<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended March 31, 1999
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)
2 Greenwood Square, 3331 Street Road, Suite 275
Bensalem, Pennsylvania 19020
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(215) 633-9400
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and, (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Outstanding at
Common Stock May 7, 1999
------------ --------------
$.001 20,009,894
<PAGE>
US WATS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE (S)
--------
PART I
======
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1999 (unaudited) and December 31, 1998 3-4
Consolidated Statements of Operations
Three Months Ended March 31, 1999 and 1998 (unaudited) 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-14
Item 3. Quantitative and Qualitative Disclosure about Market Risk 15
PART II
=======
OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE PAGE 17
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<PAGE>
PART I
======
FINANCIAL INFORMATION
ITEM 1.
- -------
FINANCIAL STATEMENTS
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
1999 1998
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ 2,847,196 $ 1,665,485
Accounts receivable, net of allowance for
doubtful accounts of $998,215 for 1999,
and $934,624 for 1998 5,958,294 6,165,896
Prepaid expenses and other 168,418 166,977
----------- -----------
Total Current Assets 8,973,908 7,998,358
----------- -----------
Property and Equipment
Telecommunications equipment 5,209,166 5,031,047
Equipment 1,705,261 1,690,490
Software 652,422 652,422
Office furniture and fixtures 157,006 157,006
Leasehold improvements 96,171 46,671
----------- -----------
7,820,026 7,577,636
Less accumulated depreciation and amortization 5,078,176 4,708,113
----------- -----------
Total Property and Equipment, net 2,741,850 2,869,523
----------- -----------
Other assets, principally deposits - net 143,658 153,583
----------- -----------
Total $11,859,416 $11,021,464
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Note payable $ 664,536 $ 1,121,341
Capital lease obligations, current portion 221,078 226,968
Accounts payable 4,990,486 4,372,548
Accrued commissions 1,011,774 891,318
Accrued expenses and other 655,087 790,699
State and Federal taxes payable 850,985 961,731
Deferred revenue 1,670 2,887
------------ ------------
Total Current Liabilities 8,395,616 8,367,492
------------ ------------
Long-Term Liabilities
Capital lease obligations, net of current portion 98,103 149,792
------------ ------------
Commitments and Contingencies
Redeemable preferred stock, $.01 par, authorized
150,000 shares, issued and outstanding:
30,000 shares in 1999 and 1998
Redemption value: $11.00 per share 330,000 330,000
------------ ------------
Common Shareholders' Equity
Common stock, $001 par, authorized
30,000,000 shares; issued:
20,078,894 shares in 1999
20,077,144 shares in 1998 20,079 20,077
Additional paid-in capital 11,045,253 9,514,075
Accumulated Deficit (8,029,416) (7,358,853)
------------ ------------
3,035,916 2,175,299
Common stock held in treasury
(219,000 shares), at cost (219) (1,119)
------------ ------------
3,035,697 2,174,180
------------ ------------
Total $ 11,859,416 $ 11,021,464
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------ ------------
<S> <C> <C>
Revenues $ 9,185,562 $ 11,871,250
Cost of sales 6,269,743 8,615,837
------------ ------------
Gross profit 2,915,819 3,255,413
Selling, general and administrative expenses 3,557,231 3,611,047
------------ ------------
(Loss) Income from operations (641,412) (355,634)
Other Income (expense)
Interest income 26,348 16,932
Interest expense (48,749) (59,590)
------------ ------------
(Loss) Income before income taxes (663,813) (398,292)
Income tax expense -- --
------------ ------------
Net (Loss) income (663,813) (398,292)
Preferred dividends 6,750 6,750
------------ ------------
Net (loss) income applicable to common shareholders $ (670,563) $ (405,042)
============ ============
Net (loss) per share applicable
to common shareholders: $ (.04) $ (.02)
============ ============
Weighted average number of shares outstanding 19,049,233 17,730,787
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVIES
Net income (loss) before preferred dividends $ (663,813) $ (398,292)
Adjustments to reconcile net income (loss)
to net cash provided by (used-in) operating activities
Depreciation and amortization 374,435 256,625
Provision for bad debts 134,116 272,220
Changes in assets and liabilities which provided (used) cash:
Accounts receivable 73,486 (381,625)
Prepaid expenses and other (1,441) (11,082)
Other assets 5,553 --
Deferred revenue (1,217) (63,621)
Accounts payable and accrued expenses 602,782 (853,858)
State and Federal Taxes payable (110,746) (172,119)
----------- -----------
Net cash provided by (used in) operating activities 413,155 (1,351,752)
----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (242,390) (40,416)
----------- -----------
Net cash (used in) provided by investing activities (242,390) (40,416)
----------- -----------
FINANCING ACTIVITIES
Proceeds from private placement 1,530,000 --
Proceeds from stock option exercises 2,080 258,443
Decrease in notes payable, net (456,805) 490,950
Repayment of capital lease obligations (57,579) (66,771)
Preferred stock dividend (6,750) (6,750)
----------- -----------
Net cash provided by (used in) financing activities 1,010,946 675,872
----------- -----------
Net increase (decrease) in cash 1,181,711 (716,296)
Beginning cash 1,665,485 1,588,267
----------- -----------
Ending cash $ 2,847,196 $ 871,971
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<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 generally located in
the Mid-Atlantic region and California (0n-net areas). 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. Substantially all of the Company's revenues are earned from
its customers located on the East Coast.
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 3331
Street Road, Suite 275, Bensalem, Pennsylvania 19020. The Company's telephone
number at that location is (215) 633-9400.
The accompanying unaudited interim consolidated financial statements and related
notes have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission and in the opinion of management, include all
adjustments necessary for a fair presentation of such financial statements. Such
adjustments consist only of normal recurring items. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations. Where appropriate, certain amounts in the prior period
financial statements have been reclassified to conform to the current period
presentation. The results of operations for the three months ended March 31,
1999 are not necessarily indicative of results to be expected for the full year.
The accompanying unaudited interim consolidated financial statements and related
notes should be read in conjunction with the financial statements and related
notes included in the Company's Form 10-K for the year ended December 31, 1998.
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<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its four wholly-owned subsidiaries, USW Corporation, USW Enterprises, Inc.,
Carriers Group, Inc. and US Wats of Virginia Inc. after elimination of all
inter-company accounts, transactions and profits.
BUSINESS SEGMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the reporting of information about operating segments on an annual basis and is
effective for fiscal years beginning after December 15, 1997. The Company's
operations have been aggregated into a single reportable segment, as permitted
under SFAS No. 131, since management has chosen not to organize the Company
around products and services, geographic areas, regulatory environments,
economic characteristics, or types of customers.
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
The Company intends to replace its Dex 400 switch in Philadelphia by no later
than the end of the second quarter of 1999 as a result of the switch's capacity
limitations and lack of Year 2000 compliance. Therefore, the Company has changed
the estimated remaining life of all the related fixed assets associated with
this switch and as a result has accelerated its depreciation by approximately
$105,000 in the first quarter of 1999.
DEFERRED FINANCING COSTS
Loan origination costs are amortized over the term of the related loan, and are
included in other assets.
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<PAGE>
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 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.
INCOME (LOSS) PER COMMON SHARE APPLICABLE TO COMMON SHAREHOLDERS
Income (loss) per common share applicable to common shareholders is computed by
dividing net income (loss), after deduction of preferred stock dividends, by the
weighted average number of common shares outstanding during the period.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which was adopted by the Company effective for the year ended December
31, 1997, as required by the statement. For the three months ended March 31,
1999 and 1998, the Company's potential common stock equivalents have either an
antidilutive or have no effect on income (loss) per share applicable to common
shareholders and, therefore, diluted income (loss) per common share applicable
to common shareholders has not been presented.
The following table summarizes those securities that could potentially dilute
income (loss) per common share applicable to common shareholders in the future
that were not included in determining the fully diluted income (loss) per common
share applicable to common shareholders as there is either no effect or the
effect is antidilutive.
Three Months Ended March 31,
Potential Common Shares resulting from: 1999 1998
------- ---------
Stock Options 662,052 844,453
Stock Warrants 0 539,654
Cumulative, Convertible, Redeemable Preferred Stock 300,000 300,000
------- ---------
962,052 1,684,107
======= =========
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<PAGE>
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 such
estimated cash flows are 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 June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company adopted this
standard in January, 1999, which had no impact on the Company's financial
statements.
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. Interest on the loan is
currently calculated at prime plus 3 3/4%(11 1/2% at March 31, 1999) on a
minimum loan value of $750,000. The loan is collateralized by accounts
receivable and fixed and intangible assets of the Company. In the event the
Company fails to meet the subjective financial performance criteria during 1999,
the lender has the right to call the loan in full.
The Company has recently negotiated the terms for the renewal of three
successive one year periods with Century Business Credit Corporation which began
on May 11, 1999. Interest for the new term will be calculated at prime plus 2
3/4%. The renewal period also includes a revolving $2,000,000 credit facility
with a minimum loan value of $750,000. The new term does not require any limited
personal guarantees.
4. LITIGATION
On June 13, 1997, Mark Scully, a 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
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<PAGE>
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. The case
was tried to the Court sitting without a jury on December 14-16, 1998. The
parties recently filed post-trial memorandum and are awaiting the decision of
the Court.
The Company is party, in the ordinary course of business, to other litigation
involving services rendered, contract claims and other miscellaneous causes of
action arising from its business. The Company has established reserves relating
to its legal claims and believes that potential liabilities in excess of those
recorded will not have a material adverse effect on the Company's Consolidated
Financial Statements, however, there can be no assurances to this effect.
5. PRIVATE PLACEMENT
On March 23, 1999, the Company through a private placement transaction, issued
900,000 shares of common stock to Gold & Appel Transfer, S.A., a majority
shareholder of the Company, for an aggregate purchase price of $1,530,000 or
$1.70 per share. The proceeds of the issuance will be used for general working
capital. The terms of such transaction were negotiated between the Company and
Gold & Appel Transfer, S.A. on an arms length basis, with Mr.
Anderson abstaining from all negotiations and approvals.
6. OTHER SALES INFORMATION
Net sales information by the Company's product groups for the quarters ended
March 31 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Amount % Amount %
----------- -----------
<S> <C> <C> <C> <C>
Domestic 1+ $ 4,807,680 52 $ 4,897,925 41
International 1,372,782 15 3,054,988 26
Inbound 1,602,774 18 1,824,049 15
Wireless 295,304 3 443,747 4
Domestic Carrier Termination 1,107,022 12 1,650,541 14
----------- ----------- ----------- -----------
Total $ 9,185,562 100% $11,871,250 100%
=========== =========== =========== ===========
</TABLE>
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<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Revenue for the quarter ended March 31, 1999 decreased approximately $2,686,000
(22.6%) versus the quarter ended March 31, 1998. Approximately $909,000 (34%) of
the decrease was due to a decrease in the Company's revenue derived from retail
sales through the agent and reseller channels. This was mainly attributed to
decreasing selling rates as a result of strong competition in the marketplace.
Competitive pressures resulted in a decline in the Company's average retail rate
per minute of $.021 from March, 1998 to March, 1999. The Company has recently
issued a new selling plan with aggressive pricing to the agents. This strategy
is intended allow the Company to build the revenue base by adding enough
additional minutes to offset the decline in the retail rate per minute.
Revenue through the carrier sales channel decreased by approximately $1,224,000
for the quarter ended March 31, 1999 or 45% of the overall revenue decrease.
Similar to the retail sales channel, the average selling price per minute in the
carrier sales channel decreased approximately $.02 from the quarter ended March
31, 1998 as a result of strong competition. Also, in the fourth quarter of 1998,
the Company lost two significant carrier customers as a result of their
bankruptcy. The Company is in the process of rebuilding the carrier sales
channel to higher but controlled revenue levels.
In addition, approximately $553,000 (21%) of the overall revenue decrease was
related to the international callback revenue channel. This was a result of
management's decision to gradually exit the International Callback business.
This decision was based primarily on the telecommunications deregulation in
European and Asian countries. As pricing for long distance services has
decreased in these areas, the International Callback business as a whole has
diminished.
For the quarter ended March 31, 1999, gross profit as a percentage of revenue
increased to approximately 32% versus 27% for the quarter ended March 31, 1998.
The increase in gross profit margin is attributed to two main factors. First,
the Company experienced an decrease in carrier revenue as a percentage of
overall revenue, decreasing from approximately 26% for the quarter ended March
31, 1998 to approximately 20% for the quarter ended March 31, 1999. Carrier
revenue has lower gross margins than other revenue streams. Therefore, as a
result of this percentage decrease in carrier revenue to total revenue, the
Company's overall gross margin increased. Also, the Company negotiated lower
rates from two significant off-net vendors, which lowered its cost in off-net
territories whereby increasing gross profit margins for the quarter ended March
31, 1999. Overall, the Company's gross profit decreased approximately $340,000,
mainly due to the decrease in revenue as noted above.
Selling, general and administrative ("SG&A") expenses for the quarter ended
March 31, 1999 decreased approximately $54,000 versus the amount incurred in the
quarter ended March 31, 1998. The decrease in SG&A expense is mainly due to a
decrease in bad debt expense of approximately $138,000, as a result of the
decrease in revenue. The Company's bad debt expense is approximately (1.5%) of
revenue for the quarter ended March 31, 1999 compared with (2.3%) of revenue for
the quarter ended March 31, 1998. The decrease in bad debt expense is offset by
an increase in depreciation expense of approximately $118,000 for the quarter
ended March 31, 1999. This is mainly due to a charge of approximately $105,000
for accelerating the depreciation of assets associated with the Philadelphia
switch (see footnote 2 under Property and Equipment). SG&A expense as a
percentage of revenue increased from approximately 30% for the quarter ended
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March 31, 1998 to approximately 39% for the quarter ended March 31, 1999. This
increase is mainly due to the decrease in revenue, the increase in depreciation
expense mentioned above, as well as an increase in commission expense of
approximately $52,000.
Interest expense for the quarter ended March 31, 1999 decreased by approximately
$11,000 versus the amount incurred in the quarter ended March 31, 1998. This is
due to a decrease in long-term debt during the quarter ended March 31, 1999.
The net loss for the quarter ended March 31, 1999 was approximately $664,000, an
increase of approximately $266,000 versus the quarter ended March 31, 1998. The
additional loss is due to the increased depreciation expense of approximately
$105,000 as mentioned above, as well as approximately $205,000 for other
consulting, legal and accounting fees associated with potential strategic
alternatives for the Company.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, cash and cash equivalents were approximately $2,847,000. Cash
flow provided by operations in the first quarter of 1999 was approximately
$413,000. Net cash used in investing activities was approximately $242,000,
which resulted from the purchase of property and equipment.
Working capital at March 31, 1999 was approximately $578,000 as compared to
approximately $(369,000) at December 31, 1998. The increase in working capital
was primarily due to the private placement as stated below.
The Company's working capital ratio increased from .96:1.00 at December 31, 1998
to 1.07:1.00 at March 31, 1999. The Company's cash balance increased
approximately $1,182,000 from its balance at December 31, 1998. This was mainly
due to the private placement in the amount of $1,530,000 offset by a decrease in
the note payable of approximately $457,000.
The Company has a revolving $2,000,000 credit facility with Century Business
Credit Corporation, which was recently renewed for three successive one year
periods beginning on May 11, 1999. Interest on the revolving credit facility is
currently calculated at the prime lending rate plus 2 3/4%, on a minimum loan
value of $750,000. The loan is collateralized by accounts receivable and fixed
and intangible assets of the Company. The new term does not require any limited
personal guarantees. As of March 31, 1999, the Company's outstanding balance on
its credit facility was approximately $665,000, leaving approximately $1,335,000
available for future borrowing under the credit facility.
On March 23, 1999, the Company through a private placement transaction, issued
900,000 shares of common stock to Gold & Appel Transfer, S.A., a majority
shareholder of the Company, for an aggregate purchase price of $1,530,000 or
$1.70 per share. The proceeds of the issuance will be used for general working
capital. The terms of such transaction were negotiated between the Company and
Gold & Appel Transfer, S.A. on an arms length basis, with Mr.
Anderson abstaining from all negotiations and approvals.
Management will focus on obtaining additional financing or possibly raising
additional equity through private placement, in order to support future growth.
The Company's plans for growth include both substantial internal growth and the
potential acquisition of other long distance companies. In order to achieve the
Company's plans for growth in the long distance business as well as its entry
into the local exchange arena, the Company may require additional equity and is
currently seeking sources of funding. The Company cannot give assurance as to
the potential success of these efforts. However, the
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<PAGE>
Company's subsequent improvement in cash and working capital position should
provide the Company with better funding alternatives then it has had in the
past.
YEAR 2000
Many computers and computer applications define dates by the last two digits of
the year, and as such may not be able to accurately calculate, store, use or
identify a date after December 31, 1999. This could result in major system
errors that could adversely affect the Company's operation. This Year 2000 issue
might also adversely affect the systems of the Company's customers, vendors or
resellers.
The Company has initiated a project to identify and address the Year 2000 issue
and is addressing the most critical needs first. The Company has completed an
inventory of its computer systems, network elements, software applications and
other office systems. The preliminary results indicated that the Company would
be required to replace its long distance switch located in Philadelphia. The
Company has purchased a new DSC DEX600 switch, which is Year 2000 compliant, to
replace its existing switch in Philadelphia. The Company anticipates that the
new switch will be installed by the end of the second quarter of 1999. Although
the original Philadelphia switch required replacement as a result of Year 2000
compliance issues, the Company also needed to replace the switch due to its
inability to support any significant growth. The total estimated cost of
replacing the switch will be approximately $1.9 million. Approximately $1.3
million has been incurred as of March 31, 1999.
The Company has identified all vendors that the Company interacts with
electronically or otherwise relies on in order to conduct business. The Company
is contacting those vendors in order to obtain the appropriate assurances that
those third parties are or will be Year 2000 compliant. As of this writing, the
Company has requested Year 2000 compliance status from 171 vendor/suppliers and
has received 125 responses that have indicated that they are indeed Year 2000
compliant or would be compliant by December 31, 1999. The Company continues to
monitor these returns and will make assessments as to their relative impact on
the Company's systems. If compliance is not achieved in a timely manner by the
Company or any significant related third party, the Year 2000 issue could have a
material adverse effect on the Company's operations.
The Company plans to develop and, if necessary, implement contingency plans to
minimize the effects of any significant Year 2000 noncompliance. On the
telecommunications network side, these contingency plans would include, but
would not be limited to, immediately directing terminating traffic away from a
long distance carrier who was not Year 2000 compliant. Traffic would then be
transferred to different carriers with potentially higher rates to desired
locations for an undetermined period of time. This could have a material adverse
effect on the Company's results of operations and liquidity.
On the data network side, information would be compiled and transferred manually
to firms that were unable to accept data electronically because of
noncompliance. The Company currently has these manual alternative procedures in
place. The cost of all such plans cannot be assessed at this time but are not
expected to have a material adverse financial impact on the Company. However,
these and any other plans may not be adequate and any additional significant
expenditures could have a material adverse affect on the Company's results of
operations and liquidity.
-14-
<PAGE>
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
-15-
<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, which Note 4 is incorporated by reference into this
Item 1.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. 27, Financial Data Schedule
(b) Reports on Form 8-K:
On February 19, 1999 the Company filed Form 8-K
regarding the resignation of a Former President
and Chief Executive Officer and the naming of an
interim successor.
On March 16, 1999 the Company filed Form 8-K
regarding the resignation of a Former Director
and the appointment of a new Chairman.
-16-
<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/ MICHAEL MCANULTY
----------------------------
Michael McAnulty
Chief Financial Officer
Dated: May 17, 1999
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements set forth in this Form 10-Q for the fiscal quarter ended
March 31, 1999 and is qualified in its entirely by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,847,196
<SECURITIES> 0
<RECEIVABLES> 6,956,509
<ALLOWANCES> 998,215
<INVENTORY> 0
<CURRENT-ASSETS> 8,973,908
<PP&E> 7,820,026
<DEPRECIATION> 5,078,176
<TOTAL-ASSETS> 11,859,416
<CURRENT-LIABILITIES> 8,395,616
<BONDS> 98,103
330,000
0
<COMMON> 20,079
<OTHER-SE> 3,015,618
<TOTAL-LIABILITY-AND-EQUITY> 11,859,416
<SALES> 0
<TOTAL-REVENUES> 9,185,562
<CGS> 0
<TOTAL-COSTS> 6,269,743
<OTHER-EXPENSES> 3,423,115
<LOSS-PROVISION> 134,116
<INTEREST-EXPENSE> 48,749
<INCOME-PRETAX> (663,813)
<INCOME-TAX> 0
<INCOME-CONTINUING> (663,813)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (663,813)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
