which shareholders are subject.
Vote Required for the Reincorporation
Approval of the proposal to reincorporate in California will require the
affirmative vote of a majority of the outstanding Common and Preferred Stock
entitled to vote, to the same extent as applies to the Merger. Approval by
stockholders of the proposed Reincorporation Merger will constitute approval
of the Reincorporation Merger Agreement, a copy of which is set forth as
Appendix C to this Proxy Statement/Prospectus and the Certificate of
Incorporation and Bylaws attached as Exhibits 2 and 3 to Appendix C.
The Board of Directors recommends a vote FOR the Reincorporation in
California.
Appraisal Rights of Dissenting Stockholders.
Pursuant to the MBCA, the owners of UStel Common Stock will have dissenters'
rights in connection with the Merger and the Reincorporation Merger, and may
dissent from the Merger and the Reincorporation Merger and demand in writing
that UStel pay the "fair value" of their Common Stock. See "Merger -
Dissenter's Rights."
PAGE
<PAGE>
DESCRIPTION OF UStel SECURITIES
UStel's authorized capital stock consists of 40,000,000 shares of Common
Stock, par value $0.01 per share (the "Common Stock"), and 5,000,000 shares of
Preferred Stock, par value $0.01 per share (the "Preferred Stock").
Common Stock
At the Record Date, there were 6,872,778 shares of UStel Common Stock
outstanding. The holders of Common Stock are entitled to one vote for each
share on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Accordingly, the holders of a majority of the stock
entitled to vote in any election of directors may elect all of the directors
standing for election. The Company intends to reincorporate in California,
which provides for cumulative voting. Subject to preferences that may be
applicable to any then outstanding Preferred Stock, the holders of Common
Stock will be entitled to receive such dividends, if any, as may be declared
by the Board of Directors from time to time out of legally available funds.
Upon liquidation, dissolution or winding up of the Company, the holders of
Common Stock will be entitled to share ratably in all assets of the Company
that are legally available for distribution, after payment of all debts and
other liabilities and subject to the prior rights of holders of any Preferred
Stock then outstanding. The holders of Common Stock have no preemptive,
subscription, redemption or conversion rights. The rights, preferences and
privileges of holders of Common Stock will be subject to the rights of the
holders of shares of any series of Preferred Stock that the Company may issue
in the future.
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of Preferred Stock.
The Board of Directors is authorized, subject to any limitations prescribed by
the laws of the State of Minnesota, but without further action by the
Company's stockholders, to provide for the issuance of Preferred Stock in one
or more series, to establish from time to time the number of shares to be
included in each such series, to fix the designations, powers, preferences and
rights of the shares of each such series and any qualifications, limitations
or restrictions thereof, and to increase or decrease the number of shares of
any such series (but not below the number of shares of such series then
outstanding) without any further vote or action by the stockholders.
The Board of Directors has designated 550,000 shares of Preferred Stock as
Series A Convertible Preferred Stock ("Series A Preferred") 275,000 of which
were outstanding as of the Record Date. Each share of Series A Preferred
entitles the holder to dividends at the same rate paid to holders of Common
Stock and as a result of an amendment to the terms of the Series A Preferred
made on January 24, 1997, is convertible at any time into 1.3636 shares of
Common Stock, subject to adjustment for stock splits, stock dividends and
other similar events. Holders of Series A Preferred are entitled to vote on
all matters submitted or required to be submitted to stockholders on an as if
converted basis and, except as required by law, vote together with the Common
Stock and not a separate class. Upon the liquidation, dissolution or winding
up of the Company (including for such purposes certain mergers or
consolidations and the sale of all of the assets of the Company) holders of
each outstanding share of Series A Preferred shall be entitled to receive,
prior to holders of Common Stock, an amount equal to approximately $5.45 per
share.
The unissued Preferred Stock may be issued in one or more series, the terms of
which may be determined at the time of issuance by the Board of Directors,
without further action by the Company's stockholders, and may include voting
rights, preferences as to dividends and liquidation, conversion and redemption
rights and sinking fund provisions as determined by the Board of Directors.
Although the Company has no present plans to issue any new shares of Preferred
Stock, the issuance of Preferred Stock in the future could adversely affect
the rights of the holders of Common Stock and, therefore, reduce the value of
the Common Stock. In particular, specific rights granted to future holders of
Preferred Stock could be used to restrict the Company's ability to merge with
or sell its assets to a third party, thereby preserving control of the Company
by present owners.
The Board of Directors may authorize and issue additional Preferred Stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of Common Stock. In addition, the issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no current plan to issue any
additional shares of Preferred Stock.
Convertible Subordinated Debentures
The characteristics of the Convertible Debentures to be issued in the Merger
as described as follows: The Convertible Debenture will bear interest at 10%
per annum and will be subordinated to all existing and future institutional
debt. For the first six months from Closing the Convertible Debentures will
be payable interest only, quarterly in arrears. Beginning six months from
Closing, the Convertible Debentures will be amortized over a three year term,
with principal payments paid quarterly in advance. Such principal payments
will include all amounts due thereunder, including the conversion of all
Arcada shareholder loans. Interest on the Convertible Debentures will
continue to be paid quarterly in arrears. Beginning one year after issuance,
the Convertible Debentures will be convertible dollar for dollar at a
conversion price equal to 150% of the Average Price as defined above. The
number of shares of UStel Common Stock issuable upon conversion of the
Convertible Debentures will be proportionally adjusted in the event of a
change in the capitalization of UStel after the Effective Time. UStel will
have the right to prepay, in whole or in part, without penalty, at any time,
including the right to pay cash in lieu of Convertible Debentures at Closing.
In the event of a default under the Convertible Debentures, the conversion
price will be equal to the Average Price.<PAGE>
The Company also has outstanding Convertible Subordinated Debentures (the
"Debentures") in the aggregate principal amount of $500,000, which bear
interest at the rate of 12% per annum, payable quarterly on the first day of
January, April, July and September, commencing April 1, 1994, with all
principal and accrued interest due and payable on or before December 31, 1998.
The principal amount of the Debentures is convertible on any payment date into
shares of the Company's Common Stock at a price of $7.00 per share. If the
aggregate principal amount of the Debentures were converted, an aggregate of
71,429 shares of Common Stock would be issued.
Warrants
The following is a brief summary of certain provisions of the warrants (the
"Warrants") sold in the 1997 Public Offering. A total of 1,552,500 Warrants
were sold in the 1997 Public Offering and are presently outstanding. In
addition, Barber & Bronson, Incorporated, the Representative of Underwriters,
received the option to acquire 125,000 Units, each Unit considering two shares
of UStel Common Stock and one Warrant (the "Representative's Warrants") to
purchase one share of UStel Common Stock.
Exercise Price and Terms. Each Warrant entitles the holder thereof to purchase
one share of Common Stock at a price of $4.00 per share, subject to adjustment
in accordance with the anti-dilution and other provisions referred to below.
The Warrants may be exercised until February 14, 2002 in whole or in part at
the applicable exercise price until expiration of the Warrants. No fractional
shares will be issued upon the exercise of the Warrants.
The exercise price of the Warrants bears no relation to any objective criteria
of value and should in no event be regarded as an indication of any future
market price of the securities.
Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon
the occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock and, excluding all
presently outstanding options, warrants, employee stock options, the
Representative's Warrants and the Warrants included in the Units, upon sale of
the Common Stock below the then fair market value. Additionally, an adjustment
would be made in the case of a reclassification or exchange of Common Stock,
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the surviving
corporation) or sale of all or substantially all of the assets of the Company
in order to enable warrantholders to acquire the kind and number of shares of
stock or other securities or property receivable in such event by a holder of
the number of shares of Common Stock that might otherwise have been purchased
upon the exercise of the Warrant. No adjustments will be made until the
cumulative adjustments in the exercise price per share amount to $0.05 or
more. No adjustment to the number of shares and exercise price of the shares
subject to the Warrants will be made for dividends (other than stock
dividends), if any, paid on the Common Stock.
Redemption Provisions. The Warrants are subject to redemption at $0.01 per
Warrant on 30 days' written notice to the warrantholders if the closing bid
price of the Common Stock as reported on the Nasdaq Small Cap Market (or any
other market where the Common Stock is then traded) averages or exceeds $6.00
over a period of 20 consecutive trading days. In the event the Company
exercises the right to redeem the Warrants, such Warrant will be exercisable
until the close of business on the business day immediately preceding the date
for redemption fixed in such notice. If any Warrant called for redemption is
not exercised by such time, it will cease to be exercisable and the holder
will be entitled only to the redemption price.
Transfer, Exchange and Exercise. The Warrants are in registered form and may
be presented to the Transfer and Warrant Agent for transfer, exchange or
exercise at any time prior to their expiration date, at which time the
Warrants become wholly void and of no value. The Warrants are currently traded
on the NASDAQ Small-Cap Market under the symbol "USTLW."
Warrantholder Not a Shareholder. The Warrants do not confer upon holders any
voting, dividend or other rights as shareholders of the Company.
Modification of Warrant. The Company and the Transfer and Warrant Agent may
make such modifications to the Warrants that they deem necessary and desirable
that do not materially adversely affect the interests of the Warrantholders.
No other modifications may be made to the Warrants without the consent of the
majority of the Warrantholders. Modification of the number of securities
purchasable upon the exercise of any Warrant, the exercise price and the
expiration date with respect to any Warrant requires the consent of the holder
of such Warrant.
Registration Rights
The Company has granted certain registration rights to the holder of the
Series A Preferred, Integrated Financial Consultants, Inc., a company
wholly-owned by Andrew J. Grey, a former director of the Company, the
investors in the December 29, 1995 $160,000 private placement, Noam Schwartz,
David Schwartz, the RGB 1993 Family Trust (the "RGB Trust"), the TAD 1993
Family Trust (the "TAD Trust"), the Palisades USTL Trust, (the trustee of
which is Royce Diener, a director of the Company, which now owns the RGB
Trust's and TAD Trust's shares along with the registration rights), and to the
holders of warrants issued in connection with the October, 1995 $1,500,000
line of credit, the holder of the Representative's Warrants, Jeflor, Inc., Abe
Sher and Norcross Securities, Inc. for the shares issuable pursuant to the
exercise of their warrants or options, as the case may be, and to certain
other parties. The total number of shares as to which the Company has granted
registration rights is 2,443,000. The Company has also agreed to register with
the Commission under Form S-3 the 1,076,923 shares which were issued in the
acquisition of Consortium 2000. However, certain of the shareholders who have
registration rights have signed registration rights waivers to February 1999. <PAGE>
Accordingly, the Company intends to concurrently register with the Commission
1,824,148 shares, consisting of 747,225 shares as to which there is no waiver
of registration rights in effect and the 1,076,923 shares issued in the
Consortium 2000, Inc. acquisition. Officers and directors and principal
stockholders of the Company who received shares in the acquisition of
Consortium 2000 will be subject to the two-year lock-up agreement.
Outstanding Warrants
In addition to the 1997 Public Offering Warrants and the Representative's
Warrants, the following table sets forth certain information as of September
30, 1997 with respect to the issuance or agreements to issue by the Company of
warrants to purchase Common Stock:
<TABLE>
<CAPTION>
Max. Shares
Date of Name of Holder/ Issuable Upon Exercise Date First Expiration
Issuance Description of Group Exercise (#) Price ($) Exercisable Date Background of Warrants
<S> <C> <C> <C> <C> <C> <C>
6/94 Registered Consulting 16,000 5.00 6/94 N/A In consideration of financial
Group public relations services
6/94 Norcross Securities, Inc 65,000 6.25 6/95 6/99 Granted to the Underwriter upon .
(Assigned to Messrs. Dean completion of the Company's
Johnson and Andrew Gray, initial public offering
former employees of Norcross
Securities, Inc.)
8/95 Diener Financial Group 100,000 5.00 (1) 10/00 Issued in connection with engagement
as a financial consultant to the
Company.
10/95 $1,500,000 term loan 100,000 5.00 10/95 10/00 Issued to investors making investors
$1,500,000 term loan to the Company.
11/95 Robert L.B. Diener 100,000 5.00 (1) 11/00 Issued in connection with Mr.
Diener's engagement as a
consultant to the Company.
1/96 Abe M. Sher 200,000 5.00 (1) 12/01 Issued in connection with Mr. Sher's
engagement as Vice President and
General Counsel.
12/95 Investors in equity private 160,000 7.50 5/96 5/01 Issued as part of 160,000 units
placement (consisting of 160,000
shares of Common Stock and 160,000
Common Stock purchase warrants) in
a private placement completed in
December, 1995
6/96 Jeflor, Inc. 240,000 5.00 8/96 6/01 Issued in connection with a loan for
$1,200,000 due June 19, 1997,
subject to four 90 day extensions,
Total 981,000
______________________
</TABLE>
(1)The warrants are fully vested.
Transfer and Warrant Agent and Registrar
The Transfer and Warrant Agent and Registrar for the Common Stock and Warrants
is American Securities Transfer & Trust, Inc.
PAGE
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market could
adversely affect market prices prevailing from time to time. The officers,
directors and certain principal stockholders have agreed not to sell their
Common Stock into the open market for a period until February 1999 without the
consent of the Representative. Sales of substantial amounts of the Common
Stock in the public market after the restrictions lapse could adversely affect
the prevailing market price and the ability of the Company to raise equity
capital in the future.
Assuming 3,150,000 shares of UStel Common Stock are issued in the Merger, upon
the Effective Date, UStel will have 10,022,778 shares of Common Stock
outstanding, assuming no exercise of options or warrants or conversion of
convertible securities such as the Convertible Debentures or convertible
securities that might be issued in the Sutro Private Placement. Of these
shares, the shares to be issued in the Merger, the shares sold in the Initial
public offering, the shares included in the Units sold in the 1997 Public
Offering, the shares to be included in S-3 registration, the shares issuable
upon exercise of the Warrants and Representative's Warrants will be freely
tradable without restriction under the Securities Act, unless held by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining shares of Common Stock held by existing
stockholders were issued and sold by the Company in reliance on exemptions
from the registration requirements of the Securities Act. These shares and
the shares underlying options, warrants and convertible securities may be sold
in the public market only if registered, or pursuant to an exemption from
registration such as Rule 144, 144(k) or 701 under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least one year
(including the holding period of any prior owner, except an affiliate) is
entitled to sell in "broker's transactions" or to market makers within any
three-month period, a number of shares that does not exceed the greater of (i)
one percent of the number of shares of Common Stock then outstanding or (ii)
the average weekly trading volume of the Common Stock during the four calendar
weeks preceding the required filing of a Form 144 with respect to such sale.
Sales under Rule 144 are generally subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed
to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years, is entitled to sell such shares without having to
comply with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
PAGE
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF ARCADA
As of the date of this Prospectus, the authorized capital stock of Arcada
consists of 50,000 shares of Common Stock, no par value per share, all of
which will be outstanding on the Effective Date.
All outstanding shares of Common Stock are duly authorized, validly issued,
fully paid and nonassessable. Holders of Arcada Common Stock are entitled to
receive dividends, when and if declared by the Arcada Board of Directors, out
of funds legally available therefore and to share ratably in the net assets of
Arcada upon liquidation. Holders of Arcada Common Stock do not have preemptive
or other rights to subscribe for additional shares, nor are there any
redemption or sinking fund provisions associated with the Arcada Common
Stock.
Holders of Common Stock are entitled to one vote per share on all matters
requiring a vote of shareholders. Since the Common Stock does not have
cumulative voting rights in electing directors, the holders of more than a
majority of the outstanding shares of Arcada Common Stock voting for the
election of directors can elect all of the directors whose terms expire that
year, if they choose to do so.
There is no trading market for the Arcada Common Stock.
PAGE
<PAGE>
EXPERTS
The financial statements of UStel, Inc. for the years ended December 31, 1995
and 1996 have been audited by BDO Seidman LLP, independent certified public
accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of said firm as experts in auditing and accounting.
The combined financial statements of Arcada Communications and Affiliates for
the years ended December 31, 1995 and 1996 have been audited by BDO Seidman,
LLP, independent certified public accountants, to the extent and for the
periods set forth in their report appearing elsewhere herein, and are included
in reliance upon such report given upon the authority of said firm as experts
in auditing and accounting.
LEGAL MATTERS
The validity of the UStel Common Stock being offered hereby is being passed
upon for UStel by Freshman, Marantz, Orlanski, Cooper & Klein, Beverly Hills,
California.
OTHER INFORMATION AND STOCKHOLDER PROPOSALS
The management of UStel knows of no other matters that may properly be, or
which are likely to be, brought before the UStel Special Meetings. However, if
any other matters are properly brought before such UStel Special Meetings, the
persons named in the enclosed proxy or their substitutes will vote the proxies
in accordance with the recommendations of management.
PAGE
<PAGE>
UStel, INC.
INDEX TO FINANCIAL STATEMENTS
Page
1. PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
a. Introduction F-3
b. Unaudited Pro Forma Condensed Balance Sheet F-4
c. Unaudited Pro Forma Condensed Statement of Operations F-5
d. Unaudited Pro Forma Condensed Statement of Operations F-6
e. Notes to Pro Forma Financial Statements F-7
2. HISTORICAL FINANCIAL STATEMENTS OF UStel, INC.
a. Report of Independent Certified Public Accountants F-9
b. Audited financial statements
Balance Sheets at December 31, 1995 and 1996 F-10
Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 F-12
Statements of changes in stockholders'
equity for the years ended December 31, 1994,
1995 and 1996 F-13
Statements of cash flows for the years
ended December 31, 1994, 1995 and 1996 F-14
Summary of accounting policies F-15
Notes to financial statements F-17
c. Unaudited financial statements
Condensed balance sheets at December 31, 1996
and June 30, 1997 F-24
Condensed statements of operations for the
six months ended June 30, 1996 and 1997 F-26
Condensed statements of changes in
stockholders' equity for the six months
ended June 30, 1997 F-27
Condensed statements of cash flows for
the six months ended June 30, 1996 and 1997 F-28
Summary of Accounting Policies F-29
Notes to condensed financial statements F-32
3. HISTORICAL FINANCIAL STATEMENTS OF CONSORTIUM 2000, INC.
a. Report of Independent Certified Public Accountants F-36
b. Financial statements
Balance sheets at June 30, 1996 and June 30, 1997
(Unaudited) F-37
Statements of operations for the years
ended June 30, 1996 and 1997 (Unaudited) F-38
Statements of changes in stockholders'
equity for the years ended June 30, 1996 and
1997 (Unaudited) F-39
Statements of cash flows for the years
ended June 30, 1996 and 1997 (Unaudited) F-40
<PAGE> <PAGE>
Summary of accounting policies F-41
Notes to financial statements F-44
4. ARCADA COMMUNICATIONS AND AFFILIATES
a. Report of Independent Certified Public Accountants F-46
b. Combined Balance Sheets as of December 31, 1995
and 1996 and (Unaudited) June 30, 1997 F-47
c. Combined Statements of Operations for the
Years Ended December 31, 1995 and 1996 and
(Unaudited) for the Six Months Ended June 30, 1996
and 1997 F-48
d. Combined Statements of Shareholders' Equity
for the Years Ended December 31, 1995 and 1996
and (Unaudited) for the Six Months Ended
June 30, 1997 F-49
e. Combined Statements of cash flows for the
Years Ended December 31, 1995 and 1996 and
(Unaudited) for the Six Months Ended June 30,1997 F-50
f. Notes to Financial Statements F-51
PAGE
<PAGE>
UStel, INC.
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
INTRODUCTION
On September 25, 1997, UStel, Inc. (the "Company") entered into an agreement
to purchase Arcada Communications (Arcada) for a purchase amount comprising
2,100,000 newly issued shares of UStel, Inc. Common Stock (subject to
adjustment based upon the Average Price of the Registrant's Common Stock), $5
million in cash, $1.5 million in subordinated notes and fees and expenses of
approximately $912,000. These Pro Forma Condensed Combined Financial
Statements assume an Average Price of $2.25 and accordingly the number of
newly issued shares of UStel Common Stock have been adjusted to 3,150,000.
The purchase agreement provides that if the average price is less than $3.00
per share but greater than or equal to $2.50 per share, then the aggregate
number of Merger Shares issuable at Closing shall be increased by 420,000
shares, less than $2.50 per share but greater than or equal to $2.00 per share
increased by 1,050,000 shares, less than $2.00 per share but greater than or
equal to $1.50 per share, then increased by 2,100,000 shares or less than
$1.50 per share but greater than or equal to $1.00 per share, then increased
by 4,200,000 shares.
UStel will account for the acquisition using the purchase method of accounting
with the assets acquired and liabilities assumed recorded at fair values and
the results of Arcada included in the Company's consolidated financial
statements from the date of acquisition.
The accompanying unaudited pro forma condensed combined financial statements
illustrate the effects of the acquisition on the Company's financial position
and results of operations. The pro forma condensed combined balance sheet at
June 30, 1997 is based on the historical balance sheets of the consolidated
Company and Arcada. The pro forma condensed combined statements of operations
for the year ended December 31, 1996 and the six months ended June 30, 1997
are based on the historical statements of operations of the company and Arcada
for those periods. The pro forma condensed statements assume the acquisition
took place on the beginning of each period presented. The pro forma condensed
combined financial statements may not be indicative of the actual results of
the acquisition. In particular, the pro forma condensed combined financial
statements are based on management's current estimate of the allocation of the
purchase price, the actual allocation of which may differ.
The accompanying condensed combined pro forma financial statements should be
read in connection with the historical financial statements of the Company and
Arcada Communications.
The pro forma financial information for the year ended December 31, 1996 and
six months ended June 30, 1997 also includes Consortium 2000, Inc. results of
operations for the period prior to its July 1997 acquisition by UStel.
The following pro forma adjustments have been determined on the basis as
described below:
1.The business combination involving UStel and Arcada is accounted for
utilizing the purchase method of accounting.
2.Pro forma condensed results of operations for the year ended December
31, 1996 include pro forma purchase accounting adjustments relating to UStel's
July 1997 acquisition of Consortium 2000, Inc.
3.Consistent with the application of purchase accounting for this
business combination as described above, estimated fees and other costs of
$912,000 that are directly attributable to the Merger have been capitalized.
4.The owners of Arcada common Stock have agreed to fully satisfy
obligations relating to Arcada severance agreements with two individuals which
provide for the payment of $1.26 million under certain conditions, the
consummation of this merger being one of such events. In accordance with
guidelines established by the Securities and Exchange Commission, pro forma
net loss does not include this related expense to be recorded on consummation
of the Merger.
These unaudited pro forma financial statements are not necessarily indicative
of future financial positions or results of operations or the actual results
that would have occurred had the merger been consummated at the beginning of
the periods presented and should be read in conjunction with the historical
financial statements included elsewhere in this Proxy Statement/Prospectus.
PAGE
<PAGE>
<TABLE>
UStel, INC.
<CAPTION>
Eliminations/ Combined Proforma Combined
UStel C2000 Adjustments UStel Arcada Adjustments Proforma UStel
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash $ 556,000 $ (1,000) - $ 555,000 $ 409,000 - $ 964,000
Accounts receivable
net of Allowance for
Doubtful Accounts 6,936,000 104,000 - 7,040,000 1,631,000 - 8,671,000
Prepaid Expenses 283,000 107,000 - 390,000 428,000 - 818,000
--------- ------- -------- --------- --------- ------- ----------
Total current assets 7,775,000 210,000 - 7,985,000 2,468,000 - 10,453,000
Property and Equipment
net of Depreciation 2,427,000 49,000 - 2,476,000 1,819,000 - 4,295,000
Related Party Receivables 670,000 - (341,000) 329,000 329,000
Other Receivables less 144,000 5,000 - 149,000 89,000 - 238,000
Allowance for Doubtful
Accounts
Goodwill - - 3,215,000 <F5> 3,215,000 - 15,114,000 <F1> 18,329,000
Start-up Cost less
accumulated amortization 11,000 61,000 - 72,000 - - 72,000
Deferred Charges 592,000 - - 592,000 - - 592,000
----------- -------- ---------- ----------- ---------- ----------- -----------
Total Assets $11,619,000 $325,000 $2,874,000 $14,818,000 $4,376,000 $15,114,000 $34,308,000
=========== ======== ========== =========== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Notes Payable to Bank $2,278,000 - - $2,278,000 254,000 $ 2,532,000
Notes Payable to 341,000 (341,000) - - -
Related Parties
Notes Payable Other - - -
Accounts Payable 880,000 70,000 - 950,000 2,386,000 3,336,000
Accrued Expenses - 583,000 - 583,000 911,000 1,494,000
Accrued Revenue Taxes 180,000 - - 180,000 - - 180,000
--------- ------- ------- --------- --------- --------- ---------
Total current liabilities 3,338,000 994,000 (341,000) 3,991,000 3,551,000 - 7,542,000
Convertible Subordinated 500,000 - - 500,000 - 7,412,000 <F1> 7,912,000
Debentures
Other Long-term Liabilities - - - - 2,010,000 (571,000) 1,439,000
--------- ------- -------- --------- --------- --------- ----------
Total Liabilities 3,838,000 994,000 (341,000) 4,491,000 5,561,000 6,841,000 16,893,000
Stockholders' equity
Series A Convertible 3,000 53,000 56,000 56,000
Preferred Stock
Series B Convertible
Preferred Stock - 15,000 - 15,000 - 15,000
Common Stock 54,000 12,000 2,466,000 <F5> 2,532,000 - 7,088,000 <F1> 9,620,000
Additional Paid-In Capital 14,027,000 1,036,000 (1,036,000)<F5> 14,027,000 558,000 (558,000)<F1> 14,027,000
Accumulated Deficit (6,303,000) (1,785,000) 1,785,000 <F5> (6,303,000) (1,743,000) 1,743,000 <F1> (6,303,000)
--------- ---------- --------- ----------- ----------- ----------- ----------
Total stockholders' 7,781,000 (669,000) 3,215,000 10,327,000 (1,185,000) 8,273,000 17,415,000
equity --------- --------- --------- ---------- ----------- ---------- ----------
Total Liabilities $11,619,000 $325,000 $2,874,000 $14,818,000 $4,376,000 $15,685,000 $34,879,000
and Stockholders' ========== ======== ========= ========== ========= ========== ==========
equity
<FN>
<F1> See Note 1 of Notes to Pro Forma Financial Statements.
<F5> See Note 5 of Notes to Pro Forma Financial Statements.
</FN>
</TABLE>
PAGE
<PAGE>
<TABLE>
UStel, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Six Months Ended June 30, 1997
<CAPTION>
Eliminations/ Combined Proforma Combined
Ustel C2000 Adjustments Ustel Arcada Adjustments Proforma UStel
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $11,568,000 $1,842,000 $(886,000) $12,524,000 $6,576,000 - $19,100,000
Cost of services sold 8,844,000 - - 8,844,000 3,956,000 - 12,800,000
----------- ---------- --------- ---------- --------- --------- -----------
Excess of revenues 2,724,000 1,842,000 (886,000) 3,680,000 2,620,000 - 6,300,000
over cost
Other Operating Expenses:
Selling, general, 3,065,000 2,862,000 (886,000) 5,041,000 2,388,000 (369,000)<F2> 7,060,000
administrative & other
Depreciation and 183,000 6,000 81,000 <F6> 270,000 363,000 378,000 <F3> 1,011,000
amortization --------- --------- -------- --------- --------- -------- ----------
Loss before interest (524,000) (1,026,000) (81,000) (1,631,000) (131,000) (9,000) (1,771,000)
and tax
Interest expense, net 280,000 1,000 - 281,000 33,000 371,000 <F4> 685,000
of interest income --------- ---------- ------- --------- --------- -------- ---------
Loss before income tax (804,000) (1,027,000) (81,000) (1,912,000) (164,000) (380,000) (2,456,000)
Provision for Income Tax - 1,000 - 1,000 - - 1,000
---------- ---------- --------- ------------ ---------- ---------- ------------
Net loss $(804,000) $(1,028,000) $(81,000) $(1,913,000) $(164,000) $(380,000) $(2,457,000)
========== ============ ========= ============ ========== ========== ============
Net loss per share ($0.18) ($0.25)
Shares used in calculation 4,383,724 10,022,778
========= ==========
<FN>
<F2> See Note 2 of Notes to Pro Forma Financial Statements.
<F3> See Note 3 of Notes to Pro Forma Financial Statements.
<F4> See Note 4 of Notes to Pro Forma Financial Statements.
<F6> See Note 6 of Notes to Pro Forma Financial Statements.
</FN>
</TABLE>
PAGE
<PAGE>
<TABLE>
UStel, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<CAPTION>
Eliminations/ Combined Proforma Combined
Ustel C2000 Adjustments Ustel Arcada Adjustments Proforma UStel
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $22,027,000 $3,749,000 $(2,522,000) $23,254,000 $12,646,000 - $35,900,000
Cost of services sold 16,225,000 - - 16,225,000 7,810,000 - 24,035,000
----------- ---------- ------------ ----------- ---------- ---------- ----------
Excess of revenues 5,802,000 3,749,000 (2,522,000) 7,029,000 4,836,000 - 11,865,000
over cost
Other Operating Expenses:
Selling, general, 8,075,000 4,324,000 (2,522,000) 9,877,000 5,216,000 (1,022,000)<F2> 14,071,000
administrative & other
Depreciation and 250,000 19,000 161,000 <F6> 430,000 666,000 756,000 <F3> 1,852,000
amortization --------- --------- --------- --------- --------- --------- ----------
Loss before interest (2,523,000) (594,000) (161,000) (3,278,000) (1,046,000) 266,000 (4,058,000)
and tax
Interest expense, net 450,000 (3,000) - 447,000 239,000 741,000 <F4> 1,427,000
of interest income --------- -------- -------- --------- --------- -------- ----------
Loss before income tax (2,973,000) (591,000) (161,000) (3,725,000) (1,285,000) (475,000) (5,485,000)
Provision for Income Tax - (125,000) - (125,000) - - (125,000)
------------ ---------- --------- ----------- ----------- --------- ------------
Net loss $(2,973,000) $(466,000) $(161,000) $(3,600,000) $(1,285,000) $(475,000) $(5,360,000)
=========== ========= ========= ========== ========== ========= ============
Net loss per share ($1.54) ($0.53)
Shares used in calculation 1,926,091 10,022,778
========= ==========
<FN>
<F2> See Note 2 of Notes to Pro Forma Financial Statements.
<F3> See Note 3 of Notes to Pro Forma Financial Statements.
<F4> See Note 4 of Notes to Pro Forma Financial Statements.
<F6> See Note 6 of Notes to Pro Forma Financial Statements.
</FN>
</TABLE>
PAGE
<PAGE>
UStel, INC.
Notes to Pro Forma Financial Statements
Note A - The pro forma adjustments to the condensed combined balance sheet are
as follows:
(1)To record the acqusition of Arcada Communications and the allocation of the
purchase price on the basis of the fair values of the assets acquired and
liabilities assumed. The components of the purchase price and its allocation
to the assets and liabilities of Arcada communications acquired are as
follows:
Components of purchase price:
Acquisition price paid in cash $5,000,000
Acquisition costs 912,000
----------
Cash portion 5,912,000
Acquisition price paid in subordinated debt 1,500,000
Acquisition price paid in stock 7,088,000
------------
Total purchase price $14,500,000
Plus
Equity deficit of net assets acquired 614,000
------------
Cost in excess of net assets acquired $15,114,000
===========
Note B - The pro forma adjustments to the condensed combined statements of
operations are as follows:
(2)To record reductions in general and administrative expenses from
non-recurring distributions and payments to shareholders
Year Ended Six Months Ended
December 31, 1996 June 30, 1997
Salaries, wages and related $ 427,000 $172,000
General and administrative 66,000 174,000
Sales and marketing 74,000 23,000
Provision for severance obligation 455,000 -
-----------------------------
Net Reduction $1,022,000 $369,000
==============================
(3)To record adjustments to amortization expense based on the value of excess
of the fair value over net assets acquired as follows:
Addition to amortization expense $756,000 $378,000
============================
(4)To record adjustment to interest expense for increase in subordinated debt
in connection with the acquisition as follows
Addition to interest expense $741,000 $371,000
============================
PAGE
<PAGE>
Ustel, INC.
Notes to Pro Forma Financial Statements
Note C - The pro forma adjustments to the condensed combined balance sheet for
the Consortium 2000, Inc. acquisition are as follows:
(5)To record the acquisition of Consortium 2000, Inc. and the allocation of
the purchase price on the basis of the fair values of the assets acquired and
liabilities assumed. The components of the purchase price and its allocation
to the assets and liabilities of Consortium 2000, Inc. acquired are as
follows:
Components of purchase price:
Acquisition price paid in stock $2,546,000
Plus
Equity deficit of net assets acquired 669,000
----------
Cost in excess of net assets acquired $3,215,000
==========
Note D - The pro forma adjustments to the condensed combined statements of
operations for Consortium 2000, Inc. are as follows:
(6)To record adjustments to amortization expense based on the value of excess
of the fair value over net assets acquired as follows:
Addition to amortization expense $161,000 $81,000
======== =======
PAGE
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
UStel, Inc.
Los Angeles, California
We have audited the accompanying balance sheets of UStel, Inc. as of December
31, 1995 and 1996, and the related statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of
UStel, Inc. at December 31, 1995 and 1996, and the results of its operations
and cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
March 21, 1997
PAGE
<PAGE>
<TABLE>
USTEL, INC.
BALANCE SHEETS
<CAPTION>
December 31,
1995 1996
<S> <C> <C>
Assets (Notes 2 and 4)
Current
Cash $ 1,200 $ 225,926
Restricted cash 3,133,433 -0-
Accounts receivable, less allowance for
doubtfulaccounts of $329,500 and $1,123,000 5,307,478 6,876,465
Prepaid expenses 506,824 376,331
----------------------------------
Total current assets 8,948,935 7,478,722
----------------------------------
Property and equipment
Office furniture and equipment 1,440,294 2,537,268
Leasehold improvement 164,063 180,012
----------------------------------
1,604,357 2,717,280
Less accumulated depreciation (241,176) (471,449)
----------------------------------
Net property and equipment 1,363,181 2,245,831
----------------------------------
Related party receivables (Note 3 (a)) 348,519 301,475
Other receivables, less allowance for doubtful
accounts of $322,000 and $744,000,
respectively 593,244 138,936
Start-up costs less accumulated amortization
of $59,022 and $78,696 39,347 19,673
Deferred charges (Note 1) 684,805 1,182,308
---------------------------------
Total Assets $11,978,031 $11,366,945
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
PAGE
<PAGE>
<TABLE>
UStel, Inc.
Balance Sheets
<CAPTION>
December 31,
1995 1996
<S> <C> <C>
Liabilities and stockholders' equity
Current
Notes payable to bank (Note 2) $ 2,900,000 $ 2,225,608
Notes payable to related parties (Note 3(b)) 1,500,000 84,000
Notes payable - others (Note 4) -0- 4,907,239
Accounts payable 2,078,954 984,014
Accrued expenses 113,525 194,804
Accrued revenue taxes 1,097,779 232,999
---------------------------------
Total current liabilities 7,690,258 8,628,664
Convertible subordinated debentures (Note 6) 500,000 500,000
---------------------------------
Total liabilities 8,190,258 9,128,664
Commitments and contingencies (Note 5)
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
Series B Convertible Preferred Stock,
$.01 par value, 95,000shares authorized
and 95,000 and 0 shares outstanding 950 -0-
Common stock, $.01 par value, 40,000,000 shares
authorized; 1,600,000 and 2,126,851 shares
issued and outstanding 16,000 21,269
Additional paid-in capital 6,386,178 7,710,561
Note receivable (Note 3(d)) (95,000) -0-
Accumulated deficit (2,525,855) (5,499,049)
----------------------------------
Total stockholders' equity 3,787,773 2,238,281
----------------------------------
Total Liabilities and Stockholders'
Equity $11,978,031 $11,366,945
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
PAGE
<PAGE>
<TABLE>
UStel, Inc.
Statement of Operations
<CAPTION>
Years Ended December 31,
1994 1995 1996
<S> <C> <C> <C>
Revenues $ 6,118,480 $ 16,127,575 $ 22,026,857
Operating expenses
Cost of services sold 4,696,106 11,539,874 16,225,354
General and administrative 1,412,649 3,074,289 5,654,625
Selling 785,933 1,460,009 2,420,139
Depreciation and amortization 87,363 177,971 249,947
---------------------------------------------
Total operating expenses 6,982,051 16,252,143 24,550,065
Loss from operations (863,571) (124,568) (2,523,208)
Loss from rental operations (101,705) -0- -0-
Net gain on sale of property 7,614 -0- -0-
Relocation costs -0- (110,766) -0-
Interest income 34,283 124,060 101,934
Interest expense (152,063) (260,437) (551,920)
--------------------------------------------
Net loss $(1,075,442) $(371,711) $(2,973,194)
============ ========== ============
Net loss per share $(.83) $(0.23) $(1.54)
====== ======= =======
Weighted average number of
common shares outstanding 1,291,913 1,600,000 1,926,091
========= ========= =========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
PAGE
<PAGE>
<TABLE>
UStel, Inc.
Statement of Changes in Stockholder's Equity
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In Accumulated Note
Shares Amount Shares Amount Capital Deficit Receivable Total
------------------ ------------------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1994 0 $ 0 950,000 $ 9,500 $ 570,608 $ (1,078,702) 0 $ (498,594)
Sale of shares to
public (Note 8) 0 0 650,000 6,500 2,595,770 0 0 2,602,270
Sale of preferred
shares (Note 7) 550,000 5,500 0 0 2,994,500 0 0 3,000,000
Contribution to
capital 0 0 0 0 60,000 0 0 60,000
Net loss for
period 0 0 0 0 0 (1,075,442) 0 (1,075,442)
---------- ------- ------------- ----------- ----------- ------------ --------- -------------
Balance, December
31, 1994 550,000 5,500 1,600,000 16,000 6,220,878 (2,154,144) 0 4,088,234
Sale of preferred
shares (Note 7) 95,000 950 0 0 165,300 0 (95,000) 71,250
Net loss for
period 0 0 0 0 0 (371,711) 0 (371,711)
------- ------- --------- ------ --------- ------------ -------- -----------
Balance, December
31, 1995 645,000 6,450 1,600,000 16,000 6,386,178 (2,525,855) (95,000) 3,787,773
Cancellation of
note receivable
(Note 3(d)) 0 0 0 0 (95,000) 0 95,000 0
Private placement
of common stock
(Note 8) 0 0 160,000 1,600 798,400 0 0 800,000
Conversion of
Series B
preferred stock
to common stock
(Notes 3(d) and 7) (95,000) (950) 95,000 950 0 0 0 0
Cost of private
placement of
common stock
(Notes 3(f) and
Note 8) 0 0 0 0 (25,000) 0 0 (25,000)
Cost of issuing
Series A
preferred stock
in prior period
(Note 7) 0 0 112,000 1,120 (47,120) 0 0 (46,000)
Acquisition of
switching
equipment (Note
3(g)) 0 0 107,851 1,079 514,623 0 0 515,702
Repayment of
agent commission
fees (Note 3(e)) 0 0 20,000 200 114,800 0 0 115,000
Stock issued in
connection with
raising capital
(Note 3(c)) 0 0 32,000 320 63,680 0 0 64,000
Net loss for
period 0 0 0 0 0 (2,973,194) 0 (2,973,194)
------ ------ ------- -------- ------- ---------- ------- -----------
Balance, December
31, 1996 550,000 $ 5,500 2,126,851 $ 21,269 $ 7,710,561 $ (5,499,049) $ 0 $ 2,238,281
======= ======= ========= ======== =========== ============ === ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements
PAGE
<PAGE>
<TABLE>
UStel, Inc.
Statements of Cash Flows
Increase (Decrease) in Cash
<CAPTION>
Year Ended December 31,
1994 1995 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,075,442) $ (371,711) $ (2,973,494)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 125,643 177,971 249,947
Provisions for losses on accounts
receivable 158,000 464,000 1,993,142
Net gain on sale of property (7,614) -0- -0-
Increase (decrease) from change in:
Checks issued against future deposits (32,668) -0- -0-
Accounts receivable (1,821,467) (3,746,364) (3,225,619)
Prepaid expenses and other (108,466) (323,683) 130,492
Accounts payable and accrued expenses 1,136,820 1,329,865 (1,878,440)
Other items (21,583) (619,391) (364,503)
----------- ----------- -----------
Net cash used in operating activities (1,646,777) (3,089,313) (6,068,175)
Cash flows from investing activities: ----------- ----------- -----------
Proceeds from sale of property 142,877 -0- -0-
Purchase of equipment (528,463) (780,185) (410,766)
----------- ----------- -----------
Net cash used in investing activities (385,586) (780,185) (410,766)
Cash flows from financing activities:
Proceeds from notes payable-banks 395,000 4,030,000 21,521,381
Proceeds from related party debt -0- -0- 400,000
Proceeds from notes payable - others -0- -0- 4,907,239
Restricted cash (1,000,000) (2,133,433) (3,133,433)
Proceeds from sale of common stock 2,602,270 -0- -0-
Proceeds from sale of preferred stock 3,000,000 71,250 -0-
Proceeds from issuance of convertible
debenture 500,000 -0- -0-
Related parties receivable (665,395) 95,847 (337,613)
Payments on debt (592,678) (400,000) (22,920,773)
----------- ----------- -----------
Net cash provided by financing
activities 4,239,197 1,663,664 6,703,667
----------- ----------- -----------
Net increase (decrease) in cash 2,206,834 (2,205,834) 224,726
Cash, beginning of period 200 2,207,034 1,200
----------- ----------- -----------
Cash, end of period $2,207,034 $ 1,200 $ 225,926
========== ========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
PAGE
<PAGE>
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 recapitalization 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 will be
charged against paid-in capital if the public offering is consummated. If the
public 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 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 since their effect is anti-dilutive.
Use of Estimates
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.
PAGE
<PAGE>
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 December 31, 1996, the Company has uninsured cash in the
amount of approximately $157,001.
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 nonemployees 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 applications 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.
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.
PAGE
<PAGE>
UStel, Inc.
Notes to Financial Statements
Note 1 - Deferred Charges
Deferred charges consist of the following:
December 31,
1995 1996
Development costs $ 336,690 $ 131,437
Offering costs 164,792 739,672
Loan fees 35,000 183,153
Calling card program 118,157 138,108
Deposits and other 82,166 128,202
--------- ---------
736,805 1,320,572
Accumulated amortization (52,000) (138,264)
--------- ---------
$ 684,805 $ 1,182,308
========= ===========
Note 2 - Notes Payable to Bank
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 three
certificates of deposit at the same bank totaling $3.1 million. In March and
July 1996, this outstanding credit line was paid off by offsetting the
outstanding balance against the certificates of deposit used as collateral.
Borrowings at December 31, 1995 and December 31, 1996 were $2,900,000 and $0,
respectively.
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, 1995 and December 31,
1996 were $0 and $2,225,608, respectively.
Note 3 - Related Party Transactions
(a) Related Parties Receivables
At December 31, 1995 and 1996, the Company has amounts due from various
related parties relating to loans as follows:
December 31,
1995 1996
Loans:
Related entities $ 20,505 $ 26,371
Officers 326,225 274,330
Employees 1,789 774
--------- ---------
$ 348,519 $ 301,475
========= =========
PAGE
<PAGE>
(b) Related Parties Payable
In October 1995, the Company entered into a revolving credit agreement
with a related party that provides for secured borrowing aggregating $1.5
million and expiring in October, 1996. 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. The credit
agreement was collateralized by a security interest in the Company's
unrestricted deposit accounts and accounts receivable. The agreements called
for the issuance of warrants for the purchase of up to 100,000 shares of the
Company's common stock at $5.00 per share, exercisable over a period of five
years. Borrowing under the credit agreement amounted to $1.5 million 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 cash.
During February, 1996 the Company borrowed $400,000 from a related
party. The note is payable on demand and bears interest at 12% per annum. In
June 1996, $116,000 of this borrowing was repaid. An additional repayment of
$200,000 was made in August 1996. Interest is 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
During 1996 the Company issued 32,000 shares of common stock to an
officer in connection with his assistance in raising additional capital. The
fair value of the common stock issued of $64,000 is included in deferred
offering cost at December 31, 1996.
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 employment
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) Stock Note Payable
In consideration of services rendered and to be rendered to the Company
and $95,000 paid in the form of a promissory note due upon the earlier of
conversion or May 31, 2005, in November 1995 the Company issued to one of its
officers, 95,000 shares of Series B Preferred Stock.
In January, 1996, the Company entered into a supplemental consulting
agreement with the officer to provide services 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. In February, 1996, the Company agreed to
cancel the $95,000 note in consideration of services rendered by the officer.
(e) 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. These
warrants will be canceled upon consummation of the merger. Royce Diener is
Chairman of the Board of the sales agent.
In July, 1996, the Company's Board of Directors authorized the issuance
of 20,000 shares of common stock to Consortium 2000 at $5.75 per share to
reconcile variances in commissions owed to Consortium 2000 for July, 1995
through March, 1996. Prior to the Merger, discussed further in Note 10 of the
Notes to Financial Statements, these shares will be distributed as a dividend
to the shareholders of Consortium 2000.
(f) 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 (Note 8), 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.
(g) Acquisition of Telecommunications Switch
In June, 1996, the Company acquired title to a telecommunications switch
owned by Mr. Epling, an officer and director of the Company, for aggregate
consideration in the amount of $702,157. 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, canceling
approximately $117,798 in interim advances made by the Company to TYC, Inc.,
a corporation wholly-owned by Mr. Epling, and a cancellation of interim
advances of approximately $68,656 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 with a
total additional charge to equity of $15,702. At the time the switching
equipment was acquired, it was appraised at approximately $716,000.
(h) Consulting Agreement
In August, 1996, the Company entered into a two-year consulting
agreement with Vanguard Consultants, Inc., a Nevada corporation owned by <PAGE>
Ronnie Schwartz, to provide consulting services in the areas of marketing,
finance and business development. Pursuant to this agreement, Vanguard
Consultants, Inc. will receive $7,500 per month for such services.
Note 4 - Notes Payable - Others
During June 1996 the Company borrowed $1,200,000 from an unrelated
party. The one-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 the purchase of
120,000 common shares were issuable at the time the loan was funded.
Additional warrants 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 remains 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 have been granted as of December 31, 1996.
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 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 proceeds of a public offering. The amount outstanding
on the promissory note at December 31, 1996 was $3,707,239.
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. Rent expense under these arrangements was
$120,000; $124,000; and $92,879 for the years ended December 31, 1994, 1995
and 1996. Insurance and maintenance expenses covering these facilities are the
Company's obligations.
PAGE
<PAGE>
At December 31, 1996 future minimum lease commitments were as follows:
December 31, Office Space Switching Space Total Amount
1997 $ 26,948 $ 71,926 $ 98,985
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
The Company has employment agreements with certain executive officers
and employees, the terms of which expire at various dates through August,
1999. Such agreements provide for minimum salary levels and incentive bonuses
to be determined at the discretion of the Board of Directors.
Aggregate commitments related to employment contracts are as follows:
Years ending December 31, Amount
1997 $ 697,000
1998 661,440
1999 325,000
----------
$1,683,440
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 is
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.
In connection with the issuance of the Preferred shares described above,
the Company committed to pay a finders fee for the placement of the Preferred
shares. During 1996, the Company issued 112,000 common shares plus
cancellation of a note receivable of $46,000 in satisfaction of the finders
fee.
During November 1995, the Company issued 95,000 shares of $.01 par value
Series B Convertible Preferred Stock ("Series B"). Each share of Series B
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 Series B. Each share of Series B is convertible into one share of
common stock, as adjusted, for such things as stock splits, stock dividends
and other similar dilutive occurrences. Each holder of record of Series B
PAGE
<PAGE>
may, at the option of the holder, convert all or part of the shares of Series
B held by that recordholder into fully paid nonassessable shares of common
stock, if the Company files a registration statement or there is a change in
control of the Company. During 1996, these shares of series B were converted
into 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. The Company received net
proceeds from the IPO amounting to $2,602,270 (after deducting offering costs
of $647,730).
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
December 31, 1996.
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 with the private placement, the Company
paid Robert L.B. Diener the sum of $25,000 and granted him 100,000 warrants at
$5.00 per share, expiring November 2000.
Stock Option Plan
The Company adopted a stock option plan to provide for the grant of
options to key employees to acquire up to 450,000 shares of the Company's
common stock. The option price per share may not be less than 100% of the
fair market value of a share on the date the option is granted, and the
maximum term of an option may not exceed ten years. There are currently
210,000 options granted and outstanding under the 1993 stock option plan.
These options were granted to the President of the Company at an exercise
price of $7.50 per share, one-third which will vest each year. In January
1996, the Company also granted to each of two officers options to purchase
100,000 shares of common stock at $5.00 per share. One officer exercised his
100,000 shares of options when the switch equipment transaction was
completed.
Employee Option and Employee Warrant activity during the years ended December
31, 1994, 1995 and 1996 is as follows:
Stock Option Plan
Balance outstanding, January 1, 1994 -0-
Options granted, per share $7.00 210,000
Balance outstanding, December 31, 1994 and 1995, -------
per share $7.00 210,000
Options granted, per share $5.00 200,000
Warrants granted, per share $5.00 300,000
Options exercised, per share $5.00 (100,000)
Options canceled, per share $7.00 (210,000)
Options, re-issued, per share $5.00 210,000
-------
Balance outstanding, December 31, 1996, per share $5.00 610,000
Options and employee warrants exercisable at =======
December 31, 1996 440,000
=======
Information relating to stock options and employee warrants at December 31,
1996 summarized by exercise price are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
Exercise Price Weighted Average Weighted Average
Per Share Shares Life (Year) Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C>
$5.00 610,000 3.7 $5.00 440,000 $5.00
</TABLE>
PAGE
<PAGE>
All stock options and warrants issued to employees have an exercise price
not less than the fair market value of the Company's common stock on the date
of grant, and in accordance with accounting for such options utilizing the
intrinsic value method there is no related compensation expense recorded in
the Company's financial statements. Had compensation cost for stock-based
compensation been determined based on the fair value at the grant dates
consistent with the method of SFAS 123, the Company's net loss and loss per
share for the years ended December 31, 1995 and 1996 would have been reduced
to the pro forma amounts presented below:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Net Loss
As reported $(1,075,442) $(371,711) $(2,973,194)
Pro forma $(1,075,442) $(371,711) $(3,621,910)
Loss per share
As reported $(0.83) $(0.23) $(1.54)
Pro forma $(0.83) $(0.23) $(1.88)
</TABLE>
The fair value of option grants and employee warrants is estimated on the
date of grants utilizing the Black-Scholes option-pricing with the following
weighted average assumptions for 1996, expected life of 3.8 years: expected
volatility of 9.5%, risk-free interest rates of 6% and a 0% dividend yield.
The weighted average fair value at date of grant for options granted during
1996 approximated $1.04 per option.
Due to the fact that the Company's stock option programs vest over many
years and additional awards are made each year, the above proforma numbers
are not indicative of the financial impact had the disclosure provisions of
FASB 123 been applicable to all years of previous option grants. The above
numbers do not include the effect of options granted prior to 1995 that vested
in 1996 and 1995.
Note 9 - Income Taxes
At December 31, 1996, 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.
Note 10 - Subsequent Event
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.
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. The net proceeds to the Company were approximately
$7,065,000.
On August 14, 1996, the Company, and 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 1997.
Note 11 - Supplemental Disclosures of Cash Flow Information
Non-cash investing and financing activities for the year ended December
31, 1995 were as follows:
Cash paid for interest during the year ended December 31, 1995 amounted
to $260,437.
During 1995, the Company issued 95,000 shares of Series B Convertible
Preferred in payment of services rendered plus a promissory note for $95,000.
Non-cash investing and financing activities for the year ended December
31, 1996 were as follows:
Cash paid for interest during the year ended December 31, 1996 amounted
to $551,920.
During 1996, the Company acquired title to a telecommunications switch
through the issuance of 107,851 shares of common stock for $515,702, the
cancellation of accounts receivable for $117,798 and the cancellation of
related party receivables of $68,657 for a total consideration of $702,157.
During 1996, the Company canceled a promissory note receivable for
$95,000 as consideration of services rendered by an officer.
<PAGE>
During 1996 the Company repaid $775,000 of a loan payable of a related
party through the issuance of 160,000 of common stock.
In 1996, the Company converted 95,000 shares of preferred stock into
common stock.
In 1996, the Company issued 112,000 shares of common stock and canceled
a note receivable in the amount of $46,000 to satisfy the payment of a finder
fee in connection with the issuance of series A preferred stock in a prior
period.
In 1996, the Company issued 20,000 shares of common stock for the
repayment of commission fees for $115,000.
In 1996, the Company issued 32,000 shares of common stock for $64,000 to
an officer for services rendered in connection with raising capital.
PAGE
<PAGE>
<TABLE>
UStel, Inc.
Condensed Balance Sheets
<CAPTION>
December 31, June 30,
1996 1997
(Unaudited)
<S> <C> <C>
ASSETS(Note 3)
Current Assets
Cash $ 225,926 $ 555,698
Accounts receivable, less allowance for
doubtful accounts of $1,123,000 and
$1,014,000 $ 6,876,465 $ 6,935,804
Prepaid expenses 376,331 283,688
----------- -----------
Total current assets 7,478,722 7,775,190
----------- -----------
Property and equipment
Office furniture and equipment 2,537,268 3,072,476
Leasehold improvement 180,012 188,799
----------- -----------
2,717,280 3,072,476
Less accumulated depreciation (471,499) (644,936)
----------- -----------
Net property and equipment 2,245,831 2,427,540
Related party receivables (Note 4(a) 301,475 674,981
Other receivables, less allowance for doubtful
accounts of $744,000 and $529,000, 138,936 144,239
respectively
Start-up costs less accumulated amortization
of $78,696 and $86,893 19,673 9,837
Deferred charges (Note 2) 1,182,308 587,090
----------- -----------
Total Assets $11,366,945 $11,618,877
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
PAGE
<PAGE>
UStel, Inc.
<TABLE>
Condensed Balance Sheets
<CAPTION>
December 31, June 30,
1996 1997
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to bank (Note 3) $ 2,225,608 $ 2,278,585
Notes payable to related parties (Note 4(b) $ 84,000 $ 0
Notes payable - others (Note 5) $ 4,907,239 $ 0
Accounts payable $ 1,178,818 $ 880,618
Accrued revenue taxes $ 232,999 $ 179,840
----------- -----------
Total current liabilities $ 8,628,664 $ 3,339,043
Convertible subordinated debentures (Note 7) $ 500,000 $ 500,000
----------- -----------
Total liabilities $ 9,128,664 $ 3,839,043
Commitments and contingencies (Note 6)
Stockholders' equity
Series A Convertible Preferred Stock, $ 5,500 $ 2,750
$.01 par value, 5,000,000 shares
authorized and 275,000 shares,
respectively, outstanding (Liquidation
Preference $3,000,000 and $1,500,000)
Common stock, $.01 par value 40,000,000 $ 21,269 $ 54,069
shares authorized; 2,126,851 and
5,406,851 shares issued and outstanding,
respectively
Additional paid-in capital $ 7,710,561 $14,026,042
Accumulated deficit $(5,499,049) $(6,303,027)
----------- -----------
Total stockholders' equity $ 2,238,281 $ 7,779,834
----------- -----------
Total Liabilities and Stockholders'
Equity $11,366,945 $11,618,877
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
PAGE
<PAGE>
<TABLE>
UStel, Inc.
Condensed Statements of Operations
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1996 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $10,526,503 $11,568,447
Operating expenses
Cost of services sold $ 7,241,355 $ 8,844,107
Selling $ 1,074,719 $ 1,233,754
General and administrative $ 1,830,339 $ 1,830,875
Depreciation and amortization $ 122,112 $ 183,324
----------- -----------
Total operating expense $10,268,525 $12,092,060
----------- -----------
Income (loss) from operations $ 257,978 $ (523,613)
Interest expense, net of interest income $ (186,013) $ (280,365)
----------- -----------
Net Income (Loss) $ 71,965 $ (803,978)
=========== ===========
Net Income (Loss) per share:
Primary $ 0.041 $ (0.183)
=========== ===========
Fully Diluted $ 0.023 $ (0.183)
=========== ===========
Weighted average number of common shares outstanding:
Primary 1,763,056 4,383,724
=========== ===========
Fully Diluted 3,118,039 4,383,724
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
PAGE
<PAGE>
<TABLE>
UStel, INC.
Condensed Statements of Changes in Stockholders' Equity
<CAPTION>
Preferred Stock Common Stock
Additional
Paid-In Accumulated Total
Shares Amount Shares Amount Capital Deficit Equity
<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 2,905,000 29,050 8,685,950 8,715,000
Common Stock and
Warrants (Unaudited)
(Note 9)
Conversion of Preferred (275,000) (2,750) 374,990 3,750 (1,000) - -
Stock (Note 8)
Costs of Public (2,369,469) (2,369,469)
Offering (Unaudited)
(Note 9)
Net Loss For (803,978) (803,978)
Period
(Unaudited)
-------- ------- --------- -------- ----------- ----------- ----------
Balance, June 30, 1997 275,000 $ 2,750 5,406,841 $ 54,069 $14,027,042 $(6,303,027) $7,779,834
(Unaudited) ======== ======= ========= ======== =========== ============ ==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
PAGE
<PAGE>
<TABLE>
UStel, Inc.
Condensed Statements of Cash Flows
Increase (Decrease) in Cash
(Unaudited)
<CAPTION>
Six Months Six Months
Ended Ended
June 30,1996 June 30,1997
<S> <C> <C>
Net Income (Loss) $ 71,965 $ (803,978)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization 122,112 183,324
Provisions for losses on accounts
receivable 244,466 286,508
Change in operations-assets and
liabilities:
Accounts receivable (971,818) (345,847)
Other receivables 0 (5,303)
Prepaid expenses and other (181,793) 92,643
Accounts payable and accrued
expenses 1,178,371 (351,358)
Other (865,179) 5,000
------------ -----------
Net cash used in operating
activities (401,876) (939,011)
------------ -----------
Cash flows from investing activities:
Purchase of equipment (78,101) (355,196)
Prepaid offering costs (238,226) 0
------------ -----------
Net cash used in investing activities (316,327) (355,196)
------------ -----------
Cash flows from financing activities:
Liquidation of certificates of deposit 1,023,428 0
Proceeds from notes payable
- related parties 400,000 24,500
Proceeds from notes payable - others 8,233,309 12,077,253
Public offering of common stock and
warrants, net 0 7,147,749
Due from related parties 10,191 (373,507)
Payments on debt-related parties (725,000) (108,500)
Payments on debt-others (7,576,683) (17,143,516)
------------ -----------
Net cash provided by financing activities 1,365,245 1,623,979
Net increase in cash 647,042 329,772
Cash, beginning of period 1,200 225,926
------------ -----------
Cash, end of period $ 648,242 $ 555,698
========== ==========
Supplemental information:
Interest paid $ 242,533 $ 430,037
Income taxes paid 12,638 2,878
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
PAGE
<PAGE>
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
recapitalization 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 over lives
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 have
been charged against paid-in capital when the offering with which they are
associated has been consummated. If the offering had not been consummated,
such costs would have been charged to operations during the period when it
became evident that the offering would not have been 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 (Loss) Per Share
Earnings (loss) 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
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 UncertaintiesThe 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 June 30, 1997, the Company has uninsured cash in the amount
of approximately $464,993.
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
<PAGE>
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
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.
Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130) issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general purpose financial statements. The Company has not determined the
effect on its financial position or results of operations, if any, from the
adoption of this statement.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by
the FASB is effective for financial statements beginning after December 15,
1997. The new standard requires that public business enterprises report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. It also requires that public business
enterprise report certain information about their products and services, the
geographic areas in which they operate and their major customers. The Company
does not expect adoption of SFAS No. 131 to have a material effect, if any, on
its Results of Operations.
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.
PAGE
<PAGE>
UStel, Inc.
Notes to Condensed Financial Statements
Note 1 - Interim Financial Information
The interim financial statements for the six months ended June 30, 1997 and
June 30, 1996, respectively, are unaudited. In the opinion of management,
such financial 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 period ended
June 30, 1997 are not necessarily indicative of the results for the entire
year.
Note 2 - Deferred Charges
Deferred charges consist of the following:
December 31, 1996 June 30, 1997
(Unaudited)
Development costs $ 131,437 $ 111,438
Offering costs 739,672 -0-
Acquisition program costs -0- 141,355
Loan fees 183,153 199,478
Calling card program 138,108 138,108
Deposits and other 128,202 173,253
-------------------------------
1,320,572 763,632
Accumulated amortization (138,264) (176,542)
-------------------------------
$ 1,182,308 $ 587,090
===============================
Note 3 - 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 June 30, 1997
were $2,225,608 and $2,278,585 (unaudited), respectively.
Note 4 - Related Party Transactions
(a) Related Parties Receivables
At December 31, 1996 and June 30, 1997, the Company has amounts due from
various related parties relating to loans as follows:
December 31, 1996 June 30, 1997
(Unaudited)
Loans:
Related entities $ 26,371 $ 27,396
Officers and former officers 274,330 298,311
Employees 774 8,774
Consortium 2000 -0- 370,500
-------- ---------
$301,475 $ 674,981
======== =========
PAGE
<PAGE>
(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, 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 employment
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
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 merged 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. was 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. is a wholly-owned subsidiary of the Company. The transaction was
completed in the first week of July 1997.
In August, 1994 the Company had retained 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 were cancelled upon the completion of
the acquisition of Consortium 2000, Inc.
(e) Financial Consultant
In 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 5 - Notes Payable - Others
During 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 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.
PAGE
<PAGE>
Note 6 - 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
December 31, Office Space Switching Space Total 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
========= ========= =========
Note7 - 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 8 - 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 749,980 shares of the
Company's Common Stock.
On May 23, 1997, 275,000 shares of the Series A Preferred Stock were converted
into 374,990 shares of the Company's Common Stock.
Note 9 - 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 June 30, 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 appr
oximately $6,316,000 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.
Note 10 - Income Taxes (Unaudited)
At June 30, 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 $3,548,000. 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.
Note 11 - Other Events (Unaudited)
In June 1997 the Company reported that it had signed a letter of intent to
acquire Arcada Communications, a privately held switched-based inter-exchange
carrier based in Seattle, WA. The transaction is subject to the execution of
a definitive agreement, due diligence and approval by the stockholders of both
companies.<PAGE>
In July 1997 the Company reported that it had completed the acquisition of
Pacific Cellular, a Las Vegas-based reseller of wireless telecommunication
services for 304,014 shares of the Company's common stock. Pacific Cellular
will continue to operate as a wholly-owned subsidiary of the Company.
In July 1997 the Company also completed the acquisition of Consortium 2000,
Inc., marketing organization, which was previously announced in August 1996.
PAGE
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Consortium 2000, Inc.
Culver City, California
We have audited the accompanying balance sheet of Consortium 2000, Inc.
as of June 30, 1996, and the related statements of operations, shareholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, based on our audit, the financial statements referred to
above present fairly, in all material respects, the financial position of
Consortium 2000, Inc. at June 30, 1996, and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
September 20, 1996
PAGE
<PAGE>
<TABLE>
CONSORTIUM 2000, INC.
BALANCE SHEET
ASSETS
<CAPTION>
June 30, June 30,
1996 1997
(Unaudited)
<S> <C> <C>
Current
Cash $ 116,068 $ (605)
Accounts receivable, less allowance for
doubtful accounts of $115,000 at
June 30, 1996 810,470 103,684
Due from related parties (Note 1, a) 52,242 ---
Employee advances 18,642 17,898
Prepaid expenses 103,092 89,283
Loans to officers (Note 1, b) 8,254 ---
--------- ---------
Total current assets 1,108,768 210,260
--------- ---------
Furniture and equipment
Furniture and fixtures 22,107 22,511
Professional equipment 79,327 88,014
--------- ---------
101,434 110,526
Less accumulated depreciation (54,844) (61,775)
--------- ---------
Net furniture and equipment 46,590 48,750
Other assets
Deposits 5,000 5,000
Intangible assets, less accumulated
amortization of $74,510 (Note 2) 68,088 60,888
--------- ---------
Total assets $1,228,446 $324,898
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current
Bank loan (Note 3) $100,000 $50,000
Accounts payable 6,026 70,448
Payable to UStel --- 340,500
Accrued agent fee 405,342 453,334
Accrued expenses 84,170 27,609
Deferred salaries 37,381 41,303
Dividends payable 10,764 10,364
--------- ---------
Total current liabilities 643,683 993,558
--------- ---------
Commitments and contingencies (Note 4)
Stockholders' equity (Deficit)
Common stock, no par value, with a stated value
of $0.01 each, 30,000,000
shares authorized; 6,753,009 shares 67,530 67,530
issued and 6,750,009 shares
outstanding
Additional paid-in capita l 1,036,166 1,036,166
Accumulated deficit (518,933) (1,772,356)
--------- ---------
Total shareholders' equity (Deficit) 584,763 (668,660)
--------- ---------
Total liabilities and shareholders
equity (Deficit) $1,228,446 $324,898
========== ========
</TABLE>
PAGE
<PAGE>
<TABLE>
CONSORTIUM 2000, INC.
STATEMENT OF OPERATIONS
<CAPTION>
For the Year For the Year
Ended Ended
June 30, 1996 June 30, 1997
(Unaudited)
<S> <C> <C>
Revenues $ 3,416,851 $ 3,778,152
Cost of service provided 1,500,187 2,064,006
Gross profit 1,916,664 1,714,146
Operating expenses
Depreciation and amortization 9,000 9,000
General and administrative 2,071,656 2,857,494
Loss from operations (163,992) (1,152,348)
Other income (expense)
Other income 71,541 ---
Interest income 4,301 ---
Interest expense (3,717) 402
Net loss before income tax (91,867) (1,152,750)
Income tax provision 800 800
Net loss $ (92,667) $(1,153,550)
Net loss per share $ (.01) $ (.17)
Weighted average number of shares outstanding 6,751,676 6,750,009
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
PAGE
<PAGE>
<TABLE>
CONSORTIUM 2000, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
Year Ended June 30, 1996
<CAPTION>
Common Stock Additional
Paid-In Accumulated
Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1995 6,753,009 $67,530 $1,036,166 $(361,529) $742,167
Dividend paid -- -- -- (61,866) (61,866)
Treasury stock purchased (Note 5) (3,000) -- -- (2,871) (2,871)
Net loss for period -- -- -- (92,667) (92,667)
--------- ------- ---------- ---------- ---------
Balance, June 30, 1996 6,750,009 $67,530 $1,036,166 $(518,933) $584,763
Dividend paid (Unaudited) -- -- -- (99,873) (99,873)
Net loss for period (Unaudited) -- -- -- (1,153,550) (1,153,550)
Balance, June 30, 1997 (Unaudited) 6,750,009 $67,530 $1,036,166 $(1,772,356) $(668,660)
========= ======= ========== ============ ==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
PAGE
<PAGE>
<TABLE>
CONSORTIUM 2000, INC.
STATEMENT OF CASH FLOWS
Increase (decrease) in Cash
<CAPTION>
For the Year For the Year
Ended Ended
June 30, 1996 June 30, 1997
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net Loss $ (92,667) $(1,153,550)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 15,600 14,131
Change in operating assets and liabilities
Accounts receivable 208,098 706,786
Prepaid expenses and other (50,569) 13,809
Accounts payable and accrued expenses 1,262 55,853
Payments for deferred salaries (57,585) 3,922
Other items 2,811 8,598
----------- ----------
Net cash provided by (used in)
operating activities 26,950 (350,451)
----------- ----------
Cash flows from investing activities
Purchase of equipment (26,673) (9,091)
----------- ----------
Net cash used in investing activities (26,673) (9,091)
----------- ----------
Cash flows from financing activities
Related party borrowing -- 392,742
Dividends paid (61,866) (112,067)
Treasury stock purchased (2,871) 12,194
Proceeds from bank loans 100,000 (50,000)
----------- ----------
Net cash provided by financing activities 35,263 242,869
----------- ----------
Net increase (decrease) in cash 35,540 (116,673)
Cash, beginning of period 80,528 116,068
----------- ----------
Cash, end of period $116,068 $ (605)
======== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
PAGE
<PAGE>
CONSORTIUM 2000, INC.
SUMMARY OF ACCOUNTING POLICIES
Nature of Operations
Consortium 2000, Inc. (the "Company") was formed in December 1988 under
the laws of the State of California. The major business of the Company is to
conduct consultative marketing service for designing, developing, operating
and managing a telecommunication users group to produce savings for its member
clients. The Company provides services to various clients who are connecting
with long distance carriers throughout the nation.
Revenue Recognition
Revenue is recognized upon completion of the telephone call.
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 Uncertainties
The Company's commission revenue is based upon its clients' usage of
telephone services with various long distance carriers. A majority of its
commission revenue comes from the Company's business clients. Generally, any
economic fluctuation in business client's operations will have significant
impact on their telephone usage. Accordingly, the fluctuation in the usage of
the Company's clients will have affected the commission revenue of the
Company.
Cash and Cash Equivalents
For purposes of cash flows, the Company considers all short-term debt
securities purchased with an original maturity of three months or less to be
cash equivalents.
Allowance for Doubtful Accounts
The Company provides an allowance for all doubtful accounts. The balance
of the allowance is based on review of the current status of accounts
receivable. The allowance for doubtful accounts was $115,000 as of June 30,
1996.
Equipment and Furniture
Equipment is stated at cost with depreciation provided over the estimated
useful lives of the respective assets on the straight-line basis as follows:
Years
Professional Equipment............5 years
Furniture and Fixtures............5 years
Expenditures for major renewals and betterments that extend the useful lives
of property and equipment are capitalized. Expenditures for maintenance and
repairs are charged to expense as incurred.
PAGE
<PAGE>
Intangible Assets
Intangible assets consists of start-up costs which are stated at cost.
Amortization is computed using the straight-line method over twenty years.
Income Tax
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes, which requires the Company to
recognize deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement carrying amounts and tax basis of assets using enacted rates in
effect in the years in which the differences are expected to reverse.
At June 30, 1996, the Company has available net operating loss
carryforwards of approximately $500,000 for income tax purposes, which expire
in varying amounts through 2010. Federal tax rules impose limitations on the
use of net operating losses following certain changes in ownership.
The loss carryforward generated a deferred tax asset of approximately
$185,000. The deferred tax asset was not recognized due to uncertainties
regarding its realization, accordingly, a 100% valuation allowance was
provided.
During fiscal year 1996, the Company incurred a loss. As a result, the
tax provision of $800 represents the minimum payment required for State income
tax purposes.
Earnings Per Share
Earnings per share was computed by dividing net loss for the year ended
June 30, 1996 by the weighted average number of shares for the year ended June
30, 1996.
New Accounting Standards
Statement 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 nonemployees 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.
Statement 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 applications 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.
Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130) issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general purpose financial statements. The Company has not determined the
effect on its financial position or results of operations, if any, from the
adoption of this statement.
PAGE
<PAGE>
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by
the FASB is effective for financial statements beginning after December 15,
1997. The new standard requires that public business enterprises report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate and their major customers. The Company
does not expect adoption of SFAS No. 131 to have a material effect, if any, on
its Results of Operations.
PAGE
<PAGE>
CONSORTIUM 2000, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- RELATED PARTY TRANSACTIONS
(a) Due from Related Party
R & R Ventures, Inc. (R&R) is an agent which markets residential services
and is engaged by the Company. A board member and shareholder of the Company
owns 50% of R&R. In November, 1995, the Company and R&R agreed that R&R would
allow the Company to deduct R&R's commission from the Company to offset the
$75,422 that R&R owes to the Company. As a result of deducting commissions
earned by R&R from the Related Receivables, the remaining balance due from R&R
as of June 30, 1996 was $52,242. This receivable was paid in full during the
fiscal year ended June 30, 1997 (unaudited).
(b) Officer Loan Receivables
The balance due to the company from an officer is $8,254. Interest
accrues monthly at seven percent per annum. This receivable was paid in full
during the fiscal year ended June 30, 1997 (unaudited).
NOTE 2 -- INTANGIBLE ASSETS
Intangible assets consist of the following:
(Unaudited)
1996 1997
Start-up cost $ 142,598 $ 142,598
Less accumulated amortization 74,510 81,710
--------- ---------
$ 68,088 $ 60,888
========= =========
NOTE 3 -- BANK LOAN
In May of 1996, the Company obtained a revolving line of credit of
$200,000 from a commercial bank for working capital purposes. The loan was
paid in full in October of 1997 and had a variable interest rate (1% over the
bank's prime rate). The revolving line of credit is subject to certain
restrictive covenants and is collateralized by substantially all of the
Company's assets. At June 30, 1996, the Company was in violation of all of the
financial ratio requirements due to the write-off of $775,943 which was due
from UStel, Inc. The Company obtained a waiver of default from the lender
which temporarily waives the specific events of default for a period not to
exceed sixty days.
NOTE 4 -- OPERATING LEASES
The Company conducts its operations from facilities that are leased under
a 56 month noncancelable operating lease expiring in June 1998.
Future minimum rental payments required under the above operating lease
as of June 30, 1997 were $60,000.
PAGE
<PAGE>
NOTE 5 -- SHAREHOLDERS' EQUITY
In October of 1995, the Company repurchased 3,000 shares of common stock
from one of its shareholders for $3,750 and agreed to sell these shares to a
key employee. Per the employee stock purchase agreement, the employee will
make installment payment each payroll period, and has made 15 installment
payments. When the employee fulfills his performance, the Company will make a
contribution for the difference between the employee's installment payments
and the stock price of $3,750. As of June 30, 1996, the treasury stock balance
was $2,871.
NOTE 6 -- SUBSEQUENT EVENT
On August 14, 1996, UStel, Inc. ("UStel"), Consortium Acquisition
Corporation (a wholly-owned subsidiary created by UStel, Inc.) 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 with Consortium 2000, Inc., with
Consortium 2000, Inc. 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 UStel, Inc. As a result
of the Merger Agreement, Consortium 2000, Inc. will become a wholly-owned
subsidiary of UStel.
As a result of entering into the Merger Agreement, the Company agreed to
write off a one time difference of $775,943 between UStel, Inc.'s commission
expenses to the Company and the Company's commission revenue from UStel, Inc.
during the fiscal year ended June 30, 1996. This difference was included in
general and administrative expenses. The management of the Company agreed not
to pursue collection of bad debt from UStel, Inc.
PAGE
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Arcada Communications and
Affiliates
We have audited the accompanying combined balance sheets of Arcada
Communications and Affiliates (the "Company") as of December 31, 1995 and 1996
and the related combined statements of operations, shareholders' equity
(deficit) and cash flows for each of the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the combined financial position of Arcada Communications and
Affiliates as of December 31, 1995 and 1996, and the results of their
operations and cash flows for each of the years then ended in conformity with
generally accepted accounting principles.
BDO Seidman, LLP
May 16, 1997
PAGE
<PAGE>
<TABLE>
ARCADA COMMUNICATIONS AND AFFILIATES
COMBINED BALANCE SHEETS
(Dollars in Thousands)
<CAPTION>
December 31, June 30,
1995 1996 1997
(Unaudited)
<S> <C> <C> <C>
Current Assets
Cash and Cash Equivalent $ 115 $ 76 $ 109
Certificates of Deposit -
Restricted (Note 5) 200 300 300
Accounts receivable, net of allowance
for doubtful accounts of $144,$136
and $188 (Note 5) 1,760 1,597 1,631
Carrier security deposits 282 352 362
Prepaid expenses and other 105 93 66
------ ------ ------
Total Current Assets 2,462 2,418 2,468
Property and Equipment, net of
accumulated depreciation and
amortization (Note 4)
Other Assets 265 169 89
------ ------ ------
Total Assets $ 4,858 $ 4,405 $ 4,376
======= ======= ========
Current Liabilities
Line of credit borrowings (Note 5) $ 260 $ 223 $ 254
Accounts payable 1,795 2,461 2,386
Accrued compensation and related 141 291 302
Other accrued liabilities 136 206 249
Current portion of long-term
liabilities 235 382 360
------ ------ ------
Total Current Liabilities 2,567 3,563 3,551
------ ------ ------
Long-Term Liabilities
Notes payable to shareholders
(Note 6) 456 294 376
Capital lease obligations, net of
current portion (Note 7) 663 431 691
Long-term debt, net of current
portion (Note 8) 452 325 348
Other long-term liabilities (Note
11 and 12) 292 649 595
------ ------ ------
Total Long-Term Liabilities 1,863 1,699 2,010
------ ------ ------
Commitments and Contingencies (Note 7 &12)
Shareholders' Equity (Deficit)
Common stock and additional paid in
capital (Note 9) 558 558 558
Accumulated deficit (130) (1,415) (1,743)
------ ------ ------
Total Shareholders' Equity
(Deficit) 428 (857) (1,185)
------ ------ ------
Total Liabilities and
Shareholders' Equity
(Deficit) $ 4,485 $ 4,405 $ 4,376
======= ======= ========
</TABLE>
See accompanying notes to financial statements
PAGE
<PAGE>
<TABLE>
ARCADA COMMUNICATIONS AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
except for per share data
(Dollars in Thousands)
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
1995 1996 1996 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue $ 10,954 $ 12,646 $ 6,236 $ 6,576
Line Charges 6,816 7,810 4,076 3,956
-------- -------- --------- ---------
Excess of Revenues over
Line Charges 4,138 4,836 2,160 2,620
Other operating expenses:
Salaries, wages and
related 2,094 2,286 1,058 1,314
General and administrative 531 745 350 436
Facilities and switch expense 409 389 202 167
Depreciation and Amortization 407 666 307 363
Sales and Marketing 332 430 184 194
Provisions for doubtful
accounts 160 481 95 52
Provisions for severance
obligation (Note 10) 295 455 - -
Legal and other consulting 175 176 15 225
Terminated Merger Costs
(Note 3) - 254 - -
-------- -------- --------- ---------
Loss Before Interest and Tax (328) (1,046) (51) (131)
Interest expense net 231 239 76 33
-------- -------- --------- ---------
Loss Before Income Tax (559) (1,285) (127) (164)
Provision for Income Tax - - - -
-------- -------- --------- ---------
Net Loss (559) (1,285) (127) (164)
======== ======== ========= =========
Net Loss Per Share $(13.31) $(30.9) $(3.02) $(4.43)
======= ====== ====== ======
Shares Used in Calculation 42,000 41,583 41,000 37,000
====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements
PAGE
<PAGE>
<TABLE>
ARCADA COMMUNICATIONS AND AFFILIATES
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(In Thousands)
<CAPTION>
Common Stock Retained Earnings
Shares Amount (Accumulated Deficit) Total
<S> <C> <C> <C> <C>
Balance, January 1, 1995 52 $ 560 $ 597 $ 1,157
Redemption of common stock (Note 9) (10) (2) --- (2)
Dividends --- --- (168) (168)
Net loss --- --- (559) (559)
----- ----- ------ ------
Balance, December 31, 1995 42 558 (130) 428
Redemption of common stock (Note 9) (5) --- --- ---
Net loss --- --- (1,285) (1,285)
----- ----- ------ ------
Balance, December 31, 1996 37 558 (1,415) (857)
Dividends (Unaudited) --- --- (164) (164)
Net loss (Unaudited) --- --- ( 164) (164)
----- ----- ------ ------
Balance, June 30, 1997 (Unaudited) 37 $ 558 $(1,743) $ (1,185)
===== ======= ======== =========
</TABLE>
See accompanying notes to financial statements
PAGE
<PAGE>
<TABLE>
ARCADA COMMUNICATIONS AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
(Unaudited)(Unaudited)
1995 1996 1996 1997
<S> <C> <C> <C> <C>
Net Loss $(559) $(1,285) $(127) $(164)
Adjustments to reconcile net loss
to cash flows from operating activities
Depreciation and amortization 476 666 236 363
Changes in Assets and Liabilities:
Decrease (increase) in accounts receivable (459) 163 (33) (35)
Increase in accounts payable 687 667 351 106
Provision for severance obligation 295 455 --- ---
Payments of severance obligation (43) (39) (18) (53)
Loss on disposal of vehicles - - - 18
Other (89) 33 39 70
------ ------ ------ ------
Net Cash Provided by
Operating Activities 308 660 448 305
------ ------ ------ ------
Cash Flows From Investing Activities
Purchases of equipment (262) (191) (55) (321)
Investment in other assets (199) (47) --- (10)
Purchase (sale) of certificates of
deposit - restricted (200) (100) 200 ---
------ ------ ------ ------
Net Cash Provided by (Used in)
Investing Activities (661) (338) 145 (331)
------ ------ ------ ------
Cash Flows From Financing Activities
Net borrowing on lines of credit 260 (37) (260) 31
Proceeds from notes payable to shareholders 436 378 1,468 ---
Repayment of notes payable to shareholders (234) (489) --- (50)
Repayment of long-term debt and capital
lease obligations (165) (213) (1,139) (117)
Increase in capital lease obligations --- --- --- 195
Redemption of common stock (2) --- --- ---
Dividends paid (168) --- (11) ---
Loans to shareholders --- --- (17) ---
------ ------ ------ ------
Net Cash Provided by (Used in) Financing
Activities 127 (361) 41 59
------ ------ ------ ------
Net Increase (Decrease) in Cash
and Cash Equivalents (226) (39) 634 33
Cash and Cash Equivalents
Beginning of period 341 115 115 76
------ ------ ------ ------
End of period $ 115 $ 76 $ 749 $ 109
===== ===== ===== =====
Supplemental Disclosures of Non-Cash
Investing and Financing Transactions
Accounts payable exchanged for
Note Payable $ 326 $ --- $ --- $ 183
</TABLE>
See accompanying notes to financial statements
PAGE
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
NOTE 1: Description of Business
Operations - Arcada Communications and Affiliates (together, "Arcada" or the
"Company") provide long-distance telecommunication services. The Company
currently serves over 20,000 customers in 17 states, with an emphasis in the
Pacific Northwest. The Company's corporate offices are located in Seattle,
Washington with marketing offices and switching equipment in Vancouver,
Washington and Denver, Colorado. Arcada also provides cellular air time and
other cellular telecommunication products and services.
NOTE 2: Summary of Significant Accounting Policies
Principles of Combination - The combined financial statements include S.V.V.
Sales, Inc. dba Arcada Communications ("SVV"), LeBanco, Ltd. ("LeBanco"), and
Stellar Telecommunications Services, Inc. ("Stellar"), which are affiliated
through common ownership. Stellar and LeBanco own certain equipment and
switches utilized in the Company's operation, which are leased to Arcada. All
significant intercompany balances and transactions have been eliminated in
combination in a manner similar to consolidation.
Use of Estimates - 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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers cash on hand, cash in banks,
certificates of deposits, time deposits and other short-term securities with
maturities of three months or less as cash and cash equivalents. Cash and
cash equivalents are comprised primarily of funds on deposit with banks and
are recorded at market value.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed on the straight-line method over estimated useful
lives ranging from three to ten years. Leasehold improvements are amortized
over the lesser of lease term or useful life of property. Maintenance and
repairs are expensed while major improvements are capitalized.
Deferred Customer Acquisition Costs and Other Intangible Assets - The Company
is one of five long-distance carriers that AT&T Wireless Services ("AT&T
Wireless") customers may select for long distance in the 17 states in which
Arcada does business. The Company pays a one-time equal access charge to AT&T
Wireless for each customer subscribing to the Company's services. Intangible
assets are included in other assets, consist primarily of deferred customer
acquisition costs and are amortized on the straight-line method over estimated
productive lives ranging from two to four years. Net tangible assets
approximate $211,000 and $169,000 at December 31, 1995 and 1996, and
accumulated amortization approximates $53,000 and $197,000 at December 31,
1995 and 1996.
Impairment of Long-Lived Assets - The Company evaluates at each balance sheet
date the carrying value of long-lived assets and intangible assets, and the
appropriateness of the remaining lives of such assets considering whether any
events have occurred or conditions have developed which my indicate that the
remaining life or the amortization method requires adjustment. After
reviewing the appropriateness of the remaining lives, the Company then
assesses the overall recoverability of the assets by determining if the unamorti
zed balance can be recovered through undiscounted future operating cash
flows. If such evaluations were to indicate a material impairment of these
assets, such impairment would be recognized by a write down of the applicable
asset. Absent any unfavorable findings, the Company continues to amortize its
intangible assets based upon existing estimated lives.
PAGE
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
NOTE 2: Summary of Significant Accounting Policies (Continued)
Income Taxes - SVV and LeBanco, with consents of their shareholders, have
elected under the Internal Revenue Code to be taxed as S corporations, and as
a result in lieu of these companies paying corporate income tax, the
shareholders are taxed on their proportionate share of taxable income.
Stellar is a C corporation and accordingly, income taxes are provided for the
tax effect of Stellar operating results reported in the financial statements.
Deferred taxes relate to differences in financial statement and tax bases of
assets and liabilities. Deferred tax assets and liabilities represent
estimated future tax return consequences of such differences, which will
either be taxable or deductible when the assets and liabilities are recovered
or settled.
Fair Value of Financial Instruments - The carrying amounts of current assets
and liabilities are considered to be reasonable estimates of fair value due to
the short maturity of these items. The carrying amounts of long-term debt are
considered to be reasonable estimates of fair value because they bear interest
at relatively recently established market rates. It is not practicable to
estimate the fair value of notes payable to shareholders as the related party
nature of these financial instruments allow for possible modification to their
terms and maturities.
Concentration of Credit Risk - Financial instruments that potentially subject
the Company to concentrations of credit risk include primarily cash deposits
and accounts receivable. The Company places its deposits and short term
investments with high credit quality financial institutions; at times deposits
exceed federally-insured limits. Accounts receivable consist of many small
account balances due from individuals and companies dispersed across the
United States. with a concentration in the Pacific Northwest. Collateral is
generally not required.
Effect of Recently Issued Accounting Standards - Recently issued accounting
standards having relevant applicability to the Company consist primarily of
Statement of Financial Accounting Standards No. 128 "Earnings per Share,"
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" and Statement of Financial Accounting Standards No. 131 "Disclosures
about Segments of an Enterprise and Related Information," each of which
relates to additional reporting and disclosure requirements effective for
financial statement periods beginning after December 15, 1997. It is not
expected that the adoption of these accounting pronouncements will have a
material effect on the Company's operating results or financial condition.
Interim Financial Statements - The interim financial data at and for the six
months ended June 30, 1996 and 1997 is unaudited; however, in the opinion of
Company management, the interim data includes all adjustments, consisting only
of normal recurring adjustments necessary for a fair statement of results for
the interim periods. The interim results of operations for the six months
ended June 30, 1997 are not necessarily indicative of results expected for the
entire year.
NOTE 3: Terminated Merger
In 1996, the Company entered into an Agreement and Plan of Merger, as amended
(the "Merger Agreement"). The merger was subject to and contingent upon,
among other things, shareholder approval and certain conditions precedent with
Touch Tone America, Inc. ("Touch Tone"), a public company based in Phoenix,
Arizona, which provides Internet services, local dedicated access and other
telecommunications products. In March 1997, the Company terminated the Merger
Agreement. The Company recorded costs associated with the merger as expense
during the year ended December 31, 1996. Pursuant to terms of the Merger
Agreement, the Company is seeking to recover a portion of its merger related
costs from Touch Tone. See Note 13 - Events (Unaudited) Subsequent to Date of
Report of Independent Accountants for information regarding settlement of this
matter.
PAGE
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
NOTE 4: Property and Equipment
Certain property and equipment are pledged as security for borrowings as
described in Note 6. Property and equipment consists of the following (in
thousands):
December 31, June 30,
1995 1996 1997
(Unaudited)
Equipment and switches $ 1,477 $ 1,557 $ 1,660
Equipment under capital lease 1,008 1,085 1,304
Vehicles 353 365 318
Leasehold improvements 77 83 83
-------- -------- --------
2,915 3,090 3,365
Accumulated depreciation
and amortization (784) (1,272) (1,546)
-------- -------- --------
Property and equipment net $ 2,131 $ 1,818 $ 1,819
======== ======== ========
Accumulated amortization of equipment under capital leases approximated
$216,000 and $364,000 at December 31, 1995 and 1996, respectively.
PAGE
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
NOTE 5: Line-of-Credit
The Company maintains line-of-credit borrowing agreements with banks. In
August 1996, the Company entered into a $400,000 line-of-credit agreement.
Borrowing availability approximated $300,000 and $400,000 during 1995 and
1996, respectively. Borrowings are secured by accounts receivable,
certificates of deposits, and personal guarantees of Company shareholders.
Line-of-Credit agreements provide for interest, payable monthly, at prime plus
2% during 1995 and at prime plus 1% on the 1996 line (9.25% at December 31,
1996).
The Company has pledged and assigned as security for line of credit borrowings
certificates of deposit which are reported as Restricted in the accompanying
balance sheet as such amounts are legally restricted as to withdrawal.
NOTE 6: Related Party Borrowings
Certain of the Company's shareholders and employees, including and primarily
the Majority Shareholders, loan cash to the Company pursuant to terms of
unsecured, four-year promissory notes with interest payable monthly at 15%.
Interest expense related to these borrowings approximated $74,000 and $70,000
during the years ended December 31, 1995 and 1996, respectively. In addition,
the Company has unsecured demand notes payable to one shareholder totaling
$190,000 at December 31, 1996 which bears interest at 8%. Related party
payables are subordinate to line-of-credit bank borrowings.
NOTE 7: Leases
The Company has various lease agreements for certain equipment and switches,
office premises and office equipment. Most leases contain renewal options and
some contain purchase options. Rent expense approximated $342,000 during the
years ended December 31, 1995 and 1996. Minimum annual future obligations for
leases at December 31, 1996 are as follows (in thousands):
Years Ending December 31, Capital Leases Operating Leases
1997 $ 292 $ 326
1998 292 321
1999 209 288
2000 70 104
2001 -- 23
----- --------
Total minimum lease payments 863 $ 1,062
Amount representing interest ========
and other charges (169)
Present value of minimum lease
payments 694
Less current portion (263)
------
Capital lease obligations,
net of current portion $ 431
======
PAGE
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
NOTE 8: Long-Term Debt
Long-term debt consists of the following (in thousands):
December 31, June 30,
1995 1996 1997
Note payable to vendor, due
in 2002 in $5 monthly installments,
including annual interest at
approximately 14%, secured by
switching equipment $ 321 $ 299 $ 293
Unsecured notes payable to vendor,
due in 1999 in $10 monthly
installments, including annual
interest at approximately 12% --- --- 183
Notes payable to vendor, due in
2002 in $4 monthly installments,
including annual interest at
approximately 5%, secured by vehicles 177 129 78
Other secured notes payable bearing
interest at 8% to 15% 26 16 13
------- ------- -------
524 444 567
Amounts due within one year (72) (119) (219)
Long-term debt, net of current ------- ------- -------
portion $ 452 $ 325 $ 348
======= ======= =======
Long-term debt annual principal payment obligations at December 31, 1996 for
years ending December 31 are as follows (in thousands):
1997 $ 119
1998 153
1999 125
2000 47
-----
$ 444
=====
Interest paid in cash, including interest attributable to capital lease
obligations and interest paid on notes payable to vendors and shareholders,
approximated $279,000 and $148,000 during the years ended December 31, 1995
and 1996, respectively.
PAGE
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
NOTE 9: Common Stock
SVV commenced operations in 1992 as a result of the contribution and
assignment by the Company's then sole stockholder, an individual who
subsequently transferred stock ownership to his two sons (the "Majority
Shareholders"), of certain assets comprised primarily of accounts receivable,
and assumption of various operating liabilities and other accrued
liabilities. The Company recorded assets assigned and liabilities assumed at
their historical net book value of approximately $557,000 such net amount
being recorded as common stock and additional paid in capital. Inasmuch as
most assets and liabilities were current and subsequently recovered and
extinguished in the ordinary course of business, net book value approximated
fair value. Stellar and LeBanco were capitalized with cash of approximately
$1,000 and $2,000 and are also owned by SVV stockholders. Common stock
information of each of the companies in the combined financial statements are
summarized below:
<TABLE>
<CAPTION>
December 31,
--------------------------------
Company Par Value Authorized Issued 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
SVV No Par 50,000 50,000 50,000 40,000 35,000
Stellar No Par 1,000 980 980 700 560
LeBanco $1 1,000 1,000 1,000 900 800
</TABLE>
During 1994, the Majority Shareholders sold 42% of SVV common stock (21,000
shares) to five individuals, all of whom were Company employees, in exchange
for promissory notes secured by such shares. The shares sold are subject to
terms of a buy-sell agreement which among other things, provides the Company
an option to purchase shares from a selling shareholder under certain
circumstances including termination of employment. During 1995, pursuant to
terms of the buy-sell agreement the Company acquired 5,000 shares from each of
two shareholders for a combined total purchase price of approximately $2,000.
In addition, during 1995 the Company also acquired for nominal consideration
280 shares of Stellar and 100 shares of LeBanco common stock pursuant to terms
of buy-sell agreements. During 1996, pursuant to terms of buy-sell
agreements, the Company acquired for nominal consideration as provided for in
such agreements 5,000 shares of SVV common stock, 140 shares of Stellar
common stock and 100 shares of LeBanco common stock. Shares of common stock
acquired by the Company have been canceled.
In March 1997, LeBanco entered into a roll-up merger agreement (the "Roll-up
Merger Agreement") with SVV, pursuant to which LeBanco merged with and into
SVV (as the surviving corporation) and each outstanding share of common stock
of LeBanco was converted into the right to receive 18.7 shares of common stock
of SVV. In March 1997, Stellar entered into the Share Exchange Agreement (the
"Share Exchange Agreement") with SVV, pursuant to which all of the issued and
outstanding shares of common stock of Stellar was acquired by SVV and each
share of Stellar was exchanged for one share of common stock of SVV. Upon
consummation of the Roll-up Merger Agreement and the Share Exchange Agreement,
all of the 50,000 shares of authorized capital stock of SVV were issued.
Stellar is now a wholly-owned subsidiary of SVV and LeBanco no longer exists,
but has been merged into SVV.
PAGE
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: Employee Benefit Plan
The Company has a 401(k) employee benefit plan for those employees who meet
eligibility requirements. Eligible employees may contribute up to 15% of
their compensation. The Company's contribution to the plan is discretionary
as determined by the Board of Directors. The Company has made no
contributions to the plan.
NOTE 11: Federal and Income Taxes
The provision for income tax relates solely to Stellar as described in Note
1. The Company has recorded deferred income tax liabilities of approximately
$40,000 at December 31, 1995 and 1996. Deferred tax liabilities relate to
depreciation and are included in other long-term liabilities. As a result of
pre-tax losses, there is no tax provision for 1995 and 1996.
NOTE 12: Commitments and Contingencies
The Company does not own any transmission facilities, other than its
investments in its long distance switches, thus its long distance services are
dependent upon other carriers for the transmission of its customers' calls.
The Company procures such services at bulk rates pursuant to short-term
agreements from several suppliers, including three major suppliers.
The Company serves customers in numerous localities. The Company currently
collects and remits local utility taxes in jurisdictions where it has offices
or holds other assets. The Company has been contacted in the past by other
localities where it has customers, but no other assets of operations,
requesting that the Company collect and remit local utility taxes in such
jurisdictions. The Company does not believe such local utility taxes apply to
its operations, has not historically collected such taxes, and does not intend
to do so in the future. However, there can be no assurance that localities
will not actively seek to collect such taxes from the Company for past or
future services.
The Company is subject to various legal proceedings and claims that arise in
the ordinary course of business. Company management currently believes that
resolving these matters will not have a material adverse impact on the
Company's financial position or results of operation.
During 1995, the Company entered into a severance agreement with a former
employee pursuant to which the Company committed to make payments totaling
$400,000 over a seven year period, subject to acceleration under certain
circumstances, including a change in control. Accordingly, during 1995 the
Company recorded a liability and compensation expense of approximately
$295,000 at the discounted net present value of the payments. The severance
obligation, net of the current portion, is included in other long-term
liabilities.
In addition, during 1995, the Company entered into a severance agreement with
another employee. Pursuant to terms of the agreement, among other things, the
Company is contingently committed to make payments totaling $560,000 in the
event of a sale of the Company, or certain other future events. Inasmuch as
the event which would require a commitment on behalf of the Company to make
these payments has not occurred, no expense or obligation has been recorded.
PAGE
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: Commitment and Contingencies (Continued)
During 1996, the Company entered into a severance agreement with an employee,
pursuant to which the Company committed to make payments totaling $750,000
over an eleven year period. The Company may make prepayments on the
obligation at any time and may pay up to fifty percent of the original
principal balance by delivering to the employee fully paid, non-assessable and
unencumbered publicly tradable stock. During 1996, the Company recorded a
liability and compensation expense of approximately $455,000 at the discounted
net present value of the payments. The severance obligation, net of current
portion, is included in other long-term liabilities.
NOTE 13: Events (Unaudited) Subsequent to Date of Report of Independent
Accountants
In June 1997, Touch Tone and the Company entered into a settlement agreement.
For purposes of this settlement agreement, Touch Tone agreed that Arcada
retained the funds collected by Arcada on behalf of Touch Tone ("Funds") in
their entirety, and Touch Tone waived and released any and all claims
whatsoever to the Funds. Arcada agreed to pay up to, but no more than, the
sum of $4,000 toward any and all federal, state or local sales, excise and
utility taxes directly attributable to and payable by virtue of the
telecommunication services which were provided by Touch Tone and
billed/collected by Arcada. Approximately $130,000 was recorded as income on
Arcada's income statement as of June 30, 1997.
The Company has entered into a merger agreement, subject to the satisfaction
or waiver of certain conditions, with a long distance telecommunications
provider. As a result of the merger, among other things, the Company's stock
will be converted into the right to receive shares of stock, the number of
which will be determined at a later date, $5 million of cash and $1.5 million
of convertible debentures.
PAGE
<PAGE>
APPENDICES:
A. Merger Agreement Including Plan of Merger
B. Minnesota Dissenters' Rights Statute
C.Form of Reincorporation Agreement and Plan of Merger, Amended and Restated
Articles of Incorporation and Bylaws of UStel - California
D. Fairness Opinion
PAGE
<PAGE>
APPENDIX A
AGREEMENT FOR MERGER
This Agreement for Merger ("Agreement") is made and entered into as of
September 25, 1997 by and among UStel, Inc., a Minnesota corporation
("UStel"), Arcada Acquisition Corp., a Washington corporation and wholly-owned
subsidiary of UStel ("Newco"), and S.V.V. Sales, Inc., a Washington
corporation d/b/a Arcada Communications ("Arcada").
RECITALS
Newco is a wholly owned subsidiary of UStel. The parties desire that
UStel and Newco enter into a transaction with Arcada which will result in a
merger (the "Merger") of Newco with and into Arcada, which shall be the
surviving corporation.
Therefore, in consideration of the mutual covenants, representations,
warranties and agreements herein contained, the parties hereto agree as
follows:
1. MERGER. Subject to the terms and conditions of this Agreement, the
Merger is to be accomplished in the manner described herein.
1.1 MERGER OF ARCADA AND NEWCO. At the Effective Time (as defined in
Section 2), Newco shall be merged with and into Arcada, with Arcada being the
surviving institution, in accordance with the Plan of Merger by and among
UStel, Newco and Arcada substantially in the form attached hereto as Exhibit A
(the "Plan of Merger"). The Plan of Merger provides for the terms of the
Merger and the manner of carrying it into effect. The terms and conditions of
the Plan of Merger are incorporated herein and made a part hereof. The
parties intend that this Agreement and the Plan of Merger shall constitute a
plan of reorganization of the type described in Sections 368(a)(1)(A) and
368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code").
1.2 CONVERSION OF ARCADA COMMON STOCK. Subject to the provisions
below and in the Plan of Merger, at the Effective Time, all of the outstanding
shares of common stock, no par value per share, of Arcada ("Arcada Common
Stock") shall be converted into the right to receive shares of common stock,
$.01 par value per share, of UStel ("UStel Common Stock"), and certain
additional consideration, as described below and in the Plan of Merger.
(a) Subject to the provisions below and the provisions of the
Plan of Merger, at the Effective Time each shareholder of Arcada Common Stock
will receive the consideration set forth opposite his or her name,
respectively, as described on Schedule A hereto. The total consideration to
be paid by UStel to the Arcada shareholders in connection with the Merger
shall consist of (i) an aggregate of 2,100,000 newly issued shares of UStel
Common Stock, subject to adjustment as described in Section 1.5 below (the
"Merger Shares"), (ii) an aggregate of $1,500,000 in principal amount of 10%
Convertible Subordinated Debentures (the "Convertible Debentures") issued by
UStel and described in further detail below and (iii) an aggregate of
$5,000,000 cash. The Merger Shares, the Convertible Debentures and the cash
payable by UStel at Closing are collectively referred to herein as the "Merger
Consideration".
(b) No fractional shares of UStel Common Stock shall be issued.
In lieu of any fractional shares, any holder of Arcada Common Stock who would
otherwise be entitled to a fractional share of UStel Common Stock will, upon
surrender of his certificate or certificates representing Arcada Common Stock
outstanding immediately prior to the Effective Time, be paid the cash value of
such fractional share interest, which shall be equal to the product of the
fraction multiplied by the Average Price as hereinafter defined. For the
purposes of determining any such fractional share interests, all shares of
Arcada Common Stock owned by an Arcada stockholder shall be combined so as to
calculate the maximum number of whole shares of UStel Common Stock issuable to
such Arcada stockholder.
(c) The Average Price is calculated by dividing (A) the sum of
(i) the five day trading average closing price of the UStel Common Stock for
the five day period beginning on the date of public announcement of the
signing of this Agreement; (ii) the five day trading average closing price of
the UStel Common Stock for the five day period ending on the second to last
trading day prior to Closing; and (iii) the Interim Period Average, by (B)
three (3). The Interim Period Average is calculated by dividing the sum of
the closing prices of the UStel Common Stock on every trading day from and
including the date hereof through and including the second to last trading day
prior to Closing, by the number of trading days in such period. The above
formula shall be equitably adjusted for any reclassifications, stock splits,
stock dividends, stock combinations or the like with respect to the UStel
Common Stock occurring after the date hereof but prior to the Effective Time.
1.3 EXISTING SHAREHOLDER LOANS. The Arcada shareholder loans
outstanding at Closing, which are set forth on Schedule B hereto, shall be
converted as of the Closing, on a dollar for dollar basis, into additional
principal amount of Convertible Debentures.
1.4 Convertible Debentures. The Convertible Debenture shall be
substantially in the form as set forth on Exhibit B hereto and as described
herein. For the first six months from Closing the Convertible Debentures
shall be payable interest only, quarterly in arrears. Beginning six months
from Closing, the Convertible Debentures shall be amortized over a three year
term, with principal payments paid quarterly in advance. Such principal
payments shall include all amounts due thereunder, including the conversion of
all Arcada shareholder loans. Interest on the Convertible Debentures will
continue to be paid quarterly in arrears. Beginning one year after issuance,
the Convertible Debentures will be convertible dollar for dollar at a <PAGE>
conversion price equal to 150% of the Average Price. The number of shares of
UStel Common Stock issuable upon conversion of the Convertible Debentures will
be proportionally adjusted in the event of a change in the capitalization of
UStel after the Effective Time. UStel shall have the right to prepay, in
whole or in part, without penalty, at any time, including the right to pay
cash in lieu of Convertible Debentures at Closing. In the event of a default
under the Convertible Debentures, the conversion price will be equal to the
Average Price.
1.5 ADJUSTMENT.
(a) If the Average Price is (w) less than $3.00 per share but
greater than or equal to $2.50 per share, then the aggregate number of Merger
Shares issuable at Closing shall be increased by 420,000 shares, (x) less than
$2.50 per share but greater than or equal to $2.00 per share, then the
aggregate number of Merger Shares issuable at Closing shall be increased by
1,050,000 shares, (y) less than $2.00 per share but greater than or equal to
$1.50 per share, then the aggregate number of Merger Shares issuable at
Closing shall be increased by 2,100,000 shares, and (z) less than $1.50 per
share but greater than or equal to $1.00 per share, then the aggregate number
of Merger Shares issuable at Closing shall be increased by 4,200,000 shares.
In the event of an increase in the number of Merger Shares pursuant to this
Section 1.5(a), the additional Merger Shares payable to the Arcada
shareholders shall be paid in the same proportions as the Merger Shares set
forth on Schedule A hereto.
(b) If between the date of this Agreement and the Effective
Time, the shares of UStel Common Stock shall be changed into a different
number of shares by reason of any reclassification, recapitalization,
split-up, combination or exchange of shares, or if a stock dividend thereon
shall be declared with a record date within such period, the number of shares
of UStel Common Stock issuable in the Merger will be adjusted accordingly.
1.6 STOCKHOLDERS' MEETINGS OR CONSENTS. UStel shall, as soon as
practicable, hold a meeting of its stockholders (the "UStel Stockholders'
Meeting") to submit for stockholder approval (the "UStel Stockholder
Approval") this Agreement and the Plan of Merger, and Arcada shall, as soon as
practicable, hold a meeting of its stockholders (to coincide with the UStel
Stockholders' Meeting) or otherwise solicit stockholder consent (the "Arcada
Stockholders' Meeting") to submit for stockholder approval (the "Arcada
Stockholder Approval") this Agreement and the Plan of Merger.
1.7 PROXY STATEMENT/PROSPECTUS.
(a) The parties hereto will cooperate in the preparation of an
appropriate proxy statement/prospectus satisfying all applicable regulations,
rules and requirements of the Securities Exchange Commission (the "SEC")
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and state law (such proxy statement/prospectus in the form
mailed by UStel to UStel stockholders, together with any and all amendments or
supplements thereto, being herein referred to as the "Proxy
Statement/Prospectus").
(b) Arcada will furnish such information concerning itself as is
necessary to be included in the Proxy Statement/Prospectus. Arcada agrees
promptly to advise UStel if at any time prior to the UStel Stockholders'
Meeting any information provided by Arcada for inclusion in the Proxy
Statement/Prospectus becomes incorrect or incomplete in any material respect
and to provide the information needed to correct such inaccuracy or omission.
Arcada will continue to furnish UStel with such supplemental information as
may be necessary in order to cause such Proxy Statement/Prospectus insofar as
it relates to Arcada, after the mailing thereof to UStel stockholders, to
remain accurate and complete.
(c) UStel will, as promptly as practicable, file with the SEC a
registration statement on Form S-4, or any such successor form (together with
any and all amendments or supplements thereto, the "Registration Statement"),
containing the Proxy Statement/Prospectus in connection with the registration
under the Securities Act of 1933, as amended (the "Securities Act"), of the
Merger Shares and the shares of UStel Common Stock issuable in connection with
the Merger upon conversion of the Convertible Debentures. UStel will use all
reasonable efforts to cause the Registration Statement to become effective as
promptly as practicable and to cause the Proxy Statement/Prospectus to be
cleared for mailing under federal securities law and state law at the earliest
practicable date and UStel will advise Arcada promptly when the Proxy
Statement/Prospectus has been cleared for mailing. UStel will take any and
all other action required to be taken under any applicable federal or state
securities laws in connection with the issuance of the Merger Shares, the
Convertible Debentures and the shares of UStel Common Stock issuable upon
conversion of the Convertible Debentures.
(d) UStel will use its best efforts to register and qualify the
securities covered by such Registration Statement under such other securities
or blue sky laws of such jurisdictions as shall be reasonably requested by the
shareholders; provided that UStel shall not be required in connection
therewith or as a condition thereto to qualified to do business or to file a
general consent to service of process in any such states or jurisdictions,
unless UStel is already subject to service in such jurisdiction and except as
may be required by the Securities Act.
(e) UStel will cause all such shares of UStel Common Stock registered
pursuant to the Registration Statement to be listed on each securities
exchange and/or Nasdaq Stock Market on which similar securities issued by
UStel are then listed.
(f) UStel shall bear and pay all expenses incurred in connection
with the registration, filing or qualification of the shares of UStel Common
Stock issued and issuable in connection with the Merger with respect to the
Registration Statement, including (without limitation) all registration, <PAGE>
filing and qualification fees and printers and accounting fees relating or
apportionable thereto.
2. EFFECTIVE TIME; CLOSING.
As used herein, the term "Effective Time" shall mean the date and time
when the Merger becomes effective. As used herein, the term "Effective Date"
shall mean the day on which the Effective Time occurs. The parties intend that
the Effective Time shall occur as soon as reasonably practicable following the
satisfaction of the conditions set out in Section 7 below. A closing (the
"Closing") shall take place prior to the Effective Time at the offices of
Freshman, Marantz, Orlanski, Cooper & Klein, 9100 Wilshire Blvd., East Tower,
8th Floor, Beverly Hills, CA 90212, or at such other place as the parties
hereto may mutually agree upon for the Closing to take place.
3. REPRESENTATIONS AND WARRANTIES REGARDING NEWCO.
Each of UStel and Newco, jointly and severally, hereby represent and
warrant to Arcada as follows:
3.1 CORPORATE ORGANIZATION. Newco is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Washington. Newco has all the requisite power and authority to own, lease and
operate all of its properties and assets and to carry on its business as
currently conducted. Newco is duly licensed or qualified to do business and is
in good standing in each jurisdiction in which the nature of the business
conducted by it makes such licensing or qualification necessary and where the
failure to be so qualified would, individually or in the aggregate, have a
Material Adverse Effect (as defined below) on UStel.
3.2 AUTHORITY. Newco has requisite corporate power and authority to
execute and deliver this Agreement and the Plan of Merger and, subject to
applicable regulatory approvals, to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement and the Plan
of Merger and the consummation of the transactions contemplated hereby and
thereby have been duly and validly approved by the Board of Directors of
Newco. This Agreement has been duly and validly executed and delivered by
Newco. Assuming the due authorization, execution and delivery hereof by the
other parties hereto, this Agreement constitutes the valid and binding
obligation of Newco, enforceable against it in accordance with its respective
terms.
3.3 NO VIOLATIONS. Neither the execution and delivery of this
Agreement or the Plan of Merger nor the consummation by Newco of the
transactions contemplated hereby and thereby, nor compliance by Newco with any
of the terms or provisions hereof or thereof, will (i) violate any provision
of the Articles of Incorporation or Bylaws of Newco, (ii) assuming the
consents and approvals referred to in Section 7 hereof are duly obtained,
violate any statute, code, ordinance, rule, regulation, judgment, order, writ,
decree or injunction applicable to Newco or any of its respective properties
or assets, or (iii) violate, conflict with, result in a breach of any
provisions of, constitute a default (or an event which, with notice or lapse
of time, or both, would constitute a default) under, result in the termination
of, accelerate the performance required by, or result in the creation of any
lien, security interest, charge or other encumbrance upon any of the
properties or assets of Newco under any of the terms, conditions or provisions
of any note, bond, mortgage indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which Newco is a party, or by
which it or any of its properties or assets may be bound or affected, except
with respect to (iii) above, for such violations, conflicts, breaches,
defaults, termination's, accelerations and encumbrances which would not
individually or in the aggregate have a Material Adverse Effect on UStel or
otherwise prevent or delay the consummation of the transactions contemplated
hereby.
3.4 CONSENTS AND APPROVALS. Except for consents and approvals of or
filings, deliveries or registrations with the SEC, the Federal Communications
Commission or other applicable governmental authorities, no consents or
approvals of or filings or registrations with any third party or public body
or authority, except for consents, approvals, filings or registrations where
the failure to obtain such consents or approvals or to make such filings or
registrations would not prevent or delay the Merger and would not in the
aggregate have a Material Adverse Effect on UStel, are necessary in connection
with the execution and delivery by Newco of this Agreement and the
consummation of the transactions contemplated hereby.
3.5 CAPITALIZATION. The authorized capital stock of Newco as of the
date hereof consists of 1,000 shares of common stock, no par value per share,
of which 1,000 shares are duly issued and outstanding, fully paid and
nonassessable. All such shares of common stock are owned by UStel. There are
outstanding no options, convertible securities, warrants or other rights to
purchase or acquire capital stock of Newco and there is no commitment of UStel
or Newco to issue any of the same.
4. REPRESENTATIONS AND WARRANTIES REGARDING USTEL.
The "UStel Disclosure Schedules" shall mean all of the disclosure
schedules required by this Agreement, dated as of the date hereof, which are
attached hereto. UStel hereby represents and warrants to Arcada as follows:
4.1 ORGANIZATION, POWER, GOOD STANDING, ETC.
(a) UStel is a corporation duly organized, validly existing and
in good standing under the laws of the State of Minnesota. UStel has all the
requisite corporate power and authority to own, lease and operate all of its
properties and assets and to carry on its business as currently conducted.
UStel is duly licensed or qualified to do business and is in good standing in
each jurisdiction in which the nature of the business conducted by it makes
such licensing or qualification necessary and where the failure to be so <PAGE>
qualified would, individually or in the aggregate, have a Material Adverse
Effect on UStel. UStel owns all of the outstanding capital stock of Newco.
UStel has previously delivered or made available to Arcada true and correct
copies, including all amendments thereto, of its Articles of Incorporation and
its bylaws (the "UStel Charter Documents") as in effect on the date hereof. As
used in this Agreement, the term "Material Adverse Effect" with respect to any
party shall mean any change or effect that is reasonably likely to be
materially adverse to the business, operations, properties, condition
(financial or otherwise), assets or liabilities of such party and such party's
subsidiaries taken as a whole.
(b) Except for Consortium 2000, Inc. ("C-2000") and Calmart
Communications, Inc. ("Calmart"), there is no firm, corporation, partnership,
joint venture or similar organization actively engaged in business which is
consolidated with UStel for financial reporting purposes or any corporation
actively engaged in business a majority of the outstanding capital stock of
which is owned by UStel. All of the issued and outstanding capital stock of
each of C-2000 and Calmart is owned by UStel. C-2000 is a corporation duly
organized, validly existing and in good standing under the laws of the State
of California. Calmart is a corporation duly organized, validly existing and
in good standing under the laws of the State of Nevada. Each of C-2000 and
Calmart has all requisite corporate power and authority to carry on its
business as currently conducted. Each of C-2000 and Calmart is duly licensed
or qualified to do business and is in good standing in each jurisdiction in
which the nature of the business conducted by it makes such licensing or
qualification necessary and where the failure to be so qualified would have a
Material Adverse Effect on UStel. Disclosure Schedule 4.l(b) correctly sets
forth a list of each firm, corporation, partnership, joint venture or similar
organization in which UStel has a direct or indirect equity interest.
4.2 AUTHORITY. UStel has full corporate power and authority to
execute and deliver this Agreement and the Plan of Merger and, subject to the
UStel Stockholder Approval and applicable regulatory approvals, to consummate
the transactions contemplated hereby and thereby. The execution and delivery
of this Agreement and the Plan of Merger and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
approved by the Board of Directors of UStel. This Agreement has been duly and
validly executed and delivered by UStel. Assuming the due authorization,
execution and delivery hereof by the other parties hereto, this Agreement
constitutes the valid and binding obligation of UStel, enforceable against it
in accordance with its respective terms.
4.3 NO VIOLATION. Neither the execution and delivery of this
Agreement or the Plan of Merger nor the consummation by UStel of the
transactions contemplated hereby and thereby, nor compliance by UStel with any
of the terms or provisions hereof or thereof, will (i) assuming UStel
Stockholder Approval, violate any provision of the UStel Charter Documents,
(ii) assuming the consents and approvals referred to in Section 7.1 hereof are
duly obtained, violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to UStel or any of its
subsidiaries or any of their respective properties or assets, or (iii) except
as set forth on Disclosure Schedule 4.3, violate, conflict with, result in a
breach of any provisions of, constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default) under, result in
the termination of, accelerate the performance required by, or result in the
creation of any lien, security interest, charge or other encumbrance upon any
of the properties or assets of UStel or any of its subsidiaries under any of
the terms, conditions or provisions of any note, bond, mortgage indenture,
deed of trust, license, lease, agreement or other instrument or obligation to
which UStel or any of its subsidiaries is a party, or by which it or any of
UStel's or its subsidiaries' respective properties or assets may be bound or
affected, except with respect to (iii) above, for such violations, conflicts,
breaches, defaults, termination's, accelerations and encumbrances which would
not individually or in the aggregate have a Material Adverse Effect on UStel.
4.4 CONSENTS AND APPROVALS. Except for (i) consents and approvals of
or filings, deliveries or registrations with the SEC or other applicable
governmental authorities, (ii) the approval of the stockholders of UStel and
(iii) the consents, approvals, filings or registrations set forth on
Disclosure Schedule 4.4, no consents or approvals of or filings or
registrations with any third party or public body or authority, except for
consents, approvals, filings or registrations where the failure to obtain such
consents or approvals or to make such filings or registrations would not
prevent or delay the Merger and would not in the aggregate have a Material
Adverse Effect on UStel, are necessary in connection with the execution and
delivery by UStel of this Agreement and the consummation of the transactions
contemplated hereby.
4.5 CAPITALIZATION. As of the date hereof, the authorized capital
stock of UStel consists of the following: 40,000,000 shares of UStel Common
Stock, of which 6,787,778 shares are dully authorized and validly issued and
outstanding, fully paid and non-assessable, with no personal liability
attaching to the ownership thereof, and 5,000,000 shares of preferred stock,
of which 275,000 shares are designated as Series A Preferred and are issued
and outstanding, fully paid and nonassessable with no personal liability
attaching to the ownership thereof. Assuming receipt of UStel Stockholder
Approval, (i) the shares of UStel Common Stock to be issued in the Merger,
when issued in accordance with the Plan of Merger and (ii) the shares of UStel
Common Stock to be issued upon conversion of the Convertible Debentures, when
issued in accordance with the terms and conditions of the Convertible
Debentures, will be duly authorized, validly issued and fully paid and
nonassessable, with no personal liability attaching to the ownership thereof,
and no stockholder of UStel will have any preemptive rights thereto. Upon
consummation of the Merger, the stockholders of Arcada will acquire valid
title to the Merger Shares, free and clear of any and all liens, claims,
encumbrances and restrictions on transfer other than those contemplated by
this Agreement. Except as provided in this Agreement or as set forth on
Disclosure Schedule 4.5 hereto, there are no outstanding subscriptions, <PAGE>
options, warrants, calls, commitments, agreements, understandings or
arrangements of any kind which call for or might require the transfer, sale,
delivery or issuance of any shares of UStel capital stock or other equity
securities or any securities representing the right to acquire stock or
securities convertible into or representing the right to purchase or subscribe
for any shares.
4.6 REPORTS. UStel and its subsidiaries have duly filed with the FCC
and the SEC in correct form in all material respects, the monthly, quarterly,
semi-annual and annual reports required to be filed by them under applicable
regulations for all periods subsequent to December 31, 1992. UStel has
previously delivered or made available to Arcada accurate and complete copies
of such reports. Except as disclosed on Disclosure Schedule 4.6, UStel has
timely filed all reports required to be filed by its pursuant to the
Securities Exchange Act and the rules and regulations promulgated by the SEC
thereunder an accurate and complete copy of each (i) final registration
statement, offering circular, and definitive proxy statement filed by UStel
since January 1, 1993, with the SEC and (ii) communication (other than general
advertising materials) mailed by UStel to its stockholders since January 1,
1993. No such SEC report, registration statement, offering circular, proxy
statement or communication, as of its date, contained any untrue statement of
a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.7 FINANCIAL STATEMENTS.
(a) UStel has previously delivered or made available to Arcada
copies of (i) audited consolidated statements of financial conditions for
UStel and its subsidiaries as of the end of UStel's last two fiscal years, and
audited consolidated statements of income, stockholders' equity, and cash
flows for each for the last two fiscal years, including the notes to such
audited consolidated financial statements, together with the reports of
UStel's independent certified public accountants, pertaining to such audited
consolidated financial statements (the "UStel 1995 and 1996 Financial
Statements," respectively), and (ii) the unaudited consolidated statement of
financial condition as of June 30, 1997 and the related unaudited consolidated
statements of income, stockholders' equity and cash flows for the six-month
period then ended (the "June 1997 UStel Financial Statements"). The UStel
1995 and 1996 Financial Statements and the UStel June 1997 Financial
Statements are sometimes herein referred to collectively as the UStel
Financial Statements. In addition, the parties acknowledge that UStel intends
to make a negative adjustment of up to $1,500,000 to its unaudited financial
statements for the nine months ended September 30, 1997 to reflect a write-off
of certain uncollectible accounts receivable of UStel (the "UStel Adjusted
Financials"). Pursuant to Section 6.17 hereof, UStel is obligated to deliver
to Arcada copies of the UStel Adjusted Financials. The UStel Financial
Statements (including the related notes) have been prepared in accordance with
GAAP consistently applied throughout the periods covered thereby. Other than
the write-off of the up to $1,500,000, the UStel Financial Statements
(including the related notes) fairly and accurately present in all material
respects the consolidated financial position of UStel as of the respective
dates set forth therein and the results of operations for the periods included
therein.
(b) The books and records of UStel and its subsidiaries have
been, and are being, maintained in accordance with applicable legal and
accounting requirements using generally accepted accounting principles
consistently applied in all material respects and reflect only actual
transactions.
4.8 BROKERAGE. Except for payments owed to BC Capital Corp., there
are no claims for investment banking fees, brokerage commissions, finder's
fees or similar compensation arising out of or due to any act of UStel or any
of its subsidiaries in connection with the transactions contemplated by this
Agreement.
4.9 ABSENCE OF MATERIAL ADVERSE CHANGE. Since December 31, 1996,
there has not been any Material Adverse Change with respect to UStel (except
for changes resulting from market and economic conditions which generally
affect the telecommunications industry as a whole including, without
limitation, changes in law or regulation, and changes in generally accepted
accounting principles or interpretations thereof.
4.10 LITIGATION. Except as set forth on Disclosure Schedule 4.10
hereto, no action, suit, counterclaim or other litigation, investigation or
preceding to which UStel or any of its subsidiaries is a party is pending, or
is known by the executive officers of UStel or any of its subsidiaries to be
threatened, against UStel or any of its subsidiaries before any court or
governmental or administrative agency, domestic or foreign which would be
reasonably expected to result in any liabilities which would, in the
aggregate, have a Material Adverse Effect on UStel. Except as set forth on
Disclosure Schedule 4.10 hereto, neither UStel nor any of its subsidiaries is
in default with respect to any orders, judgments or decrees that would in the
aggregate require payment of more than $10,000.
4.11 COMPLIANCE WITH APPLICABLE LAW.
(a) Each of UStel and its subsidiaries holds all licenses,
certificates, franchises, permits and other governmental authorizations
("Permits") necessary for the lawful conduct of their respective businesses
and such Permits are in full force and effect, and each of UStel and its
subsidiaries is in all material respects complying therewith, except in each
case where the failure to possess or comply with such Permits would not have a
Material Adverse Effect on UStel.
(b) Except as set forth on Disclosure Schedule 4.11(b), each of
UStel and its subsidiaries is and since January 1, 1994 has been in compliance
with all foreign, federal, state and local laws, statutes, ordinances, rules, <PAGE>
regulations and orders applicable to the operation, conduct or ownership of
its business or properties except for any noncompliance which has not and will
not have in the aggregate a Material Adverse Effect on UStel.
(c) UStel is in compliance with all of the quantitative and
qualitative maintenance criteria required for continued listing of the UStel
Common Stock on The Nasdaq SmallCap Market, and UStel has not received notice
of, and is not aware of, any deficiency relating to listing of the UStel
Common Stock or any action for delisting of the UStel Common Stock.
4.12 TAX MATTERS.
(a) Neither UStel nor any of its affiliates or subsidiaries has
any plan or intention of taking any action prior to, at or after the Effective
Time or of permitting Arcada to take any action after the Effective Time,
including any transfer or other disposition of any assets of or any interest
in Arcada, that would cause the Merger to fail to qualify as a reorganization
within the meaning of Section 368(a) of the Code.
(b) Neither UStel nor any of its affiliates or subsidiaries has
any plan or intention to acquire or reacquire, as the case may be, any of the
shares of UStel Common Stock to be issued as contemplated by this Agreement
(c) UStel has no plan or intention to sell or otherwise dispose
of any of the assets of Arcada acquired in the Merger, except for dispositions
made in the ordinary course of business or transfers described in Section
368(a) of the Code.
(d) UStel is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
4.13 USTEL INFORMATION. The information relating to UStel to be
contained in the Proxy Statement/Prospectus will not, at the time it is filed
with the applicable governmental authorities, as of the date thereof, or at
the date actions of UStel stockholders are taken with respect to the
transactions contemplated therein, contain any untrue statement of a material
fact or omit to state a material fact necessary to make such statements, in
light of the circumstances under which such statements were made, not
misleading.
5. REPRESENTATIONS OF ARCADA.
The "Arcada Disclosure Schedules" shall mean all of the disclosure
schedules required by this Agreement, dated as of the date hereof, which are
attached hereto. Arcada hereby represents and warrants to each of UStel and
Newco as follows:
5.1 ORGANIZATION, POWER, GOOD STANDING, ETC.
(a) Arcada is a corporation duly organized, validly existing and
in good standing under the laws of the State of Washington. Arcada has all the
requisite corporate power and authority to own, lease and operate all of its
properties and assets and to carry on its business as currently conducted.
Arcada is duly licensed or qualified to do business and is in good standing in
each jurisdiction in which the nature of the business conducted by it makes
such licensing or qualification necessary and where the failure to be so
qualified would, individually or in the aggregate, have a Material Adverse
Effect on Arcada. Arcada has previously delivered or made available to UStel
true and correct copies, including all amendments thereto, of its Articles of
Incorporation and its bylaws (the "Arcada Charter Documents") as in effect on
the date hereof.
(b) There is no firm, corporation, partnership, joint venture or
similar organization which is consolidated with Arcada for financial reporting
purposes or any corporation a majority of the outstanding capital stock of
which is owned by Arcada. Disclosure Schedule 5.l(b) correctly sets forth a
list of each firm, corporation, partnership, joint venture or similar
organization in which Arcada has a direct or indirect equity interest.
(c) The minute books of Arcada and its subsidiaries contain
materially complete and accurate records of all meetings held and other
corporate action taken, since their respective dates of organization, by their
respective stockholders and Boards of Directors.
(d) Arcada has previously delivered or made available for
inspection by UStel true and complete copies of all agreements to which it or
its subsidiaries is a party or by which its or any of its subsidiaries' assets
may be bound (i) which relate to any ownership interest by Arcada of an equity
interest in any partnership, joint venture, or similar enterprise or (ii)
pursuant to which Arcada may be required to transfer funds in respect of an
equity interest to, make an investment in, or guarantee or assume any debt,
dividend or other obligation of, any person or entity, partnership, joint
venture or similar enterprise. Disclosure Schedule 5.l(d) correctly sets
forth a list of all such agreements.
5.2 CAPITALIZATION.
(a) The authorized capital stock of Arcada consists of 50,000
shares of Arcada Common Stock, all of which shares are issued and outstanding
as of the date hereof. Disclosure Schedule 5.2(a) sets forth the identity of
the Arcada stockholders and the amount of stock owned by such stockholders.
(b) Except as set forth on Disclosure Schedule 5.2(b), Arcada
has not in the past two years repurchased or retired any shares of its capital
stock.
(c) All of the issued and outstanding shares of Arcada Common
Stock have been duly authorized, validly issued, and are fully paid and
non-assessable, with no personal liability attaching to the ownership <PAGE>
thereof.
(d) Except as set forth on Disclosure Schedule 5.2(d), Arcada is
not bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the transfer, purchase,
or issuance of any shares of its capital stock or any securities representing
the right to purchase or otherwise receive any shares of its capital stock or
any securities convertible into or representing the right to purchase or
subscribe for any such shares, and there are no agreements or understandings
to which Arcada is a party with respect to voting any such shares.
(e) Except as set forth on Disclosure Schedule 5.2(e), to the
best of Arcada's knowledge, there are no outstanding subscriptions, options,
warrants, calls, commitments or agreements of any character calling for the
transfer, purchase, or issuance of any shares of its capital stock or any
securities representing the right to purchase or otherwise receive any shares
of its capital stock or any securities convertible into or representing the
right to purchase or subscribe for any such shares, and there are no
agreements or understandings to which Arcada is a party with respect to voting
any such shares.
5.3 REPORTS. Arcada has previously delivered or made available to
UStel an accurate and complete copy of all reports or other material
communications delivered by Arcada to its stockholders since January 1, 1993
and no such report or communication, as of its date, contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
5.4 AUTHORITY. Arcada has full corporate power and authority to
execute and deliver this Agreement and the Plan of Merger and, subject to the
Arcada Stockholder Approval and applicable regulatory approvals, to consummate
the transactions contemplated hereby and thereby. The execution and delivery
of this Agreement and the Plan of Merger and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
approved by the Board of Directors of Arcada. This Agreement has been duly
and validly executed and delivered by Arcada. Assuming the due authorization,
execution and delivery hereof by the other parties hereto, this Agreement
constitutes the valid and binding obligation of Arcada, enforceable against it
in accordance with its respective terms.
5.5 NO VIOLATION. Neither the execution and delivery of this
Agreement or the Plan of Merger nor the consummation by Arcada of the
transactions contemplated hereby and thereby, nor compliance by Arcada with
any of the terms or provisions hereof or thereof, will (i) assuming Arcada
Stockholder Approval, violate any provision of the Arcada Charter Documents,
(ii) assuming the consents and approvals referred to in Section 7 hereof are
duly obtained, violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to Arcada or its
subsidiaries or any of its or its subsidiaries' properties or assets, or (iii)
except as set forth on Disclosure Schedule 5.5, violate, conflict with, result
in a breach of any provisions of, constitute a default (or an event which,
with notice or lapse of time, or both, would constitute a default) under,
result in the termination of, accelerate the performance required by, or
result in the creation of any lien, security interest, charge or other
encumbrance upon any of the properties or assets of Arcada or its subsidiaries
under any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which Arcada or any of its subsidiaries is a party, or by which
its or any of its subsidiaries' properties or assets may be bound or affected,
except with respect to (iii) above, for such violations, conflicts, breaches,
defaults, termination's, accelerations and encumbrances which would not
individually or in the aggregate have a Material Adverse Effect on Arcada.
5.6 CONSENTS AND APPROVALS. Except for (i) consents and approvals of
or filings, deliveries or registrations with the SEC or other applicable
governmental authorities, (ii) the Arcada Stockholder Approval and (iii) the
consents, approvals, filings or registrations set forth on Disclosure Schedule
5.6, no consents or approvals of or filings or registrations with any third
party or public body or authority, except for consents, approvals, filings or
registrations where the failure to obtain such consents or approvals or to
make such filings or registrations would not prevent or delay the Merger and
would not in the aggregate have a Material Adverse Effect on Arcada, are
necessary in connection with the execution and delivery by Arcada of this
Agreement and the consummation of the transactions contemplated hereby.
5.7 FINANCIAL STATEMENTS.
(a) Arcada has previously delivered or made available to UStel
copies of (i) audited consolidated statements of financial conditions for
Arcada and its subsidiaries as of the end of Arcada's last two fiscal years,
and audited consolidated statements of income, stockholders' equity, and cash
flows for each for the last two fiscal years, including the notes to such
audited consolidated financial statements, together with the reports of
Arcada's independent certified public accountants, pertaining to such audited
consolidated financial statements (the "Arcada 1995 and 1996 Financial
Statements," respectively), and (ii) the unaudited consolidated statement of
financial condition as of June 30, 1997 and the related unaudited consolidated
statements of income, stockholders' equity and cash flows for the six-month
period then ended (the "June 1997 Arcada Financial Statements"). The Arcada
1995 and 1996 Financial Statements and the Arcada June 1997 Financial
Statements are sometimes herein referred to collectively as the Arcada
Financial Statements. The Arcada Financial Statements (including the related
notes) have been prepared in accordance with GAAP consistently applied
throughout the periods covered thereby, and fairly and accurately present in
all material respects the consolidated financial position of Arcada as of the
respective dates set forth therein and the results of operations for the
periods included therein.
<PAGE>
(b) The books and records of Arcada have been, and are being,
maintained in accordance with applicable legal and accounting requirements and
reflect only actual transactions.
5.8 BROKERAGE. There are no claims for investment banking fees,
brokerage commissions, finder's fees or similar compensation arising out of or
due to any act of Arcada in connection with the transactions contemplated by
this Agreement.
5.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. As of the date hereof,
except as disclosed on Disclosure Schedule 5.9, there has not been any
material adverse change in the business, operations, properties, assets or
financial condition of Arcada or any of its subsidiaries since December 31,
1996, and, to the best of Arcada's knowledge, no fact or condition exists as
of the date hereof that Arcada has reason to believe would cause such a
material adverse change after the date hereof.
5.10 LITIGATION. As of the date hereof, except as disclosed on
Disclosure Schedule 5.10, there were no actions, suits, claims, inquiries,
proceedings or, to the knowledge of Arcada, investigations before any court,
commission, bureau, regulatory, administrative or governmental agency,
arbitrator, body or authority pending or, to the knowledge of Arcada,
threatened against Arcada which would reasonably be expected to result in any
liabilities, including defense costs, in excess of $10,000 in the aggregate.
Except as disclosed on Disclosure Schedule 5.10, Arcada is not subject to any
order, judgment or decree and Arcada is not in default with respect to any
such order, judgment or decree.
5.11 TAXES AND TAX RETURNS.
(a) Arcada is now and at all time since its incorporation has
been a corporation taxable pursuant to Subchapter S of the Code (an "S
Corporation"), and not as a corporation taxable pursuant to Subchapter C of
the Code, by reason of a valid election to be taxed as an S Corporation by
virtue of filing Internal Revenue Service Form 2553 (or its successor form)
with the required shareholder consents. No action has been taken by Arcada or
any present or past shareholder and no event has occurred which would cause
Arcada's election to be taxed as an "S Corporation" to be revoked or
terminated at any time in the future. Arcada has previously delivered or made
available to UStel complete and correct copies of the income tax returns of
Arcada and its consolidated companies for the fiscal year ending December 31,
1995, as filed with the Internal Revenue Service and all state, county and
local taxing authorities, together with all related correspondence and
notices. Arcada undertakes to make available to UStel complete and correct
copies of the income tax returns of Arcada and its consolidated companies for
the fiscal year ending December 31, 1996, as soon as it has been prepared and
filed with the Internal Revenue Service, which is expected to be filed in
September 1997.
(b) Except as disclosed on Disclosure Schedule 5.11, Arcada has
timely and correctly filed all federal, state, county and local tax and other
returns and reports (collectively, "Returns") required by applicable law to be
filed (including, without limitation, estimated tax returns, income tax
returns, excise tax returns, sales tax returns, use tax returns, property tax
returns, franchise tax returns, information returns and withholding,
employment and payroll tax returns), except to the extent that the failure to
timely or correctly file such Returns does not result in aggregate penalties
or assessments of more than $25,000, and has paid all taxes, levies, license
and registration fees, charges or withholdings of any nature whatsoever shown
by such Returns to be owed, or which are otherwise due and payable
(hereinafter called "Taxes"). Arcada is not in default in the payment of any
Taxes due or payable or any assessments received in respect thereof except for
Taxes which are being contested in good faith. No additional assessments of
Taxes are known to Arcada to be proposed, pending or threatened, other than
Taxes for periods for which returns are not yet filed.
(c) Arcada has not filed a consent to the application of Section
341(f) of the Code.
5.12 EMPLOYEES; EMPLOYEE BENEFIT PLANS.
(a) Except as set forth on Disclosure Schedule 5.12(a), as of
the date hereof, Arcada is not a party to or bound by any contract,
arrangement or understanding (whether written or oral) with respect to the
employment or compensation of any officers, employees or consultants and
except as provided herein, and under those Benefit Plans (as defined below)
set forth on Disclosure Schedule 5.12(a), consummation of the transactions
contemplated by this Agreement will not (either alone or upon the occurrence
of any additional acts or events) result in any payment (whether of severance
pay or otherwise) becoming due from Arcada to any officer or employee thereof.
Arcada has previously delivered or made available to UStel true and complete
copies of all employment, consulting and deferred compensation agreements that
are in writing, to which Arcada is a party. Disclosure Schedule 5.l2(a)
correctly sets forth a list of all such agreements.
(b) Except as set forth on Disclosure Schedule 5.12(b), as of
the date hereof, no officer or employee of Arcada is receiving aggregate
remuneration bonus, salary and commissions) at a rate which, if annualized,
would exceed $80,000 in 1997.
(c) Except as disclosed on Disclosure Schedule 5.12(c), as of
the date hereof, there are not, and have not been at any time in the past
three years, any actions, suits, claims or proceedings before any court (which
have been served on Arcada), commission, bureau, regulatory, administrative or
governmental agency, arbitrator, body or authority pending or, to the best of
Arcada's knowledge, threatened by any employees, former employees or other
persons relating to the employment practices or activities of Arcada (except
for threatened actions which have subsequently been resolved). Arcada is not
a party to any collective bargaining agreement, and no union organization <PAGE>
efforts are pending or, to the best of Arcada's knowledge, threatened nor have
any occurred during the last three years.
(d) Arcada has made available to UStel true and complete copies
of all personnel codes, practices, procedures, policies, manuals, affirmative
action programs and similar materials.
(e) With respect to all employee benefit plans, Arcada
represents and warrants as follows:
(i) All employee benefit plans, as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and any other
pension, bonus, deferred compensation, stock bonus, stock purchase,
post-retirement medical, hospitalization, health and other employee benefit
plan, program or arrangement, whether formal or informal, under which Arcada
has any obligation or liability, or under which any employee or former
employee has any rights to benefits or any 'cafeteria plans,' as described in
Section 125 of the Code (together, the "Benefit Plans") are set forth on
Disclosure Schedule 5.12(e)(i). Except as set forth on Disclosure Schedule
5.12(e)(i), none of the Benefit Plans is subject to Title IV of ERISA, is a
multiemployer plan, as such term is defined in Section 3(37) and 4001(a)(3) of
ERISA and Section 414(f) of the Code, or is subject to the funding
requirements of Section 412 of the Code or Title I, Subtitle B, Part 3 of
ERISA.
(ii) In all material respects, except as discussed on Disclosure Schedule
5.12(e)(ii), the terms of the Benefit Plans are, and the Benefit Plans have
been administered, in accordance with the requirements of ERISA, the Code,
applicable law and the respective plan documents. Except as disclosed on
Disclosure Schedule 5.12(e)(ii), none of the Benefit Plans is under audit or
is the subject of an investigation by the Internal Revenue Service, the U.S.
Department of Labor or any other federal or state governmental agency. Except
as disclosed on Disclosure Schedule 5.12(e)(ii), all material reports and
information required to be filed with, or provided to, the United States
Department of Labor, the Internal Revenue Service, the Pension Benefit
Guaranty Corporation (the "PBGC") and plan participants and beneficiaries with
respect to each Benefit Plan have been timely filed or provided. With respect
to each Benefit Plan for which an annual report has been filed, no material
change has occurred with respect to the matters covered by the most recent
annual report since the date thereof.
(iii) Arcada is not aware of any facts regarding any Benefit Plan which is
a 'employee pension benefit plan' as defined in Section 3(2) of ERISA
(collectively, the "Employee Pension Benefit Plans") that would present a
significant risk that any Employee Pension Benefit Plan would not be
determined by the appropriate District Director of the Internal Revenue
Service to be 'qualified' within the meaning of Section 401(a) of the Code, or
with respect to which any trust maintained pursuant thereto is not exempt from
federal income taxation pursuant to Section 501 of the Code, or with respect
to which a favorable determination letter could not be issued by the Internal
Revenue Service with respect to each such Employee Pension Benefit Plan.
(iv) Prior to the Closing, Arcada shall deliver or make available to UStel
complete and correct copies (if any) of (w) the most recent Internal Revenue
Service determination letter relating to each Employee Pension Benefit Plan
intended to be tax qualified under Section 401(a) and 501(a) of the Code, (x)
the most recent annual report (Form 5500 Series) and accompanying schedules of
each Benefit Plan, filed with the Internal Revenue Service or an explanation
of why such annual report is not required, (y) the most current summary plan
description for each Benefit Plan, and (z) the most recent audited financial
statements of each Benefit Plan.
(v) With respect to each Benefit Plan, all contributions, premiums or
other payments due or required to be made to such plans as of the Effective
Time have been or will be made or accrued prior to the Effective Time.
(vi) To the best of Arcada's knowledge, there are not now, nor have there
been, any "prohibited transactions," as such term is defined in Section 4975
of the Code or Section 406 of ERISA, involving Arcada or any of its
subsidiaries, or any officer, director or employee of Arcada or any of its
subsidiaries, with respect to the Benefit Plans that could subject Arcada or
any other party-in-interest to the penalty or tax imposed under Section 502(i)
of ERISA and Section 4975 of the Code.
(vii) As of the date hereof, no claim, lawsuit, arbitration or other
action has been instituted, asserted (and no such lawsuit has been served on
Arcada) or, to the best of Arcada's knowledge, threatened by or on behalf of
such Benefit Plan or by any employee alleging a breach or breaches of
fiduciary duty or violations of other applicable state or federal law with
respect to such Benefit Plans, which could result in liability on the part of
Arcada or any of its subsidiaries or a Benefit Plan under ERISA or any other
law, nor is there any known basis for successful prosecution of such a claim,
and UStel will be notified promptly in writing of any such threatened or
pending claim arising between the date hereof and the Closing.
(viii) Except as may be required by the Consolidated Omnibus Budget and
Reconciliation Act of 1985, as amended ("COBRA"), no Benefit Plan which is an
employee welfare benefit plan (within the meaning of Section 3(1) of ERISA)
provides for continuing benefits or coverage for any participant or
beneficiary of a participant after such participant's termination of
employment nor does Arcada have any current or projected liability under any
such plans.
(ix) Arcada has not maintained or contributed to, and does not currently
maintain or contribute to, any severance pay plan. All payments (other than
regular wages and vacation pay) made to employees of Arcada coincident with or
in connection with termination of employment since January 1, 1994 are
disclosed on Disclosure Schedule 5.12(e)(ix).
<PAGE>
(x) No individual will accrue or receive any additional benefits, service,
or accelerated rights to payment or vesting of benefits under any Benefit
Plan, or otherwise obtain rights to any "parachute payment," as defined in
Section 280G(b)(2) of the Code, as a result of the transactions contemplated
by this Agreement.
(xi) Arcada has complied in all material respects with all of the
requirements of COBRA.
5.13 ARCADA INFORMATION. The information relating to Arcada to be
contained in the Proxy Statement/Prospectus will not, at the time it is filed
with the applicable governmental authorities, as of the date thereof, or at
the date actions of UStel stockholders are taken with respect to the
transactions contemplated therein, contain any untrue statement of a material
fact or omit to state a material fact necessary to make such statements, in
light of the circumstances under which such statements were made, not
misleading.
5.14 COMPLIANCE WITH APPLICABLE LAW.
(a) Except as set forth on Disclosure Schedule 5.14(a), each of
Arcada and its subsidiaries holds all Permits necessary for the lawful conduct
of its businesses and such Permits are in full force and effect, and Arcada is
in all material respects complying therewith, except where the failure to
possess or comply with such Permits would not have in the aggregate a Material
Adverse Effect on Arcada.
(b) Except as set forth on Disclosure Schedule 5.14(b), each of
Arcada and its subsidiaries is and for the past three years has been in
compliance with all foreign, federal, state and local laws, statutes,
ordinances, rules, regulations and orders applicable to the operation, conduct
or ownership of its business or properties except for any noncompliance which
is not reasonably likely to have in the aggregate a Material Adverse Effect on
Arcada.
5.15 CONTRACTS AND AGREEMENTS. As of the date hereof, except as
disclosed on Disclosure Schedule 5.15, (i) Arcada is not a party to or bound
by any commitment, contract, agreement or other instrument which involves or
could involve aggregate future payments by Arcada of more than $25,000, (ii)
Arcada is not a party to nor was it bound by any commitment, contract,
agreement or other instrument which is material to the business, operations,
properties, assets or financial condition of Arcada and (iii) no commitment,
contract, agreement or other instrument, other than Arcada's Charter
Documents, to which Arcada is a party or by which Arcada is bound, limits the
freedom of Arcada to compete in any line of business or with any person. The
commitments, contracts, agreements or other instruments listed on Disclosure
Schedule 5.15 (the "Material Contracts") are valid and binding obligations and
Arcada is not in default therewith, except as listed on Disclosure Schedule
5.15 and except where any such defaults are not reasonably likely to have in
the aggregate a Material Adverse Effect on Arcada.
5.16 AFFILIATE TRANSACTIONS.
(a) Except as disclosed on Disclosure Schedule 5.16, and except
as specifically contemplated by this Agreement, since December 31, 1996,
Arcada has not engaged in, and is not currently obligated to engage in
(whether in writing or orally), any transaction with any Affiliated Person (as
defined below) involving aggregate payments by or to Arcada of $25,000 or more
during any consecutive 12 month period.
(b) For purposes of this Section 5.16, "Affiliated Person"
means:
(i) a director, executive officer or Controlling Person (as
defined below) of Arcada;
(ii) a spouse of a director, executive officer or Controlling Person of
Arcada;
(iii) a member of the immediate family of a director, executive officer,
or Controlling Person of Arcada who has the same home as such person;
(iv) any corporation or organization (other than Arcada) of which a
director, executive officer or Controlling Person of Arcada is a chief
executive officer, chief financial officer, or a person performing similar
functions or is a Controlling Person of such other corporation or
organization.
(v) any trust or estate in which a director, executive officer, or
Controlling Person of Arcada or the spouse of such person has a substantial
beneficial interest or as to which such person or his spouse serves as trustee
or in a similar fiduciary capacity.
(c) For purposes of this Section 5.16, "Controlling Person"
means any person or entity which, either directly or indirectly, or acting in
concert with one or more other persons or entities owns, controls or holds
with power to vote, or holds proxies representing ten percent or more of the
outstanding common stock or equity securities.
5.17 DISCLOSURE. To the knowledge of Arcada, no representation or
warranty of Arcada contained in this Agreement, and no statement contained in
the Disclosure Schedules delivered by Arcada hereunder, contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make a statement herein or therein, in light of the circumstances
under which it was made, not misleading.
5.18 TITLE TO PROPERTY.
<PAGE>
(a) REAL PROPERTY. Disclosure Schedule 5.18(a) contains a true
and correct description of all interests in real property (other than real
property security interests received in the ordinary course of business),
whether owned, leased or otherwise claimed, including a list of all leases of
real property, in which Arcada has or claims an interest as of the date
hereof and any guarantees of any such leases by Arcada. True and complete
copies of such leases have previously been delivered or made available to
UStel, together with all amendments, modifications, agreements or other
writings related thereto. Except as disclosed on Disclosure Schedule 5.18(a),
each such lease is legal, valid and binding as between Arcada and the other
party or parties thereto, and the occupant is a tenant or possessor in good
standing thereunder, free of any default or breach whatsoever and quietly
enjoys the premises provided for therein. Except as disclosed on Disclosure
Schedule 5.18(a), Arcada has good, valid and marketable title to all real
property owned by it on the date hereof, free and clear of all mortgages,
liens, pledges, charges or encumbrances of any nature whatsoever, except liens
for current taxes not yet due and payable, and such encumbrances and
imperfections of title, if any, as do not materially detract from the value of
the properties and do not materially interfere with the present or proposed
use of such properties or otherwise materially impair such operations. All
real property and fixtures material to the business, operations or financial
condition of Arcada are in substantially good condition and repair.
(b) ENVIRONMENTAL MATTERS. Except as set forth on Disclosure
Schedule 5.18(b), to the knowledge of Arcada, the real property owned or
leased by Arcada on the date hereof does not contain any underground storage
tanks, asbestos, ureaformaldehyde, uncontained polychlorinated biphenyls, or,
except for materials which are ordinarily used in office buildings and office
equipment such as janitorial supplies and do not give rise to financial
liability therefor under the hereafter defined Environmental Laws, releases of
hazardous substances as such terms may be defined by all applicable federal,
state or local environmental protection laws and regulations ("Environmental
Laws"). As of the date hereof (i) no part of any such real property has been
listed, or to the knowledge of Arcada, proposed for listing on the National
Priorities List pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") or on a registry or inventory of
inactive hazardous waste sites maintained by any state, and, (ii) except as
set forth on Disclosure Schedule 5.18(b), no notices have been received
alleging that Arcada or any of its subsidiaries was a potentially responsible
person under CERCLA or any similar statute, rule or regulation. Arcada knows
of no violation of law, regulation, ordinance (including, without limitation,
laws, regulations and ordinances with respect to hazardous waste, zoning,
environmental, city planning or other similar matters) relating to its
properties, which violations could have in the aggregate a Materially Adverse
Effect on Arcada.
(c) PERSONAL PROPERTY. Disclosure Schedule 5.18(c) contains a
true and correct list of (i) each item of machinery, equipment, or furniture,
including without limitation computers and vehicles, of Arcada, included on
the Arcada 1996 Financial Statements at a carrying value of, or, if acquired
after December 31, 1996, for a purchase price of, more than $50,000, (ii) each
lease or other agreement under which any such item of personal property is
leased, rented, held or operated where the current fair market value of such
item is more than $25,000 and (iii) all trademarks, trade names or service
marks and other intangible property currently used, owned, or registered for
use by Arcada. Except as disclosed on Disclosure Schedule 5,18(c), Arcada has
good, valid and marketable title to all personal property owned by it, free
and clear of all liens, pledges, charges or encumbrances of any nature
whatsoever.
5.19 INSURANCE. Disclosure Schedule 5.19 contains a true and
complete list and a brief description (including name of insurer, agent,
coverage and expiration date) of all insurance policies in force on the date
hereof with respect to the business and assets of Arcada. Arcada and each of
its subsidiaries is in compliance with all of the material provisions of its
insurance policies and are not in default under any of the terms thereof.
Each such policy is outstanding and in full force and effect and, except as
set forth on Disclosure Schedule 5.19, Arcada or one of its subsidiaries is
the sole beneficiary of such policies. All premiums and other payments due
under any such policy have been paid or arrangements for payment are being
made. Arcada has previously delivered to, or made available for inspection
by, UStel each insurance policy to which Arcada or any of its subsidiaries is
a party (other than insurance policies under which Arcada is named as a loss
payee or additional insured as a result of its position as a secured lender).
5.20 POWERS OF ATTORNEY. Arcada does not have any powers of attorney
outstanding other than those in the ordinary course of business with respect
to routine matters.
5.21 BANK ACCOUNTS, ETC. Set forth on Disclosure Schedule 5.21
hereto is a true and complete list of all bank accounts, safe deposit boxes
and lock boxes of Arcada and each of its subsidiaries, including, with respect
to each such account and lock box: (a) identification of all authorized
signatories, (b) identification of the business purpose of such account or
lock box, including identification of any accounts or lock boxes representing
escrow funds or otherwise subject to restriction; and (c) identification of
the amount on deposit as of June 30, 1997.
6. COVENANTS OF THE PARTIES.
6.1 CONDUCT OF THE BUSINESS OF ARCADA. During the period from the
date of this Agreement to the Effective Time, Arcada will conduct the business
of and will engage in transactions only in the ordinary course and consistent
with past practice and with prudent business practice. During such period,
Arcada will use its best efforts to (x) preserve the business organizations of
Arcada intact, (y) keep available to Arcada the present services of the
employees of Arcada, and (z) preserve for itself the goodwill of the customers
of Arcada and others with whom business relationships exist. In addition,
without limiting the generality of the foregoing, Arcada agrees that from the <PAGE>
date hereof to the Effective Time, except as otherwise consented to or
approved by UStel in writing (which consent or approval shall not be
unreasonably withheld, delayed or conditioned) or as permitted or required by
this Agreement or as required by law, Arcada will not:
(a) change any provisions of the Arcada Charter Documents or any
similar governing documents of Arcada;
(b) change the number of shares of its authorized or issued
capital stock or issue, grant or amend any option, warrant, call, commitment,
subscription, right to purchase or agreement of any character relating to the
authorized or issued capital stock of Arcada, or any securities convertible
into shares of such stock, or split, combine or reclassify any shares of its
capital stock, or declare, set aside or pay any dividend, or other
distributions (whether in cash, stock or property or any combination thereof)
in respect of the capital stock of Arcada, or redeem or otherwise acquire any
shares of such capital stock;
(c) grant any severance or termination pay to or enter into or
amend any employment agreement with, or increase the amount of payments or
fees to, any of its employees, officers or directors other than salary
increases to employees consistent with past increases;
(d) make any capital expenditures in excess of (i) $25,000 per
project or related series of projects or (ii) $200,000 in the aggregate, other
than pursuant to binding commitments existing on the date hereof and
expenditures necessary to maintain existing assets in good repair;
(e) change in any material manner its pricing policies or any
other material business or customer policies;
(f) guarantee the obligations of any other persons except in the
ordinary course of business consistent with past practice;
(g) acquire assets other than those necessary in the conduct of
its business in the ordinary course;
(h) sell, transfer, assign, encumber or otherwise dispose of
assets other than has been customary in its ordinary course of business;
(i) enter into or amend or terminate any long-term (one-year or
more) contracts (including real property leases) except for contracts which
are in the ordinary course of business consistent with past practice
(j) enter into or amend any contract that calls for the payment
by Arcada of $25,000 or more after the date of this Agreement or for a term
exceeding one year that cannot be terminated on not more than 30 days' notice
without cause and without payment or loss of any material amount as a penalty,
bonus, premium or other compensation for termination;
(k) engage or participate in any material transaction or incur
or sustain any material obligation otherwise than in the ordinary course of
business consistent with past practices;
(l) make any contributions to any Benefit Plans except in such
amounts and at such times as consistent with past practice;
(m) increase the number of full time equivalent employees of
Arcada above the current number;
(n) acquire any real property except after having followed
reasonable procedures with respect to the investigation of potential
environmental problems, which procedures have been approved in writing by
UStel (which approval shall not be unreasonably withheld, delayed or
conditioned); or
(o) agree to do any of the foregoing.
6.2 NO SOLICITATION. Neither Arcada nor any of its directors,
officers, shareholders' representatives, agents or other persons controlled by
any of them, shall, directly or indirectly encourage or solicit, or hold
discussions or negotiations with, or provide any information to, any person,
entity or group other than UStel concerning any merger, sale of substantial
assets not in the ordinary course of business, sale of shares of capital stock
or similar transactions involving Arcada. Arcada will communicate within 24
hours to UStel the terms of any proposal that it may receive in respect of any
such transaction.
6.3 CURRENT INFORMATION. No later than ten days after the date of
this Agreement, UStel and Arcada shall each designate an individual acceptable
to the other party (a "Designated Representative" and, together, the
"Designated Representatives") to be the primary point of contact between the
parties. During the period from the date of their designation to the Closing,
the Designated Representatives or their representatives shall confer on a
regular basis so that each party is kept advised as to the general status of
the ongoing operations of the other party. Without limiting the foregoing,
each party agrees to confer with the other's Designated Representative
regarding any proposed significant changes to the other's management policies
and objectives. Each party agrees to provide access to members of the other's
acquisition team and to work with them in order to plan, prepare for and
facilitate the coordination of the parties' (i) accounting, billing and other
data processing systems, (ii) billing structure and (iii) sales and marketing
systems and structures with each other as well as other matters arising from
the Merger. Each party will promptly notify the other's Designated
Representative or his or her representatives of any material change in the
normal course of business or in the operation of the properties of such
property or of any governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated) or the
institution or the threat of any litigation involving such party, and have <PAGE>
kept and will keep the other's Designated Representative or his or her
representatives fully informed of such events and the progress of any already
existing litigation. Without limiting the foregoing, each party shall
immediately notify the other's Designated Representative if it appears that
there has occurred any change in its financial or other condition or any other
event that will or may affect such party's ability to complete the Merger or
have a Material Adverse Effect on such party.
6.4 ACCESS TO PROPERTIES AND RECORDS CONFIDENTIALITY.
(a) Arcada shall permit UStel reasonable access to its
properties, and shall disclose and make available to Arcada all books, papers
and records relating to the assets, stock, ownership, properties, obligations,
operations and liabilities of Arcada, including but not limited to, all books
of account (including the general ledger), tax records, minute books of
directors and stockholders meetings, organizational documents, bylaws,
material contracts and agreements, filings with any regulatory authority,
accountants work papers, litigation files, plans affecting employees, and any
other business activities or prospects in which UStel may have a reasonable
interest, in each case during normal business hours and upon reasonable
notice. Arcada shall not be required to provide access to or disclose
information where such access or disclosure would jeopardize the
attorney-client privilege of Arcada or would contravene any law, rule,
regulation, order, judgment, decree or binding agreement entered into prior to
the date hereof. The parties will use all reasonable efforts to make
appropriate substitute disclosure arrangements under circumstances in which
the restrictions of the preceding sentence apply.
(b) UStel shall permit Arcada reasonable access to its
properties, and shall disclose and make available to Arcada all books, papers
and records relating to the assets, stock, ownership, properties, obligations,
operations and liabilities of UStel, including but not limited to, all books
of account (including the general ledger), tax records, minute books of
directors and stockholders meetings, organizational documents, bylaws,
material contracts and agreements, filings with any regulatory authority,
accountants work papers, litigation files, plans affecting employees, and any
other business activities or prospects in which Arcada may have a reasonable
interest, in each case during normal business hours and upon reasonable
notice. UStel shall not be required to provide access to or disclose
information where such access or disclosure would jeopardize the
attorney-client privilege of UStel or would contravene any law, rule,
regulation, order, judgment, decree or binding agreement entered into prior to
the date hereof. The parties will use all reasonable efforts to make
appropriate substitute disclosure arrangements under circumstances in which
the restrictions of the preceding sentence apply.
(c) All information furnished by UStel to Arcada or the
representatives or affiliates of either pursuant to, or in any negotiation in
connection with, this Agreement shall be treated as the sole property of UStel
until consummation of the Merger and, if the Merger shall not occur, Arcada
and their affiliates, agents and advisers shall upon written request return to
UStel, all documents or other materials containing, reflecting, referring to
such information, and shall keep confidential all such information and shall
not disclose or use such information for competitive purposes. The obligation
to keep such information confidential shall not apply to (i) any information
which (w) Arcada can establish by evidence was already in its possession
(subject to no obligations of confidentiality) prior to the disclosure thereof
by UStel; (x) was then generally known to the public; (y) becomes known to the
public other than as a result of actions by Arcada or by the directors,
officers or employees or agents of either; or (z) was disclosed to Arcada, or
to the directors, officers or employees of either, solely by a third party not
bound by any obligation of confidentiality; or (ii) disclosure in accordance
with the federal securities laws, or pursuant to an order of a court or agency
of competent jurisdiction.
(d) All information furnished by Arcada to UStel or the
representatives or affiliates of UStel pursuant to, or in any negotiation in
connection with, this Agreement shall be treated as the sole property of
Arcada until consummation of the Merger and, if the Merger shall not occur,
UStel and its affiliates, agents and advisors shall upon written request
return to Arcada, all documents or other materials containing, reflecting,
referring to such information, and shall keep confidential all such
information and shall not disclose or use such information for competitive
purposes. The obligation to keep such information confidential shall not
apply to (i) any information which (w) UStel can establish by evidence was
already in its possession (subject to no obligations or confidentiality) prior
to the disclosure thereof by Arcada; (x) was then generally known to the
public; (y) becomes known to the public other than as a result of actions by
UStel or by the directors, officers or employees or agents of UStel; or (z)
was disclosed to UStel, or to the directors, officers or employees of UStel,
solely by a third party not bound by any obligation of confidentiality; or
(ii) disclosure in accordance with the federal securities laws, federal
banking laws, or pursuant to an order of a court or agency of competent
jurisdiction.
6.5 REPORTS. Promptly upon filing with the SEC, UStel will deliver
to Arcada all reports filed under the Exchange Act, including without
limitation any Forms 8-K, 10-QSB and 10-KSB. UStel shall use reasonable
efforts to provide Arcada with drafts of such reports prior to filing.
6.6 REGULATORY MATTERS.
(a) The parties hereto will cooperate with each other and use
all reasonable efforts to prepare all necessary documentation, to effect all
necessary filings and to obtain all necessary permits, consents, approvals and
authorizations of all third parties and governmental bodies necessary to
consummate the transactions contemplated by this Agreement including, without
limitation, those that may be required from the SEC, other regulatory
authorities, or the holders of Arcada and UStel Common Stock. Arcada and <PAGE>
UStel shall each have the right to review reasonably in advance all
information relating to Arcada or UStel, as the case may be, and any of their
respective subsidiaries, together with any other information reasonably
requested, which appears in any filing made with or written material submitted
to any governmental body in connection with the transactions contemplated by
this Agreement.
(b) Arcada and UStel shall furnish each other with all
reasonable information concerning themselves, their subsidiaries, directors,
officers and stockholders and such other matters as may be necessary or
advisable in connection with the Proxy Statement/Prospectus, or any other
statement or application made by or on behalf of Arcada or UStel, or any of
their respective subsidiaries, to any governmental body in connection with the
Merger and the other transactions, applications or filings contemplated by
this Agreement.
(c) Arcada and UStel will promptly furnish each other with
copies of written communications received by Arcada or UStel or any of their
respective subsidiaries from, or delivered by any of the foregoing to, any
governmental body in respect of the transactions contemplated hereby.
6.7 APPROVAL OF USTEL STOCKHOLDERS. UStel will (a) take all steps
necessary duly to call, give notice of, convene and hold a meeting of its
stockholders as soon as practicable for the purpose of voting on this
Agreement and the Plan of Merger and the transactions contemplated hereby and
thereby, and for such other purposes as may be necessary or desirable, (b)
include in the Proxy Statement/Prospectus the recommendation of the UStel
Board of Directors that the stockholders approve this Agreement and the Plan
of Merger and the other transactions contemplated hereby and thereby, and such
other matters as may be submitted to its stockholders in connection with this
Agreement, (c) cooperate and consult with Arcada with respect to each of the
foregoing matters, and (d) use all reasonable efforts to obtain, as promptly
as practicable, the necessary UStel Stockholder Approval.
6.8 APPROVAL OF ARCADA STOCKHOLDERS. Arcada will (a) take all steps
necessary duly to call, give notice of, convene and hold a meeting of or
otherwise obtain the consent of its stockholders as soon as practicable for
the purpose of voting on this Agreement and the Plan of Merger and the
transactions contemplated hereby and thereby, and for such other purposes as
may be necessary or desirable, and such other matters as may be submitted to
its stockholders in connection with this Agreement, (b) cooperate and consult
with UStel with respect to each of the foregoing matters, and (c) use all
reasonable efforts to obtain, as promptly as practicable, the necessary Arcada
Stockholder Approval.
6.9 FURTHER ASSURANCES. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this
Agreement.
6.10 PUBLIC ANNOUNCEMENTS. Neither party will issue or distribute
any information to its shareholders or employees, any news releases or any
other public information disclosures with respect to this Agreement or any of
the transactions contemplated hereby without the consent of the other party,
except as may be otherwise required by law.
6.11 ASSIGNMENT OF CONTRACT RIGHTS. Arcada shall use its reasonable
efforts to obtain any consents, waivers or revisions necessary to allow UStel
to accede to all of the rights of Arcada under any existing real property
leases and all material personal property leases, licenses and other
contracts, which UStel wishes to have continue in effect after the Effective
Time, without incurring substantial costs in connection therewith. UStel will
offer its reasonable cooperation with Arcada in obtaining such consents,
waivers and revisions, it being understood that the obligation to obtain such
consents, waivers and revisions shall nevertheless be the obligation of
Arcada.
6.12 EMPLOYEES.
(a) UStel and Frank Bonadio shall have entered into a mutually
satisfactory employment agreement to be effective at Closing, substantially in
the form attached hereto as Exhibit C. Such employment contract is to provide
that Mr. Bonadio will become the President and Chief Operating Officer of
UStel and to become a member of the board of directors of UStel, to have an
annual base salary of $150,000 plus options to purchase 100,000 shares of
UStel Common Stock pursuant to the vesting and other provisions of the UStel
Stock Option Plan.
(b) Except as otherwise provided herein, all employees of Arcada
as of the Effective Time will continue as at will employees of Arcada after
the Effective Time.
(c) Effective as of the Effective Time, all employees of Arcada
shall, at the option of UStel, either continue to participate in the Benefit
Plans that are in effect immediately prior to the Effective Time or become
participants in similar UStel employee benefit plans, practices and policies
(the "UStel Benefit Plans") on the same terms and conditions as similarly
situated employees of UStel or its subsidiaries. If any of the employees of
Arcada shall become eligible to participate in any UStel Benefit Plans that
provide medical, hospitalization or dental benefits, UStel shall waive any
pre-existing condition exclusions and actively at work requirements (but shall
not waive general requirements of formal employment with UStel or its
subsidiaries). All employees of Arcada who continue as employees of Arcada
shall receive service credit for employment with Arcada for purposes of
satisfying all eligibility and vesting requirements in UStel's employee
benefit plans, including its stock option plan.
<PAGE>
(d) All vacation time, sick pay or short-term disability accrued
and not used by employees of Arcada prior to the Effective Time shall be
maintained by UStel or Arcada after the Effective Time and such vacation time,
sick pay or short-term disability shall after the Effective Time continue to
accrue at the same rate in effect at the Effective Time for employees of
Arcada.
6.13 INDEMNIFICATION OF ARCADA DIRECTORS AND OFFICERS.
(a) UStel will use all reasonable efforts, in cooperation with
Arcada, to arrange for insurance coverage for prior acts for all current
directors and officers of Arcada, provided that such coverage must be
available from normal carriers at a reasonable cost in light of the cost of
similar policies under similar circumstances. Subject to the foregoing, it is
contemplated that Arcada will purchase "tail" coverage to cover the first six
months following the Effective Date, and UStel will purchase "prior acts"
coverage for subsequent periods. UStel shall not cancel such prior acts
coverage for three years after the Effective Date.
a. From the Effective Time and continuing up to and through the one-year
anniversary date of the Effective Time, UStel will, to the extent permitted by
then applicable law, indemnify current directors and officers of Arcada (each
an "Indemnified Party") as though they had been directors and/or officers of
UStel, for acts or omissions occurring prior to, and including, the Effective
Time. Notwithstanding the foregoing, no Indemnified Party shall be entitled
to indemnification for any conduct which involved: (i) intentional
misconduct, (ii) a knowing violation of law by the Indemnified Party, (iii)
conduct violating RCW 23B.08.310, or (iv) any transaction from which the
Indemnified Party has personally received a benefit in money, property or
services to which the Indemnified Party is not legally entitled.
Any Indemnified Party wishing to claim indemnification under this
provision shall, upon learning of any claim, action, proceeding or
investigation (hereinafter a "Claim"), promptly notify UStel thereof. UStel
shall have the right to assume the defense of any such Claim and upon so doing
shall not thereafter be liable to such Indemnified Party for any expenses, of
other counsel or otherwise, subsequently incurred by such Indemnified Party in
connection with such Claim. If UStel elects not to assume such defense, or
counsel for the Indemnified Party advises that there are issues which raise
conflicts of interest between UStel and the Indemnified Party, the Indemnified
Party may retain counsel satisfactory to such Indemnified Party and UStel will
pay all reasonable fees and expenses of such counsel incurred in defending the
Claim; provided however, that (i) in the event that more than one Indemnified
Party is involved in the same Claim, UStel shall not be obligated to pay for
more than one firm of counsel for all Indemnified parties in any one
jurisdiction (unless counsel for the Indemnified Parties will cooperate in the
defense of the Claim, and (iii) UStel shall not be liable for any settlement
effected without its prior written consent. If, upon the conclusion of the
proceedings in any Claim, it is determined by UStel that the Indemnified Party
was not entitled to such indemnification, such party shall be required to
reimburse UStel for all cost expensed in defending such Indemnified Party.
(c) This Section 6.13 is intended to be for the benefit of, and
shall be enforceable by, the Indemnified Parties, their heirs and personal
representatives and shall be binding on UStel and its successors and assigns.
6.14 CURRENT PUBLIC INFORMATION. UStel shall continue to satisfy the
current public information requirements of Rules 144 and 145 of the SEC with
respect to the UStel Common Stock, and to provide affiliates of Arcada with
such information as they may reasonably require and to otherwise cooperate
with them to facilitate sales of UStel Common Stock in compliance with Rules
144 and 145 of the SEC.
6.15 PURCHASE ACCOUNTING. UStel and Arcada shall cooperate and
assist in the preparation of any and all materials reasonably required by
UStel in connection with establishing appropriate values for assets and
liabilities of Arcada for purchase accounting purposes.
6.16 USTEL BOARD OF DIRECTORS. At the Effective Time, Frank Bonadio
will be appointed to fill a vacancy on the UStel Board of Directors. For as
long as Frank Bonadio and Keith Leppaluoto own in the aggregate more than
250,000 shares of UStel Common Stock, as appropriately adjusted from time to
time for any change in capitalization of UStel (including, without limitation,
by means of a stock split, combination or exchange of shares), UStel shall
nominate Mr. Bonadio or his designee for reelection to the UStel Board of
Directors at each annual or special meeting of the UStel stockholders at which
directors are to be elected.
6.17 ADJUSTED FINANCIAL STATEMENTS OF USTEL. Within thirty (30) days
of the date of this Agreement, UStel shall deliver to Arcada copies of the
UStel Adjusted Financials, prepared in accordance with GAAP consistently
applied throughout the periods covered thereby. The UStel Adjusted Financials
shall fairly and accurately present in all material respects the consolidated
financial position of Arcada as of the respective dates set forth therein and
the results of operations for the periods included therein.
6.18 CASH AT CLOSING. UStel shall use its best efforts to have in
immediately available funds the $5,000,000 in cash to be paid at Closing.
7. CLOSING CONDITIONS.
7.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS UNDER THIS AGREEMENT. The
respective obligations of each party under this Agreement to consummate the
Merger shall be subject to the fulfillment at or prior to the Effective Time,
of the following conditions:
(a) This Agreement, the Plan of Merger and the transactions
contemplated hereby and thereby shall have been approved by the requisite
votes of the boards of directors and stockholders of UStel, Arcada and Newco, <PAGE>
respectively.
(b) All necessary third party and regulatory or governmental
approvals and consents required to consummate the transactions contemplated
hereby shall have been obtained and shall remain in full force and effect and
all statutory or regulatory waiting periods in respect thereof shall have
expired.
(c) No party hereto shall be subject to any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits the consummation of the Merger.
(d) The shares of UStel Common Stock and the Convertible
Debentures to be issued in the Merger shall be exempt or shall have been
qualified or registered for offering and sale under federal securities law and
the state securities or blue sky laws of each jurisdiction in which
stockholders of Arcada reside, and no order suspending the sale of such
securities in any such jurisdiction shall have been issued prior to the
Effective Time and no proceedings for that purpose shall have been instituted
or shall be contemplated.
(e) UStel shall have in immediately available funds the
$5,000,000 in cash to be paid at Closing.
7.2 CONDITIONS TO THE OBLIGATIONS OF USTEL UNDER THIS AGREEMENT. The
obligations of UStel under this Agreement shall be further subject to the
satisfaction, at or prior to the Closing, of all of the following conditions,
any one or more of which may be waived by UStel:
(a) Each of the obligations or covenants of Arcada required to
be performed by it on or prior to the Closing pursuant to the terms of this
Agreement shall have been duly performed and complied with in all material
respects.
(b) Each of the representations and warranties of Arcada
contained in this Agreement shall be true and correct in all material respects
as of the date of this Agreement and as of the Effective Time as though made
at and as of the Effective Time except as to any representation or warranty
which specifically relates to an earlier date, which shall be true and correct
as of such earlier date, except in the case of such representations and warranti
es, where the failure to be true would not have, in the aggregate, a Material
Adverse Effect on Arcada.
(c) Any consents, waivers, clearances, approvals and
authorizations of regulatory or governmental bodies that are necessary in
connection with the consummation of the transactions contemplated hereby shall
have been obtained, and none of such consents, waivers, clearances, approvals
or authorizations shall contain any term or condition that is a term or
condition that has not heretofore been normally imposed in such transactions
and which would have, in the aggregate, a Material Adverse Effect on Arcada or
UStel.
(d) UStel shall have received an opinion, dated the Effective
Date, from Cairncross & Hempelmann, P.S., counsel to Arcada, reasonably
satisfactory to UStel with respect to the matters set forth on Exhibit D
hereto.
(e) Since the date of this Agreement there shall have been no
Material Adverse Effect with respect to Arcada.
(f) Arcada shall have furnished UStel with such certificates of
its officers and such other documents to evidence fulfillment of the
conditions set forth in this Section 7.2 as UStel may reasonably request.
(g) Each of Arcada's outstanding severance obligations or
commitments to former employees or shareholders of Arcada identified on
Disclosure Schedule 7.2(g) shall be assumed by the current stockholders of
Arcada, each of whom shall agree to indemnify UStel prior to the Closing
against any such obligations, upon terms satisfactory to UStel.
(h) The stockholders of Arcada shall have entered into a lock-up
agreement, substantially in the form attached hereto as Exhibit E, with
respect to the Merger Shares and the shares of UStel Common Stock issuable
upon conversion of the Convertible Debentures.
(i) Each executive officer and director of Arcada shall have
entered into an affiliate agreement, substantially in the form attached hereto
as Exhibit F, as of the date hereof pursuant to which each such person shall
agree to vote all shares of Arcada Common Stock owned by such person or over
which he or she exercises voting power in favor of the Merger in any
stockholder vote or consent to obtain Arcada Stockholder Approval.
7.3 CONDITIONS TO THE OBLIGATIONS OF ARCADA UNDER THIS AGREEMENT. The
obligations of Arcada under this Agreement shall be further subject to the
satisfaction, at or prior to the Closing, of all of the following conditions,
any one or more of which may be waived by Arcada:
(a) Each of the obligations or covenants of UStel and Newco
required to be performed by them at or prior to the Closing pursuant to the
terms of this Agreement shall have been duly performed and complied with in
all material respects.
(b) Each of the representations and warranties of UStel and
Newco contained in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as of the Effective Time as
though made at and as of the Effective Time except as to any representation or
warranty which specifically relates to an earlier date, which shall be true
and correct as of such earlier date, except in the case of such
representations and warranties, where the failure to be true would not have,
in the aggregate, a Material Adverse Effect on UStel. <PAGE>
(c) UStel shall have furnished Arcada with such certificates of
its officers or others and such other documents to evidence fulfillment of the
conditions set forth in this Section 7.3 as Arcada may reasonably request.
(d) Since the date of this Agreement there shall have been no
Material Adverse Effect with respect to UStel.
(e) Arcada shall have received an opinion, dated the Effective
Date, from Freshman, Marantz, Orlanski, Cooper & Klein, reasonably
satisfactory to Arcada with respect to the matters set forth on Exhibit G
hereto.
(f) Arcada shall have received an opinion, dated the Effective
Date, from Freshman, Marantz, Orlanski, Cooper & Klein, counsel to UStel,
reasonably satisfactory to Arcada that the Merger qualifies as a tax-free
reorganization under Section 368(a) of the Code.
(g) Any consents, waivers, clearances, approvals and
authorizations of regulatory or governmental bodies that are necessary in
connection with the consummation of the transactions contemplated hereby shall
have been obtained, and none of such consents, waivers, clearances, approvals
or authorizations shall contain any term or condition that is a term or
condition that has not heretofore been normally imposed in such transactions
and which would have a Material Adverse Effect on Arcada or UStel.
(h) Each executive officer and director of UStel identified on
Disclosure Schedule 7.3(h) shall have entered into an affiliate agreement,
substantially in the form attached hereto as Exhibit F, as of the date hereof
pursuant to which each such person shall agree to vote all shares of UStel
Common Stock owned by such person or over which he or she exercises voting
power in favor of the Merger in any stockholder vote to obtain UStel
Stockholder Approval. In addition, each member of the board of directors of
UStel who is a representative of institutions that own shares of UStel Common
Stock, but who do not as individuals have dispositive voting power for such
shares, shall agree to use his or her best efforts to see that such shares are
made subject to the same terms and conditions as outlined above regarding the
voting of such shares.
(i) UStel shall be in compliance with all of the quantitative
and qualitative maintenance criteria required for continued listing of the
UStel Common Stock on The Nasdaq SmallCap Market, and the five day trading
average closing price of the UStel Common Stock for the period ending on the
second to last trading day prior to Closing shall be greater than $1.00.
8. TERMINATION, AMENDMENT AND WAIVER.
8.1 TERMINATION. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after UStel Stockholder Approval:
(a) by mutual written consent of Arcada and UStel;
(b) by any party hereto (i) if the Effective Time shall not have
occurred on or prior to January 31, 1998, unless the failure of such
occurrence shall be due to the failure of the party seeking to terminate this
Agreement to perform or observe its agreements and conditions set forth herein
to be performed or observed by such party at or before the Effective Time; or
(ii) 10 days after written certification of the vote of UStel's stockholders
is delivered to Arcada indicating that such stockholders failed to adopt the
resolution to approve this Agreement, the Plan of Merger and the transactions
contemplated hereby and thereby at the UStel Stockholders' Meeting (or any
adjournment thereof);
(c) by Arcada (i) if the Average Price is less than $1.00 per
share; (ii) if, at the time of such termination, there shall have been a
Material Adverse Change in the consolidated financial condition of UStel from
that set forth in the 1996 Financial Statements of UStel, it being understood
that (x) any of the matters set forth in UStel's Disclosure Schedules as of
the date of this Agreement are not deemed to be a Material Adverse Change for
purposes of this paragraph (c); or (iii) if there shall have been any material
breach of any covenant of UStel hereunder and such breach shall not have been
remedied within 45 days after receipt by UStel of notice in writing from
Arcada specifying the nature of such breach and requesting that it be
remedied.
(d) by UStel (i) if at the time of such termination, there shall
have been a Material Adverse Change in the consolidated financial condition of
Arcada from that set forth in the Arcada 1996 Financial Statements, it being
understood that any of the matters set forth in Arcada's Disclosure Schedules
as of the date of this Agreement are not deemed to be a Material Adverse
Change for purposes of this paragraph (d); (ii) if there shall have been any
material breach of any covenant of Arcada hereunder and such breach shall have
not been remedied within 45 days after receipt by Arcada of notice in writing
from UStel specifying the nature of such breach and requesting that it be
remedied; or (iii) if the holders of more than ten percent of the shares of
UStel capital stock entitled to notice of and to vote at the UStel
Shareholders' Meeting exercise their dissenters rights in connection with the
UStel Stockholders' Approval.
8.2 MANAGEMENT SERVICES FEE. The parties hereby acknowledge that, in
connection with and in anticipation of the Merger, Arcada and UStel have
entered into certain agreements or relationships pursuant to which Arcada has
agreed to perform certain services for UStel (the "Services"), including,
without limitation, those described in that certain management services
agreement dated June 27, 1997 (the "Management Services Agreement"). UStel
agrees and acknowledges that such Services are being provided by Arcada solely
due to the contemplated post-Merger relationship of the parties and that such
Services are for the benefit of UStel and its stockholders, and UStel further
acknowledges that the Management Services Fee described below is fully-earned
as of the date hereof. To compensate Arcada for the added benefit to UStel <PAGE>
from such Services, in the event that this Agreement terminates for any reason
under Section 8.1 above, UStel shall pay to Arcada on demand (and in no event
more than three business days after such demand) in immediately available
funds, One Hundred Twenty-Five Thousand Dollars ($125,000.00) (the "Management
Services Fee"). Payment of the Management Services Fee hereunder shall
satisfy in full UStel's obligation to pay the $125,000 fee referred to in
section 3 of the Management Services Agreement.
8.3 EFFECT OF TERMINATION. In the event of termination of this
Agreement by any party, this Agreement shall forthwith become void (other than
Sections 6.4(c) and (d) and Section 8.2 hereof, which shall remain in full
force and effect).
8.4 AMENDMENT, EXTENSION AND WAIVER. Subject to applicable law, at
any time prior to the consummation of the Merger, whether before or after
UStel Stockholder Approval, the parties may (a) amend this Agreement
(including the Plan of Merger incorporated herein), (b) extend the time for
the performance of any of the obligations or other acts of any other party
hereto, (c) waive any inaccuracies in the representations and warranties of
any other party contained herein or in any document delivered pursuant hereto,
or (d) waive compliance with any of the agreements or conditions contained
herein; provided, however, that after any approval of the Merger by the UStel
and Arcada stockholders, there may not be, without further approval of such
stockholders, any amendment or waiver of this Agreement (or the Plan of
Merger) that reduces the amount or changes the form of consideration to be
delivered to the Arcada stockholders, respectively. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto. Any agreement on the part of a party hereto to any extension
or waiver shall be valid only if set forth in an instrument in writing signed
on behalf of such party, but such waiver or failure to insist on strict
compliance with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
9. MISCELLANEOUS.
9.1 EXPENSES. All legal and other costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall
be borne by the party incurring such costs and expenses unless otherwise
specified in this Agreement.
9.2 SURVIVAL. The respective representations and warranties,
covenants and agreements set forth in this Agreement and all Disclosure
Schedules shall survive the Effective Time.
9.3 NOTICES. All notices, requests, claims, demands or other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly received if so given) by delivery, by registered or
certified mail (return receipt requested) or by cable, telecopier, or telex to
the respective parties as follows:
(a) If to UStel, to:
6167 Bristol Parkway, Suite 300
Culver City, California 90230
Attn: Robert L.B. Diener, Chairman
With a copy to:
Freshman, Marantz, Orlanski, Cooper & Klein
9100 Wilshire Boulevard, 8th Floor, East Tower
Beverly Hills, California 90212-3480
Attn: Lieb Orlanski
(b) If to Arcada, to:
Arcada Communications, Inc.
2001 Sixth Avenue, Suite 3210
Seattle, Washington 98121-2516
Attn: Frank Bonadio
With a copy to:
Cairncross & Hempelmann, P.S.
Columbia Center, 70th Floor
701 Fifth Avenue
Seattle, Washington 98104-7016
Attn: David M. Otto
or such other address as shall be furnished in writing by any party to the
others in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
9.4 PARTIES IN INTEREST. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any
party hereto without the prior written consent of the other parties. Nothing
in this Agreement is intended to confer, by implication, upon any other person
any rights or remedies under or by reason of this Agreement.
9.5 ENTIRE AGREEMENT. This Agreement, including the documents and
other writings referred to herein or delivered pursuant hereto, contains the
final expression of the parties with respect to its subject matter. There are
no restrictions, agreements, promises, warranties, covenants or undertakings
between the parties other than those expressly set forth herein or therein.
This Agreement supersedes all prior agreements and understandings between the
parties, both written and oral, with respect to its subject matter.
9.6 COUNTERPARTS. This Agreement may be executed in one or more <PAGE>
counterparts all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
9.7 GOVERNING LAW. This Agreement, in all respects, including all
matters of construction, validity and performance, is governed by the internal
laws of the state of California as applicable to contracts executed and
delivered in California by citizens of such state to be performed wholly
within such state without giving effect to the principles of conflicts of laws
thereof. The parties expressly agree that any controversy, dispute, litigation
or claim arising out of the subject matter of this Agreement and the
transactions contemplated hereby and thereby shall be brought or commenced
only in a federal or state court located in Los Angeles County, California.
The parties agree to be subject to the personal jurisdiction of the federal
and/or state courts situated in Los Angeles County, California, and agree that
a claim of forum non-conveniens shall not be a defense to an action initiated
in such venues.
9.8 HEADINGS. The Section headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meanings or
interpretation of this Agreement.
[Remainder of Page Intentionally Blank - Signature Page Follows]
PAGE
<PAGE>
EXECUTED as of the date first above written.
UStel, Inc.
By: Robert L.B. Diener
Its: Chairman and Chief Executive Officer
S.V.V. Sales, Inc.
By: Frank Bonadio
Its: President
Arcada Acquisition Corp.
By: Robert L.B. Diener
Its: President
PAGE
<PAGE>
SCHEDULE A
TO AGREEMENT FOR MERGER
Merger Consideration Payable to Shareholders of Arcada
<TABLE>
<CAPTION>
Merger Consideration
---------------------------------------------------
Arcada Cash Principal Amount of
Shareholder Convertible Merger Shares
Debentures
<S> <C> <C> <C>
Keith Leppaluoto $2,500,000 $ 900,000 1,260,000
Frank Bonadio $2,500,000 $ 570,000 798,000
Tuck Jue -0- $ 30,000 42,000
---------- ---------- ---------
TOTAL $5,000,000 $1,500,000 2,100,000
</TABLE>
PAGE
<PAGE>
SCHEDULE B
TO AGREEMENT FOR MERGER
Shareholder Loans to be Converted into
UStel, Inc. Convertible Subordinated Debentures
Shareholder Aggregate Principal Amount of Loans
Keith Leppaluoto $590,500
PAGE
<PAGE>
FORM OF PLAN OF MERGER
This Plan of Merger is made by and among UStel, Inc., a Minnesota corporation
("UStel"), Arcada Acquisition Corp., a Washington corporation and wholly-owned
subsidiary of UStel ("Newco"), and S.V.V. Sales, Inc., a Washington
corporation, d.b.a. Arcada Communications ("Arcada"), in connection with the
transactions described in an Agreement for Merger dated as of __________ __,
1997 (the "Merger Agreement") by and among UStel, Newco and Arcada.
Capitalized terms used but not otherwise defined herein shall have the meaning
given them in the Merger Agreement. This Plan of Merger, including related
documents, is intended to constitute a "plan of reorganization" as that term
is used in Section 354 of the Internal Revenue Code (the "Code"). Further,
this Merger is intended to constitute a "reorganization" as defined in Section
368 of the Code by reason of Section 368(a)(2)(E) of the Code.
The boards of directors of Arcada, UStel and Newco have approved this Plan of
Merger (the "Plan of Merger") under which Newco shall be merged with and into
Arcada. The Plan of Merger has been approved by the shareholders of Arcada
and UStel and the shareholders of Newco.
UStel Arcada, and Newco hereby agree as follows:
1. MERGER. At and on the Effective Time of the Merger, Newco shall be
merged with and into Arcada in accordance with the terms hereof. Arcada shall
be the surviving corporation.
2. EFFECTIVE TIME. The Merger shall not be effective unless and until
accepted by the Secretary of State of the State of Washington. The effective
time ("Effective Time") of this Merger shall be the time and date of the
occurrence of the endorsement of the Plan of Merger by the Secretary of State
of Washington.
3. NAME. The name of the surviving corporation shall be "S.V.V. Sales,
Inc." d.b.a. Arcada Communications.
4. DIRECTORS AND PRINCIPAL OFFICERS. Arcada, as the resulting
corporation, shall have one director. There shall be one class of directors
and each such director shall have a one- year term. The name, residential
address and term of each director are set forth on Schedule A attached hereto
and incorporated herein by this reference.
5. OFFICES. The location of the office of the surviving corporation
shall be 2001 Sixth Avenue, Suite 3210, Seattle, Washington 98121-2516.
6. TERMS AND CONDITIONS OF MERGER. At the Effective Time of the Merger:
A. CONVERSION OF ARCADA COMMON STOCK. Subject to the provisions below and
in Merger Agreement, at the Effective Time, all of the outstanding shares of
common stock, no par value per share, of Arcada ("Arcada Common Stock") shall
be converted into the right to receive shares of common stock, $.01 par value
per share, of UStel ("UStel Common Stock"), and certain additional
consideration, as described below and in the Merger Agreement.
(a) Subject to the provisions below and the provisions of the
Merger Agreement, at the Effective Time each shareholder of Arcada Common
Stock will receive the consideration set forth opposite his name, as described
on Schedule A hereto. The total consideration to be paid by UStel to the
Arcada shareholders in connection with the Merger shall consist of (i) an
aggregate of ________ newly issued shares of UStel Common Stock (the "Merger
Shares"), (ii) an aggregate of $_________ in principal amount of 10%
Convertible Subordinated Debentures (the "Convertible Debentures") issued by
UStel and described in further detail below and (iii) an aggregate of
$5,000,000 cash. The Merger Shares, the Convertible Debentures and the cash
payable by UStel at Closing are collectively referred to herein as the "Merger
Consideration."
(b) No fractional shares of UStel Common Stock shall be issued.
In lieu of any fractional shares, any holder of Arcada Common Stock who would
otherwise be entitled to a fractional share of UStel Common Stock will, upon
surrender of his certificate or certificates representing Arcada Common Stock
outstanding immediately prior to the Effective Time, be paid the cash value of
such fractional share interest, which shall be equal to the product of the
fraction multiplied by ____________________. For the purposes of determining
any such fractional share interests, all shares of Arcada Common Stock owned
by an Arcada stockholder shall be combined so as to calculate the maximum
number of whole shares of UStel Common Stock issuable to such Arcada
stockholder.
(c) The Convertible Debentures shall be substantially in the
form as set forth on Exhibit B hereto and as described herein. For the first
six months from Closing the Convertible Debentures shall be payable interest
only, quarterly in arrears. Beginning six months from Closing, the
Convertible Debentures shall be amortized over a three year term, with
principal payments paid quarterly in advance. Such principal payments shall
include all amounts due thereunder, including the conversion of all Arcada
shareholder loans. Interest on the Convertible Debentures will continue to be
paid quarterly in arrears. Beginning one year after issuance, the Convertible
Debentures will be convertible dollar for dollar at a conversion price equal
to $_________. The number of shares of UStel Common Stock issuable upon
conversion of the Convertible Debentures will be proportionally adjusted in
the event of a change in the capitalization of UStel after the Effective
Time. UStel shall have the right to prepay, in whole or in part, without
penalty, at any time, including the right to pay cash in lieu of Convertible
Debentures at Closing. In the event of a default under the Convertible
Debentures, the conversion price will be equal to $__________.
B. NEWCO COMMON STOCK. Each share of Newco Common Stock issued and
outstanding immediately prior to the Effective Time shall at the Effective
Time be converted into one share of Arcada Common Stock all of which shall be <PAGE>
owned by UStel. Upon the Effective Time, UStel shall become the owner of all
the issued and outstanding shares of the surviving corporation. No new shares
of Common Stock of Arcada shall be issued or otherwise transferred in the
Merger.
7. METHOD OF EFFECTUATION OF EXCHANGE OF CERTIFICATES. At the Effective
Time, the holders of record of Arcada Common Stock shall deliver to UStel the
certificates which, immediately prior to the Effective Time, represented
outstanding shares of Arcada Common Stock (the "Certificates") duly endorsed
in blank, or accompanied by blank stock powers. Upon surrender to UStel of
the Certificates, and such other documents as may be reasonably requested,
UStel shall promptly deliver to the person entitled thereto certificates
representing the number of shares of UStel Common Stock (and cash in lieu of
any fractional shares of UStel Common Stock ) and the other Merger
Consideration such holder is entitled to receive pursuant to this Plan of
Merger. All Certificates so surrendered shall be canceled. Until so
surrendered and exchanged, each Certificate shall, after the Effective Time,
be deemed to evidence only the right to receive the number of shares of UStel
Common Stock (and cash in lieu of any fractional shares of UStel Common Stock)
and the other Merger Consideration to which such holder is entitled pursuant
to Section 6 hereof.
No dividends or other distributions declared with respect to shares of UStel
Common Stock and payable to the holders of record thereof after the Effective
Time shall be paid to the holder of any unsurrendered Certificate until the
holder thereof surrenders such Certificate. Subject to the effect of any
applicable escheat laws and unclaimed property laws, after the subsequent
surrender and exchange of a Certificate, the record holder thereof shall be
entitled to receive any such dividends or other distributions, without any
interest thereon, which theretofore had become payable with respect to the
UStel Common Stock for which such Certificate was exchangeable.
If delivery of shares of UStel Common Stock (and any cash in lieu of
fractional shares) and the other Merger Consideration is to be made to a
person other than the person in whose name a surrendered Certificate is
registered, it shall be a condition of such delivery that the Certificate so
surrendered be properly endorsed (or accompanied by an appropriate instrument
of transfer) and otherwise be in proper form for transfer and that the person
requesting such delivery shall have paid any transfer and other taxes required
by reason of such delivery to a person other than the registered holder of the
surrendered Certificate or shall have established to the satisfaction of UStel
that such tax has been paid or is not payable.
At the Effective Time, the stock transfer books of Arcada shall be closed and
there shall be no further registration of transfers of shares of Arcada Common
Stock thereafter on the records of Arcada. From and after the Effective Time,
the holders of Certificates shall cease to have any rights with respect to the
shares of Arcada Common Stock represented thereby immediately prior to the
Effective Time except as provided herein.
No interest shall be paid or accrue on or in respect of any portion of the
UStel Common Stock or the cash in lieu of fractional shares and the other
Merger Consideration, to be delivered in exchange for the surrendered
Certificates.
Notwithstanding anything to the contrary herein, UStel shall not be liable to
a holder of Arcada Common Stock for any amount properly paid to a public
official pursuant to any applicable unclaimed property, escheat or similar
laws.
8. CHARTER AND BYLAWS. At and after the Effective Time, the charter (the
"Charter") and articles of incorporation and the bylaws of Arcada as in effect
immediately prior to the Effective Time shall continue to be the charter and
articles of incorporation and the bylaws of the surviving corporation until
amended in accordance with law.
9. RIGHTS AND DUTIES OF THE SURVIVING CORPORATION. At the Effective Time,
Newco shall be merged with and into Arcada, which shall be the surviving
corporation and which shall continue to be a Washington corporation. The
business of the surviving corporation shall be that of a corporation organized
under the laws of the State of Washington and as provided for in the Articles
of Incorporation of Arcada as now existing. All assets, rights, privileges,
powers, franchises and property (real, personal and mixed, tangible and
intangible, causes in action, rights and credits) of Newco shall be
automatically vested in Arcada as the surviving corporation by virtue of the
Merger without any deed or other document of transfer. The surviving
corporation, without any order or action on the part of any court or otherwise
and without any documents of assumption or assignment, shall hold and enjoy
all of the properties, franchises and interests, including appointments,
powers, designations, nominations and all other rights and interests as agent
or other fiduciary in the same manner and to the same extent as such rights,
franchises and interests and powers were held or enjoyed by Newco and Arcada,
respectively. The surviving corporation shall be responsible for all the
liabilities of every kind and description of both Newco and Arcada immediately
prior to the Effective Time, including liabilities for all debts, savings
accounts, deposits, obligations and contracts of Newco and Arcada,
respectively, matured or unmatured, whether accrued, absolute, contingent or
otherwise and whether or not reflected or reserved against on balance sheets,
books or accounts or records of either Newco or Arcada. All rights of
creditors and other obligees and all liens on property of either Newco or
Arcada shall be preserved and shall not be released or impaired.
10. EXECUTION. This Plan of Merger may be executed in any number of
counterparts each of which shall be deemed an original and all of such
counterparts shall constitute one and the same instrument. <PAGE>
Dated as of _____________, 1997.
USTEL, INC.
By: ______________________________
Its: ______________________________
ARCADA ACQUISITION CORP.
By: ______________________________
Its: ______________________________
S.V.V. SALES, INC. DBA
ARCADA COMMUNICATIONS
By: ______________________________
Its: ______________________________
PAGE
<PAGE>
MINNESOTA DISSENTERS RIGHTS STATUTE
APPENDIX B
302A.471 RIGHTS OF DISSENTING SHAREHOLDERS.
Subdivision 1. Actions Creating Rights. A shareholder of a
corporation may dissent from, and obtain payment for the fair value of the
shareholder's shares in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely
affects the rights of preferences of the shares of the dissenting shareholder
in that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a sinking fund for
the redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the
shares to acquire shares, securities other than shares, or rights to purchase
shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a
matter, or to cumulate votes, except as the right may be excluded or limited
through the authorization or issuance of securities of an existing or new
class or series with similar or different voting rights; except that an
amendment to the articles of an issuing public corporation that provides that
section 302A.671 does not apply to a control share acquisition does not give
rise to the right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation, but not
including a transaction permitted without shareholder approval in section
302A.661, subdivision 1, or a disposition in dissolution described in section
302A.725, subdivision 2, or a disposition pursuant to an order of court, or a
disposition for cash on terms requiring that all or substantially all of the
net proceeds of disposition be distributed to the shareholders in accordance
with their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter
322B, to which the corporation is a party, except as provided in subdivision
3;
(d) A plan of exchange, whether under this chapter or under chapter
322B, to which the corporation is a party as the corporation whose shares will
be acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote
with respect to which the articles, the bylaws, or a resolution approved by
the board directs that dissenting shareholders may obtain payment for their
shares.
Subd. 2. Beneficial owners. (a) A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of
the shareholder, unless the shareholder dissents with respect to all the
shares that are beneficially owned by another person but registered in the
name of the shareholder and discloses the name and address of each beneficial
owner on whose behalf the shareholder dissents. In that event, the rights of
the dissenter shall be determined as if the shares as to which the shareholder
has dissented and the other shares were registered in the names of different
shareholders.
(b) A beneficial owner of shares who is not the shareholder may
assert dissenters' rights with respect to shares held on behalf of the
beneficial owner, and shall not be treated as a dissenting shareholder under
the terms of this section and section 302A.473, if the beneficial owner
submits to the corporation at the time of or before the assertion of the
rights a written consent of the shareholder.
Subd. 3. Rights not to apply. Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain
payment under this section does not apply to a shareholder of the surviving
corporation in a merger, if the shares of the shareholder are not entitled to
be voted on the merger.
Subd. 4. Other rights. The shareholders of a corporation who have a
right under this section to obtain payment for their shares do not have a
right at law or in equity to have a corporate action described in subdivision
1 set aside or rescinded, except when the corporate action is fraudulent with
regard to the complaining shareholder or the corporation.
PAGE
<PAGE>
302A.473 PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS.
Subdivision 1. Definitions. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action referred to in section 302A.471, subdivision 1 or
the successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective
date of the corporate action referred to in section 302A.471, subdivision 1,
up to and including the date of payment, calculated at c-e rate provided in
section 549.09 for interest on verdicts and judgments.
Subd. 2. Notice of action. If a corporation calls a shareholder meeting
at which any action described in section 302A.471, subdivision 1 is to be
voted upon, the notice of the meeting shall inform each shareholder of the
right to dissent and shall include a copy of section 302A.471 and this section
and a brief description of the procedure to be followed under these sections.
Subd. 3. Notice of dissent. If the proposed action must be approved by
the shareholders, a shareholder who wishes to exercise dissenters' rights must
file with the corporation before the vote on the proposed action a written
notice of intent to demand the fair value of the shares owned by the
shareholder and must not vote the shares in favor of the proposed action.
Subd. 4. Notice of procedure; deposit of shares. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision
3 and to all shareholders entitled to dissent if no shareholder vote was
required, a notice that contains:
(1) The address to which a demand for payment and certificates
of certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that
will apply after the demand for payment is received;
(3) A form to be used to certify the date on which the
shareholder, or the beneficial owner on whose behalf the shareholder dissents,
acquired the shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief
description of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all
other rights of a shareholder until the proposed action takes effect.
Subd. 5. Payment; return of shares. (a) After the corporate action
takes effect, or after the corporation receives a valid demand for payment,
whichever is later, the corporation shall remit to each dissenting shareholder
who has complied with subdivisions 3 and 4 the amount the corporation
estimates to be the fair value of the shares, plus interest, accompanied by:
(1) the corporation's closing balance sheet and statement of income
for a fiscal year ending not more than 16 months before the effective date of
the corporate action, together with the latest available interim
financial statements;
(2) an estimate by the corporation of the fair value of the shares
and a brief description of the method used to reach the estimate; and
(3) a copy of section 302A.471 and this sect on, and a brief
description of the procedure to be followed in demanding supplemental
payment.
(b) The corporation may withhold the remittance described in paragraph
(a) from a person who was not a shareholder on the date the action dissented
from was first announced to the public or who is dissenting on behalf of a
person who was not a beneficial owner on that date. If the dissenter has
complied with subdivisions 3 and 4, the corporation shall forward to the
dissenter the materials described in paragraph (a), a statement of the reason
for withholding the remittance, and an offer to pay to the dissenter the
amount listed in the materials if the dissenter agrees to accept that amount
in full satisfaction. The dissenter may decline the offer and demand payment
under subdivision 6. Failure to do so entitles the dissenter only to the
amount offered. If the dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the
deposit of certificates or the imposition of transfer restrictions on
uncertificated shares, it shall return all deposited certificates and cancel
all transfer restrictions. However, the corporation may again give notice
under subdivision 4 and require deposit or restrict transfer at a later time.
Subd. 6. Supplemental payment; demand. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest,
within 30 days after the corporation mails the remittance under subdivision 5,
and demand payment of the difference. Otherwise, a dissenter is entitled only
to the amount remitted by the corporation. <PAGE>
Subd. 7. Petition; determination. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand,
either pay to the dissenter the amount demanded or agreed to by the dissenter
after discussion with the corporation or file in court a petition requesting
that the court determine the fair value of the shares, plus interest. The
petition shall be filed in the county in which the registered office of the
corporation is located, except that a surviving foreign corporation that
receives a demand relating to the shares of a constituent domestic corporation
shall file the petition in the county in this state in which the last
registered office of the constituent corporation was located. The petition
shall name as parties all dissenters who have demanded payment under
subdivision 6 and who have not reached agreement with the corporation. The
corporation shall, after filing the petition, serve all parties with a summons
and copy of the petition under the rules of civil procedure. Nonresidents of
this state may be served by registered or certified mail or by publication as
provided by law. Except as otherwise provided, the rules of civil procedure
apply to this proceeding. The jurisdiction of the court is plenary and
exclusive. The court may appoint appraisers, with powers and authorities the
court deems proper, to receive evidence on and recommend the amount of the
fair value of the shares. The court shall determine whether the shareholder
or shareholders in question have fully complied with the requirements of this
section, and shall determine the fair value of the shares, taking into account
any and all factors the court finds relevant, computed by any method or
combination of methods that the court, in its discretion, sees fit to use,
whether or not used by the corporation or by a dissenter. The fair value of
the shares as determined by the court is binding on all shareholders, wherever
located. A dissenter is entitled to judgment in cash for the amount by which
the fair value of the shares as determined by the court, plus interest,
exceeds the amount, if any, remitted under subdivision 5, but shall not be
liable to the corporation for the amount, if any, by which the amount, if any,
remitted to the dissenter under subdivision 5 exceeds the fair value of the
shares as determined by the court, plus interest.
Subd. 8. Costs; fees; expenses. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and
expenses may also be assessed against a person who has acted arbitrarily,
vexatiously, or not in good faith in bringing the proceeding, and may be
awarded to a party injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if
any.
PAGE
<PAGE>
APPENDIX C
FORM OF
REINCORPORATION AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger ("Agreement") dated as of November 12, 1997
between UStel, Inc., a Minnesota corporation (the "Minnesota Company"), and
UStel Merger Corporation, a California corporation (the "California Company"),
which is a wholly-owned subsidiary of the Minnesota Company.
BACKGROUND
A. The Minnesota Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Minnesota. On
the date of this Agreement, the Minnesota Company has authority to issue
45,000,000 shares of capital stock, $0.01 par value, of which 6,872,778
shares of Common Stock were outstanding, and 5,000,000 shares of Series A
Preferred Stock, $0.01 par value, of which 275,000 were outstanding.
B. The California Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of California. On
the Effective Time of the Merger, the California Company will have authority
to issue 45,000,000 shares of capital stock, no par value, of which there
were 1000 shares outstanding of Common Stock and 5,000,000 shares of Preferred
Stock, no par value, of which none were outstanding including 550,000 shares
of Series A Preferred stock of which none were outstanding.
C. The respective Boards of Directors of the Minnesota Company and
the California Company have determined that it is advisable and in the best
interests of each corporation that the Minnesota Company merge into the
California Company upon the terms and subject to the conditions provided in
this Agreement for the purpose of effecting the reincorporation of the Minnesota
Company in the State of California and have, by resolutions duly adopted,
approved this Agreement and directed that it be submitted to a vote of their
respective shareholders and executed by the undersigned officers.
The parties agree as follows:
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms have the following
meanings:
"California Common Stock" or "California Common" means that Common Stock,
no par value, of the California Company.
"Minnesota Common Stock" or "Minnesota Common" means the Common Stock,
$0.01 par value per share, of the Minnesota Company.
"California Preferred Stock" means the preferred stock, no par value of
the California Company.
"Minnesota Series A Preferred Stock" means the 275,000 shares of Series A
Preferred Stock, $0.01 par value of the Minnesota Company, outstanding as of
the date hereof.
"California Series A Preferred Stock" means the 550,000 shares of Series
A Preferred Stock, no par value of the California Company, authorized.
"Effective Time" means the time at which the Merger shall become
effective under applicable law.
"Merger" means the merger of the Minnesota Company into the California
Company.
<PAGE>
"Shareholders' Meeting" means the special meeting of shareholders of the
Minnesota Company to be held December 19, 1997 at which the shareholders will
be asked to approve and adopt this Agreement.
"Surviving Corporation" means the California Company from and after the
Effective Time.
ARTICLE II
EFFECTUATION OF MERGER
2.1 Filings. On or before the Effective Time, the California Company
and the Minnesota Company shall cause:
(i) the Certificate of merger, substantially in the form of the
Exhibit 1 to this Agreement, to be filed with the Secretary of State of
California; and
(ii) an executed counterpart of the Certificate of Merger to be filed
with the Secretary of State of Minnesota.
2.2 Merger. At the Effective Time, the Merger shall become effective
under Section 1108 of the California General Corporation Law and Section
302A.621 of the Minnesota Business Corporation Act; the Minnesota Company
shall merge into the California Company, the separate existence of the
Minnesota Company shall cease, and the California Company shall continue in
existence under the California General Corporation Law.
2.3 Effect. At the Effective Time:
(i) the Amended and Restated Articles of Incorporation of the <PAGE>
California Company Exhibit 2 hereto shall continue as the Certificate of
Incorporation of the Surviving Corporation;
(ii) the Bylaws of the California Company Exhibit 3 hereto shall
continue as the Bylaws of the Surviving Corporation;
(iii) each officer, director and board committee member of the
Minnesota Company in office immediately prior to the Effective Time shall
remain as an officer, director or board committee member in the same capacity
of the Surviving Corporation;
(iv) each share of Minnesota Common Stock and the Minnesota Series A
Preferred Stock outstanding immediately prior to the Effective Time shall be
converted into one share of California Common Stock and one share of
California Series A Preferred Stock, as the case may be, pursuant to Article
III;
(v) without further transfer, act, or deed, the separate existence of
the Minnesota Company shall cease and the Surviving Corporation shall possess
all the rights, privileges, powers and franchises of a public as well as of a
private nature, and shall be subject to all the restrictions, disabilities and
duties of the Minnesota Company; the rights, privileges, powers and franchises
of the Minnesota Company, and all property, real, personal, tangible,
intangible, and mixed, and all debts and obligations due to the Minnesota
Company, shall be vested in the Surviving Corporation; all property, rights,
privileges, powers and franchises, and all and every other interest of the
Minnesota Company shall be thereafter as effectually the property of the
Surviving Corporation as they were of the Minnesota Company; the title to any
real estate vested by deed or otherwise in the Minnesota Company shall not
revert or be in any way impaired by reason of the Merger; and all rights of
creditors of the Minnesota Company and all liens upon any property of the
Minnesota Company shall be preserved unimpaired and all debts, liabilities and
duties of the Minnesota Company shall thenceforth attach to the Surviving
Corporation and may be enforced against it to the same extent as if such
debts, liabilities and duties had been incurred or contracted by it.
2.4 Further Assurances. The Minnesota Company agrees that if, at
any time after the Effective Time, the Surviving Corporation shall consider or
be advised that any further deeds, assignments or assurances are necessary or
desirable to vest, perfect or confirm in the Surviving Corporation title to
any property or rights of the Minnesota Company, the Surviving Corporation and
its officers and directors may execute and deliver all such proper deeds,
assignments and assurances and do all other things necessary or desirable to
vest, perfect or confirm title to such property or rights in the Surviving
Corporation and otherwise to carry out the purposes of this Agreement, in the
name of the Minnesota Company or otherwise.
ARTICLE III
CONVERSION OF SHARES
3.1 Conversion of Shares. At the Effective Time:
(i) each share of Minnesota Common Stock and each share of Minnesota
Series A Preferred Stock, as the case may be, issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into one
share of California Common Stock and one share of California Series A
Preferred Stock, as the case may be; and
(ii) each share of California Common Stock issued and outstanding
immediately prior to the Effective Time shall be cancelled and retired and no
shares shall be issued in the Merger in respect thereof.
3.2 Stock Certificates. At and after the Effective Time, all of the
outstanding certificates which immediately prior to the Effective Time
represented shares of Minnesota Common Stock and shares of Minnesota Series A
Preferred Stock, as the case may be, shall be deemed for all purposes to
evidence ownership of, and to represent, the shares of California Common Stock
and shares of Minnesota Series A Preferred Stock, as the case may be, into
which the shares of Minnesota Common Stock and shares of Minnesota Series A
Preferred Stock, as the case may be, formerly represented by such certificates
will have been converted as provided in this Agreement. The registered owner
on the books and records of the California Company or its transfer agent,
until such certificate shall have been surrendered for transfer or otherwise
accounted for to the California Company or its transfer agent, shall have and
be entitled to exercise any voting and other rights with respect to, and to
receive any dividends and other distributions upon, the shares of California
Common Stock and shares of Minnesota Series A Preferred Stock, as the case may
be, evidenced by such outstanding certificate.
3.3 Stock Options. Each right or option to purchase shares of
Minnesota Common Stock granted under the Minnesota Company's 1993 Stock Option
Plan (the "Plan"), which is outstanding immediately prior to the Effective
Time, shall, by virtue of the Merger and without any action on the part of the
holder thereof, be converted into and become a right or option to purchase the
same number of shares of California Common Stock at the same price per share,
and upon the same terms and subject to the same conditions, as set forth in
the Plan and the agreements under which those options were granted, as in
effect at the Effective Time. The same number of shares of California Common
Stock shall be reserved for purposes of the Plan as is equal to the number of
shares of Minnesota Common Stock so reserved as of the Effective Time. As of
the Effective Time, the California Company hereby assumes the Plan and all
obligations of the Minnesota Company under the Plan (including the outstanding
options granted pursuant to the Plan).
3.3.1 Each Warrant to purchase shares of Minnesota Common Stock
granted under any and all outstanding warrants of the Minnesota Company, each
share of 12% Convertible Subordinated Debentures of the Minnesota Company <PAGE>
which are convertible into Common Stock of the Minnesota Company and any and
all outstanding convertible securities of the Minnesota Company which are
convertible into Common Stock of the Minnesota Company (hereinafter
"Derivative Securities") shall be converted into a right to receive the same
number of shares of Common Stock of the California Company as such Derivative
Securities were entitled to receive on conversion thereof, of shares in the
Minnesota Company, at the Effective Time, at the same price and terms, and
subject to the same conditions as are applicable to the Derivative Securities
in the Minnesota Company. The same number of shares of California Common
Stock shall be reserved for issuance of the Derivative Securities as is equal
to the number of shares of Minnesota Common Stock so reserved as the Effective
Time. As of the Effective Time, the California Company hereby assumes the
obligations of the Derivative Securities including right of the holders of the
Derivative Securities to convert such Derivative Securities into Common Stock
of the California Company which assumes all obligations of the Minnesota
Company pertaining to such Derivative Securities.
<PAGE>
3.4 Validity of California Common and Series A Preferred Stock. At
the Effective Time, all shares of California Common and Series A Preferred
Stock into which Minnesota Common and Series A Preferred Stock are to be
converted pursuant to the Merger shall be validly issued, fully paid and
nonassessable and shall be issued in full satisfaction of all rights
pertaining to the corresponding shares of Minnesota Common and Series A
Preferred Stock.
3.5 Rights of Former Holders. From and after the Effective Time, no
holder of certificates which evidenced Minnesota Common and Series A Preferred
Stock immediately prior to the Effective Time shall have any rights with
respect to the shares formerly evidenced by those certificates, other than to
receive the shares of California Common and Series A Preferred Stock into
which such California Common and Series A Preferred Stock shall have been
converted pursuant to the Merger.
ARTICLE IV
CONDITIONS TO MERGER
The obligations of the Minnesota Company and the California Company to
consummate the Merger are subject to satisfaction of the following conditions:
(i) Authorization. The holders of at least a majority of the
outstanding shares of Common Stock and Series A Preferred Stock of the
Minnesota Company voting together and not as a class, shall have approved this
Agreement and the Merger at the Shareholders' Meeting. All necessary action
shall have been taken to authorize the execution, delivery and performance of
this Agreement by the Minnesota Company and the California Company.
(ii) Listing. The shares of California Common Stock to be issued in
the Merger or reserved for issuance shall be listed for trading on the Nasdaq
Small Cap Market.
ARTICLE V
MISCELLANEOUS
5.1 Termination. This Agreement may be terminated and the Merger and
other transactions provided for by this Agreement abandoned at any time prior
to the Effective Time, whether before or after adoption and approval of this
Agreement at the Shareholders' Meeting, by action of the Board of Directors of
the Minnesota Company if the Board determines that the consummation of the
transactions contemplated by this Agreement would not, for any reason, be in
the best interests of the Minnesota Company and its shareholders.
5.2 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Minnesota applicable to contracts
entered into and to be performed wholly within the State of Minnesota, except
to the extent that the laws of the State of California are mandatorily
applicable to the Merger.
<PAGE> <PAGE>
5.3 Approval of the Minnesota Company as Sole Shareholder of the
California Company. By its execution and delivery of this Agreement, the
Minnesota Company, as the sole shareholder of the California Company, consents
to, approves and adopts this Agreement and approves the Merger. The Minnesota
Company agrees to execute such instruments as may be necessary or desirable to
evidence its approval and adoption of this Agreement and the Merger as the
sole shareholder of the California Company.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
MINNESOTA COMPANY: UStel, Inc.
a Minnesota corporation
By:
Robert L. B. Diener
Chairman and Chief Executive Officer
ATTEST:
By:
Wouter van Biene
Secretary
CALIFORNIA COMPANY: UStel MERGER CORPORATION
a California corporation
By:
Robert L. B. Diener
Chairman and Chief Executive Officer
ATTEST:
By:
Wouter van Biene
Secretary
PAGE
<PAGE>
Exhibit 1
CERTIFICATE OF MERGER
of
UStel, Inc.
a Minnesota corporation
into
UStel MERGER CORPORATION
a California corporation
(Under Section 1108 of the General
Corporation Law of the State of California)
The undersigned corporation organized and existing under and by virtue of
the General Corporation Law of the State of California does hereby certify:
FIRST: That the name and state of incorporation of each of the
constituent corporations of the merger is as follows:
Name State of Incorporation
UStel, Inc. Minnesota
UStel Merger Corporation California
SECOND: That an Agreement of Merger between the parties to the merger
has been approved, adopted, certified, executed and acknowledged by UStel,
Inc., a Minnesota corporation, and UStel Merger Corporation, a California
corporation, in accordance with the provisions of Section 1108 of the General
Corporation Law of the State of California.
THIRD: That UStel Merger Corporation, a California corporation, shall be
the surviving corporation.
FOURTH: That the Amended and Restated Certificate of Incorporation of
UStel Merger Corporation, a California corporation, shall be the Certificate
of Incorporation of the surviving corporation.
FIFTH: That the surviving corporation is a corporation of the State of
California.
SIXTH: That the executed Agreement of Merger is on file at the principal
place of business of UStel Merger Corporation, a California corporation, at
6167 Bristol Parkway, Suite 100, Culver City, CA 90232.
SEVENTH: That a copy of the Agreement of Merger will be furnished by
UStel Merger Corporation, a California corporation, on request and without
cost, to any stockholder of UStel Merger Corporation, a California
corporation, or shareholder of UStel, Inc., a Minnesota corporation.
EIGHTH: That the authorized Capital Stock of UStel, Inc., a Minnesota
corporation, is 45,000,000 shares of Capital Stock, consisting of 40,000,000
shares of Common Stock $0.01 par value, of which 6,872,778 shares entitled to
vote were outstanding, and 5,000,000 shares of Preferred Stock of which
275,000 shares of Series A Preferred Stock $0.01 par value entitled to vote
were outstanding.
NINTH: That the principal terms of the Agreement of Merger in the form
attached were approved by each constituent corporation, by a vote of the
number of shares of each class entitled to vote which equaled or exceeded the
vote required; that the classes of Capital Stock entitled to vote were the
Common Stock $0.01 par value and the Series A Preferred Stock $0.01 par value
and that the percentage required to approve the Merger was a majority of the
Common Stock $0.01 par value and of the Series A Preferred Stock $0.01 par
value, voting together and not as a class.
<PAGE> <PAGE>
IN WITNESS WHEREOF, UStel MERGER CORPORATION, a California corporation,
has caused this certificate to be signed by Robert L. B. Diener, its Chairman
and Chief Executive Officer, and attested by Wouter van Biene, its Secretary,
on the ________ day of _______________, 1997
UStel MERGER CORPORATION
a California corporation
By:
Robert L. B. Diener
Chairman and Chief Executive Officer
ATTEST:
By:
Wouter van Biene
Secretary
PAGE
<PAGE>
Exhibit 2
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
UStel MERGER CORPORATION,
a California corporation
Robert L.B. Diener and Wouter van Biene certify that:
1.They are the Chairman, Chief Executive Officer and Secretary, respectively,
of UStel MERGER CORPORATION, a California corporation.
2.The articles of incorporation of this corporation are amended and restated
to read as follows:
I. NAME
The name of the corporation shall be UStel, Inc.
II. PURPOSE
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the trust
company business or the practice of a profession permitted to be incorporated
by the California Corporations Code.
III. DEFINITION
The word "corporation" when used in these Amended and Restated
Articles of Incorporation shall mean UStel, Inc.
IV. AUTHORIZED SHARES
1.Authorized Shares.
The total number of shares of capital stock which the corporation is
authorized to issue shall be 45,000,000 shares, consisting of 40,000,000 of
common stock, no par value per share ("Common Stock"), and 5,000,000 shares of
preferred stock, no par value per share ("Preferred Stock").
2.Common Stock.
All shares of Common Stock shall be voting shares and shall be
entitled to one vote per share. Holders of Common Stock shall not be entitled
to any preemptive rights to acquire shares of any class or series of capital
stock of the corporation. Subject to any preferential rights of holders of
Preferred Stock, holders of Common Stock shall be entitled to receive their
pro rata share, based upon the number of shares of Common Stock held by them,
of such dividends or other distributions as may be declared by the board of
directors from time to time and of any distribution of the assets of the corpora
tion upon its liquidation, dissolution or winding up, whether voluntary or
involuntary.
3. Preferred Stock.
A. The board of directors of the corporation is hereby
authorized to provide, by resolution or resolutions adopted by such board, for
the issuance of Preferred Stock from time to time in one or more classes
and/or series, to establish the designation and number of shares of each such
class or series, and to fix the relative rights and preferences of the shares
of each such class or series, all to the full extent permitted by the General
Corporation Law of California. Without limiting the generality of the
foregoing, the board of directors is authorized to provide that shares of a
class or series of Preferred Stock:
(a) are entitled to cumulative, partially cumulative or noncumulative
dividends or other distributions payable in cash, capital stock or
indebtedness of the corporation or other property, at such times and in such
amounts as are set forth in the board resolutions establishing such class or
series or as are determined in a manner specified in such resolutions;
(b) are entitled to a preference with respect to payment of dividends
over one or more other classes and/or series of capital stock of the
corporation;
(c) are entitled to a preference with respect to any distribution of
assets of the corporation upon its liquidation, dissolution or winding up over
one or more other classes and/or series of capital stock of the corporation in
such amount as is set forth in the board resolutions establishing such class
or series or as is determined in a manner specified in such resolutions;
(d) are redeemable or exchangeable at the option of the corporation
and/or a mandatory basis for cash, capital stock or indebtedness of the
corporation or other property, at such times or upon the occurrence of such
events, and at such prices, as are set forth in the board resolutions
establishing such class or series or as are determined in a manner specified
in such resolutions;
(e) are entitled to the benefits of such sinking fund, if any, as is
required to be established by the corporation for the redemption and/or
purchase of such shares by the board resolutions establishing such class or
series;
(f) are convertible at the option of the holders thereof into shares
of any other class or series of capital stock of the corporation, at such
times or upon the occurrence of such events, and upon such terms, as are set
forth in the board resolutions establishing such class or series or as are <PAGE>
determined in a manner specified in such resolutions;
(g) are exchangeable at the option of the holders thereof for cash,
capital stock or indebtedness of the corporation or other property, at such
times or upon the occurrence of such events, and at such prices, as are set
forth in the board resolutions establishing such class or series or as are
determined in a manner specified in such resolutions;
(h) are entitled to such voting rights, if any, as are specified in
the board resolutions establishing such class or series (including, without
limiting the generality of the foregoing, the right to elect one or more
directors voting alone as a single class or series or together with one or
more other classes and/or series of Preferred Stock, if so specified by such
board resolutions) at all times or upon the occurrence of specified events;
and
(i) are subject to restrictions on the issuance of additional shares
of Preferred Stock of such class or series or of any other class or series, or
on the reissuance of shares of Preferred Stock of such class or series or of
any other class or series, or on increases or decreases in the number of
authorized shares of Preferred Stock of such class or series or of any other
class or series.
Without limiting the generality of the foregoing authorizations, any of the
rights and preferences of a class or series of Preferred Stock may be made
dependent upon facts ascertainable outside the board resolutions establishing
such class or series, and may incorporate by reference some or all of the
terms of any agreements, contracts or other arrangements entered into by the
corporation in connection with the issuance of such class or series, all to
the full extent permitted by the law.
B. A series of the class of authorized Preferred Stock, no par
value per share, of the corporation be hereby created, and that the
designation and amount thereof and the voting powers, preferences and
relative, participating, optional and other special rights of the shares of
such series, and the qualifications, limitations or restrictions thereof are
as follows:
<PAGE> <PAGE>
Designation of Amount.
The shares of such series shall be designated as the "Series A
Convertible Preferred Stock" and the number of shares constituting such series
shall be five hundred fifty thousand (550,000), which number may be decreased
(but not increased) by the Board of Directors without the affirmative vote of
all of the holders of the Series A Convertible Preferred Stock.
Voting.
The holder of each share of Series A Convertible Preferred Stock
shall be entitled to vote on all matters submitted or required to be submitted
to a vote of the stockholders of the corporation and shall be entitled to the
number of votes equal to the largest number of full shares of the
corporation's Common Stock into which such shares of Series A Convertible
Preferred Stock could be converted pursuant to the provisions hereof, at the
record date for the determination of stockholders entitled to vote on such
matters or, if no such record date is established, on the date such vote is
taken or any written consent of stockholders is solicited or taken. Except as
otherwise required by law or expressly provided herein, the holders of shares
of Series A Convertible Preferred Stock and Common Stock shall vote together
and not as separate classes.
Conversion.
(i) At any time each holder of record of Series A Convertible
Preferred Stock may, at the option of the holer, convert all or part of the
shares of Series A Convertible Stock held by that recordholder into fully paid
nonassessable shares of Common Stock.
(ii) If a holder of record of Series A Convertible Preferred
Stock wishes to convert all of its shares of Series A Convertible Preferred
Stock into shares of Common Stock pursuant hereto, the holder must (a)
surrender the certificate or certificates evidencing all of such shares of
Series A Convertible Preferred Stock, duly endorsed in blank for transfer,
signature guaranteed, at the office of the corporation, or at such other place
as the corporation shall designate, and (b) give written notice to the
Secretary of the corporation that the holder of record elects to convert all
of the shares of Series A Convertible Preferred Stock. Within fifteen (15)
days after receiving that notice and the certificate or certificates, the
corporation will issue and deliver, or cause to be issued and delivered, to
the holder of record of the Series A Convertible Preferred Stock, a
certificate or certificates for the number of shares of Common Stock to which
that holder is entitled.
(iii) Each shares of Series A Convertible Preferred Stock shall
be convertible into 1.3636 shares of the corporation's Common Stock, subject
to the provisions set forth in (iv) below.
(iv) The number of shares of Common Stock into which the Series
A Convertible Preferred Stock shall be convertible shall be appropriately
adjusted for stock dividends, stock splits, reclassifications or consolidation
of or other distributions to or for the benefit of holders of the
corporation's Common Stock of record prior to the conversion date; provided,
however, if either of the following shall occur, namely: (a) any
consolidation, reorganization or merger to which the corporation is a party,
other than a consolidation, reorganization or a merger in which the
corporation is the continuing corporation and that does not result in any
reclassification, change or exchange (other than changes in par value or from
par value to no par value or from no par value to par value or changes as a
result of a subdivision or combination) in outstanding shares of the Common
Stock, or (b) any sale or conveyance to another corporation of the property of
the corporation as an entirety or substantially as an entirety, then the
holder of each shares of Series A Convertible Preferred Stock then outstanding
shall upon conversion of such share have the right to convert such share only
into the kind and amount of shares of stock and other securities and property,
(including cash) receivable upon such consolidation, reorganization, merger,
sale or conveyance by a holder of the number of shares of Common Stock
issuable upon conversion of such share of Series A Convertible Preferred Stock
immediately prior to such consolidation, reorganization, merger, sale or
conveyance, subject to adjustments which shall be as nearly equivalent as may
be practicable to the adjustments provided for herein. The provisions of this
paragraph shall similarly apply to successive consolidations, reorganizations,
mergers, sales or conveyances.
(v) The corporation will reserve and keep available out of its
authorized but unissued shares of Common Stock, the full number of shares of
Common Stock into which all shares of Series A Convertible Preferred Stock are
convertible. If at any time the number of authorized but unissued shares of
Common Stock is not sufficient to effect the conversion of all of the then
outstanding shares of Series A Convertible Preferred Stock, the corporation
shall take such corporate action as it may deem reasonably necessary,
including seeking approval of stockholders, to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be
sufficient for such purpose.
Dividends.
The holders of the Series A Convertible Preferred Stock shall be
entitled to receive dividends only if, when and as declared with respect to
the Common Stock by the corporation's Board of Directors. Unless the
corporation pays or declares dividends with respect to the Common Stock, the
corporation has no obligation to declare or pay dividends with respect to the
Series A Convertible Preferred Stock. The holder of each share of Series A
Convertible Preferred Stock shall be entitled to receive dividends with
respect to the corporation's Common Stock in an amount equal to that amount
such holder would have received if its shares of Series A Convertible
Preferred Stock had been converted into Common Stock pursuant to the
provisions hereof, at the record date for the determination of stockholders <PAGE>
entitled to receive dividends.
Liquidation Preference.
(i) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the corporation, the holders of record of the
Series A Convertible Preferred Stock shall collectively be entitled to be
paid, in the aggregate, before any distribution or payment is made upon any
shares of Common Stock of the corporation, the amount of three million dollars
($3,000,000.00) to be divided equally among each share of Series A Convertible
Preferred Stock then outstanding, subject to proportionate reduction for any
shares of Series A Convertible Preferred Stock converted prior to any such
event set forth above. The holders of Series A Convertible Preferred Stock
shall not be entitled to any further payment. If upon any liquidation,
dissolution or winding up of the corporation, the corporation's assets to be
distributed among the holders of the Series A Convertible Preferred Stock are
insufficient to permit payment to those holders of the aggregate amount they
are entitled to be paid, then the entire assets to be distributed among the
holders of the Series A Convertible Preferred Stock will be distributed pro
rata among the holders of record of the Series A Convertible Preferred Stock
based upon the number of shares of Series A Convertible Preferred Stock held
of record by each holder.
(ii) The merger or consolidation of the corporation into or with
another corporation (except if the corporation is the surviving entity and the
holders of capital stock of the corporation immediately prior to such merger
or consolidation continue to hold at least 80% by voting power of the capital
stock of the surviving corporation), or the sale of all or substantially all
of the assets of the corporation, shall be deemed to be a liquidation,
dissolution, or winding up of the corporation for purposes of paragraph (i).
(iii) The corporation will mail written notice of any
liquidation, dissolution, winding up, merger, consolidation or sale of all or
substantially all of the corporation's assets, not less than thirty (30) days
prior to the record date of any such event, to each holder of record of the
Series A Convertible Preferred Stock.
No Superior Rights.
The corporation will not create a new class or series of shares
having rights and preferences prior and superior or in parity with the shares
of Series A Convertible Preferred Stock or increase the rights and preferences
or the number of authorized shares of a class or series having rights and
preferences prior or superior to the Series A Convertible Preferred Stock.
Replacement.
Upon receipt of evidence reasonably satisfactory to the corporation
(an affidavit of the registered holder will be satisfactory) of the ownership
and the loss, theft, destruction or mutilation of any certificate evidencing
shares of Series A Convertible Preferred Stock, and in the case of any such
loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the corporation, or, in the case of any such mutilation, upon
surrender of the mutilated certificate, the corporation shall execute and
deliver in lieu of that certificate a new certificate of like kind
representing the number of shares of Series A Convertible Preferred Stock
evidenced by the lost, stolen, destroyed or mutilated certificate and dated
the date of the lost, stolen, destroyed or mutilated certificate.
Registration of Transfer.
The corporation shall keep at its principal office a register for
the registration of Series A Convertible Preferred Stock. Upon the surrender
of any certificate representing Series A Convertible Preferred Stock at such
place, the corporation shall, at the request of the recordholder of the
certificate, execute and deliver a new certificate or certificates in exchange
therefor representing in the aggregate the number of shares of Series A
Convertible Preferred Stock represented by the surrendered certificate. Each
new certificate shall be registered in the name and shall represent the number
of shares of Series A Convertible Preferred Stock as is requested by the
holder of the surrendered certificate and shall be substantially identical in
form to the surrendered certificate. In no event, however, shall the
corporation be required to effectuate any transfer of a certificate
representing Series A Convertible Preferred Stock unless and until the
corporation shall have received an opinion of counsel reasonably acceptable to
the corporation (which opinion shall be furnished at the expense of the holder
of the certificate) to the effect that any such transfer may be made without
registration under the Securities Act of 1933, as amended, or any applicable
state securities laws.
V. NO PREEMPTIVE RIGHTS
The shareholders of the corporation shall not have any preemptive
rights to subscribe for or acquire securities or rights to purchase securities
of any class, kind or series of the corporation.
VI. BOARD OF DIRECTORS
The business and affairs of the corporation shall be managed by or
under the direction of a board of directors consisting of not fewer than five
(5) nor more than nine (9) directors, the exact number of directors to be
determined from time to time by resolution adopted by the board of directors
in accordance with the California General Corporation Law.
VII. LIMITATION ON DIRECTORS LIABILITY
The liability of directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
PAGE
<PAGE>
VIII. INDEMNIFICATION
The corporation is authorized to provide indemnification of its
agents (as defined in Section 317 of the California Corporations Code) for
breach of duty to the corporation and its shareholders through by-law
provisions or through agreements with its agents or both, in excess of the
indemnification otherwise permitted by Section 317 of the California
Corporations Code, subject to the limits on excess indemnification set forth
in Section 204 of the California Corporations Code.
1.The foregoing amendments and restatement of articles of incorporation have
been duly approved by the board of directors.
2.The foregoing amendments and restatement of articles of incorporation have
been duly approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code. The total number of outstanding shares
of the corporation is 1000 shares of Common Stock. The number of shares
voting in favor of the amendments and restatement equaled or exceeded the vote
required. The percentage vote required was more than 50%.
The undersigned further declare under penalty of perjury under the laws
of the State of California that the matters set forth in this certificate are
true and correct of their own knowledge.
Date:____________, __,
1997
Robert L.B. Diener
Wouter van Biene
PAGE
<PAGE>
Exhibit 3
BYLAWS
OF
UStel, Inc.
a California corporation
ARTICLE I
OFFICES, CORPORATE SEAL
Section 1.01. Registered Office. The registered office of the
corporation in California shall be that set forth in the articles of
incorporation or in the most recent amendment of the articles of incorporation
or resolution of the directors.
Section 1.02. Other Offices. The corporation may have such other
offices, within or without the state of California, as the directors shall,
from time to time, determine.
Section 1.03. Corporate Seal. The corporation shall have a corporate
seal as shown below:
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 2.01. Place and Time of Meetings. Except as provided
otherwise by the California General Corporation Law, meetings of the
shareholders may be held at any place, within or without the state of
California, as may from time to time be designated by the directors.
Section 2.02. Regular Meetings.
(a) A regular meeting of the shareholders shall be held on August
1st, or the nearest day not constituting a holiday, each year.
(b) At a regular meeting, the shareholders, voting as provided in the
articles of incorporation and these bylaws, shall elect qualified successors
for directors as provided in the California General Corporation Law Section
301 and shall transact such other business as may properly come before them.
(c) To be properly brought before a regular meeting of shareholders,
business must be either (1) specified in the notice of the meeting, (2)
directed to be brought before the meeting by the board of directors or (3)
proposed by a shareholder in the manner herein provided. For business to be
properly brought before a regular meeting by a shareholder, the shareholder
must give written notice to the Secretary of the corporation so as to be
received at the principal executive offices of the corporation not later than
the close of business on the 15th day following the day on which the notice of
the regular meeting was mailed to shareholders. Such notice shall set forth
(1) a brief description of the business desired to be brought before the
regular meeting and the reasons for conducting such business, (2) the name and
record address of the shareholder proposing such business, (3) the class and
number of shares of the corporation beneficially owned by the shareholder and
(4) any material interest of the shareholder in such business.
Section 2.03. Special Meetings. Special meetings of the shareholders
may be held at any time and for any purpose and may be called by the Board of
Directors, the Chairman of the Board, the President, the Chief Financial
Officer, two or more directors or by a shareholder or shareholders holding 10%
or more of the voting power of all shares entitled to vote. A shareholder or
shareholders holding the requisite percentage of the voting power of all
shares entitled to vote may demand a special meeting of the shareholders by
written notice of demand given to the Chairman of the Board, President, Vice
President or Secretary of the corporation and containing the purposes of the
meeting. Not less than 35 days, no more than 60 days after receipt of demand
by one of those officers, the board of directors shall cause a special meeting
of shareholders to be called and held, at the expense of the corporation.
Special meetings shall be held on the date and at the time and place fixed by
the Chief Executive Officer or the board of directors, except that a special
meeting called by or at demand of a shareholder or shareholders shall be held
in the county where the principal executive office is located. The business
transacted at a special meeting shall be limited to the purposes as stated in
the notice of the meeting.
Section 2.04. Quorum, Adjourned Meetings. The holders of a majority
of the shares entitled to vote represented in person or by proxy shall
constitute a quorum for the transaction of business at any regular or special
meeting. In case a quorum shall not be present at a meeting, the meeting may
be adjourned from time to time by the vote of a majority of the shares
represented either in person or by proxy without notice other than
announcement at the time of adjournment of the date, time and place of the
adjourned meeting. At adjourned meetings at which a quorum is present, any
business may be transacted which might have been transacted at the meeting as
originally noticed. If a quorum is present when a meeting is convened, the
shareholders present may continue to transact business until adjournment
notwithstanding the withdrawal of enough shareholders originally present to
leave less than a quorum.
Section 2.05. Voting. At each meeting of the shareholders, every
shareholder having the right to vote shall be entitled to vote either in
person or by proxy. Each shareholder, unless the articles of incorporation or
statutes provide otherwise, shall have one vote for each share having voting
power registered in such shareholder's name on the books of the corporation.
Jointly owned shares may be voted by any joint owner unless the corporation
receives written notice from any one of them denying the authority of that
person to vote those shares. Upon the demand of any shareholder, the vote
upon any question before the meeting shall be by ballot. All questions shall
be decided by a majority vote of the number of shares entitled to vote and <PAGE>
represented at the meeting at the time of the vote except if otherwise
required by statute, the articles of incorporation, or these bylaws.
Section 2.06. Record Date. The board of directors may in advance fix
a date, not exceeding 60 days nor less than 10 days preceding the date of any
meeting of shareholders, as a record date for the determination of the
shareholders entitled to notice of, and to vote at, such meeting,
notwithstanding any transfer of shares on the books of the corporation after
any record date so fixed. If the board of directors fails to fix a record
date for determination of the shareholders entitled to notice of, and to vote
at, any meeting of shareholders, the record date shall be as set forth in
Section 701(b)(1) of the General Corporation Law of California, or any
successor section.
Section 2.07. Notice of Meetings. There shall be mailed to each
shareholder, shown by the books of the corporation to be a holder of record of
voting shares, at his address as shown by the books of the corporation, a
notice setting out the date, time and place of each regular meeting and each
special meeting, except where the meeting is an adjourned meeting and the
date, time and place of the meeting were announced at the time of adjournment,
which notice shall be mailed at least ten days, nor more than 60 days prior
thereto. Every notice of any special meeting called pursuant to section 2.03
hereof shall state the purpose or purposes for which the meeting has been
called, and the business transacted at all special meetings shall be confined
to the purposes stated in the notice.
Section 2.08. Waiver of Notice. Notice of any regular or special
meeting may be waived by any shareholder either before, at or after such
meeting, in writing, signed by such shareholder or a representative entitled
to vote the shares of such shareholder or by signing a consent to the holding
of the meeting or by approving the minutes thereof. A shareholder, by his
attendance at any meeting of shareholders, shall be deemed to have waived
notice of such meeting, except where the shareholder objects at the beginning
of the meeting to the transaction of business because the meeting is not
lawfully called or convened, or objects before a vote on an item of business
because the item may not lawfully be considered at that meeting and does not
participate in the consideration of the item at that meeting. Attendance at a
meeting is not a waiver of any right to object to the consideration of matters
required to be included in the notice but not so included, if the objection is
expressly made at the meeting.
Section 2.09. Conduct of Meetings. The presiding officer at each
meeting of shareholders shall conclusively determine the order of business,
all matters of procedure and whether or not a proposal is proper business to
be transacted at the meeting and has been properly brought before the
meeting. Following completion of the business of the meeting as determined by
the presiding officer, the presiding officer shall have the exclusive
authority and power to adjourn the meeting.
Section 2.10. Nomination of Directors. Only persons nominated in
accordance with the following procedures shall be eligible for election by
shareholders as directors. Nominations of persons for election as directors
may be made at a meeting of shareholders called for the purpose of electing
directors (a) by or at the direction of the board of directors or (b) by any
shareholder in the manner herein provided. For a nomination to be properly
made by a shareholder, the shareholder must give written notice to the
Secretary of the corporation so as to be received at the principal executive
offices of the corporation not later than the close of business on the
fifteenth day following the day on which the notice of the meeting of
shareholders was mailed to shareholders. Such notice shall set forth (a) as
to each person the shareholder proposes to nominate (1) the name, age,
business address and residence address of the person, (2) the principal
occupation or employment of the person, (3) the class and number of shares of
the corporation's capital stock beneficially owned by the person and (4) any
other information required to be disclosed in solicitations of proxies for
election of directors pursuant to Regulation 14A under the Securities Exchange
Act of 1934; and (b) as to the shareholder giving the notice (1) the name and
record address of the shareholder and (2) the class and number of shares of
the corporation beneficially owned by the shareholder.
ARTICLE III
DIRECTORS
Section 3.01. General Powers. The business and affairs of the
corporation shall be managed by or under the authority of the board of
directors, except as otherwise permitted by statute.
Section 3.02. Number, Qualification and Term of Office. The board
shall consist of not fewer than five (5) nor more than nine (9) directors.
The number of directors shall be fixed by resolution of the board of directors
and thereafter shall be increased or decreased from time to time by resolution
of the board of directors or the shareholders. Directors need not be
shareholders. Each of the directors shall hold office until the regular
meeting of shareholders next held after such director's election and until
such director's successor shall have been elected and shall qualify, or until
the earlier death, resignation, removal, or disqualification of such director.
Section 3.03. Board Meetings. Meetings of the board of directors may
be held from time to time at such time and place within or without the state
of California as may be designated in the notice of such meeting.
Section 3.04. Calling Meetings; Notices. Meetings of the board of
directors may be called by the Chairman of the Board and/or the Chief
Executive Officer by giving at least four (4) days notice by mail or 48 hours
notice delivered personally or by telephone, facsimile, electronic mail or
other electronic means, of the date, time and place thereof to each director.
If the day or date, time and place of a meeting of the board of directors has
been announced at a previous meeting of the board, no notice is required.
Notice of an adjourned meeting of the board of directors need not be given <PAGE>
other than by announcement at the meeting at which adjournment is taken.
Section 3.05. Waiver of Notice and Action Without a Meeting. Notice
of any meeting of the board of directors may be waived by any director either
before, at, or after such meeting in a writing signed by such director or who
signs a consent to holding the meeting or approves the minutes thereof. A
director, by his attendance at any meeting of the board of directors, shall be
deemed to have waived notice of such meeting, except where the director
objects at the beginning of the meeting to the transaction of business because
the meeting is not lawfully called or convened and does not participate
thereafter in the meeting.
Any action required or permitted to be taken by the board of directors
may be taken without a meeting, if all members of the board shall individually
or collectively consent in writing to such action, as permitted by California
Corporations Code Section 307(b).
Section 3.06. Quorum. A majority of the directors authorized number
of directors immediately prior to a meeting of the board of directors shall
constitute a quorum for the transaction of business at such meeting.
Section 3.07. Conference Communications. Any or all directors may
participate in any meeting of the board of directors, or of any duly
constituted committee thereof, by any means of communication through which the
directors may simultaneously hear each other during such meeting. For the
purposes of establishing a quorum and taking any action at the meeting, such
directors participating pursuant to this section shall be deemed present in
person at the meeting; and the place of the meeting shall be the place of
origination of the conference telephone conversation or other comparable
communication technique.
Section 3.08. Vacancies; Newly Created Directorships. Vacancies on
the board of directors of this corporation occurring by reason of death,
resignation, removal or disqualification shall be filled for the unexpired
term by a majority of the remaining directors of the board although less than
a quorum; newly created directorships resulting from an increase in the
authorized number of directors by action of the board of directors as
permitted by section 3.02 may be filled by a majority vote of the directors
serving at the time of such increase; and each director elected pursuant to
this section 3.08 shall be a director until such director's successor is
elected by the shareholders at their next regular or special meeting.
Section 3.09. Removal. Any or all of the directors may be removed
from office at any time, with or without cause, by the affirmative vote of the
shareholders holding a majority of the shares entitled to vote at an election
of directors. No director may be removed (unless the entire board is removed)
when the votes cast against removal, or not consenting in writing to the
removal, would be sufficient to elect the director if voted cumulatively at an
election at which the same total number of votes were cost (or, if the action
is taken by written consent, all shares entitled to vote were voted) and the
entire number of directors authorized at the time of the director's most
recent election were then being elected. In the event that the entire board
or any one or more directors be so removed by the shareholders, new directors
may be elected at the same meeting.
Section 3.10. Committees. A resolution approved by the affirmative
vote of a majority of the board of directors may establish committees having
the authority of the board in the management of the business of the
corporation to the extent provided in the resolution. A committee shall
consist of two or more directors, appointed by affirmative vote of a majority
of the directors present. Committees are subject to the direction and control
of, and vacancies in the membership thereof shall be filled by, the board of
directors. A majority of the members of the committee present at a meeting is
a quorum for the transaction of business.
Section 3.11. Written Action. Any action which might taken at a
meeting of the board of directors, or any duly constituted committee thereof,
may be taken without a meeting if done in writing and signed by all of the
directors or committee members.
Section 3.12. Compensation. Directors who are not salaried officers
of this corporation shall receive such fixed sum per meeting attended or such
fixed annual sum as shall be determined, from time to time, by resolution of
the board of directors. The board of directors may, by resolution, provide
that all directors shall receive their expenses, if any, of attendance at
meetings of the board of directors or any committee thereof. Nothing herein
contained shall be construed to preclude any director from serving this
corporation in any other capacity and receiving proper compensation therefor.
ARTICLE IV
OFFICERS
Section 4.01. Number and Designation. The corporation shall have one
or more natural persons exercising the functions of the offices of Chairman of
the Board, President, Chief Executive Officer and Chief Financial Officer.
The board of directors may elect or appoint such other officers or agents as
it deems necessary for the operation and management of the corporation, with
such powers, rights, duties, and responsibilities as may be determined by the
board of directors, including, without limitation, Chairman of the Board, a
President, and one or more Vice Presidents, a Secretary, a Treasurer and such
assistant officers or other officers as may from time to time be elected or
appointed by the board of directors. Each such officer shall have the powers,
rights, duties and responsibilities set forth in these bylaws unless otherwise
determined by the board of directors. Any number of offices may be held by
the same person.
Section 4.02. Chief Executive Officer. Unless provided otherwise by
a resolution adopted by the board of directors, the Chief Executive Officer: <PAGE>
(a) shall have general active management of the business of the corporation;
(b) shall, when present, preside at all meetings of the shareholders; (c)
shall see that all orders and resolutions of the board of directors are
carried into effect; (d) shall sign and deliver in the name of the corporation
any deeds, mortgages, bonds, contracts or other instruments pertaining to the
business of the corporation, except in cases in which the authority to sign
and delivery is required by law to be exercised by another person or is
expressly delegated by these bylaws or the board of directors to some other
officer or agent of the corporation; and (e) shall perform such other duties
as from time to time may be assigned by the board of directors.
Section 4.03. Chief Financial Officer. Unless provided otherwise by
a resolution adopted by the board of directors, the Chief Financial Officer:
(a) shall cause to be kept accurate financial records for the corporation; (b)
shall cause to be deposited all monies, drafts and checks in the name of and
to the credit of the corporation in such banks and depositories as the board
of directors shall designate from time to time; (c) shall cause to be endorsed
for deposit all notes, checks and drafts received by the corporation as
ordered by the board of directors, making proper vouchers therefor; (d) shall
cause to be disbursed corporate funds and shall cause to be issued checks and
drafts in the name of the corporation, as ordered by the board of directors;
(e) shall render to the Chief Executive Officer and the board of directors,
whenever requested, an account of all the transactions as Chief Financial
Officer and of the financial condition of the corporation; and (f) shall
perform such other duties as may be prescribed by the board of directors or
the Chief Executive Officer from time to time.
Section 4.04. Chairman of the Board. The Chairman of the Board, if
one is elected, shall preside at all meetings of the directors and shall have
such other duties as may be prescribed, from time to time, by the board of
directors.
Section 4.05. President. Unless otherwise determined by the board of
directors, the President shall be the Chief Executive Officer of the
corporation. If an officer other than the President is designated Chief
Executive Officer, the President shall perform such duties as may from time to
time be assigned by the board of directors.
Section 4.06. Vice President. Each Vice President shall perform such
duties as may be prescribed from time to time by these bylaws or by the board
of directors.
Section 4.07. Secretary. Unless provided otherwise by a resolution
adopted by the board of directors, the Secretary: (a) shall attend all
meetings of the shareholders and board of directors, and shall record all the
proceedings of such meetings in the minute book of the corporation; (b) shall
give proper notice of meetings of shareholders and board of directors and
other notices required by law or these bylaws; and (c) shall perform such
other duties as from time to time may be assigned by the board of directors.
Section 4.08. Treasurer. Unless otherwise determined by the board of
directors, the Treasurer shall be the Chief Financial Officer of the
corporation. If an officer other than the Treasurer is designated Chief
Financial Officer, the Treasurer shall perform such duties as may from time to
time be assigned by the board of directors.
Section 4.09. Authority and Duties. In addition to the foregoing
authority and duties, all officers of the corporation shall respectively have
such authority and perform such duties in the management of the business of
the corporation as may be determined from time to time by the board of
directors. Unless prohibited by a resolution of the board of directors, an
officer elected or appointed by the board of directors may, without specific
approval of the board of directors, delegate some or all of the duties and
powers of an office to other persons.
Section 4.10. Removal and Vacancies. The board of directors may
remove any officer from office at any time, with or without cause, by a
resolution approved by the affirmative vote of a majority of the directors
present. Such removal, however, shall be without prejudice to the contract
rights of the person so removed. A vacancy in an office of the corporation by
reason of death, resignation, removal, disqualification, or otherwise may, or
in the case of a vacancy in the office of the Chief Executive Officer or Chief
Financial Officer shall, be filled for the unexpired term by the board of
directors.
Section 4.11. Compensation. The officers of this corporation shall
receive such compensation for their services as may be determined by or in
accordance with resolutions of the board of directors or by one or more
committees to the extent so authorized from time to time by the board of
directors.
PAGE
<PAGE>
ARTICLE V
SHARES AND THEIR TRANSFER
Section 5.01. Certificates for Shares. All shares of the corporation
shall be certificated shares. Each holder of shares of the corporation shall
be entitled to a certificate for shares in such form as the board of directors
may, from time to time, approve. Certificates shall be signed by an
authorized representative of the corporation's transfer agent. A certificate
representing shares of this corporation shall contain on its face the
information required by the General Corporation Law of the state of
California. A certificate representing shares issued by this corporation
shall set forth upon the face or back of the certificate, or shall state that
the corporation will furnish to any shareholder upon request and without
charge, a full statement of the designations, preferences, limitations and
relative rights of the shares of each class or series authorized to be issued,
so far as they have been determined, and the authority of the board to
determine relative rights and preferences of subsequent classes or series.
Section 5.02. Issuance of Shares. The board of directors is
authorized to cause to be issued shares of the corporation up to the full
amount authorized by the articles of incorporation in such amounts as may be
determined by the board of directors and as may be permitted by law. Shares
may be issued for any consideration allowed by law. At the time of approval
of the issuance of shares, the board of directors shall state, by resolution,
its determination of the fair value to the corporation in monetary terms of
any consideration other than cash for which shares are to be issued.
Section 5.03. Transfer of Shares. Transfer of shares on the books of
the corporation may be authorized only by the shareholder named in the
certificate, or the shareholder's legal representative, or the shareholder's
duly authorized attorney-in-fact, and upon surrender of the certificate or the
certificates for such shares. The corporation may treat as the absolute owner
of shares of the corporation, the person or persons in whose name shares are
registered on the books of the corporation.
Section 5.04. Loss of Certificates. Any shareholder claiming a
certificate for shares to be lost, stolen, or destroyed shall make an
affidavit of that fact in such form as the board of directors and/or the
corporation's transfer agent shall require and shall, if the board of
directors and/or the corporation's transfer agent so requires, give the
corporation and/or the corporation's transfer agent a bond of indemnity in
form, in an amount, and with one or more sureties satisfactory to the board of
directors and/or the corporation's transfer agent, to indemnify the
corporation an/or the corporation's transfer agent against any claim which may
be made against it on account of the reissue of such certificate, whereupon a
new certificate may be issued in the same tenor and for the same number of
shares as the one alleged to have been lost, stolen or destroyed.
ARTICLE VI.
DISTRIBUTIONS, RECORD DATE
Section 6.01. Distributions. Subject to the provisions of the
articles of incorporation, of these bylaws, and of law, the board of directors
may authorize and cause the corporation to make distributions whenever, and in
such amounts or forms as, in its opinion, are deemed advisable.
Section 6.02. Record Date. Subject to any provisions of the articles
of incorporation, the board of directors may fix a date which shall not be
more than 60 nor less than 10 days preceding the date fixed for payment of any
distribution as the record date for the determination of the shareholders
entitled to receive payment of the distribution and, in such case, only
shareholders of record on the date so fixed shall be entitled to receive
payment of such distribution notwithstanding any transfer of shares on the
books of the corporation after the record date.
ARTICLE VII
BOOKS AND RECORDS, FISCAL YEAR
Section 7.01 Share Register. The board of directors of the
corporation shall cause to be kept at its principal executive office, or at
the office of its transfer agent:
(1)a share register not more than one year old, containing the names and
addresses of the shareholders and the number and classes of shares held by
each shareholder; and
(2)a record of the dates on which certificates or transaction statements
representing shares were issued.
Section 7.02. Other Books and Records. The board of directors shall
cause to be kept at its principal executive office, or, shall make available
at its primary executive office, originals or copies of:
(1)records of all proceedings of shareholders for the last three
years;
(2)records of all proceedings of the board for the last three years;
(3)its articles and all amendments currently in effect;
(4)its bylaws and all amendments currently in effect;
(5)financial statements required by the General Corporation Laws of
California and the financial statements for the most recent interim period
prepared in the course of the operation of the corporation for distribution to
the shareholders or to a governmental agency as a matter of public record;<PAGE>
(6)reports made to shareholders generally within the last three
years;
(7)a statement of the names and usual business addresses of its
directors and principal officers; and
(8)any shareholder voting or control agreements of which the
corporation is aware.
Section 7.03. Fiscal Year. The fiscal year of the corporation shall
be determined by the board of directors.
ARTICLE VIII
LOANS, GUARANTEES, SURETYSHIP
Section 8.01. The corporation may lend money to, guarantee an
obligation or, become a surety for, or otherwise financially assist a person
if the transaction, or a class of transactions to which the transaction
belongs, is approved by the affirmative vote of a majority of the directors
present, and is in accordance with the California General Corporation Law.
Subject to the requirements of the California General Corporation Law
such loan, guarantee, surety contract or other financial assistance may be
with or without interest, and may be unsecured, or may be secured in the
manner as a majority of the directors present approve, including, without
limitation, a pledge of or security interest in shares of the corporation.
Nothing in this section shall de deemed to deny, limit or restrict the powers
of guaranty, surety or warranty of the corporation at common law or under a
statute of the state of California.
ARTICLE IX
INDEMNIFICATION OF CERTAIN PERSONS
Section 9.01. The corporation shall indemnify all officers and
directors of the corporation, for such expenses and liabilities, including the
advancement of reimbursement of expenses, in such manner, under such
circumstances and to such extent as permitted by law, as now enacted or
hereafter amended. Unless otherwise approved by the board of directors, the
corporation shall not indemnify any employee of the corporation who is not
otherwise entitled to indemnification pursuant to the prior sentence of this
section, nor shall the corporation indemnify and officer or director of the
corporation for claims brought or made by him or her against the corporation.
ARTICLE X
AMENDMENTS
Section 10.01 Subject to the provisions of the California General
Corporation Law these bylaws may be amended or altered by a vote of the
majority of the whole board of directors at any meeting. Such authority of
the board of directors is subject to the power of the shareholders,
exercisable in the manner provided in the California General Corporation Law,
to adopt, amend, or repeal bylaws adopted, amended, or repealed by the board
of directors. The board of directors shall not in any case adopt, amend or
repeal a bylaw fixing a quorum for meetings of shareholders, prescribing
procedures for removing directors or filling vacancies in the board of
directors, but the board of directors may adopt or amend a bylaw to increase
the number of directors.
ARTICLE XI
SECURITIES OF OTHER CORPORATIONS
Section 11.01. Voting Securities Held by the Corporation. Unless
otherwise ordered by the board of director, the Chief Executive Officer shall
have full power and authority on behalf of the corporation (a) to attend any
meeting of security holders of other corporations in which the corporation may
hold securities and to vote such securities on behalf of this corporation; (b)
to execute any proxy for such meeting on behalf of the corporation; or (c) to
execute a written action in lieu of a meeting of such other corporation on
behalf of this corporation. At such meeting, the Chief Executive Officer
shall possess and may exercise any and all rights and powers incident to the
ownership of such securities that the corporation possesses. The board of
directors may, from time to time, grant such power and authority to one or
more other persons and may remove such power and authority from the Chief
Executive Officer or any other person or persons.
Section 11.02 Purchase and Sale of Securities. Unless otherwise
ordered by the board of directors, the Chief Executive Officer shall have full
power and authority on behalf of the corporation to purchase, sell, transfer
or encumber any and al securities of any other corporation owned by the
corporation, and may execute and deliver such documents as may be necessary to
effectuate such purchase, sale, transfer or encumbrance. The board of
directors may, from time to time, confer like powers upon any other person or
persons.
Effective Date of Bylaws: ________________
PAGE
<PAGE>
APPENDIX D
[Letter Head of Barber & Bronson Incorporated]
As of September 29, 1997
Board of Directors
UStel, Inc.
6167 Bristol Parkway
Suite 300
Culver City, California 90230
Members of the Board:
We understand that UStel, Inc., a Minnesota corporation ("UStel") and
S.V.V. Sales, Inc, a Washington corporation d/b/a Arcada Communications
("Arcada"), have entered into an Agreement and Plan of Merger dated September
25, 1997 (the "Agreement") pursuant to which Arcada will merge with and into a
newly-formed subsidiary of UStel and the stockholders of all of the
outstanding shares of Arcada shall receive: (i) an aggregate of 2,100,000
newly issued shares of UStel common stock, $.01 par value per share ("Common
Stock"), subject to adjustment as defined in the Agreement; (ii) an aggregate
of $1,500,000 in principal amount of 10% Convertible Subordinated Debentures
issued by UStel; and (iii) an aggregate of $5,000,000 cash. The transaction
described in the preceding sentence is hereby referred to as the "Proposed
Transaction." The terms and conditions of the Proposed Transaction are set
forth in detail in the Agreement.
You have requested our opinion as to the fairness, from a financial point
of view, to UStel of the consideration to be offered to the stockholders of
Arcada in the Proposed Transaction. We have not been requested to opine as
to, and our opinion does not in any manner address, the underlying business
decision of UStel to proceed with or effect the Proposed Transaction.
In arriving at our opinion, we, among other things: (i) reviewed the
Agreement and the specific terms of the Proposed Transaction; (ii) reviewed
publicly available financial information and other data with respect to UStel
and Arcada, including UStel's Form 10-KSB for the fiscal year ended December
31, 1996 and Form 10-QSB for the six months ended June 30, 1997, and certain
other relevant financial and operating data relating to UStel and Arcada made
available to us from published sources and from the internal records of UStel
and Arcada; (iii) reviewed and discussed with representatives of the
managements of UStel and Arcada certain financial and operating information
furnished to us by them, including financial projections and related
assumptions with respect to the business, operations and prospects of UStel
and Arcada furnished; (iv) considered the financial terms, to the extent
publicly available, of certain other transactions that we deemed comparable;
(v) considered the historical financial results and present financial
condition of each of UStel and Arcada with those of other companies that we
deemed relevant; (vi) reviewed certain publicly available information
concerning the trading of, and the trading market for, the common stock of
UStel and other companies that we deemed comparable; (vii) inquired about and
discussed the Proposed Transaction and Agreement and other matters related
thereto with UStel's counsel; and (viii) performed such other analyses and
examinations as we deemed appropriate.
In arriving at our opinion, we have relied upon and assumed the accuracy
and completeness of all of the financial and other information that was used
by us without assuming any responsibility for any independent verification of
any such information and have further relied upon the assurances of
managements of UStel and Arcada that they were not aware of any facts or
circumstances that would make any such information inaccurate or misleading.
With respect to the financial projections of UStel and Arcada, upon the advice
of management of UStel, we have assumed that such projections have been
reasonably prepared on a basis reflecting the best currently available
estimates and judgements of the managements of UStel and Arcada as to the
future operating and financial performances of UStel and Arcada, respectively,
and that such projections provide a reasonable basis upon which we could form
an opinion. Neither UStel and Arcada publicly discloses internal management
forecasts of the type provided to us by their respective managements in
connection with our review of the Proposed Transaction. Such projections were
not prepared with a view toward public disclosure. In addition, such
projections were based upon numerous variables and assumptions that are
inherently uncertain, including, without limitation, factors relating to
general economic and competitive conditions. Accordingly, actual results
could vary significantly from those set forth in such projections. We have
assumed no liability for such forecasts. In arriving at our opinion, we have
not made a physical inspection of the properties and facilities of UStel and
Arcada, and have not made or obtained any evaluations or appraisals of the
assets and liabilities (contingent or otherwise) of UStel and Arcada. We have
assumed that the Proposed Transaction will be consummated in an manner that
complies in all respects with the applicable provisions of the Securities Act <PAGE>
of 1933, as amended, the Exchange Act of 1934, as amended, and all other
applicable federal and state statues, rules and regulations. In addition,
upon the advice of the management of UStel and its legal and accounting
advisors, we have assumed that the Proposed Transaction will qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended and therefore, as a tax-free transaction to the
stockholders of Arcada to the extent such stockholders receive UStel Common
Stock. Our opinion was necessarily based upon market, economic and other
conditions as they exist on, and could be evaluated as of, the date of this
letter. Accordingly, although subsequent developments may affect our opinion,
we did not assume any obligation to update, review or reaffirm our opinion.
We have also assumed, with your consent, that the Proposed Transaction
will be consummated in accordance with the terms described in the Agreement,
without any further amendments thereto, and without waiver by UStel of any of
the conditions to its obligations thereunder.
Based upon and subject to the foregoing, it is our opinion as of the date
of this letter that, from a financial point of view, the consideration to be
offered to the stockholders of Arcada in the Proposed Transaction is fair to
UStel.
An affiliate of Barber & Bronson has acted as financial advisor to UStel
in connection with the transaction described above and will receive a fee for
its services contingent upon consummation of the Proposed Transaction. In
addition, we will receive a fee for rendering this opinion. In addition, as
you are aware, we have previously rendered services to UStel in connection
with a placement of UStel Common Stock, for which we received customary
compensation, including warrants, which we continue to hold, to purchase
106,250 shares of UStel Common Stock at a price of $3.75 per share. In
addition, UStel has agreed to indemnify us for certain liabilities that may
arise out of the rendering this opinion. Finally, in the ordinary course of
business, we may actively trade the securities of UStel for our own account
and for the accounts of our customers and, accordingly, at any time may hold a
long or short position in such securities.
Our opinion is for the use and benefit of the Board of Directors of the
UStel and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any stockholder of UStel as to how
such stockholder should vote with respect to the Proposed Transaction. We
understand that this opinion may be included in a document required to be
filed with the Securities and Exchange Commission and distributed to
stockholders in connection with the Proposed Transaction, subject to the
approval in form and substance by us and our legal counsel of any description
of or reference to us or any summary of this opinion or any presentation of
Barber & Bronson included in such document.
Very truly yours,
BARBER & BRONSON INCORPORATED
PAGE
<PAGE>
PROXY
USTEL, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS ON DECEMBER 19, 1997. THIS PROXY IS
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Robert L. B. Diener with full power of
substitution, as proxy of the undersigned to attend the Special Meeting of
Stockholders of UStel, Inc. (the "Company") at the executive offices of the
Company at 6167 Bristol Parkway, Suite 100, Culver City, California 90230
on December 19, 1997 at 10:00 a.m. Pacific Standard Time, and any adjournment
of postponement thereof, and to vote the number of shares the undersigned
would be entitled to vote if personally present on the following:
1.To approve the Merger Agreement and Plan of Reorganization by and among
UStel, Inc., Arcada Acquisition Corp., and S.V.V. Sales, Inc., d.b.a., Arcada
Communications dated September 25, 1997, the issuance of the UStel, Inc.
Common Stock pursuant thereto and the Merger to be effected thereby.
The Board of Directors recommends a vote FOR.
FOR AGAINST ABSTAIN
2.To approve the Reincorporation Merger Agreement between UStel, Inc. and
UStel Merger Corporation, dated November 12, 1997 and the Merger and
Reincorporation effected thereby.
The Board of Directors recommends a vote FOR.
FOR AGAINST ABSTAIN
3.To approve the Amended and Restated Certificate of Incorporation of UStel
Merger Corporation, including its name change to UStel, Inc.
The Board of Directors recommends a vote FOR.
FOR AGAINST ABSTAIN
4.To approve any proposal to adjourn or postpone the Special Meeting in the
event that the management of the Company determines, in its sole discretion,
that such adjournment or postponement is necessary or appropriate.
The Board of Directors recommends a vote FOR.
FOR AGAINST ABSTAIN
5.In their discretion, upon any and all such other matters as may properly
come before the meeting.
Dated: , 1997
Signature
Signature, if held jointly.
THIS PROXY WILL BE VOTED AS SPECIFIED, OR IF NO CHOICE IS SPECIFIED, WILL
BE VOTED FOR PROPOSALS 1, 2, 3, 4 AND 5. (Please sign exactly as your name
appears on your stock certificate. When shares are held by joint tenants,
both should sign. When signing as attorney, as executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.)
STOCKHOLDERS ARE URGED TO MARK, DATE SIGN AND RETURN THIS PROXY IN THE
ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
