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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Commission File number 0-24098
UStel, Inc.
(Name of Small Business Issuer in its charter)
Minnesota 95-4362330
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
2775 South Rainbow Blvd., #102. Las Vegas, Nevada 89102
(Address of principal executive offices) (Zip code)
(702) 247-7400
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value per share
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_____.
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB. [ ]
State issuer's revenue for its most recent fiscal year: $25,425,213
As of March 26, 1998, the aggregate market value of the voting stock
held by non-affiliates of the issuer, computed by reference to the closing
sale price at which the stock is quoted as of such date as reported by Nasdaq
was $7,638,372. Shares of Common Stock held by each officer and director and
by each person who owns 10% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily conclusive and does not
constitute an admission of affiliate status.
As of March 27, 1998, there were 7,034,111 shares of issuer's Common Stock
outstanding.
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USTEL, INC.
ANNUAL REPORT ON FORM 10-KSB
YEAR ENDED DECEMBER 31, 1997
PART I
ITEM 1. DESCRIPTION OF BUSINESS............................... 1
ITEM 2. DESCRIPTION OF PROPERTIES.............................13
ITEM 3. LEGAL PROCEEDINGS.....................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS...13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS..............................................14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS..................14
ITEM 7. FINANCIAL STATEMENTS..................................22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................22
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT.........................................22
ITEM 10. EXECUTIVE COMPENSATION................................25
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...........................................30
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........31
PART IV
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K...............33
SIGNATURES........................................................37
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
This document contains forward-looking statements that are subject to risks
and uncertainties. Forward-looking statements include certain information
relating to potential acquisition plans and the benefits the Company
anticipates from such acquisitions, the Company's business strategy and
liquidity as well as information contained elsewhere in this
Report where statements are preceded by, followed by or include the words
"believes," "expects," "anticipates" or similar expressions. For such
statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995. The forward-looking statements in this document are
subject to risks and uncertainties that could cause the assumptions underlying
such forward-looking statements and the actual results to differ materially
from those expressed in or implied by the statements.
Introduction
UStel, which was organized in March 1992,provides long distance tele-
communications services, consisting primarily of direct dial long distance
telephone transmissions to small and medium sized commercial and larger
residential customers throughout the United States. The Company also offers
a variety of service options, including "1+" dialing, "800" service, calling
cards, operator services, private line networks and data transmission. With
the acquisition in July 1997 of Pacific Cellular, a Las Vegas-based reseller
of wireless communications, the Company also offers discount cellular and
paging services to commercial and residential customers. Since commencing
operations in January, 1993, the Company's subscriber base has grown to in
excess of 28,000 customers in December 1997, consisting primarily of medium-
sized businesses. In addition, the Company's monthly revenues have increased
from approximately $10,000 in January, 1993 to approximately $2,476,000 in
December, 1997.
General
The Company owns one switch center located in Beverly Hills, California, and
leases switch capacity in New York, New York from WilTel, a national
telecommunications service provider. The Company is seeking to increase its
customer base and usage of its switches in order to attain the volume levels
necessary to realize the economic advantages from routing such traffic through
its owned or leased switch capacity. The UStel switch is a non-network
switch, meaning that it is only capable of switching calls for customers in
the facility in which the switch is located, calling card service and other
special customer services.
The Company is primarily a non-facilities based interexchange carrier that
routes its customers' calls over a transmission network consisting primarily
of long distance lines secured by the Company from a variety of other
carriers. This enables the Company to avoid the substantial capital
requirements of building and maintaining its own extensive transmission
facilities. The terms of these lease arrangements vary from month-to-month
to longer term arrangements and the lease costs may be priced on a usage
sensitive basis or at a fixed monthly rate. Because the amount the Company
charges its customers for long distance telephone calls is not based on the
cost to transmit such calls, long distance calls transmitted over facilities
leased on a fixed cost basis generally are more profitable to the Company
than long distance calls transmitted over usage sensitive circuits, assuming a
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sufficient volume of calls is routed over the fixed-cost route.
Accordingly, the Company's strategy is to reduce overall transmission costs
by development of its own dedicated switch network and leasing dedicated
lines at fixed monthly rates and to route as many of its customers' calls as
possible over such lines. The success of this strategy depends on the
Company's ability to generate a sufficient volume of its customers' calls
over such facilities to exceed the fixed costs of leasing such facilities.
Recent Developments
Consortium 2000. In July 1997, UStel completed the acquisition of Consortium
2000, Inc., for the issuance of an aggregate of 1,076,923 shares of the
Common Stock of UStel and Consortium 2000 became a wholly-owned subsidiary of
UStel. Consortium 2000, which prior to its acquisition was owned or controlled
by a certain percent of the Company's principal stockholders, formerly had a
marketing agreement with UStel pursuant to which it marketed telephone services
on behalf of UStel. Consortium 2000 is a telecommunications marketing and
consulting services provider which refers telecommunications customers to long
distance carriers, regional carriers, interexchange carriers, resellers and
other aggregators. It derives its revenues from sales agent commissions paid
by the carriers to whom it refers its customers. Consortium 2000 obtains
customers by offering to analyze the customer's long distance calling patterns,
usage volume and the specialized telecommunications needs of its individual
customers. Utilizing network analysis software and the expertise of its
employees, Consortium 2000 provides its customers with recommendations as to
which long distance carrier is best suited to provide the particular and
specialized telecommunication needs of its individual clients at the lowest
possible costs.
Pacific Cellular
In July 1997 UStel acquired substantially all of the assets of the
Wireless Division of Pacific Communications, Inc. operating
under the name "Pacific Cellular", for an aggregate consideration consisting
of 304,014 shares of UStel, Common Stock. During the
period between January 23, 1998 and April 23, 1998 the shareholders of
Pacific Communications, Inc. have the right to put, i.e., to sell back to UStel
up to 50% of the shares of UStel Inc. Common Stock which such shareholders
received from UStel in the transaction. The price at which the shares must be
purchased by UStel upon exercise of the put option is $3.81 per share. If the
UStel Common Stock received by the shareholders in the transaction has not been
registered by UStel with the Commission by April 23, 1998, the put option
extends to 100% of the 304,014 shares of UStel Common Stock.
Pacific Cellular is a reseller of wireless telecommunications services
located in Las Vegas, Nevada which currently serves approximately 2,450
customers. Pacific Cellular has reseller agreements with AT&T and Pacific Bell
Mobile Services along with a bulk sales agreement with 360 Communications.
Clients have a choice of carriers when they contract for services. Pacific
Cellular is also a sales agent for Nextel.
Arcada Communications
In June of 1997 the Company signed a letter of intent to acquire Arcada
Communications, a privately held switch-based inter-exchange carrier
based in Seattle, WA. The transaction is subject to the execution of a
definitive agreement, due diligence and approval by the stockholders of
both companies. A definitive agreement was signed in September of 1997.
The definitive agreement was approved by the shareholders at both UStel
and Arcada in December of 1997. The Company expects to close the
transaction concurrent with the "Sutro Private Placement" (see the Sutro
Private Placement below)
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Sutro Private Placement
In July 1997, UStel retained Sutro & Co., (the "Sutro Private Placement")
to use its best efforts to effect a private placement of UStel securities.
The terms of the private placement have not yet been determined. If the
Sutro Private Placement is completed, UStel will be required to pay Sutro
& Co. a cash placement fee of 6% of the aggregate dollar amount of securities
placed plus a warrant to purchase 2% of the outstanding UStel Common Stock
on a fully diluted basis. The warrant would be exercisable for five years
at an exercise price, subject to adjustment, equal to the average closing
price of the UStel Common Stock 10 trading days prior to the closing of
such financing. In addition, UStel is required to reimburse Sutro & Co.,
for its out-of-pocket expenses in acting as placement agent. Although
UStel is seeking to raise up to $15,000,000 by means of the Sutro Private
Placement, there can be no assurance that this or any amount will be
raised in the Sutro Private Placement.
Recent Developments
Recently, management has made changes in the Company's cost structure that they
believe brings 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.
The "Sutro Private Placement" would, therefore, be used primarily to restructure
existing debt obligations and to provide working capital for future growth and
network infrastructure.
Management believes that the merger between the Company and Arcada along
with proceeds from the "Sutro Private Placement" will result in
substantial and immediate benefits to the Company.
Discontinued Services and Products
During September 1997, UStel management undertook a review of certain of
the Company's services and products. This analysis focused on
profitability, growth potential and consistency with the
Company's strategic direction. On this basis, the Company determined that it
was appropriate to terminate a shared-tenant services arrangement which it
had operated for several years in Los Angeles, California. At the same time,
the Company decided to discontinue certain marketing programs which were not
producing desired results and were resulting in higher than normal customer
attrition and bad debt expense. As a result, the Company recorded a
charge of $1,700,000 in its third quarter 1997.
Business Strategy
The Company's strategy is to achieve continued growth and profitability by
focusing its marketing efforts on small- to mid-sized businesses and by
reducing its overall cost of delivering long distance telecommunications
services. The Company's specific objectives are as follows:
Continue to Market Long Distance Telecommunications Services through its
Agent Network. The Company believes that direct sales are the most effective
means of adding customers who will have long-term loyalty to the Company. In
this regard, primarily utilizing the Consortium 2000 agent network, the
Company believes that it can access new customers by continuing to market
itself as a low-cost alternative compared to other long distance carriers,
marketing wireless, paging and other services through its marketing channels
and bundling of various telecommunications services.
Development of Dedicated Transmission Network. Using its current
switches as a base, the Company intends to develop a nationwide network of low-
cost telecommunications switches. This will enable the Company to convert a
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substantial portion of its Switchless Traffic to lower cost Switched
Traffic. See "Transmission Network" below. The Company expects that this will
substantially improve operating margins overall. The Company also hopes to
negotiate more favorable rates with other long distance carriers relative to
Switchless Traffic.
Increase Name Recognition. The Company believes that its name is
well-recognized in the industry as providing reliable, low-cost
telecommunications services together with excellent customer service. The
Company will seek to increase customer awareness by targeting its products to
affinity purchasers and other groups which the Company believes will provide
it access to large customer bases.
Complete Installation of In-house Billing System. The Company believes
that it can achieve significant cost-savings and reduce reliance on its
working capital facility as a result of the recent installation of its own
dedicated billing system. The Company believes that the system will enable
it to improve cash flow by producing billings on a more timely basis and
permitting multiple billing cycles per month. The Company also believes that
the system will enhance customer service and reduce billing errors.
Make Strategic Acquisitions. The Company believes that opportunities
exist to acquire other small to mid-sized long distance carriers. Typically,
smaller carriers face difficulty reaching a critical mass of business and
accessing capital for expansion. The Company believes that it can achieve
attractive operating margins by placing the traffic of acquired companies on
UStel's transmission network and eliminating duplicative overhead.
The Long Distance Industry
On January 1, 1984, AT&T's divestiture of the Bell System went into effect.
As a result of the divestiture consent decree (the "AT&T Divestiture
Decree"), AT&T was forced to divest its 22 Bell Operating Companies ("BOCs"),
which were reorganized under seven regional holding companies known as RBOCs,
such as Pacific Telesis and US West. The RBOCs own and are responsible for
operations of the BOCs in each of their regions. The BOCs, as well as other
independent companies which provide local telephone service, are characterized
as local exchange carriers or "LECs". The LECs are responsible for providing
dial tone, local lines and billing for local service as well as local access
for long distance traffic.
The AT&T Divestiture Decree also required the RBOCs to provide all
inter-exchange carriers, such as the Company, with access to the local
telephone exchange facilities that is "equal in type, quality and price" to
that provided to AT&T. In addition, the BOCs were required to conduct a
subscription process allowing consumers to select their long distance
carrier. This development, known as "equal access," enabled consumers to
complete calls using their selected long distance carrier by simply dialing
"1" plus the area code and number. Prior to equal access, consumers using an
interexchange carrier other than AT&T had to dial a local number, then an
access code, then the area code and number of the call destination to
complete a call. With equal access, all inter Local Access and Transport Area
("LATA") calls are routed automatically to the consumer's long distance carrier
of choice. The AT&T Divestiture Decree and the implementation of equal access
constitute the fundamental regulatory developments that allow interexchange
carriers other than AT&T, such as the Company, to enter and compete in the
long distance telecommunications market. A separate consent decree imposed
similar equal access requirements in areas in which GTE is the local exchange
carrier.
All interexchange carriers, including AT&T and the Company, pay charges to
the LECs for access to local telephone lines at both the originating and
terminating ends of all long distance calls, unless the Company is able to
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install a dedicated line providing direct access from the customer to one of
the Company's switch centers. As is the case with most interexchange
carriers, access charges represent the single largest component of the
Company's cost of revenues. One element of the Company's strategy is to
focus on the development of "shared tenant services" and "shared services
providing," where the Company can install dedicated lines from commercial
customers concentrated in a single location such as a high rise building to
the Company's switch centers thereby bypassing the local access cost.
Since the AT&T Divestiture Decree, the long distance industry has experienced
rapid technological development. Prior significant technological change was
the advent of digital transmission technology, which represented an
improvement over analog technology. Because the BOCs and many LECs converted
rapidly to digital switches, digital technology was necessary for
interexchange carriers to connect to the LECs for equal access. Accompanying
the movement toward digital switching was the rapid development and
implementation of fiber optic circuitry, which also requires digital
technology. Less than 1% of such revenues were derived from customers that
were required to use access numbers and authorization codes.
Other Services
The Company makes available to its customers a variety of other service
options. The inbound "800" service, for example, permits the customer to be
billed for long distance calls made to the customer by that customer's
clients. The Company's "800" travel service permits customers to utilize the
Company's network from locations outside of their own service areas. Operator
assistance services provided through a third-party contractor permit broad
based usages of the Company's system from business establishments and
residences. The Company contracts with US Long Distance Inc., for operator
services where the call is answered in the name of the Company. The
Company's experience with third-party service providers has been positive.
Private line networks offer specialized point-to-point services, including
transmission of data, on a fixed cost basis. The TELCard calling card offers
international calling capabilities in addition to convenient long distance
usage. The Company also offers its customers special access options for
dedicated long distance lines.
Billing System
Each retail customer of the Company receives a detailed monthly call report
and invoice for services from the Company setting forth the date, number
called, duration of call and time and charges for each call. While billing
services were historically primarily provided through an outside contractor,
the Company recently installed an in-house billing system to achieve greater
control, decreased collection periods and increased profitability.
Each month UStel receives invoices from its underlying carriers. Due to the
multitude of billing rates and discounts which must be applied by carriers to
the calls completed by UStel's customers, and due to discrepancies in
information contained in suppliers' bills when compared with UStel's records,
UStel periodically has disagreements with its carriers concerning the sums
invoiced for its customers' traffic. These disputes have generally been
resolved on terms favorable to UStel, although there can be no assurance that
this will continue to be the case. No dispute over billing discrepancies or
failure to meet volume commitments has had a material adverse effect on UStel
to date, but there could be no assurance that this will continue to be the
case.
Customer Service
The Company's long distance telecommunications services are available 24
hours a day, seven days a week. To assist subscribers with questions regarding
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services, billing and other matters, the Company maintains a customer service
department and staff which is accessible to subscribers by telephone 24 hours
a day, 365 days a year.
Consulting Services
Consortium 2000 provides telecommunications consulting services to a
diversified client base. Consortium 2000 analyzes a customer's long distance
calling patterns, usage volume and specialized telecommunications needs and
recommends equipment requirements, calling plans and carriers to be utilized
to achieve the most effective result. Consortium 2000 also acts as a sales
agent for a broad base of long distance carriers, including the Company, and
is compensated in the form of commissions for business placed with each such
carrier.
Call Switching Equipment
The Company owns certain computerized network digital switching equipment
that routes certain of its customers' calls. Other customers' calls are routed
through facilities which are leased by the Company from a variety of other
carriers. A switch is a computer controlled digital processor designed
primarily to route and track telephone calls. Switching equipment operates
like an electronic "toll booth," routing each call to its destination and
tracking the length of the call for billing purposes. A secondary function
of a switch is to determine and effect the least expensive route for each call
among a variety of routing options. Currently the Company owns one digital
switching center located in Southern California and leases additional switch
capacity from WilTel in New York City. The Company's subscribers access call
switching equipment through equal access, which only requires dialing "1", plus
the area code and telephone number, by using a dedicated line, or by dialing a
seven- or ten-digit number, authorization code, identification number (for
billing), area code and telephone number. Once a customer accesses the
switching equipment, the equipment "answers" the telephone call, verifies the
caller's billing status, routes the call to the dialed destination and monitors
the call's duration for billing purposes. In addition to networking, the
switching equipment verifies customers' pre-assigned authorization codes,
records billing data and monitors system quality and performance. The
Company's switches are non-network switches, meaning that they are capable of
performing their switching function only for the customers in the facility in
which the switches are located, calling card service and other special
customer services.
Transmission Network
A call may be completed by using either (a) switches controlled by the
Company which are connected by fixed-cost, long-haul circuits, connecting the
call at a switch center to the destination city where the call is terminated by
a LEC which directs it to the called party ("Switched Traffic") or (b)
utilizing the transmission facilities of another long distance carrier
("Switchless Traffic").
Switchless Traffic is "usage sensitive" because the rates paid may vary with
the day, time, frequency and duration of telephone calls transmitted through
such circuits. In contrast, many of the rates paid by the Company for switch
traffic are fixed and therefore do not vary with usage or time of day. As a
result, Switched Traffic is less expensive over routes which the Company
carries high volumes of long distance traffic. Because the amount the
Company charges for long distance telephone calls is not based on the cost to
transmit such calls, long distance calls transmitted over high volume, fixed-
cost routes generally are more profitable to the Company than long distance
calls transmitted over usage sensitive circuits, assuming a sufficient volume
of calls is routed over the fixed-cost route. Consequently, to the extent
possible, the Company attempts to connect calls through transmission facilities
which are not usage
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which are not usage sensitive. Profitability of the Company's operations
depends largely on utilizing transmission circuits on a cost effective basis.
Accordingly, the Company's strategy is to reduce overall transmission costs by
developing its own dedicated switching network to maximize Switched Traffic and
eliminating Switchless Traffic.
Except for certain pricing agreements, the dedicated lines used by the
Company are generally leased on a month-to-month basis. While these month-to-
month arrangements may be terminated upon notice by the Company, they may not
be terminated under current law by the carrier unless the Company fails to
comply with the terms of the lease or unless the service is terminated for the
Company and all other long distance telephone carriers. Generally, rates
charged under these leases may be increased or decreased by the carriers upon
notice after filing with the FCC for interstate circuits, or applicable state
public utilities commissions ("PUCs") for intrastate circuits, provided the
rates charged apply equally to all similarly situated users of the services.
The FCC has required the detariffing of most interstate service offerings no
later than September 1997, though the order has been stayed by a federal
appeals court. If the order becomes effective, revisions to such rates by
carriers will no longer be required to be pre-filed with the FCC, but will be
governed by contracts between the Company and the carriers.
It is therefore the Company's strategy to continue to develop its own
dedicated switching network in order to continue to reduce its cost of
service. The Company will also continue to attempt to access Switchless
Traffic services on a wholesale basis at the lowest available cost.
Rates and Charges
The Company charges customers on the basis of minutes or partial minutes of
usage at flat rates, based upon whether the call is to an intrastate,
interstate or international destination. The rates charged are not affected
by the cost to the Company to transmit the particular call. Discounts are
available to customers that generate higher volumes of monthly usage. The
Company continually evaluates the rates and fees charged for its services
and, under appropriate circumstances, may implement different pricing
arrangements for existing or new services.
The Company endeavors to charge rates that are generally lower than
competitive long distance carriers. The rates offered by the Company may be
adjusted in the future as other interexchange carriers continue to adjust
their rates.
Once a customer has submitted the proper paperwork and is approved by the
Company's credit department, all pertinent information, e.g., telephone
numbers, calling card data, address, contact person, billing address, etc. is
entered into the Company's information system and the Company's computer
network. The Company's information system then generates the appropriate
electronic instructions which connect the customer to the Company's network.
Data regarding calls made by the client come from several sources: the
Company's switches; its calling card system; or WilTel, AT&T, Sprint and/or
MCI. After receiving the records of the calls, the Company inputs the data
into the billing system for processing.
Processing by the Company's information system includes: checking for
duplicate call records, confirming that calls to and from numbers that are
not in the Company's system are flagged for further research, verifying that
the origination and termination of calls are from valid telephone numbers and
circuits, and verifying that valid rates exist for each call. Calls which
fail any initial processing checks are placed in a rejected call file for
additional analysis.
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All approved calls are rated, taxed and a bill is generated for the
individual client.
Marketing
The Company's marketing efforts have been and continue to be directed
principally at small- to mid-sized business and larger residential users.
The Company derives the majority of its revenues from the sale of long distance
telecommunications services to commercial subscribers. Commercial subscribers
typically use higher volumes of telecommunications services than residential
customers and concentrate usage on weekdays and business hours when rates are
highest. Consequently, commercial customers, on average, generate higher
revenues per account than residential customers. While the Company's focus
is on commercial customers in major metropolitan areas, it can provide long
distance services to customers in any area of the United States. The largest
concentration of the Company's customers is in Southern California.
The Company principally markets long distance services through independent
sales agents. These agents are not restricted to specific territories and
their sales efforts are not directed, as to location, by the Company. Through
Consortium 2000, a network of approximately 1,000 agents have actively
marketed the Company's services over the past three years. The majority of
the Company's new accounts over this period have been procured by Consortium
2000-affiliated agents. The Company also has a number of agreements with
telemarketing agents and affiliate groups which sell UStel services through
new organizations.
Consortium 2000 maintains agent relationships with various long distance
carriers. The acquisition of Consortium 2000 results in marketing synergy in
that the Company will have the flexibility to place customers with carriers
other than the Company who might be in a better position to service that
customer's particular needs, while still benefitting from the customer
relationship through receipt of agent fees paid by the third-party carrier.
From the customer's perspective, this flexibility represents a value-added
element of the client relationship. The Company also has the ability to
divide a customer's business between several carriers, including the Company,
thereby avoiding the problem of risk concentration resulting from very large
accounts. In the case of such large accounts, as long as the Company is
managing the customer's long distance traffic, over time, additional traffic
can be directed to the Company as the situation warrants.
Competition
As a result of the AT&T Divestiture Decree and related developments, numerous
competitors, in addition to AT&T, have entered the long distance
telecommunications market, resulting in profound changes in the competitive
aspects of the industry. The Company competes directly with a number of
facilities based common carriers, including AT&T, MCI and Sprint, all of
which have substantially greater financial, marketing and product development
resources than the Company. In addition, the Company competes with hundreds
of smaller regional and local non-facilities based carriers and resellers.
AT&T remains the leading company providing domestic long distance telephone
service, and its pricing and services largely determine the prices and
services offered by resellers and other long distance telephone carriers.
Because the regulation and operations of AT&T and the BOCs are undergoing
considerable change, it is difficult to predict what effects the future
operations and regulation of AT&T and the BOCs will have on the Company's
existing and prospective business operations. Among other things, the BOCs
are permitted, under the Telecommunications Act of 1996, to immediately offer
long distance service outside the regions in which they provide local
exchange service, and will be permitted to offer long distance service within
those regions once they satisfy a checklist of conditions set forth in that Act.
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In recent years, increased competition among long distance carriers has
resulted in an overall reduction in long distance telephone rates. The
impact on net income of these reductions has been offset somewhat by networking
efficiencies, declining costs in access charges and readily available
transmission facilities, largely due to the expansion of circuit capacity
through the installation of fiber optic transmission facilities. The advent
of fiber optic technology has resulted in another major impact on the long
distance market. Initially, long distance carriers competed with AT&T based
strictly on price. Discounts of 25% to 35% from AT&T rates were typical,
because long distance carriers were attempting to build market share and
because their transmission quality was generally inferior to that of AT&T.
The introduction of fiber optic facilities, however, effectively eliminated
AT&T's transmission quality advantage. Gradually, the industry and consumers
begin to recognize the importance of quality service as well as price, and
the price differential has decreased. Recognition that competition is not
solely based on price has led to a greater emphasis on customer service, with
many companies adding product variety, customized billing and other value-added
services.
Unlike the Company's larger facilities based competitors which own their own
transmission facilities, the Company is vulnerable to changes in rates
charged by facilities based carriers for use of their facilities. The Company
has attempted to minimize its vulnerability to cost increases through the
long-term leasing of fiberoptic and other digital transmission circuits.
While cost or concessions paid to customers may, in certain cases, be the
primary consideration for a customer's selection of long distance telephone
service, the Company believes that other factors are significant, including
ease of obtaining access to the long distance network, quality of the
telephone connection format and management information presented in the
specialized billing data generated by the carrier, and enhanced services such
as "800" service, repair service and automated collect calling.
Although volume usage of the telecommunication services provided by UStel
have increased for the year ended December 31, 1997 as compared to the year
ended December 31, 1996, as a result of competitive pressures in the
industry, UStel has been experiencing a decline in revenue per minute. UStel
expects to off-set the decline in revenue per minute by diversifying its
products and by offering wireless communication, paging and other value-added
services to its customers. In connection with the Company's pending merger
with Arcada Communications, UStel plans to establish a network of switches
which will allow it to offer its services at a lower cost per minute than it
is presently able to offer. Although Arcada has been able to provide a
package pricing product to its customers and although UStel has recently
acquired Pacific Cellular, a wireless communications reseller in the Las Vegas
market, there can be no assurance that UStel will be successful in its
strategy of diversifying its products and providing value-added services or
that it will be able to establish a network of switches.
Under current industry conditions, both the interexchange carriers and local
exchange carriers have access to information regarding UStel's customers for
which they provide the actual call transmission. Because these interexchange
and local exchange carriers are potential competitors of UStel, they could
use information about UStel's customers, such as their calling volume and
pattern of use, to their advantage in attempts to gain such customers'
business, although UStel believes that the FCC would find such practices to be
unlawful. In addition, UStel's future success will depend, in part, on its
ability to continue to buy transmission services from these carriers at a
significant discount below the rates these carriers otherwise make available
to UStel's target customers.
Government Regulation
General
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The Company competes in an industry that, to a large degree, continues to be
regulated by federal and state government agencies. At approximately the
same time as the required divestiture of the Bell telephone companies by AT&T
in 1984, the FCC announced rules that were created to foster a self-regulating
interstate telecommunications industry, relying upon competitive forces to
keep rates and services in check.
The FCC has regulatory jurisdiction over interstate and international
telecommunications common carriers, including the Company. Under Section 214
of the Federal Communications Act, the FCC must certify a communications
common carrier before it may provide international services. The Company has
obtained Section 214 authorization to provide international services by means
of resale.
UStel has been authorized to provide domestic interstate and international
telecommunications services. The FCC conditions the authority to continue to
conduct interstate and international telecommunication services upon
compliance with the FCC's rules and regulations. The FCC reserves the right
to condition, modify or revoke the authority it has granted.
At December 31, 1996, the Company had obtained a certificate of public
convenience and necessity or equivalent documents from 41 states to provide
long distances services within those states. Regulations within each of
these states, as they pertain to completing direct dial long distance calls for
the Company's customers within the state, are subject to change. As the
Company expands the geographic scope of its direct dial long distance business,
it will be required to obtain additional state regulatory approvals to provide
intrastate long distance service.
Federal Regulation
In 1981, the FCC substantially deregulated the interstate activities of
terrestrial non-dominant interexchange resale carriers such as the Company.
The FCC later extended this deregulatory policy to resellers of satellite
services, resellers affiliated with independent telephone companies and
facilities based carriers (such as MCI and Sprint) which compete with AT&T.
It retained its jurisdiction over customer complaint procedures and basic
statutory common carrier obligations to provide nondiscriminatory services
and rates. The FCC ruled that interstate carriers subject to these
deregulatory actions were no longer subject to certification by the FCC or to
tariff filing requirements under the Communications Act. Subsequently,
however, a federal appeals court overturned the FCC's rulings and interstate
carriers, including resellers are currently required to file tariffs.
These changes in FCC policy, as well as substantial deregulation of AT&T,
have had the effect of lowering the rates of AT&T, the dominant provider of
long distance telephone service and pricing model for the Company, and other
providers and resellers of long distance services. The potential continued
deregulation of AT&T may have a material adverse effect on the Company's
ability to compete effectively with AT&T.
In connection with the 1984 divestiture by AT&T of the RBOCs, the RBOCs, and
subsequently, in a separate proceeding, GTE Corporation ("GTE") were required
to provide all long distance carriers and resellers the same high quality
access and technical interconnection that was previously provided solely to
AT&T. The FCC determined that the access charges to be paid by long distance
carriers such as the Company and other carriers not receiving access equal to
that afforded AT&T would be set initially at a rate offering a substantial
discount from the access charges paid by AT&T. Under equal access, the
Company's subscribers enjoy the convenience of a universal and simple dialing
plan and the Company is provided with equal access to the local exchange.
Within the Company's primary marketing areas, the equal access conversion
process is virtually complete; therefore, the Company no longer receives the
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above mentioned discount and must pay the same access charges as are paid by
AT&T.
Interstate Access Proceeding
In an effort to encourage competition in the provision of interstate access
service, in 1993 the FCC developed interim rules for the pricing of "access
transport" service. Access transport service refers to the connection
provided by LECs between long distance carriers' long distance facilities and
the customer's telephone. These interim rules were designed to: 1) align the
transport charges more closely to the way costs are incurred by reflecting
both flat rate elements and usage sensitive elements; and 2) remain in effect
through October 31, 1995.
The FCC extended the interim rules indefinitely, in part, in anticipation of
the Telecommunications Act of 1996. Several carriers appealed the interim
rules to the US Circuit Court of Appeals for the District of Columbia which
found that the FCC failed to justify important elements of the interim rules.
The Court remanded the matter back to the FCC.
In response to the Court and the Telecommunications Act of 1996, the FCC has
developed a new interim formulation of access pricing which is set to expire
no later than June 30, 1997. On December 23, 1996 the FCC instituted a
rulemaking proceeding designed to comprehensively reform access charges and
increase competition. In this proceeding the FCC is considering how best to
regulate access and associated transport rate structures, so that prices for
access and various access elements will become, by competition or other
means, more reflective of economic costs. While the Company cannot now predict
the outcome of the proceeding, the charges assessed to both the Company and its
competitors are likely to be affected. The rulemaking is expected to be
resolved in 1997, but implementation of new cost structures may be phased in
by region or service. In the event that this rulemaking proceeding has not
concluded by June 30, 1997, the FCC may extend the interim formulation date.
FCC Forbearance Policy
In 1983, the FCC exempted "non-dominant" long distance carriers from being
required to publicly file rates with the FCC. As a result of the FCC's
"forbearance" policy, non-dominant long distance carriers such as the Company
were permitted to enter into individual contracts with customers without
disclosing in public tariffs the rates charged to such customers to their
competitors or its other customers. In November, 1992, however, the U.S.
Court of Appeals for the D.C. Circuit found the FCC's "forbearance" policy to
be unlawful, ruling that the forbearance policy violated federal
communications law governing the FCC. In response to the ruling by the
federal appeals court, MCI and the U.S. Justice Department, on behalf of the
FCC, filed separate appeals with the U.S. Supreme Court requesting that the
appeals court ruling be overturned. In June, 1994, the U.S. Supreme Court
upheld the ruling in the case. As a result, all long distance carriers,
including the Company, are required to publicly file with the FCC the rates
charged for their long distance services.
Subsequently, the Telecommunications Act of 1996 amended the Communications
Act of 1934 to allow the FCC to forbear from applying any provision of the
Communications Act if enforcement of the provision: (1) is not necessary to
ensure that charges are just, reasonable and non-discriminatory; (2) is not
necessary to protect consumers; and (3) is consistent with the public
interest. On October 31, 1996, the FCC released an order finding that the
statutory conditions of the Telecommunications Act of 1996 were met with
regard to most tariff requirements for nondominant long distance carriers.
The FCC's order required all nondominant carriers to cancel their tariffs for
interstate, domestic, interexchange services on file with the FCC no later
than September 22, 1997, and not file any such tariffs thereafter.
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International services, however, would continue to be tariffed. However, in
February 1998 the Court of Appeals for the D.C. Circuit stayed the
effectiveness of the FCC's order and, accordingly, interstate services too are
required to be tariffed at present. The appeal remains pending.
Recent Legislation
In February, 1996, the Telecommunications Act was signed into law. The
purpose of the Telecommunications Act is to promote competition in all
aspects of telecommunications. The Telecommunications Act requires
telecommunications carriers to interconnect with other carriers and requires
local exchange carriers to provide for resale, number portability, dialing
parity, access to rights-of-way and compensation for reciprocal traffic.
Additionally, incumbent local telephone companies are required to provide
nondiscriminatory unbundled access, resale at wholesale rates and notice of
changes that would affect interoperability of facilities and networks. The FCC
is to adopt mechanisms to ensure that essential telecommunications services are
affordable.
The Telecommunications Act also provides that RBOCs may provide long distance
service upon enactment that is out-of-region or incidental to: (i)
audio/video programming; (ii) internet services for schools; (iii) mobile
services; (iv) information or alarm services; and (v) telecommunications
signaling. In order for a RBOC to provide in-region long distance service, the
Telecommunications Act requires the RBOC to comply with a comprehensive
competitive checklist and provides an advisory role for the U.S. Justice
Department in the FCC's determination of whether the entry of a RBOC into the
competitive long distance market is in the public interest. Additionally,
there must be a real facilities based competitor for residential and business
local telephone service (or the failure of the potential providers to request
access) prior to a RBOC providing in-region long distance service. RBOCs must
provide long distance services through a separate subsidiary for at least three
years. Until the RBOCs are allowed into long distance or three years have
passed, long distance carriers with more than 5% of the nation's access lines
may not jointly market RBOC resold local telephone service, and states may not
require RBOCs to provide intra LATA dialing parity except for single LATA
states and states that had earlier required an RBOC to implement such parity.
Telecommunications companies may also provide video programming and cable
operators may provide telephone service in the same service area under certain
circumstances. The Telecommunications Act prohibits telecommunications
carriers and cable operators from acquiring more than 10% of each other,
except in rural and other specified areas.
The impact of the Telecommunications Act on UStel is unknown because a number
of important implementation issues (such as the nature and extent of
continued subsidies for local rates) still need to be decided by state or
federal regulators. However, the Telecommunications Act offers opportunities
as well as risks. The new competitive environment should lead to a reduction
in local access fees, the largest single cost in providing long distance
service today. The removal of the long distance restrictions on the RBOCs is
not anticipated to have an immediate significant impact on UStel because of the
substantial preconditions that must be met before the RBOCs can provide most
in-region long distance services. However, the entry of these local
telephone companies into long distance telecommunications services could result
in new competition and there is a possibility that the local telephone
companies will be able to use local access to gain a competitive advantage over
other long distance providers such as the Company.
On August 1, 1996, the FCC announced the adoption of rules relating to the
manner in which and the price at which potential competitors in the local
services market will be able to obtain local facilities and services from the
incumbent telephone company. Subsequently, the FCC's rules adopted in the
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<PAGE>
August 1, 1996 Order were published and challenged in federal court. Pending
the outcome of this challenge to the FCC's rules, the U.S. Court of Appeals
for the Eighth Circuit stayed the implementation of the relevant rules
adopted by the FCC under the Telecommunications Act of 1996. Iowa Utilities
Board et al. v. Federal Communications Commission, Order Granting Stay Pending
Judicial Review, 4 C.R. (P&F) 1360 (8th Cir. 1996). As this case is still
pending, it is unclear how any court decision and its subsequent impact on the
FCC's rules will affect the Company.
State Regulation
In most states, the Company may be required to obtain state regulatory
certification prior to commencing operations. At December 31, 1996, the
Company had received authorization to provide telecommunications services to
its customers in approximately 41 states, and is applying for authorization
to provide telecommunications services to customers in other states. In
addition, the Company is required to maintain on file at the state regulatory
commissions in those states a tariff or schedule of its intrastate rates and
charges. Various state legislatures and public utility commissions are
considering a variety of regulatory policy questions which could adversely
affect the Company. At this time, however, it is impossible to determine
what effect, if any, such regulations, including the cost of compliance with
such regulations, may have on the operations of the Company.
Employees
At December 31, 1997, the Company had 102 full-time employees, including
6 executives, 45 network, technical and operations personnel, and
51 administrative and support personnel. None of the Company's
employees are represented by a union. The Company believes that its employee
relations are good.
ITEM 2. PROPERTIES
The Company leases from a third party approximately 5,000 square feet of
office space in Las Vegas, Nevada, which it uses as its operations center.
The facilities are leased for a term expiring in July, 1998. Rental of
approximately $7,500 per month is subject to adjustment based on changes in
various cost of living indices. The Company also leases approximately
7000 square feet of office space in Culver City, California, which are
used as UStel's corporate headquarters and for Consortium 2000's marketing and
consulting activities. The facilities are leased for a term expiring in
2002. The monthly rental payment is approximately 10,900.
The Company also is subject to several operating leases relating to a
property in which its switching facility is located. See Note 7 of Notes to
Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party from time to time to litigation or proceedings
incident to its business. There is no pending legal proceeding 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range Of Common Stock
The Company's Common Stock has traded in the over-the-counter market since
June 22, 1994 and is included in the Nasdaq SmallCap Market under the symbol
"USTL." The following table sets forth for the quarters indicated the high
and low closing sale prices per share of Common Stock as reported by the
Nasdaq SmallCap Market. Prices represent inter-dealer quotations, without
adjustment for retail mark-ups, markdowns or commissions and may not necessarily
represent actual transactions.
High Low
1995
First Quarter $7.50 $6.00
Second Quarter 7.00 5.00
Third Quarter 6.50 4.75
Fourth Quarter 6.25 4.75
1996
First Quarter $6.50 $5.00
Second Quarter 7.00 5.75
Third Quarter 6.75 6.00
Fourth Quarter 6.00 3.13
1997
First Quarter $3.38 $2.75
Second Quarter 4.50 3.50
Third Quarter 4.00 1.75
Fourth Quarter 2.44 1.06
1998
First Quarter (through March 24) $1.47 $0.81
The 6,911,515 shares of Common Stock outstanding as of December 31, 1997
were held by approximately 200 record holders, who the Company believes
held for in excess of 600 beneficial holders.
Dividend Policy
The Company has never paid any cash dividends on its capital stock and does
not anticipate paying any cash dividends in the foreseeable future. Instead,
the Company intends to retain any earnings to provide funds for use in its
business. The Company's line of credit with Coast Business Credit restricts
payment of cash dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resource."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the Company's
Financial Statements and Notes thereto and the other financial data included
elsewhere in this report. This report contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements.
Recent developments; decrease in revenues per minute; charge-offs;
acquisitions.
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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.
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. It should be noted in this regard that
UStel took a $2,860,000 write-off for the period ended September
30, 1996.
In July 1997 UStel completed the acquisition of Consortium 2000, Inc. and its
marketing organization, the acquisition of the Pacific Cellular wireless
services assets, and the acquisition of the Will Call assets. These
acquisitions, when combined with the acquisition of Arcada are consistent with
UStel's strategy to evolve from its historic emphasis on long distance service
into a full-service telecommunications company.
Results of Operations
UStel's primary cost is for local access services, which represents the cost
of originating and terminating calls through local networks owned and
operated by local telephone companies such as USWest and Pacific Telesis,
combined with the cost of utilizing usage-sensitive transmission facilities and
leasing long-haul bulk transmission lines from facilities-based carriers.
UStel's profit margin depends, among other things, on the volume of its
operations, on the type of services provided and on the mix between use of
usage-sensitive transmission facilities and long-haul bulk transmission
lines. Increases in volume may increase the use of usage-sensitive
transmission facilities relative to fixed rate bulk transmission facilities.
The Company does not expect this to have a significant impact on profit
margin due to volume discounts that are available on usage-sensitive
transmission facilities and the ability to shift to fixed rate long-haul bulk
transmission facilities at relatively low volumes of activity.
<PAGE>
Quarterly Financial Data (Unaudited)
The following table sets forth certain quarterly financial information
for 1996 and for 1997.
<TABLE>
<CAPTION>
1996 - Three Months Ended
March 31 June 30 September 30 December 31
<S> <C> <C>
<C> <C>
Revenues $4,903,267 $5,623,236 $5,639,841 $5,860,513
Total Operating Expense 4,810,345 5,458,181 8,361,599 5,919,940
Income (Loss) From Operations 92,922 165,055 (2,721,758) (59,427)
Net Income (Loss) 1,398 70,567 (2,849,674) (195,485)
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1997 - Three Months Ended
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Revenues $5,887,745 $5,680,702 $6,533,388 $7,323,378
Total Operating Expense 5,872,038 6,220,022 9,082,929 8,546,145
Income (Loss) From Operations 15,707 (539,320) (2,549,541) (1,222,767)
Net Loss (158,142) (645,836) (2,671,103) (1,394,733)
</TABLE>
Comparison of Results of Operations--Year Ended December 31, 1997 Compared
to Year Ended December 31, 1996.
Revenues for the year ended December 31, 1997 were $25,425,213 as compared
to $22,026,857 for the year ended December 31, 1996. The increase in
revenues in 1997 was the result of expansion from a customer base of 18,000 at
January 1, 1996 to a customer base in excess of 28,000 at December 31,
1997, offset in part by increasing competition in the long distance
telecommunications marketplace in the past fifteen months and the Company's
need to shift to products with less gross margin to enable it to compete.
The growth in the Company's customer base accounted for approximately $4.8
million in incremental revenues. This growth in revenues was offset by
approximately $4.0 million due to a reduction in revenues per minute charged.
Revenues were also affected by the acquisitions of Consortium 2000 and Pacific
Cellular during the second half of 1997, with each contributing approximately
$1,600,000 in revenues. It is expected that future revenues will also be
affected by these acquisitions.
Cost of services sold for the year ended December 31, 1997 was $19,720,474 as
compared to $16,225,354 for the year ended December 31, 1996. The increase
in cost of services sold, similar to the increase between periods in revenue,
was the result of the expansion in the Company's customer base and recent
acquisitions. Cost of services sold for the year ended December 31, 1997 was
77.6% of the revenues produced in the year ended December 31, 1997. Cost of
services sold for the year ended December 31, 1996 was 73.7% of the revenues
produced in that period of 1996. This increase in the cost of services sold,
as a percentage of revenues, reflects the increasing competition in the long
distance telecommunications marketplace in the past 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 year ended December 31, 1997
were $7,613,994 as compared to $5,654,625 for the year ended December 31,
1996. The increase in general and administrative expenses reflects the
addition of Consortium 2000 and Pacific Cellular for the second half of 1997,
together with the impact of the write-off of certain discontinued services.
Selling expenses for the year ended December 31, 1997 were $1,867,906 as
compared to $2,420,139 for the year ended December 31, 1996. The decrease is
attributable to the elimination of certain selling expenses in the second half
of 1997 as a result of the consolidation of Consortium 2000 with the Company.
Depreciation and amortization for the year ended December 31, 1997 was
$518,760 as compared to $249,947 for the year ended December 31, 1996.
Depreciation for the year ended December 31, 1997 was $396,409 as compared
to $230,274 for the year ended December 31, 1996. The increase in
depreciation was the result of the Company's increasing investments in
telephone switching equipment and facilities to handle increased telephone
traffic and increased investment in the computer hardware and software that
supports the operations of the telephone equipment and related billing
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activities. The Company's investment in these fixed assets increased from
approximately $2,717,000 at December 31, 1996 to approximately $3,271,000 at
December 31, 1997.
During the year ended December 31, 1997, the Company reported a loss from
operations of $4,295,921 versus a loss from operations of $2,523,208 for the
year ended December 31, 1996. In 1996 the Company incurred a non-cash charge
of $2,860,869 as the result of a restructuring in the third quarter.
Interest expense for the year ended December 31, 1997 was $607,553 as
compared to $551,920 for the year ended December 31, 1996. In December,
1995, the Company obtained a senior credit facility (the "Credit Facility")
from a finance company in the amount of up to $5,000,000. This Credit
Facility bears interest at the Bank of America Reference Rate plus 2% per
annum, with a minimum of $15,000 interest expense per month. Interest
expense charged on the Credit Facility for the year ended December 31, 1997 was
$361,630 including amortization of related loan fees over thirty-six months, the
period of the credit facility.
Interest income for the year ended December 31, 1997 was $33,660 principally
from the Company's accrual of interest on related party loans, as compared to
$101,934 for the year ended December 31, 1996, when interest income also
included earnings from certain certificates of deposit.
During the year ended December 31, 1997, the Company reported a net loss of
$4,869,814 versus a net loss of $2,973,194 for the year ended December 31,
1996. In September 1997, as a result of a management review, certain
unprofitable services and products were discontinued. As a result, the
Company 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.
Comparison of Results of Operations--Year Ended December 31, 1996 Compared to
Year Ended December 31, 1995.
Revenues for the year ended December 31, 1996 were $22,026,857 as compared to
$16,127,575 for the year ended December 31, 1995. The increase in revenues
in 1996 was the result of the expansion from a customer base of 9,000 at
December 31, 1995 to a customer base in excess of 18,000 at December 31, 1996.
Cost of services sold for the year ended December 31, 1996 was $16,225,354 as
compared to $11,539,874 for the year ended December 31, 1995. The increase
in the cost of services expense was partially caused by claims against other
carriers which resulted in an additional expense of $652,665. Prior to this
adjustment the cost of services expense for the year ended December 31, 1996
amounted to $15,572,689. The increase in cost of services sold, similar to
the increase between periods in revenue, was the result of the expansion in
the Company's customer base. Cost of services sold for the year ended
December 31, 1996 was 73.7% of the revenues produced in the year in 1996.
Cost of services sold for the year ended December 31, 1995 was 71.6% of the
revenues produced in that period of 1995.
General and administrative expenses for the year ended December 31, 1996 were
$5,654,625 as compared to $3,074,289 for the year ended December 31, 1995.
The increase in general and administrative expenses is due to an increase in
the reserve for bad debts of $1,269,704 and the write-down of certain
deferred offering costs of $424,000. The additional increase of $875,557 was
the result of increased staff and related costs in support of the increased
revenues being produced by the Company.
Selling expenses for the year ended December 31, 1996 were $2,420,139 as
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compared to $1,460,009 for the year ended December 31, 1995. The increase in
selling expenses reflects the costs associated with the expansion and
retention of the Company's customer base from commencement through December
31, 1996.
Depreciation and amortization for the year ended December 31, 1996 was
$249,947 as compared to $177,971 for the year ended December 31, 1995.
Amortization of the Company's start-up cost asset was $19,674 for both the
year ended December 31, 1996 and December 31, 1995, respectively.
Depreciation for the year ended December 31, 1996 was $230,273 as compared to
$158,297 for the year ended December 31, 1995.
The increase in depreciation was the result of the Company's increasing
investments in telephone switching equipment and facilities to handle
increased telephone traffic and increased investment in the computer hardware
and software that supports the operations of the telephone equipment and
related billing activities. The Company's investment in these fixed assets
increased from approximately $1,604,000 at December 31, 1995 to approximately
$2,717,000 at December 31, 1996.
During the year ended December 31, 1996 the Company reported a loss from
operations of $2,523,208 versus a loss from operations of $124,568 for the
year ended December 31, 1995. This loss includes additional general and
administrative expenses of $2,569,261 resulting from a review by new
management, as discussed above.
Interest expense for the year ended December 31, 1996 was $551,920 as
compared to $260,437 for the year ended December 31, 1995. The Company
historically utilized a short-term bank line of credit ("Bank Line") to
supplement its periodic needs for cash in operations. In July, 1996 the Bank
Line was repaid from the application of proceeds from certificates of deposit
which secured this obligation. In December, 1995, the Company obtained a
senior credit facility (the "Credit Facility") from a finance company in the
amount of up to $5,000,000. This Credit Facility bears interest at the Bank of
America Reference Rate plus 2% per annum, with a minimum of $15,000 interest
expense per month. Interest expense charged on the Credit Facility for the
year ended December 31, 1996 was $272,185 including amortization of related
loan fees over thirty-six months.
Interest income for the year ended December 31, 1996 was $101,934 principally
from the Company's holdings of bank certificates of deposit and accrual of
interest on related party loans, as compared to $124,060 for the year ended
December 31, 1995.
During the year ended December 31, 1996, the Company reported a net loss of
$2,973,194 versus a net loss of $371,711 for the year ended December 31,
1995. The Company's new management, which took control on August 15, 1996,
conducted a thorough review of the Company's assets and as a result, the
Company incurred a non-cash charge of $2,860,869 in the three-month period
ended September 30, 1996.
Liquidity and Capital Resources
UStel's negative working capital at December 31, 1997 was approximately
($569,822). During the year ended December 31, 1997, UStel utilized net
cash of $1,270,310 for operating activities.
Because UStel has just recently completed installation of an in-house billing
system, it was for most of 1997 dependent upon a third-party billing services
provider to send out bills to the Company's customers for usage of the
services provided by the Company. This reliance on an outside billing
service made it uneconomical for the Company to render bills more frequently
than once a month. Typically, bills for services were being mailed out between
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10 to 20 days after the end of the month in which the services were rendered.
The Company is generally required to pay for the use of third-party long
distance lines within 30 days of the end of the month in which the service is
rendered. This strains the Company's working capital as it is required to seek
sources for financing the differences between the payables and receivables.
With the recent installation of an in-house billing system, this situation
should improve.
At December 31, 1997, UStel's accounts receivable, net of allowance for
doubtful accounts, was $6,937,179.
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.
Under the Credit Facility, UStel can borrow up to an amount which is the
lesser of $5,000,000 or up to 85% of the Company's eligible receivables and
unbilled calling records. Subject to the $5,000,000 maximum borrowing, in
addition to amounts supported by receivables, the Company may borrow on a
36-month term loan basis up to the lesser of $1,500,000 or a formula amount
based on the fair value of new equipment and the liquidation value of
existing equipment. In addition, the Company may borrow up to 95% of the
wholesale value of unbilled call records. The amount outstanding under the
Credit Facility at December 31, 1997 was $3,338,592.
In February, 1996, UStel borrowed $400,000 from Kamel B. Nacif, the holder of
the Company's Series A Preferred Stock. This loan was payable on demand and
bore interest at the annual rate of 12%. At December 31, 1996, the unpaid
balance was $84,000. This loan was paid off in February, 1997. In addition,
an 8% loan fee was paid at maturity.
In June, 1996, UStel borrowed $1,200,000 from an unrelated party. The
one-year note bore interest at the annual rate of 12% and was unsecured.
Interest was payable at maturity. In conjunction with this loan, the Company
agreed to issue warrants for the acquisition of up to 540,000 shares of its
common stock at a price of $5.00 per share. Warrants for the purchase of
120,000 shares of common stock were issuable at the time the loan was
funded. This loan was paid off in February, 1997. At the time of repayment
the lender was entitled to warrants to purchase 240,000 shares of the Company's
common stock.
As of September 9, 1996, UStel was indebted for transmission service to
WilTel, its primary long distance carrier, in the amount of $5,595,963
(before application of certain volume discounts available under the trans-
mission service contract). Payment of this amount was settled by payment of
$1,000,000 on September 9, 1996, UStel's agreement to pay an additional
$735,688 by September 27, 1996, and the Company's agreement to execute a
promissory note in the amount of $3,860,275. In connection with this
agreement, UStel further agreed to pay future WilTel invoices within 30 days
of presentation. The initial due date of the promissory note was November
14, 1996, and it was later extended to December 31, 1996 and February 28, 1997.
The note bore interest at the rate of 15% per annum through November 14, 1996
and 18% thereafter and was secured by a second lien on all of UStel's
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assets. The promissory note was also guaranteed by Consortium 2000 and secured
by certain assets of Consortium 2000. On February 28, 1997, the principal
balance and accrued interest under the promissory note was paid in full from
the proceeds of the 1997 public offering.
In February 1997, UStel successfully completed a public offering of 1,452,500
Units (with each Unit consisting of two shares of the Company's Common Stock
plus one redeemable Common Stock Purchase Warrant) for $6.00 per Unit less
underwriter's discount, commissions and offering costs. The net proceeds to
UStel were approximately $6,346,000. With the net proceeds of this offering
UStel was able to pay off all of its outstanding notes payable, with the
exception of its Credit Facility.
In the fall of 1997, UStel retained Sutro & Co. to raise up to $15,000,000
via a private placement of UStel securities for the purpose of financing the
$5,000,000 cash Merger consideration, to expand UStel's switch network and
for working capital. There can be no assurance that such placement will be
accomplished.
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 initial due date of the promissory note
was December 31, 1997, and it was later extended to January 31, 1998 and April
30, 1998. 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 note was later extended to April 30, 1998. The Company
intends to repay this obligation from the proceeds of its private placement
of securities.
Going Concern
The Company has suffered recurring losses from operations and had a net loss
of $4,869,814 for the year ended December 31, 1997. Also, as of December 31,
1997, the Company had a working capital deficit of $569,822.
Recently, management has made changes in the Company's cost structure that they
believe brings 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.
The "Sutro Private Placement" will be used primarily to restructure existing
debt obligations and to provide working capital for future growth and network
infrastructure.
Management believes that the merger between the Company and Arcada
Communications, Inc., along with proceeds from the "Sutro Private
Placement" will result in substantial and immediate benefits to the Company.
However, no assurance can be given that the Company will be successful in
raising additional capital. Further, should the Company be successful in
raising additional capital, there is no assurance that the Company will
achieve profitability or positive cash flow. If the Company is unable to
obtain adequate additional financing, management may be required to
curtail the operations of the Company, or sell all or part of the Company's
assets. The Company's independent public accountants have included an
explanatory paragraph in their report indicating there is substantial
doubt with respect to the Company's ability to continue as a going concern.
Impact of New Accounting Standards
On March 3, 1997, the FASB issued Statement of Financial Accounting Standards
No. 128 "Earnings Per Share" (SFAS No. 128). This pronouncement provides a
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different method of calculating earnings per share than is currently used in
accordance with APB No. 15, "Earnings Per Share". SFAS No. 128 provides for
the calculation of Basic and Diluted earnings per share. Basic earnings per
share includes no dilution and is computed by dividing income available to
common shareholders by the weighted average number of shares outstanding for
the period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted earnings per share. This pronouncement is effective for fiscal years
and interim periods ending after December 15, 1997; early adoption is not
permitted. The Company adopted this pronouncement in 1997 and it had no
effect on its earnings per share computations.
Statement of Financial Accounting Standards 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 December 31, 1997 and it had no effect on its financial
condition or results of operations.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Company does not expect the
adoption of SFAS No. 130 to have any effect on its financial position or
results of operations, if any, from the adoption of this statement.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by
the FASB is effective for financial statements beginning after December 15,
1997. The new standard requires that public business enterprises report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate and their major customers. The
Company does not expect adoption of SFAS No. 131 to have any material effect
on its results of operations, but could result in additional disclosure.
As of December 31, 1997, the Company had available net operating loss carry-
forwards of approximately $7,722,000 and $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 certain changes in
ownership. As of December 31, 1997 the net operating loss carry-forward may
be utilized at a rate of approximately $402,000 per year (subject to the
Company generating sufficient income from operations.) The loss carry-forward
generated deferred tax assets of approximately $4,454,825. The deferred tax
assets were not recognized since it is not likely that they will be realized;
accordingly, a 100% valuation was provided.
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
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presently believes that, with 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.
Impact of Inflation
The Company believes that inflation has not had a material impact on
its operations. However, substantial increases in material costs could
adversely affect the operations of the Company for future periods.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements are filed as part of this Annual Report of Form
10-KSB as indexed on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS
The following table sets forth, with respect to each person who is currently
a director or executive officer of UStel, the person's age and the person's
positions and offices with UStel. Individual background information
concerning each of such persons follows the table.
The directors and executive officers of the Company are as follows:
Name Age Position
Robert L.B. Diener 49 Chairman and Chief Executive Officer
Jerry Dackerman 47 President, Chief Operating Officer
and Director
Wouter van Biene 48 Executive Vice President, Secretary
and Director
Edmund C. King, Jr. 34 Vice President/Chief Financial Officer
Abe M. Sher 36 Vice President and General Counsel
Royce Diener(1) 79 Director
Ann Graham Ehringer, Ph.D.(1) 57 Director
Jordan Barness(1) 40 Director
(1) Member of Audit Committee and Compensation Committee.
Robert L. B. Diener served the Company as a consultant from July, 1995, to
January 1996, devoting a substantial portion of his time to the Company's
business. He became Executive Vice President in January, 1996, President and
Chief Executive Officer on August 14, 1996 and Chairman and Chief Executive
Officer on December 23, 1996. From its inception in 1986 through 1993, Mr.
Diener served as President and Chief Executive Officer of American Health
Properties, Inc., a New York Stock Exchange ("NYSE") listed real estate
investment trust specializing in health care. From 1976 through 1986, Mr.
Diener held various positions with American Medical International, Inc.,
("AMI"), a multinational hospital management company listed on the NYSE and
included in the S&P 500, most recently Group Vice President--Corporate
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Development. For over seven years, he was a principal business development
officer in the international division of AMI, overseeing projects worldwide.
For four years prior to joining AMI, Mr. Diener was engaged in the private
practice of law with a law firm in Los Angeles, California, concentrating in
banking, real estate, corporate and securities law. Mr. Diener is the son of
Royce Diener.
Jerry Dackerman served the Company as Executive Vice President and Director
since August 14, 1996, and on December 23, 1996, was elected President and
Chief Operating Officer. Mr. Dackerman founded Consortium 2000 in 1988 as a
communications user group specializing in the design of large scale
telecommunications networks utilizing a group purchasing approach. Mr.
Dackerman is President and Chief Executive Officer of Consortium 2000 and
will continue to serve in such capacities after the Merger is completed. Mr.
Dackerman's initial experience in the telecommunications field was with
Executone, Inc. and RCA American Communications. In 1977, he founded Robin &
Dackerman, Inc., an international telecommunications consulting firm
specializing in the design and implementation of telecommunications
networks. Mr. Dackerman is also a director of New USA Growth Fund.
Dr. Wouter van Biene has been the Senior Vice President, Chief Financial
Officer and Secretary of Consortium 2000, Inc. since 1991. On August 14,
1996, he became Executive Vice President, Chief Financial Officer and
Secretary of UStel. On July 14, 1997 he relinquished the Chief Financial
Officer title and became Chief Information Officer. From 1986 to 1991, he
was a partner with Robin & Dackerman, Inc., a telecommunications consulting
firm. From 1972 to 1986, he was employed by AMI where he achieved the level of
Group Vice President-Information Systems and Chief Financial Officer for
International Operations. Dr. van Biene earned a doctorate in Economics and
Business Administration at the University of Amsterdam, the Netherlands.
Edmund C. King, Jr. joined the Company in May of 1997 and was appointed Vice
President and Chief Financial Officer in July of 1997. From 1995 through
1997, Mr. King served as Financial Analyst and Senior Associate at Trouver
Capital Partners, a West Los Angeles investment banking firm. During that
time, Mr. King also founded Infusion, LLC, a capital management and
resource company. From 1990 to 1995, Mr. King was employed at ITT Fluid
Technology Corporation in various positions including: Sales Company
Controller, Group Financial Reporting Manager and Division Cost Accounting
Manager, among others. He is a Certified Management Accountant. Mr. King
earned a Masters Degree in Business Administration from Oregon State University.
Abe M. Sher was appointed by the Company as its General Counsel in January,
1996. From June, 1995 to January, 1996, Mr. Sher was an advisor to the
Company. From 1994 through 1996, Mr. Sher served as a corporate finance
consultant to Micro Bell, Inc., a telecommunications/paging hardware
manufacturer. From 1993 through 1995, Mr. Sher served as General Counsel for
SpaceWorks, Inc., an international service provider specializing in
customized on-line telecommunications applications for large corporations and
associations. From 1989 to 1991, Mr. Sher was also a principal and served as
General Counsel of Atria Corporation, a real estate development company based
in Southern California. From 1986 to mid-1995, Mr. Sher was also engaged in
the private practice of law in Los Angeles, California.
Royce Diener has served as an advisor to the Company since July, 1995, became
a director of the Company in January, 1996 and served as Chairman from August
14, 1996 to December 23, 1996. Mr. Diener served for over 18 years as
President, then Chairman and Chief Executive Officer of AMI. He serves on
the Board of Directors of Acuson, Inc. and American Health Properties, Inc.,
both listed on the NYSE. Among private companies, Mr. Diener serves on the
Board of Directors of Harvard Medical International, an affiliate of Harvard
University. He recently completed a ten-year term as a director of Advanced
Technology Ventures, a registered investment firm located in Boston,
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Massachusetts, and Palo Alto, California. Mr. Diener is the father of Robert
L. B. Diener.
Ann Graham Ehringer, Ph.D., became a director in May, 1997. Dr. Ehringer has
been a director of the Family and Closely-Held Businesses Program and
associate professor in the Entrepreneur Program in the Marshall School of
Business of the University of Southern California since July 1996. From 1990
to 1996 Dr. Ehringer has acted as a private consultant to the owners and
managers of small and mid-sized companies. From September 1992 to the
present she has also been Chairman and Chief Executive Officer of S.P. Land,
Inc. and S.P. Lodge, Inc., a real-estate holding business and a fine-dining
business, respectively. Dr. Ehringer has a Ph.D. in Management from the
University of Southern California, completed the Owner/President, Management
Program at the Harvard Business School, received a M.A. from Stanford
University and a B.A. from the University of Hawaii. She is a member of the
Executive Advisory Panel for the "Executive" a Publication of the Academy of
Management and of the National Association of Corporate Directors. She serves
on the boards of directors of other private and not-for-profit organizations.
Jordan Barness became a director in May, 1997. Mr. Barness is a founding
partner of the Los Angeles and New York-based law firm of Steinberg, Barness,
Glasgow & Foster, LLP. He serves as President to Trans International
Management Corporation, a domestic and international consulting, marketing
and management firm. He was a member of the law firm of Cordero, Glasgow &
Barness from 1986 to 1994 and a member of the law firm of Barness, Glasgow &
Barness from 1994 to 1996. Mr. Barness received his Bachelor of Arts Degree
in Political Economies of Industrial Societies from the University of
California at Berkeley in 1979. He received his Juris Doctor Degree from
Southwestern University School of Law in 1983. Mr. Barness is admitted to
the New York and California Bars. Mr. Barness' practice includes general
corporate, real estate and international law. Mr. Barness is the son of
Amnon Barness, a stockholder and warrant holder of UStel, a shareholder of
Consortium 2000 and one of the beneficiaries of the Palisades USTL Trust.
Board of Directors
Directors are elected annually to serve until the next annual meeting of
stockholders and until their successors are elected and qualified or until
their death, resignation or removal.
The Audit Committee of the Board of Directors, comprised of Royce Diener, Ann
Graham Ehringer and Jordan Barness, is responsible for making recommendations
concerning the engagement of independent certified public accountants,
approving professional services provided by the independent certified public
accountants and reviewing the adequacy of the Company's internal accounting
controls. The Compensation Committee, comprised of Royce Diener, Ann Graham
Ehringer and Jordan Barness, is responsible for recommending to the Board of
Directors all officer salaries, management incentive programs and bonus
payments. Neither the Audit or Compensation Committees met formally in
1996. The Board of Directors met 18 times in 1996. Each director attended at
least 75% of the aggregate of all meetings held by the Board in 1996 during
such director's tenure as a director. Currently, none of the directors
receives compensation for acting as a director. The Company anticipates that
it may in the future institute a compensation plan for outside directors which
will involve compensation for attending meetings and stock options.
Compensation Committee Interlocks and Insider Participation
Prior to August 1996, the Company did not have a Compensation Committee or
an Audit Committee. Former director, Noam Schwartz and Barry Epling
participated in deliberations concerning compensation of executive officers
during 1995. None of the executive officers of the Company have served on
the board of directors or on the compensation committee of any other related
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entity, except for Consortium 2000.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act of 1934 requires the Company's
directors and officers, and persons who won more than 10% of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the SEC. Officers, directors and greater than 10%
stockholders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file. Based solely on the Company's
review of the copies of such reports received by it during the year ended
December 31, 1997, the Company believes that each person who, at any time
during such fiscal year, was a director, officer or beneficial owner of more
than 10% of the Company's Common Stock complied with all Section 16(a) filing
requirements during such fiscal year or prior fiscal years, except as follows:
Name of Person # of Late # of Transactions Not Failure to File
and Position Reports Reported in Timely Basis a Required Report
- ---------------------- ------- ------------------------ -----------------
Robert L. B. Diener 1 1
Chairman, Chief
Executive Officer
and Director
Jerry Dackerman 1
President, Chief Operating
Officer and Director
Wouter van Biene 1
Executive Vice President,
Chief Financial Officer
and Director
Abe M. Sher 1
Vice President and
General Counsel
Jordan Barness 1
Director
Ann Graham Ehringer 1 1
Director
Royce Diener 1
Director
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth all compensation received by the Company's
Chief Executive Officer and its other most highly compensated executive
officers and key employees whose total cash and cash equivalent compensation
exceeded $100,000 for services rendered to the Company for the years ended
December 31, 1995, 1996 and 1997.
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<TABLE>
<CAPTION>
Long Term
Compensation
Awards
Payouts
Annual Securities
Compensation Underlying
Name and Principal Position Year Salary Options/SAR's #
<S> <C> <C> <C>
Robert L.B. Diener(1)
Chairman, Chief Executive 1997 $200,000 200,000
Officer and Former 1996 --- ---
President 1995 --- ---
Jerry Dackerman(1) 1997 180,000 120,000
President, Chief Operating 1996 --- ---
Officer and Director 1995 --- ---
Wouter van Biene(1) 1997 139,992 100,000
Executive Vice President 1996 --- ---
Chief Information Officer 1995 --- ---
Edmund C. King, Jr.
Vice President, Chief 1997 72,538 100,000
Financial Officer 1996 --- ---
1995 --- ---
Barry K. Epling 1997 94,988 ---
Former Executive Vice 1996 102,440 100,000
President and Former 1995 93,000 ---
Director
</TABLE>
(1) In January 1997, the Company entered into three-year employment
agreements, retroactive to August 15, 1996, with Messrs. Diener, Dackerman
and van Biene, at annual salaries of $200,000, $180,000, and $140,000,
respectively, with bonuses to be determined at the discretion of the Board of
Directors. The employment agreements for Messrs. Diener, Dackerman and van
Biene provide that, under certain circumstances, in the event of a change in
control of the Company, each employee shall be paid the amount of his
compensation as would be due for the balance of his term of employment, or
for the two year period from such change in control, whichever is longer.
The Company had entered into employment agreements with Noam Schwartz and
Barry Epling that provide for annual salaries of $120,000 (of which Mr.
Schwartz only drew $100,000 in 1995) and $93,600, respectively. Mr.
Schwartz's employment agreement provided for a three-year term ending March
1, 1997. Mr. Schwartz resigned effective December 15, 1996. Mr. Epling's
employment agreement provided for a five-year term commencing December 1,
1993, although the salary provided for in such agreement did not commence
until February 1, 1994. Each of the employment agreements also provided for
bonuses to be paid at the discretion of the Company's Board of Directors. In
July 1997, UStel terminated Mr. Epling's contract. UStel is currently
negotiating a severance arrangement with Mr. Epling.
The compensation of Robert L. B. Diener, in his capacity as the Company's
former Executive Vice President and Secretary, was payable by the Company as
consulting fees to Diener Financial Group, a company wholly-owned by Mr.
Diener, under a one-year consulting agreement effective September 1, 1995.
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Pursuant to this arrangement, the Company agreed to pay Diener Financial
Group $7,500 per month. In addition, Mr. Diener was to personally receive
$5,000 per month for a one year period starting November 1, 1995. The
consulting agreement further provided that Diener Financial Group and Mr.
Diener were to receive five-year warrants to purchase up to 100,000 shares each
of Common Stock at a price of $5.00 per share. On August 14, 1996, Mr. Diener
became President and Chief Executive Officer of the Company.
In September, 1996, the Company entered into a two-year employment agreement
with Abe M. Sher that provides for a monthly salary of $6,950. Mr. Sher's
employment commitment is for 50% of his working time. The Company previously
granted Mr. Sher five-year warrants to purchase up to 200,000 shares of
Common Stock at $5.00 per share and issued to him 32,000 shares of Common
Stock. All of such warrants are currently exercisable. The 32,000 shares of
Common Stock are restricted from transfer for two years from the date of grant
and are forfeitable to the Company if Mr. Sher elects to terminate his
employment with the Company during that two-year period.
1993 Stock Option Plan
The 1993 Stock Option Plan (the "Stock Option Plan") provides for the grant
of options to acquire the Company's Common Stock ("Options"), the direct grant
of shares of the Company's Common Stock ("Stock Awards"), the grant of stock
appreciation rights ("SARs"), or the grant of other cash awards ("Cash
Awards") (Stock Awards, SARs and Cash Awards collectively are referred to
herein as "Awards"). Options and Awards under Stock Option Plan may be
issued to executives, key employees and others providing valuable services to
the Company and its subsidiaries. The Options issued may be incentive stock
options or nonqualified stock options. A maximum of 1,450,000 shares of
Common Stock of the Company may be issued under the Stock Option Plan. Of
this amount, 795,000 options are available for grant. If any change is made
in the stock subject to the Stock Option Plan, or subject to any Option or
SAR granted under the Stock Option Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, split-up, combination of
shares, exchange of shares, change in corporate structure or otherwise), the
Stock Option Plan provides that appropriate adjustments will be made as to
the maximum number of shares subject to the Stock Option Plan and the number of
shares and exercise price per share of stock subject to outstanding options.
The 1993 Stock Option Plan is administered by the Board of Directors of the
Company or a committee appointed by the Board. The exercise price of all
options granted under the Stock Option Plan must be at least equal to the
fair market value of such shares at the date of grant. The maximum term of
options granted under the Stock Option Plan is 10 years. With respect to any
participant who owns stock representing more than 10% of the voting rights of
the Company's outstanding capital stock, the exercise price of any option
must be equal at least to 110% of the fair market value of such shares on the
date of grant.
Options granted under the 1993 Stock Option Plan are nontransferable other
than by will or by the laws of descent and distribution upon the death of the
option holder and, during the lifetime of the option holder, are exercisable
only by such option holder. Termination of employment at any time for cause
immediately terminates all options held by the terminated employee.
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<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
Number of Securities Percent of Total
Underlying Options/SAR's
Options/SAR's Granted to
Granted # Employees In Exercise of Base
Name Fiscal Year Price ($/sh) Expiration Date
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
Robert L.B. Diener 200,000 30.5 3.625 07/07
Jerry Dackerman 120,000 18.3 3.625 07/07
Wouter van Biene 100,000 15.3 3.625 07/07
Edmund C. King, Jr. 100,000 15.3 3.625 07/07
Morris Fox 100,000 15.3 3.625 07/07
Nissim Ozer 20,000 3.0 3.625 07/07
Art Finta 5,000 0.01 3.625 07/07
Ron Neilan 5,000 0.01 3.625 07/07
Mary Rivenbark 5,000 0.01 3.625 07/07
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(Individual Grants)
Value of Unexercised
Number of Unexercised In-the-Money
Options/SAR's At Options/SAR's At
Shares Acquired FY-End (#) Exercisable FY-End($) Exercisable
Name On Exercise (#) Value Realized($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Robert L.B. Diener -0- -0- 0/200,000 0/0
Jerry Dackerman -0- -0- 0/120,000 0/0
Wouter van Biene -0- -0- 0/100,000 0/0
Edmund C. King, Jr. -0- -0- 0/100,000 0/0
Morris Fox -0- -0- 0/100,000 0/0
Nissim Ozer -0- -0- 0/ 20,000 0/0
Art Finta -0- -0- 0/ 5,000 0/0
Ron Neilan -0- -0- 0/ 5,000 0/0
Mary Rivenbark -0- -0- 0/ 5,000 0/0
</TABLE>
At December 31, 1994, there were outstanding options to acquire 210,000
shares of the Company's Common Stock under the Stock Option Plan. These
options were granted in January, 1994 to Noam Schwartz, the Company's former
President, at an exercise price of $7.50 per share. In January, 1996, the
Company's Board of Directors approved the reduction of the exercise price of
Mr. Schwartz's outstanding options to $5.00 In 1997, Mr. Schwartz resigned as
a Director without exercising his options within the period provided for the
exercise of stock options by a former director or employee. UStel notified Mr.
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Schwartz of the cancellation of his options due to non-exercise within the
prescribed period of exerciseability.
Limitation of Director's Liability and Indemnification
The Company's Articles of Incorporation limit the liability of its directors
in their capacity as directors to the fullest extent permitted by the
Minnesota Business Corporation Act. Specifically, directors of the Company
will not be personally liable for monetary damages for breach of fiduciary duty
as directors except liability for (i) any breach of the duty of loyalty to the
Company or its stockholders, (ii) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) dividends
or other distributions of corporate assets that are in contravention of
certain statutory or contractual restrictions, (iv) violations of certain
Minnesota securities laws, or (v) any transaction from which the director
derives an improper personal benefit.
The Minnesota Business Corporation Act requires that the Company indemnify
any director, officer or employee made or threatened to be made a party to a
proceeding, by reason of the former or present official capacity of the
person, against judgments, penalties, fines, settlements and reasonable
expenses incurred in connection with the proceeding if certain statutory
standards are met. "Proceeding" means a threatened, pending or completed
civil, criminal, administrative, arbitration or investigative proceeding,
including a derivative action in the name of the Company. Reference is made
to the detailed terms of the Minnesota Indemnification Statute (Minn. Stat.
SEC.302A.521) for a complete statement of such indemnification rights. The
Company's Bylaws also require the Company to provide indemnification to the
fullest extent of the Minnesota Indemnification Statute.
The directors and officers of the Company also are indemnified against
certain civil liabilities that they may incur under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to officers, directors or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
Outstanding Warrants
The following table sets forth certain information as of December 31,
1997 with respect to the issuance or agreements to issue by the Company of
warrants to purchase Common Stock:
Max. Shares
Date of Name of Holder/ Issuable Upon Exercise Date First Expire
Issue Description of Group Exercise Price Exercisable Date
- ----- ------------------------- ---------- ------- ------- --------
6/94 Registered Consulting Grp 16,000 5.00 6/94 N/A
In consideration of financial
public relations services
6/94 Norcross Securities, Inc. 65,000 6.25 6/95 6/99
Granted to the Underwriter
upon completion of the
Company's initial public
offering.
8/95 Diener Financial Group 100,000 5.00 (1) 10/00
Issued in connection with
engagement as a financial
consultant to the Company
-29-
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<PAGE>
10/95 $1,500,000 term loan investors 100,000 5.00 10/95 10/00
Issued to investors making
$1,500,000 term loan to the
Company.
11/95 Robert L.B. Diener 100,000 5.00 (1) 11/00
Issued in connection with
Mr. Diener's engagement as a
consultant to the Company
12/95 Investors in equity private 160,000 7.50 5/95 5/01
placement
Issued as part of 160,000 units
(consisting of 160,000 shares of
Common Stock and 160,000 Common
Stock purchase warrants) in a
private placement completed in
December, 1995
1/96 Abe M. Sher 200,000 5.00 (1) 12/01
Issued in connection with
Mr. Sher's engagement as Vice
President and General Counsel
6/96 Jeflor, Inc. 240,000 5.00 8/96 6/01
Issued in connection with a loan
for $1,200,000 due June 19, 1997,
subject to four 90 day extensions
Total 981,000
All warrants are fully vested.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to beneficial
ownership of the UStel Common Stock as of December 31, 1997 by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
Common Stock, (ii) each director of the Company owning Common Stock, (iii)
each executive officer of the Company owning Common Stock and (iv) all
executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Number of Shares
Beneficially Owned Owned
Name and Address(1) Number Percent
<S> <C> <C>
Robert L.B. Diener(2) 213,476 3.0
Jerry Dackerman 117,054 1.7
Wouter van Biene 124,107 1.8
Edmund C. King, Jr. -- --
Abe M. Sher(3) 232,000 3.3
Royce Diener (4) 374,996 5.4
Kamel B. Nacif(5) 594,990 8.2
Ann Graham Ehringer, Ph.D. 5,000 *
Jordan Barness -- --
All directors and officers
as a group (eight persons) 1,066,633 14.4
* Less than one percent.
</TABLE>
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PAGE
<PAGE>
(1) In calculating percentage ownership, all shares of Common Stock which
the named stockholder has the right to acquire upon exercise of stock options
or conversion of convertible securities exercisable or convertible within 60
days of the Record Date, are deemed outstanding for the purpose of computing
the percentage of Common Stock owned by such stockholder, but are not deemed
to be outstanding for the purpose of computing the percentage of Common Stock
owned by any other stockholder. Percentages may be rounded. Each of such
persons may be reached through the Company at 6167 Bristol Parkway, Suite
100, Culver City, California 90230.
(2) Consists of 8,476 shares of Common Stock and warrants to purchase up
to 100,000 shares of Common Stock owned by the Diener Financial Group, and
warrants to purchase up to an aggregate of 105,000 shares of Common Stock
owned by Robert L.B. Diener, individually.
(3) Consists of 32,000 shares of Common Stock and 200,000 shares of
Common Stock issuable upon the exercise of warrants.
(4) Consists of 291,663 Shares of Common Stock and 83,333 shares of
Common Stock issuable upon exercise of warrants.
(5) Consists of 220,000 shares of Common Stock and 374,990 shares of
Common Stock underlying 275,000 shares of Series A Convertible Preferred
stock issued to Mr. Nacif. Mazliach Gamliel holds a general power of attorney
for Mr. Nacif which includes the right to vote his shares but Mr. Gamliel
disclaims beneficial ownership of Mr. Nacif's shares.
(6) Includes an aggregate of 488,333 shares of Common Stock as to which
the named directors and executive officers may acquire, as described in
footnotes (2), (3) and (4) above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August, 1995, the Company agreed to engage the Diener Financial Group as a
financial consultant for a period of one year commencing September 1, 1995
and agreed to grant to the Diener Financial Group five year warrants to
purchase 100,000 shares of the Company's Common Stock at $5.00 per share. The
sole principal of the Diener Financial Group is Robert Diener, who currently is
the Company's Chairman and Chief Executive Officer. Pursuant to the Diener
Financial Group engagement, the Company agreed to pay a consulting fee of
$7,500 per month to the Diener Financial Group and $5,000 a month to Mr.
Diener personally. The Company also agreed to additionally compensate the
Diener Financial Group in an amount equal to 1%, 2% and 3% of the senior
debt, subordinated debt and equity proceeds, respectively, raised by the Diener
Financial Group for the Company. As of August 14, 1996, the engagement
agreement with the Diener Financial Group was terminated with no additional
sums owing to the Diener Financial Group.
In October, 1995, the Company obtained a $1,500,000 term loan from a group of
investors introduced to the Company by the Diener Financial Group. Of the
$1,500,000 loaned to the Company by the investor group, $500,000 came from
Royce Diener. The loan bore interest at 10% per annum payable quarterly and
was due in one year. The loan was secured by the Company's accounts
receivable and unrestricted deposit accounts of the Company to the fullest
extent permitted by law and was convertible at the lenders' option, in whole
or in part, into shares of the Company's Common Stock at the rate of $5.00
per share. The Company also issued to the members of the investor group
five-year warrants to purchase an aggregate of up to 100,000 shares of Common
Stock at $5.00 per share. The warrants are allocable among the members of the
investor group in proportion to the amount loaned to the Company, which means
that Royce Diener, who loaned one-third of the total term loan, is entitled to
one third of the warrants (i.e., warrants to purchase 33,333 shares of Common
Stock). In consideration for arranging the term loan in 1995, the Company
-31-
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<PAGE>
paid Robert Diener $15,000 (1% of the proceeds raised). The $1,500,000 term
loan was repaid by the Company in January, 1996 from proceeds drawn under its
new line of credit with Coast Business Credit.
In January, 1996, the Company completed a private placement of 160,000 Units
(consisting of 160,000 shares of Common Stock and 160,000 redeemable common
stock purchase warrants) raising net proceeds of approximately $775,000. For
assisting the Company in connection with this private placement, the Company
paid Robert Diener the sum of $25,000. In November, 1995, the Company
granted Mr. Diener 100,000 warrants exercisable at $5.00 per share, expiring
October, 2000.
In June, 1996, the Company acquired title to a telecommunications switch
owned by a former executive officer, Mr. Epling, for aggregate consideration in
the amount of $702,157. Consideration was paid by crediting $500,000 as
payment for the issuance of 100,000 shares of Common Stock to Mr. Epling
pursuant to the exercise of employee stock options, canceling approximately
$117,799 in interim advances made by the Company to TYC, Inc., a corporation w
holly-owned by Mr. Epling, and a cancellation of interim advances of
approximately $68,656 made by the Company to Mr. Epling for upgrading the
switch, and the issuance of an additional 7,851 shares of Common Stock to Mr.
Epling based on a $5.00 per share market value. At the time the switching
equipment was acquired, it was appraised at approximately $716,000.
In July, 1996, the Company's Board of Directors authorized the issuance of
20,000 shares of Common Stock to Consortium 2000 at $5.75 per share to
reconcile variances in commissions owed to Consortium 2000 for July, 1995
through March, 1996. These shares were distributed as dividends to the
shareholders of Consortium 2000 in 1997.
Noam Schwartz, and his brother, Ronnie Schwartz, personally guaranteed the
Company's credit facility with Jeflor, Inc. As of December 31, 1996, the
amount outstanding under this facility was $1,200,000. The loan was paid off
in February, 1997.
Under Minnesota law, officers and directors of the Company may enter into
transactions or contracts with the Company provided generally that (i) the
transaction is fair to the Company at the time it is authorized or approved;
(ii) the stockholders approve the transaction after disclosure of the
relationship or interest; or (iii) after disclosure to the Board of
Directors, a majority of the disinterested board members authorize the
transaction. In addition, any transaction involving a loan, guarantee or other
financial assistance by the Company to an officer or director requires approval
of the Board of Directors.
Related Party Transactions
The Company has entered into business transactions with Consortium 2000, an
entity which prior to its acquisition was owned or controlled by certain of
the Company's principal stockholders. Although the Company may continue to
enter into such transactions in the future, its policy is not to enter into
transactions with related persons unless the terms thereof are at least as
favorable to the Company as those that could be obtained for unaffiliated
third parties and are approved by a majority of disinterested directors.
-32-
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<PAGE>
ITEM 13. EXHIBITS
Exhibit
Number Exhibits
2 Merger Agreement and Plan of Reorganization by and among UStel,
Inc., Consortium Acquisition Corporation and Consortium 2000, Inc.
dated August 13, 1996(4)
2.1 Form of Reincorporated Merger Agreement between UStel, Inc. and
UStel Merger Corporation(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 the Company(1)
3.1-a Statement of Designation of Preferences and Rights of Series
A Convertible Preferred Stock(2)
3.1-b Amendment to Statement of Designation of Preferences and
Rights of Series A Convertible Preferred Stock*
3.2 Bylaws of the Company(1)
4.1 Form of Certificate evidencing shares of Common Stock(l)
4.1-a * Form of Warrant Agreement between the Company and American
Transfer & Trust, Inc.
4.2 Form of 12% Convertible Subordinated Debenture(1)
4.3 * Form of Representative's Warrant between the Company and Barber
& Bronson Incorporated
4.4 * Form of Warrant Certificate
4.5 * Form of Unit Certificate
10.1 Federal Communications Commission Order, Authorization and
Certificate dated October 20, 1992(1)
10.3 Carrier Switched Services Agreement between the Company and
WilTel, Inc. dated March 10, 1993(1)
10.3.1 Collocate Agreement with WilTel, Inc., dated January 9, 1995(3)
10.5 Lease Agreement between the Company and California Mart, dated
June 11, 1993(1)
10.12-a,b,c (a) Leases for 3,400 square feet in Las Vegas, Rainbow Interim
Partners, dated June 19, 1995(3)
(b) NY Lease Forty-Seventh-Fifth Company, dated July, 1994(3)
(c) PacTel Meridian Systems, Equipment Agreement, dated April 15,
1994(3)
10.18 Employment Agreement between the Company and Noam Schwartz, dated
February 1, 1994(1)
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<PAGE>
Exhibit
Number Exhibit
10.19 Employment Agreement between the Company and Barry Epling,
dated December 1, 1993(1)
10.20 1993 Stock Option Plan(1)
10.21 Form of 1993 Option Agreement(1)
10.22 Stock Option Agreement between Noam Schwartz and Barry Epling,
dated December 1, 1993(1)
10.23 Stock Option Agreement between David Schwartz and Barry Epling,
dated December 1, 1993(1)
10.24+ Employment Agreement between the Company and Abe Sher, as of
January 4, 1996
10.24-a+ Modification to Employment Agreement between the Company and Abe
Sher.
10.25 Consulting Agreement between the Company and Integrated Financial
Consultants ("IFC"), dated November 10, 1995, and Supplement and
Cancellation of Indebtedness Agreement between the Company and
IFC dated January 10, 1996(3)
10.26 Coast Business Credit Agreement, dated as of December 21, 1995(3)
10.28 Consortium 2000 Agreement, dated as of August 5, 1994(3)
10.29 Subscription Documents, 160 Units, January 15, 1996, Form of(3)
10.30 Registered Consulting Group Agreement, dated June 20, 1994(3)
10.33 Robert L. Diener Consulting Agreements, dated November 1, 1995,
August 15, 1995(3)
10.34 Service Agreement between the Company and Cardservice
International, dated December 21, 1993(3)
10.35 Interconnect Agreement between the Company and Euronet
International, dated December 17, 1994(3)
10.37 Service Agreement between the Company and Digital Communications
of America, Inc., dated October 14, 1992(3)
10.38 Carrier Transport and Switched Services Agreement, dated December
15, 1993(4)
10.39 Telecommunication Services Agreement between the Company and
WilTel, Inc., dated 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 to
the Company's report on Form 8-K filed with the SEC on
August 27, 1996(4)
10.41 Registration Rights Agreement, dated August 14, 1996 between the
Company and Consortium 2000 Shareholders (exhibit 10.1 to the
Company's report on Form 8-K filed with the SEC on August 27,
1996)(4)
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PAGE
<PAGE>
Exhibit
Number Exhibit
10.43+ Promissory Note, and ancillary agreement, between the Company and
Kamel B. Nacif, dated February 29, 1996
10.44+ Beverly Hills Switching Equipment Letter Agreement, among the
Company, Barry Epling individually and d/b/a TYC and TYC, Inc.,
dated June 5, 1996
10.45+ Form of Employment and Non-Disclosure Agreement between the
Company and Danny Knoller, dated September 1, 1996
10.46+ Consulting Agreement between the Company and Vanguard
Consultants, Inc., dated August 1, 1996
10.47+ Indemnification Agreement between the Company and Noam Schwartz,
dated August 2, 1996
10.48+ Letter Agreement between the Company and Consortium 2000, Inc.,
dated August 7, 1996
10.49+ Amendment Number One to Loan and Security Agreement, Secured
Promissory Note and Amended and Restated Secured Promissory
Note between the Company and Coast Business Credit, dated
September, 1996
10.51+ Sublease between Consortium 2000, Inc., and Primedex Corporation,
dated September 25, 1993
10.52+ Sales Agency Agreement between Consortium 2000, Inc., and
WorldCom, Inc., d/b/a/ LDDS WorldCom, dated June 1, 1995
Confidential Redacted Version
10.53+ Hertz Technologies, Inc., Marketing Agreement and Amendments No.
1 and 2 thereto, between Consortium 2000, Inc., and Hertz
Technologies, Inc., dated July 7, 1995 Confidential Redacted
Version
10.54+ Distributor Program Agreement and Amendment No. 1 and 2 thereto,
between Consortium 2000, Inc., and LCI International Telecom
Corp., dated November 3, 1994, January 31, 1996 and March 26,
1996, respectively, Confidential Redacted Versions
10.55+ Marketing Services Agreement between Consortium 2000, Inc. and
New Enterprise Wholesale Telephone Services, Limited Partnership,
dated August 15, 1994, Confidential Redacted Version
10.56+ Consortium 2000 and Call Points, Inc. Agreement between
Consortium 2000 and Call Points, Inc., dated September 7, 1995,
Confidential Redacted Version
10.57+ Client Contract among Consortium 2000, Inc., Verifications Plus
and Advanced Data Com, Inc., dated January 24, 1996, Confidential
Redacted Version
10.59+ Promissory Note, Commercial Security Agreement and Letter
Agreement between Consortium 2000, Inc., and City National Bank,
dated May 28, 1996, May 28, 1996 and May 30, 1996, respectively
10.60-a,b,c,d+(a) Letter Agreement between the Company and Jeflor, Inc.,
dated June 10, 1996
(b) Subordinated Convertible Debenture, dated June 19, 1996
-35-
PAGE
<PAGE>
Exhibit
Number Exhibit
(c) Warrant, dated June 21, 1996
(d) Guaranty of Loan by Noam Schwartz, Ronnie Schwartz and
Haskel Iny, dated June 17, 1996
10.61+ Form of Employment and Non-Disclosure Agreement between the
Company and Robert B. Diener, effective as of August 15, 1996
10.62+ Form of Employment and Non-Disclosure Agreement between the
Company and Jerry Dackerman, effective as of August 15, 1996
10.63+ Form of Employment and Non-Disclosure Agreement between the
Company and Wouter van Biene, effective as of August 15, 1996
10.64+ Form of Indemnification Agreement between the Company and Robert
B. Diener, effective as of August 15, 1996
10.65+ Form of Indemnification Agreement between the Company and Jerry
Dackerman, effective as of August 15, 1996
10.66+ Form of Indemnification Agreement between the Company and Wouter
van Biene, effective as of August 15, 1996
10.67+ Form of Financial Consulting Agreement between the Company and
BC Capital Corp.
10.68 Employment Agreement between UStel, Inc. and Frank Bonadadio,
Summary
10.69 Professional Consulting Agreement between UStel, Inc. and MDC
Group, Inc., dated January 1, 1998.
+ Previously filed as an exhibit and incorporated by reference to the
Company's Registration Statement and Amendments No. 1 through 3 on
Form SB-2 (Registration No. 333-12981) declared effective February
14, 1997.
* Document to be filed when available.
(1) Incorporated by reference to the Company's Registration Statement and
Amendments No. 1 through No. 2 on Form SB-2 (Registration No.
33-75210-LA) declared effective June 21, 1994.
(2) Incorporated by reference to the Company's 10-KSB for the year ended
December 31, 1995, filed with the SEC on April 16, 1996 commission file
0-24098; same exhibit number.
(3) Incorporated by reference to the Company's Amendment No. 1 to 10-KSB
for the year ended December 31, 1995 filed with the SEC on August
27, 1996 commission file 0-24098.
(4) Incorporated by reference to the Company's report on Form 8-K, filed
with the SEC on August 27, 1996.
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<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
UStel, INC.
Date March 31, 1998 By:_/s/_Robert L. B. Diener______
Robert L. B. Diener
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and
on the dates indicated.
/s/ Robert L. B. Diener Dated March 31, 1998 Chairman of the Board
- --------------------------- Chief Executive Officer
Robert L. B. Diener and Director (Principal
Executive Officer)
/s/ Jerry Dackerman Dated March 31, 1998 President, Chief
- -------------------------- Operating Officer and
Jerry Dackerman Director
/s/ Wouter van Biene Dated March 31, 1998 Executive Vice President
- -------------------------- Chief Information Officer
Wouter van Biene and Director
/s/ Edmund C. King, Jr. Dated March 31, 1998 Vice President and
- ---------------------------- Chief Financial Officer
Edmund C. King, Jr. (Principal Financial
Officer)
/s/ Royce Diener Dated March 31, 1998 Director
- --------------------------
Royce Diener
__________________________ Dated March 31, 1998 Director
Ann Graham Ehringer, Ph.D.
__________________________ Dated March 31, 1998 Director
Jordan Barness
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<PAGE>
UStel, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Report of Independent Certified Public Accountants F-2
Financial statements
Consolidated Balance sheets at December 31, 1997 and 1996 F-3
Consolidated Statements of operations for the years
ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of changes in stockholders' equity for
the years ended December 31, 1997, 1996 and 1995 F-6
Consolidated Statements of cash flows for the years
ended December 31, 1997, 1996 and 1995 F-7
Summary of accounting policies F-8
Notes to consolidated financial statements F-12
F-1
PAGE
<PAGE>
Report of Independent Certified Public Accountants
UStel, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheets of UStel, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of UStel,
Inc. and subsidiaries at December 31, 1997 and 1996, and the results of
their operations and cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 1 to the consolidated financial statements, the Company has
suffered recurring losses from operations and negative working capital.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not
include any adjustment that might result from the outcome of this
uncertainty.
/s/ BDO SEIDMAN, LLP
Los Angeles, California
March 13, 1998
F-2
PAGE
<PAGE>
<TABLE>
UStel, Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
December 31,
1997 1996
Assets (Notes 3 and 7)
Current
<S> <C> <C>
Cash $ 135,689 $ 225,926
Accounts receivable, less allowance for
doubtful accounts of $1,696,000 and
$1,093,000, respectively 6,937,179 6,876,465
Prepaid expenses and other current assets 606,067 376,331
---------- ----------
Total current assets 7,678,935 7,478,722
---------- ----------
Property and equipment
Office furniture and equipment 3,073,452 2,537,268
Leasehold improvement 197,616 180,012
---------- ----------
3,271,068 2,717,280
Less accumulated depreciation (873,198) (471,449)
---------- ----------
Net property and equipment 2,397,870 2,245,831
---------- ----------
Goodwill, net of accumulated amortization
of $102,454 (Note 5) 4,333,049 -0-
Related party receivables (Note 4 (a)) 348,308 301,475
Other receivables, less allowance for
doubtful accounts of $559,000 and
$744,000, respectively 149,170 138,936
Start-up costs less accumulated amortization
of $162,538 and $78,696, respectively 78,429 19,673
Deferred charges (Note 2) 982,938 1,182,308
----------- -----------
Total Assets $15,968,699 $11,366,945
=========== ===========
<FN>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
</TABLE>
F-3
PAGE
<PAGE>
<TABLE>
UStel, Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
December 31,
1997 1996
Liabilities and stockholders' equity
Current
<S> <C> <C>
Notes payable to bank (Note 3) $ 3,338,592 $ 2,225,608
Notes payable to related parties
(Note 4(b)) -0- 84,000
Notes payable - others (Note 7) 1,561,532 4,907,239
Accounts payable and accrued expenses 3,066,322 1,178,818
Accrued revenue taxes 282,311 232,999
---------- -----------
Total current liabilities 8,248,757 8,628,664
Convertible subordinated debentures
(Note 9) 500,000 500,000
---------- -----------
Total liabilities 8,748,757 9,128,664
---------- -----------
Commitments and contingencies (Note 8)
Stockholders' equity
Series A Convertible Preferred Stock,
$.01 par value, 5,000,000 shares
authorized and 275,000 and 550,000
shares outstanding (Liquidation
Preference $1,500,000) (Note 10) 2,750 5,500
Common stock, $.01 par value, 40,000,000
shares authorized; 6,911,515 and
2,126,851 shares issued and
outstanding (Note 11) 69,115 21,269
Additional paid-in capital 18,238,940 7,710,561
Accumulated deficit (11,090,863) (5,499,049)
----------- -----------
Total stockholders' equity 7,219,942 2,238,281
----------- -----------
Total Liabilities and Stockholders'
Equity $15,968,699 $11,366,945
=========== ===========
See accompanying summary of accounting policies and notes to financial statements.
F-4
</TABLE>
PAGE
<PAGE>
<TABLE>
UStel, Inc.
Consolidated Statements of Operations
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $25,425,213 $22,026,857 $16,127,575
----------- ----------- -----------
Operating expenses
Cost of services sold 19,720,474 16,225,354 11,539,874
General and administrative 7,613,994 5,654,625 3,074,289
Selling 1,867,906 2,420,139 1,460,009
Depreciation and amortization 518,760 249,947 177,971
---------- ----------- -----------
Total operating expenses 29,721,134 24,550,065 16,252,143
---------- ----------- -----------
Loss from operations (4,295,921) (2,523,208) (124,568)
Relocation costs -0- -0- (110,766)
Interest income 33,660 101,934 124,060
Interest expense (607,553) (551,920) (260,437)
----------- ----------- -----------
Net loss $(4,869,814) $(2,973,194) $ (371,711)
=========== ========== ===========
Net loss per common
shareholder $ (1.00) $ (1.54) $ (0.23)
======== ======== ==========
Weighted average number of common
shares outstanding 5,549,914 1,926,091 1,600,000
========= ========== ===========
<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-5
</TABLE>
PAGE
<PAGE>
<TABLE>
UStel, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1995, 1996 and 1997
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In Accumulated Note
Shares Amount Shares Amount Capital Deficit
Receivable Total
<S> <C> <C> <C> <C> <C> <C> <C>
<C>
Balance, January 1, 1995 550,000 $ 5,500 1,600,000 $ 16,000 $ 6,220,878 $ (2,154,144) $
-0- $ 4,088,234
Sale of preferred shares
(Note 10) 95,000 950 -0- -0- 165,300 -0-
(95,000) 71,250
Net loss for period -0- -0- -0- -0- -0- (371,711)
-0- (371,711)
------- ------- --------- ------- ---------- ------------
- -------- -----------
Balance, December 31, 1995 645,000 6,450 1,600,000 16,000 6,386,178 (2,525,855)
(95,000) 3,787,773
Cancellation of note
receivable (Note 4 (d)) -0- -0- -0- -0- (95,000) -0-
95,000 -0-
Private placement of common
stock (Note 11) -0- -0- 160,000 1,600 798,400 -0-
-0- 800,000
Conversion of Series B
preferred stock to
common stock (Notes 4
(d) and 10) (95,000) (950) 95,000 950 -0- -0-
-0- -0-
Cost of private placement
of common stock (Notes
4 (f) and Note 11) -0- -0- -0- -0- (25,000) -0-
-0- (25,000)
Cost of issuing Series
A preferred stock in
prior period (Note 10) -0- -0- 112,000 1,120 (47,120) -0-
-0- (46,000)
Acquisition of switching
equipment (Note 4 (g)) -0- -0- 107,851 1,079 514,623 -0-
-0- 515,702
Repayment of agent
commission fees
(Note 4 (e)) -0- -0- 20,000 200 114,800 -0-
-0- 115,000
Stock issued in connection
with raising capital
(Note 4 (c)) -0- -0- 32,000 320 63,680 -0-
-0- 64,000
Net loss for period -0- -0- -0- -0- -0- (2,973,194)
-0- (2,973,194)
------- ------- --------- -------- ----------- ------------
- ------- -----------
Balance, December 31, 1996 550,000 5,500 2,126,851 21,269 7,710,561 (5,499,049)
-0- 2,238,281
Offering of common stock
(Note 11) -0- -0- 2,905,000 29,050 8,685,950 -0-
-0- 8,715,000
Conversion of preferred
stock (Note 10) (275,000) (2,750) 374,990 3,750 (1,000) -0- -0- -0-
Costs of secondary
offering (Note 11) -0- -0- -0- -0- (2,365,687) -0- -0- (2,365,687)
Acquisition of Consortium
2000, Inc. (Note 5) -0- -0- 1,076,923 10,769 2,535,497 -0- -0- 2,546,266
Acquisition of Pacific
Cellular, Inc. (Note 5) -0- -0- 304,014 3,040 734,044 -0- -0- 737,084
Acquisition of Will Call
(Note 5) -0- -0- 38,737 387 91,613 -0- -0- 92,000
Issuance of common shares
for services (Note 11) -0- -0- 85,000 850 125,962 -0- -0- 126,812
Preferred stock dividend -0- -0- -0- -0- 722,000 (722,000) -0- -0-
Net loss for period -0- -0- -0- -0- -0- (4,869,814) -0- (4,869,814)
------- ------- --------- -------- ----------- ------------ ------- -----------
Balance, December 31, 1997 275,000 $ 2,750 6,911,515 $ 69,115 $18,238,940 $(11,090,863) $ -0- $ 7,219,942
======= ====== ========= ======== =========== ============ ======= ===========
<FN>
See accompanying summary of accounting policies and notes to consolidated financial statements.
F-6
</TABLE>
PAGE
<PAGE>
<TABLE>
UStel, Inc.
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash
<CAPTION>
Years Ended December 31,
1997 1996 1995
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (4,869,814) $ (2,973,194) $ (371,711)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 518,760 249,947 177,971
Provisions for losses on accounts receivable 1,964,888 1,993,142 464,000
Increase (decrease) from change in:
Accounts receivable (2,115,602) (3,225,619) (3,746,364)
Prepaid expenses and other (155,861) 130,492 (323,683)
Accounts payable and accrued expenses 3,498,349 (1,878,440) 1,329,865
Other items (111,030) (364,503) (619,391)
------------ ------------ ------------
Net cash used in operating activities (1,270,310) (6,068,175) (3,089,313)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of equipment (703,788) (410,766) (780,185)
------------ ------------ ------------
Net cash used in investing activities (703,788) (410,766) (780,185)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable - banks 24,650,377 21,521,381 4,030,000
Proceeds from related party debt 24,500 400,000 -0-
Proceeds from notes payable - others -0- 4,907,239 -0-
Restricted cash -0- 3,133,433 (2,133,433)
Proceeds from sale of common stock 6,349,214 -0- -0-
Proceeds from sale of preferred stock -0- -0- 71,250
Related parties receivable (46,833) (337,613) 95,847
Payments on debt (28,553,132) (22,920,773) (400,000)
Prepaid acquisition costs (540,265) -0- -0-
------------ ------------ ------------
Net cash provided by financing activities 1,883,861 6,703,667 1,663,664
------------ ------------ ------------
Net increase (decrease) in cash (90,237) 224,726 (2,205,834)
Cash, beginning of period 225,926 1,200 2,207,034
------------ ------------ ------------
Cash, end of period $ 135,689 $ 225,926 $ 1,200
============ ============ ============
See accompanying summary of accounting policies and notes to financial statements.
F-7
</TABLE>
PAGE
<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
the Virgin Islands. On January 12, 1994, the Company effected a recapital-
ization of its capital stock in connection with its re-incorporation in
Minnesota. In connection with the recapitalization, the Company exchanged
all its outstanding common shares (1,000 shares) for 950,000 shares of the
reincorporated company's common shares. Accordingly, the financial statements
were retroactively restated.
Principles of Consolidation
The balance sheet at December 31, 1997 reflects the accounts of UStel, Inc.,
and its wholly-owned subsidiaries Consortium 2000, Inc., Pacific Cellular and
Will Call Communications. The consolidated statements of operations for the
year ended December 31, 1997 include the results of operations for the period
presented and the results of the above subsidiaries of UStel, Inc., from their
respective acquisition dates. 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
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
F-8
PAGE
<PAGE>
UStel, Inc. and Subsidiaries
Summary of Accounting Policies
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 year ended December 31,
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 (Note 8). Loss per
share is based on the weighted average number of common stock outstanding
during each period presented. For years ended December 31, 1997, 1996 and
1995, outstanding stock options and warrants of 4,384,500, 1,391,000 and
591,000 and convertible preferred stock outstanding of 275,000, 550,000
and 645,000 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
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 one financial institution. Deposits
not to exceed $100,000 are insured by the Federal Deposit Insurance
Corporation. At December 31, 1997, the Company had no uninsured cash.
Stock-based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123) establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which
an entity acquires goods or services from 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
F-9
PAGE
<PAGE>
UStel, Inc. and Subsidiaries
Summary of Accounting Policies
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 December
31, 1997 and it had no effect on its financial position or results of
operations.
Reporting Comprehensive Income
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 does not expect adoption of SFAS
No. 130 to have an effect, if any, 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 does not expect adoption
of SFAS No. 131 to have an effect on its financial position or results of
operations; however, additional disclosures may be made relating to the
above items.
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
F-10
PAGE
<PAGE>
UStel, Inc. and Subsidiaries
Summary of Accounting Policies
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.
F-11
PAGE
<PAGE>
UStel, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Going Concern
The Company has suffered recurring losses from operations and had a net loss
of $4,869,814 for the year ended December 31, 1997. Also, as of December 31,
1997, the Company had a working capital deficit of $569,822. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. 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.
The "Sutro Private Placement" will be used primarily to restructure existing
debt obligations and to provide working capital for future growth and network
infrastructure.
Management believes that the merger between the Company and Arcada
Communications, Inc. (Note 6), along with proceeds from the "Sutro Private
Placement" will result in substantial and immediate benefits to the Company.
However, no assurance can be given that the Company will be successful in
raising additional capital. Further, should the Company be successful in
raising additional capital, there is no assurance that the Company will
achieve profitability or positive cash flow. If the Company is unable to
obtain adequate additional financing, management may be required to
curtail the operations of the Company, or sell all or part of the Company's
assets.
Note 2 - Deferred Charges
Deferred charges consist of the following:
December 31,
1997 1996
Development costs $ 111,437 $ 131,437
Acquisition costs - Arcada 365,966 -0-
Offering costs 34,361 739,672
Loan fees 274,478 183,153
Calling card program 138,108 138,108
Deposits and other 321,128 128,202
---------- ----------
1,245,478 1,320,572
Accumulated amortization (262,540) (138,264)
---------- ----------
$ 982,938 $1,182,308
========== ==========
Note 3 - Notes Payable to Bank
In June 1995 and September 1995, the Company entered into a revolving credit
agreement with a bank that provided for secured borrowings aggregating $1.0
million and $2.1 million, respectively, expiring in July 1996. Borrowings
under the agreements bear interest at the bank's prime lending rate. The
credit agreements were collateralized by three certificates of deposit at
the same bank totaling $3.1 million. In March and July 1996, this
outstanding credit line was paid off by offsetting the outstanding balance
against the certificates of deposit used as collateral. Borrowings at
December 31, 1996 were $0.
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
F-12
PAGE
<PAGE>
UStel, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
Note 3 - Notes Payable To Bank (Continued)
rate equal to the Bank of America Reference Rate plus 2% per annum. The Line
is secured by accounts receivable and all of the Company's other assets.
Under the Credit Facility, the Company can borrow up to an amount which is
the lesser of $5 million or up to 85% of the Company's eligible receivables.
Subject to the $5 million maximum borrowing, in addition to amounts supported
by receivables, the Company may borrow on a 36-month term loan basis up to the
lesser of $1.5 million or a formula amount based on the fair value of new
equipment and the liquidation value of existing equipment. Amounts
outstanding under the Credit Facility at December 31, 1997 and December 31,
1996 were $3,338,592 and $2,225,608, respectively.
Note 4 - Related Party Transactions
(a) Related Parties Receivables
At December 31, 1997 and 1996, the Company has amounts due from various
related parties relating to loans as follows:
December 31,
1997 1996
Loans:
Related entities..........................$ 337,329 $ 26,371
Officers.................................. 102,904 274,330
Employees................................. 8,075 774
--------- ---------
448,308 301,475
Less allowance for bad debt (100,000) -0-
--------- ---------
$ 348,308 $ 301,475
========= =========
(b) Related Parties Payable
In October 1995, the Company entered into a revolving credit agreement with a
related party that provides for secured borrowing aggregating $1.5 million
and expiring in October, 1996. Borrowing under the agreement bears interest
at 10% per annum on a daily principal balance outstanding during the three
calendar months prior to each interest payment date. The credit agreement
was collateralized by a security interest in the Company's unrestricted
deposit accounts and accounts receivable. The agreements called for the
issuance of warrants for the purchase of up to 100,000 shares of the Company's
common stock at $5.00 per share, exercisable over a period of five years.
Borrowing under the credit agreement amounted to $1.5 million at December 31,
1995. This loan was repaid in January 1996 by the issuance of 160,000 common
shares of the Company plus $725,000 in cash.
During February, 1996 the Company borrowed $400,000 from a related party. The
note is payable on demand and bears interest at 12% per annum. In June 1996,
$116,000 of this borrowing was repaid. An additional repayment of $200,000
was made in August 1996. Interest is payable at the earlier of maturity or
repayment of the full amount borrowed. The amounts outstanding at December 31,
1997 and December 31, 1996 were $0 and $84,000, respectively. This loan was
repaid in full in February 1997.
(c) Shares Issued to Officer/Employee
During 1996 the Company issued 32,000 shares of common stock to an officer in
connection with his assistance in raising additional capital. The fair value
of the common stock issued of $64,000 is included in deferred offering cost at
December 31, 1996.
F-13
PAGE
<PAGE>
UStel, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
Note 4 - Related Party Transactions (Continued)
On January 1, 1996 the Company issued warrants for the purchase of up to
200,000 shares of the Company's common stock in connection with the employ-
ment of the Company's Vice-President and General Counsel. Also in September
1996 the Company issued warrants for the purchase of up to 100,000 shares of
the Company's stock in connection with the employment of the Company's
representative in Israel. These warrants are issued at an exercise price
of $5.00 per share, which was the fair value at the date of the grant, and
are exercisable upon issuance.
(d)Stock Note Payable
In consideration of services rendered and to be rendered to the Company and
$95,000 paid in the form of a promissory note due upon the earlier of
conversion or May 31, 2005. In November 1995 the Company issued to one of
its officers, 95,000 shares of Series B Preferred Stock. The 95,000 shares
of Series B Preferred Stock were converted into 95,000 shares of common
stock during 1996.
In January, 1996, the Company entered into a supplemental consulting
agreement with the officer to provide services as the chief financial
officer and as a director of the Company for up to 20 hours of service per
week for compensation of $12,500 per month. In February, 1996, the Company
agreed to cancel the $95,000 note in consideration of services rendered by
the officer.
(e) Sales Agent
In August, 1994 the Company retained an independent sales representative,
Consortium 2000, Inc., on a commission basis. As part of the consideration
for its engagement, the Company agreed to issue the sales agent warrants to
purchase up to 300,000 shares of common stock. These warrants are
exercisable in increments of 50,000 shares upon the Company reaching certain
monthly revenue milestones for four years from the date of issuance. The
minimum exercise price of warrants was $7.50 per share and increased depending
on when specified monthly revenue milestones were met. These warrants were
canceled upon consummation of the merger with Consortium 2000 (Note 5). Royce
Diener is Chairman of the Board of the sales agent.
In July, 1996, the Company's Board of Directors authorized the issuance of
20,000 shares of common stock to Consortium 2000 at $5.75 per share to
reconcile variances in commissions owed to Consortium 2000 for July, 1995
through March, 1996. Prior to the merger with Consortium 2000, discussed
further in Note 5, these shares were distributed by Consortium 2000 as a
dividend to its shareholders.
(f) Financial Consultant
Effective as of September 1995, the Company engaged the Diener Financial
Group, a company wholly-owned by Robert L.B. Diener, who is the son of Royce
Diener, a director of the Company.
For assisting the Company in connection with a private placement (Note 11),
the Company paid Robert L. B. Diener the sum of $25,000. In November, 1995,
the Company granted Mr. Diener 100,000 warrants exercisable at $5.00 per
share, expiring November, 2000.
(g) Acquisition of Telecommunications Switch
In June, 1996, the Company acquired title to a telecommunications switch owned
F-14
PAGE
<PAGE>
UStel, Inc. and Subsidiaries
Notes To consolidated Financial Statement
Note 4 - Related Party Transactions (Continued)
by Mr. Epling, a former officer and director of the Company, for aggregate
consideration in the amount of $702,157. Consideration was paid by crediting
$500,000 as payment for the issuance of 100,000 shares of common stock to Mr.
Epling pursuant to the exercise of employee stock options, canceling
approximately $117,798 in interim advances made by the Company to TYC, Inc.,
a corporation wholly-owned by Mr. Epling, and a cancellation of interim
advances of approximately $68,656 made by the Company to Mr. Epling for
upgrading the switch, and the issuance of an additional 7,851 shares of
Common Stock to Mr. Epling based on a $5.00 per share market value with a total
additional charge to equity of $15,702. At the time the switching equipment
was acquired, it was appraised at approximately $716,000.
Note 5 - 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.
During the period January 23, 1998 and April 23, 1998 the shareholders of
Pacific Communications, Inc., have the right to put, i.e., to sell back to
the Company up to 50% of the shares of UStel, Inc., 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.
If the Company's common stock received by the shareholders in the trans-
action have not been registered by the Company with the Securities and
Exchange Commission by April 23, 1998, the put exercise extends to 100%
of the 304,014 shares of the Company's common stock. 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.
The unaudited pro forma results of operations presented below reflect the
Company's operations as though the acquisitions had taken place at the
beginning of each period presented. The pro forma results have been
prepared for comparative purposes only, and are not necessarily
indicative of what the actual results of operations would have been had
such acquisitions occurred at the beginning of the periods presented,
F-15
PAGE
<PAGE>
UStel, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
Note 5 - Acquisitions (Continued)
or what the results of operations will be in the future.
For The Year Ended
December 31,
-------------------------------------
1997 1996 1995
-------------------------------------
Revenues $27,679,188 $26,254,280 $17,877,642
Income (Loss) from operations (5,452,995) (3,555,767) 67,107
Net Loss (6,028,995) (3,877,767) (302,856)
Net Loss per share (0.97) (1.17) (0.11)
Weighted average shares outstanding 6,240,279 3,307,028 2,676,923
Note 6 - Pending Acquisition
In June 1997 the Company signed a letter of intent to acquire Arcada
Communications, Inc., a privately held switch-based interexchange carrier based
in Seattle, WA. The transaction is subject to the execution of a definitive
agreement, due diligence and approval by the stockholders of both companies.
A definitive agreement was signed in September 1997. The definitive agreement
was approved by the shareholders of both companies in December 1997. The
Company expects to close the transaction concurrent with the "Sutro Private
Placement."
Note 7 - 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 is payable at maturity. In conjunction with this loan the Company
agreed to issue warrants for acquisition of up to 540,000 of its common shares
at a price of $5.00 per share. Warrants for the purchase of 120,000 common
shares were issuable at the time the loan was funded. Additional warrants
become issuable in increments of 60,000 common shares each at intervals of
ninety days after funding of the loan so long as the loan remains unpaid.
The amount outstanding at December 31, 1996 was $1,200,000. This loan was
paid off in February 1997. Total warrants of 240,000 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 of $1,000,000 on September 9, 1996, the Company's agreement
to pay an additional $735,688 by September 27, 1996, and the Company's
agreement to execute a promissory note in the amount of $3,860,275. In
connection with this agreement, the Company further agreed to pay future
WilTel invoices within 30 days of presentation. The initial due date of the
1996 Promissory Note was November 14, 1996, and it was later extended to
December 31, 1996 and February 28, 1997. 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 at December 31, 1996 was $3,707,239.
F-16
PAGE
<PAGE>
UStel, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
Note 7 - Notes Payable To Others (Continued)
On October 15, 1997 the Company executed a second 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 bears 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. The note was later extended
to April 30, 1998.
Note 8 - 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. Rent expense under these arrangements was $263,868;
$92,879 and $124,000 for the years ended December 31, 1997, 1996 and 1995.
Insurance and maintenance expenses covering these facilities are the Company's
obligations.
At December 31, 1997 future minimum lease commitments were as follows:
Office Switching Total
December 31, Space Space Amount
1998 $ 219,752 $ 28,574 $ 248,326
1999 153,288 26,950 180,238
2000 130,788 26,950 157,738
2001 130,788 4,492 135,280
2002 119,889 -0- 119,889
-------- -------- ---------
$754,505 $ 86,966 $ 841,471
======== ======== =========
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.
Aggregate commitments related to employment contracts are as follows:
Years ending December 31, Amount
1998 $ 661,440
1999 325,000
-----------
$ 986,440
F-17 ===========
PAGE
<PAGE>
UStel, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
Note 9 - Convertible Subordinated Debentures
In January 1994, the Company issued 12% Convertible Subordinated Debentures
("Debentures") in the aggregate amount of approximately $500,000. The
Debentures bear interest at the rate of 12% per annum, payable on the first
day of each calendar quarter. Principal and accrued interest will be due and
payable on or before December 30, 1998. At any time prior to the payment in
full, the Debentures can be converted into shares of the Company's common
stock at the rate of $7.00 per share, subject to adjustment (as defined).
Note 10 - Preferred Stock
During September 1994, the Company issued 550,000 shares of $.01 par value
Series A Convertible Preferred Stock ("Preferred"). Each share of Preferred
entitles its holder to receive dividends at the same rate paid to common
stockholders. Unless the Company pays or declares dividends with respect to
common shares, the Company has no obligation to declare or pay dividends with
respect to the Preferred. Each share of Preferred is convertible into one
share of common stock, as adjusted, for such things as stock splits, stock
dividends and other similar dilutive occurrences. At any time subsequent to
October 16, 1995, each holder of record of Preferred may, at his or her
option, convert all or part of the Preferred shares held into fully paid
common shares.
In connection with the issuance of the Preferred shares described above, the
Company committed to pay a finders fee for the placement of the Preferred
shares. During 1996, the Company issued 112,000 common shares plus
cancellation of a note receivable of $46,000 in satisfaction of the finders
fee.
On January 24, 1997, the Company agreed to amend the terms of the Series A
Convertible Preferred Stock to change the conversion ratio from 1:1 to
1.3636:1. As a result of this change, the 550,000 shares of Series A
Convertible Preferred Stock will be convertible into 750,000 shares of the
Company's Common Stock and also resulted in a deemed dividend of $722,000.
During May 1997 275,000 shares of the Series A Preferred stock were converted
into 374,990 shares of common stock.
During November 1995, the Company issued 95,000 shares of $.01 par value
Series B Convertible Preferred Stock ("Series B"). Each share of Series B
entitles its holder to receive dividends at the same rate paid to common
stockholders. Unless the Company pays or declares dividends with respect to
common shares, the Company has no obligation to declare or pay dividends with
respect to Series B. Each share of Series B is convertible into one share of
common stock, as adjusted, for such things as stock splits, stock dividends
and other similar dilutive occurrences. Each holder of record of Series B
may, at the option of the holder, convert all or part of the shares of Series
B held by that recordholder into fully paid nonassessable shares of common
stock, if the Company files a registration statement or there is a change in
control of the Company. During 1996, these shares of series B were converted
into common stock.
Note 11 - Common Stock
During June 1994 the Company completed an initial public offering ("IPO")
of 650,000 shares of its common stock. In connection with the IPO, the Company
granted to the underwriter, warrants to acquire 65,000 shares of the Company's
common stock. The warrants are exercisable for a period of four years
commencing one year after the date of the prospectus (June 22, 1994) at an
exercise price of $6.25 (125% of the public offering price). This warrant
F-18
PAGE
<PAGE>
UStel, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
Note 11 - Common Stock (Continued)
remains outstanding as of December 31, 1997.
In January 1996, the Company completed a private placement of 160,000 Units
(consisting of 160,000 shares of common stock and 160,000 redeemable common
stock purchase warrants) raising net proceeds of approximately $775,000. For
assisting the Company with the private placement, the Company paid Robert L.B.
Diener the sum of $25,000 and granted him 100,000 warrants at $5.00 per share,
expiring November 2000.
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 $6,345,531.
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.
Stock Option Plan
The 1993 Stock Option Plan provides for the grant of options to acquire
the Company's common stock to executives, key employees and others providing
valuable service to the Company and its subsidiaries. The options issued
may be incentive stock options or nonqualified stock options. The
exercise price of all options granted under the stock option plan must be
at least equal to the fair market value of such shares at the date of
grant. The maximum term of options granted under the stock option plan
is 10 years. With respect to any participant who owns stock representing
more than 10% of the voting rights of the Company's outstanding capital
stock, the exercise price of any option must be equal at least to 110%
of the fair market value of such shares on the date of grant. Termination
of employment at any time for cause immediately terminates all options
held by the terminating employee.
In 1997 the Company's Board of Directors, with the approval of shareholders,
amended the 1993 Stock Option Plan to increase the number of common shares
covered by the plan from 450,000 shares to 1,450,000 shares. Employee
Option and Employee Warrant activity during the years ended December 31,
1995, 1996 and 1997:
Options and
Employee Weighted
Warrants Average Price
Balance outstanding, January 1, 1995 210,000 $ 7.00
Warrants granted 200,000 5.04
--------- ------
Balance outstanding, December 31, 1995 410,000 6.03
Options granted 200,000 5.00
Warrants granted 300,000 5.00
Options exercised (100,000) 5.00
Options canceled (210,000) 7.00
Options re-issued 210,000 5.00
--------- ------
Balance outstanding, December 31, 1996 810,000 5.00
F-19
PAGE
<PAGE>
UStel, Inc. and Subsidiaries
Notes To Financial Consolidated Statements
Note 11 - Common Stock (Continued)
Balance outstanding, December 31, 1996 810,000 5.00
Options granted 655,000 3.62
Warrants canceled (100,000) 5.00
Options canceled (210,000) 5.00
--------- ------
Balance outstanding, December 31, 1997 1,155,000 $ 4.16
========= ======
Options and employee warrants exercisable
at December 31, 1997 405,000 $ 5.03
======== ======
Information relating to stock options and employee warrants at December 31,
1997 summarized by exercise price is as follows:
Outstanding Exercisable
Exercise Price Weighted Average Weighted Average
Per Share Shares Life (Year) Exercise Price Shares Exercise Price
- ---------------- -------- ---------- -------------- -------- -------------
$ 3.62 655,000 9.5 $ 3.62 - -
5.00 400,000 5.7 5.00 400,000 $ 5.00
7.50 5,000 7.5 7.50 5,000 7.50
- ------ --------- ---- ------ -------- ------
$3.62-7.50 1,060,000 8.0 $ 4.16 405,000 $ 5.03
========== ========= ==== ====== ======== ======
All stock options and warrants issued to employees have an exercise price not
less than the fair market value of the Company's common stock on the date of
grant, and in accordance with accounting for such options utilizing the
intrinsic value method there is no related compensation expense recorded in
the Company's financial statements. Had compensation cost for stock-based
compensation been determined based on the fair value at the grant dates
consistent with the method of SFAS 123, the Company's net loss and loss per
share for the years ended December 31, 1997, 1996 and 1995 would have been
increased to the pro forma amounts presented below:
1997 1996 1995
Net loss
As reported $ (4,869,814) $(2,973,194) $ (371,711)
Pro forma $ (5,074,615) $(3,621,910) $ (371,711)
Loss per share
As reported $ (0.88) $ (1.54) $ (0.23)
Pro forma $ (0.91) $ (1.88) $ (0.23)
The fair value of option grants and employee warrants is estimated on the
date of grants utilizing the Black-Scholes option-pricing model with the
following weighted average assumptions for 1997 and 1996: expected life of
5.0 and 3.8 years; expected volatility of 24.2% and 9.5%, risk-free interest
rates of 7% and 6% and a 0% dividend yield. The weighted average fair value
at date of grant for options granted during 1997 and 1996 approximated $1.31
and $1.04 per option. The fair value of employee warrants granted in 1995
was immaterial.
Due to the fact that the Company's stock option programs vest over many years
and additional awards are made each year, the above proforma numbers are not
indicative of the financial impact had the disclosure provisions of FASB 123
been applicable to all years of previous option grants. The above numbers do
not include the effect of options granted prior to 1995 that vested in 1997,
F-20
PAGE
<PAGE>
UStel, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
Note 11 - Common Stock (Continued)
1996 and 1995.
Note 12 - 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 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.
Note 13 - Supplemental Disclosures Of Cash Flow Information
Non-cash investing and financing activities for the year ended December 31,
1995 were as follows:
Cash paid for interest during the year ended December 31, 1995 amounted to
$260,437.
During 1995, the Company issued 95,000 shares of Series B Convertible
Preferred in payment of services rendered plus a promissory note for $95,000.
Non-cash investing and financing activities for the year ended December 31,
1996 were as follows:
Cash paid for interest during the year ended December 31, 1996 amounted to
$551,920.
During 1996, the Company acquired title to a telecommunications switch through
the issuance of 107,851 shares of common stock for $515,702, the cancellation
of accounts receivable for $117,798 and the cancellation of related party
receivables of $68,657 for a total consideration of $702,157.
During 1996, the Company canceled a promissory note receivable for $95,000
as consideration of services rendered by an officer.
During 1996 the Company repaid $775,000 of a loan payable of a related party
through the issuance of 160,000 shares of common stock.
In 1996, the Company converted 95,000 shares of preferred stock into common
stock.
In 1996, the Company issued 112,000 shares of common stock and canceled a
note receivable in the amount of $46,000 to satisfy the payment of a finder
fee in connection with the issuance of series A preferred stock in a prior
period.
In 1996, the Company issued 20,000 shares of common stock for the repayment
of commission fees for $115,000.
In 1996, the Company issued 32,000 shares of common stock for $64,000 to an
officer for services rendered in connection with raising capital.
F-21
PAGE
<PAGE>
UStel, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
Note 13 - Supplemental Disclosure of Cash Flows Information (Continued)
Non-cash investing and financing activities for the year ended December 31,
1997 were as follows:
Cash paid for interest during the year ended December 31, 1997 amounted to
$598,007.
In 1997, the Company converted 275,000 shares of its Series A Preferred
Stock into 374,990 shares of common stock.
In 1997, the Company issued 1,076,923 shares of common stock for the
acquisition of Consortium 2000, Inc., which is now a wholly-owned subsidiary
of the Company.
In 1997, the Company issued 304,014 shares of common stock for the
acquisition of the Pacific Cellular division of Pacific Communications, Inc.
Pacific Cellular is now a wholly-owned subsidiary of the Company.
In 1997, the Company issued 38,717 shares of common stock for the
acquisition of Will Call Communications. Will Call Communications now
operates as a wholly-owned subsidiary of Pacific Cellular.
In 1997, the Company issued 85,000 shares of common stock for international
marketing services and assistance to be provided by an individual over a
two-year period commencing October 1, 1997.
F-22
<PAGE>
/TEXT
<PAGE>
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<CASH> 135689
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<RECEIVABLES> 8633179
<ALLOWANCES> 1696000
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<PP&E> 3271068
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<CGS> 19720474
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<INTEREST-EXPENSE> (607553)
<INCOME-PRETAX> (4869814)
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