SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
_________________________
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 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.
------------------------------------------------------
(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, PA 19004
- ---------------------------------------- ----------
(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code (610) 660-0100
--------------
Securities registered pursuant to Section 12(b) of the Act: None
--------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($0.001 par value)
--------------------------------
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ X ]
As of April 22, 1997, the aggregate market value of the Company's common
stock held by non-affiliates of the registrant, based on the average closing
sale price, was approximately $11,296,526.
As of April 22, 1997, the registrant has 15,927,100 shares of common stock
outstanding.
<PAGE>
DESCRIPTION OF AMENDMENTS
The Company has amended its Form 10-K for the fiscal year ended December
31, 1996 as follows:
Item 10. Director and Executive Officers of the Registrant.
Item 10 has been set forth in its entirety herein.
Item 11. Executive Compensation.
Item 11 has been set forth in its entirety herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 12 has been set forth in its entirety herein.
Item 13. Certain Relationships and Related Transactions.
Item 13 has been set forth in its entirety herein.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Item 14 has been set forth in its entirety herein to amend Footnote 9
to the Financial Statements entitled "Stock Options and Warrants."
All other information in the Form 10-K of the Company not set forth in
this Form 10-K/A remains the same as filed with the Securities and Exchange
Commission by the Company in its Form 10-K on March 31, 1997.
2
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth information with respect to all of the
incumbent directors of the Company at April 22, 1997.
Name Age Position Director Since
- -----------------------------------------------------------------------------
Kevin M. O'Hare (36) Director, President and Chief 1996
Executive Officer (1)
Stephen J. Parker (58) Vice Chairman and Secretary (2) 1989
Tansukh Ganatra (53) Director (3) 1997
Murray Goldberg (54) Director (4) 1996
(1) Kevin M. O'Hare served from 1995 to 1996 as the Corporate Executive Vice
President of C-TEC, a publicly-held telecommunications company. Before
joining C-TEC, Mr. O'Hare served in a general management capacity with
ACC Long Distance Corp. from 1994 to 1995. From 1985 to 1993, Mr. O'Hare
managed telephone companies for Rochester Telephone Corp. (now Frontier
Corporation), including two local exchange carriers, Seneca Gorham
Telephone Company and Ausable Valley Telephone Company. Mr. O'Hare was
appointed a Director of the Company on December 16, 1996.
(2) Stephen J. Parker holds a Ph.D. from Ohio University. He was employed
part-time by the Company from October 1989 until March 1990. He joined
the Company full-time in March 1990 as Vice President of Operations.
Prior to his employment with the Company, and in August 1989, Mr. Parker
and Aaron Brown, a former Director, Chief Executive Officer and Treasurer
of the Company, founded Parker Brown, Inc. ("PBI"), a broker-dealer that
became licensed with the NASD in November 1990. PBI did not conduct any
business, and Mr. Parker sold all of his interest in PBI in September
1991. Mr. Parker and Mr. Brown also founded Parker Brown Partners
("PBP") in August 1989. PBP was organized to operate as a branch office
of Morgan Gladstone, a registered broker-dealer, and to provide
investment banking and consulting services to start-up and development
stage businesses. PBP operated as a branch office of Morgan Gladstone
until April 1990. Mr. Parker is a former stockbroker, and in addition to
his association with PBI and Morgan Gladstone in 1989-1990, he was
employed as a stockbroker with Princeton Financial, and with Profile
Investments, both in Philadelphia, during 1989. Mr. Parker was Executive
Vice President of the Company until May 24, 1995 and Chief Operating
Officer and Chairman of the Board from that date until December 16, 1996.
He has been Vice Chairman since that date.
3
<PAGE>
(3) Tansukh Ganatra currently serves as President and Chief Operating Officer
for US LEC, a privately-held local exchange carrier in Charlotte, North
Carolina. Prior to founding US LEC, Mr. Ganatra was employed by ACC
Corp. during various periods from 1987 on. At ACC, Mr. Ganatra held
various positions, including President and Chief Operating Officer and
Executive Vice President, and Vice President of Engineering/Operations
and President of ACC Long Distance Corp. Prior to joining ACC Corp., Mr.
Ganatra held various positions with Rochester Telephone Corp. (now
Frontier Corporation). Mr. Ganatra was elected a Director of the Company
on February 11, 1997.
(4) Murray Goldberg, a shareholder of the Company since 1989, and an
independent sales agent of the Company since 1993, is also currently
employed as a sales agent for MEG Associates, a partnership, Mr. Goldberg
also is the owner and a Vice-President of Jamco, Inc., a discount shoe
distributor in Florida and the owner and Director of Doxs, Inc., an
anaesthesia equipment developer and distributor. Prior to January 1993,
Mr. Goldberg worked as an anesthesiologist at Paoli Memorial Hospital.
From June 1994 until May 1996, he was an owner of Strathmore Bagel
Franchise Company. Mr. Goldberg was elected a Director of the Company in
November, 1996.
Executive Officers
The Company's executive officers are appointed by the Board of Directors and,
except as described herein, hold office at the pleasure of the Board until
their successors are appointed and have qualified. In addition to Messrs.
O'Hare and Parker, both of whom serve as executive officers, the Company has
three additional executive officers, David B. Hurwitz, Mark Mendes and
Christopher J. Shannon. Mr. Hurwitz, the Executive President of Sales and
Marketing of the Company, age 34, served from 1995 to 1996 as the Vice
President of Sales and Marketing of Commonwealth Long Distance, a C-TEC
company. Prior to the position with Commonwealth, he served as Executive
Vice President and Chief Operating Officer of InterNet Communications
Services, Inc. and as General Manager of FiberNet from 1992 to 1995. Both
InterNet and FiberNet are affiliated with one another. From 1985 to 1992 Mr.
Hurwitz held sales and sales management positions with RCI Long Distance, a
subsidiary of Rochester Telephone Corp. (now Frontier Corporation). Mr.
Mendes, the Chief Operating Officer of the Company, age 34, served as the
Vice President, Service & Technology for ACCESS Teleconferencing
International from 1995 to 1997. Prior to joining ACCESS, Mr. Mendes was
Vice President of Engineering and Operations of Internet Communications
Services, Inc. from 1993 to 1995, and a Director of Network Development at
FiberNet from 1992 to 1993. From 1986 to 1992, Mr. Mendes was employed at
Rochester Telephone in various management positions relating to service and
maintenance of subscriber lines. Mr. Shannon, the Chief Financial Officer of
the Company, age 36, served as the Director of Business Development for
Teleglobe International Corporation in 1996. Prior to joining Teleglobe
International, Mr. Shannon served as a Senior Manager with Price Waterhouse
LLP's International Telecommunications Group from 1995 to 1996. In 1994, Mr.
Shannon served as a merger and acquisition consultant with John Staurulakis,
Inc., a Washington, DC, based telecommunications consulting firm. From 1984
to 1994, Mr. Shannon was employed at Rochester Telephone Corp. in various
financial management positions and was involved in its acquisition program.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers, and persons who own more than ten percent of
the Company's Common Stock ("10% Shareholders") to file reports of ownership
and reports of changes in ownership of the Company's Common Stock with the
Securities and Exchange Commission ("SEC"). Officers, directors and 10%
Shareholders are required by SEC regulation to furnish the Company with
copies of all forms they file under Section 16(a). Based solely on its
review of the copies of such forms received by it with respect of its fiscal
year ended December 31, 1996, the Company believes that all Section 16(a)
filing requirements applicable to its officers, directors and 10%
Shareholders were complied with.
4
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
The following table shows for the years ended December 31, 1994, 1995 and
1996, certain compensation paid or accrued by the Company for services by the
named officers.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
------------------------------------------
Annual Compensation Awards Payouts
- ----------------------------------------------------------------------------------------------------------------------------------
Name Other Restricted Common All
and Annual Stock Stock LTIP Other
Principal Salary Bonus Comp. Awards Underlying Payouts Comp.
Position Year ($) ($) ($) (1) ($) Options (#) ($) ($) (2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kevin M. O'Hare '96 8,333 -- -- -- 1,100,000 -- --
President and '95 N/A N/A N/A N/A N/A N/A N/A
Chief Executive '94 N/A N/A N/A N/A N/A N/A N/A
Officer (3)
Aaron R. Brown, '96 165,000 -- -- -- -- -- 1,116
Former Chief '95 160,000 -- -- -- 600,000(5) -- 1,932
Executive Officer '94 149,063 -- -- -- -- -- 1,070
and Treasurer (4)
Stephen J. Parker, '96 165,000 -- -- -- -- -- 2,065
Secretary (6) '95 160,000 -- -- -- 600,000(5) -- 4,332
'94 149,063 -- -- -- -- -- 3,098
Mark Scully, '96 150,000 -- -- -- -- -- --
Former President (7) '95 100,000 -- -- N/A 850,000(8) -- --
'94 N/A N/A N/A N/A 150,000(9) N/A N/A
Ward G. Schultz '96 121,666 -- -- -- -- -- --
Chief Financial '95 94,000 37,500(11) -- -- 100,000 -- --
Officer (10) '94 75,301 -- -- -- 200,000 -- --
</TABLE>
5
<PAGE>
(1) For 1994, 1995 and 1996 the aggregate amount of such Other Annual
Compensation for each named officer is not reportable under SEC rules
because such amount is the lesser of either $50,000 or 10% of the total
salary for such named officer.
(2) Includes amounts paid for life insurance of the named officer where the
Company is not the beneficiary of the policy.
(3) Mr. O'Hare became President and Chief Executive Officer of the Company
on December 16, 1996.
(4) Mr. Brown resigned his positions with the Company as Chief Executive
Officer and Treasurer effective December 16, 1996, but remained a
Director of the Company at the end of fiscal 1996.
(5) On May 11, 1995, the Company agreed to issue each of Messrs. Brown and
Parker warrants to purchase 600,000 shares of the Company's common stock
in consideration for their limited personal guarantees provided in
connection with the Company's revolving credit facility. The warrants
were issued after the rescission of a transaction consisting of a stock
grant and option cancellation described under "Item 13. Certain
Relationships and Related Transactions."
(6) Mr. Parker resigned his position with the Company as Chief Operating
Officer on December 16, 1996.
(7) Mr. Scully terminated employment as President of the Company on December
30, 1996.
(8) Mr. Scully's options to purchase 850,000 shares of the Company's common
stock terminated upon his termination as President on December 30, 1996.
(9) Represents options to purchase 150,000 shares of the Company's common
stock granted outside of any benefit plan granted to Olney Telecom, Inc.
on December 12, 1994, as compensation for its services as an independent
contractor. Mr. Scully, the sole owner of Olney Telecom, may be deemed
to be the beneficial owner of such options and underlying shares.
(10) Mr. Schultz terminated employment as Chief Financial Officer of the
Company on February 27, 1997.
(11) Represents the fair market value on April 27, 1995 ($.75 per share) of
50,000 shares of the Company's common stock awarded to Mr. Schultz as
compensation for his services as an executive officer of the Company.
6
<PAGE>
Option Grants In Last Fiscal Year
The following table summarizes the number of options granted to named
officers during the year ended December 31, 1996. The Company did not grant
any stock appreciation rights in 1996.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Potential Realizable
Number of Shares of Value of Assumed
Common Stock Percent of Total Annual Rates of Stock
Underlying Options Options Granted Exercise Expiration Price Appreciation for
Name Granted in Fiscal Year(1) Price Date Option Term(2)
- ------------------------------------------------------------------------------------------------------------------------
5% 10%
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Kevin M. O'Hare 600,000 29% $1.03125 12/16/01 $170,949 $377,753
125,000(3) 6% $1.50000 12/16/01 $5,146 $48,230
125,000(3) 6% $2.00000 12/16/01 $0 $0
125,000(3) 6% $2.50000 12/16/01 $0 $0
125,000(3) 6% $3.00000 12/16/01 $0 $0
- ------------------------------------------------------------------------------------------------------------------------
Aaron R. Brown -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Stephen J. Parker -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Mark Scully -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Ward G. Schultz -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based upon options to purchase a total of 2,045,000 shares granted to
all officers and employees of the Company in 1996 under its Amended and
Restated Stock Option Plan or its predecessor plans.
(2) These amounts represent hypothetical gains that could be achieved for
the respective stock options if exercised at the end of the option term.
These gains are based on assumed rates of stock appreciation of 5% and
10% compounded annually from the date the respective options were
granted to their expiration date.
(3) Options to purchase a total of 500,000 shares of the Company's common
stock were granted to Mr. O'Hare on December 16, 1996 and will vest upon
the attainment of certain performance criteria. Each 150,000 share
increment underlying the option becomes exercisable, or vests, provided
the average of the closing bid and asked prices of the common stock
equals or exceeds $1.50, $2.00, $2.50 and $3.00 per share, respectively,
for at least thirty (30) consecutive trading days within the period
ending on the third anniversary of the date of grant. In the event that
the option shall have so vested, the per share exercise price shall equal
the product of (i) the arithmetic mean of the closing bid and asked
prices of the common stock for such thirty (30) day period, and (ii) 85%.
7
<PAGE>
Aggregated Option Exercises In Last Fiscal Year and Fiscal Year-End
Option Values
The following table summarizes the number and value of unexercised options
held by the named officers as of December 31, 1996. No named officer
exercised any options in 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Number of Value Number of Shares of Common Value of Unexercised
Shares Realized Stock In-The-Money Options
Acquired on Underlying Unexercised Options or Warrants
Exercise or Warrants at Fiscal Year-End at Fiscal Year-End(1)
------------------------------------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME # # $ $
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Kevin M. O'Hare -0- N/A 300,000(2) 800,000(3) $65,625 $65,625
- -------------------------------------------------------------------------------------------------------------------
Aaron R. Brown(4) -0- N/A 780,000(5) 120,000(6) 112,500 none
- -------------------------------------------------------------------------------------------------------------------
Stephen J. Parker(4) -0- N/A 780,000(5) 120,000(6) 112,500 none
- -------------------------------------------------------------------------------------------------------------------
Mark Scully(7) -0- N/A 150,000(8) -0- 37,500 none
- -------------------------------------------------------------------------------------------------------------------
Ward G. Schultz -0- N/A 130,000(9) 170,000(10) 5,000 20,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based upon a market price of the Company's common stock on December 31,
1996 of $1.25 per share (last trading day in December 1996).
(2) Represents options to purchase the common stock of the Company issued to
Mr. O'Hare on December 16, 1996 under its Amended and Restated Stock
Option Plan at a price of $1.03125 per share, which vested immediately.
(3) Includes 300,000 options issued to Mr. O'Hare on December 16, 1996 under
its Amended and Restated Stock Option Plan, at a price of $1.03125 per
share, 150,000 of which will each vest in 1997 and 1998, respectively,
and 500,000 options issued to Mr. O'Hare under the same plan which will
vest in 125,000 share increments in accordance with certain stock price
performance criteria described in footnote 3 to the Option Grant table,
above.
(4) Options to purchase 300,000 shares of the Company's common stock issued
on September 1, 1993 to each of Messrs. Brown and Parker that vested
upon the attainment of certain performance goals were terminated on
December 16, 1996, the date Messrs. Brown and Parker resigned certain
executive positions with the Company.
(5) Includes options to purchase 180,000 shares of common stock issued on
September 1, 1993 under the Company's 1993 Executive Stock Option Plan
(the "Executive Plan", now consolidated with the Employee Compensation
Stock Option Plan in the Amended and Restated Stock Option Plan) at an
exercise price of $1.375 per share and warrants to purchase 600,000
shares of the Company's Common Stock issued on May 11, 1995 at $1.0625
per share (See "Item 13. Certain Relationships and Related
Transactions").
(6) Represents options to purchase 120,000 shares of common stock issued on
September 1, 1993 under the Company's Executive Plan at a price of
$1.375 per share.
(7) Options to purchase 850,000 shares of common stock granted under the
Executive Plan on May 1, 1995 with an exercise price of $.75 per share
were terminated upon Mr. Scully's termination on December 30, 1996.
(8) Represents options to purchase 150,000 shares of common stock granted to
Olney Telecom, Inc., a company of which Mr. Scully is the sole owner,
outside of any formal benefit plan as compensation for its services on
December 19, 1994 at an exercise price of $1.00 per share.
8
<PAGE>
(9) Includes options to purchase 50,000 shares of common stock granted under
the 1992 Employee Compensation Stock Option Plan on August 5, 1994 at an
exercise price of $1.53 per share, options to purchase 60,000 shares of
common stock granted under the Executive Plan on August 5, 1994 at an
exercise price of $1.53 per share and options to purchase 20,000 shares
of common stock granted under the Executive Plan on April 27, 1995 at an
exercise price of $1.00 per share.
(10) Includes options to purchase 90,000 shares of common stock granted under
the Executive Plan on August 5, 1994 at an exercise price of $1.53 per
share and options to purchase 80,000 shares of common stock granted
under the Executive Plan on April 27, 1995 at an exercise price of $1.00
per share.
Compensation of Directors
Directors who also serve as salaried employees of the Company do not receive
any fees or salaries in addition to their compensation as employees. No
compensation was paid to non-employee directors during 1996 for their
services as directors.
Employment Agreements
The Company executed an Employment Agreement with Mr. O'Hare effective
December 16, 1996. The Agreement is for a term of three years from the
effective date and contains a cost of living increase of not less than the
increase in the Consumer Price Index. The base salary payable to Mr. O'Hare
is $200,000. In addition, Mr. O'Hare will be eligible to participate in the
Company's profit sharing bonus pool to be implemented by the Company's
Compensation Committee once such a committee is established. The pool, when
created, will not exceed 7% of the Company's pre-tax income. If the bonus
pool is not implemented before the first anniversary of the termination of
the Agreement, then Mr. O'Hare will be entitled to receive a cash bonus equal
to 3.5% of the Company's net pre-tax income. Under the Agreement, the
Company is obligated to provide term life insurance in an amount of not less
than two times Mr. O'Hare's annual yearly salary and an after-tax automobile
allowance of $600 per month.
Mr. Parker has a seven year Employment Agreement terminating December 31,
2000, which is automatically renewable for an additional five years unless
either party provides written notice of non-renewal no later than thirty (30)
days prior to the expiration of the initial term. The contract provides for
an annual base salary of not less than $165,000 subject to annual cost of
living increases as measured by the growth in the Consumer Price Index--Urban
Consumer, All Items, U.S. Cities' Average. Upon the death of Mr. Parker, the
Company is obligated to pay his beneficiary his annual salary in effect at
the time of his death for the remainder of the term of the agreement. Mr.
Parker's Employment Agreement provides that Mr. Parker may not be terminated
by the Company except for the conviction of a felony. Any costs of legal
counsel engaged by Mr. Parker relating to the Company's failure to comply
with the terms of the Employment Agreement will be paid by the Company.
Mr. Brown had an Employment Agreement that was substantially similar to the
Employment Agreement the Company has with Mr. Parker, described above.
Effective December 16, 1996, Mr. Brown released the Company from its
obligations under the Agreement. On January 14, 1997, Mr. Brown entered into
a Consulting Agreement with the Company. The Consulting Agreement, which is
for a term of six years with an automatic extension of one year unless a
party gives thirty-days written notice of its intent not to renew, provides
that Mr. Brown will be compensated at a rate of $125,000 annually, to be
increased each year in accordance with the Consumer Price Index.
9
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of April 30, 1997 certain information
regarding the beneficial ownership of the Company's Common Stock (a) by the
only persons or groups of persons shown by the Securities and Exchange
Commission records or the Company's own records to own beneficially more than
5% of the Company's Common Stock, and (b) by each director and named officer,
and all directors and officers as a group. Except as otherwise indicated,
each person named or included in a group has sole voting and investment power
with respect to his or its shares of common stock. The Company also has
outstanding a class of preferred stock known as the "9% Series of Preferred
Stock." To the Company's knowledge, no officer or director of the Company
owns any shares of such preferred stock.
<TABLE>
<CAPTION>
Name and Address of Beneficial Amount and Nature
Owner or Identity of Group of Beneficial Ownership Percent of Class(1)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Gold & Appel Transfer, S.A. 1,143,635 7.2%
Omar Hodge Building
Wickhams Cay
Road Town
Tortula, British Virgin Islands
Kevin M. O'Hare 310,000(2) 1.9%
111 Presidential Boulevard
Suite 114
Bala Cynwyd, PA 19004
Stephen Parker 2,930,000(3) 17.5%
111 Presidential Boulevard
Suite 114
Bala Cynwyd, PA 19004
Aaron R. Brown 2,580,000(4) 15.4%
111 Presidential Boulevard
Suite 114
Bala Cynwyd, PA 19004
Murray Goldberg 2,270,000 14.3%
26 Anthony Drive
Malvern, PA 19355
Mark Scully 150,000(5) *
P.O. Box 9260
Incline, NV 89452
Ward G. Schultz 180,000 1.1%
1240 Turnbury Lane
North Wales, PA 19454
Tansukh Ganatra -- --
6523 Ashdale Place
Charlotte, NC 28215
All Directors and Executive Officers
as a group (7 persons) 6,066,000(6) 34.5%
- ---------------
* Less than 1%
</TABLE>
10
<PAGE>
(1) Based on 15,927,100 shares of common stock outstanding on April 23,
1997. Shares which are not outstanding but which a person has the right
to acquire within sixty (60) days of April 23, 1997, are considered as
shares outstanding for purposes of computing the percentage of common
stock owned by such person, but such shares are not deemed outstanding
for purposes of computing the percentage of common stock owned by any
other person.
(2) Includes 300,000 shares issuable to Mr. O'Hare upon exercise of
options granted under the Company's Amended and Restated Stock Option
Plan.
(3) Includes 180,000 shares issuable to Mr. Parker upon exercise of options
granted under the Company's Executive Plan and 600,000 shares issuable
upon exercise of warrants issued in consideration of Mr. Parker's
limited personal guarantee of the Company's revolving credit facility
(See "Item 13. Certain Relationships and Related Transactions").
(4) Includes 180,000 shares issuable to Mr. Brown upon exercise of options
granted under the Company's Executive Plan and 600,000 shares issuable
upon exercise of warrants issued in consideration of Mr. Brown's limited
personal guarantee of the Company's revolving credit facility (See "Item
13. Certain Relationships and Related Transactions").
(5) Represents 150,000 shares issuable to Olney Telecom, Inc., of which Mr.
Scully is the sole owner.
(6) Includes shares issuable to Messrs. O'Hare and Parker upon the exercise
of options and warrants described in notes 2 and 3 as well as shares
issuable to Messrs. Hurwitz (200,000), Mendes (170,000) and Shannon
(170,000) upon the exercise of options.
Item 13. Certain Relationships and Related Transactions
On May 11, 1995, the Company entered into a Loan and Security Agreement with
Century Business Credit Corporation ("Century") for a revolving credit
facility of $2,000,000. The loan is for a period of two years, and is
automatically renewable for two successive years. On April 27, 1995, the
Company issued 500,000 shares of restricted Common Stock to each of Aaron R.
Brown and Stephen J. Parker in consideration for their limited personal
guarantee given to Century equal to 25% of the indebtedness incurred with
Century. In connection with this transaction each of these two officers also
terminated 420,000 Executive Stock Options. After review of the transaction
by a Special Committee appointed by the Board of Directors, the issuance of
the restricted stock and the cancellation of options was rescinded. In its
place, the Company agreed to issue each of Messrs. Brown and Parker 600,000
warrants to purchase Common Stock of the Company in consideration for the
limited personal guarantees given by each in connection with the credit
facility.
Each warrant issued in the transaction described in the above paragraph
entitles the holder to purchase one share of Common Stock of the Company at
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 the
warrants is restricted stock under the federal securities laws.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Annual Report on form 10-K:
(1) Financial Statements
--------------------
See "Index To Consolidated Financial Statements and Financial
Statement Schedules" on page F-i herein.
11
<PAGE>
(2) Financial Statement Schedules require to be filed by Item 8
on this form:
See "Index To Consolidated Financial Statements and Financial
Statement Schedules" on page F-i herein.
(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.
(3) On January 15, 1996, the Company filed Form 8-K regarding US WATS
settling its litigation with AT&T.
(4) On January 12, 1996, the Company filed Form 8-K regarding its
decision to replace its certifying accountant for the year ended
December 31, 1995.
(c) Exhibits
Exhibit No. Description
3.1 Certificate of Incorporation of Registrant*
3.2 Amendment to Certificate of Incorporation*
3.3 By-Laws of Registrant*
4.1 Specimen Common Share Certificate*
10.1 DSC Marketing Services Supply Agreement**
10.2 Key Employees Incentive Stock Option Plan**
10.3 Employee Compensation Stock Option Plan**
10.4 Agreement of Lease for 3 Parkway, Philadelphia, PA**
10.6 Employment Agreement dated December 23, 1993, between US WATS, Inc.
and Stephen J. Parker***
10.7 Loan and Security Agreement between US WATS, Inc. and Century
Business Credit Corporation dated May 11, 1995****
10.8 Employment Agreements dated February 25, 1997, between US WATS,
Inc. and David B. Hurwitz, Kevin M. O'Hare and Mark A. Mendes*****
10.9 Employment Agreement dated March 3, 1997, between US WATS, Inc. and
Christopher J. Shannon
* Filed as an exhibit with corresponding Exhibit No. to Registrant's
post effective amendment No. 1 to Registration Statement on
Form S-18, or previous Annual Report Form 10-K.
** Incorporated by reference to the December 31, 1992 Form 10-K
*** Incorporated by reference to the December 31, 1993 Form 10-K
**** Incorporated by reference to the June 30, 1995 Form 10-Q
***** Incorporated by reference to the February 25, 1997 Form 8-K
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant had duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
US WATS, INC.
By: /s/Christopher J. Shannon
--------------------------
Christopher J. Shannon
Chief Financial Officer
April 30, 1997
13
<PAGE>
US WATS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Page (s)
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Reports F-1 to F-3
Consolidated Balance Sheets--
December 31, 1996 and 1995 F-4 to F-5
Consolidated Statements of Operations--
Years ended December 31, 1996, 1995, and 1994 F-6
Consolidated Statements of Common Shareholders' Equity
Years ended December 31, 1996, 1995, and 1994 F-7 to F-9
Consolidated Statements of Cash Flows--
Years ended December 31, 1996, 1995, and 1994 F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-11 to F-19
F-i
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
US WATS, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheet of US WATS, Inc.
and subsidiaries as of December 31, 1996, and the related consolidated
statements of operations, common shareholders' equity, and cash flows for the
year then ended These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audit provide a
reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements present fairly, in
all material respects, the financial position of US WATS, Inc. and
subsidiaries as of December 31, 1996, and the results of their operations and
cash flows for the year then ended in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 28, 1997, except for note 9 for which the date is April 29, 1997.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Directors and Shareholders
US WATS, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheet of US WATS, Inc.
and subsidiaries as of December 31, 1995, and the related consolidated
statements of operations, common shareholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 1995 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of US WATS,
Inc. and subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
RUDOLPH, PALITZ LLP
Plymouth Meeting, Pennsylvania
March 25, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
US WATS, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying statement of operations, shareholder's
equity, and cash flows of US WATS, Inc. and subsidiaries for the year ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 audit 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 financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of US WATS,
Inc. and subsidiaries for the year ended December 31, 1994, in conformity
with generally accepted accounting principles.
BARATZ & ASSOCIATES, P.A.
Marlton, New Jersey
March 8, 1995
F-3
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
1996 1995
- -----------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $1,455,186 $ 680,834
Accounts receivable, net of allowance for
doubtful accounts of $672,058 for 1996
and $268,921 for 1995 6,513,899 4,900,066
Prepaid expenses and other 137,325 107,191
----------- -----------
Total Current Assets 8,106,410 5,688,091
----------- -----------
Property and Equipment
Telecommunications equipment 3,773,459 3,046,877
Equipment 1,356,609 1,231,346
Software 610,286 484,199
Office furniture and fixtures 130,003 119,630
Leasehold improvements 35,226 35,226
----------- -----------
5,905,583 4,917,278
Less accumulated depreciation and amortization 2,305,565 1,426,463
----------- -----------
Total Property and Equipment 3,600,018 3,490,815
----------- -----------
Other assets, principally deposits 285,931 321,455
----------- -----------
$11,992,359 $ 9,500,361
=========== ===========
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------
1996 1995
- --------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Note payable $ 1,196,860 $ 1,175,164
Capital lease obligations, current portion 194,472 130,664
Accounts payable 6,378,296 4,581,373
Accrued commissions 918,129 753,596
Accrued expenses and other 553,445 361,010
State and Federal taxes payable 963,372 475,012
Deferred revenue 116,222 371,791
----------- -----------
Total Current Liabilities 10,320,796 7,848,610
----------- -----------
Long-Term Liabilities
Capital lease obligations, net of current portion 509,224 601,037
----------- -----------
Commitments and Contingencies - see note 8
Redeemable preferred stock, $.01 par, authorized
150,000 shares, issued and outstanding:
30,000 shares in 1996, 30,000 shares in 1995
Redemption value: $11.00 per share 300,000 300,000
----------- -----------
Common Shareholders' Equity
Common stock, $.001 par, authorized
30,000,000 shares; issued:
15,902,100 shares in 1996
15,852,100 shares in 1995 15,902 15,852
Additional paid-in capital 2,623,350 2,573,400
Accumulated Deficit (1,776,663) (1,838,288)
----------- -----------
862,589 750,964
Common stock held in treasury
(250,000 shares), at cost (250) (250)
----------- -----------
862,339 750,714
----------- -----------
$11,992,359 $ 9,500,361
=========== ===========
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
US WATS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
----------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
Revenues $40,304,442 $27,755,388 $23,633,312
----------- ----------- -----------
Cost of sales 26,802,398 15,918,212 14,706,549
----------- ----------- -----------
Gross profit 13,502,044 11,837,176 8,926,763
Selling, general and administrative
expenses 13,196,173 12,095,991 10,199,679
----------- ----------- -----------
Income (loss) from operations 305,871 (258,815) (1,272,916)
Other income (expense)
Interest income 62,732 69,859 12,975
Interest expense (272,978) (88,767) (435)
----------- ----------- -----------
Income (loss) before income tax
expense (benefit) 95,625 (277,723) (1,260,376)
Income tax expense (benefit) 7,000 -- (14,300)
----------- ----------- -----------
Net income (loss) before
preferred dividends 88,625 (277,723) (1,246,076)
Preferred dividends earned 27,000 67,255 118,500
----------- ----------- -----------
Net income (loss) available to
common shareholders $ 61,625 $ (344,978) $(1,364,576)
=========== =========== ===========
Net income (loss) per share
available to common shareholders $ -- $ (.02) $ (.09)
=========== =========== ===========
Weighted average number of shares
outstanding 15,877,900 15,100,400 14,875,584
=========== =========== ===========
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996
Treasury
Common Add'l Treasury Stock Share-
Common Stock Par Value Paid-In Stock At holders'
Description Shares issued $.001 Capital Deficit Shares Cost Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 15,852,100 $15,852 $2,573,400 $(1,838,288) 250,000 $(250) $750,714
Net Income (loss) before Preferred
Dividends for the year ended
December 31, 1996 -- -- -- 88,625 -- -- 88,625
Exercise of Employee Stock
Options 50,000 50 49,950 -- -- -- 50,000
Cash Dividends on Preferred
Stock, December 1, 1996
($.90 per share) (27,000) (27,000)
---------- ------- --------- ---------- ------- ---- --------
Balance, December 31, 1996 15,902,100 $15,902 $2,623,350 $(1,776,663) 250,000 $(250) $862,339
========== ======= ========== ========== ======= ==== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-7
<PAGE>
<TABLE>
<CAPTION>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY (DEFICIENCY)
YEAR ENDED DECEMBER 31, 1995
Treasury Share-
Common Add'l Treasury Stock holders'
Common Stock Par Value Paid-In Stock At Equity
Description Shares issued $.001 Capital Deficit Shares Cost (Deficiency)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 14,691,100 $14,691 $1,395,691 $(1,493,310) 250,000 $(250) $(83,178)
Net Income (loss) before Preferred
Dividends for the year ended
December 31, 1995 -- -- -- (277,723) -- -- (277,723)
Conversion of 100,000 shares
of Series 9% Preferred Stock 1,000,000 1,000 999,000 -- -- -- 1,000,000
Employee Stock Bonus 50,000 50 24,950 -- -- -- 25,000
Exercise of Employee Stock Options 111,000 111 153,759 -- -- -- 153,870
Cash Dividends on Preferred
Stock, December 1, 1995
($.90 per share) -- -- -- (67,255) -- -- (67,255)
---------- ------- ---------- ----------- ------- ----- --------
Balance, December 31, 1995 15,852,100 $15,852 $2,573,400 $(1,838,288) 250,000 $(250) $750,714
========== ======= ========== =========== ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-8
<PAGE>
<TABLE>
<CAPTION>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY (DEFICIENCY)
YEAR ENDED DECEMBER 31, 1994
Treasury Share-
Common Add'l Treasury Stock holders'
Common Stock Par Value Paid-In Stock At Equity
Description Shares issued $.001 Capital Deficit Shares Cost (Deficiency)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 14,487,000 $14,487 $1,190,770 $ (127,234) 250,000 $(250) $1,077,773
Net Income (loss) before Preferred
Dividends for the year ended
December 31, 1994 -- -- -- (1,246,076) -- -- (1,246,076)
Conversion of 20,000 shares
of Series 9% Preferred Stock 200,000 200 199,800 -- -- -- 200,000
Exercise of Employee Stock Options 4,100 4 5,121 -- -- -- 5,125
Cash Dividends on Preferred
Stock, December 1, 1994
($.90 per share) -- -- -- (120,000) -- -- (120,000)
---------- ------- ---------- ----------- ------- ----- --------
Balance, December 31, 1994 14,691,100 $14,691 $1,395,691 $(1,493,310) 250,000 $(250) $(83,178)
========== ======= ========== =========== ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-9
<PAGE>
<TABLE>
<CAPTION>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended December 31,
---------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) before preferred dividends $ 88,625 $ (277,723) $(1,246,076)
Adjustment to reconcile net income (loss) to
net cash provided by (used-in) operating activities
Litigation settlement -- (2,882,223) --
Issuance of stock bonus -- 25,000 --
Depreciation and amortization 930,293 769,685 505,443
Provision for bad debts 479,208 842,628 953,397
Write-off of fixed assets -- 305,008 --
Changes in assets and liabilities which provided
(used) cash:
Accounts receivable (2,093,041) (218,822) (1,563,504)
Prepaid expenses and other (30,134) (20,822) (47,654)
Other assets 24,332 (27,501) 330,731
Deferred revenue (255,569) 79,274 292,517
Accounts payable and accrued expenses 2,153,891 1,209,863 2,062,980
State & Federal Taxes payable 488,360 (72,977) 165,372
---------- --------- ----------
Net cash provided by (used in) operating activities 1,785,965 (268,610) 1,453,206
---------- --------- ----------
INVESTING ACTIVITIES:
Purchase of property and equipment (864,304) (695,469) (1,679,252)
Investment in internet service provider (40,000) -- --
---------- --------- ----------
Net cash used in investing activities (904,304) (695,469) (1,679,252)
---------- --------- ----------
FINANCING ACTIVITIES:
Proceeds from stock option exercises 50,000 153,870 5,125
Increase in notes payable net 21,696 1,175,164 127,166
Repayment of capital lease obligations (152,005) (134,453) --
Preferred stock dividend (27,000) (67,255) (120,000)
Payment of loan acquisition costs -- (110,986) --
---------- --------- ----------
Net cash (used in) provided by financing activities (107,309) 1,016,340 12,291
---------- --------- ----------
Net increase (decrease) in cash and cash equivalents 774,352 52,261 (213,755)
Beginning cash and cash equivalents 680,834 628,573 842,328
---------- --------- ----------
Ending cash and cash equivalents $1,455,186 680,834 628,573
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-10
<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-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, 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). 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.
Substantially all of the Company's revenues are earned from its customers
located on the East Coast.
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 in 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 bills its customers for service on a monthly basis.
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.
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.
Allowance for Doubtful Accounts
Write-offs of accounts receivable for 1996 and 1995 were approximately
$213,000 and $1,052,000, respectively.
F-11
<PAGE>
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
Depreciation and amortization expense of property, plant and equipment for
1996, 1995, and 1994, was $930,293, $1,030,462, and $504,879, respectively.
Included in depreciation expense for 1995 was approximately $305,008
resulting from the recognized obsolescence of telecommunications equipment.
Deferred Revenue
Deferred revenue consists primarily of prepayments of Debit Card and
International Call Back services. Deferred revenue is recognized as income
based on monthly usage.
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.
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 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.
F-12
<PAGE>
Earnings (Loss) Per Common Share
Earnings (loss) per common share is based upon the weighted average number of
common shares outstanding in 1996, 1995, and 1994. 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 1996, 1995 or 1994 since the
effect is anti-dilutive or not significant.
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.
Reclassification of Accounts
Certain reclassifications have been made to conform prior years' balances to
the current year presentation.
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 is for a period of two years, and is automatically
renewable for two successive years. Interest on the loan is calculated at
prime plus 3 3/4% (effective rate is 12% at December 31, 1996) and a minimum
loan value of $750,000 must be maintained. The loan is collateralized by
accounts receivable and fixed and intangible assets of the Company.
At December 31, 1996, the Company was not in compliance with certain loan
covenants pertaining to the acquisition of property and equipment, and Board
of Director membership by specific individuals who are no longer employed by
the Company. The Company received a waiver or amended the Loan and Security
Agreement to correct such non-compliance.
F-13
<PAGE>
4. Obligations Under Capital Leases
Property under capital leases is recorded at the lesser of the present value
of the minimum lease payments or its fair value at inception. The Company
leases various equipment under three-to-five-year noncancellable leases which
expire at various dates through 2000.
The leases carry interest rates ranging from approximately 12.9% to
approximately 13.9% and are collateralized by the equipment purchased. The
future minimum lease payments for the next five years and related lease
obligation balances as of December 31, 1996 and 1995 follow:
1997 $277,639
1998 272,843
1999 190,483
2000 137,350
--------
TOTAL $878,315
========
1996 1995
------------------------
Aggregate capital lease obligation
as of the year ended December 31, $878,315 $987,397
Less--amounts representing interest 174,619 255,696
-------- --------
Present value of net minimum payments
under capital leases 703,696 731,701
Less--current portion of capital lease obligations 194,472 130,664
-------- --------
Capital lease obligations, net of current portion $509,224 $601,037
======== ========
The following is an analysis of property under capital leases:
1996 1995
---------------------------
Telecommunications Equipment $1,028,660 $1,114,260
Office Equipment 57,300 57,300
---------- ----------
TOTAL 1,085,960 1,171,560
Less Accumulated Amortization 224,340 119,829
---------- ----------
Net Assets Under Capital Lease $861,620 $1,051,731
========== ==========
Amortization of assets under capital leases charged to operations and
included in depreciation expense was $149,523, $102,574, and $17,255 in 1996,
1995, and 1994 respectively.
F-14
<PAGE>
5. Income Taxes
The net deferred tax asset at December 31, includes the following:
1996 1995
-------------------------
Deferred Tax Asset $ 953,000 $ 942,000
Deferred Tax Liability (322,000) (301,000)
Valuation Allowance for Deferred Tax Asset (631,000) (641,000)
--------- ---------
$ -- $ --
========= =========
The utilization of the deferred tax asset depends on the Company's estimate
of its ability to earn taxable income in the future. Although estimates are
subject to change, management was not able to determine that utilization of
the deferred tax asset is likely. Accordingly, a valuation allowance has been
provided for the entire deferred tax asset. The tax effect of major temporary
differences that gave rise to the Company's deferred tax assets and
liabilities at December 31, are as follows:
1996 1995
------------------------
Net Operating Loss $ 609,000 $ 784,000
Allowance for Doubtful Accounts 344,000 158,000
Depreciation (322,000) (301,000)
--------- ---------
Net Deferred Tax Asset $ 631,000 $ 641,000
========= =========
The provision for income tax expense (benefit) for the years ended December
31, consisted of the following amounts:
1996 1995 1994
--------------------------------------
Current tax expense (benefit)
Federal $7,000 $-- $(14,300)
State -- -- --
------- ------- ---------
7,000 (14,300)
Deferred tax expense
Federal ______ ________ ________
State ______ ________ ________
------- ------- ---------
$7,000 $-- $(14,300)
====== ======== =========
F-15
<PAGE>
Total income tax expense (benefit) amounted to $ 7,000 in 1996, $0 in 1995,
and $(14,300) in 1994, (effective tax rates of 8.1%, 0%, and (1.1)%,
respectively), compared to income tax expense (benefit) of $ 29,500,
$(94,000), and $(427,500), computed by applying the statutory rate of 34% to
income (loss) before income tax (benefit). These differences are accounted
for as follows:
<TABLE>
<CAPTION>
1996 1995 1994
% of % of % of
pretax pretax pretax
Amount income Amount income Amount income
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" income
tax expense (benefit) $29,500 34.0 $(94,000) (34.0) $(427,500) (34.0)
State income tax expense,
net of Federal income
tax benefit -- -- -- --
Utilization of NOL -- -- (14,300) (1.1)
Valuation allowance (30,500) (35.1) 80,000 28.9 427,500 34.0
Other 8,000 9.2 14,000 5.1 -- --
-------- ----- ------- ----- -------- ----
Actual income tax
expense (benefit) $ 7,000 8.1 $ -- -- $(14,300) (1.1)
======= ===== ======= ===== ======== ====
</TABLE>
The Company has available approximately $ 1,497,000 and $952,000 of tax
carryforwards which may be applied against future Federal taxable income
and alternative taxable income respectively. These carryforwards expire
in 2010.
F-16
<PAGE>
6. Commitments and contingencies
The Company has a long term contract for the purchase of 1+, 800, and Private
lines services over a 36 month period. The contract provides for a minimum
monthly commitment of $250,000 and an aggregate commitment of $9,000,000 over
the contract life. The Company has met its monthly commitments through
December 1996.
The Company leases certain offices and equipment. Future annual minimum lease
payments under the significant agreements are as follows for the years ended
December 31:
1997 $ 370,345
1998 322,705
1999 151,280
2000 140,514
2001 62,019
thereafter 62,019
----------
TOTAL $1,108,882
Rent expense incurred for operating leases was approximately $ 422,896,
$351,300, and $367,600, in 1996, 1995, and 1994, respectively.
The Company has entered into employment agreements with each of its five
Executive Officers. With respect to the officers agreements, the total
minimum commitment level over the next three years is approximately
$2,499,000.
The Company entered into a consulting contract with its former Chairman for
consulting services to be rendered over the next six year period. The total
minimum aggregate commitment level of the contract is approximately $750,000.
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 will not be materially affected by such proceedings.
7. Pension Plans
The Company sponsors a 401(K) Pension and Profit Sharing Plan for all
employees. The Company has elected not to match any employee contributions or
make any profit sharing contributions to the plan.
8. Preferred Stock
Redeemable Preferred:
The Company has outstanding cumulative, convertible, redeemable preferred
stock which is convertible at the option of respective shareholders thereof,
into ten (10) common shares at a conversion price of one dollar ($1.00) each.
F-17
<PAGE>
At any time after September 1, 1996, the Company, at the option of its Board
of Directors, may redeem part or all of the preferred shares outstanding at
$11.00 each plus unpaid and accumulated dividends. The maximum aggregate
redemption value at December 31, 1996 is $330,000. The preferred stock is
mandatorily redeemable in cash on January 2, 2049 at $11.00 per share.
Dividends on the preferred stock are payable in cash only at a rate of 9% per
annum on December 1, March 1, June 1, and September 1.
Preferred Stock:
In July 1994, the shareholders approved an amendment to the Company's
Certificate of Incorporation to authorize 850,000 shares of par value $.01
per share preferred stock, no shares were issued as of December 31, 1996.
9. Stock Options And Warrants
Under the Company's stock option plans, options may be granted to officers
and employees of the Company and its subsidiaries. No option may be granted
for a term in excess of ten years from the date of grant. As of December 31,
1996, 2,414,040 of the outstanding stock options were exercisable under the
plans. The exercise prices of the outstanding options represented the fair
market value at dates of grant.
A summary of the Company's stock option plans activity for common shares
as well as additional non-plan options for the three years ended
December 31, 1996 follows:
Number of Shares Option Price Per Share
---------------- ----------------------
Outstanding 1/1/94 1,887,300 $1.00 to $1.25
Granted 615,000 $1.53
Exercised (4,100) $1.25
Terminated (348,700) $1.25
----------
Outstanding 12/31/94 2,149,500 $1.00 to $1.53
Granted 2,182,500 $0.75 to $2.00
Exercised (111,000) $1.00 to $1.875
Terminated (1,028,800) $1.00 to $2.00
----------
Outstanding 12/31/95 3,192,200 $0.75 to $2.00
Granted 2,045,000 $1.00 to $3.00
Exercised (50,000) $1.00
Terminated (1,361,000) $0.75 to $1.25
----------
Outstanding 12/31/96 3,826,200 $1.00 to $3.00
==========
Subsequent to year end, the Company has terminated 800,000 outstanding
options with members of management at prices ranging from $1.50 to $3.00.
In 1997, the Company has issued an additional 1,500,000 options to members
of management exercisable at prices ranging from $1.22 to $1.30.
The Company accounts for its stock option plans in accordance with Accounting
Principles Board Opinion No. 25, under which compensation cost is recognized
based on the difference, if any, between the fair value of the Company's
stock at the time of option grant and the amount the employee must pay to
acquire the stock. The Company's options have been issued at fair market
value at the time of grant. Had compensation cost for the incentive and non-
qualified options been determined consistent with Statement of Financial
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), the
Company's pro forma net loss and net loss per share for the years ended
December 31 are as follows:
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<PAGE>
1996 1995
---- ----
Reported Net Income $ 61,625 $ (344,978)
Proforma Net Loss $(503,163) $ (1,806,162)
Reported Net Income (Loss) Per Share $ -- $ (0.02)
Proforma Net Loss Per Share $ (0.03) $ (0.12)
In accordance with the requirements of SFAS 123, this method of accounting
has not been applied to options granted prior to the fiscal year beginning
January 1, 1995. The resulting pro forma compensation cost may be
representative of that to be expected in future years.
The fair values of each stock option granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1996 and 1995: risk-free
interest rates of 6.5%, expected dividend yields of 0%, expected lives of
three years from the date of grant, and expected price volatility ranging
from 69% to 200% for the options granted in 1995 and 1996.
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.
10. Cash Flow Information
Supplemental Disclosure of Cash Flow Information
The Company made cash payments for interest of $272,978, $87,189, and $0 for
the years ended December 31, 1996, 1995, and 1994, respectively. The Company
made cash payments for income taxes of $0, $75,000, and $56,640 for the years
ended December 31, 1996, 1995, and 1994 respectively.
Supplemental Disclosure of Non-Cash Financing Activities
Redeemable Preferred Stock in the amounts of $1,000,000 and $200,000 was
converted into Common Stock in the years ended December 31, 1995 and 1994,
respectively.
Non-Cash Transactions
During the years ended December 31, 1996 and 1995, the Company acquired
approximately $124,000 and $939,000, respectively of telephone communications
and other equipment with capital leases. The lease agreements were financed
over three and five year periods.
11. LITIGATION SETTLEMENTS
During 1995, the Company's dispute with Colonial Penn Group, Inc. and
Colonial Penn Insurance Company (collectively "CPG") was favorably resolved ,
resulting in the reversal of an accounts payable in the amount of
approximately $2,880,000. However, this benefit was substantially offset by
the cost of unsuccessfully litigating the resultant AT&T case on the basis of
anti-trust. The costs of litigation with AT&T incurred during 1995
approximated $850,000. These costs do not include the additional expense of
approximately $305,000 of related expenses pertaining to the write-down of
certain AT&T signal conversion equipment and accounts receivable written-off,
which were attributable to AT&T services provided by the Company. In
addition, AT&T was awarded a counter claim in the litigation in the amount of
$669,000, pertaining to services utilized in prior years. As a result of
settlement of these matters the Company recognized a net favorable impact of
approximately $1,056,000 in 1995.
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