<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly period ended June 30, 1998
Commission File number 0-24098
UStel, Inc.
(Name of Small Business Issuer in its charter)
Minnesota 95-4362330
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
6167 Bristol Parkway #100, Culver City CA 90230
(Address of principal executive offices) (Zip code)
(310) 645-1770
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed
Sections 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes_X___ No_____.
State the number of shares outstanding of each of issuers's classed
of
common equity as of the latest practicable date.
Class Outstanding as of August 12, 1998
Common Stock, $0.01 par value per share 11,503,252 shares
Transitional Small Business Disclosure Format (check one)
Yes______; No___X__
PAGE
<PAGE>
USTEL, INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and June 30, 1998................... 2
Condensed Consolidated Statements of Operations -
Three Months and Six Months Ended June 30, 1997 and
Three Months and Six Months Ended June 30, 1998........4
Condensed Consolidated Statement of Changes In
Stockholders' Equity For The Period
January 1, 1998 to June 30, 1998.......................5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and
June 30, 1998..........................................6
Summary of Accounting Policies.........................7
Notes To Condensed Consolidated Financial Statements..11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS..................18
PART II - OTHER INFORMATION
Items 1 through 5 are not applicable for the quarter ended
June 30, 1998.
Item 6
Form 8-K Dated June 25, 1998:
Item 5 - Other Events.
Form 8-K-A Dated June 25, 1998:
Item 5 - Other Events. This report incorporated certain
financial statements previously filed on Form S-4, filed on
October 27, 1997 as Commission File No. 33-38831.
<PAGE> <PAGE>
<TABLE>
ITEM 1:
UStel, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<CAPTION>
December 31, June 30,
1997 1998
Assets (Notes 6 and 8) (Audited) (Unaudited)
Current
<S> <C> <C>
Cash $ 135,689 $ 3,724,358
Accounts receivable, less allowance for
doubtful accounts of $1,696,000 and
$2,526,000, respectively 6,937,179 9,815,815
Prepaid expenses and other current assets 606,067 762,615
---------- ----------
Total current assets 7,678,935 14,302,788
---------- ----------
Property and equipment
Office furniture and equipment 3,073,452 5,232,668
Leasehold improvement 197,616 245,806
---------- ----------
3,271,068 5,478,474
Less accumulated depreciation (873,198) (1,081,215)
---------- ----------
Net property and equipment 2,397,870 4,397,259
---------- ----------
Original issue discount on Goldman Sachs
Note Payable (Note 6) -0- 2,800,000
Goodwill, net of accumulated amortization
of $102,454 and $213,267, respectively
(Notes 5 and 6) 4,333,049 17,427,913
Related party receivables (Note 4) 348,308 426,226
Other receivables, less allowance for
doubtful accounts of $559,000 and
$559,000, respectively 149,170 142,971
Start-up costs less accumulated amortization
of $162,538 and $166,103, respectively 78,429 -0-
Deferred charges (Note 3) 982,938 2,414,320
----------- -----------
Total Assets $15,968,699 $41,911,477
=========== ===========
<FN>
See accompanying summary of accounting policies and notes to condensed
consolidated financial statements.
</TABLE>
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<TABLE>
UStel, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<CAPTION>
December 31, June 30,
1997 1998
Liabilities and stockholders' equity (Audited) (Unaudited)
Current
<S> <C> <C>
Notes payable to bank (Note 7) $ 3,338,592 $ 250,000
Notes payable to others 1,561,532 939,102
Accounts payable and accrued expenses 3,066,322 11,529,027
Accrued revenue taxes 282,311 463,704
---------- -----------
Total current liabilities 8,248,757 13,181,833
Notes payable to Goldman Sachs CP(Note 6) -0- 15,907,820
Other long-term debt -0- 393,567
Convertible subordinated debentures
(Note 9 ) 500,000 1,250,000
---------- -----------
Total liabilities 8,748,757 30,733,220
---------- -----------
Commitments and contingencies (Note 10)
Stockholders' equity
Series A Convertible Preferred Stock,
$.01 par value, 5,000,000 shares
authorized and 275,000 and 275,000
shares outstanding (Liquidation
Preference $1,500,000) (Note 11) 2,750 2,750
Series B Convertible Preferred Stock,
$.01 par value, 750,000 shares
authorized and -0- and 750,000
shares outstanding (Liquidation
Preference $750,000) (Note 11) -0- 7,500
Common stock, $.01 par value, 40,000,000
shares authorized; 6,911,515 and
11,492,281 shares issued and
outstanding (Note 12) 69,115 114,923
Additional paid-in capital 18,238,940 25,490,977
Accumulated deficit (11,090,863) (13,279,893)
----------- -----------
Sub-total 7,219,942 12,336,257
Less Treasury Stock -0- (1,158,000)
----------- -----------
Total Stockholders' Equity 7,219,942 11,178,257
----------- -----------
Total Liabilities and Stockholders'
Equity $15,968,699 $41,911,477
=========== ===========
<F/N>
See accompanying summary of accounting policies and notes to condensed
consolidated financial statements.
</TABLE> -3-
<PAGE>
<TABLE>
UStel, Inc.
Condensed Consolidated Statements of Operations
<CAPTION> (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------------------------
1997 1998 1997 1998
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 5,680,702 $ 7,295,668 $ 11,568,447 $ 14,347,309
----------- ----------- ------------ ------------
Operating expenses
Cost of services sold 4,484,269 5,481,406 8,844,107 10,910,394
Selling 622,535 347,607 1,233,754 647,261
General and administrative 1,015,773 2,244,905 1,830,875 3,877,709
Depreciation and amortization 97,449 169,264 183,324 342,606
---------- ----------- ------------ ------------
Total operating expenses 6,220,026 8,243,182 12,092,060 15,777,970
---------- ----------- ------------ ------------
Loss from operations (539,324) (947,514) (523,613) (1,430,661)
Interest income 6,657 8,123 18,548 14,793
Interest expense (113,172) (444,736) (298,913) (773,162)
----------- ------------ ------------ ------------
Net loss $ (645,839) $(1,384,127) $ (803,978) $ (2,189,030)
=========== ============ ============ ============
Net loss per common
shareholder $ (0.124) $ (0.197) $ (0.183) $ (0.300)
======== ======== ======== ========
Weighted average number of common
shares outstanding 5,188,097 7,042,281 4,383,724 7,034,952
========= ========= ========= =========
<FN>
See accompanying summary of accounting policies and notes to condensed
consolidated financial statements.
-4-
</TABLE>
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<TABLE>
UStel, Inc.
Condensed Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 1998
<CAPTION> (Unaudited)
Additional
Preferred Stock Common Stock Paid-In Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 275,000 $ 2,750 6,911,515 $ 69,115 $18,238,940 $(11,090,863) $ -0- $ 7,219,942
Issuance of Common Stock
for Investor relations
contract (Note 12) 100,000 1,000 76,000 -0- -0- 77,000
Issuance of Common Stock
for acquisition of
sub-agent contracts
(Note 12) 30,766 308 30,337 -0- -0- 30,645
Issuance of Common Stock
for acquisition of
Arcada Communications,
Inc. (Notes 6 and 12) 4,200,000 42,000 3,678,864 -0- -0- 3,720,864
Issuance of Preferred Stock
Series B for acquisition of
Arcada Communications,
Inc. (Notes 6 and 11) 750,000 7,500 447,857 -0- -0- 455,357
Issuance of Common Stock
to Sutro & Co. in
connection with Arcada
Communications, Inc.
(Notes 6 and 12) 150,000 1,500 131,388 -0- -0- 132,888
Issuance of Common Stock
to Catalyst Financial in
connection with Arcada
Communications, Inc.
(Notes 6 and 12) 100,000 1,000 87,592 -0- -0- 88,592
Value of Original Issue
Discount (Note 6) -0- -0- -0- -0- 2,800,000 -0- -0- 2,800,000
Acquisition of Treasury Stock (1,158,000) (1,158,000)
Net loss for period -0- -0- -0- -0- -0- (2,189,030) -0- (2,189,030)
---------- ------- ---------- -------- ----------- ------------ ----------- -----------
Balance, June 30, 1998 1,025,000 $10,250 11,492,281 $114,923 $25,490,977 $(13,268,057) $(1,158,000) $11,178,257
========== ======= ========== ======== =========== ============ =========== ===========
<FN>
See accompanying summary of accounting policies and notes to condensed
consolidated financial statements.
</TABLE>
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<TABLE>
UStel, Inc.
Condensed Consolidated Statements of Cash Flows
Increase (Decrease) in Cash
<CAPTION> (Unaudited)
Six Months Ended June 30,
1997 1998
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (803,978) $ (2,189,030)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 183,324 342,607
Provisions for losses on accounts receivable 286,508 386,473
Increase (decrease) from change in:
Accounts receivable (345,847) (1,435,474)
Prepaid expenses and other 92,643 (53,252)
Accounts payable and accrued expenses (351,358) 3,450,656
Other items (303) (96,312)
------------ ------------
Net cash source (uses) in operating activities (939,011) 405,666
------------ ------------
Cash flows from investing activities:
Purchase of equipment (355,196) (293,166)
Acquisition of Arcada Communications, Inc.
net of cash acquired -0- (6,409,716)
Costs of offering and acquisition program -0- 328,466
Cost of treasury stock - cash portion -0- (758,000)
------------ ------------
Net cash used in investing activities (355,196) (7,132,416)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable - banks 12,077,253 7,991,067
Proceeds from notes payable-Goldman Sachs CP -0- 15,907,820
Proceeds from related party debt 24,500 -0-
Proceeds from sale of common stock 7,147,749 -0-
Payments on related parties debt (482,007) (68,722)
Payments on other debt (17,143,516) (12,641,191)
Costs of borrowing -0- (873,555)
------------ ------------
Net cash provided by financing activities 1,623,979 10,315,419
------------ ------------
Net increase in cash 329,772 3,588,669
Cash, beginning of period 225,926 135,689
------------ ------------
Cash, end of period $ 555,698 $ 3,724,358
============ ============
Supplemental Data:
Interest Paid $ 430,037 $ 572,872
Income Taxes Paid 2,878 4,040
<F/N>
See accompanying summary of accounting policies and notes to condensed
consolidated financial statements.
</TABLE>
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<PAGE>
UStel, Inc. and Subsidiaries
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 t
he Virgin Islands. On January 12, 1994, the Company effected a recapital-
ization of its capital stock in connection with its re-incorporation in
Minnesota. In connection with the recapitalization, the Company exchanged
all its outstanding Common Stock (1,000 shares) for 950,000 shares of the
reincorporated company's Common Stock. Accordingly, the financial statements
were retroactively restated.
Financial Statements
This quarterly statement on Form 10-QSB should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto filed on Form
10-KSB for the year ended December 31, 1997.
Principles of Consolidation
The balance sheets reflects the accounts of UStel, Inc., and its wholly-owned
subsidiaries Consortium 2000, Inc. (Consortium), Pacific Cellular (Pacific),
Will Call Communications (Will Call) and Arcada Communications, Inc. (Arcada)
(acquired June 25, 1998 - see Note 6). The condensed consolidated statements
of operations for the periods ended June 30, 1997 do not include the results of
operations of the above subsidiaries of UStel, Inc., because their acquisition
dates were in the third quarter of 1997 or later. The condensed consolidated
statements of operations for the periods ended June 30, 1998 do not include the
results of operations for Arcada because it was effectively acquired at the end
of the second quarter of 1998. All significant intercompany transactions and
balances have been eliminated in consolidation.
Revenue Recognition
Revenue is recognized upon completion of the telephone call.
Property And Equipment
Equipment is stated at cost with depreciation provided over the estimated
useful lives of the respective assets on the straight-line basis ranging from
five to fifteen years. Leasehold improvements are amortized over the shorter
of the estimated life of the asset or the term of the lease.
Deferred Charges
Deferred charges consist of loan fees, offering costs and certain costs
incurred in connection with expanding the Company's market position. Loan
fees are amortized over the life of the related loan. Offering costs are
charged against paid-in capital if the 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
-7-
<PAGE>
UStel, Inc. and Subsidiaries
Summary of Accounting Policies (Continued)
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, SFAS
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
On March 31, 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 during
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. The Company has adopted
this pronouncement and it had no effect on its loss per share computations.
For the purpose of calculating loss per share for the six months ended June 30,
1997, net loss was increased by $722,000 for deemed dividend to the preferred
shareholder as a result of the January 24, 1997 change in the conversion
features of the Series A Convertible Preferred Stock (see Note 11).
Loss per share is based on the weighted average number of Common Stock
outstanding during each period presented. For three-month periods ended March
31, 1997 and 1998, outstanding stock options, warrants and convertible
preferred stock and debentures outstanding are not included in the diluted
earnings per share calculation since their effect would be 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 Uncertainties
-8-
<PAGE)
UStel, Inc. and Subsidiaries
Summary of Accounting Policies (Continued)
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 Risk
The Company maintains cash balances at several financial institutions. Deposits
not to exceed $100,000 are insured by the Federal Deposit Insurance
Corporation. At June 30, 1998, the Company had uninsured cash of $2,985,933.
Stock-based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123) establishes a fair value method of account-
ing 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.
Also in accordance with SFAS No. 133, the Company has provided footnote
disclosure with respect to stock-based employee compensation. The cost of
stock-based compensation is measured at the grant date on the value of the
award and recognizes this cost over the service period. The value of the
stock-based award is determined using a pricing model whereby compensation
cost is the excess of the fair market value of the stock as determined by the
model at grant date or other measurement date over the amount an employee
must pay to acquire the stock.
New Accounting Pronouncements
Disclosure of Information About Capital Structure
Statement of Financial Accounting Standard No. 129, "Disclosure of Information
About Capital Structure," (SFAS No. 129) issued by the FASB is effective for
financial statements with fiscal years ending after December 15, 1997. The new
standard reinstated various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 128. The Company adopted SFAS No. 129 as of January 1,
1997 and it had no effect on its financial position or results of operations.
Reporting Comprehensive Income
-9-
<PAGE>
UStel, Inc. and Subsidiaries
Summary of Accounting Policies (Continued)
Statement of Financial Accounting Standard 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
adoption is permitted. SFAS 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 adopted SFAS 130 as of January
1, 1998 and it had no effect on its financial position or results of operations.
Disclosure About Segments Of An Enterprise And Related Information
Statement of Financial Accounting Standard No. 131, "Disclosure About Segments
Of An Enterprise And Related Information," (SFAS No. 131) issued by the FASB is
effective for financial statements with fiscal years beginning after December
15, 1997. Earlier application is permitted. SFAS No. 131 requires that public
companies report certain information about operating segments, products,
services and geographical areas in which they operate and their major
customers. The Company adopted SFAS 131 as of January 1, 1998 and it had no
effect on its financial position or results of operations.
Reporting On The Costs of Start-Up Activities
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
(SOP 98-5) issued by the Accounting Standards Executive Committee is effective
for financial statements beginning after December 15, 1998. SOP 98-5 requires
that the costs of start-up activities should be expenses as incurred. At the
time of adopting this SOP, the initial application should be reported as the
cumulative effect of a change in accounting principles. At June 30, 1998 the
Company had net unamortized start-up costs of $74,864 and has chosen to write
off this asset in the accompanying financial statements.
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, Accounts Receivable and Accounts Payable
The carrying amount approximates fair value due to the short maturity of those
instruments.
Notes Payable
The carrying amount of the Company's notes payable approximates fair value
because the interest rates on these instruments approximate on quoted market
prices for similar issues of debt with similar remaining maturities.
Convertible Debenture
-10-
<PAGE>
UStel, Inc. and Subsidiaries
Summary of Accounting Policies (Continued)
The fair value of the Company's convertible debentures is estimated based upon
current market borrowing rates for loans with similar terms and maturities
Related Party Receivables and Notes Payable To Related Parties
The fair value of related party receivables and notes payable to related
parties cannot be determined due to their related party nature.
Reclassification
Certain financial statement items have been reclassified to conform to the
current year's presentation.
-11-
<PAGE>
UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1 - Management's Plan
The Company has suffered recurring losses from operations and had a net loss of
$4,869,814 and $2,177,194 for the year ended December 31, 1997 and the six
months ended June 30, 1998, respectively. Also, as of December 31, 1997 the
Company had a working capital deficit of $569,822 but positive working capital
of $1,332,926 at June 30, 1998. The Company's financial condition raised
substantial doubt about the Company's ability at December 31, 1997 to continue
as a going concern. The audited financial statements at December 31, 1997 led
the Company's independent auditors, BDO Seidman LLP, to include in their
opinion a "Going Concern" paragraph. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Recently, management has made changes in the Company's cost structure that they
believe bring the Company close to or exceeding breakeven operating cash flows
on a monthly basis. These changes include a reduction in underlying long
distance carrier rates and a reduction in workforce primarily through
attrition.
Management believes that the merger between the Company and Arcada
Communications, Inc. (see Note 6), along with proceeds from the "Sutro Private
Placement" will result in substantial and immediate benefits to the Company.
The "Sutro Private Placement" has been used to finance the Arcada acquisition
and to restructure existing debt obligations and will provide working capital
for future growth and network infrastructure. As a result of the "Sutro
Private Placement," the Company's working capital position has gone from a
deficit at December 31, 1997 of $569,822 to a positive $1,120,953 at June 30,
1998.
Note 2 - Interim Financial Statements
The interim condensed consolidated financial statements for the three-month
periods and the six-month periods ended June 30, 1997 and June 30, 1998 are
unaudited. In the opinion of management, such financial statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of the interim periods. The results of
operations for the three-month period and six-month period ended June 30, 1998
are not necessarily indicative of the results for the entire year.
Note 3 - Deferred Charges
Deferred charges consist of the following:
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<PAGE>
UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 3 - Deferred Charges (Continued)
December 31, June 30
1997 1998
Development costs $ 111,437 $ 111,437
Acquisition costs - Arcada 365,966 -0-
Offering costs 34,361 250,271
Loan fees 274,478 1,245,553
Calling card program 138,108 138,108
Deposits and other 321,128 1,244,921
---------- ----------
1,245,478 2,990,290
Accumulated amortization (262,540) (575,970)
---------- ----------
$ 982,938 $2,414,320
========== ==========
Note 4 - Related Party Receivables
At December 31, 1997 and June 30, 1998, the Company has amounts due from
various related parties relating to loans as follows:
December 31, June 30,
1997 1998
Loans:
Related entities..........................$ 337,329 $ 350,643
Officers.................................. 102,904 101,857
Employees................................. 8,075 73,726
--------- ---------
448,308 526,226
Less allowance for bad debt (100,000) (100,000)
--------- ---------
$ 348,308 $ 426,226
========= =========
Note 5 - 1997 Acquisitions
On July 8, 1997, the Company completed the acquisition of Consortium 2000,
Inc., its principal sales source since mid-1994. 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 acquisition, Consortium
2000, Inc. is now a wholly-owned subsidiary of the Company. The transaction
was accounted for as a purchase as the assets and liabilities were recorded at
their fair values and the operations were included as of the date of the
acquisition. Goodwill created in the acquisition is being amortized over
twenty years.
On July 25, 1997, the Company completed the acquisition of the Pacific
Cellular Division of Pacific Communications, Inc., in exchange
for an aggregate of 304,014 shares of the Common Stock of the Company.
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<PAGE>
UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 5 - 1997 Acquisitions (Continued)
Because the Company's Common Stock received by the shareholders in the
transaction had not been registered by the Company with the Securities and
Exchange Commission by April 23, 1998, the shareholders of Pacific
Communications, Inc. have the right to put, i.e., to sell back to the Company
100% of the shares of the Company Common Stock received from the Company in the
transaction. The price at which the shares must be purchased by the Company
upon exercise of the put option is $3.81 per share. As a result of the
acquisition, Pacific Cellular is now a wholly-owned subsidiary of the Company.
The transaction was accounted for as a purchase as the assets and liabilities
were recorded at their fair values and the operations were included as of the
date of the acquisition. Goodwill created in the acquisition is being amortized
over twenty years.
On October 1, 1997, the Company completed the acquisition of Will Call
Communications in exchange for an aggregate of 38,737 shares of the Common
Stock of the Company. As a result of the acquisition, Will Call Communications
is now a wholly -owned subsidiary of the Company. The transaction was
accounted for as a purchase as the assets and liabilities were recorded at
their fair values and the operations were included as of the date of the
acquisition. Goodwill created in the acquisition is being amortized over
twenty years.
Note 6 - Acquisition of Arcada Communications, Inc. and Goldman Sachs Credit
Partners LP Financing
On June 25, 1998 the Company completed the acquisition of Arcada
Communications, Inc. (Arcada), a privately held switch-based interexchange
carrier based in Seattle, WA. As consideration for this acquisition, the
Company issued to the Arcada shareholders 4,200,000 shares of UStel, Inc.,
Common Stock (valued at $3,720,864), $750,000 in 14.75% Convertible
Subordinated Debentures (see Note 9), $750,000 in Series B Convertible
Preferred Stock (valued at $455,357 - see Note 11), paid $5,000,000 in cash and
issued a note for $520,388. The Company also granted an aggregate of 585,000
stock options to certain Arcada employees. The transaction was accounted for
as a purchase as the assets and liabilities were recorded at their fair values
and the operations were included as of the date of the acquisition. Goodwill
created in the acquisition is being amortized over twenty years.
Concurrently with the Closing of the acquisition of Arcada, the Company entered
into a Loan and Security Agreement (the Loan Agreement) dated as of June 25,
1998 between Coast Business Credit and Goldman Sachs Credit Partners LP on the
one hand (the Lenders) and the Company and Arcada on the other hand (the
Borrowers) whereby the Lenders agreed to lend the Company up to a maximum of
$35,000,000, secured by all the assets of the Company. The Loan Agreement
provides that the $35,000,000 in financing is to be divided among a $12,500,000
revolving accounts receivable line of credit, a $15,000,000 term loan and a
$7,500,000 equipment purchase facility. The Loan Agreement also provides for
additional advances from time to time for acquisitions acceptable to the
Lenders in their sole and absolute discretion. As part of the transaction, the
Lenders received five year warrants to acquire shares of Common Stock of the
Company. The warrants contain registration rights. The following table sets
forth the number of shares subject to the warrants issued to the Lenders and
the exercise price per share:
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<PAGE>
UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 6 - Acquisition of Arcada Communications, Inc. and Goldman Sachs Credit
Partners LP Financing (Continued)
NUMBER OF SHARES EXERCISE PRICE
SUBJECT TO WARRANTS PER SHARE
7,500,000 $1.00
1,000,000 1.50
2,000,000 3.00
2,000,000 5.00
----------
12,500,000
==========
Sutro & Co. (Sutro) and Catalyst Financial Corp. (Catalyst), who assisted the
Company in the acquisition of Arcada and the placement of the financing with
the Lenders, each received compensation for their role in these transactions.
Sutro, for its role, received a cash payment of $768,000, 150,000 shares of the
Company's Common Stock subject to registration rights and five year warrants,
subject to registration rights, to purchase 619,228 shares of the Company's
Common Stock at an exercise price of $1.23 per share. Catalyst, for its role,
received a cash payment of $200,000 and 100,000 shares of the Company's Common
Stock subject to registration rights.
The warrants issued in connection with the Arcada acquisition were valued at
$2,800,000 using the Black-Sholes valuation method and are recorded as an
original issue discount to be amortized over the term of the Loan Agreement.
Note 7 - 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 could 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 could 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, 1997 was $3,338,592. This Credit
Facility was paid off at June 30, 1998, when it had a balance of $4,561,551, by
use of a portion of the proceeds in the Loan Agreement ($4,311,551) discussed
in Note 6 and the issuance of a 12-month note in the amount of $250,000.
Note 8 - Notes Payable To 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 was 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
-15-
<PAGE>
UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 8 - Notes Payable To Others (Continued)
of ninety days after funding of the loan so long as the loan remains unpaid.
This loan was paid off in full in February 1997. Total warrants of 240,000
granted and remaining outstanding as of December 31, 1997 were for 240,000
shares of Common Stock.
As of September 9, 1996, the Company was indebted for transmission service
to WilTel, its primary long distance carrier, in the amount of $5,595,963
(before application of certain volume discounts available under the
transmission service contract)(the "1996 Promissory Note"). Payment of this
amount was settled by payment required amounts over the second half of 1996 and
the Company's agreement to execute a promissory note in the amount of
$3,860,275. The 1996 Promissory 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 1996 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 1996 Promissory Note, $3,707,239, was paid off in February 1997.
On October 15, 1997 the Company executed a second Promissory Note (the "1997
Promissory Note") payable to Worldcom (formerly WilTel, Inc.) in the principal
amount of $1,561,532 in payment for telecommunications services provided to the
Company. This note bore interest at the annual rate of 16%. This note was
initially due on December 31, 1997. However, under the terms of the note, the
Company elected to extend the due date until January 31, 1998, with the annual
interest rate increasing to 20% for the period of January 1, 1998 to January
31, 1998. Further, if the note was not paid in full by January 31, 1998, the
annual interest rate for the period of execution of the note until it is paid
in full becomes 18%. As of December 31, 1997 the unpaid principal on this note
was $1,561,532. This note was paid in full on June 30, 1998.
Note 9 - Convertible Subordinated Debentures
In January 1994, the Company issued 12% Convertible Subordinated Debentures
("12.00% Debentures") in the aggregate amount of approximately $500,000. The
12.00% 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).
On June 25, 1998 in conjunction with the acquisition of Arcada, the Company
issued $750,000 of 14.75% Convertible Debentures (14.75% Debentures) to selling
shareholders of Arcada. These 14.75% Debentures bear interest at the annual
rate of 14.75% payable quarterly commencing September 25, 1998. The 14.75%
Debentures are interest only until such time as the Loan Agreement (see Note
6) has been paid in full, at which time the 14.75% Debentures become payable
in eight equal quarterly installments of principal plus accrued interest on
the outstanding amount. The 14.75% Debentures are convertible into an aggregate
of up to 382,653 shares of the Company's Common Stock, as adjusted, for such
things as stock splits, stock dividends and other similar dilutive occurrences.
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<PAGE>
UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 10 - Commitments And Contingencies
Legal Proceedings
The Company is a party from time to time to litigation or proceedings incident
to its business. There are no pending legal proceedings to which the Company
is party that in the opinion of management is likely to have a material adverse
effect on the Company's business, financial condition or results of operations.
Operating Leases
The Company occupies certain office and switching facilities under operating
leases expiring on various dates through 2002 with options to renew on
switching facilities. Insurance and maintenance expenses covering these
facilities are the Company's obligations.
Employment Contracts
The Company has employment agreements with certain executive officers and
employees, the terms of which expire on 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.
Note 11 - Preferred Stock
In September 1994, the Company issued 550,000 shares of $.01 par value Series A
Convertible Preferred Stock ("Preferred A"). Each share of Preferred A
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 A. Each share of Preferred A 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 A may, at his or her
option, convert all or part of the Preferred A shares held into fully paid
Common Stock.
On January 24, 1997, the Company agreed to amend the terms of the Preferred A
to change the conversion ratio from 1:1 to 1.3636:1. As a result of this
change, the 550,000 shares of Preferred A became convertible into 749,980
shares of the Company's Common Stock. This amendment in the terms of Preferred
A resulted in a deemed dividend of $722,000 at that time. During May 1997
275,000 shares Preferred A were converted into 374,990 shares of Common Stock.
On June 25, 1998, the Company issued 750,000 shares of $0.01 par value Series B
Convertible Preferred Stock (Preferred B) as part of the consideration for the
acquisition of Arcada (See Note 6). Those shares have an aggregate liquidation
preference value of $750,000. Each share of Preferred B entitles its holder to
receive dividends at the rate of 14.75 cents per annum from the date issued
until the date redeemed.
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<PAGE>
UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 11 - Preferred Stock (Continued)
These shares of Preferred B are convertible into an aggregate of up to 382,653
shares of Common Stock, as adjusted, for such things as stock splits, stock
dividends and other similar dilutive occurrences.
Note 12 - 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 $6,349,313.
In 1997 the Company issued 85,000 of its Common shares to a consultant in
exchange for the services of that individual over a two-year period commencing
October 1, 1997. The shares were valued at the fair value at the date of
issuance. The services to be provided by the consultant are in the areas of
international negotiations, both with customers and telecommunications service
providers.
In 1998 the Company issued 100,000 of its Common shares to an independent
consulting firm in exchange for the services of that consulting firm over a
period commencing January 1, 1998 and ending one year after the date on which
the Company completes a registration statement on Form S-3 that registers the
shares granted under the agreement between the parties. In addition, the
agreement calls for an investor relations program conducted by the consultants
and payment of a minimum monthly retainer of $7,500.
In 1998 the Company entered into an agreement with one of the independent
agents of its subsidiary, Consortium 2000, whereby that agent became an
employee of that subsidiary. A portion of the compensation of the individual
involved a series of quarterly payments, in the form of the Company's Common
Stock in exchange for liquidation of commission obligations of the subsidiary
to that individual and his former company. Through June 30, 1998 a total of
30,766 shares of Common Stock had been issued in exchange for liquidation of
commissions owed to the agent.
Note 13 - Acquisition of Treasury Stock
In connection with the acquisition of Pacific Cellular in July 1997 (Note 5),
the Company issued 304,014 of its previously unissued shares of Common Stock.
Because the Company's Common Stock received by the shareholders in the
transaction had not been registered by the Company with the Securities and
Exchange Commission by April 23, 1998, the shareholders of Pacific
Communications, Inc. have the right to put, i.e., to sell back to the Company
100% of the shares of the Company Common Stock received from the Company in the
transaction. The price at which the shares must be purchased by the Company
upon exercise of the put option is $3.81 per share. On June 25, 1998 the
Company required those shares payment of $758,000 and issuance of its note
payable in the amount of $400,000 to honor the "Put" of those shares.
Note 14 - Income Taxes
At December 31, 1997, the Company has available net operating loss carry-
forwards of approximately $12,040,066 for income tax purposes, which expire in
varying amounts through 2012. Federal tax rules impose limitations on the use
of net operating losses following
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<PAGE>
UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 14 - Income Taxes (Continued)
certain changes in ownership. Such a change in control occurred during 1994.
As a result, $3,208,000 of the net operating loss carryforwards 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 carryforward generated a deferred tax asset of
approximately $4,454,825 as of December 31, 1997. The deferred tax asset
was not recognized since it is more likely than not that they will not be
realized. Accordingly, a 100% valuation allowance was provided.
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<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto filed on Form 10-KSB for
the year ended December 31, 1997. This quarterly report, as well as the Annual
Report on Form 10-KSB, contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements.
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 minute of usage from its customer base. While management of UStel expects
to mitigate 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.
In 1997 UStel completed the acquisition of Consortium 2000, Inc. and its
marketing organization, the acquisition of the Pacific Cellular wireless
services assets, and the acquisition of the Will Call assets. These
acquisitions, when combined with the acquisition on June 25, 1998 of Arcada are
consistent with UStel's strategy to evolve from its historic emphasis on long
distance service into a full-service telecommunications company.
UStel also announced in September 1997 that as a result of a management review,
certain unprofitable services and products will be discontinued. As a result,
UStel recorded a charge of $1,700,000 in its third quarter 1997 results. The
charge comprised a write-down of discontinued 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.
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. That
effort resulted in the Loan Agreement with Goldman Sachs Credit Partners LP, as
discussed in Note 6 of Notes to the Condensed Consolidated Financial
Statements. When this Sutro Private Placement was completed, UStel was
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 covers the right
to purchase up to 619,228 shares of the Company's Common Stock and is
exercisable over five years at an exercise price, subject to adjustment, of
$1.23 per share. In addition, UStel is required to reimburse Sutro & Co., for
its out-of-pocket expenses in acting as placement agent. The aggregate amount
of the Private Placement was $35,000,000.
Management believes that the merger between the Company and Arcada along with
proceeds from the "Sutro Private Placement" has resulted in substantial and
immediate benefits to the Company.
Results of Operations
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
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.
Comparison of Results of Operations--Three Months Ended June 30, 1998 Compared
to Three Months Ended June 30, 1997:
Revenues for the three months ended June 30, 1998 were $7,295,668 as compared
to $5,680,702 for the three months ended June 30, 1997. The increase in
revenues in 1998 was the result of expansion from a customer base of 18,000 at
January 1, 1997 to a customer base in excess of 35,000 at June 30, 1998, 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 and acquisitions have accounted for most of the growth
in periodic revenues. Revenues were also affected by the acquisitions of
Consortium 2000 and Pacific Cellular during the second half of 1997, with
combined revenues of $1,797,155 in the second quarter of 1998. It is expected
that future revenues will continue to be affected by these acquisitions.
Cost of services sold for the three months ended June 30, 1998 was $5,481,406
as compared to $4,484,269 for three months ended June 30, 1997. 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 and recent
acquisitions. Cost of services sold for the three months ended June 30, 1998
was 75.1% of the revenues produced in the three months ended June 30, 1998.
Cost of services sold for the three months ended June 30, 1997 was 78.9% of the
revenues produced in that period of 1997. This decrease in the cost of
services sold, as a percentage of revenues, reflects the increasing
contribution of the business of Pacific Cellular, which has a higher gross
margin than the Company, partially offset by competition in the long distance
telecommunications marketplace in the past eighteen months and the Company's
need to shift to products with less gross margin to enable it to compete. It
is also expected that future costs of services will be affected by the recent
acquisitions.
General and administrative expenses for the three months ended June 30, 1998
were $2,244,905 as compared to $1,015,773 for the three months ended June 30,
1997. The increase in general and administrative expenses reflects
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
the addition of Consortium 2000 and Pacific Cellular, which were acquired in
July 1997.
Selling expenses for the three months ended June 30, 1998 were $347,607 as
compared to $622,535 for the three months ended June 30, 1997. The decrease is
attributable to the elimination of certain selling expenses in 1998 as a result
of the consolidation of Consortium 2000 with the Company.
Depreciation and amortization for the three months ended June 30, 1998 was
$169,264 as compared to $97,449 for the three months ended June 30, 1997.
Depreciation for the three months ended June 30, 1998 was $107,601 as compared
to $92,532 for the three months ended June 30, 1997. 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 $2,717,000 at January 1, 1997 to approximately $3,564,000 at June
30, 1998, exclusive of the acquisition of Arcada.
During the three months ended June 30, 1998, the Company reported a loss from
operations of $947,514 versus a loss from operations of $539,324 for the three
months ended June 30, 1997.
Interest expense for the three months ended June 30, 1998, was $444,736 as
compared to $113,172 for the three months ended June 30, 1997. 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 bore interest at the Bank of America Reference Rate plus 2% per
annum, with a minimum of $15,000 interest expense per month. Interest
expense charged on the Credit Facility for the three months ended June 30,
1998 was $331,597 including amortization of related loan fees over thirty-
six months, the period of the credit facility.
Interest income for the three months ended June 30, 1998 was $8,123
principally from the Company's accrual of interest on related party loans,
as compared to $6,657 for the three months ended June 30, 1997, when
interest income also included earnings from certain certificates of deposit.
During the three months ended June 30, 1998, the Company reported a net
loss of $1,384,127 versus a net loss of $645,839 for the three months ended
June 30, 1997.
Comparison of Results of Operations Six Months Ended June 30, 1998
Compared to Six Months Ended June 30, 1997:
Revenues for the six months ended June 30, 1998 were $14,347,309 as compared
to $11,568,447 for the six months ended June 30, 1997. The increase in
revenues in 1998 was the result of expansion from a customer base of 18,000 at
January 1, 1997 to a customer base in excess of 35,000 at June 30, 1998, offset
in part by increasing competition in the long distance telecommunications
marketplace in the past fifteen
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
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 and
acquisitions have accounted for most of the growth in periodic revenues.
Revenues were also affected by the acquisitions of Consortium 2000 and Pacific
Cellular during the second half of 1997, with combined revenues of $3,168,360
in the first half of 1998. It is expected that future revenues will continue
to be affected by these acquisitions.
Cost of services sold for the six months ended June 30, 1998 was $10,910,394
as compared to $8,844,107 for six months ended June 30, 1997. 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 and recent
acquisitions. Cost of services sold for the six months ended June 30, 1998 was
76.0% of the revenues produced in the six months ended June 30, 1998. Cost of
services sold for the six months ended June 30, 1997 was 76.5% of the revenues
produced in that period of 1997. This decrease in the cost of services sold,
as a percentage of revenues, reflects the increasing contribution of the
business of Pacific Cellular, which has a higher gross margin than the Company,
partially offset by competition in the long distance telecommunications
marketplace in the past eighteen months and the Company's need to shift to
products with less gross margin to enable it to compete. It is also expected
that future costs of services will be affected by the recent acquisitions.
General and administrative expenses for the six months ended June 30, 1998 were
$3,877,710 as compared to $1,830,875 for the six months ended June 30, 1997.
The increase in general and administrative expenses reflects the addition of
Consortium 2000 and Pacific Cellular, which were acquired in July 1997.
Selling expenses for the six months ended June 30, 1998 were $647,261 as
compared to $1,233,754 for the six months ended June 30, 1997. The decrease is
attributable to the elimination of certain selling expenses in 1998 as a result
of the consolidation of Consortium 2000 with the Company.
Depreciation and amortization for the six months ended June 30, 1998 was
$342,606 as compared to $183,324 for the six months ended June 30, 1997.
Depreciation for the six months ended June 30, 1998 was $219,280 as compared
to $173,490 for the six months ended June 30, 1997. 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 $2,717,000 at January 1, 1997 to approximately $3,564,000 at June
30, 1998, excluding the acquisition of Arcada.
During the six months ended June 30, 1998, the Company reported a loss from
operations of $1,430,661 versus a loss from operations of $523,613 for the six
months ended June 30, 1997.
Interest expense for the six months ended June 30, 1998, was $773,162 as
compared to $298,913 for the six months ended June 30, 1997. 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
bore 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, 1998 was $560,933 including
amortization of related loan fees over thirty six months, the period of the
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<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS (Continued)
credit facility.
Interest income for the six months ended June 30, 1998 was $14,793 principally
from the Company's accrual of interest on related party loans, as compared to
$18,548 for the six months ended June 30, 1997, when interest income also
included earnings from certain certificates of deposit.
During the six months ended June 30, 1998, the Company reported a net
loss of $2,189,030 versus a net loss of $803,978 for the six months ended
June 30, 1997.
Liquidity and Capital Resources
UStel's working capital at June 30, 1998 was $1,120,953. During the six months
ended June 30, 1998 UStel's operating activities contributed a positive
$405,666 to cash flow.
At June 30, 1998, UStel's consolidated accounts receivable, net of allowance
for doubtful accounts, were $8,135,351, exclusive of the acquisition of Arcada.
To raise funds to meet cash needs for operations and fixed asset
acquisitions, the Company has relied upon an initial public offering of Common
Stock, a secondary public offering of units comprising Common Stock and
warrants, 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 a 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. Except for a 12-month note issued to the
Bank for $250,000, this Credit Facility was paid in full at June 30, 1998 with
proceeds from the new Loan Agreement discussed more fully in Note 6 of Notes to
Condensed Consolidated Financial Statements.
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 a series of required
payments and the Company's agreement to execute a promissory note in the amount
of $3,860,275.
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 $6,349,000. With the
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<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS (Continued)
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. That effort resulted in the Loan Agreement executed in June
1998 that provides credits aggregating $35,000,000 with Goldman Sachs Credit
Partners LP, as more fully discussed in Note 6 of Notes to Condensed
Consolidated Financial Statements.
On October 15, 1997, UStel executed a promissory note in favor of Worldcom
Network Services, Inc., its primary long distance carrier, in the amount of
$1,561,532 which represented all past due amounts under the Company's
transmission service contract. The note bears interest at the rate of 16% per
annum through December 31, 1997 and 18% thereafter and is secured by a second
lien on all of UStel's assets. The Company repaid this obligation from the
proceeds of its private placement of securities in June 1998.
Management's Plan
The Company has suffered recurring losses from operations and had a net loss of
$4,869,814 and $2,177,194 for the year ended December 31, 1997 and the six
months ended June 30, 1998, respectively. Also, as of December 31, 1997 the
Company had a working capital deficit of $569,822 but positive working capital
of $1,332,926 at June 30, 1998. The Company's financial condition raised
substantial doubt about the Company's ability at December 31, 1997 to continue
as a going concern. The audited financial statements at December 31, 1997 led
the Company's independent auditors, BDO Seidman LLP, to include in their
opinion a "Going Concern" paragraph. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Recently, management has made changes in the Company's cost structure that they
believe bring the Company close to or exceeding breakeven operating cash flows
on a monthly basis. These changes include a reduction in underlying long
distance carrier rates and a reduction in workforce primarily through
attrition.
Management believes that the merger between the Company and Arcada
Communications, Inc. (see Note 6), along with proceeds from the "Sutro Private
Placement" will result in substantial and immediate benefits to the Company.
The "Sutro Private Placement" has been used to finance the Arcada acquisition
and to restructure existing debt obligations and will provide working capital
for future growth and network infrastructure. As a result of the "Sutro
Private Placement," the Company's working capital position has gone from
a deficit at December 31, 1997 of $569,822 to a positive $1,120,953 at June 30,
1998.
Year 2000
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The Year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with
-25-
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS (Continued)
modifications to existing software and converting to new software, which the
Company expects to implement on a timely basis, the Year 2000 problem will not
pose significant operational problems for the Company's computer systems as so
modified and converted. Estimated costs associated with this conversion are
anticipated to be minimal. However, if such modifications and conversions are
not completed timely, the Year 2000 problem may have a material adverse impact
on the operations of the Company.
-26-
<PAGE>
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibits
2 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. See Appendix A of Proxy
Statement/Prospectus (7).
2(a) Amendment No. 2 to Agreement for Merger, dated as of June 25, 1998, by
and among UStel, Inc., Arcada Acquisition Corp. and S.V.V. Sales,
Inc., d.b.a. Arcada Communications (5).
2.2 Merger Agreement and Plan of Reorganization by and among UStel, Inc.
and Consortium 2000, Inc., dated August 14, 1996 (4).
2.3 Asset Purchase and Sale Agreement between UStel, Inc. and Pacific
Communications, Inc., dated July 23, 1997.
3.1 Articles of Incorporation of UStel, Inc.(1).
3.1-a Statement of Designations, Preferences and Rights of Series A
Convertible Preferred Stock(2).
3.1-b Form of Amendment to Statement of Designation of Preferences and Rights
of Series A Convertible Preferred Stock.
3.2 Bylaws of UStel(1).
4.1 Form of Certificate evidencing shares of Common Stock of UStel(1).
4.1-a Form Warrant Agreement between UStel and American Transfer & Trust,
Inc.
4.2 Form of 12% Convertible Subordinated Debenture(1).
4.3 Form of Representative's Warrant by and between UStel and Barber &
Bronson Incorporated.
4.4 Form of Warrant Certificate.
4.5 Form of 14.75% Convertible Subordinated Debentures dated June 25,
1988 (5).
4.6 Form of Amended & Restated Statement of Designations, Preferences and
Rights of Series B Convertible Preferred Stock(5).
10.1 Federal Communications Commission Order, Authorization and Certificate
dated October 20, 1992(1).
10.2 Registration Rights Agreement dated August 14, 1996 between UStel, Inc.
and Noam Schwartz, David Schwartz, the RGB 1993 Family Trust and the
TAD 1993 Family Trust (4).
10.3 Carrier Switched Services Agreement between the Company and WilTel,
Inc. dated March 10, 1993(1).
10.3.1 Collocate Agreement with WilTel, Inc., January 9, 1995(3).
10.12 Leases for 3400 square feet in Las Vegas, Rainbow Interim Partners,
June 19, 1995(3).
10.20 1993 Stock Option Plan(1).
10.21 Form of 1993 Option Agreement(1).
10.21-aAmendment to Stock Option Plan(7).
10.22 Stock Option Agreement between UStel, Inc. and Frank Bonadio dated
June 25, 1998.
10.23 Stock Option Agreement between UStel, Inc. and David Otto dated
June 25, 1998.
10.24 Employment Agreement with Abe Sher, January 4, 1996.
10.24-aModification to Employment Agreement with Abe Sher.
10.26 Coast Business Credit Agreement, December 21, 1995(3).
10.33 Robert L. Diener Consulting Agreements dated November 1, 1995, August
15, 1995(3).
10.39 Telecommunication Services Agreement, WilTel, Inc., July 25, 1994,
Confidential Redacted Version(3).
10.40 Registration Rights Agreement dated August 14, 1996 between UStel, Inc.
and Consortium 2000 Shareholders (exhibit 10.1 to the Company's report
on Form 8-K filed with the SEC on August 27, 1996)(4).
10.43 Promissory Note, and ancillary agreement, by and between the Registrant
and Kamel B. Nacif, February 29, 1996.
10.45 Form of Employment and Non-Disclosure Agreement by and between the
Registrant and Danny Knoller, September 1, 1996.
10.47 Indemnification Agreement by and between the Registrant and Noam
Schwartz, August 2, 1996
10.49 Amendment Number One to Loan and Security Agreement, Secured
Promissory Note and Amended and Restated Secured Promissory Note by and
between UStel, Inc. and Coast Business Credit, September, 1996.
10.52 Sales Agency Agreement by and between Consortium 2000, Inc., and
Worldcom, Inc., d/b/a/ LDDS Worldcom, June 1, 1995 Confidential
Redacted Version.
10.53 Hertz Technologies, Inc., Marketing Agreement and Amendments No. 1 and
2 thereto, by and between Consortium 2000, Inc., and Hertz
Technologies, Inc., July 7, 1995 Confidential Redacted Version.
10.54 Distributor Program Agreement and Amendment No. 1 and 2 thereto, by and
between Consortium 2000, Inc., and LCI International Telecom Corp.,
November 3, 1994, January 31, 1996 and March 26, 1996, respectively,
Confidential Redacted Versions.
10.55 Marketing Services Agreement by and between Consortium 2000, Inc., and
New Enterprise Wholesale Telephone Services, Limited Partnership,
August 15, 1994 Confidential Redacted Version.
10.56 Consortium 2000 and Call Points, Inc., Agreement by and between
Consortium 2000 and Call Points, Inc., September 7, 1995 Confidential
Redacted Version.
10.60 a, b, c, d
(a) Letter Agreement by and between UStel, Inc. and Jeflor, Inc., June
10, 1996;
(b) Subordinated Convertible Debenture, June 19, 1996;
Warrant, June 21, 1996; and
(d) Guaranty of Loan by Noam Schwartz, Ronnie Schwartz and Haskel Iny,
June 17, 1996.
10.61 Employment and Non-Disclosure Agreement between the Company and Robert
L.B. Diener, effective as of August 15, 1996.
10.62 Employment and Non-Disclosure Agreement between the Company and Jerry
Dackerman, effective as of August 15, 1996.
10.63 Employment and Non-Disclosure Agreement between the Company and Wouter
van Biene, effective as of August 15, 1996.
10.64 Form of Indemnification Agreement between the Company and Robert L.B.
Diener, effective as of August 15, 1996.
10.65 Form Indemnification Agreement between the Company and Jerry Dackerman,
effective as of August 15, 1996.
10.66 Form of Indemnification Agreement between the Company and Wouter van
Biene, effective as of August 15, 1996.
10.67 Form of Financial Consulting Agreement between the Company and B.C.
Capital Corporation.
10.68 Employment Agreement between UStel, Inc. and Frank Bonadio, June 25,
1998.
10.69 Loan and Security Agreement entered into as of June 25, 1998, between
and among Coast Business Credit, a division of Southern Pacific Bank,
and Goldman Sachs Credit Partners LP, on one hand and on the other hand
UStel, Inc. and Arcada Communications, Inc. (6).
10.70 Warrant to purchase 11,785,715 shares of UStel, Inc. Common Stock in
favor of Goldman Sachs & Co. dated as of June 25, 1998(6).
10.71 Warrant to purchase 714,285 shares of UStel, Inc. Common Stock in favor
Coast Business Credit, a division of Southern Pacific Bank, dated as of
June 25, 1998 (6).
10.72 Warrant to purchase 619,228 shares of UStel, Inc. Common Stock in favor
of Sutro & Co. Incorporated, dated as of June 25, 1998 (6).
10.73 Side Letter Agreement dated as of June 25, 1998, by and between Coast
Business Credit, a division of Southern Pacific Bank and UStel, Inc.
and Arcada Communications, Inc.(6)
Filed as an Exhibit to the Company's Registration Statement on Form SB-2,
Amendments 1 through 3, declared effective February 14, 1997, File No.
333-12981 and incorporated by reference.
(1) Incorporated by reference to the Company's Registration Statement and
Amendments No. 1 through No. 2 on Form SB-2 (Registration No. 33-75210-LA)
declared effective June 21, 1994.
(2) Incorporated by reference to the Company's 10-KSB for the year ended
December 31, 1994 Commission file 0-24098;
(3) Incorporated by reference to the Company's Amendment No. 1 to 10-KSB for
the year ended December 31, 1995 filed with the SEC on August 27, 1996
Commission file 0-24098.
(4) Incorporated by reference to the Company's report on Form 8-K, filed with
the SEC on August 27, 1996
(5) Incorporated by reference to the Company's report on Form 8KA, dated June
25, 1998
(6) Incorporated by reference to the Company's report on Form 8K, dated June
25, 1998.
(7) Incorporated by reference to the Company's registration Form S-4, dated
October 25, 1997, Commission file no. 33-38831
<PAGE>
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
UStel, INC.
Date August 14, 1998 By:_/s/_Robert L. B. Diener______
Robert L. B. Diener
Chief Executive Officer
Date August 14, 1998 By:_/s/_Edmund C. King, Jr,______
Edmund C. King, Jr.
Chief Financial Officer
Date August 14, 1998 By:_/s/_Richard C. Ward
Richard C. Ward
Controller
<PAGE>
<PAGE>
Exhibit # 10.22
UStel, Inc.
STOCK OPTION AGREEMENT
THIS AGREEMENT, is made as of June 25, 1998, (the "Grant Date"), by and
between UStel, Inc., a Minnesota corporation (the "Company"), and Frank Bonadio
(the "Optionholder").
Optionholder is a key person associated with the Company, and the Company
considers it desirable and in its best interest that Optionholder be given an
inducement to acquire a proprietary interest in the Company and added incentive
to advance the interest of the Company by possessing an option to purchase the
Company's Stock, all in accordance with the UStel, Inc. Stock Option Plan (the
"Plan") adopted by the Board of Directors of the Company and attached hereto.
Now, therefore, it is agreed by and between the parties as follows:
1. Grant of Option. The Company hereby grants to Optionholder, as of the
Grant Date, the right, privilege and option to purchase 100,000 shares
of UStel, Inc., Common Stock (the "Optioned Shares"), subject in all
respects to the terms, conditions and provisions of this Agreement and
the Plan, which is attached hereto and incorporated by reference in this
Agreement. The Optionholder acknowledges having received and carefully
reviewed a copy of the Plan. The option is intended to be:
Check one:
an incentive stock option ("ISO") as defined in Section
422 of the Internal Revenue Code.
a non-statutory stock option.
2. Option Price. The option price (the "Option Price") as determined by the
Plan Administrator is $1.15 per share. If an ISO, the following is
applicable: the price per share has been determined by the Plan
Administrator to be not less than 100 percent of the fair market value
per share of the Stock on the date of grant of this option (110 percent
if an option is an ISO and the Optionholder is a shareholder who
at the date of the grant of this option owns stock possessing more than
ten percent of the combined voting power of all classes of stock of the
Company or any parent or subsidiary of the Company).
3. Vesting of Option.
(a) Vesting Schedule. The time at which the Optioned Shares vest
and the optionholder may exercise this option with respect to such
Optioned Shares shall be as follows: (I) one-third of the Optioned
Shares shall vest on the first anniversary date of the Grant Date; (ii)
one-third of the Optioned Shares shall vest on the second anniversary
date of the Grant Date; and (iii) one-third of the Optioned Shares shall
vest on the third anniversary date of the Grant Date, (pro-rated,
quarterly). Optioned Shares that have vested may be acquired at any
time, and from time to time, in whole or in part, until the option
expires as provided in Section 6 hereof.
(b) $100,000 Limitation. Notwithstanding the foregoing, the number
of Optioned Shares that are granted pursuant to an ISO that may vest in
any one calendar year shall not exceed the $100,000 Limitation, as that
term is defined in the Plan. To the extent the $100,000 Limitation is
exceeded, such excess Optioned Shares shall vest on January 1 of each
subsequent calendar year until all of the Optioned Shares have vested
without violating the $100,000 Limitation.
Acceleration. Upon the death of the Optionholder, the Optioned
Shares may vest on an accelerated basis as provided in the Plan. In
addition, the Plan Administrator may, by resolution adopted after the
Grant Date, allow the option to be exercised on an accelerated basis,
provided that in no event shall the Plan Administrator accelerate the
exercise period for the option granted hereunder as to violate the
$100,000 Limitation. Furthermore, in the event of Change in Control of
the Company, vesting shall accelerate effective with the Change of
Control. A Change of Control shall be deemed to have occurred at such
time after the Grant Date as there shall occur the acquisition by
any Person (including any syndicate or group deemed to be a "person"
under Section 13(d)(3) of the Securities Exchange Act of 1934) of
beneficial ownership, directly or indirectly, through a purchase,
merger or other acquisition transaction or series of transactions, of
shares of capital stock of the Company entitling such Person to exercise
50% or more of the total voting power of all shares of capital stock of
the Company entitled to vote generally in elections of directors, other
than any such acquisition by the Company, any subsidiary of the Company
or any employee benefit plan of the Company or merger for reincorporation
purposes.
4. Exercise of Option. The option issued hereunder shall be exercisable by
written notice to the Company, addressed to the Company at its principal
place of business, in accordance with the terms of the Plan.
Optionholder shall be entitled to exercise any or all of the Options by
means of "cashless exercise" by delivering shares of Common Stock having
fair market value equal to the exercise price or by exercising and
immediately selling shares of Common Stock on the market to pay the
exercise price.
5. Stock Lock-Up Agreement. Upon the proper exercise of any option, the
Optionholder (or in the case of the Optionholder's death, his successors
as provided under Section 6 of the Plan) may be required to execute a
Lock-up Agreement in such form as may be required by the Plan
Administrator from time to time. UNDER THAT LOCK-UP AGREEMENT, THE
OPTIONHOLDER AGREES NOT TO SELL OR OTHERWISE TRANSFER ANY ACQUIRED
OPTIONED SHARES DURING ANY STOCK LOCK-UP PERIOD AGREED TO BY THE COMPANY
AND ANY UNDERWRITER ASSOCIATED WITH ANY PUBLIC OFFERING BY THE COMPANY OF
ITS COMMON STOCK.
6. Termination of Option. This option, to the extent not previously
exercised, shall terminate upon the first to occur of the tenth
anniversary of the Grant Date or as otherwise set forth in the Plan.
7. No Privilege of Stock Ownership. The holder of the option granted
hereunder shall not have any of the rights of a stockholder with
respect to the Optioned Shares until such Optionholder shall have
exercised the option, paid the Option Price, and received a stock
certificate for the purchased shares of Stock.
8. Compliance With Laws and Regulations. The exercise of this option and
the issuance of the Stock upon such exercise shall be subject to
compliance by the Company and the Optionholder with all applicable
requirements of law relating thereto and with all applicable regulations
of any stock exchange in which the shares of the Stock may be listed at
the time of such exercise and issuance. In connection with the exercise
of this option, Optionholder shall execute and deliver to the Company
such representations in writing as may be requested by the Company in
order for it to comply with applicable requirements of federal and state
securities laws.
9. Liability of the Company.
(a) If the Optioned Shares covered by this Agreement exceed, as of
the Grant Date, the number of shares of Stock which may without
stockholder approval be issued under the Plan, then this option shall be
void with respect to such excess shares unless stockholder approval of an
amendment increasing the number of shares of Stock issuable under the
Plan is obtained in accordance with the applicable provisions of the
Plan.
(b) The inability of the Company to obtain approval from any
regulatory body having authority deemed by the Company to be necessary to
the lawful issuance and sale of any Stock pursuant to this Agreement
shall relieve the Company of any liability with respect to the
nonissuance or sale of the Stock as to which such approval shall not have
been obtained. The Company, however, shall use its best efforts
to obtain all such approvals.
10. No Employment or Service Contract. Nothing in this Agreement or in the
Plan shall confer upon the Optionholder any right to continue in the
service of the Company (or any parent or subsidiary corporation of the
Company employing or retaining Optionholder) for any period of time or to
interfere with or otherwise restrict in any way the rights of the Company
(or any parent or subsidiary corporation of the Company employing or
retaining Optionholder) or the Optionholder, which rights are hereby
expressly reserved by each, to terminate the service of Optionholder at
any time for any reason whatsoever, with or without cause.
11. Assignability. Neither this option nor any rights or privileges
conferred thereby shall be assignable or transferable by the Optionholder
other than by will or by the laws of descent and distribution, and this
option shall be exercisable only by Optionholder during the
Optionholder's lifetime. Upon the death of Optionholder, the rights of
the successors to Optionholder shall be limited as set forth in the
Plan.
12. Binding Affect. This agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
13. Securities Matters.
(a) Exercise of Option. The option granted hereunder may be
exercised by the Optionholder only if (I) the shares of Stock which are
to be issued upon such execution are registered under the Securities Act
of 1933, as amended (the "1933 Act"), and the securities laws of any
other applicable jurisdiction, or (ii) the Company, upon advice of
counsel, determines that the issuance of the shares of Stock upon the
exercise of the Optionholder is exempt from registration requirements.
(b) Restriction of Shares. The Company is under no obligation to
register, under the 1933 Act, any of the shares of Stock to be issued to
the Optionholder upon the exercise of any option or to take any action
which would make available any exemption from registration. If the
shares to be issued to the Optionholder upon the exercise of any option
have not been registered under the 1933 Act, those shares will be
"restricted securities" within the meaning of Rule 144 under the 1933 Act
unless (a) the shares are subsequently registered under the 1933 Act, or
(b) the Optionholder obtains an opinion of counsel which is satisfactory
to counsel for the Company that the shares may be sold in reliance on an
exemption from registration requirements.
14. Defined Terms. All capitalized terms herein which are not otherwise
defined herein shall have the same meaning ascribed to such terms in the
Plan.
15. Notices. Any notice required to be given or delivered to the Company
under the terms of this Agreement shall be in writing and addressed to
the Company in care of the Corporate Secretary at its principal corporate
offices. Any notice required to be given or delivered to Optionholder
may be given at such address as is supplied by Optionholder to the
Corporate Secretary, or if not supplied, at the address kept in the
business records of the Corporate Secretary. All notices shall be deemed
to have been given or delivered upon personal delivery or upon deposit in
the U.S. mail, postage prepaid and properly addressed to the party to be
notified.
16. Construction. This Agreement and the option evidenced hereby are made
and granted pursuant to the Plan and are in all respects limited by and
subject to the express terms and provisions of the Plan. All decisions
of the Plan Administrator with respect to any question or issue arising
under the Plan or this Agreement shall be conclusive and binding on all
persons having an interest in this option.
17. Governing Law. The interpretation, performance, and enforcement of
this Agreement shall be governed by the laws of the State of
California.
18. Stockholder Approval. The grant of this option is subject to approval
of the Plan by the Company's stockholders within 12 months after the
adoption of the Plan by the Board of Directors. Notwithstanding any
provision of this Agreement to the contrary, this option may not be
exercised in whole or in part until such stockholder approval is
obtained. In the event that such stockholder approval is not obtained,
then this option shall thereupon terminate in its entirety and the
Optionholder shall have no further rights to require any optioned shares
hereunder.
IN WITNESS WHEREOF the parties hereto have executed this agreement or caused
it to be exercised on the day and year first above written.
UStel, Inc.
By:
Its:
Optionholder
<PAGE>
Exhibit #10.23
UStel, Inc.
STOCK OPTION AGREEMENT
THIS AGREEMENT, is made as of June 25, 1998, (the "Grant Date"), by and
between UStel, Inc., a Minnesota corporation (the "Company"), and David Otto
(the "Optionholder").
Optionholder is a key person associated with the Company, and the Company
considers it desirable and in its best interest that Optionholder be given an
inducement to acquire a proprietary interest in the Company and added incentive
to advance the interest of the Company by possessing an option to purchase the
Company's Stock, all in accordance with the UStel, Inc. Stock Option Plan (the
"Plan") adopted by the Board of Directors of the Company and attached hereto.
Now, therefore, it is agreed by and between the parties as follows:
1. Grant of Option. The Company hereby grants to Optionholder, as of the
Grant Date, the right, privilege and option to purchase 100,000 shares of
UStel, Inc., Common Stock (the "Optioned Shares"), subject in all
respects to the terms, conditions and provisions of this Agreement and
the Plan, which is attached hereto and incorporated by reference in this
Agreement. The Optionholder acknowledges having received and carefully
reviewed a copy of the Plan. The option is intended to be:
Check one:
an incentive stock option ("ISO") as defined in Section
422 of the Internal Revenue Code.
a non-statutory stock option.
2. Option Price. The option price (the "Option Price") as determined by the
Plan Administrator is $1.15 per share. If an ISO, the following is
applicable: the price per share has been determined by the Plan
Administrator to be not less than 100 percent of the fair market value
per share of the Stock on the date of grant of this option (110 percent
if an option is an ISO and the Optionholder is a shareholder who
at the date of the grant of this option owns stock possessing more than
ten percent of the combined voting power of all classes of stock of the
Company or any parent or subsidiary of the Company).
3. Vesting of Option.
(a) Vesting Schedule. The time at which the Optioned Shares vest
and the optionholder may exercise this option with respect to such
Optioned Shares shall be as follows: (I) one-third of the Optioned
Shares shall vest on the first anniversary date of the Grant Date; (ii)
one-third of the Optioned Shares shall vest on the second anniversary
date of the Grant Date; and (iii) one-third of the Optioned Shares shall
vest on the third anniversary date of the Grant Date, (pro-rated,
quarterly). Optioned Shares that have vested may be acquired at any
time, and from time to time, in whole or in part, until the option
expires as provided in Section 6 hereof.
(b) $100,000 Limitation. Notwithstanding the foregoing, the number
of Optioned Shares that are granted pursuant to an ISO that may vest in
any one calendar year shall not exceed the $100,000 Limitation, as that
term is defined in the Plan. To the extent the $100,000 Limitation is
exceeded, such excess Optioned Shares shall vest on January 1 of each
subsequent calendar year until all of the Optioned Shares have vested
without violating the $100,000 Limitation.
Acceleration. Upon the death of the Optionholder, the Optioned
Shares may vest on an accelerated basis as provided in the Plan. In
addition, the Plan Administrator may, by resolution adopted after the
Grant Date, allow the option to be exercised on an accelerated basis,
provided that in no event shall the Plan Administrator accelerate the
exercise period for the option granted hereunder as to violate the
$100,000 Limitation. Furthermore, in the event of Change in Control of
the Company, vesting shall accelerate effective with the Change of
Control. A Change of Control shall be deemed to have occurred at such
time after the Grant Date as there shall occur the acquisition by
any Person (including any syndicate or group deemed to be a "person"
under Section 13(d)(3) of the Securities Exchange Act of 1934) of
beneficial ownership, directly or indirectly, through a purchase, merger
or other acquisition transaction or series of transactions, of shares of
capital stock of the Company entitling such Person to exercise
50% or more of the total voting power of all shares of capital stock of
the Company entitled to vote generally in elections of directors, other
than any such acquisition by the Company, any subsidiary of the Company
or any employee benefit plan of the Company or merger for reincorporation
purposes.
4. Exercise of Option. The option issued hereunder shall be exercisable by
written notice to the Company, addressed to the Company at its principal
place of business, in accordance with the terms of the Plan.
Optionholder shall be entitled to exercise any or all of the Options by
means of "cashless exercise" by delivering shares of Common Stock having
fair market value equal to the exercise price or by exercising and
immediately selling shares of Common Stock on the market to pay the
exercise price.
5. Stock Lock-Up Agreement. Upon the proper exercise of any option, the
Optionholder (or in the case of the Optionholder's death, his successors
as provided under Section 6 of the Plan) may be required to execute a
Lock-up Agreement in such form as may be required by the Plan
Administrator from time to time. UNDER THAT LOCK-UP AGREEMENT, THE
OPTIONHOLDER AGREES NOT TO SELL OR OTHERWISE TRANSFER ANY ACQUIRED
OPTIONED SHARES DURING ANY STOCK LOCK-UP PERIOD AGREED TO BY THE COMPANY
AND ANY UNDERWRITER ASSOCIATED WITH ANY PUBLIC OFFERING BY THE COMPANY OF
ITS COMMON STOCK.
6. Termination of Option. This option, to the extent not previously
exercised, shall terminate upon the first to occur of the tenth
anniversary of the Grant Date or as otherwise set forth in the Plan.
7. No Privilege of Stock Ownership. The holder of the option granted
hereunder shall not have any of the rights of a stockholder with respect
to the Optioned Shares until such Optionholder shall have exercised the
option, paid the Option Price, and received a stock certificate for the
purchased shares of Stock.
8. Compliance With Laws and Regulations. The exercise of this option and
the issuance of the Stock upon such exercise shall be subject to
compliance by the Company and the Optionholder with all applicable
requirements of law relating thereto and with all applicable regulations
of any stock exchange in which the shares of the Stock may be listed at
the time of such exercise and issuance. In connection with the exercise
of this option, Optionholder shall execute and deliver to the Company
such representations in writing as may be requested by the Company in
order for it to comply with applicable requirements of federal and state
securities laws.
9. Liability of the Company.
(a) If the Optioned Shares covered by this Agreement exceed, as of
the Grant Date, the number of shares of Stock which may without
stockholder approval be issued under the Plan, then this option shall be
void with respect to such excess shares unless stockholder approval of an
amendment increasing the number of shares of Stock issuable under the
Plan is obtained in accordance with the applicable provisions of the
Plan.
(b) The inability of the Company to obtain approval from any
regulatory body having authority deemed by the Company to be necessary to
the lawful issuance and sale of any Stock pursuant to this Agreement
shall relieve the Company of any liability with respect to the
nonissuance or sale of the Stock as to which such approval shall not have
been obtained. The Company, however, shall use its best efforts
to obtain all such approvals.
10. No Employment or Service Contract. Nothing in this Agreement or in the
Plan shall confer upon the Optionholder any right to continue in the
service of the Company (or any parent or subsidiary corporation of the
Company employing or retaining Optionholder) for any period of time or to
interfere with or otherwise restrict in any way the rights of the Company
(or any parent or subsidiary corporation of the Company employing or
retaining Optionholder) or the Optionholder, which rights are hereby
expressly reserved by each, to terminate the service of Optionholder at
any time for any reason whatsoever, with or without cause.
11. Assignability. Neither this option nor any rights or privileges
conferred thereby shall be assignable or transferable by the Optionholder
other than by will or by the laws of descent and distribution, and this
option shall be exercisable only by Optionholder during the
Optionholder's lifetime. Upon the death of Optionholder, the rights of
the successors to Optionholder shall be limited as set forth in the
Plan.
12. Binding Affect. This agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
13. Securities Matters.
(a) Exercise of Option. The option granted hereunder may be
exercised by the Optionholder only if (I) the shares of Stock which are
to be issued upon such execution are registered under the Securities Act
of 1933, as amended (the "1933 Act"), and the securities laws of any
other applicable jurisdiction, or (ii) the Company, upon advice of
counsel, determines that the issuance of the shares of Stock upon the
exercise of the Optionholder is exempt from registration requirements.
(b) Restriction of Shares. The Company is under no obligation to
register, under the 1933 Act, any of the shares of Stock to be issued to
the Optionholder upon the exercise of any option or to take any action
which would make available any exemption from registration. If the
shares to be issued to the Optionholder upon the exercise of any option
have not been registered under the 1933 Act, those shares will be
"restricted securities" within the meaning of Rule 144 under the 1933
Act unless (a) the shares are subsequently registered under the 1933 Act,
or (b) the Optionholder obtains an opinion of counsel which is
satisfactory to counsel for the Company that the shares may be sold in
reliance on an exemption from registration requirements.
14. Defined Terms. All capitalized terms herein which are not otherwise
defined herein shall have the same meaning ascribed to such terms in the
Plan.
15. Notices. Any notice required to be given or delivered to the Company
under the terms of this Agreement shall be in writing and addressed to
the Company in care of the Corporate Secretary at its principal corporate
offices. Any notice required to be given or delivered to Optionholder
may be given at such address as is supplied by Optionholder to the
Corporate Secretary, or if not supplied, at the address kept in the
business records of the Corporate Secretary. All notices shall be deemed
to have been given or delivered upon personal delivery or upon deposit
in the U.S. mail, postage prepaid and properly addressed to the party to
be notified.
16. Construction. This Agreement and the option evidenced hereby are made
and granted pursuant to the Plan and are in all respects limited by and
subject to the express terms and provisions of the Plan. All decisions
of the Plan Administrator with respect to any question or issue arising
under the Plan or this Agreement shall be conclusive and binding on all
persons having an interest in this option.
17. Governing Law. The interpretation, performance, and enforcement of
this Agreement shall be governed by the laws of the State of California.
18 Stockholder Approval. The grant of this option is subject to approval of
the Plan by the Company's stockholders within 12 months after the
adoption of the Plan by the Board of Directors. Notwithstanding any
provision of this Agreement to the contrary, this option may not be
exercised in whole or in part until such stockholder approval is
obtained. In the event that such stockholder approval is not obtained,
then this option shall thereupon terminate in its entirety and the
Optionholder shall have no further rights to require any optioned shares
hereunder.
IN WITNESS WHEREOF the parties hereto have executed this agreement or caused it
to be exercised on the day and year first above written.
UStel, Inc.
By:
Its:
Optionholder
<PAGE>
Exhibit #10.68
UStel, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as of June 25,
1998 by and between UStel. Inc., a Minnesota corporation (the "Company" or
"UStel"), and Frank J. Bonadio, a resident of Washington ("Employee").
The Company is party to a transaction pursuant to which Arcada Acquisition
Corporation, a wholly owned subsidiary of the Company, will be merged with and
into SVV Sales. Inc. d/b/a Arcada Communications (the "Merger"). Pursuant to
the terms of the Merger, Employee will be named President and Chief Operating
Officer of the Company. The parties wish to enter into this Agreement to
memorialize the terms upon which the Employee will provide services to UStel.
For good and valuable consideration, the receipt and sufficiency of which we
hereby acknowledge, the parties agree as follows:
1. Term of Agreement. The Company and Employee agree that the Employee will be
employed by UStel commencing on the effective date of the Merger (the
"Effective Time") for an initial term of four (4) years, unless employment is
sooner terminated as provided herein. This Agreement shall be automatically
renewed for succeeding terms of one (1) year, unless at least ninety (90) days
prior to the expiration of any term, either party gives written notice to the
other of that party's intention not to renew this Agreement.
2. Position and Duties.
2.1 The Company and Employee agree that Employee will be employed as the
President and Chief Operating Officer of UStel and that, in this
capacity, Employee's responsibilities will include, subject to the
approval and oversight of the Chief Executive Officer and the Board
of Directors, providing overall leadership and operational control of
the Company consistent with Employee's oversight and reporting duties
set forth in the attached Exhibit A Employee shall be located, and the
operational activities of the divisions set forth below shall take
place in Seattle, Washington. Employee will have all operational
control of UStel, particularly as it relates to all credit and
collection functions, accounts receivable and payable, access to and
control over all bank accounts and credit facilities and signature
authority on all commitments by UStel. Additionally, Employee shall
analyze, oversee and assist in operating, directing and developing, and
assume responsibility for the profitability and/or operational
integrity of, the following divisions of the Company (I) Operational
Support and Corporate Affairs; (ii) Engineering and Network
Administration; (iii) Customer Care; (iv) MIS; (iv) Sales and
Marketing: (vi) Operational Accounting and (vii) Retail, Wireless and
Internet Products and Services.
3. UStel's Covenants
3.1 UStel agrees to furnish Employee with such equipment, employees and
services as are necessary to perform Employee's obligations under this
Agreement. The Company shall also pay for Employee's membership dues
in professional organizations, the reasonable costs of any seminar
attendance or continuing education requirements of Employee's
profession and Employee's subscriptions to a reasonable number of
professional journals.
3.2 UStel agrees to reimburse Employee for all reasonable business
expenses incurred by Employee while on UStel's business. Employee shall
maintain such records as will be necessary to enable the Company to
properly deduct such items as business expenses when computing the
Company's federal income tax.
4. Compensation.
4.1 For all services rendered by Employee under this Agreement (exclusive
of directors' fees, if any), the Company shall pay Employee a base
salary of One Hundred and Seventy-Five Thousand Dollars ($175,000) per
year. Employee shall be paid this salary on a biweekly basis, minus
all lawful and agreed upon payroll deductions.
4.2 The base salary set forth in Section 4.1 above shall be reviewed
annually by the Company and may be increased by such amount as the
Company shall, in its sole discretion. determine; provided, however,
that such base salary shall, at a minimum, be increased annually on
each anniversary of the Effective Time by an amount equal to the
proportionate increase in the Consumer Price Index (as hereinafter
defined) during the twelve (12) calendar months immediately preceding
the month in which such anniversary date occurs. For purposes hereof,
"Consumer Price Index" shall mean the U.S. City Average for All Urban
Consumers (1982-84=100) issued monthly by the Bureau of Labor
Statistics of the United States Department of Labor, or any successor
index thereto appropriately adjusted.
5. Bonus and Options.
5.1 Discretionary Bonuses. The Company shall periodically, but not less
frequently than annually, review Employee's service rendered and may
award bonuses in an amount which will recognize Employee's
contributions to profits during that period. At a minimum, Employee
shall be entitled to all bonuses and other, fringe benefits available
to the Company's Chief Executive Officer, including, without
limitation, cash bonuses, sick leave, automobile allowance and
insurance and four (4) weeks of vacation as set forth in Section 6
herein.
5.2 Options.
a. As of the Effective Time as defined in the Agreement for
Merger. the Company shall grant to the Employee options (the
"Options") to purchase an aggregate of 100,000 shares of common
stock of the Company ("Common Stock") (as such number shall be
appropriately adjusted to take into account stock splits, stock
dividends and similar events in respect of the Common Stock), under
and subject to the terms of any stock option plan then in effect
(the "Option Plan"), at an exercise price equal to the closing
bid and asked price of the Common Stock, as quoted on the Nasdaq
Small Cap market on the date of grant. The Options shall be ten
(10) year options and shall become exercisable and vest as to
33-1/3 percent of such shares on each of the first, second and
third anniversaries of the date of grant. Employee shall be
entitled to exercise any or all of the Options by means of
"cashless exercise" by delivering shares of Common Stock
having fair market value equal to the exercise price or by
exercising and immediately selling shares of Common Stock on the
market to pay the exercise price. It is understood and agreed by
the employee and the Company that the Options shall otherwise be in
all respects subject to the terms and conditions of the Option
Plan, if any, and the certificate representing such options, which
terms and conditions shall include acceleration of exercisability
and vesting of the Options upon the occurrence of certain change of
control events.
b. In addition to the Options described in Section 5.2(a) above,
Employee shall be eligible to participate in the Option Plan and to
receive additional stock options under the Option Plan, in such
amounts and with such other terms and conditions as determined from
time to time by the Company's Board of Directors.
6. Fringe Benefits.
6.1 Benefit Plans. The Company and Employee agree that, during the term
of this Agreement, Employee shall be entitled to participate in all
fringe benefits and incentive compensation plans as may be authorized
and adopted from time to time by the Company and for which Employee is
eligible, including, for example, any pension plan, profit sharing
plan, disability plan, medical plan, group life insurance plan, or
other employee benefit plans.
6.2 Sick Leave. Employee shall be entitled to a reasonable number of paid
sick leave days during, each calendar year of employment.
6.3 Automobile Expense. Employee shall be provided an automobile by the
Company or, if Employee so chooses, the Company shall provide the
Employee with an automobile allowance of $1,000 per month. The Company
shall pay on behalf of the Employee all insurance, fuel, repair and
maintenance expenses relating to such automobile incurred by Employee
during the term hereof (including any extensions thereof) and shall, in
connection therewith, provide to Employee one or more gasoline charge;
cards for use by Employee during the term hereof (and any extensions
thereof).
6.4 Insurance. In the event this Agreement is terminated, the Company,
upon the request of Employee, shall assign to Employee any insurance
policy owned by the Company under which Employee is the insured and
which is assignable by the policy terms; provided, however, that if
any such policy has a cash surrender value, Employee shall pay the
then cash surrender value of such policy to the Company in exchange for
its assignment to Employee under this section. Any conversion rights
which Employee may have under the terms of any such insurance policy
shall survive any termination of this Agreement.
6.5 Vacation. Employee shall be entitled to four (4) weeks paid vacation
per calendar year.
7. Termination. This Agreement shall be terminated upon the occurrence of any
one of the following events:
7.1 Death of Employee. In the event of Employee's death, Employee's
spouse, or it there is no spouse then Employee's estate shall be
entitled to: (a) all benefits due Employee under any life insurance
policy held by the Company then in effect; and (b) compensation under
this agreement for a period of two (2) years following Employee's
death. The payments in respect to this subsection shall be made in
twenty-four (24) equal monthly installments.
7.2 If Employee shall have been incapacitated from illness, accident or
other disability and unable to perform his normal duties hereunder for
a cumulative period of six (6) months in any period of twelve (12)
consecutive months, upon the Company or Employee giving the other party
not less than thirty (30) days' written notice. In the event of such
termination, Employee shall be entitled to: (a) all benefits due
Employee under any accident, sickness, disability, health or
hospitalization plan or insurance policy of the Company then in effect;
and (b) compensation under this agreement for a period of two (2) years
following the effective date of Employee's termination. The
payments in respect to this subsection shall be made in twenty-four
(24) equal monthly installments.
7.3 Immediately by the Company for cause. For purposes of this subsection,
"cause" includes, but is not necessarily limited to, the following: (a)
breach by Employee of any material provision of this Agreement; (b)
material violation by either party of any statutory or common law duty
of loyalty to the Company; or personal or professional conduct of
Employee, which, in the reasonable and good faith judgment of the Board
of Directors of the Company injures or tends to injure the reputation
of the Company or otherwise adversely affects the interests of the
Company. Such conduct may include, but is not limited to, dishonesty,
chronic absenteeism, alcoholism, drug addiction, and conviction of a
felony or misdemeanor involving moral turpitude.
7.4 By Employee for good reason. "Good Reason" means (I) reduction in
duties or position as set forth herein and in the attached Exhibit A
or (ii) a change in control of the Company that results in unacceptable
changes in Employee's duties or position or (iii) material, uncured
breach by the Company of any of the terms of this Agreement or any
other terms and conditions set forth herein or otherwise agreed to
between the Company and Employee. Employee may terminate Employee's
employment for good reason, Employee shall first give Company thirty
(30) days' written notice of the circumstances constituting good
reason and an opportunity to cure, unless the circumstances are not
subject to being cured. Following the notice and opportunity to cure
(if cure is not made), or immediately if notice and opportunity to
cure are not required, Employee may terminate employment for good
reason by giving, written notice of termination. The notice may take
effect immediately or at such later date as Employee may designate,
provided that Company may accelerate the termination date by giving
five (5) business days' written notice of the acceleration.
7.5 By Employee without good reason. Employee may terminate Employee's
employment at any time, with or without good reason, by giving ninety
(90) days' advance written notice of termination.
7.6 Expiration of this Agreement or expiration of any renewal or extension
thereof.
7.7 Upon the cessation of business by the Company.
7.8 Upon the retirement of Employee.
8. Effect of Termination
a. Upon termination of Employee's employment with the Company pursuant to
Section 7.1, 7.2, 7.3, 7.5, 7.6, 7.7 or 7.8. the Company agrees to pay
Employee all salary, fringe benefits, bonuses or other remuneration
which are due and owing, to Employee as of the date of termination,
less deductions or offsets Employee may owe to the Company for such
items as salary advances or loans. Employee agrees that his signature
on this Agreement constitutes his authorization for all such
deductions, upon termination of Employee's employment with the Company.
Upon the termination of Employee's employment with the Company,
Employee agrees to return to the Company all of the Company's property
of any kind which may be in Employee's possession.
b. Upon termination of Employee's employment with the Company pursuant to
Section 7.4, (I) the Company shall pay Employee, within thirty (30)
days of such termination, the total amounts due and owing Employee over
the five (5) year period of this Agreement. Employee shall be entitled
to accelerate the vesting of all of his remaining Options to the date
of termination and (ii) the lock-up agreement or any commitment to
"lock-up" the common stock of Employee and Keith Leppaluoto shall
terminate as of the date of termination.
9. Construction of Agreement
9.1 Essential Terms and Modification of Agreement. It is understood and
agreed that the terms and conditions described in this Agreement
constitute the essential terms and conditions of the employment
arrangement between the Company and Employee, all of which have been
voluntarily agreed upon. The Company and Employee agree that there are
no other essential terms or conditions of the employment relationship
that are not described within this Agreement, and that any change in
the essential terms and conditions of this Agreement will be written
down in a supplemental agreement which shall be signed by both the
Company and Employee before it is effective.
9.2 Severability. The invalidity of all or any part of any section of this
Agreement shall not render invalid the remainder of this Agreement or
the remainder of such section. In the event a court of competent
jurisdiction should decline to enforce any provision of any section of
this Agreement, such section shall be reformed to the extent necessary
in the judgment of such court to make such provision of such section
enforceable to the maximum extent which the court shall find
enforceable.
9.3 Notices. Any notice hereunder shall be sufficient if in writing and
telefaxed to the party or sent by certified mail, return receipt
requested and addressed as follows:
a. If to the Company:
UStel, Inc.
6167 Bristol Parkway, Suite 300
Culver City, California 90203
b. If to Employee:
Frank Bonadio
2033 - 6th Avenue. Suite 401
Seattle, WA 98121-2516
Either party may change the address herein specified by giving to the
other, written notice of such change.
9.4 Governing Law. This Agreement is made and shall be construed and
performed under the laws of the State of Washington.
9.5 Venue and Attorneys' Fees. A breach of any of the terms of this
Agreement shall entitle the aggrieved party to sue for breach of the
Agreement. In such case, venue shall be in King County, Washington. In
the event it is necessary for either party to institute suit in
connection with this Agreement or its breach each party in such suit or
proceeding shall bear the costs of its own attorney's fees and neither
party shall be entitled to reimbursement for any costs or attorney's
fees incurred.
9.6 Waiver of Agreement.. The waiver by the Company of a breach of any
provision of this Agreement by Employee shall not operate or be
construed as a waiver by the Company of any subsequent breach by
Employee.
9 7 Captions.. The captions and headings of the sections of this Agreement
are for convenience and reference only and are not to be used to
interpret or define the provisions hereof.
9.8 Assignment and Successors. The rights and obligations of the Company
under this Agreement shall inure to the benefit of and be binding upon
the successors and assigns of the Company. The rights and obligations
of Employee hereunder are nonassignable, except for termination
payments due under Sections 7.1 and 7.2. The Company may assign its
rights and obligations to any entity in which the Company, or a company
affiliated to the Company, has a majority ownership interest.
Executed on the date first written above and commencing at the Effective Time.
EMPLOYEE:
By: Frank Bonadio
UStel, INC.:
By: Robert L. B. Diener
Its: Chairman and Chief Executive Officer
<PAGE>
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