UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 1997
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
----------------------------------------------------
(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 May 7, 1997
------------------------------
$.001 15,927,100
<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, 1997 (unaudited) and December 31, 1996 3 - 4
Consolidated Statements of Operations~
Three Months Ended March 31, 1997 and 1996 (unaudited) 5
Consolidated Statements of Cash Flows~
Three Months Ended March 31, 1997 and 1996 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 12
PART II
- -------
OTHER INFORMATION 13
SIGNATURE PAGE 14
-2-
<PAGE>
PART I
- ------
Financial Information
Item 1.
- -------
Financial Statements
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
1997 1996
-----------------------------
Assets
------
Current Assets
Cash and cash equivalents $ 768,160 $ 1,455,186
Accounts receivable, net of allowance for
doubtful accounts of $648,026 for 1997,
and $672,058 for 1996 8,779,756 6,513,899
Prepaid expenses and other 185,807 137,325
----------- -----------
Total Current Assets 9,733,723 8,106,410
----------- -----------
Property and Equipment
Telecommunications equipment 3,792,692 3,773,459
Equipment 1,443,145 1,356,609
Software 622,004 610,286
Office furniture and fixtures 130,003 130,003
Leasehold improvements 35,226 35,226
----------- -----------
6,023,070 5,905,583
Less accumulated depreciation and amortization 2,548,182 2,305,565
----------- -----------
Total Property and Equipment, net 3,474,888 3,600,018
----------- -----------
Other assets, principally deposits 273,338 285,931
----------- -----------
$13,481,949 $11,992,359
=========== ===========
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
1997 1996
---------------------------
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Note payable $2,017,131 $1,196,860
Capital lease obligations, current portion 201,163 194,472
Accounts payable 6,894,776 6,378,296
Accrued commissions 1,227,246 918,129
Accrued expenses and other 572,121 553,445
State and Federal taxes payable 973,551 963,372
Deferred revenue 90,101 116,222
----------- -----------
Total Current Liabilities 11,976,089 10,320,796
----------- -----------
Long-Term Liabilities
Capital lease obligations, net of current portion 453,811 509,224
----------- -----------
Commitments and Contingencies
Redeemable preferred stock, $.01 par, authorized
150,000 shares, issued and outstanding:
30,000 shares in 1997, 30,000 shares in 1996
Redemption value: $11.00 per share 330,000 300,000
----------- -----------
Common Shareholders' Equity
Common stock, $001 par, authorized
30,000,000 shares; issued:
15,927,100 shares in 1997
15,902,100 shares in 1996 15,927 15,902
Additional paid-in capital 2,618,325 2,623,350
Accumulated Deficit (1,911,953) (1,776,663)
----------- -----------
722,299 862,589
Common stock held in treasury
(250,000 shares), at cost (250) (250)
----------- -----------
722,049 862,339
----------- -----------
$13,481,949 $11,992,359
=========== ===========
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31,
1997 1996
--------------------------
Revenues $13,507,072 $ 8,924,291
Cost of sales 9,622,812 5,752,320
----------- -----------
Gross profit 3,884,260 3,171,971
Selling, general and administrative expenses 3,956,961 2,974,482
----------- -----------
Income (loss) from operations (72,701) 197,489
Other Income (expense)
Interest income 19,085 7,080
Interest expense (74,924) (60,828)
----------- -----------
Income (loss) before income taxes (128,540) 143,741
Income taxes -- --
----------- -----------
Net income (loss) before preferred dividends (128,540) 143,741
Preferred dividends earned 6,750 6,750
----------- -----------
Net income (loss) available to common shareholders $ (135,290) $ 136,991
=========== ===========
Earnings (loss) per share available
to common shareholders: $ (.01) $ .01
=========== ===========
Weighted Average Number of Shares
Outstanding in Computation 15,922,649 15,852,100
=========== ===========
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1997 1996
---------------------
OPERATING ACTIVIES
Net income (loss) before preferred dividends $(128,540) $ 143,741
Adjustments to reconcile net income (loss)
to net cash provided by (used-in) operating activities
Depreciation and amortization 255,414 216,038
Provision for bad depts 4,669 102,659
Changes in assets and liabilities which provided
(used) cash:
Accounts receivable (2,270,526) (1,340,031)
Prepaid expenses and other (48,482) (38,373)
Other assets (205) (22,797)
Deferred revenue (26,121) 26,842
Accounts payable and accrued expenses 844,275 1,338,989
State and Federal Taxes payable 10,179 34,295
Net cash provided by (used in) operating activities (1,359,337) 461,363
---------- ----------
INVESTING ACTIVITIES
Purchase of property and equipment (117,488) (153,335)
Net cash provided by (used in) investing activities (117,488) (153,335)
---------- ----------
FINANCING ACTIVITIES
Proceeds from stock option exercises 25,000 --
Increase (decrease) in notes payable net 820,271 9,412
Repayment of capital lease obligations (48,722) (27,928)
Preferred stock dividend (6,750) (6,750)
Advance from officers -- 196,709
Net cash provided by (used in) financing activities 789,799 171,443
---------- ----------
Net increase (decrease) in cash (687,026) 479,471
Beginning cash 1,455,186 680,834
---------- ----------
Ending cash $ 768,160 $1,160,305
========== ==========
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE>
US WATS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Background
- --------------
US WATS, Inc. ("the Company") is a switch-based interexchange
carrier providing long distance telephone communications services
primarily to small and medium-size 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, internet service, 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 located in the Mid-
Atlantic region as well as all of California with the exception
for select Independent Telephone Company territories.
Approximately 85% of the calls billed by the Company each month
are processed through the Company's own switches. 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 Company's revenues are derived primarily from the transport
of outgoing and incoming calls which are billed by the Company to
end-users at specified rates. Transport costs of these calls are
billed to the Company from other carriers at contractual rates.
These carriers supply the Company with call detail information
which enables the Company to bill its customers depending upon
the Company's individual rates. The combination of the
efficiency of the Company's network and facilities, and the
purchase of long distance services in bulk from other carriers
allow the Company to offer competitive rates to small and medium-
sized businesses.
The Company differentiates itself from a price-only sales
approach by offering various value-added services for its
customers, provided by its customized proprietary software. The
Company's outbound long distance services, inbound 800 services,
cellular services, as well as paging and internet services are
provided on one combined bill which includes various management
reports. The Company believes its consultative approach to
meeting its customers' needs distinguishes it from its larger
competitors. All of the Company's customer support functions,
such as customer service, credit and collections, and
administrative services are centrally located at the Company's
offices at 111 Presidential Boulevard, Suite 114, Bala Cynwyd,
Pennsylvania 19004. The Company's telephone number at that
location is (610) 660-0100.
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. Where appropriate, 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, 1997 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, 1996.
-7-
<PAGE>
2. Summary of Significant Accounting Policies
- ----------------------------------------------
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its three wholly-owned subsidiaries, USW Corporation,
USW Enterprises, Inc., and Carriers Group Inc., after elimination
of all inter-company accounts, transactions and profits. The
Company's investment as an internet service provider is accounted
for under the cost method.
Revenue Recognition
The Company recognizes revenue based upon the customer's usage of
services. The Company primarily bills its customers for service
on a monthly basis, however, in some instances, it bills certain
customers on a more frequent basis.
Cash and Cash Equivalents
The Company considers cash in its bank and repurchase agreements
with a maturity of three months or less when purchased as cash
and cash equivalents.
At certain times during the year, the Company has balances in its
operating accounts that in the aggregate exceed the $100,000
Federal Deposit Insurance Corporation insurance limit.
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, and are included in other
assets.
Accounts Payable
Accounts payable includes the cost of access charges due local
telephone companies and long distance transport purchased from
long distance carriers.
-8-
<PAGE>
Marketing
All costs related to marketing and advertising the Company's
products and services are expensed in the period incurred.
Use of Estimates
The preparation of the Consolidated 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 the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Earnings Per Common Share
Earnings (loss) per common share is based upon the weighted
average number of common shares outstanding for the three months
ended March 31, 1997 and March 31, 1996. The assumed exercise
and/or conversion of preferred stock, options or warrants has not
been included in the calculation of earnings (loss) per share for
the three months ended March 31, 1997 and March 31, 1996.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments such as
accounts receivable, accounts payable, and note payable
approximate their carrying amounts.
Carrying Value of Long-Term Assets
The Company evaluates the carrying value of long-term assets,
including property, plant and equipment, and other intangibles,
based upon current and anticipated undiscounted cash flows, and
recognizes an impairment when it is probable that such estimated
cash flows will be less than the carrying value of the asset.
Measurement of the amount of impairment, if any, is based upon
the difference between carrying value and fair value.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per
Share. This Statement will be effective for financial reporting
purposes, for both interim and year-end financial statements
ending after December 15, 1997. Management has not yet determined
what impact, if any, application of this statement will have on the
Company's financial statements.
Reclassification of Accounts
Certain reclassifications have been made to conform prior years'
balances to the current year presentation.
-9-
<PAGE>
3. Note Payable
- ----------------
On May 11, 1995, the Company entered into a Loan and Security
Agreement with Century Business Credit Corporation for a
revolving credit facility of $2,000,000. The loan was
established for an initial period of two years, and was
automatically renewed for two successive years on March 11, 1997.
Interest on the loan is currently calculated at prime plus 3 3/4%
with a minimum loan value of $750,000. The loan is collateralized
by accounts receivable and fixed and intangible assets of the
Company. In order to facilitate the Company's growth, it is
currently in the process of establishing a higher line of credit.
4. Litigation
- ---------------
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.
Management does not consider that any such matters will
materially effect the Company's financial condition or results of
operations.
-10-
<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, 1997 increased
approximately $4,583,000 (51%) over the quarter ended
March 31, 1996. Revenue for the quarter ended March 31, 1997 was
the highest quarterly revenue experienced by the Company in its
history. Approximately $2,617,000 (57%) of the increase was due
to an increase in the Company's revenue derived from retail sales
through the agent and reseller channels. The addition of three
Agent Sales Managers throughout the country was a leading factor
to the increase in revenue through the agent and reseller
channels. These three Agent Sales Managers were strategically
placed in locations designed to generate sales in areas where the
Company has network facilities, thus allowing the Company to
utilize its network more efficiently. In addition, approximately
$1,928,000 (42%) of the overall revenue increase was derived from
sales to other long distance carriers. The Company continues to
grow its carrier sales in a manner that it believes increases
network efficiency.
For the quarter ended March 31, 1997, Gross Profit as a
percentage of revenue was approximately 29% versus 35% for the
quarter ended March 31, 1996. The Company believes that decrease
in gross profit margin is attributable to two main factors. First,
the Company experienced a substantial increase in carrier sales
revenue, increasing from approximately 12% of overall revenue for the
quarter ended March 31, 1996 to approximately 22% for the quarter
ended March 31, 1997. As a result of this increase the overall
blended gross margin of the Company, as a percentage of revenue,
declined. Secondly, during the first quarter of 1997, the
Company's network utilization of overflow traffic to off-net
carriers was less than optimal. This resulted in higher network
costs during the first quarter. Senior management identified the
issues to be corrected, and has implemented the necessary changes,
although the full effect of the network changes are not anticipated
to be realized until third quarter 1997. Despite the decrease in
gross profit margins the overall gross profit increased
approximately $712,000.
Selling, general, and administrative ("SG&A") expenses for the
quarter ended March 31, 1997 increased approximately $983,000
over the amount incurred in the quarter ended March 31, 1996 but
declined as a percentage of revenue from approximately 33% to 29%.
The Company believes that increase in SG&A expense was substantially
due to increases in commissions paid to resellers and agents and to
increased salary and consulting expenses. The reduced ratio of SG&A
expense to revenue is attributable to increased labor efficiencies,
lower indirect overhead expenses and improved bad debt expense.
Interest expense for the quarter ended March 31, 1997 increased
over the amount incurred in the quarter ended March 31, 1996 by
approximately $14,000 due to the acquisition during 1996 of
certain equipment financed with capital leases and advances on
the Company's line of credit. 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 for the quarter ended March 31, 1997 decreased
approximately $270,000 versus first quarter ended March 31, 1996.
Net lost for the quarter ended March 31, 1997 was approximately
$129,000, or $272,000 lower than net income for the first quarter
ended March 31, 1996. The Company believes that change in operating
results was substantially due to the effects of the Company's
decreased gross margins as noted above.
-11-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital ratio also improved from .79:1.00
at December 31, 1996 to .81:1.00 at March 31, 1997. The
Company's cash balance decreased approximately $687,000 from its
balance at December 31, 1996 primarily due to the following
factors: 1) The Company reported a first quarter net loss of
approximately $128,000; 2) In an effort to support the
significant growth of International Callback revenue,
International Callback Wholesalers were provided payment terms as
opposed to prepaying for all their customer's monthly usage.
This had a one time effect on the Company's cash flow in the
first quarter of 1997. Terms to these wholesalers will be
reversed in the second quarter as the Company migrates
International Callback Wholesalers once again to prepaying their
customers monthly usage. The Company believes that new pre-payment
terms will allow growth in the Company's International Callback
revenue while limiting the Company's credit risk in providing
International Callback service.
Accounts receivable net of the allowance for doubtful accounts
increased approximately 30% from December 31, 1996 to
March 31, 1997 versus a 15% increase in gross revenue for the quarter
ended March 31, 1997 compared to the quarter ended December 31, 1996.
As a percentage of gross revenue, the Company was able to reduce the
allowance for doubtful accounts in the first quarter of 1997 as a
result of ongoing internal collection efforts. Bad Debt expense for
the quarter ended March 31, 1997 was less than 1% of gross sales revenue.
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 continued growth includes both
substantial internal growth and the potential acquisition of
other long distance companies. In order to achieve the Company's
plans for growth in the long distance business as well its entry
into the local exchange arena, the Company will require
additional equity and is currently seeking sources of funding.
The Company cannot give assurance as to the potential success of
these efforts.
Item 3.
- ------
Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
-12-
<PAGE>
PART II
- -------
Other Information
Item 1. Legal Proceedings
None
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:
(1) On February 25, 1997, the Company filed Form 8-K
regarding executive management changes and changes
in the Board of Directors.
(2) On March 19, 1997, the Company filed Form 8-K regarding
its decision to replace its certifying accountant for
the year ended December 31, 1996.
-13-
<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/ Kevin M. O'Hare
------------------------------------
KEVIN M. O'HARE,
President & Chief Executive Officer,
Treasurer, Director
By: /s/ Christopher J. Shannon
-----------------------------------
CHRISTOPHER J. SHANNON
Chief Financial Officer
Dated: May 14, 1997
-14-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements set forth in this Form 10-Q for the fiscal quarter
ended March 31, 1997 and is qualified in its entirely by reference to
such financial statements.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 768,160
<SECURITIES> 0
<RECEIVABLES> 8,131,730
<ALLOWANCES> 648,026
<INVENTORY> 0
<CURRENT-ASSETS> 9,733,723
<PP&E> 6,023,070
<DEPRECIATION> 2,548,182
<TOTAL-ASSETS> 11,228,376
<CURRENT-LIABILITIES> 11,976,089
<BONDS> 453,811
330,000
0
<COMMON> 15,927
<OTHER-SE> 706,372
<TOTAL-LIABILITY-AND-EQUITY> 722,299
<SALES> 0
<TOTAL-REVENUES> 13,507,072
<CGS> 0
<TOTAL-COSTS> 9,622,812
<OTHER-EXPENSES> 3,957,318
<LOSS-PROVISION> 4,669
<INTEREST-EXPENSE> 74,924
<INCOME-PRETAX> (128,540)
<INCOME-TAX> 0
<INCOME-CONTINUING> (128,540)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (128,540)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
