U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
--------------------
[ ] 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)
801 Brickell Avenue, 9th Floor, Miami, Florida 33131
----------------------------------------------------
(Address of principal executive offices)
(904) 409-0200
--------------
(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 [ ] No [X]
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 [X] 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: 81,175,193 common shares as
of July 28, 1997; the Issuer is currently engaged in a dispute with certain
holders of its convertible preferred stock and notes as to the validity of their
asserted rights to convert their securities into Common Stock and as to the
number of shares of Common Stock that may be issuable thereunder if they do have
valid conversion rights. The Issuer has received purported notices of conversion
which, if valid and accepted at the amounts alleged by the holders, would result
in the Issuer having to issue an additional 26,957,753 shares of Common Stock as
of August 18, 1997. The Company's current authorized shares are not sufficient
to allow these issuances in their entirety.
<PAGE>
TOTAL WORLD TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet -- June 30, 1997
Consolidated Statements of Operations -- Three Months Ended
June 30, 1997 and 1996
Consolidated Statements of Operations -- Nine Months Ended
June 30, 1997 and 1996
Consolidated Statements of Cash Flows -- Nine Months Ended
June 30, 1997 and 1996
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
<PAGE>
TOTAL WORLD TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 166,318
Accounts receivable, net 9,179,737
Due from employees and related parties 488,993
Prepaid expenses and other current assets 1,444,000
-----------
Total current assets 11,279,048
-----------
PROPERTY AND EQUIPMENT, at cost
(net of accumulated depreciation
of $2,609,197) 8,404,040
-----------
OTHER ASSETS:
Notes receivable - sale of assets of
discontinued operations (net of
reserve for doubtful accounts of
$2,000,000) 2,050,000
Intangible assets pertaining to sub-
sidiary in bankruptcy (net of
accumulated amortization of
$10,528,510) 5,849,401
-----------
7,899,401
-----------
Total assets $27,582,489
===========
See accompanying notes to consolidated financial statements.
<PAGE>
TOTAL WORLD TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 750,843
Notes payable 16,700,271
Accounts payable 131,340
Accrued expenses and other liabilities 8,266,478
------------
Total current liabilities 25,848,932
------------
LIABILITIES OF SUBSIDIARY IN BANKRUPTCY 39,658,711
------------
Total liabilities 65,507,643
------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock 29,641,187
Common Stock, $.00001 par value,
100,000,000 shares authorized,
49,137,802 shares issued and
outstanding 2,916
Additional paid-in capital 77,326,880
Accumulated deficit (144,156,137)
Treasury stock at cost, 55,933
common shares (740,000)
------------
(37,925,154)
------------
Total liabilities and
stockholders' equity $ 27,582,489
============
See accompanying notes to consolidated financial statements.
<PAGE>
TOTAL WORLD TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months
Ended June 30,
1997 1996
---- ----
(Unaudited)
REVENUE $ 15,033,789 $ 2,315,133
COST OF SALES 23,823,441 1,778,802
------------ ------------
GROSS PROFIT (LOSS) (8,789,652) 536,331
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 13,512,435 1,824,783
Depreciation and amortization 1,851,326 213,604
------------ ------------
15,363,761 2,038,387
------------ ------------
Loss from operations (24,153,413) (1,502,056)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 5,440 3,715
Interest expense (3,050,831) (119,589)
Other income 19,609 53,278
Write down of goodwill of subsidiary (39,103,706) --
------------ ------------
Total other income (expense) (42,129,488) (62,596)
------------ ------------
Loss from continuing operations (66,282,901) (1,564,652)
------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations -- (559,653)
Loss on disposal of real estate
brokerage and credit union
auditing segments including
$461,515 of operating losses for
the period April 1, 1997 to
May 15, 1997, date of disposal (66,636) --
------------ ------------
Income (loss) from discontinued
operations (66,636) (559,653)
------------ ------------
NET LOSS $(66,349,537) $ (2,124,305)
============ ============
PER COMMON SHARE:
Loss from continuing operations $ (4.18) $ (.80)
Income (loss) from discontinued
operations -- (.29)
------------ ------------
NET LOSS $ (4.18) $ (1.09)
============ ============
NUMBER OF SHARES USED IN COMPUTATION 18,069,858 1,949,715
============ ============
See accompanying notes to consolidated financial statements.
<PAGE>
TOTAL WORLD TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months
Ended June 30,
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
REVENUE $ 35,495,847 $ 2,315,133
COST OF SALES 43,395,640 1,778,802
------------ ------------
GROSS PROFIT (LOSS) (7,899,793) 536,331
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 27,767,986 3,277,901
Depreciation and amortization 4,378,853 413,178
------------ ------------
32,146,839 3,691,079
------------ ------------
Loss from operations (40,046,632) (3,154,748)
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (8,335,234) (250,061)
Interest income 49,373 3,962
Other income 1,520,912 252,089
Write down of goodwill of subsidiary (39,103,706) --
------------ ------------
Total other income (expense) (45,868,655) 5,990
------------ ------------
Loss from continuing operations (85,915,287) (3,148,758)
------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations -- (1,201,707)
Loss on disposal of real estate
brokerage and credit union auditing segments and
restructuring charges including $2,175,441 of
operating losses for the period ending May 15,
1997, date of disposal (7,780,562) --
------------ ------------
Loss from discontinued operations (7,780,562) (1,201,707)
------------ ------------
NET LOSS $(93,695,849) $ (4,350,465)
============ ============
PER COMMON SHARE:
Loss from continuing operations $ (8.19) $ (2.06)
Loss from discontinued operations (.74) (.78)
------------ ------------
NET LOSS $ (8.93) $ (2.84)
============ ============
NUMBER OF SHARES USED IN COMPUTATION 10,489,239 1,532,411
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TOTAL WORLD TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months
Ended June 30,
1997 1996
------------ --------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss from continuing operations $(93,695,849) (4,350,465)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation 1,193,510 600,654
Amortization of intangible assets 3,185,343 --
Write down of goodwill of subsidiary 39,103,706 --
Amortization of deferred compensation 4,374,817 --
Gain on sale of equipment (21,651) --
Credit arising from disputed transaction (1,500,000) --
Issuance of debt for payment of interest on debentures 4,209,260 --
Issuance of common stock to employees and stockholders -- 14,500
Interest accrued on amounts due stockholders -- 31,617
Common stock issued for consulting fees -- 312,973
(Increase) decrease in accounts receivable (979,652) (798,994)
Increase (decrease) in mortgages held for sale (422,607) --
(Increase) decrease in advances to
employees and stockholders 473,647 (63,658)
(Increase) (decrease) in prepaid expenses
and other current assets (385,680) (909,766)
(Increase) decrease in other assets 998,921 58,614
Deferred revenue 3,791,596 --
(Decrease) increase in accounts payable
and accrued expenses 23,304,130 (1,548,487)
------------ ------------
Net cash provided used in operating activities (16,370,509) (6,653,012)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loss from discontinued operations (7,080,562) --
Payments for acquisition of subsidiaries (4,433,765) --
Capital expenditures (706,191) (418,724)
------------ ------------
Net proceeds used in investing activities (12,220,518) (418,724)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Preferred Stock (13,251,545) --
Payments for repurchase of common stock (10,630,611) --
Proceeds from notes payable & long term debt 13,307,550 --
Proceeds from officers 197,500 --
Payments of amounts due to officers (42,421) (765,677)
Payments of notes payable and long-term debt (6,129,385) (1,727,519)
Net proceeds from issuance of common stock per Reg S 4,577,751 --
Net proceeds from issuance of common stock -- --
Net proceeds from issuance of convertible preferred stock 40,134,819 10,270,517
Preferred stock dividends paid (1,893,533) (43,800)
------------ ------------
Net cash provided financing activities 26,270,125 7,733,521
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS (2,320,902) 661,785
CASH received in acquisition of TWT -- 121,575
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 $ (584,525) $ 1,914,203
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
TOTAL WORLD TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1997
(1) GENERAL:
-------
The interim June 30, 1997 and 1996 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, and the Statements of Operations for three and
nine months ended June 30, 1996 have been reclassified for comparative purposes.
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 nine-month period ended June 30,
1997 are not necessarily indicative of the results that may be expected for the
year ended September 30, 1997.
(2) DISCONTINUED OPERATIONS:
------------------------
In the latter part of March 1997, management elected to divest the two
business units comprising the Company's non-telecommunications operations.
These two units are Financial Standards Group, Inc., the credit union auditing
operation ("FSG"), and Real Estate Services Network Holding Corp., the real
estate group ("RESN").
The Company has sold to former employees the outstanding stock in FSG,
all of which was owned by TWTI.
<PAGE>
In addition, the Company has sold to management of the real estate
services group all of the outstanding stock in its subsidiary, RESN, as well as
the commercial warehouse facility in Mount Vernon, Ohio.
The Company received notes and receivables of $4,050,000 as proceeds
for the sale of the aforementioned companies; however, because of these
entities' poor operating performance, the Company has recorded these receivables
at their estimated realizable value of $2,050,000 which is based on the
underlying collateral in the companies sold.
The Company's net book value of the foregoing is approximately
$7,310,000. Accordingly, the Company has recorded a charge to operations of
$5,260,000 representing the difference between the carrying value and the
estimated realizable value of $2,050,000.
(3) BANKRUPT SUBSIDIARY
-------------------
On July 23, 1997, the Company's wholly-owned operating subsidiary,
Total National Telecommunications, Inc., filed a petition for relief under
Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court
for the Southern District of Texas. Under Chapter 11, certain claims against the
Company's subsidiary in existence prior to the filing of the petitions for
relief under the federal bankruptcy laws are stayed while the subsidiary
continues business operations as Debtor-in-Possession. Claims secured against
the subsidiary's assets ("secured claims") also are stayed, although the holders
of such claims would have the right to move the court for relief from the stay.
On September 12, 1997, the case was converted to Chapter 7, and a
trustee was appointed. On September 24, 1997, the assets of TNT were sold
pursuant to 11 U.S.C. Section 363. Accordingly, the Company's intangible assets
related to this subsidiary have been written off. The subsidiary's liabilities
are shown separately on the June 30, 1997 balance sheet as "liabilities of
subsidiary in bankruptcy."
(4) NET LOSS PER COMMON SHARE:
--------------------------
The loss per share is computed by dividing the weighted average shares
outstanding during each period into the net loss applicable to common shares and
is based on the following:
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss from continuing
operations $(66,282,901) $(1,564,652) $ (85,915,287) $(3,148,758)
Preferred stock dividends
applicable to conversion
feature and discounts (8,283,109) - (28,555,940) -
Preferred stock dividends
based on coupon rate (928,551) - (1,437,400) -
------------- ----------- ------------- -----------
Loss from continuing
operations (75,494,561) (1,564,652) (115,908,627) (3,148,758)
Income (loss) from dis-
continued operations (66,636) (559,653) (7,780,562) (1,201,707)
------------- ------------ ------------- ------------
Net loss applicable to
common shares $(75,561,197) $(2,124,305) ($123,689,189) $(4,350,465)
============= ============ ============== ============
Number of shares used
in computation 18,069,858 1,949,715 10,489,239 1,532,411
------------- ------------ -------------- ------------
Loss per share from
continuing operations $ (4.18) $ (.80) $ (11.05) $ (2.06)
Income (loss) per share from
discontinued operations (.03) (.29) (.21) (.78)
Income (loss) on disposal of
real estate brokerage and
credit union auditing
segments .03 - (.53) -
------------ ------------ -------------- ------------
Net loss $ (4.18) $ (1.09) $ (11.79) $ (2.84)
============ ============ ============== =============
</TABLE>
<PAGE>
The impact of converting certain convertible debt and convertible preferred
stock is anti-dilutive.
(5) CHANGE IN ACCOUNTING POLICY:
----------------------------
As of October 1, 1996, the Company has changed its method of accounting
from not recognizing the assumed discounts from the conversion of preferred
shares into common shares at a discount. The Company now recognizes the benefits
received by preferred stockholders' conversions as a dividend to conform to
current interpretation.
As of the date of the issuance of the convertible preferred stock, the
excess of the quoted market value of the common stock assumed received over the
net proceeds (after commissions and fees) received for issuance of convertible
preferred shares is considered a preferred stock dividend with this difference
being accreted over the period beginning with the issuance of the preferred
stock to the date the shares are eligible for conversion.
During the period October 1, 1996 through June 30, 1997, these assumed
preferred stock dividends aggregating $28,555,940 have been charged to the
accumulated deficit. Unredeemed accreted amounts are included in the Redeemable
Convertible Preferred Stock on the balance sheet. In addition, undeclared
dividends based on coupon rates aggregated $1,437,400
(6) EQUITY TRANSACTIONS:
--------------------
The Company has at various times in 1996 and 1997 issued shares of its
convertible preferred stock in transactions that were intended to be exempt from
registration under the federal securities laws under Regulation S, and it has
also issued convertible notes in a transaction that was intended to be exempt
from registration under the federal securities laws under Regulation D. Among
other provisions, these instruments have included terms of conversion that would
allow a holder who has given the required notice after a specified date to
convert them into shares of Common Stock based on the following formula:
[(x)(n/365)(y)] + y
-------------------
Conversion Rate
x = a stated percentage, i.e., 0% to 10%.
n = the number of days from the date of closing to the
date of conversion
y = the number of preferred shares being converted multiplied
by the face value of the preferred stock, i.e.,
1,500 shares x $100 = 150,000
<PAGE>
Conversion Rate = a stated percentage, i.e, 75%, 80%,
81%, etc., of the five-day average of the
closing bid price as reported on the NASDAQ
SmallCap Market Exchange
The only exception to this formula is Series Z Convertible Preferred
Stock which conversions are based on the following formula:
[(.02)(n/365)($100.00)] + $100.00 = x
---------------------------------
Conversion Rate
n = the number of days from the date of closing to the
date of conversion
x = the number which is multiplied by the number of preferred
shares being converted to obtain the number of
common shares to be received, i.e., x = 122
x 1,500 shares = 183,000 common shares
This formula essentially allows the holder to receive Common Stock
having a value equal to 133% of the purchase price of the security, plus an
accumulated return of 8% per annum. Upon receiving notice of conversion, the
Company generally has the right to effect a redemption of the convertible
security by paying the holder cash in an amount equal to the value of the Common
Stock that would be issued upon conversion. If the Company fails to issue the
shares of Common Stock indicated by the above formula with regard to the Series
H and Series Z Preferred Stock, the instruments provide that a penalty equal to
1% of the total value of the shares issuable accrues for seven days, and after
seven days the penalty accrues at a rate of 2% per day. Under these provisions,
as the value of the Company's Common Stock decreases, the holder would obtain
the right to purchase an ever increasing number of shares of Common Stock upon
exercise of the conversion right.
The Company has identified a number of circumstances that have caused
management to believe that the holders of these convertible securities may not
be legally entitled to convert such securities into Common Stock, and that the
number of shares issuable to any holder that has valid conversion rights may be
in dispute (the "Questionable Acts"), including without limitation the existence
of heavy short selling of the Company's Common Stock during 1997, that suggest
that the purchasers of the Company's convertible securities may have violated
certain representations and warranties in their purchase documents with regard
to their investment intent in purchasing the securities, or that they or other
persons may have engaged in other actions to manipulate the price of the
Company's Common Stock downward for their advantage. Such actions have prevented
the Company from issuing freely tradable shares of Common Stock upon conversion
in order to avoid participating in a potentially unregistered distribution of
Common Stock in violation of the federal securities laws. Accordingly, the
Company is engaged in a dispute with certain of the holders of these securities
as to their rights under such securities, and is considering a proposal to
restructure the Company's capital stock. This dispute could result in litigation
that would require a substantial amount of the Company's management time and
limited financial resources to resolve.
As of June 30, 1997, the Company had outstanding the following
convertible securities which are convertible into Common Stock based on the
formulas set forth above:
<PAGE>
Number of
Stated Value Common Shares
of Preferred Underlying
Shares Conversion
------ ----------
Series B $ 1,579,900 11,087,018
Series C 8,584,600 60,242,807
Series D 4,720,300 33,124,912
Series E 500,000 3,508,772
Series F 720,000 5,052,632
Series G 2,500,000 17,543,860
Series H 4,737,100 33,242,807
Series L 50,000 350,877
Series U 120,000 842,105
Series Z 889,900 6,244,912
----------- -----------
24,401,800 171,240,702
Other outstanding
preferred shares:
Series A 73,000 730,000
Series M 178,500 1,539,999
Series O 35,000 233,333
----------- -----------
24,688,300 173,744,034
Accretion in excess
of stated value 4,952,887 -
----------- -----------
Balance June 30, 1997 $29,641,187 173,744,034(a)
=========== ===========
(a) The Company's common stock had a closing NASDAQ price of $0.19 per
share on June 30, 1997 and $0.16 per share on July 23, 1997, the date
on which trading was halted. In addition to the foregoing in connection
with outstanding convertible debt of $17,650,829 at June 30, 1997
including $7,650,800 of disputed interest, 110,317,681 shares would be
issuable upon conversion at the current market prices. The Company's
authorized shares are 100,000,000 of which 81,175,193 shares are issued
and outstanding at July 28, 1997; therefore, there are not sufficient
shares available for a total conversion.
At June 30, 1997, the Company had received purported conversion notices
which, if honored, would result in the issuance of 22,176,202 additional shares
of Common Stock. The Company has not honored these notices of Conversion, and
has not delivered shares of Common Stock to the holders pursuant thereto based
on the above concerns. Between April 1, 1997 and June 30, 1997, the Company did
accept notices of conversion and issued 30,887,790 shares of Common Stock, as to
<PAGE>
which the Company reserves its rights to contest the validity of the conversion
rights so exercised. In addition, the Company has received notices of conversion
and responded with the intention of exercising the Company's right to redeem.
The Company's right of redemption was not exercised on a timely basis, thereby
reverting back to the original conversion request. Of the remaining convertible
securities, based upon the market price of the Common Stock during the five
trading days ending June 30, 1997, the holders of such securities, if exercising
valid conversion rights, could have required that 2,241,163 additional shares of
Common Stock (including 1,177,192 penalty shares) be issued, and at those same
stock prices, approximately 40,000,000 additional shares of Common Stock would
be issuable as of various dates ending September 18, 1997.
When the above described convertible securities were issued, it was the
Company's belief that its financial results would permit the redemption of such
securities without issuance of any additional shares of Common Stock, thereby
avoiding any material dilution to the holders of the Company's Common Stock. The
Company's financial results in the first half of fiscal 1997 have not permitted
the Company to redeem its convertible securities as intended, and the decline in
the price of the Company's Common Stock has resulted in significant potential
dilution of the holders of the Company's issued and outstanding Common Stock if
the holders of the convertible securities have valid conversion rights at the
levels they have claimed or that might otherwise be provided by their
instruments. These developments may have effectively terminated the Company's
ability to issue its equity securities and otherwise threaten to substantially
diminish the value of the Company's Common Stock.
The Company intends to contest by all available means the right of
substantially all of the holders of the Company's convertible securities to
convert based upon the questionable actions referenced above and plans to
propose a recapitalization of the Company. There can be no assurance that the
Company will be successful in these efforts or that the holders of Common Stock
will not experience substantial dilution as the result of the purported
conversion of the Company's convertible securities.
During the nine months ended June 30, 1997, the Company entered into a
program to purchase shares of its own stock at the market value. Accordingly,
1,601,866 shares of common stock were purchased by the Company for an aggregate
cost of $10,630,611. Substantially all of these purchases were made in the first
quarter of fiscal 1997. Such shares have been retired.
<PAGE>
(7) CONVERTIBLE DEBT:
-----------------
On December 7, 1996, the Company entered into a convertible note
agreement providing for interest at 7% and received proceeds of $8,000,000. The
note was due or convertible in 60 days from the time of issuance into shares of
common stock based on a formula which provided common shares to be issued at 75%
of the quoted market value, as defined, and having an aggregate value of
$8,000,000. On February 7, 1997, the Company was granted an extension of time to
repay the note until January 31, 1999. The new note bears interest at 7% per
annum and was issued in the amount of $10,755,334 in consideration for extending
the payment term. The difference of $2,755,334 between the new note and the
original note has been charged to operations. The Company also received
$2,000,000 in cash on February 7, 1997 with the same due dates and interest
rates. Both notes are convertible with a similar formula to the December 7, 1996
note with conversion allowable in 90 days from the date of the note limited to
conversion of 4.9% of the outstanding shares at the date conversion is
requested. Accretion has been calculated from the date of the note issuance
through the period the debt first could be converted. Accretion and additional
accrued interest aggregating $7,650,829 has also been charged to operations. The
creditor has demanded payment of $19,417,570 to settle this debt, and the
Company has filed a lawsuit against the creditor for criminal usuary. At July
28, 1997, the outstanding debt was convertible into 110,317,681 shares of common
stock. The Company's authorized shares are 100,000,000, of which 81,175,193
shares are issued and outstanding at June 30, 1997; therefore, there are not
sufficient shares available for a total conversion.
Interest payments were to commence on May 1, 1997. The Company has
defaulted on such payment and has accrued an additional 7% interest pursuant to
the terms of the note. The note also provided for registration rights for the
common shares in a defined period. The Company is past due pursuant to this
provision. In July 1997, the Company received additional financing of
$2,000,000. This additional financing is collateralized by the stock of the
Company's wholly-owned subsidiary (see Note 8).
<PAGE>
(8) FINANCIAL CONDITION:
--------------------
On July 23, 1997, the Company's wholly-owned subsidiary, Total National
Telecommunications, Inc. ("TNT") filed a Voluntary Petition in the U.S.
Bankruptcy Court for the Southern District of Texas for purposes of reorganizing
under Chapter 11 of the Bankruptcy Code (Case No. 97-47491-#5-11). The Company
has retained the services of Cambridge Associates, L.L.C. of Dallas, Texas to
evaluate the operations during the proceedings. Negotiations are presently being
held with several sources to obtain Debtor-in-Possession financing for TNT, and
the Company is seeking to retain the services of an experienced interim chief
executive officer for TNT to evaluate and advise on each area of the business.
TNT had negotiated a contract for the Debtor-in-Possession funding the
subsidiary, and they had negotiated a contract with a former senior executive of
Sprint pending approval by the bankruptcy court; however, to date no
Debtor-in-Possession funds have been provided.
Through July 9, 1997, the Company has been unable to achieve a positive
cash flow in its NetTouch Communications, Inc. subsidiary d/b/a N'Touch. The
Company does not have the financial resources to continue to invest cash into
this subsidiary until N'Touch generates positive cash flow from its own
operations. Accordingly, the Company has ceased operations at N'Touch and is
pursuing the sale or other divestiture of these assets.
Since inception, the Company has incurred substantial losses, and as of
June 30, 1997, has an accumulated deficit of $144,156,137. The Company's working
capital requirements to date have been satisfied through cash on hand, as well
as short-term loans from private individuals and private financing with a
limited number of non-resident institutional investors conducted pursuant to
Regulation S and Regulation D 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 reorganization and restructuring plans. The
Company's survival is also dependent on the success of its efforts to obtain
Debtor-in-Possession financing for its subsidiary. Further, it is unclear at the
present time whether the Company may become part of the Chapter 11 proceedings,
which would require additional Debtor-in-Possession funding for the Company's
reorganization. While the Company believes that it may have the opportunity to
attain the necessary financial support, no assurances can be provided that the
Company will be able to secure sufficient funding in order to complete its plan
of reorganization.
<PAGE>
(9) LEGAL PROCEEDINGS:
------------------
(a) On July 16, 1996, a 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
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. On January 6, 1997, the Company received written
Notice of default from Carlsen as to the payment of principal and interest. On
March 7, 1997, the Company and Carlsen agreed to modify the terms of the note.
The Company received a 60-day extension on the note with no additional interest
in exchange for a $250,000 cash payment to Carlsen. At March 31, 1997, the
balance of $706,250 remains unpaid.
(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
<PAGE>
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
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.
(d) A case was filed on January 11, 1996 by the Addison Terry Company,
a business brokerage 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 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
March 31, 1997, the Company has accrued $200,000 relating to this matter.
<PAGE>
(f) In July 1996, a civil action was filed against Heartline
Communications, Inc. by the Attorney General in the State of New York. The case
was settled on January 13, 1997 for $100,000 in investigative costs plus
consumer restitution. These costs have been accrued.
(g) In June 1996, a civil action was filed by the Middlesex County
Office of Consumer Affairs in New Jersey. This has now 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 $140,000, which has been accrued.
(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 has accrued $500,000
against operations.
(i) On April 10, 1996, the California Public Utilities Commission
("Commission") issued an Order Instituting Investigation into the operations of
Heartline, Total National Telecommunica-tions, 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
<PAGE>
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
refiled their petition in December 1996, and it was dismissed with prejudice on
June 11, 1997.
(k) In February 1997, the Company responded to civil investigative
demands in Arizona. A settlement for $40,000 in investigative costs was filed in
June 1997.
(l) In February 1997, the Company also responded to a civil
investigative demand in Missouri. At this date, nothing has been filed.
(10) AMENDED PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE UNITED STATES
BANKRUPTCY COURT:
--------------------------------------------------------------------
The Company has filed with the United States Bankruptcy Court for the
Southern District of Florida (the "Bankruptcy Court") its Amended Plan of
Reorganization dated July 2, 1998. The Company's Amended Disclosure Statement
dated July 2, 1998 (the "Disclosure Statement") and its Summary of Amended
Disclosure Statement of Total World Telecommunications, Inc. under Chapter 11 of
the United States Bankruptcy Code for Certain General Unsecured Creditors and
Holders of Existing Common Stock dated July 2, 1998 (the "Summary Disclosure
Statement") are submitted pursuant to Section 1125 of the Bankruptcy Code 11
U.S.C. Section 101, et. seq. (the "Bankruptcy Code") in connection with the
solicitation of votes on the Plan from Holders of Impaired Claims against and
Impaired Equity Interests in the Debtor and the hearing on Confirmation of the
Plan schedule for August 17, 1998.
At a hearing on June 19, 1998, this Disclosure Statement was approved
by the Bankruptcy Court in accordance with Section 1125(b) of the Bankruptcy
Code as containing information of a kind and in sufficient detail adequate to
enable a hypothetical reasonable investor typical of holders of Claims and
<PAGE>
Equity Interests of the relevant Voting Classes to make an informed judgment
whether to accept or reject the Plan. Approval of this Disclosure Statement by
the Bankruptcy Court and the transmittal of this Disclosure Statement does not,
however, constitute a determination by the Bankruptcy Court as to the fairness
or merits of the Plan and should not be interpreted as being a recommendation by
the Bankruptcy Court either to accept or reject the Plan.
In the opinion of the Company, as described below, the treatment of
claims and equity interests under the Plan contemplates a greater recovery than
that which is likely to be achieved under other alternatives for the
reorganization or liquidation of the Company. Accordingly, the Company believes
that confirmation of the Plan is in the best interests of creditors and holders
of equity interests and recommends that the creditors and holders of equity
interests vote to accept the Plan.
The Plan has been approved by the Company's Board of Directors. In
addition, Advantage Fund Limited, formerly known as GFL Advantage Fund Limited
("Advantage"), which the Company believes holds in excess of 90% of the
unsecured claims against the Company, has consented to the Plan as part of a
settlement between the Company and Advantage which has been approved by the
Bankruptcy Court.
In summary, the Plan is based upon (a) a transfer of all Unsecured
Claims and assets of the Company (excluding certain tax attributes and a portion
of the Condominium Parcel Net Proceeds) to a liquidating trust of which Holders
of Allowed Unsecured Claims will be the primary beneficiaries and Holders of
Allowed Subordinated Claims will be secondary beneficiaries, (b) the purchase by
the Company of all of the issued and outstanding stock of Mega Blow Moulding
Limited, a Canadian plastics company ("MB"), from 1299004 Ontario Corporation
("129 Ontario"), a wholly-owned subsidiary of 1274328 Ontario Inc. (the
"Proponent"), in consideration for the issuance to the Proponent of
approximately 76% voting control of the Reorganized Debtor and the cash sum of
$75,000, (c) the cancellation of all Existing Preferred Stock and Existing
Common Stock of the Debtor, and (d) the issuance of common stock of the
Reorganized Debtor to Holders of Existing Preferred Stock and Existing Common
Stock of the Debtor.
<PAGE>
In August 1997, the Board of Directors of the Company was substantially
reconstituted. The new Board, having observed the failure of TNT to successfully
continue its Chapter 11 case, decided to examine alternatives to maintain a
level of stability with the Company for that period of time necessary for a new
investor to fund ongoing and future operations for the Company. The new Board
hoped to structure a transaction with a new investor which would satisfy
existing Creditor Claims and preserve some value for existing stockholders of
the Company. In examining all of its alternatives, the new Board concluded
shortly after its appointment that the Company had no resources (financial or
otherwise) to defend against any claims or actions which had been or could be
asserted by Advantage. In addition, the filing of the involuntary petition
against the Company on December 1, 1997 left the Company with no option but to
seek to successfully reorganize under Chapter 11 of the Bankruptcy Code. In
order to do so, the Company needed the support of Advantage, which, as stated
above, holds in excess of 90% of the Unsecured Claims against the Company.
The Company's efforts have resulted in (a) the Advantage Settlement
Agreement, which has been approved by the Bankruptcy Court, pursuant to which
Advantage has agreed to support the Plan, and (b) an agreement for the Debtor to
acquire all of the stock of MBM from a wholly-owned subsidiary of the Proponent,
pursuant to which MBM will become a wholly-owned operating subsidiary of the
Reorganized Debtor on and after the Effective Date, August 28, 1998.
Notwithstanding the uncertain distribution to Unsecured Creditors and
the reduced equity interest for stockholders, the Company believes that the Plan
is in the best interest of all Unsecured Creditors and Holders of Equity
Interests for a number of reasons. First, no free and clear assets of
significant value exist which are available for immediate liquidation and
distribution to Unsecured Creditors and Holders of Equity Interests. Second, TNT
the Company's chief operating subsidiary prior to the Involuntary Petition Date,
is presently in a Chapter 7 bankruptcy proceeding in Texas, and the Company will
in all likelihood receive nothing in return for its substantial investment in
TNT. Third, the costs of administering the Estate continue to accrue as long as
the Reorganization Case remains pending, further eroding whatever value there is
available for Unsecured Creditors. Fourth, Advantage, which holds in excess of
90% of the total dollar amount of Unsecured Claims, supports the Plan and has
already expended significant funds in investigating Causes of Action, the
proceeds of which will be available for distribution to all Unsecured Creditors
on a pro rata basis. Indeed, absent confirmation of the Plan, the Company would
itself have to consider an orderly liquidation of assets in Chapter 11 or a
conversion to Chapter 7, either of which would yield far less of the total
number of shares of Reorganized Debtor Common Stock issued and outstanding
immediately after the Effective Date.
<PAGE>
The Company believes that its efforts to maximize the return for
Creditors and to find an investor and attract value for stockholders have been
full and complete. The Company further believes that the Plan is in the best
interest of all Creditors and Holders of Equity Interests, even though (a) it
does not appear that there are sufficient funds to pay Unsecured Creditors in
full and (b) the percentage of the outstanding equity to be retained by Holders
of Equity Interests following the Effective Date will be substantially diluted.
In the event of a liquidation of the Company's assets under Chapter 7 of the
Bankruptcy Code, the Company believes the distribution to Unsecured Creditors
would be substantially less than under the Plan. In addition, absent concessions
from holders of Unsecured Claims, there would be no distribution to Holders of
Equity Interests. Should the Plan not be confirmed, the Company will have to
seriously consider a Chapter 7 liquidation.
<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 and Nine Months Ended June 30, 1997 Compared to Three and Nine Months
Ended June 30, 1996
- ---------------------------------------------------------------------------
For the three months ended June 30, 1997, the Company had total
consolidated revenue of $15,033,789 in contrast to $2,315,133 for the three
<PAGE>
months ended June 30, 1996. The reason for the increase in revenues was due to
the acquisition of the telecommunications (TWT) division. Management anticipates
that, with the implementation of its plan of reorganization, revenues will
decrease during the next few months. Several contracts are being discontinued
due to their negative gross margins.
For the three months ended June 30, 1997, the Company had a gross loss
of $8,789,652 compared to a gross profit of $536,331 for the three months ended
June 30, 1996. This decrease was attributable to the aforementioned prepaid
debit card contracts, the related write offs in accounts receivable, and the
increased cost margins due to the under-utilization of the Company's switches
and network. For the three months ended June 30, 1997, the Company had a loss
from continuing operations of $66,282,901 as compared to a loss from continuing
operations for the three months ended June 30, 1996 of $1,564,652.
The estimated loss from disposal of these two segments had been accrued at
$7,000,000 for the quarter ended March 31, 1997. Since the actual loss was less,
the Company recognized income of $841,000 for the three months ended June 30,
1997 due to an over-accrual in the prior quarter.
The Company's consolidated net loss for the three months ended June 30,
1997 was $22,424,893 as compared to $2,124,305 at June 30, 1996. The June 30,
1997 quarter net loss includes certain expenses which are not expected to
continue relating to the telecom segment. In addition, the Company realized
$3,050,831 in interest expenses relating to the discount of the $12,000,000
convertible promissory notes.
For the nine months ended June 30, 1997, the Company had total
consolidated revenue of $35,495,847 in contrast to $2,315,133 for the nine
months ended June 30, 1996. The reason for the increase in revenues was due to
the acquisition of the telecommunications (TWT) division.
For the nine months ended June 30, 1997, the Company had a gross loss
of $7,899,793 compared to a gross profit of $536,331 for the nine months ended
June 30, 1996. For the nine months ended June 30, 1997, the Company had a loss
from continuing operations of $85,915,287 as compared to a loss from continuing
operations for the nine months ended June 30, 1996 of $3,148,758.
The net loss from discontinued operations for the nine months ended
June 30, 1997 was $7,780,562 as compared to a net loss of $1,201,707 for the
nine months ended June 30, 1996. This was primarily due to the loss on disposal
of the real estate brokerage and credit union auditing segments.
<PAGE>
Interest expense increased to $8,335,234 for the nine months ended June
30, 1997 as compared to $250,061 for the nine months ended June 30, 1996. This
is primarily due to the disputed interest owed on the note payable pursuant to
Regulation D in the amount of $4,900,000. Other income increased by $1,268,823
for the nine months ended June 30, 1997 due to the reversal of the credit
arising from a disputed transaction of $1,500,000.
The Company's consolidated net loss for the nine months ended June 30,
1997 was $93,695,849 as compared to a net loss of $4,350,465 at June 30, 1996.
The June 30, 1997 nine-month net loss includes increased cost due to the
under-utilization of the Company's switches and network, as well as the
inability to obtain the most efficient pricing. Several contracts had continued
to operate at negative margins through the end of July. With the plan of
reorganization, these contracts have been discontinued. Write downs on accounts
receivable have also contributed to reduced gross profit. These costs are not
expected to continue.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
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 reorganization and restructuring plans. The
Company's survival is also dependent on the success of its efforts to obtain
Debtor-in-Possession financing for its subsidiary. Further, it is unclear at the
present time whether the Company may become part of the Chapter 11 proceedings,
which would require additional Debtor-in-Possession funding for the Company's
reorganization. While the Company believes that it may have the opportunity to
attain the necessary financial support, no assurances can be provided that the
Company will be able to secure sufficient funding in order to complete its plan
of reorganization.
The Company has engaged the services of Cambridge Associates, L.L.C.,
of Dallas, Texas to assist in the restructuring. A plan for the reorganization
of TNT is being developed which may include a third party, a possible joint
venture, a reduction of its network, and the sale of certain other assets. Each
segment of the operation is being reviewed, and certain contracts have been
<PAGE>
discontinued due to their negative margins. Costs are being reduced to a level
appropriate with remaining revenues. Several senior executives have been
eliminated, and remaining executives have been subject to substantial salary and
benefit reductions.
At June 30, 1997, the Company had operating cash on hand of $(584,525)
as compared to operating cash on hand at June 30, 1996 of $1,390,255. At June
30, 1997, the Company had a working capital ratio of current assets to current
liabilities of approximately .45.
Net cash used in operating activities was approximately $16,370,509 and
$6,653,012 for the three months ended June 30, 1997 and 1996, respectively. The
cash used in operations of the Company was primarily to fund the Company's
operating losses. Such losses are described above.
Net cash used in investing activities was $12,220,518 and $418,724 for
the three months ended June 30, 1997 and 1996, respectively. This is
attributable to expenses relating to the capital expenses associated with the
addition of new switches for the telecommunications segment as well as the
additional payments made for the acquisition of N'Touch.
Net cash provided by financing activities was $26,270,125 and
$7,733,521 for the three months ended June 30, 1997 and 1996, 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 the
refinancing of the discounted convertible promissory note plus the receipt of
$2,000,000 in additional cash making the new convertible promissory note now
$12,755,334.
During the three months ended June 30, 1997, the Company had financed
its expansion and operations with equity and debt funding. The Company received
funds through the issuance of shares of its preferred stock and shares of Common
Stock pursuant to Regulation S and $2,000,000 through the refinancing of its
convertible promissory note. The proceeds from such financing have been used
primarily to exercise the Company's option of redemption on prior fundings. In
addition, during the nine months ended June 30, 1997, the Company purchased
1,601,866 shares of its Common Stock pursuant to a buyback program at a total
cost of $10,803,594.
<PAGE>
In December 1996, the Company acquired 100 percent of the outstanding
shares of NETTouch Communications, Inc., d/b/a N'Touch, 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 was obligated to make additional payments to
such shareholders $4,800,000. The Company is currently in default on such
payments. To date, N'Touch has not achieved its projected revenues and, for the
quarter ended June 30, 1997, has a net loss of $1,146,000. Since N'Touch has
been unable to achieve a positive cash flow, and since the Company does not have
the financial resources to continue to invest cash into this subsidiary until it
achieves profitability from its own operations, the Company has ceased
operations at N'Touch and is pursuing the sale or other divestiture of these
assets.
The Company has experienced negative cash flow during the period, and
it is in arrears in several of its financial obligations. The preferred dividend
payments to the former TNT shareholders have not been made. Of this amount, the
balance due at June 30, 1997 has been accrued in the amount of $3,091,000.
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 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. On January 6, 1997, the Company received written
Notice of default from Carlsen as to the payment of principal and interest. On
March 7, 1997, the Company and Carlsen agreed to modify the terms of the note.
The Company received a 60-day extension on the note with no additional interest
in exchange for a $250,000 cash payment to Carlsen. At August 14, 1997, the
balance of $706,250 remains unpaid, and Carlsen has filed a Motion for Summary
Judgment .
Subsequent to June 30, 1997, the Company has received net proceeds of
approximately $744,800 through issuance of its Series R Preferred Stock pursuant
to Regulation S.
Given the Company's financial constraints, the lack of sufficient
revenue growth, the negative gross margins, and the financial liabilities to
prior investors, there can be no assurances that the Company will be able to
<PAGE>
continue as a going concern. The Company is currently utilizing the services of
an outside consultant to assist in the reorganization and restructuring. Several
senior executives have been eliminated. The Company's Board of Directors and the
Board of the TNT subsidiary have been replaced, and a new President and CEO will
be appointed at each level. Remaining executives have been subject to salary and
benefit reductions. The Company is currently negotiating with several financing
sources to support its reorganization and restructuring plans. The survival is
also contingent upon an agreement with a Debtor-in-Possession financier. While
the Company believes that it may have such financial support, no assurances can
be provided that the Company will secure sufficient funding to complete its plan
of reorganization.
On May 30, 1997, the Company, its officers and directors received
subpoenas issued by the Securities and Exchange Commission pursuant to an order
of investigation. The investigation is ongoing, and the Securities and Exchange
Commission has provided no information to the Company regarding the
investigation. Any party interesting in obtaining further information regarding
the investigation can attempt to do so by contacting the Miami, Florida Branch
Office of the Securities and Exchange Commission.
In August 1997, Joseph Lents resigned as Chairman of the Board of the
Company, and the Board of Directors of the Company was thereafter substantially
reconstituted to add Vincent Landis, Carlos Trueba and Les Miller as new members
of the Board with the then existing directors, Arnold Salinas and Loretta
Murphy. Loretta Murphy resigned as a director of the Company during the course
of the Reorganization Case in order to pursue other business interests. During
the Reorganization Case, Luis Alvarez has served as interim President of the
Company. None of the directors of executive officers of the Company has received
any compensation from the Company for service in such capacities for the period
from the Involuntary Petition Date to the date of this quarterly report.
A number of factors ultimately contributed to the Company's decision to
seek Bankruptcy Court protection. As of March 31, 1996, the Company was
experiencing a number of financial problems, including significant losses since
its inception, negative cash flow and arrears in several of its obligations. A
significant portion of these problems resulted from the losses sustained in the
TNT operations. As a result of the foregoing, the Company continued to finance
<PAGE>
its expansion and operations with equity and debt financing in 1997. In 1997,
the Company was sued in various jurisdictions as a result of these equity
offerings. In July 1997, TNT was forced to seek protection under Chapter 11 of
the Bankruptcy Code. In September 1997, TNT's Chapter 11 case was converted to a
case under Chapter 7 of the Bankruptcy Code, thus leaving the Company with
little hope of recouping its substantial investment in TNT. On December 1, 1997,
three petitioning alleged creditors, Francesco Morello, Christopher Robichaux
and David J. Latraverse, filed an involuntary petition under Chapter 7 of the
Bankruptcy Code against the Company. On December 19, 1997, Advantage instituted
the Advantage Suit against certain former officers and directors of the Company.
Had it not been for the filing of the involuntary petition and the automatic
stay provisions of Section 362 of the Bankruptcy Code, Advantage would have also
named the Company as a defendant in the Advantage Suit. The combined effect of
these events led the Company to conclude that it was without any viable
procedure for handling these and other concerns outside of a reorganization
proceeding under Chapter 11 of the Bankruptcy Code. Accordingly, on December 24,
1997, the Company consented to the entry of an order for relief under Chapter 11
of the Bankruptcy Code.
The Company has filed with the United States Bankruptcy Court for the
Southern District of Florida (the "Bankruptcy Court") its Amended Plan of
Reorganization dated July 2, 1998. The Company's Amended Disclosure Statement
dated July 2, 1998 (the "Disclosure Statement") and its Summary of Amended
Disclosure Statement of Total World Telecommunications, Inc. under Chapter 11 of
the United States Bankruptcy Code for Certain General Unsecured Creditors and
Holders of Existing Common Stock dated July 2, 1998 (the "Summary Disclosure
Statement") are submitted pursuant to Section 1125 of the Bankruptcy Code 11
U.S.C. Section 101, et. seq. (the "Bankruptcy Code") in connection with the
solicitation of votes on the Plan from Holders of Impaired Claims against and
Impaired Equity Interests in the Debtor and the hearing on Confirmation of the
Plan schedule for August 17, 1998.
At a hearing on June 19, 1998, this Disclosure Statement was approved
by the Bankruptcy Court in accordance with Section 1125(b) of the Bankruptcy
Code as containing information of a kind and in sufficient detail adequate to
enable a hypothetical reasonable investor typical of holders of Claims and
Equity Interests of the relevant Voting Classes to make an informed judgment
whether to accept or reject the Plan. Approval of this Disclosure Statement by
the Bankruptcy Court and the transmittal of this Disclosure Statement does not,
however, constitute a determination by the Bankruptcy Court as to the fairness
or merits of the Plan and should not be interpreted as being a recommendation by
the Bankruptcy Court either to accept or reject the Plan.
<PAGE>
In the opinion of the Company, as described below, the treatment of
claims and equity interests under the Plan contemplates a greater recovery than
that which is likely to be achieved under other alternatives for the
reorganization or liquidation of the Company. Accordingly, the Company believes
that confirmation of the Plan is in the best interests of creditors and holders
of equity interests and recommends that the creditors and holders of equity
interests vote to accept the Plan.
The Plan has been approved by the Company's Board of Directors. In
addition, Advantage Fund Limited, formerly known as GFL Advantage Fund Limited
("Advantage"), which the Company believes holds in excess of 90% of the
unsecured claims against the Company, has consented to the Plan as part of a
settlement between the Company and Advantage which has been approved by the
Bankruptcy Court.
In summary, the Plan is based upon (a) a transfer of all Unsecured
Claims and assets of the Company (excluding certain tax attributes and a portion
of the Condominium Parcel Net Proceeds) to a liquidating trust of which Holders
of Allowed Unsecured Claims will be the primary beneficiaries and Holders of
Allowed Subordinated Claims will be secondary beneficiaries, (b) the purchase by
the Company of all of the issued and outstanding stock of Mega Blow Moulding
Limited, a Canadian plastics company ("MB"), from 1299004 Ontario Corporation
("129 Ontario"), a wholly-owned subsidiary of 1274328 Ontario Inc. (the
"Proponent"), in consideration for the issuance to the Proponent of
approximately 76% voting control of the Reorganized Debtor and the cash sum of
$75,000, (c) the cancellation of all Existing Preferred Stock and Existing
Common Stock of the Debtor, and (d) the issuance of common stock of the
Reorganized Debtor to Holders of Existing Preferred Stock and Existing Common
Stock of the Debtor.
In August 1997, the Board of Directors of the Company was substantially
reconstituted. The new Board, having observed the failure of TNT to successfully
continue its Chapter 11 case, decided to examine alternatives to maintain a
level of stability with the Company for that period of time necessary for a new
<PAGE>
investor to fund ongoing and future operations for the Company. The new Board
hoped to structure a transaction with a new investor which would satisfy
existing Creditor Claims and preserve some value for existing stockholders of
the Company. In examining all of its alternatives, the new Board concluded
shortly after its appointment that the Company had no resources (financial or
otherwise) to defend against any claims or actions which had been or could be
asserted by Advantage. In addition, the filing of the involuntary petition
against the Company on December 1, 1997 left the Company with no option but to
seek to successfully reorganize under Chapter 11 of the Bankruptcy Code. In
order to do so, the Company needed the support of Advantage, which, as stated
above, holds in excess of 90% of the Unsecured Claims against the Company.
The Company's efforts have resulted in (a) the Advantage Settlement
Agreement, which has been approved by the Bankruptcy Court, pursuant to which
Advantage has agreed to support the Plan, and (b) an agreement for the Debtor to
acquire all of the stock of MBM from a wholly-owned subsidiary of the Proponent,
pursuant to which MBM will become a wholly-owned operating subsidiary of the
Reorganized Debtor on and after the Effective Date of August 28, 1998.
Notwithstanding the uncertain distribution to Unsecured Creditors and
the reduced equity interest for stockholders, the Company believes that the Plan
is in the best interest of all Unsecured Creditors and Holders of Equity
Interests for a number of reasons. First, no free and clear assets of
significant value exist which are available for immediate liquidation and
distribution to Unsecured Creditors and Holders of Equity Interests. Second, TNT
the Company's chief operating subsidiary prior to the Involuntary Petition Date,
is presently in a Chapter 7 bankruptcy proceeding in Texas, and the Company will
in all likelihood receive nothing in return for its substantial investment in
TNT. Third, the costs of administering the Estate continue to accrue as long as
the Reorganization Case remains pending, further eroding whatever value there is
available for Unsecured Creditors. Fourth, Advantage, which holds in excess of
90% of the total dollar amount of Unsecured Claims, supports the Plan and has
already expended significant funds in investigating Causes of Action, the
proceeds of which will be available for distribution to all Unsecured Creditors
on a pro rata basis. Indeed, absent confirmation of the Plan, the Company would
itself have to consider an orderly liquidation of assets in Chapter 11 or a
conversion to Chapter 7, either of which would yield far less of the total
number of shares of Reorganized Debtor Common Stock issued and outstanding
immediately after the Effective Date.
<PAGE>
The Company believes that its efforts to maximize the return for
Creditors and to find an investor and attract value for stockholders have been
full and complete. The Company further believes that the Plan is in the best
interest of all Creditors and Holders of Equity Interests, even though (a) it
does not appear that there are sufficient funds to pay Unsecured Creditors in
full and (b) the percentage of the outstanding equity to be retained by Holders
of Equity Interests following the Effective Date will be substantially diluted.
In the event of a liquidation of the Company's assets under Chapter 7 of the
Bankruptcy Code, the Company believes the distribution to Unsecured Creditors
would be substantially less than under the Plan. In addition, absent concessions
from holders of Unsecured Claims, there would be no distribution to Holders of
Equity Interests. Should the Plan not be confirmed, the Company will have to
seriously consider a Chapter 7 liquidation. For these reasons, the Company urges
that the Plan be accepted.
<PAGE>
PART II.
ITEM 1. LEGAL PROCEEDINGS
-----------------
For information concerning current litigation regarding the Company,
see Note 9 in the Notes to Consolidated Financial Statements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
See Note 6 in the Notes to Consolidated Financial Statements.
ITEM 6. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
------------------------------------------------------------------
(a) Exhibits -- None
(b) The Company filed Form 8-K reports dated April 1, 1997
(items 5, 7 and 9), July 9, 1997 (item 5), August 31, 1997
(item 5), September 4, 1997 (items 5 and 7) and December 1,
1997 (item 5).
<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: ______________, 1998 By:
-----------------------
Luis Alvarez, President
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