UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 3
_________________________
[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 February 18, 1998, 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 $10,997,383.
As of February 18, 1998, the registrant has 16,134,600 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 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" and add
Footnotes 12 and 13 to the Financial Statements entitled "Related Party
Transactions" and "Subsequent Events (unaudited)."
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.
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/ Michael McAnulty
----------------------
Michael McAnulty
Controller
January 30, 1998
<PAGE>
INDEX TO US WATS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
PAGE (S)
--------
Independent Auditors' Report F-2
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets
December 31, 1996 and 1995 F-5
Consolidated Statements of Operations
Years ended December 31, 1996, 1995, and 1994 F-7
Consolidated Statements of Common Shareholders' Equity
Years ended December 31, 1996, 1995, and 1994 F-8
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995, and 1994 F-11
Notes To Consolidated Financial Statements F-12
F-1
<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 Notes 9 and 12 for which the date is
January 21, 1998
F-2
<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-3
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-4
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-5
<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-6
<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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
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-14
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-15
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-16
<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-17
<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.
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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
- ---------------------------------
Subsequent to the initial filing of these financial statements for the year
ended December 31, 1996, Management determined that certain options had been
excluded from the original information below. The information below has been
updated to reflect the changes in such option activity.
Under USW's stock option plans, options may be granted to officers and
employees of USW 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,
2,414,000 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 USW's stock option plans activity for common shares for the three
years ended December 31, 1996 follows:
Weighted
Average
Exercise
Number of Shares Price
---------------- --------
Outstanding 1/1/94 2,037,300 $1.125
Granted 2,254,700 $1.53
Exercised (4,100) $1.25
Terminated (1,179,600) $1.25
---------- -----
Outstanding 12/31/94 3,108,300 $1.37
Granted 2,282,500 $1.17
Exercised (111,000) $1.48
Terminated (1,028,800) $1.66
---------- -----
Outstanding 12/31/95 4,251,000 $1.19
Granted 2,045,000 $1.52
Exercised (50,000) $1.00
Terminated (1,770,000) $ .97
---------- -----
Outstanding 12/31/96 4,476,000 $1.43
========== =====
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 $1.25 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
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<PAGE>
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:
1996 1995
---- ----
Reported Net Income (Loss) $ 61,625 $ (344,978)
Proforma Net Loss $(288,493) $(1,560,848)
Reported Net Income (Loss) Per Share $ -- $ (0.02)
Proforma Net Loss Per Share $ (0.02) $ (0.10)
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 not be representative
of that to be expected in future years.
The weighted average fair value of options granted during fiscal 1996 and 1995
was $.55 and $.97, respectively. The fair values of each stock option grant 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, USW agreed to issue to each of two directors/officers of USW
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 USW 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.
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<PAGE>
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.
12. RELATED PARTY TRANSACTIONS
- ------------------------------
Indemnification Arrangements
USW is a party to indemnification agreements with two of its directors, Aaron
R. Brown and Stephen J. Parker, dated August 1990. In addition, USW has
entered into an indemnification agreement with Kevin O'Hare, a former executive
officer of USW, dated July, 1997. In general, the indemnification agreements
obligate USW to indemnify each of Messrs. Brown, Parker and O'Hare against the
liabilities and expenses incurred by them in acting as a director or officer of
USW to the maximum extent allowed by law. USW, together with Messrs. Parker,
Brown and O'Hare, have been sued by USW's former president for various claims
asserted by the plaintiff in connection with his termination of employment with
USW on December 30, 1996. USW and the individual defendants have selected
counsel to defend the action. The Board of Directors of USW has authorized USW
to advance the expenses of the individual defendants incurred in defending ths
action upon the receipt of an undertaking from each of them to repay the
amounts so advanced in the event it is determined that they are not entitled to
indemnification under applicable law. As of December 31, 1996, no amounts had
been advanced by USW under such agreements.
Sales Agency
Mr.Goldberg, a director of USW, acts as a sub-agent for USW and is the co-owner
of a company that acts as an agent for USW in the sale of USW's products and
services. During 1996, USW paid Mr. Goldberg and such company a total of
$224,467 in commissions for their services as USW's sales agents.
Loans
During the first quarter of 1996, USW borrowed $100,000 from each of Aaron R.
Brown and Stephen J. Parker, directors of USW. During 1996, USW repaid the
entire outstanding balance of the loans to Messrs. Brown and Parker with
interest.
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<PAGE>
13. SUBSEQUENT EVENTS (UNAUDITED)
- ---------------------------------
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. Management
cannot presently predict the outcome of this suit, accordingly no adjustment
has been recorded in the Financial Statements.
The Company was notified in August, 1997 that it had failed to meet the Capital
and Surplus requirement for continued listing of its Common Stock on the Nasdaq
SmallCap Market as of June 30, 1997. The Company was granted a temporary
exemption from the NASD subject to the Company meeting certain conditions. In
order to prevent the Company's stock from being delisted, on September 19,
1997, certain members of the Company's Board of Directors exercised outstanding
warrants to purchase 62,000 shares of Common Stock for $65,720 in net proceeds
to the Company. On November 26, 1997, the Company sold an additional 1,590,000
shares of its Common Stock for $1.50 per share, raising $2,300,000 of net
proceeds in a private placement sale to a significant former shareholder.
On October 28, 1997, the Company entered into an Agreement and Plan of Merger
with ACC Corp. and a wholly-owned subsidiary of ACC Corp., pursuant to which
ACC Corp. will issue approximately $46 million worth of its Common Stock to
holders of US WATS capital stock, and US WATS will become a wholly-owned
subsidiary of ACC Corp. The number of shares to be issued to the holders of US
WATS capital stock will be calculated using a price of $2.48 per share of US
WATS Common Stock, subject to certain adjustments. The merger is subject to
the satisfaction of certain conditions, including that the merger be treated as
a pooling of interests.
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