U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[ X ] Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required] for the fiscal year ended:
May 31, 1996
------------
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period
from to
----------- -----------
COMMISSION FILE NUMBER: 0 -24058
------------
TOUCH TONE AMERICA, INC.
--------------------------------------------
(Name of small business issuer in its charter)
California 33-0424087
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4110 N. Scottsdale Road
Suite 170
Scottsdale, Arizona 85251
--------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (800) 535-2211
---------------
Securities registered under Section 12(b) of the Act: None
------
Securities registered under Section 12(g) of the Act:
Common Stock, no par value
--------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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
for at least the past 90 days. Yes X No
----- -----
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to this Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year: $2,238,000
------------
Aggregate market value of voting stock held by non-affiliates as of
September 5, 1996: $21,833,787
-----------
Shares of Common Stock, no par value, outstanding as of September 5, 1996:
3,319,300
- ---------
Documents incorporated by reference: Exhibits to Issuer's Registration
Statement on Form SB-2, No. 33-80131.
_____________________________________________________________________
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ------------------------------------------------------------------------
(a) The following documents are filed as a part of this Form
10-KSB/A:
1. Consolidated Financial Statements of Touch Tone America, Inc.:
Independent Auditor's Report
Consolidated Balance Sheet - May 31, 1996
Consolidated Statement of Operations - Ten months ended May 31,
1995 and year end May 31, 1996
Consolidated Statement of Changes in Stockholders' Equity - For
the period from August 1, 1995 through May 31,1996
Consolidated Statement of Cash Flows - Ten months ended May 31,
1995 and year end May 31, 1996
Notes to Consolidated Financial Statements
-2-
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<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT . . . . . . . . . . . . . . . . . . F-2
CONSOLIDATED BALANCE SHEET - May 31, 1996 . . . . . . . . . . . F-3
CONSOLIDATED STATEMENTS OF OPERATIONS - For the Ten Months
Ended May 31, 1995 and the Year Ended May 31, 1996. . . . . F-4
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - For
the Period from August 1, 1994 through May 31, 1996 . . . . F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Ten Months
Ended May 31, 1995 and the Year Ended May 31, 1996. . . . . F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . F-7
F-1
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<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Touch Tone America, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheet of Touch Tone
America, Inc. as of May 31, 1996, and the related consolidated statements
of operations, stockholders' equity and cash flows for the ten months ended
May 31, 1995 and for the year ended May 31, 1996. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Touch Tone America, Inc. as of May 31, 1996, and the results of
their operations and their cash flows for the ten months ended May 31, 1995
and for the year ended May 31, 1996, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 2 to the consolidated financial statements, the Company has
incurred losses from operations and has entered into significant sales
volume commitments. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the
outcome of these uncertainties.
Hein + Associates LLP
Denver, Colorado
August 9, 1996
F-2
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<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
May 31,
1996
-------
ASSETS
------
CURRENT ASSETS:
Cash $5,278,000
Trade receivables, net allowance for
doubtful accounts of $124,000 264,000
----------
Total current assets 5,542,000
EQUIPMENT, net of accumulated depreciation of $62,000 429,000
OTHER:
Intangibles, net of accumulated amortization of $97,000 738,000
Refundable deposits 76,000
Prepaid expenses 143,000
----------
TOTAL ASSETS $6,928,000
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 477,000
Accrued liabilities 1,170,000
Deferred revenues 76,000
Notes payable to stockholders 393,000
Current portion of capital lease obligations 61,000
----------
Total current liabilities 2,177,000
DEFERRED REVENUE 25,000
CAPITAL LEASE OBLIGATIONS, net of current portion 134,000
COMMITMENTS (NOTE 5)
REDEEMABLE PREFERRED STOCK LIABILITY 750,000
COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 10,000,000 shares
authorized; none outstanding -
Common stock, no par value, 100,000,000 shares
authorized, 3,204,300 shares issued and outstanding 7,195,000
Accumulated deficit (3,353,000)
----------
Total stockholders' equity 3,842,000
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,928,000
==========
See accompanying notes to these consolidated financial statements.
F-3
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<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE
TEN MONTHS FOR THE
ENDED YEAR ENDED
MAY 31, MAY 31,
1995 1996
-------- --------
NET REVENUES:
Long distance resell $ 1,952,000 $ 1,951,000
Internet access - 287,000
----------- -----------
1,952,000 2,238,000
COST OF SALES
Long distance resell (1,310,000) (1,284,000)
Internet access - (122,000)
----------- -----------
(1,310,000) (1,406,000)
----------- -----------
GROSS MARGIN 642,000 832,000
OPERATING EXPENSES:
Selling 337,000 620,000
General and administrative 507,000 1,853,000
Excess volume commitments 32,000 871,000
----------- -----------
876,000 3,344,000
----------- -----------
LOSS FROM OPERATIONS (234,000) (2,512,000)
OTHER INCOME (EXPENSE):
Interest expense, primarily stockholders (12,000) (172,000)
Absorbed offering and acquisition costs (48,000) (118,000)
----------- -----------
(60,000) (290,000)
----------- -----------
NET LOSS $ (294,000) $(2,802,000)
=========== ===========
LOSS PER SHARE $ (.19) $ (1.81)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
AND EQUIVALENTS 1,508,000 1,552,000
=========== ===========
See accompanying notes to these consolidated financial statements.
F-4
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<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED
------------------ STOCK ACCUM-
NUMBER ISSUANCE ULATED
OF SHARES AMOUNT COSTS DEFICIT TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, August 1, 1994 2,785,000 $ 2,000 $ - $(257,000) $(255,000)
Surrender of common stock (1,651,000) - - - -
Grants of common stock
by stockholders - 16,000 - - 16,000
Common stock issued to
officer/director for
services 160,000 40,000 - - 40,000
Common stock issued
for cash 11,000 15,000 - - 15,000
Issuance cost of redeemable
preferred stock - - (108,000) - (108,000)
Net loss - - - (294,000) (294,000)
--------- --------- --------- --------- ---------
BALANCE, May 31, 1995 1,305,000 73,000 (108,000) (551,000) (586,000)
Issuance of common stock
in a private placement,
net of offering costs 350,000 600,000 - - 600,000
Issuance of common stock
for acquisition of GetNet 400,000 800,000 - - 800,000
Surrender of common stock (763,200) - - - -
Issuance of common stock
and warrants in a public
offering, net of
offering costs 1,725,000 5,830,000 - - 5,830,000
Conversion of redeemable
preferred stock to
common stock 187,500 (108,000) 108,000 - -
Net loss - - - (2,802,000) (2,802,000)
--------- --------- ---------- ---------- ----------
BALANCE, May 31, 1996 3,204,300 $7,195,000 $ - $(3,353,000) $3,842,000
========= ========== ========= ========== ==========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-5
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<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE
TEN MONTHS FOR THE
ENDED YEAR ENDED
MAY 31, MAY 31,
1995 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (294,000) $(2,802,000)
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation and amortization 2,000 129,000
Common stock for services 56,000 -
Bad debt expense 17,000 185,000
Absorbed acquisition costs 48,000 118,000
Change in assets and liabilities:
Decrease (increase) in:
Trade receivables (311,000) 128,000
Other assets - (214,000)
Increase (decrease) in:
Accounts payable 274,000 (71,000)
Accrued liabilities 422,000 625,000
Deferred revenue and other (8,000) 11,000
----------- -----------
Net cash provided by (used in)
operating activities 206,000 (1,891,000)
CASH FLOWS FROM INVESTING ACTIVITY:
Acquisition costs incurred (95,000) (25,000)
Purchase of equipment - (101,000)
----------- -----------
Net cash used in investing activities (95,000) (126,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 50,000 -
Payment of note payable (50,000) -
Payment of capital lease obligations - (100,000)
Proceeds from notes payable to stockholders - 210,000
Payment of notes payable to stockholders (24,000) -
Proceeds from issuance of redeemable
preferred stock 637,000 113,000
Proceeds from issuance of common stock 15,000 7,816,000
Offering costs incurred (285,000) (1,256,000)
----------- -----------
Net cash provided by financing
activities 343,000 6,783,000
----------- -----------
NET INCREASE IN CASH 454,000 4,766,000
CASH, beginning of period 58,000 512,000
----------- -----------
CASH, end of period $ 512,000 $ 5,278,000
=========== ===========
See accompanying notes to these consolidated financial statements.
F-6
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<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
--------------------------------------------------------
NATURE OF OPERATIONS - The consolidated financial statements include
the accounts of Touch Tone America, Inc. (Touch Tone) and from
November 1, 1995, GetNet International, Inc. (GetNet) (collectively
referred to as "the Company"). Touch Tone acquired the outstanding
common stock of GetNet effective November 1, 1995 as more fully
described in Note 3.
Touch Tone is engaged in the reselling long distance
telecommunications products and services primarily in the western and
southwestern United States. As a reseller of long distance services,
Touch Tone offers its customers the use of routing equipment and phone
lines of large carriers; in turn, the large carriers offer Touch Tone
volume discounts based on the use of this equipment. Touch Tone was
incorporated as a California corporation in 1990. Touch Tone
previously had a July 31 year-end. In fiscal 1995, Touch Tone changed
its year-end to May 31. Therefore, the 1995 financial statements only
include the financial operations for the ten months ended May 31,
1995.
GetNet is a provider of Internet and World Wide Web access services to
individuals and businesses in Arizona and other parts of the United
States. The Internet is a network of millions of computers around the
world which are able to communicate with one another, as well as
access the World Wide Web which is a system of documents on a
multitude of subjects.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Touch Tone and its subsidiary, GetNet as
described above. All significant intercompany accounts and
transactions have been eliminated in consolidation.
BASIS OF ACCOUNTING - The accompanying consolidated financial
statements have been prepared on the accrual basis of accounting.
Customer billings and collections for long distance services are
performed by a third party service provider (Provider). Accounts
receivable represents the amount the Company's customers owe for
actual usage. However, the amount the Company will receive from the
Provider will be offset by the payable due to the Provider for the
cost of providing the service, which is included in accounts payable
in the financial statements. The net of the receivable and payable is
the margin the Company receives. The Provider is responsible for
maintaining the Company's long distance accounts receivable and
withholds payments to the Company for past due customer amounts. Such
amounts withheld from the Company are offset by the margin otherwise
paid to the Company. Bad debt expense is included with general and
administrative expenses.
EQUIPMENT - Equipment is recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful life of the
equipment, generally five years. Repairs and maintenance are charged
to expense as incurred. Material expenditures, which increase the
life of an asset, are capitalized and depreciated over the estimated
remaining useful life of the asset. The cost of equipment sold, or
otherwise disposed of, and the related accumulated depreciation or
amortization are removed from the accounts, and any gains or losses
are reflected in current operations.
F-7
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<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES - The Company accounts for income taxes under the
liability method of SFAS No. 109, whereby current and deferred tax
assets and liabilities are determined based on tax rates and laws
enacted as of the balance sheet date. Deferred tax expense or benefit
represents the change in the deferred tax asset/liability balance.
REVENUE RECOGNITION - The Company recognizes revenue during the period
of performance of the related services. Deferred revenues consist of
the following:
* Funds paid by AT&T to Touch Tone at the initiation of a contract
of $42,000, deferred initially and recognized as a reduction to
cost of sales ratably over the life of the contract as earned.
A total of $1,000 and $16,000 was recognized during the ten
months ended May 31, 1995 and the year ended May 31, 1996,
respectively.
* Current month's advance billings by GetNet for subscriber
services and revenue received in advance for services under
contract. This amount will be recognized as revenue when earned.
INTANGIBLES - Intangibles represent the excess of the purchase price
paid over the net liabilities acquired in the GetNet acquisition of
$835,000. This amount is being amortized over five years.
CONCENTRATION OF CREDIT RISK - Credit risk represents the accounting
loss that would be recognized at the reporting date if counterparties
failed completely to perform as contracted. Concentrations of credit
risk (whether on or off balance sheet) that arise from financial
instruments exist for groups of customers or counterparties when they
have similar economic characteristics that would cause their ability
to meet contractual obligations to be similarly effected by changes in
economic or other conditions. The Company does not have a significant
exposure to any individual customer or counterparty.
At May 31, 1996, the Company's cash balance at one financial
institution was in excess of FDIC insured limits by approximately
$5,190,000.
USE OF ESTIMATES - The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles requires the Company's management to make estimates and
assumptions that affect the amounts reported in these financial
statements and accompanying notes. Actual results could differ from
those estimates. The Company makes significant estimates as to the
amortization period used for its intangibles. Due to the
uncertainties inherent in the life of intangibles, especially in light
of increased competition and technology changes, it is reasonably
possible that the estimated life of intangibles could materially
change in the forthcoming year.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values for
financial instruments under SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS, are determined at discrete points in time
based on relevant market information. These estimates involve
uncertainties and cannot be determined with precision. The estimated
fair values of the Company's financial instruments, which includes
cash and cash equivalents, trade receivables, accounts payable, and
notes payable to stockholders, approximates the carrying value in the
financial statements at May 31, 1996.
LOSS PER SHARE - Loss per share is generally computed based on the
weighted average number of shares outstanding. However, for the
periods presented, common and common equivalent shares including the
F-8
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<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
common stock underlying the redeemable preferred stock and common
stock options (using the treasury stock method and the public offering
price) have been included in the weighted average calculation, as if
they were outstanding for the entire period through December 31, 1995.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In March 1995, the
Financial Accounting Standards Board issued a new statement titled
"Accounting for Impairment of Long-Lived Assets." This new standard
is effective for years beginning after December 15, 1995 and would
change the Company's method of determining impairment of long-lived
assets. Although the Company has not performed a detailed analysis of
the impact of this new standard on the Company's consolidated
financial statements, the Company does not believe that adoption of
the new standard will have a material effect on the consolidated
financial statements.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for Stock-Based Compensation" (FAS 123).
The new statement is effective for fiscal years beginning after
December 15, 1995. FAS 123 encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock
options, and other equity instruments to employees based on fair
value. Companies that do not adopt the fair value accounting rules
must disclose the impact of adopting the new method in the notes to
the financial statements. Transactions in equity instruments with
non-employees for goods or services must be accounted for on the fair
value method. The Company currently does not intend to adopt the fair
value accounting prescribed by FAS 123, and will be subject only to
the disclosure requirements prescribed by FAS 123. However, the
Company intends to continue its analysis of FAS 123 and may elect to
adopt its provisions in the future.
2. CONTINUED OPERATIONS:
--------------------
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue operating as a going concern,
which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has
incurred significant losses since inception. Furthermore, as
discussed in Note 5, the Company has entered into sales volume
commitments with service providers.
The Company renegotiated two significant commitments under which it
was experiencing substantial shortfalls. Under the revised
agreements, the Company's future commitment has been eliminated. The
Company, however, has a continuing service commitment with AT&T of
$1,800,000 annually, which it was currently satisfactorily meeting at
year-end. However, as discussed in Note 5, subsequent to year-end,
monthly revenues under this commitment have declined, and unless
related revenues increase the Company will be unable to continue to
meet this commitment. Therefore, an additional loss accrual may be
recorded in fiscal 1997.
The Company's ability to continue as a going concern is dependent upon
several factors, including meeting its future carrier commitments, and
ultimately achieving and maintaining profitable operations. The
Company is also aggressively working to increase revenues, which it
believes will ultimately lead to profitable operations and enable the
Company to meet its continuing service commitments. The accompanying
consolidated financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
F-9
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<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS
------------
In August 1996, the Company entered into a letter of intent to merge
with Arcada Communications Inc. (Arcada), based in Seattle,
Washington, whereby the Company would issue to Arcada a $1,500,000
promissory note and 12,500,000 shares of the Company's common stock.
As a result, Arcada would acquire control of both management and the
board of directors of the Company. The completion of the merger is
subject to completion of a merger agreement and approval by the board
of directors and shareholders of both companies.
In November 1995, the Company acquired the outstanding common stock of
GetNet through the issuance of 400,000 shares of its common stock,
which was valued at $800,000. This acquisition was accounted for
under purchase method of accounting. The excess of the purchase price
over the net liabilities acquired of approximately $835,000 will be
amortized over a period not to exceed five years. All other assets
and liabilities were recorded at book values, which approximated fair
value. Unaudited pro-forma financial information is provided below:
FISCAL YEAR FISCAL YEAR
1995 1996
----------- -----------
Net Revenues $ 2,067,000 $ 2,388,000
=========== ===========
Net Loss $ (724,000) $(2,823,000)
=========== ===========
Net Loss per Share $ (.24) $ (1.88)
=========== ===========
The above pro-forma financial information assumes the acquisition
occurred at the beginning of the period presented. This information
is not necessarily indicative of the financial results which would
have resulted if the acquisition had occurred at such earlier date nor
of future financial operating results.
In August 1995, the Company entered into an acquisition agreement with
National Telcom Management, Inc. (NTM) to purchase NTM's long distance
customer base (Telcom). In January 1996, the Company terminated the
contract with NTM and forfeited a $90,000 deposit previously paid.
Accordingly, this amount and other costs associated with the
acquisition of approximately $25,000 has been shown as an expense in
the accompanying financial statements.
F-10
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<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES PAYABLE TO STOCKHOLDERS:
-----------------------------
Notes payable to stockholders consist of the following:
Notes payable to stockholder with a stated interest
rate of 30% per annum, unsecured which was repaid
subsequent to year-end through the issuance of
70,000 shares of common stock. As a result, the
Company will record interest and finance charges
totaling $250,000, based upon the value of the shares
issued, of which $125,000 is included in accrued
liabilities based on the period the note was
outstanding. The balance will be expensed in fiscal
1997.
$210,000
Notes payable to stockholders with interest at 10% and
12%, principal and interest was paid after year end.
183,000
--------
Total $393,000
========
Interest expense to stockholders for the ten months ended May 31, 1995
and for the year ended May 31, 1996 totaled $12,000 and $172,000,
respectively. Accrued interest of $127,000 was included in accrued
liabilities at May 31, 1996.
5. COMMITMENTS:
-----------
OPERATING LEASES - The Company leases its office facilities and
certain equipment under non-cancelable operating leases. Rent expense
for the ten months ended May 31, 1995 and for the year ended May 31,
1996 was $26,000 and $63,000, respectively. At May 31, 1996, future
lease obligations under leases with lease terms in excess of one year
are as follows:
For the Year Ended May 31,
--------------------------
1997 $ 118,000
1998 121,000
1999 78,000
2000 37,000
2001 37,000
Thereafter 3,000
---------
$ 394,000
=========
F-11
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<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL LEASES - The Company leases certain equipment which have been
recorded as capital leases. Obligations under these capital leases
have been recorded at the present value of future minimum lease
payments, discounted at rates ranging from approximately 20% to 23%.
The capitalized cost of $231,000 less accumulated amortization of
$31,000, are included in property and equipment at May 31, 1996. The
following is a schedule of future minimum lease payments under capital
leases at May 31, 1996:
For the Year Ended May 31,
--------------------------
1997 $ 95,000
1998 80,000
1999 44,000
2000 30,000
2001 15,000
---------
Future minimum lease payment 264,000
Less amount representing interest (69,000)
---------
Present value of net minimum lease payments 195,000
Less current portion (61,000)
---------
$ 134,000
=========
TELECOMMUNICATIONS CIRCUIT LEASES - The Company leases certain
telecommunication circuits, primarily in connection with its Internet
backbone, under non-cancelable operating leases. Lease expense for
both the ten months ended May 31, 1995 and for the year ended May 31,
1996 was nominal as most of these leases were entered into subsequent
to May 31, 1996. As of August 9, 1996, future minimum lease
obligations under leases with lease terms in excess of one year are as
follows:
For the Year Ended May 31,
--------------------------
1997 $ 647,000
1998 1,129,000
1999 1,129,000
2000 549,000
2001 43,000
Thereafter 205,000
----------
$3,702,000
==========
Included in the above amounts is a three-year commitment beginning in
January 1997 with WilTel, whereby the Company is required to lease a
minimum of $70,000 per month of telecommunication circuits. Under
this agreement, all costs incurred are not only applied dollar-for-
dollar against this commitment, but are also concurrently credited 1-
1/2 times actual usage against the Company's long distance service
commitment described below.
F-12
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<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company, however, is obligated to pay for actual monthly usage of
telecommunication circuits, which for August 1996 approximated $70,000
(unaudited), irrespective of the related usage by the Company's
Internet customers which was nominal for August 1996.
SERVICE COMMITMENTS - The Company signed the following commitments:
* A commitment which commenced in November 1994 (as revised)
with AT&T to sell $1,200,000 of "800" service annually,
which will be terminated with the payment to AT&T of
$586,000 with no minimum commitments thereafter.
* Five-year commitment beginning August 1994 with AT&T
Software Defined Network (SDN) to sell $1.8 million
annually.
* Two-year commitment beginning October 1995 with WilTel to be
a reseller of its long distance services. Minimum
commitments of $50,000 per month to commence in August 1996.
* Three-year commitment beginning September 1995 with Paging
Network of Arizona, Inc. to be a reseller of paging
services. The Company is required to resell a minimum
number of paging service agreements by various dates or
otherwise risk termination of its agreement. The Company
does not consider this commitment to be significant to
future operations.
The Company was not meeting its "800" service agreement commitment
with AT&T, and consequently, in April 1996, the Company entered into
a revised agreement with AT&T, which provided for the repayment in
June 1996 of $186,000 paid by AT&T on the signing of the initial
agreement and $400,000 over twelve months beginning in June 1996. If
the Company does not make the payments as required, the Company will
be obligated to pay $1,027,000, less amounts previously paid. During
the year ended May 31, 1996, the Company has recorded $400,000 of
expense in connection with settlement of this commitment. As of
August 9, 1996, the Company is current in its payments to AT&T.
The Company also has a continuing commitment with AT&T to provide long
distance service of $1,800,000 annually, which as of May 31, 1996, it
was satisfactorily meeting. However, subsequent to year-end, monthly
revenues have declined and unless related revenues increase the
Company will be unable to continue to meet the minimum amount of this
commitment (which is 80% of the total commitment). Therefore, an
additional loss accrual may be recorded in fiscal 1997, however, an
estimate of such loss, if any, cannot be made at this time. The
Company is hopeful it will be able to renegotiate its contract with
AT&T to obtain a more favorable rate per minute and commitment level
and replace its existing SDN contract. However, there is no assurance
that the Company will be able to ultimately renegotiate its existing
contract.
The Company has a commitment with WilTel which commenced in August
1996 to sell $50,000 per month of long distance services. This
substantially exceeds the Company's current level of service. The
Company will effectively meet this commitment as a result of its
telecommunication circuit leases.
The Company has an agreement with ICG Access Services, which was
revised in March 1996. Under the old agreement, the Company was
required to utilize ICG services or pay ICG the difference between
the amount utilized and the minimum monthly commitment. During the
periods ended May 31, 1996 and May 31, 1995, the Company has recorded
F-13
__________________________________________________________________________
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$462,000 and $32,000, respectively, of expense under this initial
agreement. In March 1996, the Company renegotiated its agreement with
ICG whereby it agreed to pay its then current obligation of
approximately $430,000 with $250,000 from proceeds of public offering
and the issuance of 45,000 shares valued at $180,000. At May 31,
1996, the Company has an accrued liability to ICG of approximately
$180,000 which represents the 45,000 shares which were issued
subsequent to year-end. There has been relatively insignificant
revenue associated with this expense as the Company has only began
marketing services under the ICG agreement on a very limited basis.
EMPLOYMENT AGREEMENTS - During the year ended May 31, 1996, the
Company entered into employment agreements with various individuals.
As of May 31, 1996, the base salary under these agreements aggregate
approximately $480,000 in fiscal 1997 and $225,000 in fiscal 1998.
The Company may terminate the agreements for cause. If terminated for
any other reason, the Company will pay six months salary and benefit
allowance if termination occurs in the first year of the agreement and
nine months salary and benefit allowance if after the first year. In
connection with the employment agreements, certain options were
granted as discussed in Note 6. In April 1996, two of the Company's
officers resigned and terminated their employment agreements and the
Company hired a new president/chief executive officer. Furthermore,
in July 1996, two employees were terminated without cause, but agreed
to terminate their employment agreements for a total of $36,000 in
compensation which will be expensed in fiscal 1997. The above
commitments have been revised to reflect these changes.
In April 1996, the Company entered a consulting agreement with the
former chief executive officer of the Company to assist the Company in
mergers and acquisitions. Under this agreement, the Company will pay
a base compensation of approximately $15,000 per month, which under an
amended agreement in June 1996 has been extended through October 1997,
plus additional compensation based on the level of success of future
endeavors.
6. CAPITAL STOCK:
-------------
PREFERRED STOCK - In June 1995, the Company completed a private
placement of the Company's Series A Convertible Preferred Stock. The
Company received $642,000, net of offering costs of $108,000, from
issuing 150,000 shares of convertible preferred stock. The shares
were redeemed from $750,000 proceeds received in the Company's public
offering plus 187,500 shares of common stock. (The common stock was
effectively issued at the time of the public offering; but the
preferred stock liability was paid in June 1996.)
The Company has authorized, but unissued 10,000,000 shares of
preferred stock, which may be issued in such series and with such
preferences as determined by the Company's Board of Directors.
COMMON STOCK - In March 1995, the Company restructured its capital
accounts, whereby it revised its articles to increase the authorized
shares and changed its common stock to a "no par value." Furthermore,
the Company declared an approximate 1 for 185 reverse stock split.
For financial statement presentation purposes, shares outstanding and
all common shares references have been restated to reflect this split,
as if it occurred at the beginning of the period presented.
During the ten months ended May 31, 1995, a prior shareholder
surrendered 1,393,000 shares of common stock when the Company repaid
a then outstanding $23,000 debt. Another shareholder also surrendered
F-14
_________________________________________________________________________
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
258,000 shares of common stock for an agreement to repay an
outstanding debt plus accrued interest totaling $41,000. The
surrendered shares were canceled by the Company.
During the ten months ended May 31, 1995 the founding shareholders
transferred 62,300 of their shares of common stock to persons who in
the past provided certain limited consulting assistance to the
Company. For financial statement presentation purposes, the value of
such services has been reflected as an expense in the financial
statement with an offset to capital, as if such shares had been issued
directly by the Company.
The Company also issued 60,000 and 100,000 shares of common stock for
services in February and May 1995 to an officer/director. For
financial statement presentation purposes, such shares have been
recorded based on the estimated value of the services rendered
(aggregating $40,000), which approximated the value of the common
stock at the time of issuance, as determined by the Company's Board of
Directors.
In April 1995, the Company sold 11,000 shares of common stock to an
unrelated party based on a prior agreement to issue common stock at a
price 50% of an initial public offering price.
In November 1995, the Company completed a private placement of its
common stock whereby it sold 350,000 shares of common stock for
$700,000. The Company incurred costs associated with this offering of
approximately $100,000.
Pursuant to an understanding with the Company's Representative, in
November 1995 and March 1996, the founding shareholders surrendered an
aggregate of 763,200 shares of common stock back to the Company.
In May 1996, the Company completed a public offering of its common
stock and warrants whereby it sold 1,725,000 shares of common stock at
$4 per share and 1,725,000 warrants at $.125 per warrant. Net
proceeds, after offering costs, was approximately $5,830,000. Each
warrant enables the holder to purchase one share of common stock at
the public offering price of $4 per share through May 1997. The
Company may redeem the warrants at $.25 per warrant, under certain
circumstances. The Representative to the offering also received a
warrant for the purchase of 150,000 shares of common stock and
150,000 warrants exercisable at $4.80 per share for four years
commencing May 1997. At the closing of the public offering, the
Company engaged the Representative as a financial advisor to the
Company for a fee of $108,000 which is reflected as an other asset and
will be amortized over three years.
Also, see Note 3 for the common stock issued in connection with the
GetNet acquisition.
COMMON STOCK OPTIONS AND DIRECTOR WARRANTS - In April 1995, the
Company issued common stock options to certain persons who had
previously loaned funds to the Company. The options, which are
currently exercisable, entitle these persons to purchase an aggregate
15,900 shares of common stock for $3.00 per share for five years. As
of May 31, 1996, no options have been exercised.
F-15
_________________________________________________________________________
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 1996, the Company issued common stock options to an
independent significant sales agent (see Note 8). These options,
which are currently exercisable, entitle this sales agent to purchase
an aggregate of 60,000 shares of common stock for $2.00 per share over
five years. As of May 31, 1996, no options have been exercised.
As part of the various employment agreements, stock options were
granted to purchase a total of 540,000 shares. At May 31, 1996, no
options are exercisable. Options for 270,000 shares become
exercisable during fiscal 1997, with the remainder becoming
exercisable in fiscal 1998, at prices ranging from $4 to $6 per share
and generally expire one year after becoming exercisable. As
discussed in Note 5, in July 1996, two employees with employment
agreements were terminated. Under their termination agreements, the
terms of their options, previously issued, were amended and have been
reflected in the above figures.
During fiscal 1996, the Company issued 600,000 warrants to new
directors and 100,000 warrants to a member of the Company's
compensation committee to purchase common stock. The warrants have an
exercise price of $4.00 per share for a period of five years, with
125,000 warrants currently exercisable, 225,000 warrants vesting in
six months, and the balance vesting in one year. One of the new
directors became president of the Company in April 1996. As of
May 31, 1996, no options have been exercised.
7. INCOME TAXES:
------------
As of May 31, 1996, the Company has a net operating loss (NOL)
carryforward for tax reporting purposes of approximately $3,200,000,
however, a substantial portion may be limited due to changes in
ownership of the Company in fiscal 1995 and 1996, pursuant to Section
382 of the Internal Revenue Code, stemming primarily from the
issuances of common stock in its public and private offerings and the
acquisition of GetNet. This NOL expires in the years 2009 through
2011.
Deferred income taxes are provided for differences between the tax and
book basis of assets and liabilities as a result of temporary
differences in the recognition of revenues or expenses for tax and
financial reporting purposes, which relates primarily to certain items
not currently deductible for tax purposes until paid.
Deferred tax assets resulting from these differences consist of the
following:
Net operating loss carryforward $ 1,248,000
Other 72,000
-----------
Total 1,320,000
Less valuation allowance (1,320,000)
----------
Net deferred tax asset $ -
==========
The valuation allowance for deferred tax assets increased from
$195,000 at May 31, 1995 to $1,320,000 at May 31, 1996, due primarily
to an increase in the Company NOL carryforwards.
F-16
_________________________________________________________________________
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SIGNIFICANT SALES AGENT RELATIONSHIP:
------------------------------------
The Company has an agreement with an independent sales agent, whereby
the agent receives maximum commissions of approximately 32% on sales
it originates. At current sales levels, the Company does not realize
a direct profit from the sales generated by the agent. Indirectly,
however, the Company realizes more profit on its other monthly usage
as a result of the increased discounts resulting from the increased
usage received from the Company's provider. Also, if the Company
successfully renegotiates its contract with its provider, the Company
believes it will then directly realize additional profit on sales
originated by the agent, if a greater discount can be obtained from
the provider. Payment of the commissions to the agent is secured by
the customer base generated by the sales agent. For the ten months
ended May 31, 1995 and the year ended May 31, 1996, the sales
originated by the agent have accounted for 42% and 36%, respectively,
of company sales. During these periods, the Company has recorded a
related expense to the agent of approximately $265,000 and $299,000,
respectively, which includes $75,000 paid in fiscal 1996 to settle
past misunderstandings between the parties.
9. SUPPLEMENTAL CASH FLOW INFORMATION:
----------------------------------
The supplemental cash flow information is as follows:
FOR THE
TEN MONTHS FOR THE
ENDED YEAR ENDED
MAY 31, MAY 31,
1995 1996
-------- --------
Equipment acquired through capital
leases $ 24,000 $ 265,000
========= =========
Issuance of preferred stock for
receivables $ 113,000 $ -
========= =========
Issuance of common stock for GetNet
acquisition $ - $ 800,000
========= =========
F-17
__________________________________________________________________________
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SEGMENT INFORMATION:
-------------------
The Company's principal operations are in the long distance resell and
Internet access industries. The following is selected information for
fiscal 1996 about the Company's industry segments. Since GetNet was
acquired in November 1995, segment information is not included for the
ten months ended May 31, 1995.
Long
Distance Internet
Year Ended May 31, 1996 Resell Access Consolidated
----------------------- ----------- ----------- -----------
Revenue $ 1,951,000 $ 287,000 $ 2,238,000
Loss from operations (2,092,000) (420,000) (2,512,000)
Depreciation and
amortization 11,000 119,000 130,000
Capital expenditures 106,000 260,000 366,000
Identifiable assets 5,832,000 1,096,000 6,928,000
11. SUBSEQUENT EVENTS (UNAUDITED):
-----------------------------
Subsequent to year-end, an unknown party fraudulently charged over
$1,000,000 in long distance charges on the Company's account. The
Company is currently investigating the matter and has contacted the
carrier, AT&T, who denies any responsibility. The Company believes it
has recourse in the matter, and will not be held responsible for these
charges, but the outcome of this matter cannot be predicted at this
time.
F-18
_________________________________________________________________________
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
Date: October 31, 1996 TOUCH TONE AMERICA, INC.
By /s/ Michael J. Canney
-----------------------------
Michael J. Canney, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Michael J. Canney President, Principal October 31, 1996
- ------------------------ Executive Officer
Michael J. Canney
/s/ David J. Smith Principal Financial October 31, 1996
- ------------------------ and Accounting Officer
David J. Smith
/s/ Mathew J. Barletta Director October 31, 1996
- ------------------------
Mathew J. Barletta
- ----------------------- Director October ___, 1996
Stephen P. Shearin
/s/ Norman B. Walko Director October 31, 1996
- ------------------------
Norman B. Walko
/s/ Benjamin W. Bronston Director October 31, 1996
- ------------------------
Benjamin W. Bronston
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Balance Sheet as of May 31, 1996 and Statement of Operations
for the year then ended.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 5,278,000
<SECURITIES> 0
<RECEIVABLES> 368,000
<ALLOWANCES> (124,000)
<INVENTORY> 0
<CURRENT-ASSETS> 5,542,022
<PP&E> 491,000
<DEPRECIATION> (62,000)
<TOTAL-ASSETS> 6,928,000
<CURRENT-LIABILITIES> 2,177,000
<BONDS> 0
750,000
0
<COMMON> 7,195,000
<OTHER-SE> (3,353,000)
<TOTAL-LIABILITY-AND-EQUITY> 6,928,000
<SALES> 2,238,000
<TOTAL-REVENUES> 2,238,000
<CGS> (1,406,000)
<TOTAL-COSTS> (1,406,000)
<OTHER-EXPENSES> (3,462,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (172,000)
<INCOME-PRETAX> (2,802,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,802,000)
<EPS-PRIMARY> (1.81)
<EPS-DILUTED> 0
</TABLE>
