U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A-1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 1996
-------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___________ to _____________
Commission File Number 0-20922
-------------
TOTAL WORLD TELECOMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 75-2274730
- ------------------------------------ ----------------------------------------
(State or jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3200 North Military Trail, Suite 300, Boca Raton, Florida 33431
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(561) 997-5880
---------------------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 in the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 7,843,368 shares as of January
30, 1997.
<PAGE>
TOTAL WORLD TELECOMMUNICATIONS, INC.
INDEX
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets -- December 31, 1996 and September
30, 1996
Consolidated Statements of Operations -- Three Months Ended
December 31, 1996 and 1995
Consolidated Statements of Cash Flows -- Three Months Ended
December 31, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Financial Statements, Pro Forma Financial Information and
Exhibits
2
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TOTAL WORLD TELECOMMUNICATIONS, INC.
------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
Dec. 31, 1996 Sept. 30, 1995
------------- --------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 4,819,837 $ 1,358,414
Cash - in trust 664,456 345,606
Accounts receivable, net 7,925,024 8,200,085
Due from employees and
related parties 152,741 962,640
Mortgages held for resale 8,322,140 7,442,385
Prepaid expenses and
other current assets 3,136,036 1,058,320
----------- -----------
Total current assets 25,020,234 19,367,450
----------- -----------
PROPERTY AND EQUIPMENT, at cost
(net of accumulated depreciation
of $2,438,468 (unaudited) and
$2,092,897, respectively 5,190,877 5,125,832
----------- -----------
OTHER ASSETS:
Property and plant, held for
resale, net of accumulated
depreciation of $759,861
(unaudited) and $726,624,
respectively 6,317,276 6,179,754
Intangible assets, (net of
accumulated amortization
of $1,486,465 (unaudited)
and $2,763,777, respectively 44,427,541 41,332,087
Other 482,343 998,921
----------- -----------
51,227,160 48,510,762
----------- -----------
Total assets $81,438,271 $73,004,044
=========== ===========
See accompanying notes to financial statements.
3
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TOTAL WORLD TELECOMMUNICATIONS, INC.
------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Dec. 31, 1996 Sept. 30, 1995
------------- --------------
(Unaudited)
CURRENT LIABILITIES:
Notes payable and current
portion of long-term debt $ 13,697,465 $ 6,594,453
Warehouse lines of credit 8,759,864 7,864,992
Accounts payable 9,343,623 9,133,554
Accrued expense
and other liabilities 2,861,606 3,868,434
Due for redemption of stock 3,459,270 2,625,000
Due to stockholders 61,000 42,421
------------ ------------
Total current liabilities 38,182,828 30,128,854
LONG-TERM DEBT 3,361,999 2,567,066
------------ ------------
CREDIT ARISING FROM DISPUTED
TRANSACTION -- 1,500,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.00001 par
value, 10,000,000 shares
authorized, 528,400 shares
issued and outstanding 13 12
Common Stock, $.00001 par value,
100,000,000 shares authorized,
7,050,296 shares (unaudited)
and 6,635,525 shares issued,
respectively 2,916 66
Additional paid-in capital 81,056,415 74,973,115
Unearned compensation (4,927,394) (5,203,695)
Accumulated deficit (35,498,506) (30,221,374)
Treasury stock at cost,
55,933 shares (740,000) (740,000)
------------ ------------
39,893,444 38,808,124
------------ ------------
Total liabilities and
stockholders' equity $ 81,438,271 $ 73,004,044
============ ============
See accompanying notes to financial statements.
4
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TOTAL WORLD TELECOMMUNICATIONS, INC.
------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the Three Months
Ended December 31,
1996 1995
------------ ------------
(Unaudited)
REVENUES:
Telecommunications $ 8,922,290 $ --
Real estate brokerage fees 1,529,997 1,380,284
Audit fees 234,514 171,810
------------ ------------
10,686,801 1,552,094
COST OF SALES:
Telecommunications 8,072,718 --
Real estate commissions 1,310,166 1,281,779
Direct audit expenses 169,490 163,126
------------ ------------
9,552,374 1,444,905
GROSS PROFIT 1,134,427 107,189
------------ ------------
OPERATING EXPENSES:
Selling, general and
administrative 5,119,080 1,175,407
Depreciation and amortization 1,404,196 149,221
------------ ------------
6,523,276 1,324,628
------------ ------------
Loss from operations (5,388,849) (1,217,439)
------------ ------------
OTHER INCOME (EXPENSE):
Rental income 89,496 67,241
Rental expenses, including
depreciation of $33,238 for
1996 and $31,339 in 1995 (80,674) (74,410)
Interest expense (1,401,136) (67,352)
Interest income 34,942 93
Other income (expense) 1,469,089 202,864
------------ ------------
Total other expense 111,717 128,436
------------ ------------
Net loss $ (5,277,132) $ (1,089,003)
============ ============
NET LOSS PER COMMON SHARE $ (.77) $ (.86)
============ ============
NUMBER OF SHARES USED
IN COMPUTATION 6,838,853 1,268,789
============ ============
See accompanying notes to financial statements
5
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TOTAL WORLD TELECOMMUNICATIONS, INC.
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Three Months
Ended Dec. 31,
1996 1995
------------ ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,277,132) $ (1,089,003)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 422,567 180,560
Amortization of intangible assets 1,207,645 --
Issuance of debt for payment of
interest on debentures 1,009,149 --
Credit arising from disputed transaction (1,500,000) --
Issuance of common stock to employees
and shareholders -- 12,921
(Increase) decrease in accounts receivable 815,154 (245,751)
Increase (decrease) in mortgages held for sale (879,755) (8,528,751)
(Increase) decrease in advances to
employees and stockholders 883,664 (39,294)
(Increase) (decrease) in prepaid expenses
and other current assets 523,189 (126,146)
(Increase) decrease in other assets 516,578 (15,291)
(Decrease) increase in accounts payable
and accrued expense (2,821,259) 269,338
------------ ------------
Net cash provided by (used in)
operating activities (6,146,578) (9,581,427)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisition of subsidiaries (3,423,765) --
Capital expenditures (521,586) (109,000)
------------ ------------
Net proceeds used in investing activities (3,945,351) (109,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Series T Preferred Stock (1,348,422) --
Payments for repurchase of common stock (10,409,330) --
Proceeds from notes payable & long term debt 7,446,000 300,000
Proceeds from officers 55,000 --
Payments of amounts due to officers (20,000) (59,829)
Payments of notes payable and
long-term debt (2,380,278) (395,598)
Proceeds from warehouse lines -- 8,266,894
Net proceeds from issuance of common stock
per Reg S 1,082,751 --
Net proceeds from issuance of common stock -- 1,494,898
Net proceeds from issuance of convertible
preferred stock 20,782,124 --
Preferred stock dividends paid (1,368,000) (14,600)
------------ ------------
Net cash provided financing activities 13,839,845 9,591,765
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 3,747,916 (98,662)
CASH received in acquisition of SOW and N'Touch 32,357 --
CASH AND CASH EQUIVALENTS, beginning of period 1,704,020 1,130,843
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 5,484,293 $ 1,032,181
============ ============
NON-CASH FINANCING TRANSACTIONS:
Dividends accrued on Series and
Series N Preferred Stock $ 1,236,400 $ --
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid $ 50,687 $ 52,331
============ ============
See accompanying notes to financial statements
6
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TOTAL WORLD TELECOMMUNICATIONS, INC.
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
December 31, 1996
(1) GENERAL:
-------
The interim December 31, 1996 and 1995 unaudited financial statements, in
the opinion of management, include all adjustments (consisting of only normal
recurring accruals) considered necessary for a fair presentation of financial
position as of such date and earnings and cash flows for the periods then ended.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is recommended that these interim
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-KSB for the fiscal year ended September 30, 1996.
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. Operating results for the three-month period ended December
31, 1996 are not necessarily indicative of the results that may be expected for
the year ended September 30, 1997.
(2) ACQUISITIONS:
------------
On November 5, 1996, the Company acquired 100 percent of the outstanding
stock of Southwestern Telecom, Inc. ("SOW"), San Antonio, Texas, a "casual-user"
direct-dial long distance company. The purchase price for the acquisition was
$1,023,765 in cash.
The transaction is being accounted for as a purchase. the excess purchase
price over the estimated fair value of assets was approximately $971,000 and is
being amortized using the straight line method over 15 years. The operations and
financial portion of SOW were accounted for in the consolidated financial
statements of the Company beginning in November 1996.
On December 16, 1996, the Company completed the acquisition of all of the
capital stock of NETTouch Communications, Inc., Dallas, Texas ("NETTouch"). In
7
<PAGE>
consideration for the acquisition, the Company paid to the principal
shareholders of NETTouch, $2,400,000 and issued a Common Stock Purchase Warrant
(the "Warrants") to acquire shares of Common Stock of the Company on or prior to
December 31, 2000 at an exercise price of $7.75 per share. In addition,
commencing with the month ended November 30, 1996, the Company is obligated to
make additional payments to such shareholders up to an aggregate of $4,800,000
based on NETTouch achieving incremental revenues, as defined. The actual number
of Warrants to be received is predicated on the level of revenues periodically
obtained by NETTouch during the 1997 calendar year. The principal shareholder of
NETTouch was Telecommunications Resources, Inc. ("TRI") also from Dallas, TX.
TRI is a software developer and provider of telecommunications platforms which
converge technologies and telecommunications services, such as worldwide
long-distance, voice mail, virtual fax, travel card, wireless messaging
notification, enhanced "follow me" features, conference calling, paging,
internet access, text-to-screen e-mail, website development and hosting, and the
convenience of single 1- 800/888 numbers. NETTouch currently markets these
bundled services under the brand name "N'Touch." Pursuant to the acquisition
agreement, N'Touch as a wholly-owned subsidiary of the Company will receive
licensing rights to market TRI's future products and services to the home-based
business segment.
The transaction is being accounted for as a purchase. the excess purchase
price over the estimated fair value of assets was approximately $2,840,000 and
is being amortized using the straight line method over 15 years. The operations
and financial portion of SOW were accounted for in the consolidated financial
statements of the Company beginning in December 1996.
(3) FINANCIAL CONDITION:
-------------------
Since inception, the Company has incurred substantial losses, and as of
December 31, 1996, has an accumulated deficit of $35,498,506. The Company,
through its wholly-owned subsidiary Financial Standards Group, Inc. ("FSGI"),
commenced revenue producing operations in October 1991. The Company's working
capital requirements to date have been satisfied through cash on hand, proceeds
from private placements, certain loans from private individuals and private
financings with a limited number of non-resident institutional investors
conducted pursuant to Regulation S of the federal securities laws.
The foregoing matters and uncertainties raise substantial doubt about the
Company's ability to continue as a going concern. The Company is currently
negotiating with several alternative financing sources in order to secure
sufficient funding to support its contemplated expansions and acquisitions.
While the Company believes that it will have the opportunity to attain
additional financial support, no assurances can be provided that the Company
will be able to secure sufficient funding in order to complete its financial
program or achieve its strategic plans.
8
<PAGE>
(4) LEGAL PROCEEDINGS:
-----------------
(a) On July 16, 1996, the Company's subsidiary entered into an agreement
to purchase all of the voting stock of The Financial Group ("TFG") from its
shareholders ("Shareholders"), and upon consummation of that agreement, TFG
became a wholly-owned subsidiary of the Company. At the time of purchase, TFG
conducted a mortgage banking business and was involved in the origination,
purchase and sale of residential mortgage loans. TFG presently continues to
operate a mortgage banking business. As part of the stock purchase transaction,
TFG entered into an agreement with the Shareholders to allow them to operate a
net branch and originate residential mortgage loans under TFG's regulatory
licenses and approvals. On December 17, 1996, TFG received a letter from counsel
to the Shareholders which alleged numerous breaches, defaults and
misrepresentations by the Company in connection with the net branch operation.
The Shareholders have proposed a compromise pursuant to which the Company would
pay approximately $6,400 of accounting fees and computer conversion costs
allegedly incurred by the Shareholders, waive prior advances to the Shareholders
in the amount of approximately $12,000, and the parties would execute mutual
releases of all obligations between the parties. The Company disputes those
allegations and intends to vigorously defend against these claims.
(b) On July 1, 1995, the Company executed a Convertible Promissory Note in
the original principal amount of $956,250 (which is included as a liability in
the Company's balance sheet) in favor of Christian E. Carlsen, as Trustee under
a Land Trust Agreement dated September 19, 1992 ("Carlsen"). The Carlsen Note
matured on December 31, 1996, and remains unpaid. On January 6, 1997, the
Company received written Notice of Default from Carlsen as to the payment of
principal and interest. The Company is evaluating certain of the circumstances
concerning the initial incurrence of the obligation in connection with the
Company's 1994 acquisition of Membership Realty Limited, Inc. and expects to
commence negotiations concerning the Carlsen Note with Carlsen in the proximate
future. In the absence of settlement, the Company expects Carlsen to file suit
to collect on the Carlsen Note.
(c) On or about October 2, 1996, Jalmark Realty, Inc., an involuntarily
dissolved Florida Corporation, and Jalmark East Realty, Inc., a Florida
corporation, filed a Complaint against the Company, Real Estate Services Network
Holding Corp., its subsidiary and Mr. Francesco Morello, an officer of the
latter. The suit relates to an alleged breach of a 1995 agreement pursuant to
which RESN had allegedly agreed to purchase the real estate brokerage business
of Jalmark Realty, Inc. for $250,000. In addition to the breach of contract
count, the Complaint alleges numerous other counts, including, but not limited
to, for fraudulent misrepresentations, tortious interference with business
relationship, defamation and violations of Florida real estate laws. The
9
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Plaintiffs have alleged damages in excess of $15,000, exclusive of interest and
costs, and have reserved the right to amend the Complaint to seek punitive
damages. The Defendants have filed a motion to dismiss the Complaint for failure
to state a cause of action. The motions to dismiss are set for hearing in early
February 1997. At the present time, no discovery has been conducted in this
case.
(d) A case was filed on January 11, 1996 by the Addison Terry Company, a
business brokering firm, against Total National Telecommunications Inc. (TNT).
The plaintiff claims in this lawsuit that it is owed a brokerage fee of $95,000
for the services it provided in connection with possible financing for TNT. TNT
signed a commitment letter, but no final agreement was reached, and no financing
was obtained. The plaintiff claims, however, that it is entitled to its
brokerage fee due to the signing of the commitment letter. The plaintiff sues
for the brokerage fee, attorneys' fees, pre-judgment interest, post-judgment
interest and costs of suit. TNT denies that the brokerage fee is owed and
intends to defend itself against the plaintiff's claim. Further TNT has filed
counterclaims against the plaintiff asserting causes of action for breach of
contract, breach of fiduciary duty, negligence, negligent misrepresentation and
violation of the Texas Deceptive Trade Practices Act. TNT seeks to recover
actual damages in the total amount of $165,000, exemplary damages, pre-judgment
and post-judgment interest, attorneys' fees and costs of suit. The case is
currently in the discovery stage, and the parties have jointly moved for a
continuance of the January 6, 1997 trial date.
The following matters (items e, f, g and h) aggregating $880,000 are included in
accrued expenses and other liabilities.
(e) On June 20, 1996, the Federal Communications Commission ("FCC") issued
a Notice of Apparent Liability proposing to assess a forfeiture against the
Company in the amount of $200,000 for unauthorized conversion of five long
distance customer accounts.
The Company filed a Response with the FCC on July 29, 1996 arguing
that the proposed forfeiture amount be reduced. While the FCC is presently in
the process of reviewing the Company's Response, the Company is exploring the
possibility of a settlement with the FCC regarding this matter. At September 30,
1996, the Company has accrued $200,000 relating to this matter.
(f) In July 1996, a civil action was filed against Heartline
Communications, Inc. by the Attorney General in the State of New York.
Negotiations have proceeded, and it is estimated the monetary exposure in this
matter to be approximately $100,000, which the Company has accrued at September
30, 1996.
(g) In June 1996, a civil action was filed by the Middlesex County Office
of Consumer Affairs in New Jersey. This has not been consolidated with an action
by the Office of the Attorney General of New Jersey. Negotiations are ongoing in
this, and it is anticipated that the monetary settlement range here will be near
$80,000, which has been accrued.
10
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(h) On August 30, 1996, an administrative subpoena was issued by the
Orange County District Attorney's ("OCDA") office requesting information
regarding the marketing of telecommunication services in California by Heartline
and TWT. Although a formal proceeding has not been instituted, the OCDA asserts
that Heartline/TWT may have violated Business and Professions Code sections
17200 and 17500. These code sections provide for civil penalties for unlawful
and unfair business practices and false or misleading advertising. By letter
dated December 11, 1996, the OCDA demanded in excess of $1,000,000 in return for
resolving the matter without litigation. Counsel believes the OCDA's demand
exceeds any reasonable estimate of Heartline/TWT's liability, and has been
instructed by TWT to vigorously defend the Company against these claims while
continuing to explore a reasonable settlement. The Company had charged
operations for $500,000 which has been accrued at September 30, 1996.
(i) On April 10, 1996, the California Public Utilities Commission
("Commission") issued an Order Instituting Investigation into the operations of
Heartline, Total National Telecommunications, Inc. ("TNT") d/b/a Total World
Telecom ("TWT") and their affiliates alleging that Heartline/TWT had violated
regulations governing how long distance telephone customers are switched from
one interexchange carrier to another.
On August 13, Heartline/TWT and Commission staff entered into a
settlement agreement to resolve the disputes among them and to settle and
forever dispose of all issues raised. The settlement agreement was approved by
the Commission on December 9, 1996. Pursuant to the settlement agreement, TWT is
prohibited from offering retail long distance service in California for a period
of forty months. In addition, TWT is required to pay $35,000 to the Commission's
general fund and refund $20.00 to all customers whose long distance telephone
service was allegedly switched to TWT/Heartline without proper authorization.
These customers may also seek additional restitution through arbitration. While
the exact amount of TWT's exposure as a result of the settlement agreement is
unknown at this time, the Company has accrued $635,000 for this matter which
adjusted the amounts of liabilities assumed during the TNT acquisition.
(j) In June of 1996, a Class Action Complaint was filed in Cook County,
Illinois against Heartline Communications, Inc. and several other defendants.
This action was dismissed by the judge on November 26, 1996. The plaintiffs had
until December 24, 1996 to refile their petition; however, as of this date,
Heartline has not been notified of any refiling.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS CERTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND SECTION 21F OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SPECIFICALLY, ALL STATEMENTS OTHER
THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS REPORT REGARDING THE
COMPANY'S FINANCIAL POSITION, BUSINESS STRATEGY AND PLANS AND OBJECTIVES OF
MANAGEMENT OF THE COMPANY FOR FUTURE OPERATIONS ARE FORWARD-LOOKING STATEMENTS.
THESE FORWARD-LOOKING STATEMENTS ARE BASED ON THE BELIEFS OF THE COMPANY'S
MANAGEMENT, AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE
TO THE COMPANY'S MANAGEMENT. WHEN USED IN THIS REPORT, THE WORDS "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "EXPECT" AND "INTEND" AND WORDS OR PHRASES OF SIMILAR
IMPORT AS THEY RELATE TO THE COMPANY OR COMPANY'S MANAGEMENT, ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT VIEW OF
THE COMPANY WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO CERTAIN RISKS,
UNCERTAINTIES AND ASSUMPTIONS RELATED TO CERTAIN FACTORS INCLUDING, WITHOUT
LIMITATIONS, COMPETITIVE FACTORS, GENERAL ECONOMIC CONDITIONS, CUSTOMER
RELATIONS, RELATIONSHIPS WITH VENDORS, THE INTEREST RATE ENVIRONMENT, COST OF
CAPITAL, GOVERNMENTAL REGULATION AND SUPERVISION, THE OPERATION OF THE COMPANY'S
NETWORKS, TRANSMISSION COSTS, TECHNOLOGICAL CHANGE, CHANGES IN INDUSTRY
PRACTICES, DISRUPTIONS ASSOCIATED WITH EXPANSION, ONE-TIME EVENTS AND OTHER
FACTORS DESCRIBED HEREIN. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS
ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO BE
CORRECT. BASED UPON CHANGING CONDITIONS, SHOULD ANY ONE OR MORE OF THESE RISKS
OR UNCERTAINTIES MATERIALIZE, OR SHOULD ANY UNDERLYING ASSUMPTIONS PROVE
INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS
ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED OR INTENDED. ALL SUBSEQUENT WRITTEN
AND ORAL FORWARD- LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS
ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE APPLICABLE
CAUTIONARY STATEMENTS.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended December 31, 1996 Compared to Three Months Ended December 31,
- --------------------------------------------------------------------------------
1995
- ----
Revenue
-------
Three Months Ended Dec. 31,
---------------------------
1996 1995
---- ----
Telecommunications $ 8,922,290 $ -
Real Estate 1,529,997 1,380,284
Auditing Services 234,514 171,810
----------- -----------
Total Revenue $10,686,801 $ 1,552,094
=========== ===========
12
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Gross Profit
Three Months Ended Dec. 31,
---------------------------
1996 1995
---- ----
Telecommunications $ 849,572 $ -
Real Estate 219,831 98,505
Auditing Services 65,024 8,684
----------- -----------
Total Gross Profit $ 1,134,427 $ 107,189
=========== ===========
Selling, General and
Administration Expenses
-----------------------
Three Months Ended Dec. 31,
---------------------------
1996 1995
---- ----
Telecommunications $ 3,193,988 $ -
Real Estate 726,278 363,086
Auditing Services 105,155 63,388
Corporate 1,093,659 748,933
----------- -----------
Total S, G & A Expenses $ 5,119,080 $ 1,175,407
=========== ===========
Net Income (Loss)
from Operations
---------------
Three Months Ended Dec. 31,
---------------------------
1996 1995
---- ----
Telecommunications $(2,645,221) $ -
Real Estate (633,722) (161,076)
Auditing Services (42,826) (57,404)
Corporate (2,067,080) (998,959)
------------ ------------
Total Net Income (Loss) from Ops $(5,388,849) $(1,217,439)
============ ============
Net Loss
Three Months Ended Dec. 31,
---------------------------
1996 1995
---- ----
Telecommunications $(2,771,579) $ -
Real Estate (719,303) (119,706)
Auditing Services (42,826) (57,404)
Corporate (1,743,424) (911,893)
------------ ------------
Total Net Income (Loss) $(5,277,132) $(1,089,003)
============ ============
For the three months ended December 31, 1996, the Company had total
consolidated revenue of $10,686,801 in contrast to $1,552,094 for the three
months ended December 31, 1995. The primary reason for the increase in revenues
was due to the acquisition of the telecommunications (TWT) division which
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provided an additional $8,900,000 in revenue, and the expansion and addition of
new offices of the real estate division whose revenues increased by $150,000.
Telecommunications revenue for the quarter ended December 31, 1996 had decreased
by $4,577,000 as compared to the previous quarter due to the "wind down" of the
box business and the related charge backs. Management anticipates that, with the
acquisition of N'Touch and Southwestern Telecom, Inc. and their continuing
growth, revenues will begin to increase on a quarterly basis to the projected
levels.
The Company's consolidated net loss for the three months ended December
31, 1996 was $5,277,132 as compared to $1,089,003 at December 31, 1995. The
December 31, 1996 quarter net loss includes certain expenses which are not
expected to continue relating to the telecommunications segment and the costs
incurred with the phaseout of the "box business." In addition, the Company
realized amortization expenses of approximately $1,208,000 relating to its
intangible assets, as well as $1,009,000 in interest expenses relating to the
discount of the $8,000,000 convertible promissory note.
For the three months ended December 31, 1996, the Company had a gross
profit of $1,134,427 compared to $107,189 for the three months ended December
31, 1995. This increase was attributable to the aforementioned growth in
revenues due to the telecommunications acquisition and the real estate
expansion. For the three months ended December 31, 1996, the Company had a loss
from operations of $5,388,849 as compared to a loss from operations for the
three months ended December 31, 1995 of $1,217,439.
Total other income decreased to $111,717 from $128,436 for the three
months ended December 31, 1996 as compared to the three months ended December
31, 1995. This was due primarily to the reversal of the credit arising from a
disputed transaction of $1,500,000, as well as the interest expense related to
the discount on the convertible promissory note.
During fiscal 1997 the Company expects to achieve profitability through
the growth of its telecommunications segment and by increasing revenues and
controlling costs. The new marketing plans which have been developed and are
being implemented will target new areas of concentration and attract new
business based on the addition of switches and development of marketing programs
focused on the residential segment. Management expects to open the foreign
markets for both the long distance services and N'Touch with recent contracts
being completed in South Africa, Puerto Rico, Venezuela, the Caribbean and a
joint venture involving the European markets which are expected to contribute to
the profit margins during the current fiscal year.
14
<PAGE>
In addition, the installation and operation of the new switch sites will
substantially lower the costs and increase profit margins. As mentioned above,
the Company continues to evaluate the real estate and audit operations. The real
estate division has acquired a mortgage banking company and plans to expand
those operations within the second quarter of fiscal 1997. Additionally, the
real estate branches have begun new marketing programs to attract additional
member agents. With these expansions and cost cutting measures which are also
being implemented, the real estate division should be able to significantly
curtail its losses.
During the three months ended December 31, 1996, the Company had rental
income from its Mount Vernon Distribution Center facility of $89,496 as compared
to rental income during the same period in 1995 totalling $67,241, an increase
of $22,255. This is due to several new tenants, as well as increased space being
utilized by current tenants. For the three months ended December 31, 1996, the
Company had interest expense of $1,401,136 as compared to $67,352 for the three
months ended December 31, 1995, due primarily to the amortization of the
discount on the convertible promissory note.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At December 31, 1996, the Company had operating cash on hand of $4,819,837
as compared to operating cash on hand at December 31, 1995 of $1,358,414. At
December 31, 1996, the Company had a working capital ratio of current assets to
current liabilities of approximately .65. The long-term portion of debt at
December 31, 1996 consisted of the mortgage note payable to Bank One, Mansfield,
relating to the Mount Vernon property, a note payable on the undeveloped Florida
land, the mortgage note payable to Boca First National Bank secured by the
corporate office condo, and the long-term portion of five capital leases for
switches located in Los Angeles, Atlanta, New York, Chicago and Houston.
Net cash used in operating activities was approximately $6,146,578 and
$9,581,427 for the three months ended December 31, 1996 and 1995, respectively.
The cash used in operations of the Company was primarily to fund the operating
losses. Such losses are described above.
Net cash used in investing activities was $3,945,351 and $109,000 for the
three months ended December 31, 1996 and 1995, respectively. This is primarily
attributable to expenses relating to the capital expenses associated with the
addition of new switches for the telecommunications segment as well as the real
estate expansions and renovations in both 1996 and 1995.
15
<PAGE>
Net cash provided by financing activities was $13,839,845 (net of payment
of debt of $2,380,278, dividends paid $1,368,000, and repurchase/redemption of
stock of $11,757,752) and $9,591,765 for the three months ended December 31,
1996 and 1995, respectively. The increase was primarily attributable to the
issuance of the Company's Common Stock and/or convertible Preferred Stock in
private placement offerings and/or sales to accredited offshore investors
pursuant to Regulation S, as well as a discounted convertible promissory note
entered into in the amount of $8,000,000.
During the three months ended December 31, 1996, the Company had financed
its expansion and operations with equity and debt funding. The Company received
net proceeds of $20,782,124 through the issuance of 226,900 shares of its
preferred stock and 661,480 shares of Common Stock pursuant to Regulation S and
$7,440,000 through issuance of its convertible promissory note. The proceeds
from such financing have been used for acquisition and expansions, expenses
connected with the addition of new switches, and the Company's option to
exercise its redemption rights on prior fundings. Additionally, through December
31, 1996, the Company has purchased 1,531,866 shares of its common stock in a
buyback program at a total cost of $10,409,330.
As previously announced, the Company's business focus has been
transforming from credit union auditing and related services and real
estate/mortgage brokerage services to telecommunications operations. TWT has
expanded their switch sites to nine, and expects to complete installation of an
additional switch site in Washington, D.C. by the end of the second quarter.
In November 1996, the Company acquired 100 percent of the outstanding
stock of Southwestern Telecom, Inc. for $1,023,765 in cash. The Company has
formulated a nationwide expansion program to make Southwestern Telecom a leader
in the casual-user direct-dial market by expanding on a geographic basis to
where TWT already has an existing network to better utilize TWT's origination
and termination facilities and to use the tested marketing techniques of
Southwestern Telecom. It is anticipated to take at least eighteen months to
complete the nationwide expansion program.
In December 1996, the Company acquired 100 percent of the outstanding
shares of NETTouch Communications, Inc. from Telecommunications Resources, Inc.,
("TRI"), of Dallas, Texas. The company paid to the principal shareholders of
NETTouch $2,400,000 and issued a Common Stock Purchase Warrant to acquire shares
of the Company's Common Stock at an exercise price of $7.75 per share. In
addition, the Company is obligated to make additional payments to such
shareholders up to an aggregate of $4,800,000 based on NETTouch achieving
16
<PAGE>
incremental revenues, as defined. The actual number of Warrants to be received
is predicated on the level of revenues periodically obtained by NETTouch during
the 1997 calendar year. TRI is a software developer and provider of
telecommunications platforms which converge technologies and telecommunications
services such as worldwide long distance, voice mail, virtual fax, travel card,
wireless messaging notification, enhanced "follow me" features, conference
calling, paging, internet access, text-to-screen e-mail, web site development
and hosting as well as other features into the convenience of single 1-800/888
numbers.
The Company's plans for growth include acquisitions of other
telecommunications companies as well as the addition of new technology and
services. Several new switches are planned to facilitate the future growth and
enhance the profit margins on current business, and the Company will be expected
to pay the remaining legal settlements which were accrued. To achieve this
growth and the necessary working capital, the Company will require additional
funding.
Subsequent to December 31, 1996, the Company has received net proceeds of
$7,562,085 through issuance of its preferred stock pursuant to Regulation S. In
addition, the Company issued a discounted convertible promissory note of
$2,000,000 and received net proceeds of $1,400,000. The proceeds of such
financings have been used primarily to exercise the Company's option of
redemption on prior fundings. The Company had received preliminary commitments
from several institutional investors and institutions to arrange funding. While
the Company has reason to expect the completion of these arrangements, no
assurances can be given that such funds will be provided.
In view of the acquisition of TWT and the focus of the Company's
operations in the telecommunications industry, the Company will evaluate in the
course of the current fiscal year whether the operations of the Company's FSGI
and RESN subsidiaries are complementary. In the event management determines that
these operations are not sufficiently compatible and synergetic, the Company
will consider the sale or other disposition of these subsidiaries or their
operations.
17
<PAGE>
PART II.
ITEM 6. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
------------------------------------------------------------------
(a) Exhibits -- Exhibit 27 - Financial Data Schedule
(Electronic filing only)
(b) The Company filed Form 8-K reports dated October 29, 1996
(item 1 and item 5) and November 8, 1996 (item 5).
18
<PAGE>
SIGNATURE
---------
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 as a duly authorized officer and as the chief financial officer of
the Registrant.
TOTAL WORLD TELECOMMUNICATIONS, INC.
(Registrant)
Date: February 19, 1997 By: /s/ Joseph L. Lents
-----------------------------------------
Joseph L. Lents, Chairman
and Chief Executive Officer
By: /s/ Loretta A. Murphy
-----------------------------------------
Loretta A. Murphy, Vice President
Secretary and Chief Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TOTAL WORLD TELECOMMUNICATIONS, INC. FOR THE THREE
MONTHS ENDED ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> TOTAL WORLD TELECOMMUNICATIONS, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,484,293
<SECURITIES> 0
<RECEIVABLES> 8,068,653
<ALLOWANCES> 143,629
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<CURRENT-ASSETS> 25,020,234
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<DEPRECIATION> (2,438,468)
<TOTAL-ASSETS> 81,438,271
<CURRENT-LIABILITIES> 38,182,828
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13
<COMMON> 2,916
<OTHER-SE> 39,890,515
<TOTAL-LIABILITY-AND-EQUITY> 81,438,271
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<CGS> 9,552,374
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