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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
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[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to _____
Commission File Number: 0-22944
US WATS, INC.
----------------------
(Exact name of Registrant as specified in its charter)
New York 22-3055962
- ------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
111 Presidential Boulevard
Bala Cynwyd, Pennsylvania 19004
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(610) 660-0100
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(Registrant's telephone number, including area code)
Not Applicable
----------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and, (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Outstanding at
Common Stock August 14, 1996
-------------- ------------------
$.001 15,652,100
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<PAGE>
US WATS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page (s)
--------
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets--
June 30, 1996 (unaudited) and December 31, 1995 3-4
Consolidated Statements of Operations--
Three and Six Months Ended June 30, 1996 and 1995
(unaudited) 5
Consolidated Statements of Cash Flows--
Six Months Ended June 30, 1996 and 1995 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-11
PART II
OTHER INFORMATION 12
SIGNATURE PAGE 13
<PAGE>
PART I
- ------
Financial Information
Item 1.
- -------
Financial Statements
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1996 1995
---------------------------
Assets
------
Current Assets
Cash and cash equivalents $ 950,397 $ 680,834
Accounts receivable, net of allowance for
doubtful accounts of $397,531 for 1996,
and $268,921 for 1995 6,511,427 4,900,066
Prepaid expenses and other 191,728 107,191
----------- ----------
Total Current Assets 7,653,552 5,688,091
----------- ----------
Property and Equipment
Telecommunications equipment 3,311,154 3,046,877
Equipment 1,267,129 1,231,346
Software 551,385 484,199
Office furniture and fixtures 124,949 119,630
Leasehold improvements 35,226 35,226
----------- ----------
5,289,843 4,917,278
Less accumulated depreciation and amortization 1,840,881 1,426,463
----------- ----------
Total Property and Equipment, net 3,448,962 3,490,815
----------- ----------
Other assets, principally deposits 306,814 321,455
----------- ----------
$11,409,328 $9,500,361
=========== ==========
The accompany notes are an integral part of these financial statements.
-3-
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1996 1995
---------------------------
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Note payable $ 1,556,757 $1,175,164
Capital lease obligations, current portion 181,776 130,664
Accounts payable 5,283,897 4,581,373
Accrued commissions 703,533 753,596
Accrued expenses and other 649,144 361,010
State and Federal taxes payable 674,178 475,012
Deferred revenue 345,042 371,791
----------- ----------
Total Current Liabilities 9,394,327 7,848,610
Long-Term Liabilities
Capital lease obligations, net of
current portion 604,714 601,037
----------- ----------
Commitments and Contingencies
Redeemable preferred stock, $.01 par, authorized
150,000 shares; 30,000 shares issued
and outstanding in 1996 and 1995
Redemption value: $11.00 per share 300,000 300,000
----------- ----------
Preferred stock, $.01 par, authorized
850,000 shares, none issued and outstanding -- --
Common Shareholders' Equity
Common stock, $.001 par, authorized
30,000,000 shares;
issued 15,877,100 shares in 1996,
and 15,852,100 shares in 1995 15,877 15,852
Additional paid-in capital 2,598,375 2,573,400
Deficit (1,503,715) (1,838,288)
----------- ----------
1,110,537 750,964
Common stock held in treasury
(250,000 shares), at cost (250) (250)
----------- ----------
1,110,287 750,714
----------- ----------
$11,409,328 $9,500,361
=========== ==========
The accompany notes are an integral part of these financial statements.
-4-
<PAGE>
US WATS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues $9,429,335 $6,749,333 $18,353,626 $13,670,499
Cost of sales 6,043,042 1,709,578 11,795,362 6,186,605
---------- ---------- ----------- -----------
Gross profit 3,386,293 5,039,755 6,558,264 7,483,894
Selling, general and
administrative expenses 3,132,406 3,481,558 6,106,887 6,089,340
---------- ---------- ----------- -----------
Income from operations 253,887 1,558,197 451,377 1,394,554
---------- ---------- ----------- -----------
Other income (expense)
Interest income 14,756 10,015 21,836 35,983
Interest expense 64,311 13,747 125,140 17,252
---------- ---------- ----------- -----------
Total other income
(expense) (49,555) (3,732) (103,304) 18,731
Income before income taxes 204,332 1,554,465 348,073 1,413,285
Income taxes 0 306,000 0 306,000
Net income (loss) before
preferred dividends 204,332 1,248,465 348,073 1,107,285
Preferred dividends
earned 6,750 11,250 13,500 38,555
---------- ---------- ----------- -----------
Net income available to
common shareholders $ 197,582 $1,237,215 $ 334,573 $ 1,068,730
========== ========== =========== ===========
Earnings (loss) per
common shares available
to common shareholders $ .01 $ .07 $ .02 $ .07
========== ========== =========== ===========
Weighted average number
of shares 17,705,655 16,920,670 17,695,655 16,730,885
========== ========== =========== ===========
The accompany notes are an integral part of these financial statements.
-5-
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1996 1995
---------------------------
Cash flows from operating activities
Net income before preferred dividends $ 348,073 $1,107,285
Adjustments to reconcile income
to net cash provided by operating activities
Depreciation and amortization 439,950 463,162
Provision for bad debts 219,461 643,882
Litigation settlement -- (2,882,223)
Issuance of stock bonus -- 25,000
Net (increase) decrease in non-cash
current assets
Accounts receivable (1,830,822) (509,870)
Prepaid expenses and other (84,537) (41,889)
Net increase (decrease) in non-debt
current liabilities
Taxes payable 199,166 466,967
Accounts payable 702,524 965,428
Accrued expenses 14,498 437,629
Increase (decrease) in deposits (9,027) --
(Increase) decrease in prepaid other assets (1,864) 1,500
----------- ----------
Net cash provided by (used in)
operating activities (2,578) 676,871
----------- ----------
Cash flows from investing activities
Purchase of property and equipment (247,498) (138,011)
----------- ----------
Net cash used in investing activities (247,498) (138,011)
----------- ----------
Cash flows from financing activities
Advances (repayments) of notes payable 381,593 263,351
Preferred stock dividends paid (13,500) (44,755)
Payment of loan acquisition fees -- (40,713)
Advances from officers/directors 196,824 --
Repayments of capital lease obligations (70,278) --
Proceeds from stock option exercises 25,000 --
----------- ----------
Net cash provided by financing activities 519,639 177,883
----------- ----------
Net increase in cash 269,563 716,743
Beginning cash 680,834 628,573
----------- ----------
Ending cash $ 950,397 $1,345,316
=========== ==========
The accompany notes are an integral part of these financial statements.
-6-
<PAGE>
US WATS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Background
- --------------
The Company is a switch-based interexchange carrier providing long distance
telephone communications services primarily to small and medium-sized
business customers. The Company also provides inbound-800 long distance
services, as well as other telecommunications services such as travel cards
(calling cards), cellular, paging, dedicated access, data services, pre-paid
calling cards (debit cards), international callback, and carrier termination
services. The Company uses its own switches and facilities to originate,
transport and terminate calls for customers generally located in the
Mid-Atlantic region and California (on-net areas).
The Company currently serves its customers with two Digital Switch
Corporation toll switches located in Philadelphia, Pennsylvania, and
Oakland, California. Traffic is trunked between the Company's two (2)
switches with leased long haul facilities. For calls originating or
terminating outside the Company's own network (off-net area), the Company
utilizes the services provided by other long distance companies. The
majority of the Company's revenues are currently derived from its customers
located on the East Coast.
The accompanying unaudited interim consolidated financial statements and
related notes have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission and in the opinion of management,
include all adjustments necessary for a fair presentation of such financial
statements. Such adjustments consist only of normal recurring items.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations.
Certain amounts in the prior period financial statements have been
reclassified to conform to the current period presentation. The results of
operations for the six months ended June 30, 1996 are not necessarily
indicative of results to be expected for the full year.
The accompanying unaudited interim consolidated financial statements and
related notes should be read in conjunction with the financial statements
and related notes included in the Company's Form 10-K for the year ended
December 31, 1995.
2. Summary of Significant Accounting Policies
- ----------------------------------------------
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its two wholly-owned subsidiaries, USW Corporation and USW Enterprises,
Inc., after elimination of all inter-company accounts, transactions and
profits.
Revenue Recognition
The Company recognizes revenue based upon the customer's usage of services.
The Company bills its customers for service on a monthly basis.
-7-
<PAGE>
Cash and Cash Equivalents
The Company considers cash in bank and repurchase agreements with a maturity
of three months or less when purchased as cash and cash equivalents.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated for
financial reporting purposes using the straight line method over the
estimated useful lives of the assets:
Telecommunications equipment................ 7 years
Furniture fixtures and other................ 5 years
Deferred Financing Costs
Loan origination costs are amortized by the straight-line method over the
term of the related loan.
Accounts Payable
Accounts payable includes the cost of access charges due local telephone
companies and long distance transport purchased from long distance carriers.
Use of Estimates
The preparation of the Consolidated Financial Statements in conformity with
generally accepted accounting principles requires the use of management's
estimates.
Earnings Per Common Share
Earnings per common share is based upon the weighted average number of
common and common equivalent shares outstanding for the six months ended
June 30, 1996 and considers stock options, warrants and convertible
preferred stock.
3. Uninsured Cash
- ------------------
The Company, from time-to-time, invests its cash balances in excess of its
operating needs for short-term periods in repurchase agreements. These
arrangements are more fully described in the Company's Form 10-K for the
year ended December 31, 1995.
-8-
<PAGE>
4. Related Party Transactions
- ------------------------------
On May 11, 1995, the Company agreed to issue to each of two
directors/officers of the Company 600,000 Warrants to purchase Common Stock,
in consideration for limited personal guarantees to be provided in
connection with the revolving credit facility. Each Warrant entitles the
holder to purchase one share of Common Stock of the Company at a price of
$1.0625 per share until May 11, 2000. The Warrants are non-transferable by
the officers, and the stock issuable upon exercise of Warrants is subject to
the restrictions of Rule 144 of the Federal Securities laws.
During the quarter ended March 31, 1996, two officers/directors made
advances to the Company. At June 30, 1996, $196,824 was owed to these
officers/directors which is recorded as accrued expenses and other.
Interest on the advances are payable at 10% per annum. The notes are due on
demand.
5. Commitments
- ----------------
The Company has a contract with commitment levels as follows:
Commitment Remaining at June 30, 1996
Company Service Length of Commitment Approx $ Commitment
- ------- ------- -------------------- -------------------
WILTEL Outbound/Private Line 41 months $10,250,000(1)
(1) The Company is at or above minimum monthly requirement.
6. Litigation
- ---------------
On September 19, 1994, the Company commenced suit against Quantum
Communications, Inc. ("Quantum") in the United States District Court for the
Eastern District of Pennsylvania, Civil Action No. 94-CV-5734, to recover in
excess of $400,000 owed for the provision of telecommunications services.
Quantum filed a counterclaim seeking damages in excess of $2,000,000. During
the quarter ended June 30, 1996, the parties executed a definitive settlement
agreement. Under the terms of the settlement, Quantum will make payments to
the Company over time of either $75,000 or $150,000 (depending on certain
performance and payment criteria), and the counterclaim will be dismissed and
released.
The Company is party, in the ordinary course of business, to litigation
involving services rendered, contract claims and other miscellaneous causes
of action arising from its business. Although such matters are immaterial
individually, the aggregate effect of all such matters, if resolved
adversely, could affect the financial position of the Company. Management
does not consider that any such matters depart from usual routine litigation
and, in its judgement, the Company's financial condition or results of
operations will not be materially affected by such proceedings.
-9-
<PAGE>
Item 2.
- -------
Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The Company's revenues continued to increase over prior quarters rising
approximately $505,000 (5.7%) over the level recorded for the quarter ended
March 31, 1996, and by approximately $2,680,000 (39.7%) over the quarter
ended June 30, 1995. Revenue for the quarter ended June 30, 1996 was the
highest quarterly revenue in the Company's history. The increase was due to
substantial increases in each of the Company's agent, reseller, carrier, and
international callback sales channels.
Gross profit as a percentage of revenue, (35.9%) was relatively unchanged
from its level in the quarter ended March 31, 1996 (35.5%). The Company is
awaiting the installation of additional high capacity circuits to originate
and terminate traffic over its own facilities. For reasons outside the
Company's control, the Company's vendors have been unable to provide all
facilities within standard intervals. This has caused the Company to both
overflow traffic to its vendors and to delay the provisioning of certain
reseller accounts. As a result, call termination costs were higher than
expected and revenue was less than expected. The Company expects that its
vendors will be able to supply back-ordered facilities within the next 60 to
90 days.
Gross profit as a percentage of revenue for the quarter ended June 30, 1995
was substantially higher (74.7%) than the percentage earned for the quarter
ended June 30, 1996. This difference was due to a non-recurring benefit of
approximately $2,885,000 generated by the reversal of an account payable in
settlement of litigation with a vendor. Gross profit as a percentage of
revenue for the quarter ended June 30, 1995, exclusive of this and certain
non-recurring disputed charges related to 800 services, would have
approximated 34%.
The Company is continually improving its network efficiency in order to
reduce network cost per minute more rapidly than market conditions require
retail rates per minute to be reduced. For the period January to June 1996,
the Company experienced reductions in its retail rate per minute for
interstate outbound and inbound services of approximately 2.8% and 5.4%,
respectively. The Company derives approximately 30% of its revenue from
these two products.
Selling, general, and administrative ("SG&A") expenses for the quarter ended
June 30, 1996 increased approximately $158,000 over the amount for the
quarter ended March 31, 1996, but remained relatively unchanged as a
percentage of sales (33.2%). Increases in amount were primarily due to
increased commission expense and bad debt expense resulting from increased
sales volume as well as increased salary expense.
SG&A for the quarter ended June 30, 1996 was approximately $349,000 less than
the amount for the quarter ended June 30, 1995. The Company experienced
higher than normal expenses in the prior year due to its litigation with
Colonial Penn Group, Inc., Colonial Penn Insurance Company, and AT&T.
Non-recurring expenses incurred during the quarter ended June 30, 1995
pertaining to this litigation were approximately $900,000. As a result,
recurring SG&A expenses increased approximately $550,000 over the level for
the quarter ended June 30, 1995. The primary items contributing to this
increase were commission and salary expense. SG&A as a percentage of revenue
exclusive of these non-recurring items was approximately 33.2% for the
quarter ended June 30, 1996 versus approximately 38.2% for the quarter ended
June 30, 1995. Commission expense rose as a result of increased agent and
-10-
<PAGE>
reseller revenue. Although salary expense increased over its 1995 level,
payroll efficiencies increased; and, revenue and gross profit per employee
ratios rose over 1995 levels.
SG&A expenses for the year to date June 30, 1996 were approximately equal to
the amount incurred year to date June 30, 1995, however SG&A for the year to
date June 30, 1995 included the $900,000 in non-recurring expenses indicated
above. The increase in recurring expenses primarily related to commissions
and salary expense. Year to date salary expense as a percentage of revenue
declined whereas commission expense as a percentage of revenue remained
relatively equal to its 1995 level.
Interest expense incurred by the Company during 1996 exceeded amounts
incurred during 1995 due to the Company's line of credit established in May
of 1995 and the financing of capital asset acquisitions during 1995 and 1996.
The Company recorded net income before preferred dividends for the quarter
ended June 30, 1996 of approximately $204,000 versus approximately $144,000
for the quarter ended March 31, 1996, an increase of approximately $60,000
(42.2%). Net income before preferred dividends for the quarter and year to
date June 30, 1996 were less than the respective 1995 amounts, however, the
results for 1995 included the non-recurring items noted above. Adjusted for
these items and the resulting tax effect, net income before preferred
dividends for the quarter ended June 30, 1995 and year to date June 30, 1995,
would have been a loss of $431,000 and $572,000, respectively. The
improvement in operating results is substantially due to increased network
efficiency, reduced call transport costs, improved overhead efficiencies, and
increased gross profit from increased revenue levels.
LIQUIDITY AND CAPITAL RESOURCES
The Company's improved operating results positively affected the Company's
working capital and working capital ratios. Working capital increased
approximately $294,000 from the amount at March 31, 1996 and approximately
$420,000 over the amount at December 31, 1995. The Company's working capital
ratio at June 30, 1996 (.82:1.00) improved over its ratio at March 31, 1996
(.79:1.00), as well as its ratio at December 31, 1995 (.73:1.00). The
Company's bad debt expense continued at approximately 1.2% of revenue.
During the quarter ended June 30, 1996, the Company satisfied the remainder
($379,000) of the total obligation ($669,000) pertaining to the 1995
settlement of its litigation with AT&T. This obligation was recorded during
the fourth quarter of 1995.
The Company has been able to finance its growth to date with limited equity
capital. However, management expects that in order to support the rate of
revenue growth recently experienced, the Company will require additional
working capital needs beyond that created by operating cash flow and current
lines of credit. As a result, the Company is planning to raise approximately
$1 million to $3 million in equity prior to the end of 1996, and may seek an
increase in its line of credit. A portion of these funds may be used for
acquisition purposes. Due to the rapid growth of the Company's revenue,
additional switch capacity is likely to be required. The Company is
evaluating its options in this regard. A portion of the funds raised may be
used for the purchase of such additional switch capacity. The timing and
relative success of these efforts may impact the rate at which the Company
can increase its revenue during the remainder of 1996. No assurance can be
given as to the potential success of these efforts.
-11-
<PAGE>
PART II
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Other Information
Item 1. Legal Proceedings
For a discussion of pending legal proceedings, see Note 6 to
the Consolidated Financial Statements contained in this
filing.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Financial Data Schedule, Exhibit No. 27.
(b) Reports on Form 8-K: None.
-12-
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
US WATS, Inc.
(Registrant)
By: /s/ Aaron R. Brown
----------------------------------
AARON R. BROWN,
Chief Executive Officer, Director, Treasurer
By: /s/ Ward G. Schultz
----------------------------------
WARD G. SCHULTZ,
Chief Financial Officer
Dated: August 14, 1996
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 950,397
<SECURITIES> 0
<RECEIVABLES> 6,908,958
<ALLOWANCES> 397,531
<INVENTORY> 0
<CURRENT-ASSETS> 7,653,552
<PP&E> 5,289,843
<DEPRECIATION> 1,840,881
<TOTAL-ASSETS> 11,409,328
<CURRENT-LIABILITIES> 9,394,327
<BONDS> 604,714
300,000
0
<COMMON> 15,877
<OTHER-SE> 2,598,375
<TOTAL-LIABILITY-AND-EQUITY> 1,110,287
<SALES> 0
<TOTAL-REVENUES> 9,429,335
<CGS> 0
<TOTAL-COSTS> 6,043,042
<OTHER-EXPENSES> 3,015,602
<LOSS-PROVISION> 116,804
<INTEREST-EXPENSE> 49,555
<INCOME-PRETAX> 204,332
<INCOME-TAX> 0
<INCOME-CONTINUING> 204,332
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 204,332
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
