<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 June 30, 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 August 16, 1999
------------ --------------
$.001 20,336,694
<PAGE>
US WATS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page(s)
-------
PART I
======
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1999 (unaudited) and December 31, 1998 3-4
Consolidated Statements of Operations
Three and Six Months Ended June 30, 1999 and 1998
(unaudited) 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-16
Item 3. Quantitative and Qualitative Disclosure about Market Risk 16
PART II
=======
OTHER INFORMATION 17
Item 1. Legal Proceedings
Item 2. Changes in Securities and use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE PAGE 18
<PAGE>
PART I
======
Financial Information
Item 1.
- ------
Financial Statements
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 (unaudited) 1998
---------------- ------------
<S> <C> <C>
Assets
------
Current Assets
Cash and cash equivalents $ 2,307,955 1,665,485
Accounts receivable, net of allowance for
doubtful accounts of $708,148 for 1999,
and $934,624 for 1998 6,986,285 6,165,896
Prepaid expenses and other 163,201 166,977
----------- -----------
Total Current Assets 9,457,441 7,998,358
----------- -----------
Property and Equipment
Telecommunications equipment 5,343,311 5,031,047
Equipment 1,719,358 1,690,490
Software 653,922 652,422
Office furniture and fixtures 157,006 157,006
Leasehold improvements 621,779 46,671
----------- -----------
8,495,376 7,577,636
Less accumulated depreciation and amortization 5,362,490 4,708,113
----------- -----------
Total Property and Equipment, net 3,132,886 2,869,523
----------- -----------
Other assets, principally deposits, net 88,348 153,583
----------- -----------
Total $12,678,675 $11,021,464
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 (unaudited) 1998
---------------- ------------
<S> <C> <C>
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Note payable $ 888,427 $ 1,121,341
Capital lease obligations, current portion 206,735 226,968
Accounts payable 5,740,425 4,372,548
Accrued commissions 987,338 891,318
Accrued expenses and other 1,105,819 790,699
State and Federal taxes payable 935,290 961,731
Deferred revenue 745 2,887
----------- -----------
Total Current Liabilities 9,864,779 8,367,492
----------- -----------
Long-Term Liabilities
Capital lease obligations, net of current portion 53,432 149,792
----------- -----------
Commitments and Contingencies
Redeemable preferred stock, $.01 par, authorized
150,000 shares; 30,000 shares issued
and outstanding 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:
20,239,894 shares in 1999
20,077,144 shares in 1998 20,240 20,077
Additional paid-in capital 11,218,456 9,514,075
Accumulated deficit (8,808,013) (7,358,853)
----------- -----------
2,430,683 2,175,299
Common stock held in treasury
(219,000 shares in 1999 and 1,119,000 in 1998),
at cost (219) (1,119)
----------- -----------
2,430,464 2,174,180
----------- -----------
Total $12,678,675 $11,021,464
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
US WATS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $10,236,755 $11,844,652 $19,422,316 $23,715,902
Cost of sales 7,322,818 8,538,178 13,592,560 17,154,015
----------- ----------- ----------- -----------
Gross profit 2,913,937 3,306,474 5,829,756 6,561,887
Selling, general and administrative expenses 3,687,310 3,247,700 7,244,541 6,858,746
----------- ----------- ----------- -----------
(Loss) Income from operations (773,373) 58,774 (1,414,785) (296,859)
Other Income (expense)
Interest income 42,232 41,237 68,580 58,168
Interest expense (40,713) (64,542) (89,462) (124,133)
----------- ----------- ----------- -----------
(Loss) income before income taxes (771,854) 35,469 (1,435,667) (362,824)
Income tax expense 0 0 0 0
----------- ----------- ----------- -----------
Net (loss) income (771,854) 35,469 (1,435,667) (362,824)
Preferred dividends 6,750 6,750 13,500 13,500
----------- ----------- ----------- -----------
Net (Loss) Income available to common shareholders $ (778,604) $ 28,719 $(1,449,167) $ (376,324)
=========== =========== =========== ===========
Net (Loss) per share available
to common shareholders $ (.04) $ -- $(.07) $(.02)
=========== =========== =========== ===========
Weighted average number of shares outstanding 20,002,795 19,479,945 19,528,648 18,610,198
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
-5-
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
--------------------------
<S> <C> <C>
OPERATING ACTIVIES
Net income (loss) before preferred dividends $(1,435,667) $ (362,824)
Adjustments to reconcile net income (loss)
to net cash provided by (used-in) operating activities
Issuance of stock options 10,403
Depreciation and amortization 661,457 514,211
Provision for bad debts 227,781 472,394
Changes in assets and liabilities which provided
(used) cash:
Accounts receivable (1,048,170) (447,901)
Prepaid expenses and other 3,776 (83,778)
Other assets 58,155 (34,794)
Deferred revenue (2,142) (53,495)
Accounts payable and accrued expenses 1,779,017 (1,159,318)
State and Federal Taxes payable (26,441) (277,797)
----------- -----------
Net cash provided by (used in) operating activities 228,169 (1,433,302)
----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (917,740) (54,574)
----------- -----------
Net cash (used in) investing activities (917,740) (54,574)
----------- -----------
FINANCING ACTIVITIES
Proceeds from private placement 1,530,000
Proceeds from stock option exercises 165,048 2,572,482
Increase (decrease) in notes payable net (232,914) 332,441
Repayment of capital lease obligations (116,593) (138,981)
Preferred stock dividends (13,500) (13,500)
Short swing profit proceeds -- 2,480,979
----------- -----------
Net cash provided by financing activities 1,332,041 5,233,421
----------- -----------
Net increase in cash 642,470 3,745,545
Beginning cash and cash equivalents 1,665,485 1,588,267
----------- -----------
Ending cash and cash equivalents $ 2,307,955 $ 5,333,812
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated 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 and California (on-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
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 and six
months ended June 30, 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.
-7-
<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 is in the process of replacing its Dex 400 switch in Philadelphia as
a result of the switch's capacity limitations and lack of Year 2000 compliance.
The Company anticipates that the switch and the associated network will be fully
migrated by no later than the end of the third quarter of 1999. Therefore, the
Company 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.
-8-
<PAGE>
Deferred Financing Costs
Loan origination costs are amortized 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 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 six and three months ended
June 30, 1999 and 1998, the Company's potential common stock equivalents have
either an antidilutive or 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.
-9-
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
Potential Common Shares resulting from: 1999 1998
---- ----
<S> <C> <C>
Stock Options 497,844 725,868
Stock Warrants 0 269,827
Cumulative, Convertible, Redeemable Preferred Stock 300,000 300,000
------- ---------
797,844 1,295,695
======= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30,
Potential Common Shares resulting from: 1999 1998
---- ----
<S> <C> <C>
Stock Options 395,433 607,283
Stock Warrants 0 0
Cumulative, Convertible, Redeemable Preferred Stock 300,000 300,000
------- -------
695,433 907,283
======= =======
</TABLE>
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 Statement of Financial Accounting Standards 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 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.
-10-
<PAGE>
Reclassification of Accounts
Certain reclassifications have been made to conform prior years' balances to the
current year presentation.
3. Note Payable
- ----------------
In May the Company negotiated the terms of the Loan and Security Agreement with
Century Business Credit Corporation for the renewal of three successive one year
periods beginning on May 11, 1999. Interest for the new term is calculated at
prime plus 2 3/4%. The renewal period includes a revolving $2,000,000 credit
facility with 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.
4. Litigation
- ---------------
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. On June 9,
1999, the court issued its decision and judgment was entered in favor of Mr.
Scully and against the Company and two former officers for the sum of
$626,442.20. The Court denied Mr. Scully's claim for attorneys' fees and
liquidated damages. An additional amount of $376,000 was accrued during the
quarter ended June 30, 1999 to increase the reserve to the full judgement amount
and was recorded in SG&A expenses. The Company has appealed the decision and
maintains that the Court made a number of errors of law and that the Court
applied the wrong measure of damages. Mr. Scully has advised that he intends to
appeal as well.
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 that effect.
-11-
<PAGE>
5. OTHER SALES INFORMATION
- ----------------------------
Net sales information by the Company's product groups for the six months ended
June 30 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Amount % Amount %
------ ------
<S> <C> <C> <C> <C>
Domestic 1+ $ 9,577,216 49 $10,487,557 44
International 3,674,937 19 5,766,008 24
Inbound 3,439,815 18 3,565,444 15
Wireless 579,279 3 920,281 4
Domestic Carrier Termination 2,151,069 11 2,976,612 13
----------- ---- ----------- ---
Total $19,422,316 100% $23,715,902 100%
=========== ==== =========== ===
</TABLE>
-12-
<PAGE>
Item 2.
- ------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Certain information contained herein may include "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. All statements, other than statements of historical facts included in
this report are forward-looking statements. Such statements are subject to
certain risks and uncertainties, including but not limited to: changes in
general economic conditions, increasing levels of competition in the
telecommunications industry, changes in telecommunications technologies, changes
in FCC regulations, the Company's reliance on transmission facilities based
carriers, risks involved in conducting international operations, the inability
to generate sufficient revenues to meet debt service obligations and operating
expenses, unanticipated costs associated with the Company's recent and future
acquisitions and the failure of the Company to manage its growth effectively.
Should one or more of these risks or uncertainties materialize, actual results
may vary materially from those estimated, anticipated or projected. Although the
Company believes that the expectations reflected by such forward-looking
statements are reasonable based on information currently available to the
Company, no assurance can be given that such expectations will prove to have
been correct. Cautionary statements identifying important facts that could cause
actual results to differ materially from the Company's expectations are set
forth in this report. All forward-looking statements included herein are
expressly qualified in their entirety by these cautionary statements.
RESULTS OF OPERATIONS
The Company's revenues increased over the prior quarter by approximately
$1,051,000 (11%) from the level recorded for the quarter ended March 31, 1999,
although revenues decreased by approximately $1,608,000 (14%) over the quarter
ended June 30, 1998.
Three Months ended June 30, 1999 compared with Three Months ended June 30, 1998
- -------------------------------------------------------------------------------
The Company's total revenue for the quarter ended June 30, 1999 decreased
$1,608,000 over the second quarter ended June 30, 1998, or 14%. Approximately
$706,000 (44%) of the revenue decrease from the quarter ended June 30, 1998 was
due to a decline 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 $.025 from the three months ended June 30, 1998 to $.104 in the three months
ended June 30, 1999. In addition, approximately $427,000 (27%) of the decrease
was due to a decline in revenue from the carrier channel (sales to other carrier
customers). Similar to the retail sales channel, the average selling price per
minute in the carrier sales channel also decreased from the quarter ended June
30, 1998 as a result of strong competition. However, revenue from the carrier
sales channel has increased approximately $612,000 (33%) from the quarter ended
March 31, 1999. In the second quarter of 1999, the Company was successful in
increasing carrier sales to higher levels while maintaining strong credit
control procedures. Finally, approximately $282,000 (18%) of the revenue
decrease was due to a decline in international callback revenue. This revenue
decrease was attributed to the Company's decision to gradually exit the
International Callback business. This decision was based primarily on the
telecommunication deregulation in European and Asian countries. As pricing for
long distance services decreases in these areas, the international callback
business as a whole is diminishing.
For the quarter ended June 30, 1999, gross profit as a percentage of revenue has
remained relatively unchanged at approximately 28.5% versus 27.9% for the
quarter ended June 30, 1998. As retail selling rates have decreased management
has been able to negotiate lower costs from significant off-net vendors and
anticipates this trend to continue going forward. As an example, the Company
lowered the cost of certain underlying facilities by approximately $45,000 per
month. This decrease will be realized in the third quarter of 1999. Overall, the
Company's gross profit decreased approximately $393,000, mainly due to the
decrease in revenue as noted above.
Selling, General, and Administrative ("SG&A") expenses for the second quarter
ended June 30, 1999 increased approximately $440,000, or 14% over the amount for
the second quarter ended June 30, 1998. Of this increase, approximately
$376,000 was attributed to an additional legal accrual necessary for a lawsuit
judgment (see footnote 4). SG&A expense as a percentage of revenue increased
from 27.4% during the quarter ended June 30, 1998 to 36.0% for the quarter ended
June 30, 1999. This increase is a result of the decrease in revenues and the
increase in legal expenses as noted above.
For the second quarter ended June 30, 1999, interest expense incurred by the
Company decreased by approximately $24,000 from the quarter ended June 30, 1998.
This decrease was due to a decrease in long-term debt during the quarter ended
June 30, 1999.
The Company recorded a net loss for the quarter ended June 30, 1999 of
approximately $772,000 versus net income of approximately $35,000 for the
quarter ended June 30, 1998, a decrease of approximately $807,000. As a result
of gross profit as a percentage of revenues remaining relatively the same, the
net
-13-
<PAGE>
loss reported in 1999 is due to the decrease in revenues and the additional
legal expense of approximately $376,000 as noted above.
Six Months ended June 30, 1999 compared with Six Months ended June 30, 1998
- ---------------------------------------------------------------------------
The Company's total revenue for the six months ended June 30, 1999 decreased
approximately $4,294,000 over the six months ended June 30, 1998, or 18%. This
decrease was primarily due to a decrease in revenue through the carrier sales
channel of approximately $1,651,000 (38%). In addition, approximately $835,000
(19%) of the revenue decrease was due to a decrease in international callback
revenue. This revenue decrease was due to deregulation in the
telecommunications industry in European and Asian countries. As pricing for
long distance services decreases in these areas, the international callback
business as a whole is diminishing. Finally, approximately $1,467,000 (34%) of
the revenue decrease from the six months ended June 30, 1998 was due to a
decline in 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 $.023 from the six
months ended June 30, 1998 to the six months ended June 30, 1999.
The Company's gross profit for the six months ended June 30, 1999 decreased
approximately $732,000 (11%) over the six months ended June 30, 1998. The
decrease in gross profit is due to the decrease in revenue as noted above.
However, the Company's gross profit margin increased from 27.7% for the six
months ended June 30, 1998 to 30.0% for the six months ended June 30, 1999.
Management has been able to negotiate lower costs from significant off-net
vendors and anticipates this trend to continue going forward
SG&A expenses for the six months ended June 30, 1999 were approximately $386,000
higher than the amount incurred for the six months ended June 30, 1998. Of this
increase, approximately $105,000 was due to accelerating the depreciation of
assets associated with the Philadelphia switch (see footnote 2 under Property
and Equipment). Also, approximately $376,000 was attributed to an additional
legal accrual necessary for a lawsuit judgment (see footnote 4). In addition
salary expense increased approximately $52,000 due to increased personnel in
1999. These increases in SG&A expenses were offset by a decrease in bad debt
expense of approximately $245,000. The Company's bad debt expense was
approximately (1.2%) of revenue for the six months ended June 30, 1999 compared
with (2.0%) of revenue for the six months ended June 30, 1998. SG&A expense for
the six months ended June 30, 1999 was 37.3% of revenue, compared to SG&A
expense for the six months ended June 30, 1998 of 28.9%. This increase was
attributed to the increase in depreciation and legal expenses as well as the
decrease in revenues as noted above.
For the six months ended June 30, 1999, interest expense incurred by the Company
decreased by approximately $35,000 form the six months ended June 30, 1998. This
decrease was due to a decrease in long-term debt and more favorable interest
rates during the quarter ended June 30, 1999.
The Company recorded a net loss for the six months ended June 30, 1999 of
approximately $1,436,000 versus a net loss of approximately $363,000 for the six
months ended June 30, 1998, an increase of approximately $1,073,000. This
increase was mainly due to the decrease in revenues as well as an increase in
SG&A expenses as a percentage of revenue as noted above.
-14-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, cash and cash equivalents were approximately $2,308,000. Cash
flow provided by operations in the first six months of 1999 was approximately
$228,000. Net cash used in investing activities was approximately $918,000,
which resulted from the purchase of property and equipment.
Working capital at June 30, 1999 was approximately $(407,000) as compared to
approximately $(369,000) at December 31, 1998. The decrease in working capital
was primarily due to the legal expense accrual previously noted above.
The Company's working capital ratio (current assets divided by current
liabilities) remained the same at .96:1.00 from December 31, 1998 to June 30,
1999. The Company's cash balance increased approximately $642,000 from its
balance at December 31, 1998. This was mainly due to a private placement of
common stock in the amount of $1,530,000 offset by an increase of property and
equipment of approximately $918,000, mainly due to the build out and
installation of the new switch in Philadelphia.
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. As of June 30, 1999, the Company's
outstanding balance on its credit facility was approximately $888,000, leaving
approximately $1,112,000 available for future borrowing under the credit
facility.
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.
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 third 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 $2.0 million. Approximately $1.8
million has been incurred as of June 30, 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
-15-
<PAGE>
appropriate assurances that those third parties are or will be Year 2000
compliant. As of the date of this Report 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 contingency plans, if they are required to be
implemented, 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.
Item 3
- ------
Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
-16-
<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:
Financial Data Schedule, Exhibit No. 27.
(b) Reports on Form 8-K:
On June 29, 1999, the Company filed Form 8-K regarding the
Court's decision in the lawsuit filed by the former President,
Mark Scully.
-17-
<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: August 16, 1999
-18-
<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 SIX MONTHS ENDED JUNE
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,307,955
<SECURITIES> 0
<RECEIVABLES> 7,694,433
<ALLOWANCES> 708,148
<INVENTORY> 0
<CURRENT-ASSETS> 9,457,441
<PP&E> 8,495,376
<DEPRECIATION> 5,362,490
<TOTAL-ASSETS> 12,678,675
<CURRENT-LIABILITIES> 9,864,779
<BONDS> 53,432
330,000
0
<COMMON> 20,240
<OTHER-SE> 2,410,224
<TOTAL-LIABILITY-AND-EQUITY> 12,678,675
<SALES> 0
<TOTAL-REVENUES> 19,422,316
<CGS> 0
<TOTAL-COSTS> 13,592,560
<OTHER-EXPENSES> 7,016,760
<LOSS-PROVISION> 227,781
<INTEREST-EXPENSE> 89,462
<INCOME-PRETAX> (1,435,667)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,435,667)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,435,667)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
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