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 June 30, 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 August 14, 1997
------------- ----------------
$.001 15,927,100
<PAGE>
US WATS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE (S)
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PART I
======
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets--
June 30, 1997 (unaudited) and December 31, 1996 3-4
Consolidated Statements of Operations--(unaudited)
Three and Six Months Ended June 30, 1997 and 1996 5
Consolidated Statements of Cash Flows--(unaudited)
Six Months Ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements (unaudited) 7-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-14
PART II
=======
OTHER INFORMATION 15
SIGNATURE PAGE 16
<PAGE>
PART I
======
FINANCIAL INFORMATION
Item 1.
- ------
FINANCIAL STATEMENTS
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 (unaudited) 1996
---------------- ------------
ASSETS
- ------
Current Assets
Cash and cash equivalents $ 640,952 $ 1,455,186
Accounts receivable, net of allowance for
doubtful accounts of $495,660 for 1997,
and $692,058 for 1996 10,352,465 6,513,899
Prepaid expenses and other 149,036 137,325
----------- -----------
Total Current Assets 11,142,453 8,106,410
----------- -----------
Property and Equipment
Telecommunications equipment 3,814,783 3,773,459
Equipment 1,488,448 1,356,609
Software 638,728 610,286
Office furniture and fixtures 139,855 130,003
Leasehold improvements 35,801 35,226
----------- -----------
6,117,615 5,905,583
Less accumulated depreciation and amortization 2,791,412 2,305,565
----------- -----------
Total Property and Equipment, net 3,326,203 3,600,018
----------- -----------
Other assets, principally deposits 311,477 285,931
----------- -----------
$14,780,133 $11,992,359
=========== ===========
The accompanying notes are an integral part of these financial statements
-3-
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 (unaudited) 1996
---------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Note payable $ 2,274,777 $ 1,196,860
Capital lease obligations, current portion 258,983 194,472
Accounts payable 7,669,131 6,378,296
Accrued commissions 1,406,100 918,129
Accrued expenses and other 481,929 553,445
State and Federal taxes payable 1,114,769 963,372
Deferred revenue 117,840 116,222
----------- -----------
Total Current Liabilities 13,323,529 10,320,796
----------- -----------
Long-Term Liabilities
Capital lease obligations, net of
current portion 518,933 509,224
----------- -----------
Commitments and Contingencies
Redeemable preferred stock, $.01 par, authorized
150,000 shares; 30,000 shares issued
and outstanding in 1997 and 1996
Redemption value: $11.00 per share 330,000 300,000
----------- -----------
Preferred stock, $.01 par, authorized
850,000 shares, none issued and outstanding -- --
Common Shareholders Equity
Common stock, $.001 par, authorized
30,000,000 shares;
issued 15,927,100 shares in 1997,
and 15,902,100 shares in 1996 15,927 15,902
Additional paid-in capital 2,618,325 2,623,350
Deficit (2,026,331) (1,776,663)
----------- -----------
607,921 862,589
Common stock held in treasury
(250,000 shares), at cost (250) (250)
----------- -----------
Total Equity 937,671 1,162,339
----------- -----------
$14,780,133 $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 Six Months Ended
June 30, June 30,
------------------------ --------------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues $15,884,285 $9,429,335 $29,391,357 $18,353,626
Cost of sales 11,592,457 6,043,042 21,215,269 11,795,362
----------- ---------- ----------- -----------
Gross profit 4,291,828 3,386,293 8,176,088 6,558,264
Selling, general and
administrative expenses 4,333,829 3,132,406 8,290,790 6,106,887
----------- ---------- ----------- -----------
Income from operations (42,001) 253,887 (114,702) 451,377
Other income (expense)
Interest income 18,586 14,756 37,671 21,836
Interest expense 84,215 64,311 159,139 125,140
----------- ---------- ----------- -----------
Total other income
(expense) (65,629) (49,555) (121,468) (103,304)
Income before income taxes (107,630) 204,332 (236,170) 348,073
Income taxes 0 0 0 0
----------- ---------- ----------- -----------
Net income before
preferred dividends (107,630) 204,332 (236,170) 348,073
Preferred dividends earned 6,750 6,750 13,500 13,500
----------- ---------- ----------- -----------
Net income available to
common shareholders $ (114,380) $ 197,582 $ (249,670) $ 334,573
=========== ========== =========== ===========
Earnings per common shares
available to common
shareholders $ (.01) $ .01 $ (.02) $ .02
=========== ========== =========== ===========
Weighted average number
of shares 15,927,100 15,854,298 15,924,890 15,851,274
=========== ========== =========== ===========
The accompanying notes are an integral part of these financial statements
-5-
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
1997 1996
------------------------
OPERATING ACTIVIES
Net income (loss) before preferred dividends $ (236,170) $ 348,073
---------- ----------
Adjustments to reconcile net income (loss)
to net cash provided by (used-in)
operating activities
Depreciation and amortization 506,419 439,950
Provision for Bad Dept 254,998 219,461
Changes in assets and liabilities which
provided (used) cash:
Accounts receivable (4,093,564) (1,830,822)
Prepaid expenses and other (11,711) (84,537)
Other assets (5,373) (1,864)
Deferred revenue 1,618 --
Accounts payable and accrued expenses 1,707,288 707,995
State and Federal Taxes payable 151,397 199,166
---------- ----------
Net cash provided by (used in) operating
activities (1,725,098) (2,578)
---------- ----------
INVESTING ACTIVITIES
Purchase of property and equipment (212,033) (247,498)
---------- ----------
Net cash provided by (used in) investing
activities (212,033) (247,498)
---------- ----------
FINANCING ACTIVITIES
Proceeds from stock option exercises 25,000 25,000
Increase (decrease) in notes payable 1,077,920 381,593
Repayment of capital lease obligations 74,220 (70,278)
Preferred stock dividend (13,500) (13,500)
Advance from officers -- 196,824
Payment of lease acquisition costs (40,743) --
---------- ----------
Net cash provided by (used in)
financing activities 1,122,897 519,639
---------- ----------
Net increase (decrease) in cash (814,234) 269,563
Beginning cash and cash equivalents 1,455,186 680,834
---------- ----------
Ending cash and cash equivalents $ 640,952 $ 950,397
========== ==========
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 June 30, 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 and Form 10-K/A 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 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 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.
Marketing
All costs related to marketing and advertising the Company's products and
services are expensed in the period incurred.
-8-
<PAGE>
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 and six months ended June 30,
1997 and June 30, 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 and six months ended
June 30, 1997 and June 30, 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.
The Financial Accounting Standards Board has issued SFAS No. 130. "Reporting
Comprehensive Income," which will result in disclosure of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The Company is not required to adopt
this standard until fiscal 1999. At this time, the Company has not determined
the impact this standard will have on the Company's financial statements.
The Financial Accounting Standards Board has issued SFAS No. 131.
"Disclosures about Segments of an Enterprise and Related Information" which
establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company is not required to adopt
this standard until 1999. At this time, the Company has not determined the
impact this standard will have on the Company's financial statements.
-9-
<PAGE>
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 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 3.75% with a
minimum loan value of $750,000. The loan is collateralized by accounts
receivable and fixed and intangible assets of the Company. As of
June 30, 1997, the Company's outstanding line of credit with Century Credit
Corporation exceeds the facility's defined limit, however, the Company is
currently in the process of negotiating 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.
On June 13, 1997, Mark Scully, the former President and Chief Operating
Officer of the Company, filed a complaint against the Company, Kevin O'Hare,
Aaron Brown and Stephen Parker in the United States District Court for the
Eastern District of Pennsylvania. Mr. Scully asserts various claims in
connection with his termination of employment with the Company on December 30,
1996. In particular, he alleges, among other things, breach of contract in
connection with the termination of certain stock options, breach of the
alleged contract for employment, breach of an asserted duty of good faith and
fair dealing, fraudulent and negligent misrepresentation, and civil
conspiracy. Mr. Scully alleges damages of at least $1.6 million, plus
attorneys' fees, costs and other disbursements and the cost of COBRA payments
and interest; $1 million of the alleged damages claimed are punitive. The
Company contests the allegations of the complaint and intends to vigorously
defend against the action.
-10-
<PAGE>
Item 2.
- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The Company's revenues continued to increase over prior quarters rising
approximately $2,377,000 (17.6%) over the level recorded for the quarter ended
March 31, 1997, and by approximately $6,455,000 (68.5%) over the quarter ended
June 30, 1996. Revenue for the quarter ended June 30, 1997 was the highest
quarterly revenue in the Company's history. The latest rise in revenue was
due to substantial increases in the Company's Carrier and Agent sales channels
somewhat offset by a decline in International Callback sales revenue.
Second Quarter 1997 compared with Second Quarter 1996
- -----------------------------------------------------
The Company's total revenue for the second quarter ended 1997 increased
$6,455,000 over the second quarter ended June 30, 1996, or 68.5%. This
increase was primarily due to an increase in revenue through the Carrier and
Agent sales channels of approximately $3,477,000 (252%), and $3,002,000 (362%)
, respectively. The Company's revenue through Switchless resale also
increased approximately $817,000 or 147%. The increase in these sales
channels were somewhat offset by decreases in revenues obtained through the
reseller and direct sales channels which declined by $606,000 (18%) and
$342,000 (22%), respectively.
The Company's gross profit for the second quarter ended 1997 increased
approximately $905,000 over the second quarter ended June 30, 1996, or 27%.
The decrease in gross profit margin is primarily attributable to the
substantial increase in Carrier revenue, which increased from approximately
15% in the second quarter of 1996 to approximately 31% in the second quarter
of 1997. In addition, during the second quarter of 1997, the Company's
network utilization of overflow traffic to off-net carriers was less than
optimal, resulting in higher network costs during the second quarter. Network
inefficiencies were identified during the first and second quarter of 1997 and
management believes that the full effect of the network changes necessary to
correct such inefficiencies are not anticipated to be realized until the third
quarter of 1997.
The Company is continually striving to improve its network efficiency in order
to reduce its network cost per minute more rapidly than the market conditions
require retail rates per minute to be reduced. For the period January 1997
to June 1997, the Company experienced reductions in its retail rate per minute
for both domestic and international services of approximately 3.9% and 7.4%,
respectively. In addition, the Company's carrier-wholesale rate per minute
for domestic service decreased approximately 3.6%. The international carrier-
wholesale rate increased slightly during the second quarter ended June 30,
1997 versus first quarter ended March 31, 1997, however, international costs
per minute increased faster than international revenue per minute resulting in
a decrease in international gross profit per minute from approximately
$.12 to $.096.
The gross profit margin for the quarter ended June 30, 1997 of 27%, decreased
from the gross profit margin (36%) for the quarter ended June 30, 1996. This
is a result of the lower retail rates driven in the marketplace as well as the
impact of the Company's significant increase in sales of "lower-margin"
carrier revenue as a percentage of its overall revenue.
-11-
<PAGE>
Selling, General, and Administrative ("SG&A") expenses for the second quarter
ended June 30, 1997 increased approximately $1,201,000, or 38.4% over the
amount for the second quarter ended June 30, 1996. Of this increase, $791,000
was attributed to higher commission expense, $135,000 to higher bad debt
expense, $90,000 to higher salaries, $35,000 to higher depreciation, with the
remainder attributable to a variety of miscellaneous expenses. The increase
in commission, bad debt and salaries expense are primarily a result of higher
revenues. However, SG&A expense decreased as a percentage of revenue from
33.2% during the second quarter ended June 30, 1996 to 27.3% for the second
quarter ended June 30, 1997. This was a result of the Company's ability to
generate efficiencies from almost all SG&A expenses including salaries,
depreciation, billing cost, etc.. Salaries declined as a percentage of revenue
from 8.1% for the quarter ended June 30, 1996 to 5.4% for the quarter ended
June 30, 1997, and billing cost declined from 1.2% of revenue for the quarter
ended June 30, 1996 to 0.9% for the quarter ended June 30, 1997.
For the second quarter ended June 30, 1997, interest expense incurred by the
Company exceeded amounts incurred during the second quarter ended June 30,
1996 by approximately $20,000 primarily due to higher borrowings against the
Company's line of credit and the financing of additional capital asset
acquisitions during late 1996 and 1997.
The Company recorded a net loss before preferred dividends for the quarter
ended June 30, 1997 of approximately $107,600 versus net income of
approximately $204,000 for the quarter ended June 30, 1996, a decrease of
approximately $311,600. The net income reported in 1996 stems from the
achievement of higher gross margins through the sale of a higher percentage of
total revenue through the Company's Agent, Direct Sales, and Reseller sales
channels. The decline in operating results is substantially due to lower
network efficiencies and higher call transport costs, offset by improved
overhead efficiencies and increased gross profit from increased revenue
levels.
During the second quarter of 1997, the Company's recorded net loss before
preferred dividends of approximately $107,600 compared favorably with its net
loss of approximately $128,500 for the first quarter ended March 31, 1997, an
increase of approximately $21,000, or 16.3%. The increase in operating
results from the first quarter 1997 to the second quarter 1997 is
substantially due to improved overhead efficiencies and increased gross profit
from increased revenue levels.
Six Months 1997 compared with Six Months 1996
- ---------------------------------------------
The Company's total revenue for the six months ended June 30, 1997 increased
approximately $11,000,000 over the six months ended June 30, 1996, or 60.1%.
This increase was primarily due to an increase in revenue through the Carrier
and Agent sales channels of approximately $5,403,000 (223%), and $5,273,000
(309%), respectively. The Company's revenue through Switchless resale also
increased approximately $1,456,000 or 129%. The increase in these sales
channels were somewhat offset by decreases in revenues obtained through the
reseller and direct sales channels which declined by approximately $900,000
(14%) and $828,000 (25%), respectively.
The Company's gross profit for the six months ended June 30, 1997 increased
approximately $1,618,000 over the six months ended June 30, or 24.7%.
However, the Company's gross profit margin declined from 35.7% for the six
months ended June 30, 1996 to 27.8% for the six months ended June 30, 1997.
The decrease in gross profit margin is primarily attributable to the
substantial increase in Carrier revenue, which increased from approximately
13.2% of overall revenue as of the six months ended June 30, 1996 to
approximately 26.6% of overall revenue in the six months ended June 30, 1997.
In addition, during the six months ended June 30, 1997, the Company's network
utilization of overflow traffic to off-net carriers was less than optimal,
resulting in higher network costs during the second quarter. Network
-12-
<PAGE>
inefficiencies were identified during the first and second quarter of 1997 and
management believes that the full effect of the network changes necessary to
correct such inefficiencies are not anticipated to be realized until the third
quarter of 1997.
SG&A expenses for the six months ended June 30, 1997 were approximately
$2,184,000 higher than the amount incurred for the six months ended June 30,
1996. SG&A expense for the six months ended June 30, 1997 was 28.2% of
revenue, whereas SG&A for the six months ended June 30, 1996 was 33.3%. This
decline is a result of the same back-office efficiencies described above in
the quarterly comparison. Year to date salary expense as a percentage of
revenue declined whereas commission expense as a percentage of revenue
increased slightly from its 1996 level.
Selling, General, and Administrative ("SG&A") expenses for the six months
ended June 30, 1997 increased approximately $2,184,000, or 35.8% over the
amount for the six months ended June 30, 1996. Of this increase,
approximately $1,475,000 was attributed to higher commission expense, $195,000
to higher salaries, $190,000 to higher consulting services, $73,000 to higher
billing costs, $72,000 to higher depreciation, $52,000 in recruiting expenses,
$35,000 to higher bad debt expense, $35,000 in telephone expense, $35,000 in
insurance expense, and $30,000 in public accounting/audit fees. The increase
in commission, bad debt, and billing expense are primarily a result of the
Company's higher revenue. The increase in consulting, recruiting and salary
expense is a result of a the Company's changes in senior and middle
management. The increase in insurance and public accounting/audit fees are a
result of a new insurance policies and the addition of a "Big 6" accounting
firm performing the annual audit and quarterly reviews.
For the six months ended June 30, 1997, interest expense incurred by the
Company exceeded amounts incurred during the six months ended June 30, 1996 by
approximately $35,000 primarily due to higher borrowings against the Company's
line of credit and the financing of additional capital asset acquisitions
during late 1996 and 1997.
The Company recorded a net loss before preferred dividends for the six months
ended June 30, 1997 of approximately $236,000 versus net income of
approximately $348,000 for the quarter ended June 30, 1996, a decrease of
approximately $584,000. The higher net income reported in 1996 resulted from
revenue generated through a different mix of sales channels producing higher
margins. The decline in operating results in 1997 is substantially due to
lower network efficiencies and higher call transport costs, offset by improved
overhead efficiencies and increased gross profit from increased revenue
levels.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital ratio continued to improve during the second
quarter ended June 30, 1997 to 0.84:1.00 from 0.81:1.00 for the first quarter
ended March 31, 1997 and from 0.79:1.00 at December 31, 1996.
However, the Company's significant growth in revenue and improvement in
working capital did not come without some cost. Operating income and gross
profit margins declined as the Company increased its Carrier revenue as a
percentage of total revenue. In addition, many of the Company's vendors have
tightened their credit policies and are now requiring shorter payment terms.
As of the second quarter ended June 30, 1997, the Company's Average Days Sales
Outstanding (adjusted for bill process time) was 52 days, relatively unchanged
from the second quarter ended June 30, 1996. In contrast, the Company's
Average Days Outstanding for Accounts Payable declined from approximately 55
days, as of the second quarter ended June 30, 1996 to 48 days of the second
quarter ended June 30, 1997.
-13-
<PAGE>
During the first six months of 1997, this change in cash flow, coupled with
the Company's significant growth in Carrier revenue, and the requirement to
extract continual efficiencies within the network resulted in the Company's
need to increase its outstanding balance on its line of credit. Management
anticipates that in order to support the rate of revenue growth recently
experienced, as well as additional revenue growth from other product lines,
the Company will require additional working capital needs beyond that created
by operating cash flow and an expanded line of credit. As a result, the
Company is planning to raise approximately $5 million in equity prior to the
end of 1997. Due to the rapid growth of the Company's revenue, additional
switching capacity will be required and the Company is currently evaluating
its options in this regard.
As of the second quarter ended June 30, 1997, the Company's equity of $937,671
(Common and Preferred) does not meet the minimum level required ($1.0 million)
by the NASDAQ Small Cap Market. The Company believes that the network changes
implemented during the second quarter of 1997 will improve its earnings,
therefore equity, enough to maintain its listing on the NASDAQ Small Cap
Market. The Company is also preparing for the changes that NASDAQ has proposed
to the SEC regarding changes in its listing requirements. Under the proposed
new requirements, the minimum level of equity required for listing on the
NASDAQ Small Cap Market will be $2.0 million. The NASDAQ market is currently
awaiting approval from the SEC regarding its changes and expects to have a
decision from the SEC by year-end 1997. Upon approval from the SEC, any
company not meeting the new standards set by NASDAQ will have a grace period
of six months to meet the new requirements.
The Company's management is currently pursuing an equity offering and
believes that the level of equity that the Company anticipates raising
([plus or minus]$5.0 million) will provide the Company with such equity that
it will not only meet NASDAQ's current equity requirements, but also it's new
requirement listing anticipated to be finalized by year-end 1997. However,
no assurance can be given as to the potential success of these efforts.
-14-
<PAGE>
PART II
=======
OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of pending legal proceedings, see Note 4 to
the Consolidated Financial Statements contained in this filing.
Item 2. Changes in Securities
On May 6, 1997, under rule 506 of Regulation D of the
Securities and Exchange Act, the Company granted Bruce H.
Luehrs, a consultant to US WATS, Inc., a warrant for the
purchase of 50,000 shares of the Corporation's common stock at
a purchase price of $1.03 per share. The warrant is
exercisable over a period of five years and is subject to
certain conditions.
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
(b) Reports on Form 8-K: None.
-15-
<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,
Chief Executive Officer, Director
By: /s/ Christopher J. Shannon
-----------------------------------
CHRISTOPHER J. SHANNON,
Chief Financial Officer
Dated: August 14, 1997
-16-
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 640,952
<SECURITIES> 0
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<PP&E> 6,117,615
<DEPRECIATION> 2,791,412
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<BONDS> 518,933
330,000
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<COMMON> 15,927
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<INCOME-PRETAX> (236,170)
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