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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 March 31, 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.
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(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
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(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 May 13, 1996
------------ --------------
$.001 15,602,100
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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--
March 31, 1996 (unaudited) and December 31, 1995 3 - 4
Consolidated Statements of Operations--
Three Months Ended March 31, 1996 and 1995 (unaudited) 5
Consolidated Statements of Cash Flows--
Three Months Ended March 31, 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
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<PAGE>
PART I
Financial Information
Item 1.
Financial Statements
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1996 1995
------------ ------------
Assets
Current Assets
Cash and cash equivalents $ 1,160,305 $ 680,834
Accounts receivable, net of allowance for
doubtful accounts of $344,393 for 1996,
and $268,921 for 1995 6,137,438 4,900,066
Prepaid expenses and other 145,564 107,191
----------- ----------
Total Current Assets 7,443,307 5,688,091
----------- ----------
Property and Equipment
Telecommunications equipment 3,144,704 3,046,877
Equipment 1,238,733 1,231,346
Software 530,155 484,199
Office furniture and fixtures 121,795 119,630
Leasehold improvements 35,226 35,226
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5,070,613 4,917,278
Less accumulated depreciation and amortization 1,629,797 1,426,463
----------- ----------
Total Property and Equipment, net 3,440,816 3,490,815
----------- ----------
Other assets, principally deposits 344,253 321,455
----------- ----------
$11,228,376 $9,500,361
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The accompanying notes are an integral part of these financial statements.
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<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1996 1995
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Liabilities and Shareholders' Equity
Current Liabilities
Note payable $ 1,184,577 $ 1,175,164
Capital lease obligations, current portion 140,799 130,664
Accounts payable 5,567,873 4,581,373
Accrued commissions 985,411 753,596
Accrued expenses and other 691,097 361,010
State and Federal taxes payable 509,307 475,012
Deferred revenue 398,633 371,791
----------- -----------
Total Current Liabilities 9,477,697 7,848,610
----------- -----------
Long-Term Liabilities
Capital lease obligations, net of
current portion 562,974 601,037
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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
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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 15,852,100 shares in 1996 and 1995 15,852 15,852
Additional paid-in capital 2,573,400 2,573,400
Deficit (1,701,297) (1,838,288)
----------- -----------
887,955 750,964
Common stock held in treasury
(250,000 shares), at cost (250) (250)
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887,705 750,714
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$11,228,376 $9,500,361
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The accompanying notes are an integral part of these financial statements.
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<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
1996 1995
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Revenues $8,924,291 $6,921,165
Cost of sales 5,752,320 4,477,027
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Gross profit 3,171,971 2,444,138
Selling, general and administrative expenses 2,974,482 2,607,781
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Income (loss) from operations 197,489 (163,643)
Other Income (expense)
Interest income 7,080 25,968
Interest expense (60,828) (3,505)
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Income (loss) before income taxes 143,741 (141,180)
Income taxes -- --
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Net income (loss) before preferred dividends 143,741 (141,180)
Preferred dividends earned 6,750 27,305
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Net income (loss) available to
common shareholders $ 136,991 $ (168,485)
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Earnings (loss) per share available
to common shareholders: $ .01 $ (.01)
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Weighted Average Number of Shares
Outstanding in Computation 17,685,655 15,329,989
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The accompanying notes are an integral part of these financial statements.
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<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1996 1995
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Cash flows from operating activities
Net income (loss) before preferred dividends $ 143,741 $ (141,180)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation and amortization 216,038 164,355
Provision for bad debts 102,659 103,313
Net increase in non-cash current assets
Accounts receivable (1,340,031) (407,406)
Prepaid expenses and other (38,373) (72,814)
Net increase (decrease) in non-debt
current liabilities
Taxes payable 34,295 58,214
Accounts payable, accrued expenses, and other 1,351,694 387,677
Increase in deposits (33,669) --
Increase (decrease) in other assets 25,009 (15,000)
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Net cash provided by operating activities 461,363 77,159
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Cash flows from investing activities
Purchase of property and equipment (153,335) (85,734)
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Net cash used in investing activities (153,335) (85,734)
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Cash flows from financing activities
Preferred stock dividend (6,750) (29,250)
Advances of notes payable 9,412 --
Repayment of capital lease obligations (27,928) (25,551)
Advance from officers 196,709 --
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Net cash provided by (used in)
financing activities 171,443 (54,801)
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Net increase (decrease) in cash and
cash equivalents 479,471 (63,376)
Beginning cash and cash equivalents 680,834 628,573
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Ending cash and cash equivalents $ 1,160,305 $ 565,197
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The accompanying notes are an integral part of these financial statements.
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<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 three months ended
March 31, 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.
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<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 three months ended March 31,
1996 and considers stock options, warrants and convertible preferred stock.
The assumed exercise and/or conversion of preferred stock options or warrants
has not been included in the calculation of loss per share for the three
months ended March 31, 1996 and 1995, since the effect would be anti-dilutive.
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.
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<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.
In January 1996, two directors/officers collectively pledged, in total,
2,000,000 of their shares of the Company's Common Stock as security for the
payment of the $669,000 counterclaim awarded to AT&T in the Company's
antitrust litigation. At March 31, 1996 the amount owed AT&T was $379,333.
During the quarter ended March 31, 1996, two officers/directors made advances
to the Company. At March 31, 1996, $196,824 was owed to these officers which
is recorded as accrued expenses and other. Interest on the advances are
payable at a rate approximating prime. The notes are due on demand.
5. 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 has filed a counterclaim seeking damages in excess of $2,000,000. The
Company maintains that the counterclaim is frivolous, and intends to
vigorously defend against it. Recently, the parties negotiated a tentative
settlement, contingent upon the execution of a definitive settlement
agreement. Under the terms of the potential 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.
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<PAGE>
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Revenue for the quarter ended March 31, 1996 increased approximately
$2,003,000 (28.9%) over the quarter ended March 31, 1995. Revenue for the
quarter ended March 31, 1996 was the highest quarterly revenue experienced by
the Company in its history. Approximately $1,040,000 of the increase was due
to increases in the Company's revenue derived from sales to other long
distance carriers. The Company began soliciting other long distance carriers
late in 1995. The Company also experienced substantial revenue increases in
its reseller and international callback sales channels.
Gross profit as a percentage of revenue, (35.5%) remained relatively unchanged
from its level for the quarter ended March 31, 1995 (35.3%). Gross profit
increased approximately $728,000 due to the increased sales as noted above.
As of March 31, 1996 all of the Company's contractual commitments to its
vendors expired or were satisfied. As a result, the Company is now free to
route traffic to any of its vendors without regard to minimum volume
commitments. Management expects this flexibility to benefit the Company by
allowing its network engineers to least cost route all traffic without regard
to contract commitments. The Company is continuing to negotiate improved
pricing and expects to continually reduce transport costs as a result. The
Company may however enter into certain commitments in the future depending on
the benefit of such a commitment.
As mentioned in the Company's Form 10-K for the year ended December 31, 1995,
the Company's increased volume, is enabling the Company to install higher
capacity long haul facilities. These facilities have lower per mile
transport costs if efficiently utilized. Higher fixed network costs from
these facilities are expected to be offset by reduced variable costs. The
Company is awaiting installation of these facilities and until such time as
these facilities are turned up, the Company's does not expect its cost of
sales ratio to decline.
Selling, general, and administrative ("SG&A") expenses for the quarter ended
March 31, 1996 increased approximately $367,000 over the amount incurred in
the quarter ended March 31, 1995 but declined as a percentage of sales from
approximately 37.7% to 33.3%. The increase in SG&A expense was substantially
due to increases in commissions paid to resellers and agents and to increased
salary expense. The reduced ratio of SG&A expense to sales revenue is
attributable to increased labor efficiencies, reduced indirect overhead
expenses and an improved bad debt expense.
Interest expense for the quarter ended March 31, 1996 increased over the
amount incurred in the quarter ended March 31, 1995 by approximately $57,000
due to the acquisition during 1995 of certain equipment financed with capital
leases and advances on the Company's line of credit established in May 1995.
The Company intends to continue to utilize and expand its debt facilities to
provide working capital for its planned expansion and growth.
Income from operations improved approximately $361,000 from a loss of
approximately $164,000 for the quarter ended March 31, 1995 to a profit of
approximately $197,000 in the quarter ended March 31, 1996. This significant
change in operating results is substantially due to the effects of the
Company's increased revenue levels, increased personnel efficiencies, improved
network efficiencies and reduced indirect administrative costs.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's improved operating results for the quarter ended March 31, 1996
positively affected its working capital position at March 31, 1996. The
Company's cash balance increased approximately $479,000 from its balance at
December 31, 1995 substantially due to increased volume in the Company's
International Callback product. Accounts receivable net of the allowance for
doubtful accounts increased approximately 25.3% from December 31, 1995 to
March 31, 1996 as compared to the 28.9% increase in gross revenue noted above.
Working capital deficiency decreased approximately $126,000 from December 31,
1995 to March 31, 1996. The Company's working capital ratio also improved
from .72:1.00 at December 31, 1995 to .79:1.00 at March 31, 1996.
The Company continues to experience improved cash flow from its accounts
receivable and reduced bad debt expense resulting in a continuing decline in
account receivable days outstanding. Bad debt expense for the quarter ended
March 31, 1996 was approximately 1.2% of gross sales revenue.
As of March 31, 1996, the Company had satisfied approximately $290,000 of the
$669,000 awarded to AT&T in the Company's 1995 litigation with AT&T. The
balance of the amount is payable in equal monthly installments through July
1996. The Company is current with respect to its payments to AT&T.
The Company has been able to finance its growth to date with limited equity
capital which has been sufficient for current needs. The Company's plans for
growth includes both substantial internal growth and the acquisition of other
long distance companies. In order to achieve the Company's plans for growth,
and in light of the costs and result of its litigation with AT&T, the Company
requires additional equity.
The Company's security is currently trading above NASDAQ's minimum price level
requirement of $1.00. If the minimum continues to be met, the Company will
not need to consider a reverse stock split or the raising of equity to meet
NASDAQ's listing requirements.
The Company is currently exploring several alternatives with respect to
raising equity and is also exploring certain alternatives with respect to the
establishment of an investment banking relationship to assist the Company in
its plan to acquire other long distance companies. The Company cannot give
assurance as to the potential success of these efforts.
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<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
For a discussion of pending legal proceedings, see Note 5 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
The Company has scheduled its Annual Meeting of Shareholders to
be held at its corporate offices on July 10, 1996.
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.
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<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: May 14, 1996
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,160,305
<SECURITIES> 0
<RECEIVABLES> 6,137,438
<ALLOWANCES> 344,393
<INVENTORY> 0
<CURRENT-ASSETS> 7,443,307
<PP&E> 5,070,613
<DEPRECIATION> 1,629,797
<TOTAL-ASSETS> 11,228,376
<CURRENT-LIABILITIES> 9,477,697
<BONDS> 703,773
300,000
0
<COMMON> 15,852
<OTHER-SE> 872,103
<TOTAL-LIABILITY-AND-EQUITY> 887,705
<SALES> 0
<TOTAL-REVENUES> 8,924,291
<CGS> 0
<TOTAL-COSTS> 5,752,320
<OTHER-EXPENSES> 2,871,823
<LOSS-PROVISION> 102,659
<INTEREST-EXPENSE> 53,748
<INCOME-PRETAX> 143,741
<INCOME-TAX> 0
<INCOME-CONTINUING> 143,741
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 143,741
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
