<PAGE>
As filed with the Securities and Exchange Commission on December__, 1996
Registration No. 333-
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM S-4
REGISTRATION STATEMENT
under the
SECURITIES ACT OF 1933
TOUCH TONE AMERICA, INC.
(Exact name of registrant as specified in charter)
California 4813 33-0424087
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number) Identification No.)
or organization)
Touch Tone America, Inc.
4110 N. Scottsdale Road, Suite 170
Scottsdale, Arizona 85251
(800) 535-2211
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
--------------------
Michael J. Canney
Touch Tone America, Inc.
4110 N. Scottsdale Road, Suite 170
Scottsdale, Arizona 85251
(800) 535-2211
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES OF ALL COMMUNICATIONS TO:
John B. Wills, Esq. David M. Otto, Esq.
410 Seventeenth Street Robert C. Seidel, Esq.
Suite 1940 John P. Stokke, Esq.
Denver, Colorado 80202 Cairncross & Hempelmann, P.C.
(303) 628-0747 70th Floor, Columbia Center
(303) 592-1846 FAX 701 Fifth Avenue
Seattle, Washington 98104-7016
(206) 587-0700
(206) 587-2308 FAX
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO PUBLIC: As
soon as practicable after the effective date of this Registration Statement and
after the satisfaction or waiver of all conditions to the Merger of Arcada
Communications, Inc. with and into a wholly-owned subsidiary of the Registrant
pursuant to the Merger Agreement described in the enclosed Joint Proxy
Statement/Prospectus.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: / /
<PAGE>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Title of each Proposed
class of Amount Proposed maximum Amount of
securities to to be maximum aggregate registration
be registered registered offering price offering price fee
(1) (1)
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Common Stock 12,500,000 ($ 24.06) ($ 1,203,000) $ 100
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- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
____________________
(1) Based on the book value of the securities to be received by the Registrant
as of September 30, 1996, less $1,500,000 aggregate cash consideration, for
the purpose of computing the registration fee as required by Rule 457(f)(2).
--------------
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission acting
pursuant to said section 8(a) may determine.
<PAGE>
CROSS REFERENCE SHEET
FORM S-4
ITEM NO. CAPTION SECTIONS IN PROSPECTUS
- -------- ------- ----------------------
A. INFORMATION ABOUT THE TRANSACTION
1 Forepart of the Registration Statement Outside Front Cover Page
and Outside Front Cover Page of
Prospectus
2 Inside Front and Outside Back Cover Inside Front Cover Pages (i)(ii);
Pages of Prospectus Table of Contents
3 Risk Factors, Ratio of Earnings to Risk Factors; Prospectus
Fixed Charges and Other Information Summary
4 Terms of the Transaction Terms of the Transaction
5 Pro Forma Financial Information Unaudited Pro Forma Condensed
Financial Information
6 Material Contracts with Company Being Not Applicable
Acquired
7 Additional Information Required for Not Applicable
Reoffering by Persons and Parties
Deemed to Be Underwriters
8 Interest of Named Experts and Counsel Experts
9 Disclosure of Commission Position on Statement as to Indemnification
Indemnification for Securities Act
Liabilities
B. INFORMATION ABOUT THE REGISTRANT
10 Information with Respect to S-3 Not Applicable
Registrants
11 Incorporation of Certain Information Not Applicable
by Reference
12 Information with Respect to S-2 or S-3 Not Applicable
Registrants
<PAGE>
FORM S-4
ITEM NO. CAPTION SECTIONS IN PROSPECTUS
- -------- ------- ----------------------
13 Incorporation of Certain Information Not Applicable.
by Reference
14 Information with Respect to Registrants Summary; Selected Consolidated
Other Than S-3 or S-2 Registrants Financial Data; Business of Touch
Tone, Description of Securities;
Dividend Policy; Material Changes;
Post Merger Profile and Strategy;
Touch Tone Management's Discussion
and Analysis of Financial
Condition and Results of
Operations
C. INFORMATION ABOUT COMPANY BEING
ACQUIRED
15 Information with Respect to S-3 Not Applicable
Companies
16 Information with Respect to S-2 or S-3 Not Applicable
Companies
17 Information with Respect to Companies Summary; Selected Combined
Other Than S-3 or S-2 Companies Financial Data; Business of
Arcada; Arcada Management's
Discussion and Analysis of
Financial Condition and Results
of Operations
D. VOTING AND MANAGEMENT INFORMATION
18 Information if Proxies, Consents or The Special Meeting
Authorizations are to be Solicited
19 Information if Proxies, Consents or Rights of Arcada Shareholders
Authorizations are not to be
Solicited or in an Exchange Offer
20 Indemnification of Directors and Indemnification of Directors and
Officers Officers
21 Exhibits and Financial Statement Exhibits
Schedules
22 Undertakings Undertakings
<PAGE>
TOUCH TONE AMERICA, INC.
___________, 1997
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders
of Touch Tone America, Inc. ("Touch Tone") to be held at 10:00 a.m., local
time, on ____________, 1997, at 2001 Sixth Avenue, Suite 3210, Seattle,
Washington 98181.
At this meeting, you will be asked to consider and vote upon a proposal
to approve and adopt the Agreement and Plan of Merger dated as of November
13, 1996, among Touch Tone, Touch Tone/Arcada, Inc. ("Merger Sub") and Arcada
Communications, Inc. ("Arcada"), as amended November 19, 1996 and as further
amended December 4, 1996 (the "Merger Agreement"), and to approve the merger
(the "Merger") of Arcada with and into Merger Sub pursuant to the Merger
Agreement. As a result of the Merger, Arcada shareholders will receive 250
shares of Common Stock, subject to certain resale restrictions and adjustment
under certain circumstances, and a 15 month 8% unsecured promissory note
("Promissory Note") in the principal amount of $30.00 for each share of their
Arcada Common Stock. As a result of the Merger, Merger Sub, as survivor in
the Merger, will continue to be a wholly owned subsidiary of Touch Tone.
Based upon the number of shares of Arcada Common Stock outstanding as of
the date hereof, there would be approximately 12.5 million shares of Touch
Tone Common Stock and an aggregate of $1.5 million in Promissory Notes issued
in the Merger. The Merger will constitute a reverse acquisition of Touch Tone
by Arcada in that Touch Tone will continue after the Merger but it will be
owned 78% by former Arcada shareholders. Pursuant to the terms of the Merger
Agreement, 11.5 million of the 12.5 million shares of Touch Tone Common Stock
issued in the Merger will be subject to resale restrictions until November
1998.
You will also be asked to consider and vote upon a proposal to approve a
proposal to change Touch Tone's state of incorporation from California to
Washington by a merger with and into a newly formed, wholly owned Washington
subsidiary, which merger (the "Reincorporation Merger") will be effected
immediately prior to the Merger. APPROVAL OF THE REINCORPORATION MERGER IS A
CONDITION TO ARCADA'S OBLIGATION TO CONSUMMATE THE MERGER.
THE TOUCH TONE BOARD OF DIRECTORS HAS APPROVED THE MERGER AND
REINCORPORATION MERGER AND RECOMMENDS THAT YOU VOTE FOR EACH OF SUCH
PROPOSALS.
Details of the proposed Merger and other important information
concerning Arcada and Touch Tone appear in the accompanying Joint Proxy
Statement/Prospectus. Please give this material your careful attention.
Whether or not you plan to attend the Special Meeting, please complete,
sign and date the accompanying proxy card and return it in the enclosed
prepaid envelope. You may revoke your proxy in the manner described in the
accompanying Joint Proxy Statement/Prospectus at any time before it has been
voted at the Special Meeting. If you attend the Special Meeting, you may vote
in person even if you have previously returned your proxy card. Your prompt
cooperation will be greatly appreciated.
Sincerely,
Michael J. Canney
President
<PAGE>
TOUCH TONE AMERICA, INC.
--------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
, 1997
----------------
TO THE SHAREHOLDERS OF TOUCH TONE AMERICA, INC.
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Touch
Tone America, Inc. ("Touch Tone"), a California corporation, will be held
at 10:00 a.m., local time, on ____________, 1997, at 2001 Sixth Avenue, Suite
3210, Seattle, Washington, to consider and vote upon the following proposals:
1. To approve and adopt the Agreement and Plan of Merger dated as of
November 13, 1996, among Touch Tone, Touch Tone/Arcada, Inc. ("Merger Sub")
and Arcada Communications, Inc. ("Arcada"), as amended November 19, 1996
and as further amended December 4, 1996 (the "Merger Agreement"), and to
approve the merger (the "Merger") of Arcada with and into Merger Sub
pursuant to the Merger Agreement. As a result of the Merger, Arcada
shareholders will receive 250 shares of Touch Tone Common Stock, subject
to certain resale restrictions and adjustment under certain circumstances,
and a 15 month 8% unsecured promissory note in the principal amount of
$30.00 for each share of their Arcada Common Stock. As a result of the
Merger, Merger Sub, as survivor in the Merger, will remain a wholly owned
subsidiary of Touch Tone.
2. To approve a proposal to change Touch Tone's state of incorporation
from California to Washington by a merger with and into a newly formed,
wholly owned Washington subsidiary, which merger (the "Reincorporation
Merger") will be effected immediately prior to the Merger.
3. To transact such other business as may properly come before the
meeting or any postponements or adjournments thereof.
APPROVAL OF THE REINCORPORATION MERGER IS A CONDITION TO ARCADA'S
OBLIGATION TO CONSUMMATE THE MERGER.
Only shareholders of record at the close of business on_______, 1997 are
entitled to notice of and to vote at the Special Meeting.
All shareholders are cordially invited to attend the meeting in person.
However, to ensure your representation at the meeting, you are urged to
complete, sign, date and return the enclosed proxy care as promptly as
possible in the postage-prepaid envelope enclosed for that purpose. YOU MAY
REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE ACCOMPANYING JOINT PROXY
STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE SPECIAL
MEETING. ANY SHAREHOLDER ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON
EVEN IF HE OR SHE HAS RETURNED A PROXY.
Sincerely,
Michael J. Canney
President
Scottsdale, Arizona
______________, 1997
<PAGE>
ARCADA COMMUNICATIONS, INC.
___________, 1997
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders
of Arcada Communications, Inc. ("Arcada") to be held at 10:00 a.m., local
time, on ____________, 1997, at 2001 Sixth Avenue, Suite 3210, Seattle,
Washington 98181.
At this meeting, you will be asked to consider and vote upon a proposal
to approve and adopt the Agreement and Plan of Merger dated as of November
13, 1996, among Arcada, Touch Tone/Arcada, Inc. ("Merger Sub") and Touch Tone
America, Inc. ("Touch Tone"), as amended November 19, 1996 and as further
amended December 4, 1996 (the "Merger Agreement"), and to approve the merger
(the "Merger") of Arcada with and into Merger Sub pursuant to the Merger
Agreement. As a result of the Merger, Arcada shareholders will receive 250
shares of Touch Tone Common Stock, subject to certain resale restrictions and
adjustment under certain circumstances and a 15 month 8% unsecured promissory
note in the principal amount of $30.00 for each share of their Arcada Common
Stock, and Merger Sub, as survivor in the Merger, will remain a wholly owned
subsidiary of Touch Tone.
THE ARCADA BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND
RECOMMENDS THAT YOU VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND APPROVAL OF THE MERGER.
Details of the proposed Merger and other important information
concerning Arcada and Touch Tone appear in the accompanying Joint Proxy
Statement/Prospectus. Please give this material your careful attention.
Whether or not you plan to attend the Special Meeting, please complete,
sign and date the accompanying proxy card and return it in the enclosed
prepaid envelope. You may revoke your proxy in the manner described in the
accompanying Joint Proxy Statement/Prospectus at any time before it has been
voted at the Special Meeting. If you attend the Special Meeting, you may vote
in person even if you have previously returned your proxy card. Your prompt
cooperation will be greatly appreciated.
Sincerely,
Frank J. Bonadio
President
Seattle, Washington
________________, 1997
<PAGE>
ARCADA COMMUNICATIONS, INC.
______________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
________________, 1997
TO THE SHAREHOLDERS OF ARCADA COMMUNICATIONS, INC.
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Arcada
Communications, Inc. ("Arcada"), a Washington corporation, will be held at
10:00 a.m., local time, on ____________, 1997, at 2001 Sixth Avenue, Suite
3210, Seattle, Washington, to consider and vote upon the following proposals:
1. To approve and adopt the Agreement and Plan of Merger dated as of
November 13, 1996, among Arcada, Touch Tone/Arcada, Inc. ("Merger Sub") and
Touch Tone America, Inc. ("Touch Tone"), as amended November 19, 1996 and
as further amended December 4, 1996 (the "Merger Agreement"), and to
approve the merger (the "Merger") of Arcada with and into Merger Sub
pursuant to the Merger Agreement. As a result of the Merger, Arcada
shareholders will receive 250 shares of Touch Tone Common Stock, subject
to certain resale restrictions and adjustment under certain
circumstances, and a 15 month 8% unsecured promissory note in the
principal amount of $30.00 for each share of their Arcada Common Stock,
and Merger Sub, as survivor in the Merger, will remain a wholly owned
subsidiary of Touch Tone.
2. To transact such other business as may properly come before the
meeting or any postponements or adjournments thereof.
Only holders of shares of Arcada Common Stock of record at the close of
business on _______, 1997 are entitled to notice of and to vote at the Special
Meeting. Holders of Arcada Common Stock are entitled to assert dissenters'
rights in connection with the Merger.
All shareholders are cordially invited to attend the meeting in person.
However, to ensure your representation at the meeting, you are urged to
complete, sign, date and return the enclosed proxy care as promptly as possible
in the postage-prepaid envelope enclosed for that purpose. YOU MAY REVOKE YOUR
PROXY IN THE MANNER DESCRIBED IN THE ACCOMPANYING JOINT PROXY
STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE SPECIAL
MEETING. ANY SHAREHOLDER ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON EVEN
IF HE OR SHE HAS RETURNED A PROXY.
Sincerely,
Frank J. Bonadio
President
Seattle, Washington
________________, 1997
<PAGE>
TOUCH TONE AMERICA, INC.
AND
ARCADA COMMUNICATIONS, INC.
-------------
JOINT PROXY STATEMENT
-------------
TOUCH TONE AMERICA, INC.
PROSPECTUS
-------------
This Joint Proxy Statement/Prospectus is being furnished to holders of
common stock, no par value, of Touch Tone America, Inc. ("Touch Tone Common
Stock"), a California corporation ("Touch Tone"), in connection with the
solicitation of proxies by the Board of Directors of Touch Tone (the "Touch
Tone Board") for the use at the Special Meeting of the Shareholders of Touch
Tone (the "Touch Tone Shareholders"), to be held at 10:00 a.m., local time,
on _________, 1997, or at any adjournments or postponements thereof, for the
purposes set forth herein and in the accompanying Notice of Special Meeting
of Shareholders of Touch Tone (the "Touch Tone Special Meeting"). The Touch
Tone Special Meeting will be held at 2001 Sixth Avenue, Suite 3210, Seattle,
Washington.
This Joint Proxy Statement/Prospectus is also being furnished to holders
of common stock, no par value, of Arcada Communications, Inc. ("Arcada Common
Stock"), a Washington corporation ("Arcada"), in connection with the
solicitation of proxies by the Board of Directors of Arcada (the "Arcada
Board") for use at the Special Meeting of the Shareholders of Arcada (the
"Arcada Shareholders") to be held at 1:00 p.m., local time, on __________,
1997, or at any adjournments or postponements thereof, for the purposes set
forth herein and in the accompanying Notice of Special Meeting of
Shareholders of Arcada (the "Arcada Special Meeting"). The Arcada Special
Meeting will be held at 2001 Sixth Avenue, Suite 3021, Seattle, Washington.
This Joint Proxy Statement/Prospectus constitutes a prospectus of Touch
Tone with respect to the shares of Touch Tone Common Stock and promissory
notes to be issued in connection with the merger (the "Merger") of Arcada
with and into Touch Tone/Arcada, Inc., a Washington corporation and wholly
owned subsidiary of Touch Tone ("Merger Sub"), pursuant to the Agreement and
Plan of Merger, dated as of November 13, 1996, among Touch Tone, Merger Sub
and Arcada, as amended November 19, 1996 and as further amended December 4,
1996, substantially in the form attached hereto as Appendix A (the "Merger
Agreement"). As a result of the Merger, Merger Sub, the survivor in the
Merger, will be a wholly owned subsidiary of Touch Tone. Upon the
effectiveness of the Merger, each outstanding share of Arcada Common Stock
will be converted into the right to receive 250 shares of Touch Tone Common
Stock, subject to adjustment under certain circumstances, and a 15 month 8%
unsecured promissory note in the principal amount of $30.00. Based upon the
number of shares of Arcada Common Stock outstanding as of the date hereof,
there would be approximately 12.5 million shares of Touch Tone Common Stock
and an aggregate of $1.5 million in Promissory Notes, substantially in the
form attached hereto as Appendix B (the "Promissory Note") issued in the
Merger. The Merger will constitute a reverse acquisition of Touch Tone by
Arcada in that Touch Tone will continue after the Merger but it will be owned
78% by former Arcada Shareholders. Pursuant to the terms of the Merger
Agreement, 11.5 million of the 12.5 million shares of Touch Tone Common Stock
issued in the Merger will be subject to resale restrictions until November,
1998. All information contained in this Joint Proxy Statement/Prospectus
relating to Touch Tone has been supplied by Touch Tone, and all information
contained herein relating to Arcada has been supplied by Arcada.
On November 15, 1996, the last trading day prior to announcement of the
Merger, the closing sale price on the Nasdaq SmallCap Market ("Nasdaq") of
Touch Tone Common Stock and warrants was $3.00 and $1.00, respectively. On
November 22, 1996, the closing sale price on Nasdaq of Touch Tone Common
Stock and warrants was $4.00 and $1.1875, respectively.
Touch Tone is dependent on the Merger to increase revenues and operating
efficiencies. If the Merger should not be consummated for any reason, Touch
Tone will be in need of immediate financing to offset declining revenues and
short-falls on its carrier commitment. There can be no assurance such
financing would be available or on what terms. SEE "RISK FACTORS" COMMENCING
ON PAGE 18 FOR A DESCRIPTION OF CERTAIN RISKS INVOLVED IN THE MERGER.
This Joint Proxy Statement/Prospectus, the accompanying forms of proxy
and the other enclosed documents are first being mailed to shareholders of
Touch Tone and Arcada on or about ______________, 1997.
--------------------------
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
The date of this Joint Proxy Statement/ Prospectus is ____________, 1997
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION ....................................................1
SUMMARY ..................................................................2
MARKET PRICES ............................................................9
SUMMARY CONSOLIDATED FINANCIAL DATA OF TOUCH TONE AMERICA, INC. .........10
SUMMARY COMBINED FINANCIAL DATA OF ARCADA COMMUNICATIONS, INC. ..........11
SUMMARY PRO FORMA CONDENSED FINANCIAL DATA...............................12
RISK FACTORS ............................................................15
THE TOUCH TONE SPECIAL MEETING ..........................................24
Matters To Be Considered at the Touch Tone Special Meeting ............24
Voting of Proxies .....................................................24
Revocability of Proxies; Quorum .......................................25
Vote Required for Approval ............................................25
Appraisal Rights ......................................................25
Solicitation of Proxies ...............................................25
THE ARCADA SPECIAL MEETING ..............................................26
Matters to be Considered at the Arcada Special Meeting ................26
Voting of Proxies .....................................................26
Revocability of Proxies; Quorum .......................................26
Vote Required for Approval ............................................27
Appraisal Rights ......................................................27
Solicitation of Proxies ...............................................27
THE MERGER ..............................................................28
General ...............................................................28
Background of the Merger ..............................................28
-i-
<PAGE>
Interests of Certain Persons in the Merger ............................31
Governmental And Regulatory Approvals .................................31
Federal Income Tax Consequences .......................................32
Anticipated Accounting Treatment ......................................33
Dissenters' Rights ....................................................33
Nasdaq Listing ........................................................34
Resale of Touch Tone Common Stock .....................................34
THE MERGER AGREEMENT ....................................................35
Effective Date and Time of the Merger .................................35
Conditions to the Consummation of the Merger ..........................35
Business of Touch Tone Pending the Merger .............................36
Waiver and Amendment ..................................................36
Termination ...........................................................37
Break-Up Fees .........................................................37
Lock-Up ...............................................................38
Exchange of Stock Certificates ........................................38
Expenses ..............................................................39
Post-Merger Dividend Policy ...........................................39
BUSINESS OF TOUCH TONE ..................................................40
General ...............................................................40
Internet Division .....................................................42
Long Distance Division ................................................45
Local Access Division .................................................45
Wireless Division .....................................................45
Government Regulation .................................................45
Employees .............................................................45
Litigation ............................................................46
-ii-
<PAGE>
TOUCH TONE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ...............................................47
BUSINESS OF ARCADA ......................................................55
Introduction ..........................................................55
Industry Background ...................................................55
Company Strategy ......................................................56
Marketing and Sales ...................................................57
Customer Service ......................................................58
Wireless Operations ...................................................58
Products and Services .................................................59
Billing System ........................................................60
Acquisitions ..........................................................61
Suppliers .............................................................61
Acquisition of Switching Facilities ...................................61
Competition ...........................................................62
Regulation ............................................................62
Employees .............................................................64
Properties ............................................................64
Certain Transactions ..................................................64
Legal Proceedings .....................................................65
ARCADA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ...................................................66
TOUCH TONE MANAGEMENT ...................................................69
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS OF
TOUCH TONE ..............................................................74
ARCADA MANAGEMENT .......................................................76
Arcada Designees ......................................................76
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS OF ARCADA 78
-iii-
<PAGE>
MANAGEMENT AND OPERATIONS OF TOUCH TONE FOLLOWING THE MERGER ............79
Operations ............................................................79
Employment and Consulting Agreements ..................................81
REINCORPORATION OF TOUCH TONE IN WASHINGTON .............................82
Summary ...............................................................82
Principal Reasons for the Proposed Reincorporation ....................82
Plan of Reincorporation Merger ........................................82
Effect of Reincorporation and Reincorporation Merger ..................83
DESCRIPTION OF CAPITAL STOCK OF TOUCH TONE ..............................84
DESCRIPTION OF CAPITAL STOCK OF ARCADA ..................................86
COMPARISON OF RIGHTS OF HOLDERS OF TOUCH TONE COMMON STOCK AND
TOUCH TONE - WASHINGTON COMMON STOCK ....................................87
EXPERTS .................................................................90
LEGAL MATTERS ...........................................................90
OTHER INFORMATION AND STOCKHOLDER PROPOSALS .............................90
INDEX TO FINANCIAL STATEMENTS ..........................................F-1
APPENDICES:
A. Merger Agreement Including Plan of Merger
B. Form of Promissory Note
C. Washington Dissenters' Rights Statute (RCW 23B.13)
D. Form of Agreement and Plan of Reincorporation Merger
E. Articles of Incorporation and Bylaws of Touch Tone - Washington
-iv-
<PAGE>
LIST OF APPENDICES:
APPENDIX A - AGREEMENT AND PLAN OF MERGER A-1
APPENDIX B - RIGHTS OF DISSENTING
SHAREHOLDERS,
WASHINGTON BUSINESS CORPORATION ACT B-1
APPENDIX C - FORM OF PROXY C-1
<PAGE>
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN
THIS JOINT PROXY STATEMENT/ PROSPECTUS IN CONNECTION WITH THE OFFERING OF
SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY TOUCH
TONE OR ARCADA. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, NOR DOES
IT CONSTITUTE THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY
PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THE JOINT PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF TOUCH TONE OR ARCADA SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
Touch Tone is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("the 1934 Act"), and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copied
at the public reference facilities maintained by the Commission at its
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following Regional Offices of the Commission: in Denver,
1801 California Street, Suite 4800, Denver, Colorado 80202; in Chicago, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661; in New York, 7
World Trade Center, Suite 1300, New York, New York 10048; in Miami, 1401
Brickell Avenue, Suite 200, Miami, Florida 33131; and in Los Angeles, 5670
Wilshire Boulevard, 11th Floor, Los Angeles, California 90036. Copies of such
materials can be obtained at prescribed rates by written request addressed to
the Commission, Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549. The Commission also maintains a Web Site that contains reports,
proxy and information statements and other information regarding registrants,
including Touch Tone, that file electronically with the Commission at
http://www.sec.gov. In addition, copies of such documents and other
information are provided to Nasdaq and can be inspected at the Nasdaq offices
maintained at the National Association of Securities Dealers, Inc., 1735
"K" Street, Washington, D.C. 20549.
Touch Tone has filed with the Commission in Washington, D.C. a
Registration Statement on Form S-4 (together with all amendments,
supplements, and exhibits thereto, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended, (the "1933 Act")
with respect to the Touch Tone Common Stock to be issued in the Merger. This
Joint Proxy Statement/Prospectus does not contain all the information set
forth in the Registration Statement and the exhibits thereto. Such additional
information may be obtained from the Commission's principal office in
Washington D.C. Statements contained in this Joint Proxy Statement/Prospectus
or in any document incorporated in this Joint Proxy Statement/Prospectus by
reference as to the contents of any contract or other document referred to
herein or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document filed as an
exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
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SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
JOINT PROXY STATEMENT/PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS AND THE APPENDICES HERETO. AS USED HEREIN,
UNLESS THE CONTEXT OTHERWISE REQUIRES, "TOUCH TONE" MEANS TOUCH TONE
AMERICA, INC. AND ITS CONSOLIDATED SUBSIDIARY AND, AFTER GIVING EFFECT TO
THE REINCORPORATION MERGER, TOUCH TONE - WASHINGTON, "ARCADA" MEANS S.V.V.
SALES, INC., STELLAR COMMUNICATIONS, INC. AND LEBANCO, LTD., ALL OF WHICH
COMPANIES DO BUSINESS AS ARCADA COMMUNICATIONS AND ALL OF WHICH COMPANIES
WILL BE MERGED PRIOR TO THE MERGER, AND "MERGER SUB" MEANS TOUCH
TONE/ARCADA, INC., A WHOLLY OWNED SUBSIDIARY OF TOUCH TONE.
-------------------
TOUCH TONE AND ARCADA SHAREHOLDERS ARE URGED TO READ THIS JOINT PROXY
STATEMENT/PROSPECTUS AND THE APPENDICES HERETO IN THEIR ENTIRETY.
SHAREHOLDERS OF EACH COMPANY SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION
SET FORTH BELOW UNDER THE HEADING "RISK FACTORS."
-------------------
THE COMPANIES
TOUCH TONE AMERICA AND TOUCH TONE/ARCADA
Touch Tone currently provides long distance and Internet services, and
to a lesser extent, paging products. Touch Tone has a small long distance
customer base which is primarily located in the Southwestern United States.
Due to intense competition in the long distance industry and the high cost of
its AT&T long distance contracts, Touch Tone has focused its efforts on the
development of a national Internet "backbone." An Internet backbone
consists of a centralized high-speed computer network that allows access to
the Internet and connects smaller computer networks around the United States.
With the continued development of the Internet backbone, Touch Tone is able
to offer Internet services to Internet service providers and larger
individual, dial up customer accounts. Touch Tone was organized under the
laws of the State of California in 1990. Touch Tone's corporate offices are
located at 4110 N. Scottsdale Road, Suite 170, Scottsdale, Arizona 85251 and
its telephone number is (800) 535-2211.
Merger Sub was organized as a Washington corporation in 1996 for the
purpose of consummating the Merger and the other transactions contemplated by
the Merger Agreement. Merger Sub has nominal assets or business and has not
carried on any activities to date other than incident to its formation and in
connection with the Merger and the other transactions contemplated by the
Merger Agreement. Merger Sub's corporate offices are located at 4110 N.
Scottsdale Road, Suite 170, Scottsdale, Arizona 85251.
For additional information concerning Touch Tone, see "AVAILABLE
INFORMATION," BUSINESS OF TOUCH TONE," "TOUCH TONE MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS" and "TOUCH
TONE MANAGEMENT."
ARCADA
Arcada was organized under the laws of the State of Washington in 1987
as S.V.V. Sales, Inc. It is currently engaged in the provision of long
distance voice and data telecommunication services in 17 states. Arcada
offers a broad array of services designed for the telecommunications needs of
small and mid-sized commercial customers. Arcada believes that it can provide
services to its target market at rates for long distance below those
typically charged by the major carriers. Arcada also resells cellular air
time and cellular long distance telecommunications services. Arcada's
executive offices are located at 2001 Sixth Avenue, Suite 3210, Seattle,
Washington 98121-2516, telephone (206) 441-5022.
For additional information concerning Arcada, see "BUSINESS OF
ARCADA," "ARCADA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and "ARCADA MANAGEMENT."
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DATE AND PLACE OF THE MEETINGS
TIME AND PLACE. The Touch Tone Special Meeting will be held at 10:00
a.m., Seattle, Washington time, on ____________, 1997, at the offices of
Arcada, 2001 Sixth Avenue, Suite 3210, Seattle, Washington 98121-2516.
The Arcada Special Meeting will be held at 1:00 p.m., Seattle,
Washington time, on __________, 1997 at the offices of Arcada, 2001 Sixth
Avenue, Suite 3210, Seattle, Washington 98121-2516.
PURPOSE OF THE MEETINGS
THE TOUCH TONE SPECIAL MEETING. At the Touch Tone Special Meeting, the
Touch Tone Shareholders will be asked to consider the vote upon proposals (i)
to approve and adopt the Merger Agreement (included as Appendix A to this
Joint Proxy Statement/Prospectus incorporated herein by reference), pursuant
to which, among other things, Arcada will be merged with and into Merger Sub,
with Merger Sub as the surviving corporation and continuing as a wholly owned
subsidiary of Touch Tone, and to approve the Merger and the issuance of
shares of Touch Tone Common Stock and Promissory Notes in the Merger, (ii) to
approve a proposal to change Touch Tone's state of incorporation from
California to Washington by the merger of Touch Tone with and into a newly
formed, wholly owned Washington subsidiary ("Touch Tone - Washington"),
which merger will be affected immediately prior to the Merger, and (iii) to
transact such other business as may properly come before the Touch Tone
Special Meeting.
THE ARCADA SPECIAL MEETING. At the Arcada Special Meeting, Arcada
Shareholders will consider and vote upon a proposal to approve and adopt the
Merger Agreement and to approve the Merger. Arcada Shareholders will also
consider and vote upon any other matter that may properly come before the
Arcada Special Meeting.
VOTE REQUIRED
TOUCH TONE. The adoption and approval of the Merger Agreement and the
approval of the Merger requires the affirmative vote of the holders of a
majority of the outstanding shares of Touch Tone Common Stock entitled to
vote thereon. The adoption and approval of the Reincorporation Merger
requires the affirmative vote of the holders of a majority of the outstanding
shares of the Touch Tone Common Stock entitled to vote thereon.
ARCADA. The adoption and approval of the Merger Agreement and the
approval of the Merger requires the affirmative vote of the holders of
two-thirds of the outstanding shares of Arcada Common Stock entitled to vote
thereon.
See "THE SPECIAL MEETINGS - Vote Required."
SHAREHOLDERS ENTITLED TO VOTE. The Record Date for the determination of
holders of Touch Tone and Arcada Common Stock entitled to notice of and to
vote at the Touch Tone and Arcada Special Meetings is _____________, 1997. On
that date, Touch Tone had issued and outstanding __________ shares of Touch
Tone Common Stock, held by approximately 700 holders of record. As of the
Record Date, Arcada has issued and outstanding 50,000 shares of Arcada Common
Stock, held by four holders of record.
SECURITY OWNERSHIP OF MANAGEMENT
TOUCH TONE. As of the Record Date, directors and executive officers of
Touch Tone and their affiliates were beneficial owners of an aggregate of
114,516 shares, or approximately 3.5% of the outstanding shares of Touch Tone
Common Stock (excluding 410,000 shares underlying warrants to purchase Touch
Tone Common Stock at $4.00 per share held by such directors and executive
officers also outstanding and exercisable on that date and options to
purchase 125,000 shares at $.01 per share, which will be granted to Michael
J. Canney, a director and the President and Chief Executive Officer of Touch
Tone upon consummation of the Merger as part of a consulting agreement to be
entered into between Touch Tone and Mr. Canney effective upon consummation of
the Merger).
The executive officers and directors of Touch Tone who are also
stockholders of Touch Tone have indicated that they intend to vote their
shares in favor of the proposals submitted to shareholders at the touch tone
special meetings. In addition, Touch Tone has agreed, pursuant to the merger
agreement, to use its best efforts to
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have each of such directors and officers, together with its top ten (10)
shareholders, to agree to vote their shares of Touch Tone common stock in
favor of the merger and the reincorporation merger.
ARCADA. As of the Record Date, directors and executive officers of
Arcada and their affiliates were beneficial owners of an aggregate of 48,000
shares, or 98% of the outstanding shares of Arcada Common Stock.
The executive officers and directors of Arcada who are also stockholders
of Arcada have indicated that they intend to vote their shares in favor of
the proposals submitted to shareholders at the Arcada Special Meeting.
Because such executive officers and directors beneficially own 98% of the
Arcada Common Stock, approval of the Merger by Arcada Shareholders is
substantially certain to occur.
Based upon the number of shares of Arcada Common Stock outstanding as of
the date hereof, there would be approximately 12.5 million shares of Touch
Tone Common Stock issued in the Merger, representing 78% of the outstanding
Touch Tone Common Stock and an aggregate of $1.5 million in Promissory Notes.
THE MERGER
THE MERGER. The Merger Agreement provides for the Merger of Arcada with
and into Merger Sub, with Merger Sub as the surviving entity. As a result of
the Merger, each outstanding share of Arcada Common Stock will be converted
into the right to receive 250 shares of Touch Tone Common Stock, subject to
adjustment under certain circumstances, and a 15 month 8% unsecured promissory
note in the principal amount of $30.00. Based upon the number of shares of
Arcada Common Stock outstanding as of the record date (the "Record Date")
for the determination of holders of Touch Tone and Arcada Common Stock
entitled to notice of and to vote at the Touch Tone and Arcada Special
Meeting, there would be approximately 12.5 million shares of Touch Tone
Common Stock issued in the Merger, representing approximately 78% of the
outstanding Touch Tone Common Stock and an aggregate of $1.5 million in
Promissory Notes. Pursuant to the terms of the Merger Agreement, 11.5 million
of the 12.5 million shares of Touch Tone Common Stock issued in the Merger
will be subject to resale restrictions until November, 1998. See "THE MERGER
- - General."
The separate existence of Arcada will cease upon the effectiveness of
the Merger. The articles of incorporation and bylaws of Merger Sub will
continue to be the articles and bylaws of the surviving entity after
completion of the Merger and the Merger Sub board of directors will continue
to be the board of directors of the surviving entity after completion of the
Merger. Upon completion of the Mergers, the Touch Tone Board will be
reconstituted as described elsewhere herein. Upon consummation of the Merger,
all shares of Arcada Common Stock will automatically be canceled and will
cease to exist. Each holder of a certificate representing any shares of
Arcada Common Stock will cease to have any rights with respect thereto,
except the right to receive shares of Touch Tone Common Stock and a
Promissory Note to be issued upon surrender of such certificate, as described
below, or the right of dissenting Arcada Shareholders to receive fair value
for their shares of Arcada Common Stock, under certain circumstances. See
"THE MERGER - Dissenters' Rights."
At the effective date of the Merger (the "Effective Date"), each
outstanding share of Arcada Common Stock will be converted into the right to
receive 250 shares of Touch Tone Common Stock and a 15 month 8% unsecured
promissory note in the principal amount of $30.00. See "THE MERGER -
General."
Based on the number of shares outstanding on the Record Date, upon
consummation of the Merger there will be approximately 16,070,000 shares of
Touch Tone Common Stock outstanding (including 250,000 shares to be issued to
a consultant) and the shares of Touch Tone Common Stock issued to
stockholders of Arcada pursuant to the Merger Agreement will comprise
approximately 78% of the total number of shares of Touch Tone Common Stock
then outstanding. See "SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
BENEFICIAL OWNERS" and "RISK FACTORS - Significant Shareholders."
No certificates for fractional shares of Touch Tone Common Stock will be
issued as a result of the Merger. Instead, each Arcada Shareholder otherwise
entitled to a fractional share will receive cash in lieu of such fractional
share in an amount equal to the fraction multiplied by the closing price of
Touch Tone Common Stock on the date prior to the Effective Date.
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RECOMMENDATIONS
TOUCH TONE. The Touch Tone Board believes that the terms of the Merger
are fair to and advisable and in the best interests of Touch Tone
Shareholders and has approved the Merger Agreement and the Reincorporation
Merger. THE TOUCH TONE BOARD RECOMMENDS THAT TOUCH TONE SHAREHOLDERS VOTE
"FOR" THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT AND TO APPROVE
THE REINCORPORATION MERGER. Four out of five Touch Tone Directors approved
the Merger with one director abstaining based on a perceived conflict of
interest. In considering the recommendation of the Touch Tone Board, Touch
Tone Shareholders should be aware that certain officers and directors have
certain interests in the Merger apart from their interest as a Touch Tone
Shareholder. See "THE MERGER - Recommendations of the Board of Directors;
Reasons for the Merger"; and "Interests of Certain Persons in the Merger."
ARCADA. The Arcada Board believes that the terms of the Merger are fair to
and advisable and in the best interest of the Arcada Shareholders and has
unanimously approved the Merger Agreement. THE ARCADA BOARD UNANIMOUSLY
RECOMMENDS THAT THE ARCADA SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE AND
ADOPT THE MERGER AGREEMENT. In considering the recommendation of the Arcada
Board, Arcada Shareholders should be aware that certain officers and
directors have interests in the Merger apart from their interest as a
Shareholder. Because the Arcada Board beneficially owns 98% of the Arcada
Common Stock, approval of the Merger by Arcada Shareholders is substantially
certain to occur. See "THE MERGER - Recommendations of the Board of
Directors; Reasons for the Merger" and "Interests of Certain Persons in the
Merger."
RISK FACTORS
In determining whether to approve the Merger Agreement, Touch Tone and
Arcada Shareholders should consider the risks set forth under "RISK
FACTORS." The telecommunications industry is extremely competitive and
evolving rapidly. There can be no assurance that Touch Tone, Arcada or Touch
Tone and Arcada as a combined company will be able to compete and operate
profitably in the future.
IN PARTICULAR, TOUCH TONE HAS EXPERIENCED SEVERE OPERATIONAL AND
MANAGEMENT DIFFICULTIES AND HAS RECENTLY FOCUSED SUBSTANTIALLY ALL OF ITS
RESOURCES ON ITS INTERNET-RELATED BUSINESS, AN UNPROVEN BUSINESS WHICH HAS
REQUIRED SIGNIFICANT CAPITAL EXPENDITURES. BECAUSE OF TOUCH TONE'S OPERATING
LOSSES FROM ITS LONG DISTANCE RESELLER BUSINESS, THE LONG DISTANCE SERVICE
COMMITMENTS TO AT&T AND OTHERS, AND ITS CAPITAL EXPENDITURES ON ITS INTERNET
ACTIVITIES, TOUCH TONE WILL REQUIRE SUBSTANTIAL ADDITIONAL FINANCING IN THE
NEAR TERM IF IT DOES NOT COMPLETE THE MERGER.
LOCK-UP
As part of the Merger Agreement, the Arcada Shareholders will be
restricted from selling shares of Touch Tone Common Stock received in the
Merger (the "Lock-up") except as follows: (i) an aggregate of 250,000
shares of Touch Tone Common Stock may be sold prior to May 1997, (ii) an
additional 250,000 shares may be sold between May 1997 and November 1997, and
(iii) an additional 500,000 shares may be sold between November 1997 and
November 1998. After November 1998, there will be no further restrictions on
sales of Touch Tone Common Stock pursuant to the terms of the Lock-up.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In connection with the Merger, on the date the Merger is consummated,
Michael J. Canney, a director and the President and Chief Executive Officer
of Touch Tone, will resign as President and Chief Executive Officer of Touch
Tone and will enter into a consulting agreement with Touch Tone providing for
a $500 per day consulting fee for each day Mr. Canney renders such services
to Touch Tone, and the grant of options to purchase 125,000 shares of Touch
Tone Common Stock at an exercise price of $.01 per share. See "MANAGEMENT AND
OPERATIONS OF TOUCH TONE FOLLOWING THE MERGER - Employment and Consulting
Agreements."
In connection with the Merger, on the date the Merger is consummated,
Frank J. Bonadio, a director and President and Chief Executive Officer of
Arcada will be named President and Chief Executive Officer of Touch Tone
pursuant to an employment agreement providing for an annual salary of
$150,000 per annum and the grant of options to purchase 100,000 shares of
Touch Tone Common Stock at an exercise price equal to the fair market value
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per share of Touch Tone Common Stock on the date of grant. See "MANAGEMENT
AND OPERATIONS OF TOUCH TONE FOLLOWING THE MERGER - Employment and Consulting
Agreements."
In connection with the Merger, on the date the Merger is consummated,
Robert C. Vaughn, a consultant to Touch Tone, will agree to terminate his
present consulting agreement and will enter into a new consulting agreement
with Touch Tone providing for the payment of a commission to Mr. Vaughn of
$150,000 in cash and 250,000 shares of Touch Tone Common Stock in
satisfaction of certain "finders fee" provisions set forth in Mr.Vaughn's
current consulting agreement relating to the Merger. The new consulting
agreement will provide that Mr. Vaughn will serve as consultant to Touch Tone
for a period of one year following the Effective Time at an annual salary of
$120,000. Mr. Vaughn will also receive commissions for introducing Touch Tone
to future merger and acquisition candidates, which commissions will be paid
on a sliding scale formula based on the dollar value of such mergers or
acquisitions.
See also "MANAGEMENT AND OPERATIONS OF TOUCH TONE AFTER THE MERGER -
Management," "THE MERGER - Interests of Certain Persons in the Merger" and
"THE MERGER AGREEMENT."
DISSENTERS' RIGHTS. Arcada Shareholders who do not vote in favor of the
Merger may be entitled to certain dissenters' rights under Washington law.
Such dissenters' rights are described under "THE MERGER - Rights of
Dissenting Arcada Shareholders." Shareholders of Touch Tone will not be
entitled to appraisal rights in connection with the Merger or the
Reincorporation Merger.
FEDERAL INCOME TAX CONSEQUENCES. The Merger is intended to qualify as a
nontaxable reorganization under section 368(a) of the Internal Revenue Code
of 1986, as amended and in effect on the date hereof (the "Code").
Accordingly, for federal income tax purposes, neither Touch Tone, Arcada nor
Merger Sub will recognize any taxable gain or loss as a result of the Merger
and Arcada Shareholders will not recognize any taxable gain or loss on the
conversion of their Arcada Common Stock into Touch Tone Common Stock pursuant
to the Merger. Arcada shareholders will recognize taxable gain or loss upon
Touch Tone's repayment of the Promissory Notes in an amount equal to the
difference between the amount of cash received and the basis of the Arcada
Common Stock attributable thereto. Arcada Shareholders who perfect their
dissenters' rights will, for federal income tax purposes, recognize gain or
loss on the receipt of cash in exchange for their Arcada Common Stock in an
amount equal to the difference between the amount of cash received and the
basis of the stock surrendered in exchange therefor. See "THE MERGER -
Federal Income Tax Consequences."
EACH HOLDER OF ARCADA COMMON STOCK SHOULD CONSULT HIS OWN TAX ADVISOR
REGARDING THE TAX CONSEQUENCES OF THE MERGER IN LIGHT OF SUCH HOLDER'S OWN
SITUATION, INCLUDING THE APPLICATION AND EFFECT OF ANY STATE, LOCAL OR
FOREIGN INCOME AND OTHER TAX LAWS.
ACCOUNTING TREATMENT. The Merger will be accounted for as a "purchase"
in accordance with generally accepted accounting principles. See "THE MERGER
- - Anticipated Accounting Treatment" and "UNAUDITED PRO FORMA CONDENSED
FINANCIAL INFORMATION."
THE MERGER AGREEMENT
EFFECTIVE TIME OF THE MERGER. The Merger will become effective at the
time ("Effective Time") of the filing and acceptance of the Articles of
Merger in Washington or such later date as is specified in such Articles. See
MERGER AGREEMENT - Conditions to the Consummation of the Merger."
CONDITIONS TO THE MERGER. The respective obligations of Touch Tone,
Merger Sub and Arcada to consummate the Merger are subject to various
conditions, including, among others, (i) the approval of Touch Tone and
Arcada Shareholders of the Merger and, in the case of Touch Tone
Shareholders, the Reincorporation Merger, (ii) Touch Tone having at least
$1,500,000 in working capital at the Effective Time, (iii) Touch Tone having
settled certain pending law suits and renegotiated certain contracts, (iv)
the performance by each party to the Merger Agreement of its respective
covenants and obligations set forth therein, (v) the continued accuracy of
each party's representations and warranties set forth in the Merger
Agreement, (vi) the absence of any order or other legal restraint or
prohibition preventing the consummation of the Merger and (vii) Touch Tone
using its best efforts to induce its directors, officers and ten largest
shareholders to agree in writing to vote their shares of Touch Tone Common
Stock in favor of the Merger and the Reincorporation Merger. See "THE MERGER
AGREEMENT - Conditions to the Consummation of the Merger."
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TERMINATION OF THE MERGER AGREEMENT. The Merger Agreement may be
terminated and the Merger abandoned at any time prior to the Effective Time
(i) by mutual consent of Touch Tone and Arcada, (ii) by either Touch Tone or
Arcada (a) if any court or other governmental entity shall have issued a
final and nonappealable order, decree or ruling or taken any other final and
nonappealable action permanently enjoining or otherwise prohibiting the
Merger, (b) if the Merger shall not have been consummated on or before March
1, 1997 (other than due to the failure of the party seeking to terminate the
Merger Agreement to perform its obligations under the Merger Agreement), or
(c) if, under certain circumstances, the required stockholder approval is not
obtained, and (iii) by Touch Tone or Arcada in certain other situations,
including in the event of certain competing transactions or a withdrawal or
modification by the Touch Tone or Arcada Board of Directors of its
recommendation of the Merger. See "THE MERGER AGREEMENT - Termination."
BREAKUP FEES. To compensate Arcada for certain costs incurred in
anticipation of the Merger and to induce Arcada to forego initiating
discussions with other potential partners, Touch Tone has agreed to pay
Arcada $200,000 if Touch Tone terminates the Merger Agreement under certain
circumstances. To compensate Touch Tone for certain costs incurred in
anticipation of the Merger and to induce Touch Tone to forego initiating
discussions regarding other potential transactions, Arcada has agreed to pay
Touch Tone $200,000 if Arcada terminates the Merger Agreement under certain
circumstances. See "THE MERGER AGREEMENT - Breakup Fees."
ABSENCE OF REGULATORY FILINGS AND APPROVALS
Other than certain filings to be made and approvals obtained under
certain state securities or "Blue-Sky" laws, there are no federal or state
regulatory requirements that must be complied with or obtained in connection
with the Merger. See "THE MERGER - Governmental and Regulatory Approvals."
MANAGEMENT AND OPERATIONS AFTER THE MERGER
At the Effective Time, four of Touch Tone's current directors will
resign and Michael J. Canney, the remaining director of Touch Tone will elect
four new directors, each of whom have been or will be designated by Arcada
(the "Arcada Designees"). Arcada has informed Touch Tone that Frank
Bonadio, Robert Leppaluoto, Keith Leppaluoto and an individual to be named by
Arcada prior to the Effective Time will be the Arcada Designees. The
individuals identified above currently are directors of Arcada. The terms of
all directors of Touch Tone, including the Arcada Designees, will expire at
the next annual meeting of stockholders of Touch Tone. Following the
Effective Time, Frank Bonadio, currently the President and Chief Operating
Officer of Arcada, will become President of Touch Tone and the other officers
of Arcada will become officers of Touch Tone. See "MANAGEMENT AND OPERATIONS
OF TOUCH TONE FOLLOWING THE MERGER."
The Merger will combine the two companies' current operations, focusing
substantially on Arcada's operations in the long distance switched and
unswitched telecommunications markets and the cellular air time and long
distance services and on Touch Tone's Internet access products, Arcada
believes that as a result of the Merger, more sources of financing and
acquisition opportunities will be available to it as a publicly-held company
than may be available to it as a privately-held company. Touch Tone will
adopt Arcada's fiscal year end of December 31.
COMPARATIVE RIGHTS OF SHAREHOLDERS
Arcada is a Washington corporation organized under the Washington
Business Corporations Act, RCW Chapter 23B ("WBCA"). Touch Tone is a
California corporation organized under the California Corporations Code
("CCC"). The rights of Touch Tone Shareholders are governed by the CCC and
Touch Tone's Articles of Incorporation and Bylaws. The rights of Arcada
Shareholders are governed by the WBCA and Arcada's Articles of Incorporation
and Bylaws. Upon consummation of the Merger, and assuming completion of the
Reincorporation Merger which is a condition to the closing of the Merger,
Touch Tone and Arcada Shareholders will become shareholders of a newly formed
Washington corporation Touch Tone - Washington and their rights will be
governed by the WBCA and the Articles of Incorporation and Bylaws of Touch
Tone -Washington. Certain differences arise from this change of governing law
as well as the distinctions between Touch Tone's Articles of Incorporation
and Bylaws and the Articles of Incorporation and Bylaws of Touch Tone -
Washington. The Articles of Incorporation and Bylaws of Touch Tone -
Washington are not materially different than those of Arcada and,
accordingly, the rights of Arcada shareholders will not be materially
affected after the Merger. For a summary of certain differences
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between the rights of holders of Touch Tone - Washington Common Stock and
holders of Arcada and Touch Tone Common Stock and an explanation of certain
possible anti-takeover effects of certain provision in Touch Tone -
Washington's Articles of Incorporation and Bylaws, See "COMPARISON OF RIGHTS
OF HOLDERS OF TOUCH TONE COMMON STOCK AND TOUCH TONE - WASHINGTON COMMON
STOCK" and "APPENDIX E - Articles and Bylaw of Touch Tone - Washington."
RESALES OF TOUCH TONE COMMON STOCK
The shares of Touch Tone Common Stock to be issued to Arcada
Shareholders in connection with the Merger have been registered under the
1933 Act. However, of the 12.5 million shares issued in connection with the
Merger, 11.5 million of such shares will be subject to resale restrictions
until November, 1998. See "THE MERGER - Lock-up." Subject to the foregoing
restrictions, the Touch Tone Common Stock received by holders of Arcada upon
consummation of the Merger will be freely transferable by those shareholders
of Arcada not deemed to be "affiliates" of Arcada. "Affiliates" are
generally defined as persons who control, or controlled by, or under common
control with Arcada at the time of the special meeting (generally, executive
officers, directors and certain beneficial owners). All Arcada Shareholders
would be deemed to be "affiliates" of Arcada. In as much, such shareholders
are subject to certain limitations on transfer of Touch Tone Common Stock."
See "THE MERGER - Resales of Touch Tone Common Stock by Arcada
Shareholders" for a discussion of the limitations on transfer of Touch Tone
Common Stock held by affiliates of Arcada.
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MARKET PRICES
Touch Tone Common Stock and Warrants are traded on Nasdaq under the
symbols "TONE" and "TOWEW," respectively. The table below sets forth, for
the quarters indicated, the reported high and low bid prices of the Touch
Tone Common Stock and Warrants. These prices reflect inter-dealer prices
without retail markup, markdown or commissions and may not necessarily
represent actual transactions. The trading volumes of Touch Tone Common Stock
and Warrants have been limited and the prices below may not be indicative of
the value of the Touch Tone Common Stock or Warrants.
COMMON STOCK WARRANTS
------------ --------
FISCAL 1996 HIGH BID LOW BID HIGH BID LOW BID
- ----------- -------- ------- -------- -------
Fourth Quarter (ended $7.88 $5.13 $4.75 $2.00
May 31, 1996)
FISCAL 1997
- -----------
First Quarter (ended
August 31, 1996) $7.00 $6.25 $4.25 $3.25
Second Quarter (ended
November 30, 1996) $7.00 $3.00 $4.00 $0.75
Effective January 1, 1994 Arcada issued 50,000 shares of Arcada Common
Stock in exchange for $557,000 representing the net value of contributed
assets, or a per share price of $11.14. Subsequent to that time Arcada has
repurchased shares from departing employees on three occasions at $14.15 per
share, pursuant to terms of buy-sell agreements. Accordingly, this price was
not necessarily indicative of the fair market value of Arcada Common Stock
and was instead determined pursuant to the term of the respective buy-sell
agreement.
The following table sets forth (i) the closing price per share of Touch
Tone Common Stock as reported by Nasdaq on November 15, 1996 and November 22,
1996; (ii) the price per share of Arcada Common Stock based on the book value
per share of Arcada Common Stock on September 30, 1996; and (iii) the value
of the Merger Consideration received for a share of Arcada Common Stock,
without making any adjustments to the Merger Consideration.
MARKET PRICE BOOK VALUE
OF TOUCH TONE OF ARCADA MERGER
VALUE PER SHARE AT: COMMON STOCK COMMON STOCK CONSIDERATION(1)
------------- ------------ -------------
November 15, 1996 $3.00 $ 8.03 $780.00
November 22, 1996 $4.00 $ 8.03 $1,030.00
___________, 1997 $____ $ 8.03 $______
- --------------------
(1) Calculated based on 250 shares of Touch Tone Common Stock multiplied by
the market price per share, plus $30.00 representing the 15 month 8%
unsecured promissory note issued in exchange for each share of Arcada
Common Stock.
No assurance can be given as to what the market price of Touch Tone
Common Stock will be at the Effective Time. On November 22, 1996, there were
approximately 700 Touch Tone Shareholders of record and four Arcada
Shareholders of record.
-9-
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
OF TOUCH TONE AMERICA, INC.
The following table sets forth selected consolidated historical
financial data of Touch Tone and has been derived from and should be read in
conjunction with the audited consolidated financial statements of Touch Tone
for the ten months ended May 31, 1995 and the fiscal year ended May 31,
1996 and the unaudited interim consolidated financial statements of Touch
Tone for the three months ended August 31, 1995 and August 31, 1996,
including the respective notes thereto, included herein. In the opinion of
management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included in the
unaudited interim data. Unaudited interim results are not necessarily
indicative of results which may be expected for future periods.
STATEMENT OF OPERATIONS DATA:
FOR THE 10 FOR THE YEAR
MONTHS ENDED ENDED FOR THE THREE
MAY 31, 1995 MAY 31, 1996 MONTHS ENDED AUGUST 31,
-------------------------- -------------------------
1995 1996
----------- ----------- ----------- ------------
Revenues $1,952,000 $2,238,000 $689,000 $516,000
Net Loss (294,000) (2,802,000) (354,000) (1,060,000)
Loss Per Share (.19) (1.81) (.19) (.33)
BALANCE SHEET DATA:
MAY 31, AUGUST 31,
------- ----------
1995 1996 1996
---- ---- ----
Total assets $1,388,000 $6,928,000 $4,829,000
Redeemable Preferred 750,000 750,000 -
Stock
Stockholders' (586,000) 3,842,000 3,532,000
equity
-10-
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
OF ARCADA COMMUNICATION
The following table sets forth selected combined historical financial
data of Arcada and has been derived from and should be read in conjunction
with the combined financial statements of Arcada as of and for each of the
years ended December 31, 1994 and 1995 and the unaudited interim combined
financial statements of Arcada for the nine months ended September 30, 1995
and 1996, including the notes thereto, included herein. In the opinion of
Arcada management, all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation have been included
in the unaudited interim financial statements. Unaudited interim results are
not necessarily indicative of results which may be expected for the entire
fiscal year.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
FOR THE NINE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------------------
1994 1995 1995 1996
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 9,060,000 $10,954,000 $8,292,000 $9,429,000
Net Income (loss) 154,000 (559,000) (521,000) 36,000
<CAPTION>
BALANCE SHEET DATA: DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Total assets $ 4,127,000 $ 4,858,000 $ 4,873,000
Long term 775,000 1,115,000 981,000
debt and capital lease
obligations, net of current
portion
Notes payable to 254,000 456,000 469,000
shareholders
Shareholders' equity 1,157,000 428,000 297,000
</TABLE>
-11-
<PAGE>
SUMMARY PRO FORMA CONDENSED FINANCIAL DATA
As more fully described in the Pro Forma Condensed Financial Information
appearing elsewhere in this Joint Proxy Statement/Prospectus, the Unaudited
Pro Forma Condensed Balance Sheet Data gives effect to (i) the merger of
Arcada into a wholly-owned subsidiary of Touch Tone, resulting from the
exchange of Arcada Common Stock for 12.5 million shares of Touch Tone Common
Stock and issuance of a $1.5 million promissory note payable to former Arcada
Shareholders, and (ii) the payment of fees directly attributable to the Merger.
The Unaudited Pro Forma Condensed Statement of Operations Data for the year
ended December 31, 1995 and for the nine months ended September 30, 1996
include the results of operations of Arcada and Touch Tone for the respective
periods presented and give effect to pro forma adjustments as if the
aforementioned transactions had occurred at the beginning of the period.
These Pro Forma Condensed Financial Statements are not neccessarily
indicative of future financial positions or results of operations. The
following information should be read in conjunction with and is qualified in
its entirety by the financial statements of Touch Tone and Arcada and the
Unaudited Pro Forma Condensed Financial Information appearing elsewhere in
this Joint Proxy Statement/Prospectus. See "THE MERGER - Anticipated
Accounting Treatment," and "UNAUDITED PRO FORMA CONDENSED FINANCIAL
INFORMATION."
PRO FORMA CONDENSED STATEMENTS OF INCOME DATA
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- -------------------------
1995 1996
---------------------- -------------------------
<S> <C> <C>
Revenues................................................. $13,734,000 $10,784,000
Line charges............................................. (8,679,000) (6,765,000)
----------- -----------
Excess of Revenues over line charges..................... 5,055,000 4,019,000
Other operating expenses:
Selling, general, administrative and other............. 5,848,000 4,913,000
Excess volume commitments.............................. 779,000 124,000
Depreciation and amortization.......................... 545,000 577,000
Provision for Severance obligations.................... 295,000 230,000
----------- -----------
Loss from operations..................................... (2,412,000) (1,825,000)
Other expense............................................ (460,000) (501,000)
----------- -----------
Net loss................................................. $(2,872,000) $(2,326,000)
----------- -----------
----------- -----------
Net loss per share....................................... $(0.18) $(0.14)
----------- -----------
----------- -----------
</TABLE>
- -----------------
-12-
<PAGE>
PRO FORMA CONDENSED BALANCE SHEET DATA
ASSETS SEPTEMBER 30, 1996
Current Assets:
Cash............................................... $ 2,192,000
Other current assets............................... 2,913,000
-------------
Total current assets............................... 5,105,000
Property and Equipment, net.......................... 3,021,000
Other assets......................................... 1,176,000
-------------
Total assets....................................... $ 9,302,000
-------------
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable...................................... $ 480,000
Accounts payable and other accrued liabilities..... 3,483,000
-------------
Total current liabilities.......................... 3,963,000
-------------
Long term liabilities:
Notes payable to stockholders...................... 1,969,000
Other long term liabilities........................ 1,441,000
-------------
Total long term liabilities........................ 3,410,000
-------------
Stockholders' equity................................. 1,929,000
-------------
Total liabilities and stockholders' equity....... $ 9,302,000
-------------
-------------
-13-
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
Touch Tone and Arcada and combined per share data on an unaudited pro forma
basis after giving effect to the Merger on a "purchase" basis assuming that
250 shares of Touch Tone Common Stock and a 15 month 8% $30.00 Promissory Note
are issued in exchange for each share of Arcada Common Stock in the Merger.
This data should be read in conjunction with the selected historical
financial information, the pro forma condensed financial information and the
separate historical financial statements of Touch Tone and of Arcada and the
notes thereto included elsewhere in this Joint Proxy Statement/Prospectus.
The unaudited pro forma condensed financial data are not necessarily
indicative of the operating results or financial position that would have
been achieved had the Merger been consummated at the beginning of the periods
presented and should not be construed as representative of future operations.
<TABLE>
<CAPTION> AS OF AND FOR THE AS OF AND FOR THE
YEAR ENDED THREE MONTHS ENDED
MAY 31, 1996 AUGUST 31, 1996
-------------------- --------------------
<S> <C> <C>
Historical -- Touch Tone:
Net loss per share $(1.81) $(.33)
Book value per share 1.20 1.06
Cash dividends per share - -
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
-------------------- --------------------
Historical -- Arcada (1)
Net income (loss) per share $(11.89) $0.90
Book value per share 10.19 8.03
Cash dividends per share 3.57 4.18
<CAPTION>
Pro forma combined Touch Tone and Arcada(2):
Net loss per share $(.18) $(.14)
Book value per share (.14) .12
Cash dividends per share (3) - -
<CAPTION>
Equivalent pro forma Arcada (4)
Net income (loss) per share $(.04) $ -
Book value per share .03 .02
Cash dividends per share .01 .01
</TABLE>
- ---------------------
(1) Amounts calculated on the basis of 47,000 shares outstanding for the year
ended December 31, 1995 and 40,000 shares outstanding for the nine months
ended September 30, 1996, and of 42,000 shares and 37,000 shares as of
December 31, 1995 and September 30, 1996, respectively.
(2) Amounts calculated utilizing 16,069,300 shares on a pro-forma combined per
share basis with Touch Tone financial information recast on the basis of
Arcada's year end.
(3) It is assumed as a public company, the combined company would not have paid
any dividends.
(4) Amounts calculated based on 12,500,000 shares of Touch Tone Common Stock
exchanged for outstanding shares of Arcada
-14-
<PAGE>
RISK FACTORS
In addition to the other information set forth in this Joint Proxy
Statement/Prospectus, Touch Tone and Arcada Shareholders should consider the
following risk factors before voting on the proposal described herein.
WHEN USED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, THE WORDS
"ANTICIPATE," "ESTIMATE," "EXPECT," "PROJECT" AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE
SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS. SHOULD ONE OR MORE
OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS
PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED,
ESTIMATED, EXPECTED OR PROJECTED. SEVERAL KEY FACTORS THAT HAVE A DIRECT
BEARING ON TOUCH TONE'S AND THE COMBINED COMPANIES' ABILITY TO ATTAIN THEIR
GOALS ARE DISCUSSED BELOW. TOUCH TONE AND ARCADA WILL NOT UNDERTAKE AND
SPECIFICALLY DECLINE ANY OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY
REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS OR TO REFLECT THE
OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS.
PAST FINANCIAL PERFORMANCE OF TOUCH TONE AND GOING CONCERN CONSIDERATIONS
Touch Tone incurred net losses of ($1,060,000) and ($2,802,000) for the
three months ended August 31, 1996, and the year ended May 31, 1996,
respectively. Touch Tone expects to incur significant additional losses.
There is no assurance that Touch Tone will be able to achieve or sustain
profitability in the future or that Touch Tone will be able to continue to
finance its losses. Touch Tone's financial statements have been prepared on
the basis that Touch Tone will continue operating as a going concern, which
contemplates the realization of assets and liquidation of liabilities in the
normal course of business. Touch Tone's ability to continue as a going
concern is dependent upon several factors, including Touch Tone's raising
additional capital, meeting the terms of its service commitments and purchase
commitments and achieving and maintaining profitable operations. Touch Tone's
financial statements were audited by its independent certified public
accountants, whose report includes an explanatory paragraph stating that the
financial statements have been prepared assuming Touch Tone will continue as
a going concern and that Touch Tone has incurred losses from operations and
has entered into significant sales volume commitments that raise substantial
doubt about its ability to continue as a going concern. Further, Touch Tone
is dependent on the Merger to increase revenues and operating efficiencies.
If the Merger should not be consummated for any reason, Touch Tone will be in
need of immediate financing to fund expected operating losses and other
working capital needs. In addition, Touch Tone must in the near term
renegotiate certain non-competitive carrier commitments in order to avoid or
mitigate substantial short-falls on these commitments. There can be no
assurance such financing would be available or on what terms or whether such
carrier commitments can be renegotiated. See "TOUCH TONE MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
the Financial Statements included in this Joint Proxy Statement/Prospectus.
POTENTIAL LIABILITIES TO AT&T
Touch Tone is party to an agreement with AT&T where Touch Tone committed
to purchase long distance services through July 1999 of $1.8 million
annually. Touch Tone is not meeting this commitment, and pursuant to such
agreement, is liable to pay to AT&T the committed amount, whether or not the
services are used by Touch Tone. AT&T has the right to terminate Touch Tone's
long distance service if Touch Tone fails to pay these amounts when due.
Touch Tone's long distance revenues have declined from $1,952,000 for the ten
months ended May 31, 1995 to $1,951,000 for the year ended May 31, 1996 to
$340,000 for the three months ended August 31, 1996 and is expected to
decline further. Revenues have decreased because the prices at which Touch
Tone can buy long distance under its AT&T agreements are, management
believes, non-competitive in the marketplace. Under its contract Touch Tone
must pay AT&T $0.17 per minute and, due to its commission structure must
resell this service at rates between $0.23 and $0.26 per minute to make a
profit. Touch Tone believes their rates to be above prevailing market rates
and in certain cases, above the rates charged by AT&T in the retail market.
As a result, Touch Tone has lost agents who are able to offer their customers
more competitive rates attainable with other long distance resellers. Unless
this agreement can be renegotiated to allow Touch Tone to offer competitive
pricing, revenue will continue to decrease. See "TOUCH TONES MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
the Financial Statements included in this Joint Proxy Statement/Prospectus.
Additionally, beginning in June 1996 and continuing into July 1996, an
unknown party fraudulently charged over $1,000,000 in long distance charges
on Touch Tone's account. Touch Tone has been diligently investigating the
matter and has contacted the carrier, AT&T, who denies any responsibility.
Touch Tone has retained counsel to represent it in this matter and together
with Arcada has submitted a letter to AT&T stating its position. As of the
date of this Joint Proxy/Prospectus, AT&T has not formally responded to Touch
Tone's letter although discussions are ongoing between the parties. It is a
condition to Arcada's obligation to consummate the Merger that Touch Tone
settle this dispute with AT&T and renegotiate its contractual commitments to
AT&T prior to the Effective Time in a manner satisfactory to Arcada. Touch
Tone believes it has recourse against AT&T and will not be held responsible
for these charges, but the outcome of this matter cannot be predicted at this
time. If Touch Tone is unable to settle the foregoing matters with AT&T, it
is probable that AT&T will discontinue its long distance service to Touch
Tone and its customers and the parties will institute legal proceedings. If
Touch Tone loses AT&T service and to some extent, long distance customers are
not transferred to WilTel, long distance revenues will become insignificant,
further harming Touch Tone's financial condition. See "TOUCH TONE MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
the Financial Statements included in this Joint Proxy Statement/Prospectus.
-15-
<PAGE>
CHANGE OF BUSINESS FOCUS
Touch Tone has only recently entered the Internet access market. This
market has not yet generated significant revenues and Touch Tone and its
prospects in this market must be considered in light of the risks, expenses
and difficulties frequently encountered by companies attempting to develop a
new product, particularly companies in new and evolving markets. Furthermore,
the limited history of the Company's Internet access business makes
projections of future results of operations extremely difficult and
uncertain, and therefore there can be no assurance that Touch Tone will
generate significant revenues from its Internet operations.
THE MERGER
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT MARKET PRICE OF STOCK;
POSSIBLE VOLATILITY OF STOCK PRICE. Upon consummation of the Merger, an
aggregate 12.5 million shares of Touch Tone Common Stock will be issued to
the Arcada Shareholders. Although 11.5 million of the 12.5 million shares of
Touch Tone Common Stock are subject to resale restrictions until November,
1998 pursuant to the terms of the Merger Agreement, sales of unrestricted
shares of Touch Tone Common Stock in the public market could adversely affect
the market price of such stock. If the market price of Touch Tone Common
Stock were adversely affected by such sales, Touch Tone's access to equity
capital markets could be adversely affected, and issuances of stock by Touch
Tone in connection with future acquisitions, or otherwise, could dilute
earnings per share. See "THE MERGER -Resale of Touch Tone Common Stock."
SIGNIFICANT SHAREHOLDERS. At the Effective Time, the Arcada Shareholders
will own approximately 78% of the Touch Tone Common Stock then outstanding
(based on the number of shares outstanding on the Record Date). The Arcada
Shareholders are restricted in their right to sell shares of Touch Tone
Common Stock received in the Merger by state and federal securities laws.
Other than such restrictions, Touch Tone has no agreements with any Arcada
Shareholders that restrict such shareholder's rights to buy, sell or vote the
Touch Tone Common Stock. As holders of 78% of the outstanding Touch Tone
Common Stock, after the Merger, the Arcada Shareholders will be able to
determine voting on substantially all matters put before the Touch Tone
Shareholders.
NO FAIRNESS OPINIONS. The Touch Tone and Arcada Boards have not retained
independent business valuation firms to opine to their respective
shareholders as to the fairness of the Merger from a financial point of view.
Inasmuch, no independent third parties have reviewed terms of the Merger for
the benefit of the Touch Tone and Arcada Shareholders. See "THE MERGER
- -Recommendations of the Board of Directors; Reasons for the Merger."
DETERMINATION OF NUMBER OF SHARES TO BE RECEIVED IN THE MERGER. In
determining whether to vote to approve the Merger, the Touch Tone and Arcada
Shareholders should consider that the number of shares of Touch Tone Common
Stock to be received in the Merger by the holders of Arcada Common Stock was
determined by negotiations between Touch Tone and Arcada and were based on a
number of factors. The number of shares to be received do not necessarily
reflect the relative stock values, asset values, cash flow per share,
earnings per share or other attributes of either Touch Tone or Arcada. The
Merger Agreement does not provide for any adjustment in the number of shares
to be received in the event that either the Touch Tone Common Stock or Arcada
Common Stock should increase or decrease in value. See "THE MERGER
- -Recommendation of the Boards of Directors; Reasons for the Merger."
BOARD OF DIRECTORS MAY CHANGE BUSINESS POLICIES. The Touch Tone Board of
Directors may change the business objectives and policies of Touch Tone
without a vote of the stockholders. In addition, as discussed elsewhere
within this Joint Proxy Statement/Prospectus, upon the consummation of the
Merger, four of Touch Tone's current directors will resign and the remaining
director will elect four new directors, each of whom have been or will be
designated by Arcada. If Touch Tone changes its business objectives and
policies, the risks and potential rewards of an investment in Touch Tone may
also change, and the marketplace may react favorably or unfavorably to such
changes, which may affect the price at which Touch Tone's Common Stock trades
in the public market. See "MANAGEMENT AND OPERATIONS OF TOUCH TONE FOLLOWING
THE MERGER - Operations and Management After the Merger."
-16-
<PAGE>
EXPECTED BENEFITS OF COMBINED BUSINESS MAY NOT BE ACHIEVED. Touch Tone
anticipates that benefits will occur as a result of the Merger as described
under "THE MERGER - Recommendation of the Board of Directors; Reasons for
the Merger" and "MANAGEMENT AND OPERATIONS OF TOUCH TONE FOLLOWING THE
MERGER." When, if ever, the anticipated benefits of the Merger are
ultimately achieved, however, will depend on a number of factors, including
the ability of Touch Tone and Arcada as a combined company (the "combined
companies") to achieve cost savings at projected levels within projected
time frames, and, generally, the ability of the combined companies to
capitalize on their combined asset base and strategic position. There can be
no assurance that the expected benefits of the Merger relative to the
combined business will be achieved.
FIXED NUMBER OF SHARES OFFERED TO ARCADA SHAREHOLDERS. In the Merger,
Arcada shareholders will receive 12,500,000 shares of Touch Tone Common
Stock. Such number of shares will not be adjusted if the market price of
Touch Tone Common Stock decreases or increases. Arcada Shareholders should
obtain current market prices of Touch Tone Common Stock prior to voting on
the Merger. See "THE MERGER - General."
RESTRICTIONS ON TRANSFER. As part of the Merger Agreement, the Arcada
Shareholders who receive shares of Touch Tone Common Stock in the Merger will
be restricted from selling 11.5 million of the 12.5 million shares received
until November, 1998. Accordingly, such Arcada Shareholders will be unable to
liquidate such shares for a substantial period of time. The price per share
of Touch Tone Common Stock at the end of the restricted period may be
significantly higher or lower than the price per share at the Effective Time.
See "THE MERGER - Lock-up."
LONG TERM DEBT; POTENTIAL CONFLICT OF INTEREST. Touch Tone will issue $12.5
million in Promissory Notes to the Arcada Shareholders in connection with the
Merger, which notes will be due 15 months from the Effective Date. Based on
Touch Tone's present financial condition there can be no assurance that Touch
Tone will be able to satisfy this obligation when it comes due. Although a
majority of the Arcada Shareholders will become officers and directors of
Touch Tone at the Effective Time, there can be no assurance that these
individuals will not aggressively pursue collection of their respective
Promissory Notes to the detriment of Touch Tone. Additionally, a conflict of
interest may arise as to these officers and directors in their decisions as
to the timing and priority of payments to Touch Tone's creditors vis a vis
the payment of the Promissory Notes.
GENERAL
DEPENDENCE ON KEY PERSONNEL. Upon the consummation of the Merger, Frank
Bonadio, the President and Chief Operating Officer of Arcada, will become
President of Touch Tone. The success of Arcada and of the combined companies
will be dependent on the abilities of Frank Bonadio, whose loss could
adversely affect Arcada or the combined companies. See "MANAGEMENT AND
OPERATIONS OF TOUCH TONE FOLLOWING THE MERGER."
NO DIVIDENDS. Touch Tone has not paid cash dividends on its common stock
and has no present intention of paying cash dividends in the foreseeable
future. It is the present policy and is expected to be the future policy of
the Touch Tone Board to retain all earnings to provide for the growth of the
respective companies. Payment of cash dividends in the future will depend,
among other things, upon the future earnings, requirements for capital
improvements, the operating and financial conditions and other factors deemed
relevant by the combined company's Board of Directors. Arcada, as a closely
held corporation has paid dividends to its shareholders from time to time.
However, after the Merger, it will be the policy of the to retain all
earnings to provide for growth.
ELIGIBILITY AND MAINTENANCE. Under the current rules promulgated by Nasdaq
for continued listing, a company must maintain at least $2,000,000 in total
assets, at least $1,000,000 in stockholders equity, and a minimum bid price
of $1.00 per share. Touch Tone's Common Stock and Warrants (the "listed
securities") are expected to be eligible for listing on Nasdaq under these
rules. If Touch Tone or the combined company should experience significant
losses from operations or the price of the listed securities drops
significantly, it may be unable to maintain the standards for continued
listing and the listed securities could be subject to delisting from Nasdaq.
Trading, if any, in the listed securities would thereafter be conducted in
the over-the-counter market on an electronic bulletin board established for
securities that do not meet the Nasdaq listing requirements or in what are
commonly referred to as the "pink sheets." As a result, an investor may
find it more difficult to dispose of, or to obtain accurate quotations as to
the price of, the listed securities.
PRICE VOLATILITY. The market for Touch Tone Common Stock is extremely
illiquid. Consequently, whenever there are significantly more sellers than
buyers or buyers than sellers of Touch Tone Common Stock, the market price of
such stock will fluctuate significantly. The market price of the Touch Tone
Common Stock could also be subject to significant fluctuations in response to
various factors and events, including quarterly variations in operating
results, regulatory or other changes affecting the telecommunications
industry generally, announcements of business developments by Touch Tone or
its competitors, the addition of customers in connection with acquisitions,
the introduction of new services, changes in the cost of long distance
service or other operating costs and changes in general market conditions.
RISK OF LOW-PRICED STOCKS. If Touch Tone's listed securities were delisted
from Nasdaq, and no other exclusion from the definition of a "penny stock"
under applicable Securities and Exchange Commission regulations
-17-
<PAGE>
were available, such securities would be subject to the penny stock rules. A
"penny stock" is defined as a stock that has a price of $5.00 or less. The
rules relating to "penny stocks" impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally defined as
investors with net worth in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with a spouse). For example, the broker dealer
must deliver to its customer prior to effectuating any transaction, a risk
disclosure document which sets forth information as to the risks associated
with "penny stocks," information as to the salesperson, information as to
the bid and ask prices of the "penny stock," the importance of the bid and
ask prices to the purchaser, and investor's rights and remedies under certain
circumstances. Also, the broker dealer must disclose to the purchaser its
aggregate commission received on the transaction, current quotations for the
securities and monthly statements which provide information as to market and
price information. In addition, for transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase
and must have received the purchaser's written consent to the transaction
prior to sale. Consequently, delisting from NASDAQ, if it were to occur,
could affect the ability and willingness of broker-dealers to sell Touch
Tone's securities and the ability of Touch Tone Shareholders and Warrant
holders to sell their securities in the secondary market.
LONG DISTANCE
INDUSTRY CUSTOMER ATTRITION. A level of customer attrition is inherent
in the long distance industry. Attrition (the average number of customers
from whom revenues have terminated or been terminated as a result of
non-payment or dropped to zero usage expressed as a percentage of the total
number of customers) has averaged approximately 2% per month in the long
distance industry. Although both Touch Tone and Arcada attempt to reduce the
level of customer attrition, there can be no assurance that this level will
not continue or increase and as discussed below, has substantially increased
at Touch Tone. See "TOUCH TONE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
TOUCH TONE CUSTOMER ATTRITION. The level of Touch Tone's customer
attrition is significant due to several factors including its carrier
commitments at non-competitive rates, disputes with AT&T on fraudulent
third-party charges, and inability to get accurate billing records. The
result is that Touch Tone is not competitive with long distance companies and
is unable to pay their agents, as AT&T has suspended all payments to Touch
Tone until such time as the AT&T problems are resolved, if ever.
Consequently, Touch Tone's customer base is rapidly declining, causing a
shortfall in its long distance carrier commitments. and significantly
increasing its losses from operations.
DEPENDENCE ON SERVICES OFFERED BY OTHER CARRIERS. Neither Touch Tone nor
Arcada owns any transmission facilities other than Arcada's investments in its
long distance switches, and its long distance services are dependent upon
WilTel, AT&T, Frontier and other carriers for the transmission of its
customers' calls. Accordingly, Touch Tone's and Arcada's long distance
operations are subject to their continued ability to obtain such services at
bulk rates.
COMPETITION. The telecommunications industry is intensely competitive
and is significantly affected by the introduction of new services and the
market activities of major industry participants. Competition in the growing
telecommunications industry is based upon pricing, customer service, network
quality and value-added services. Touch Tone and Arcada compete with AT&T,
MCI, Sprint and other national and regional long distance carriers. Most of
Touch Tone and Arcada's competitors have greater name recognition, more
extensive transmission networks and greater engineering and marketing
capabilities than Touch Tone or Arcada and have, or have access to,
substantially greater financial and personnel resources than those of Touch
Tone and Arcada. These resources may permit certain of Touch Tone and
Arcada's competitors to offer pricing and incentives below those which can be
offered by Arcada or Touch Tone. For example, AT&T is currently selling long
distance in certain of Touch Tone's markets at rates below those which Touch
Tone is able to profitably offer. Various regulatory factors can also have an
impact on Touch Tone or Arcada's ability to compete. For example, the new
Telecommunications Act has reduced the competitive barriers facing all
telecommunications companies, especially AT&T and the regional Bell operating
companies. Arcada and Touch Tone's size makes it difficult to have an impact
on such regulations. Moreover, certain of Arcada and Touch Tone's larger
competitors may have the ability to influence regulation of the
telecommunications industry in a manner unfavorable to small or more recent
market entrants such as Touch Tone and Arcada.
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In addition, Touch Tone and Arcada are customers and competitors of AT&T
and other long distance suppliers. Touch Tone and Arcada are customers of AT&T
and other suppliers because they use such companies' long distance
telecommunications services. Touch Tone and Arcada are competitors of AT&T and
other suppliers in that they directly seek customers who are, or potentially
may be customers of AT&T.
The ability of Touch Tone and Arcada to compete effectively in the
telecommunications industry will depend upon their continued ability to provide
high quality, market-driven services at prices generally similar to, or less
than, those charged by its competitors. There can be no assurance that Touch
Tone or Arcada will be able to compete successfully with existing or
future companies.
DEPENDENCE ON EFFECTIVE BILLING SYSTEM. Both Touch Tone and Arcada rely
on their information and billing systems to efficiently and effectively
process bills and produce information. The combined companies will rely on
Arcada's current system which was installed in 1995. The successful operation
of these systems is of importance to the combined companies' growth and
profitability and there can be no assurance that Arcada's billing system will
perform to expectations into the future or that Touch Tone's billing data can
be smoothly incorporated into Arcada's billing system. See "BUSINESS OF ARCADA
- - Billing Systems."
RISK OF SERVICE INTERRUPTION. Arcada does not have long-term service
commitments with its long distance service providers. While short-term
arrangements with long distance service providers reduces the risk of
committing to minimums at pricing levels which may become above market, the
risk that service providers will terminate service and interrupt Arcada
customer service is increased. Arcada believes that its relations with
service providers are excellent and that significant terminations will not
occur; however, if terminations occur and Arcada cannot reroute
telecommunications traffic, its business may be adversely affected.
GOVERNMENT REGULATION. Federal and state regulations, regulatory actions
and court decisions have had, and may have in the future both positive and
negative effects on Touch Tone and Arcada and their ability to compete. Touch
Tone and Arcada are subject to regulation by the FCC and various state public
service or public utility commissions which typically impose obligations to
file tariffs containing the rates, terms and conditions of service. Neither
the FCC nor the relevant state utility commission currently regulate the
company's profit levels, but they have the authority to do so. The vast
majority of states require long distance service providers to apply for
authority to provide telecommunications services and to make filings regarding
their activities. The multiplicity of state regulations make full compliance
with all such regulations a challenge for any multi-state provider. There can
be no assurance that regulators or third parties will not raise material
issues with regard to either Touch Tone or Arcada's compliance with applicable
regulations or that regulatory activities will not have a material adverse
effect on the company. See "BUSINESS OF ARCADA - Regulation."
RISK OF LIABILITY FOR LOCAL UTILITY TAXES. Touch Tone and Arcada serve
customers in numerous localities throughout their service areas. Touch Tone
and Arcada currently collect and remit local utility taxes only in
jurisdictions where they have offices or hold other assets. Touch Tone and
Arcada have been contacted in the past by other localities where they have
customers but no other assets or operations requesting that they collect and
commit local utility taxes in such jurisdictions. Neither Touch Tone nor
Arcada believes such local utility taxes apply to their respective operations
and they have not historically collected such taxes and do not intend to do
so in the future. There can be no assurance that such localities will not
actively seek to collect taxes from Touch Tone or Arcada in the future or
that Touch Tone or Arcada will be liable for failure to collect such taxes in
the past. In the event Touch Tone or Arcada is found liable for such back
taxes it could have a material adverse effect on Touch Tone and Arcada. See
"BUSINESS OF ARCADA -Regulation."
WORKING CAPITAL REQUIREMENTS AND LONG CASH CYCLE. Currently, customer
billings for long distance services are generated by AT&T for Touch Tone from
detailed call records which are generally prepared by the carrier and are
available on or about the fourth day of the month following the month of
customer usage. Customer invoices usually are generated within ten days
thereafter and are due by the first day of the billing month. However,
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Touch Tone historically collects a large portion of receivables after the
scheduled due date, resulting in an average cash cycle of approximately 60
days. Pursuant to the terms of the agreement with AT&T, all cash received on
such accounts is paid directly to AT&T and then remitted to Touch Tone.
Furthermore, AT&T retains an amount equal to customer invoices which are past
due for 30 days until such time as the customer pays his bill and as noted
elsewhere herein AT&T has suspended all payments to Touch Tone pending
resolution of the $1,000,000 fraudulent charge. [While Touch Tone believes
that its current working capital sources to be sufficient to fund its
operations in the foreseeable future,] no assurances can be given that
temporary liquidity shortages will not occur in the future and adversely
affect Touch Tone. See "TOUCH TONE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
DEPENDENCE ON AGENTS. Touch Tone, and to a lesser degree, Arcada, depend
on continuing relationships with their independent marketing agents to
acquire new customer accounts. Substantially all of Touch Tone's current
customer accounts and approximately one-quarter of Arcada's accounts have
been obtained through their network of independent marketing agents. In
general, Touch Tone's agreements with its independent marketing agents
provide that all customers introduced to Touch Tone by the agents are the
Company's customers. Most of these contracts contain restrictions on the
transfer of accounts sold by the independent marketing agent, such as
limitations on the selling of a competing long distance service to customers
placed on Touch Tone's network by the independent marketing agent, a right of
first refusal to Touch Tone on sale of residual commissions and other similar
restrictions. Although Touch Tone cannot prevent an existing agent from
becoming a competitor and attempting to transfer Touch Tone's customers to a
competing service, these contractual limitations limit an independent
marketing agent's ability to do so. Touch Tone primarily uses independent
marketing agents to sell Touch Tone's services through telemarketing and
direct sales efforts.
Revenues derived from customers introduced to Touch Tone by independent
marketing agents currently constitute approximately 90% of Touch Tone's total
revenue for the year ended May 31, 1996 and the three months ended August 31,
1996. These percentages represent the total revenues derived from both
existing and new customers introduced to Touch Tone by independent marketing
agents. The independent marketing agents receive residual commissions based
on billings. Touch Tone has lost several key independent marketing agents as
a result of its disputes with AT&T, as previously discussed herein, which has
had a material adverse effect on Touch Tone's ability to develop new
business. Arcada utilizes marketing agents to supplement their inside sales
program. Revenues derived from such agents constituted 14% of revenues for
the nine months ended September 30, 1996. See "TOUCH TONE MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
OBSOLESCENCE DUE TO TECHNOLOGICAL CHANGE AND NEW SERVICES. The
telecommunications industry has been characterized by steady technological
change, frequent new service introductions and evolving industry standards.
Touch Tone and Arcada believe that their future success will depend on their
ability to anticipate such changes and to offer on a timely basis services
that meet these evolving industry standards. There can be no assurance that
Touch Tone or Arcada will have sufficient resources to make the investments
necessary to acquire new technology or to introduce new services that would
satisfy an expanded range of customer needs.
INTERNET
COMPETITION. The market for Internet access services is extremely
competitive. There are no substantial barriers to entry, and Touch Tone
expects that competition will intensify in the future. Touch Tone believes
that its ability to compete successfully depends upon a number of factors,
including market presence; the capacity, reliability and security of its
proposed network infrastructure; ease of access to and navigation of the
Internet; the pricing policies of its competitors and suppliers; the timing
of introductions of new products and services by Touch Tone and its
competitors; Touch Tone's ability to support existing and emerging industry
standards; and industry and general economic trends.
Touch Tone's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than Touch Tone. Touch Tone competes
or expects to compete directly or indirectly with the following categories of
companies: (1) other national and regional commercial Internet service
providers, such as Performance Systems International ("PSI"), Bolt Beranek
& Newman, Inc. ("BBN") and UUNET Technologies ("UUNET"), (2) established
on-line services companies that currently offer or are expected to offer
Internet access, such as American Online, Inc. ("AOL"),
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CompuServe Incorporated ("CompuServe") (a division of H&R Block, Inc.),
Prodigy Services Company ("Prodigy") (a joint venture of International
Business Machines Corp. ("IBM") and Sears, Roebuck and Co.), GEnie (a
division of General Electric Information Services) ("GEnie"), and Delphi
Internet Services ("Delphi") (a division of News Corp.), (3) computer
hardware and software and other technology companies, such as IBM and
Microsoft Corp. ("Microsoft"), (4) national long distance carriers, such at
AT&T Corp. ("AT&T"), MCI Communications Corp. ("MCI") and Sprint Corp.
("Sprint") that currently offer electronic messaging services, (5) regional
telephone companies, such as Pacific Bell, which recently announced a service
to provide Internet access, and (6) nonprofit or educational Internet service
providers.
Although most of the established on-line services companies and
telecommunications companies currently offer only limited Internet access,
many of these services have announced plans to offer expanded Internet
access. Touch Tone expects that all of the major on-line services companies
will eventually compete fully in the Internet access market. Certain
companies, including AOL, BBN, CompuServe and PSI, have obtained or expanded
their Internet access products and services as a result of acquisitions. In
addition, Touch Tone believes that new competitors, including large computer
hardware and software, media and telecommunications companies such as the
regional telephone companies, will enter the Internet access market,
resulting in even greater competition for Touch Tone. For example, Microsoft
has introduced an Internet access solution, including front-end software and
an on-line service, called "Microsoft Network," that is expected to be
competitive with Touch Tone's services. The application software for this
on-line service has been bundled with Microsoft's Windows 95 operating
system, which may give the service a significant advantage over the on-line
and Internet services from other providers, including Touch Tone. In
connection with its plans to enter the Internet access market, Microsoft
recently announced a strategic alliance with UUNET (including the purchase of
a minority investment in UUNET by Microsoft) that will give Microsoft
customers access to the Internet through UUNET's POPs. In addition, IBM's
most recent version of its OS/2 operating system software includes Internet
utilities, and IBM offers Internet access through its own private
communications network. The ability of these competitors or others to bundle
services and products with Internet connectivity services could place Touch
Tone at a significant competitive disadvantage.
Competition in Touch Tone's markets is expected to focus increasingly on
overseas traffic where Internet connectivity services are just beginning to
be introduced. For example, AOL recently announced a joint venture with
Bertelmann AG, a German entertainment company, to create an on-line computer
service in Europe. Touch Tone does not currently compete in overseas markets,
and to the extent the ability to provide connectivity services overseas
becomes a competitive advantage in the Internet connectivity industry, Touch
Tone may be at a competitive disadvantage relative to other competitors.
Increased competition could result in significant price competition,
which in turn could result in significant reductions in the average selling
price of Touch Tone's services. In addition, competition could result in
increased selling and marketing expenses and related subscriber acquisition
costs which could adversely affect Touch Tone's profitability. There can be
no assurance that Touch Tone will be able to offset the effects of any such
price reductions through an increase in the number of its subscribers, higher
revenue from enhanced services, cost reductions or otherwise. Increased
competition, price or otherwise, could result in erosion of Touch Tone's
market share and adversely affect Touch Tone's operating results. There can
be no assurance that Touch Tone will have the financial resources, technical
expertise or marketing and support capabilities to continue to compete
successfully.
DEPENDENCE ON WILTEL AND OTHER SUPPLIERS. Touch Tone will rely on other
companies, particularly WilTel, Inc. ("WilTel"), to provide communications
capacity via leased telecommunication lines. Pursuant to an addendum to Touch
Tone's existing agreement with WilTel, a majority of leased
telecommunications lines that Touch Tone will lease will be provided by
WilTel. If WilTel is unable or unwilling to continue providing service to
Touch Tone in the future, Touch Tone's operations could be materially
adversely affected. Although leased telecommunications lines are available
from several alternative suppliers, including AT&T, MCI and Sprint, there can
be no assurance that Touch Tone could obtain substitute services from other
providers at reasonable or comparable prices, or in a timely fashion.
In addition to the proposed use of WilTel, Touch Tone is dependent on
certain third party suppliers of hardware components. Although Touch Tone
attempts to maintain a minimum of two vendors for each required product,
certain components used by Touch Tone in providing its networking services
are currently acquired from only one source, including high performance
routers manufactured by Cisco Systems, Inc. and modems manufactured by U.S.
Robotics, Inc. A failure by a supplier to deliver quality products on a
timely basis, or the
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inability to develop alternative sources if and as required, could result in
delays which could materially adversely affect Touch Tone.
SOFTWARE AND SERVICE DEVELOPMENT; TECHNOLOGICAL CHANGE. The market for
Touch Tone's services is characterized by rapidly changing technology,
evolving industry standards, emerging competition and frequent new software
and service introductions. There can be no assurance that Touch Tone can
successfully identify new service opportunities and develop and bring new
services to market in a timely manner, or that software, services or
technologies developed by others will not render Touch Tone's, services or
technologies noncompetitive or obsolete. Touch Tone is also at risk to
fundamental changes in the way Internet access services are delivered.
Currently, Internet services are accessed primarily by computers and are
delivered by telephone lines. If the Internet becomes accessible by
screen-based telephones, television or other consumer electronic devices, or
customer requirements change the way Internet access is provided, Touch Tone
will have to develop new technology or modify its existing technology to
accommodate these developments. There can be no assurance that Touch Tone
will succeed in adapting its Internet service business to alternate access
devices and technology.
DEPENDENCE ON THE DEVELOPMENT OF A NETWORK INFRASTRUCTURE. The future
success of Touch Tone's business will depend upon the capacity, reliability
and security of its proposed network infrastructure. Touch Tone will attempt
to adapt its network infrastructure as the number of users and the amount of
information they wish to transfer increases, and so meet changing customer
requirements. The development and expansion of Touch Tone's proposed network
infrastructure will require substantial financial, operational and management
resources. There can be no assurance that Touch Tone will be able to develop
a network infrastructure to meet demand or its customers' changing
requirements on a timely basis, at a commercially reasonable cost, or at all,
or that Touch Tone will be able to deploy successfully any network expansion.
Any failure of Touch Tone to develop its network infrastructure on a timely
basis or to adapt it to changing customer requirements or evolving industry
standards could have a material adverse effect on Touch Tone's business,
financial condition and results of operations.
NEW AND UNCERTAIN MARKET. The market for Internet connectivity services
and related software products is in an early stage of growth. Since this
market is relatively new and because current and future competitors are
likely to introduce competing Internet connectivity and/or on-line services,
it is difficult to predict the rate at which the market will grow or at which
new or increased competition will result in market saturation. The novelty of
the market for Internet access services may also adversely affect Touch
Tone's ability to retain new customers, as customers unfamiliar with the
Internet may be more likely to discontinue Touch Tone's services after an
initial trial period than other subscribers. If demand for Internet services
fails to grow, or grows more slowly than anticipated, or becomes saturated
with competitors, Touch Tone's business, operating results and financial
condition will be adversely affected. Although Touch Tone intends to support
emerging standards in the market for Internet connectivity, there can be no
assurance that industry standards will emerge or, if they become established,
that Touch Tone will be able to conform to these new standards in a timely
fashion and maintain a competitive position in the market.
In order to achieve subscriber growth, Touch Tone must continue to
replace terminating subscribers and attract additional subscribers. However,
the sales and marketing expense and subscriber acquisition costs associated
with attracting new subscribers are substantial. Accordingly, Touch Tone's
ability to improve operating margins will depend in part on Touch Tone's
ability to retain its subscribers. Since the Internet market is new and the
utility of available services is not well understood by new and potential
subscribers, Touch Tone is unable to predict future subscriber retention
rates.
POTENTIAL LIABILITY FOR CONTENT. Recent legislative proposals aimed at
limiting the use of the Internet to transmit certain contents and materials
could, if enacted, result in significant potential liability to Internet
access providers including Touch Tone. Private suits may also be a
possibility for Internet providers for messages posted by subscribers and
disseminated through access providers systems. Touch Tone does not currently
have the ability to regulate use of the Internet by its customers and has no
plans at this time to develop software for this purpose. Accordingly,
although Touch Tone carries insurance, it may not be adequate to compensate
Touch Tone for any liability that may be imposed. Any imposition of liability
in excess of such coverage could have a material adverse effect on Touch Tone.
GOVERNMENT REGULATION OF INTERNET ACCESS PROVIDERS. Most
recently, Congress passed the Telecommunications Bill which makes
the transmission of indecent material on the Internet a crime.
Under the Bill,
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Internet access providers will have the responsibility for the material their
customers put on the Internet. At this point, Touch Tone is unable to predict
the impact or the cost of compliance on its Internet operations. The law or
future regulations soon to be adopted may decrease the growth of the
Internet, which could in turn decrease the demand for Touch Tone's products
and increase Touch Tone's cost of doing business or otherwise have an adverse
effect on Touch Tone's business, operating results or financial condition.
Moreover, the applicability to the Internet of existing laws governing issues
such as property ownership, libel and personal privacy is uncertain.
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THE TOUCH TONE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE TOUCH TONE SPECIAL MEETING
At the Touch Tone Special Meeting, Touch Tone Shareholders will consider
and vote upon a proposal to approve and adopt the Merger Agreement, the
Merger and the Reincorporation Merger. Touch Tone Shareholders entitled to
vote also will consider and vote upon any other matter that may properly come
before the Touch Tone Special Meeting.
THE TOUCH TONE BOARD HAS APPROVED THE MERGER AGREEMENT, THE MERGER, THE
REINCORPORATION MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED THEREBY, AND
RECOMMENDS A VOTE "FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT,
THE MERGER AND THE REINCORPORATION MERGER. SEE "THE MERGER - Recommendation
of the Boards of Directors; Reasons for the Merger."
Abstentions will be counted as shares present for purposes of
determining the presence of a quorum on all matters. See "-Revocability of
Proxies; Quorum." Abstentions will have the effect of votes against the
approval and adoption of the Merger Agreement, the Merger, the other
transactions contemplated by the Merger Agreement and the Reincorporation
Merger.
As of the Record Date directors and executive officers of Touch Tone
were beneficial owners of an aggregate of 114,516 shares of Touch Tone Common
Stock, or approximately 3.5% of the outstanding shares of Touch Tone Common
Stock (excluding 410,000 shares underlying warrants to purchase Touch Tone
Common Stock at $4.00 per share held by such directors and executive officers
also outstanding and exercisable on that date and an option to Michael Canney
Touch Tone's President and Chief Executive Officer to purchase 125,000 shares
of common stock at $.01 per share, which will be granted as part of a
consulting agreement to be entered into upon consummation of the Merger). The
directors and executive officers of Touch Tone who are also stockholders of
Touch Tone have advised Touch Tone that they will vote their shares of Touch
Tone Common Stock in favor of the matters submitted to stockholders of Touch
Tone at the Touch Tone Special Meeting or any adjournments or postponements
thereof.
VOTING OF PROXIES
A form of proxy is enclosed with this Joint Proxy Statement/Prospectus
for use by Touch Tone Shareholders.
Shares of Touch Tone Common Stock represented by all properly executed
proxies received in time for the Touch Tone Special Meeting and which have
not been revoked will be voted at such meeting in accordance with the
instructions indicated thereon. PROXIES WHICH DO NOT CONTAIN AN INSTRUCTION
TO VOTE FOR OR AGAINST OR TO ABSTAIN FROM VOTING ON A PARTICULAR MATTER
DESCRIBED IN THE PROXY WILL BE VOTED IN FAVOR OF THE MERGER AGREEMENT, THE
MERGER AND THE REINCORPORATION MERGER AND IN THE DISCRETION OF THE PROXY
HOLDER AS TO ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE TOUCH TONE
SPECIAL MEETING.
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REVOCABILITY OF PROXIES; QUORUM
The grant of a proxy on the enclosed Touch Tone form of proxy does not
preclude a stockholder from voting in person. A stockholder may revoke a
proxy at any time prior to its exercise by submitting a later dated proxy
with respect to the same shares, by filing with the Secretary of Touch Tone a
duly executed revocation, or by voting in person at the meeting. Attendance
at the Touch Tone Special Meeting will not in and of itself constitute a
revocation of a proxy.
Only holders of record of Touch Tone Common Stock at the close of
business on the Record Date will be entitled to receive notice of and to vote
at the Touch Tone Special Meeting. On the Record Date, Touch Tone had
outstanding ____________ shares of Touch Tone Common Stock. The holders of
Touch Tone Common Stock are entitled to one vote per share on each matter
submitted to a vote at the Touch Tone Special Meeting. The holders of a
majority of the outstanding shares of Touch Tone Common Stock entitled to
vote must be present in person or by proxy at the Touch Tone Special Meeting
in order for a quorum to be present. Shares of Touch Tone Common Stock
represented by proxies which are marked "abstain" or which are not marked
as to any particular matter or matters will be counted as shares present for
purposes of determining the presence of a quorum on all matters. Proxies
relating to "street name" shares that are voted by brokers will be counted
as shares present for purposes of determining the presence of a quorum on all
matters, but will not be treated as shares having voted at the Touch Tone
Special Meeting as to any proposal as to which authority to vote is withheld
by the broker.
In the event a quorum is not present in person or by proxy at the Touch
Tone Special Meeting, the Touch Tone Special Meeting is expected to be
adjourned or postponed.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of at least a majority of the shares
of Touch Tone Common Stock outstanding as of the Record Date voting in person
or by proxy is necessary to approve and adopt the Merger Agreement, the
Merger and the Reincorporation Merger.
APPRAISAL RIGHTS
Holders of Touch Tone Common Stock who vote against the Merger will not
be entitled to appraisal rights under the California Corporation Code if the
Merger is consummated.
SOLICITATION OF PROXIES
Subject to the Merger Agreement, Touch Tone will bear the cost of the
solicitation of proxies from its stockholders, and Arcada and Touch Tone will
pay the cost of printing and mailing this Joint Proxy Statement/Prospectus.
In addition to solicitation by mail, the directors, officers and employees of
Touch Tone and its subsidiaries may solicit proxies from stockholders of
Touch Tone by telephone or telegram or in person. Such directors, officers
and employees will not be additionally compensated for such solicitation but
may be reimbursed for out-of-pocket expenses in connection therewith.
Arrangements also will be made with brokerage houses and other custodians,
nominees and fiduciaries for the forwarding of solicitation material to the
beneficial owners of shares held of record by such persons, and Touch Tone
will reimburse such custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in connection therewith.
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THE ARCADA SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE ARCADA SPECIAL MEETING
At the Arcada Special Meeting, holders of Arcada Common Stock will
consider and vote upon a proposal to approve and adopt the Merger Agreement
and the Merger. Holders of shares of Arcada Common Stock entitled to vote
also will consider and vote upon any other matter that may properly come
before the Arcada Special Meeting or any adjournments or postponements
thereof.
THE BOARD OF DIRECTORS OF ARCADA HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT, THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED THEREBY, AND
RECOMMENDS A VOTE "FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT
AND THE MERGER. See "THE MERGER - Recommendation of the Board of Directors;
Reasons for the Merger."
Abstentions will be counted as shares present for purposes of
determining the presence of a quorum on all matters. See "-Revocability of
Proxies; Quorum." Abstentions will have the effect of votes against the
approval and adoption of the Merger Agreement, the Merger and the other
transactions contemplated by the Merger Agreement.
As of the Record Date, directors and executive officers of Arcada were
beneficial owners of an aggregate of 49,000 shares of Arcada Common Stock
(98% of the outstanding shares of Arcada Common Stock.) The directors and
executive officers of Arcada who are also stockholders of Arcada have advised
Arcada that they will vote their shares of Arcada Common Stock in favor of
the matters submitted to stockholders of Arcada at the Arcada Special Meeting
or any adjournments or postponements thereof.
VOTING OF PROXIES
A form of proxy is enclosed with this Joint Proxy Statement/Prospectus
for use by Arcada Shareholders.
Shares of Arcada Common Stock represented by all properly executed
proxies received in time for the Arcada Special Meeting and which have not
been revoked will be voted at such meeting in accordance with the
instructions indicated thereon. PROXIES WHICH DO NOT CONTAIN AN INSTRUCTION
TO VOTE FOR OR AGAINST OR TO ABSTAIN FROM VOTING ON A PARTICULAR MATTER
DESCRIBED IN THE PROXY WILL BE VOTED IN FAVOR OF THE MERGER AND IN THE
DISCRETION OF THE PROXY HOLDER AS TO ANY OTHER MATTER THAT MAY PROPERLY COME
BEFORE THE ARCADA SPECIAL MEETING.
REVOCABILITY OF PROXIES; QUORUM
The grant of a proxy on the enclosed Arcada form of proxy does not
preclude a stockholder from voting in person. A stockholder may revoke a
proxy at any time prior to its exercise by submitting a later dated proxy
with respect to the same shares, by filing with the Secretary of Arcada a
duly executed revocation, or by voting in person at the meeting. Attendance
at the Arcada Special Meeting will not in and of itself constitute a
revocation of a proxy.
Only holders of record of Arcada Common Stock at the close of business
on the Record Date will be entitled to receive notice of and to vote at the
Arcada Special Meeting. On the Record Date, Arcada had outstanding 50,000
shares of Arcada Common Stock. The holders of Arcada Common Stock are
entitled to one vote per share on each matter submitted to a vote at the
Arcada Special Meeting. The holders of a majority of the outstanding shares
of Arcada Common Stock entitled to vote must be present in person or by proxy
at the Arcada Special Meeting in order for a quorum to be present. Shares of
Arcada Common Stock represented by proxies which are marked "abstain" or
which are not marked as to any particular matter or matters will be counted
as shares present for purposes of determining the presence of a quorum on all
matters.
In the event a quorum is not present in person or by proxy at the Arcada
Special Meeting, the Arcada Special Meeting is expected to be adjourned or
postponed.
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VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of at least two-thirds (66 2/3%) of
the shares of Arcada Common Stock outstanding as of the Record Date voting in
person or by proxy is necessary to approve and adopt the Merger Agreement and
the Merger.
APPRAISAL RIGHTS
Holders of Arcada Common Stock who do not vote for the Merger will be
entitled to appraisal rights under the Washington Business Corporation Act if
the Merger is consummated. The Washington Business Corporation Act generally
entitles a stockholder to exercise appraisal rights upon a merger or
consolidation of the corporation effected pursuant to the Washington
Corporation Act if the holder complies with the requirements of Washington
Business Corporation Act. See "THE MERGER - Dissenters' Rights" and
Appendix C attached hereto.
SOLICITATION OF PROXIES
Subject to the Merger Agreement, Arcada will bear the cost of the
solicitation of proxies from its stockholders, and Arcada and Touch Tone will
pay the cost of printing and mailing this Joint Proxy Statement/Prospectus.
In addition to solicitation by mail, the directors, officers and employees of
Arcada may solicit proxies from stockholders of Arcada by telephone or
telegram or in person. Such directors, officers and employees will not be
additionally compensated for such solicitation but may be reimbursed for
out-of-pocket expenses in connection therewith.
HOLDERS OF ARCADA COMMON STOCK SHOULD NOT SEND STOCK CERTIFICATES WITH
THEIR PROXY CARDS
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THE MERGER
THE DESCRIPTION OF THE MERGER AND THE MERGER AGREEMENT CONTAINED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE MERGER AGREEMENT, A COPY OF WHICH IS INCLUDED AS APPENDIX A TO THIS JOINT
PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE.
GENERAL
Touch Tone, Merger Sub and Arcada have entered into the Merger
Agreement, which provides that, subject to the satisfaction or waiver of the
conditions set forth therein (see "THE MERGER AGREEMENT - Conditions to the
Consummation of the Merger"), Arcada will be merged with and into Merger
Sub, and Merger Sub will be the surviving corporation and a wholly owned
subsidiary of Touch Tone. As soon as practicable after the satisfaction or
waiver (where permissible) of the conditions under the Merger Agreement, the
Articles of Merger will be filed with the Secretary of State of the State of
Washington, and the time of such filings will be the Effective Time unless
otherwise provided in the Articles of Merger.
Upon consummation of the Merger, all shares of Arcada Common Stock will
automatically be canceled and retired and will cease to exist. Each holder of
a certificate representing any shares of Arcada Common Stock will cease to
have any rights with respect thereto, except the right to receive shares of
Touch Tone Common Stock and promissory notes to be issued upon the surrender
of such certificate, or the right of dissenting Arcada Shareholders to
receive fair value for their shares of Arcada Common Stock, under certain
circumstances. See "THE MERGER - Dissenters' Rights." At the Effective Time,
each outstanding share of Arcada Common Stock will be converted into the
right to receive 250 shares of Touch Tone Common Stock and $30.00 principal
amount of the Promissory Note, subject to adjustment, resulting in the
issuance of 12.5 million shares of Touch Tone Common Stock and $1.5 million
in Promissory Notes. Pursuant to the terms of the Merger Agreement, 11.5
million of the 12.5 million shares of Touch Tone Common Stock issued in the
Merger will be subject to resale restrictions until November, 1998. See "THE
MERGER AGREEMENT - Lock-up."
The number of shares of Touch Tone Common Stock to be received upon
conversion of the shares of Arcada Common Stock in the Merger, will be
subject to further adjustment if, prior to the Effective Time, the shares of
Touch Tone Common Stock are changed into a different number of shares by
reason of any recapitalization, split up, combination or exchange of shares,
or if a stock dividend on such shares is declared with a record date within
such period, then the number of shares to be issued to Arcada Shareholders
will be adjusted accordingly.
No certificates or fractional shares of Touch Tone Common Stock will be
issued as a result of the Merger. Instead, each Arcada Shareholders otherwise
entitled to a fractional shares will receive the cash value of such
fractional share in an amount equal to the fraction multiplied the closing
price of Touch Tone Common Stock on the third trading day before the
Effective Time.
BACKGROUND OF THE MERGER
The Touch Tone Board has been cognizant of increasing levels of
competition in the long distance telecommunications business. The Touch Tone
Board believes that it must expand in order to receive the substantial
competitive benefits available to larger entities. These benefits include
significant price advantages to volume purchasers provided by long distance
carriers.
In April, 1996, Touch Tone's Board retained Robert Vaughn to act as a
finder to locate parties that might be interested in a business combination
with Touch Tone. See "- Interests of Certain Persons in the Merger." During
the period from June 10, 1996 through July 31, 1996, Touch Tone identified
and performed initial due diligence on several possible candidates located in
the states of South Dakota, Texas, Utah, Washington and Hawaii. After review
and for various reasons, the Touch Tone Board determined not to pursue any of
such possible transactions.
On August 1, 1996, Arcada was identified by Mr. Vaughn to Touch Tone as
a possible acquisition candidate. During August, 1996, Michael Canney,
President and CEO of Touch Tone and Frank Bonadio, President and Director of
Arcada met several times and discussed possible terms of such a transaction.
After extensive negotiations and due diligence by Touch Tone and Arcada, a
Letter of Intent dated August 22, 1996 was executed by each party. Items
discussed during these negotiations included the number of shares to be
issued to Arcada shareholders in connection with the proposed transaction,
new management, compatibility of business philosophies
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and long term goals. Members of Arcada's management also conducted extensive
interviews of GetNet's management to evaluate the possible integration of
Arcada's long distance service with GetNet's Internet Backbone.
After further negotiations, due diligence and meetings at each of the
company's corporate offices, a draft Merger Agreement was circulated. The
parties discussed the draft merger agreement and after further revisions, a
substantially final draft of the Merger Agreement was circulated to all
parties. The Touch Tone Board, after discussions with management and the
review of legal counsel, approved the Agreement for Merger on
November 1, 1996. The Arcada Board approved the Agreement for Merger on
November 1, 1996.
The Merger Agreement was amended on November 19, 1996 to provide that
11.5 million of the 12.5 million shares of Touch Tone Common Stock issued in
the Merger will be subject to a two-year resale restriction and, in exchange
for the restriction, that Touch Tone will use its best efforts to induce its
officers ,directors and ten (10) largest shareholders to agree to vote in
favor of the Merger and the Reincorporation Merger.
The Merger Agreement was further amended on December 4, 1996 to provide
that the term of the Promissory Notes issued in the Merger would be changed
from 12 to 15 months.
The Merger Agreement is the result of arms-length negotiations between
Touch Tone and Arcada. There is no affiliation between any of the directors
and officers of the respective entities.
RECOMMENDATION OF THE BOARDS OF DIRECTORS; REASONS FOR THE MERGER
TOUCH TONE. By the vote of the Touch Tone Board of Directors at a
meeting held on November 1, 1996, the Touch Tone Board determined the Merger
to be fair to and advisable and in the best interests of Touch Tone and its
stockholders and approved the Merger and the Merger Agreement. The Touch Tone
Board's decision to declare the Merger advisable and to approve the Merger
and the Merger Agreement at the meeting followed study of strategic
alternatives.
At its meeting held on August 29, 1996, the Touch Tone Board received
the presentation of management with respect to Arcada, including reviews of,
among other things, historical information relating to the business,
financial condition and results of operations of Arcada; information provided
by Arcada management and reviewed and adjusted by Touch Tone management
regarding the long distance operations of Arcada; information regarding the
management of Arcada; and the possible effects of the Merger on Touch Tone's
financial condition and the possible market effects of the announcement of
the proposed Merger and the consummation thereof on the Touch Tone Common
Stock.
During the course of its deliberations, the Touch Tone Board of
Directors, with the assistance of management and its advisors, considered a
number of other factors, including the following:
(i) The strategic and financial alternatives available to Touch Tone,
including remaining a separate company and pursuing its existing growth
strategy;
(ii) The exchange ratio proposed by Arcada; and
(iii) The terms and conditions of the proposed Merger, including (a)
the right of Touch Tone to terminate the Merger Agreement upon the
occurrence of a material adverse change in Arcada, (b) the Touch Tone
Board's ability, subject to certain determinations regarding the
Touch Tone Board's fiduciary duties, to withdraw or modify its
recommendation to Touch Tone's stockholders and (c) the size and
structure of the termination and finders fees.
(iv) The ability of the combined companies to generate additional
long distance revenues, reduce overhead and expand the utilization of the
Internet backbone.
In the course of its deliberations, the Touch Tone Board reviewed and
considered a number of other factors relevant to the Merger, including among
other things: (i) information concerning Touch Tone's and Arcada's respective
businesses, prospects, financial performance, financial conditions,
operations and technology; (ii) an analysis of the respective contributions
to revenue, operating profits and net profits of the combined company; and
(iii) reports from management and legal advisors as to the results of their
due diligence investigation of Arcada.
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The Touch Tone Board also considered a variety of the potentially
negative factors in its deliberations of the Merger, including (i) the
potential disruption of Touch Tone's business that might result from a lack
of focus following the announcement of the Merger; (ii) possibilities that
the Merger might not be consummated and the effects of a public announcement
of the Merger on Touch Tone's business; (iii) the risk that the market price
of Touch Tone stock might be adversely affected by the announcement of the
Merger; (iv) the risk that the other benefits sought to be achieved in the
Merger will not be achieved; and (v) the risks described under "RISK
FACTORS."
In view of the wide variety of factors, both positive and negative,
considered by the Touch Tone Board, the Touch Tone Board did not find it
practical, and did not quantify or otherwise assign relative weights to the
specific factors considered.
Benjamin W. Bronston, a Touch Tone Director, elected to abstain from
voting on the Merger due to his perception of a conflict of interest, Mr.
Bronston is a principal of Nowalsky & Bronston LLP, a law firm which was
retained by Touch Tone to conduct a due diligence review of Arcada's
telecommunications contracts.
The Touch Tone Board elected not to obtain a fairness opinion because
Arcada met the profile criteria established by Touch Tone's management when
it initiated its search for a merger/acquisition candidate including solid
management with a history of results, and proven systems and products; a
profitable operation with aggressive marketing; and a long-term growth plan
through further acquisitions.
ARCADA. By the unanimous vote of the Arcada Board at a meeting held on
November 8, 1996, Arcada Board determined the Merger to be fair to and
advisable and in the best interests of Arcada and its shareholders and
approved the Merger and the Merger Agreement. The Arcada Board believes that
the following are reasons for Arcada shareholders to vote for approval and
adoption of the Merger Agreement and approval of the Merger:
(i) The strategic and financial alternatives available to Arcada,
including remaining a separate company and pursuing its existing growth
strategy;
(ii) The business opportunities available by leveraging Touch
Tone's Internet "backbone" to provide Internet access services;
(iii) The exchange ratio agreed to by Touch Tone;
(iv) The proposed terms and conditions of the proposed Merger,
including (a) the right of Arcada to terminate the Merger Agreement upon (1)
the occurrence of a material adverse change in Touch Tone (2) Touch Tone's
inability to renegotiate certain of its contracts and to settle certain
pending litigation matters and (3) Touch Tone's failure to maintain a minimum
level of working capital, (b) the Arcada Board's ability, subject to certain
determinations regarding its fiduciary duties, to withdraw or modify its
recommendations to Arcada's stockholders and (c) the size and structure of
the termination and finders fees;
(v) The potential increased liquidity and access to capital
markets available to Arcada as a publicly held and traded entity; and
(vi) The potential increased ability of Arcada to pursue
acquisitions through the issuance of publicly traded securities.
In the course of its deliberations, the Arcada Board reviewed and
considered a number of other factors relevant to the Merger, including, among
other things: (i) information concerning Arcada's and Touch Tone's respective
business, prospects, financial performance, financial conditions, operations
and technology; (ii) the historical stock prices of Touch Tone common stock;
(iii) an analysis of the respective contributions to revenue, operating
profits and net profits of the combined company; (iv) the structure of the
Merger which will permit the Arcada shareholders to exchange their shares of
Arcada common stock for Touch Tone common stock on a tax-free basis; and (v)
reports from management and legal advisors as to the results of their due
diligence investigation of Touch Tone.
The Arcada Board also considered a variety of the potentially negative
factors in its deliberations of the Merger including: (i) the potential
disruption of Arcada's business that might result from a lack of focus
following
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announcement of the Merger; (ii) possibilities that the Merger might not be
consummated and the effects of a public announcement of the Merger on
Arcada's business; (iii) the risk that the market price of Touch Tone stock
might be adversely affected by the announcement of the Merger; (iv) the risk
that the other benefits sought to be achieved in the Merger will not be
achieved; and (v) the risks described under "Risk Factors."
In view of the wide variety of factors, both positive and negative,
considered by the Arcada Board, the Arcada Board did not find it practical,
and did not quantify or otherwise assign relative weights to the specific
factors considered.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The Merger Agreement provides that from and after the Effective Time,
Touch Tone will indemnify and hold harmless all past and present officers and
directors of Arcada to the full extent such persons may be indemnified by
Arcada pursuant to Arcada's Certificate of Incorporation and Bylaws for acts
or omissions occurring at or prior to the Effective Time and will advance
reasonable litigation expenses incurred by such officers and directors in
connection with defending any action arising out of such acts or omissions.
See "THE MERGER AGREEMENT -Indemnification."
At the Effective Time, four of the current directors of Touch Tone will
resign, and the remaining director of Touch Tone will elect the Arcada
Designees to fill the four vacancies. The terms of all directors of Touch
Tone, including the Arcada Designees, will expire at the next annual meeting
of stockholders of Touch Tone. Also, at the Effective Time, Frank Bonadio,
currently the President and Chief Operating Officer of Arcada, will enter
into an employment agreement with Touch Tone and will become President and
Chief Executive Officer of Touch Tone. Michael Canney, the current President
and Chief Executive Officer of Touch Tone will resign and become a consultant
to Touch Tone pursuant to the terms of a consulting agreement between Mr.
Canney and Touch Tone. In addition, Robert Vaughn, a consultant and a
shareholder and the former President of Touch Tone will receive $150,000 in
cash and 250,000 shares of Touch Tone Common Stock upon consummation of the
Merger. See "MANAGEMENT AND OPERATIONS OF TOUCH TONE FOLLOWING THE MERGER -
Employment and Consulting Agreements."
GOVERNMENTAL AND REGULATORY APPROVALS
Certain aspects of the Merger will require notification to, and filings
with, certain securities and other authorities in certain states, including
licensing and tariff restriction in jurisdictions where Arcada currently
operates long distance service.
The obligations of Touch Tone and Arcada to consummate the Merger are
subject to the condition that there shall be no preliminary or permanent
injunction or other order by any court or governmental or regulatory
authority prohibiting the consummation of the Merger. Each party has agreed
to use reasonable efforts to defend any such challenge or order and to seek
to have any such order vacated or reversed.
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FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon the Internal Revenue Code,
existing and proposed regulations thereunder, reports of congressional
committees, judicial decisions and current administrative rulings and
practices. Any of these authorities could be repealed, overruled or modified
at any time after the date hereof. Any such change could be retroactive and,
accordingly, could modify the tax consequences discussed herein. No ruling
from the Internal Revenue Service (the "IRS") with respect to the matters
discussed herein has been requested and there is no assurance that the IRS
would agree with the conclusions set forth in this discussion. The following
discussion also is based upon representations made by Arcada and Touch Tone
and any inaccuracy in those representations could adversely modify the tax
consequences discussed herein.
This discussion is for general information only and does not address the
federal income tax consequences that may be relevant to particular
stockholders of Arcada in light of their personal circumstances or to certain
types of stockholders of Arcada (such as dealers in securities, insurance
companies, foreign individuals and entities, financial institutions and
tax-exempt entities) who may be subject to special treatment under the
federal income tax laws. This discussion also does not address any tax
consequences under state, local or foreign laws.
EXCHANGE OF ARCADA COMMON STOCK PURSUANT TO THE MERGER. The Merger is
intended to qualify as a reorganization under section 368(a) of the Code.
Accordingly, no gain or loss would be recognized by Arcada, Touch Tone or
Merger Sub as a result of the Merger. Furthermore, no gain or loss would be
recognized by Arcada Shareholders upon the conversion of their Arcada Common
Stock into shares of Touch Tone Common Stock pursuant to the Merger. The
aggregate tax basis of the shares of Touch Tone Common Stock received in
exchange for shares of Arcada Common Stock pursuant to the Merger should be
the same as the aggregate tax basis for such shares of Arcada Common Stock at
the time of the Merger and the holding period for shares of Touch Tone Common
Stock received in exchange for shares of Touch Tone Common Stock pursuant to
the Merger should include the holding period of such shares provided that
they were held as capital assets as of the Effective Time.
If the Merger does not qualify as a reorganization for federal income
tax purposes, no gain or loss would be recognized by Touch Tone, Merger Sub
or Arcada. However, an Arcada shareholder would recognize gain or loss upon
the conversion of Arcada Common Stock into Touch Tone Common Stock pursuant
to the Merger in an amount equal to the difference between the fair market
value of Touch Tone Common Stock received by such stockholder pursuant to the
Merger and its adjusted tax basis in the Arcada Common Stock surrendered in
exchange therefore. Such gain or loss would be capital gain or loss if the
shares of Arcada Common Stock were held as a capital asset and would be
long-term gain or loss if such shares had been held for more than one year as
of the Effective Time.
PROMISSORY NOTES RECEIVED PURSUANT TO THE MERGER. Arcada shareholders
will recognize gain or loss upon Touch Tone's payment of the Promissory Notes
in an amount equal to the difference between such stockholder's adjusted
basis in the Arcada Common Stock attributable to the Promissory Note. Such
gain or loss would be capital gain or loss if the shares of Arcada Stock were
held as a capital asset and would be long-term gain or loss if such shares
had been held for more than one year as of the Effective Time.
DISSENTERS. Stockholders of Arcada who perfect their dissenters' rights
should recognize gain or loss on the receipt of cash in exchange for their
Arcada Common Stock in an amount equal to the difference between the amount
of cash received and the basis of the stock surrendered in exchange
therefore, provided that no party related to such stockholder (including such
stockholder's spouse, children, parents and grandchildren and certain
corporations, partnerships, estates and trusts in which such stockholder owns
an interest) owns any stock in Touch Tone.
BACKUP WITHHOLDING. Backup withholding at a rate of 31% and information
reporting may apply to payments made with respect to Touch Tone Common Stock.
This withholding and information reporting generally will apply only if a
holder of a share of Touch Tone Common Stock, as the case may be, (i) fails
to furnish a social security or other taxpayer identification number ("TIN"),
(ii) furnishes an incorrect TIN, (iii) fails to report properly interest or
dividends or (iv) fails, under certain circumstances, to provide a certified
statement, signed under penalties of perjury, that the TIN provided is
correct and that the shareholder is not subject to backup withholding. Any
amount withheld from a payment to a holder under the backup withholding rules
is allowable as a credit against such holder's federal income tax liability,
provided that certain information is furnished to the IRS. Holders should
consult their tax advisors as to their qualification for exemption from
backup withholding and information reporting and the procedure for obtaining
such an exemption. Holders of Touch Tone Common Stock will be required to
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provide the required information to Touch Tone on a completed Form W-9. A
holder who does not provide Touch Tone with a correct TIN also may be
subject to penalties imposed by the IRS.
Touch Tone will report to Touch Tone Shareholders and the IRS the amount
of any "reportable payments" for each calendar year and the amount of tax
withheld, if any, with respect to payments on Touch Tone Common Stock.
ARCADA SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF PARTICIPATING IN THE MERGER, INCLUDING
THE APPLICABILITY OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, CHANGES IN
APPLICABLE TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION.
ANTICIPATED ACCOUNTING TREATMENT
Inasmuch as Arcada shareholders are to receive 12.5 million shares of
Touch Tone Common Stock, former Arcada shareholders will own approximately
78% of Touch Tone stock, which, for accounting purposes, results in Arcada
being deemed the "acquiring" corporation and Touch Tone the "acquiree."
Accordingly, in accordance with generally accepted accounting principles, the
recorded assets and liabilities of Arcada will be carried forward at recorded
book values. The assets and liabilities of Touch Tone will be recorded
through allocation of the purchase price based upon estimated fair values of
such assets and liabilities. There is no goodwill recorded as a result of
purchase accounting for this reverse merger business combination and costs
associated with the Merger will be recorded as a period expense. See
"UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION."
DISSENTERS' RIGHTS
Arcada Shareholders have the right to dissent from the Merger and, in
certain circumstances, to receive payment for their shares in accordance with
the terms of Chapter 23B.13 of the Washington Business Corporation Act
("WBCA"). The following discussion is not a complete statement of the law
pertaining to dissenters' rights under the WBCA and is qualified in its
entirety by the full text of Chapter 23B.13 of the WBCA, which is reprinted
in its entirety as Appendix C to this Joint Proxy Statement/Prospectus.
APPENDIX C SHOULD BE REVIEWED CAREFULLY BY ANY ARCADA SHAREHOLDER WHO
WISHES TO EXERCISE DISSENTERS' RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO
DO SO, SINCE FAILURE TO COMPLY WITH THE PROCEDURES OF THE STATUTE WILL RESULT
IN THE LOSS OF DISSENTERS' RIGHTS.
If the shares of Arcada Common Stock of a Dissenting Holder are held in
street name, either the beneficial owner or the broker in whose name the
shares are registered may dissent from the Merger by following the following
procedures. In addition, the beneficial owner must provide the written
consent of the registered holder to such dissent with or prior to the
assertion of dissenters' right. The record shareholder may dissent with
respect to all shares held by one beneficial owner and must provide written
notice to Arcada of the name and address of each such dissenting beneficial
owner.
A holder of Arcada Common Stock who wishes to dissent from the
Transaction (a "Dissenting Holder") must satisfy the following conditions,
among others:
(i) WRITTEN OBJECTION. Such shareholder must file a written
objection to the Merger with Arcada at its offices at 2001 Sixth Avenue,
Suite 3210, Seattle, Washington 98121 (Attention: Frank Bonadio, President)
prior to the vote if taken at the Arcada Special Meeting; and
(ii) NO VOTE IN FAVOR. Such shareholder must not vote in favor of
the Merger.
If the Merger is approved by the holders of Arcada Common Stock, Arcada
will send written notice along with a copy of Chapter 23B.13 of the WBCA no
later than 10 days after the Effective Time to each Dissenting Holder (i)
stating where such shareholder must send his or her written payment demand,
(ii) stating where and when
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certificates representing Arcada Common Stock must be deposited, (iii)
containing a form for demanding payment, which requires the Dissenting Holder
to certify that he or she acquired beneficial ownership before the first
public announcement of the Merger, and (iv) setting a date by which such
written payment demand must be received. A holder of Arcada Common Stock who
does not demand payment, certify that such shareholder acquired the shares
before the first public announcement, nor deposit his or her shares within
the time provided by such notice will not be entitled to dissenters' rights.
Arcada will pay to each Dissenting Holder who complies with the
procedures described above, within 30 days after the Effective Time, the
amount that Arcada estimates to be the fair value of such Dissenting Holder's
shares immediately prior to the announcement of the Merger, plus accrued
interest, excluding any appreciation or depreciation in anticipation of the
Merger. Arcada will provide, along with such payment, Arcada's balance sheet,
income statement and statement of changes in shareholders' equity for its
last fiscal year and any recent interim financial statements, an explanation
of how Arcada estimates the fair value of the shares and how the accrued
interest was calculated and certain other information. Any Dissenting Holder
who is dissatisfied with such payment or such offer may, within 30 days of
such payment or offer for payment, notify Arcada in writing of such
shareholder's estimate of fair value of his or her shares and the amount of
interest due, and demand payment thereof.
If any Dissenting Holder's demand for payment is not settled within 60
days after receipt by Arcada of such shareholder's payment demand described
in the last sentence, WBCA requires that Arcada commence a proceeding in King
County Superior Court to determine the fair value of the shares, naming all
Dissenting Holders whose demands remain unsettled as parties to the
proceeding. The court may appoint one or more persons as appraisers to
receive evidence and recommend the fair value of the shares.
Court costs and approval fees would be assessed against Arcada, except
that the court may assess such costs against some or all of the Dissenting
Holders to the extent that the court finds the Dissenting Holders acted
arbitrarily, vexatiously or not in good faith in demanding payment or to the
extent the court finds equitable.
Any shareholder who fails to follow these procedures will lose his or
her rights to dissent from the Merger. A negative vote, alone, will not
constitute the written objection required prior to the Special Meeting. Any
shareholder making a written demand for payment is thereafter entitled only
to payment as provided in the WBCA, and is no longer entitled to vote or
otherwise exercise any shareholder rights as to the shareholder's shares of
Arcada Common Stock. Consent of Arcada is required for the withdrawal of
demand for payment.
NASDAQ LISTING
It is a condition to the parties' obligations under the Merger Agreement
that Nasdaq shall have been notified and shall have approved the listing of
the shares of Touch Tone Common Stock issuable pursuant to the Merger
Agreement, and the applicable listing fee paid.
RESALE OF TOUCH TONE COMMON STOCK
The Touch Tone Common Stock to be issued pursuant to the Merger will be
subject to a "lock-up" restricting sales of Touch Tone Common Stock
received in the Merger through November 1998. See "THE MERGER AGREEMENT -
Lock-up." In addition, shares issued to any Arcada shareholder who may be
deemed to be an "affiliate" (as defined under the Securities Act and
generally including, without limitation, directors, certain executive
officers and beneficial owners of 10% or more of a class of capital stock) of
Arcada for purposes of Rule 145 under the Securities Act will not be
transferable except in compliance with the Securities Act (including Rule
145). This Joint Proxy Statement/Prospectus does not cover resales of Touch
Tone Common Stock received by any person who may be deemed to be an
"affiliate" of Arcada.
In general, under Rule 145, for two years following the Effective Time,
an affiliate would be entitled to sell Touch Tone Common Stock acquired in
connection with the Merger only through unsolicited "broker transactions"
or transactions directly with a "market maker," as such terms are defined
in Rule 144. Additionally, the number of shares to be sold by an affiliate
within any three-month period for purposes of Rule 145, may not exceed the
greater of 1% of the outstanding shares of Touch Tone Common Stock or the
average weekly trading volume of such stock during the four calendar weeks
preceding such sale. Rule 145 would remain available to affiliates, however,
only if Touch Tone remained current with its informational filings with the
Commission under the Exchange Act. Two
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years after the Effective Time, an affiliate would be able to sell such Touch
Tone Common Stock without such manner of sale or volume limitations, provided
that Touch Tone was current in its Exchange Act informational filings and
such affiliate was not then an affiliate of Touch Tone. Three years after the
Effective Time, an affiliate would be able to sell such Touch Tone Common
Stock without any restrictions, so long as such affiliate had not been an
affiliate of Touch Tone for at least three months prior thereto.
THE MERGER AGREEMENT
THE FOLLOWING IS A SUMMARY OF CERTAIN PROVISIONS OF THE MERGER AGREEMENT,
WHICH APPEARS AS APPENDIX A TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS
INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING SUMMARY INCLUDES THE MATERIAL
TERMS OF SUCH AGREEMENT BUT IS NOT NECESSARILY COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT.
EFFECTIVE DATE AND TIME OF THE MERGER
The Merger will become effective at the time of the acceptance of the
Plan of Merger by the Secretary of State of the State of Washington. As used
herein, the term "Effective Date" means the day on which the Effective Time
occurs. The parties anticipate filing the Articles of Merger as soon as
practicable after the approval of the Merger by the shareholders of Touch
Tone and Arcada. However, the parties are unable to predict when or if the
Effective Time will occur.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The obligations of Touch Tone and Arcada to consummate the Merger are
subject to, among other things, the satisfaction of the following conditions:
(i) the approval of the Merger and the Merger Agreement by the requisite vote
of the shareholders of Touch Tone and Arcada; (ii) the receipt of all
applicable regulatory and governmental approvals and consents and the
expiration of all statutory and regulatory waiting periods; (iii) the absence
of any order, decree or injunction of a court or agency of competent
jurisdiction that enjoins or prohibits the consummation of the Merger; (iv)
compliance with applicable pre-merger notification provisions of Section 7A
of the Clayton Act and the absence of pending or threatened proceedings under
any applicable antitrust law of the states of California and Washington; and
(v) the effectiveness of the Registration Statement and the absence of any
stop order suspending the effectiveness thereof or any proceedings for that
purpose initiated by the Commission.
The obligation of Touch Tone to consummate the Merger is subject to the
satisfaction or waiver of certain additional conditions, including, without
limitation, the following: (i) the continued accuracy of representations and
warranties of Arcada and the performance by Arcada of its covenants and
agreements made in the Merger Agreement, except where the failure of such
representations and warranties to be accurate or the failure to perform such
covenants or agreements would not have a material adverse affect on Touch
Tone; (ii) the receipt of all regulatory and governmental consents, waivers,
clearances, approvals and authorizations required in connection with the
transactions contemplated by the Merger Agreement without the imposition of
any condition that has not normally been imposed in such transactions and
would have a material adverse effect on Arcada or Touch Tone; (iii) the
receipt of an opinion, dated the date of the closing, from Cairncross &
Hempelmann, counsel to Arcada; (iv) the absence of any material adverse
change in the overall financial condition, businesses or results of
operations of Arcada; (v) evidence that dissenters' rights have not been
preserved with respect to more than five percent of the outstanding shares of
Arcada Common Stock: and (vi) the receipt of a certificate of officers of
Arcada and such other documents necessary to evidence fulfillment of the
conditions precedent to the closing of the Merger.
The obligation of Arcada to consummate the Merger is subject to the
satisfaction or waiver of certain additional conditions, including, without
limitation, the following: (i) the continued accuracy of the representations
and warranties of Touch Tone and Merger Sub and the performance by each of
Touch Tone and Merger Sub, of its covenants and agreements made in the
Merger Agreement, except where the failure of such representations and
warranties to be accurate or the failure to perform such covenants and
agreements would not have a material adverse effect on Touch Tone,
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(ii) the receipt of an opinion, dated the date of closing, from John B.
Wills, Esq., counsel to Touch Tone and Merger Sub; (iii) Touch Tone having
working capital of at least $1,500,000 at the Effective Time; (iv) Touch Tone
having settled certain pending litigation matters to the satisfaction of
Arcada; (v) Touch Tone having renegotiated certain contractual commitments to
the satisfaction of Arcada; (vi) the receipt of resignations from each of
Matthew J. Barleta, Norman B. Walko, Stephen P. Shearin and Benjamin W.
Bronston as directors of Touch Tone and the appointment of Frank Bonadio,
Robert Leppaluoto, Keith Leppaluoto and an individual to be named by Arcada
prior to the Effective Time and to fill the vacancies on the Touch Tone board
of directors resulting from the foregoing resignations, (i) the resignations
of all of the executive officers of Touch Tone; (viii) the absence of any
material adverse change in the overall financial condition, businesses or
results of operations of Touch Tone; and (ix) Touch Tone having used its best
efforts to induce its directors, officers and ten largest shareholders to
agree in writing to vote their shares of TTA Common Stock in favor of the
Merger and the Reincorporation Merger and (x) the receipt of a certificate of
officers of Touch Tone and Merger Sub, and other such other documents
necessary to evidence fulfillment of the conditions precedent to the closing
of the Merger;
BUSINESS OF TOUCH TONE PENDING THE MERGER
Under the Merger Agreement, until the Effective Time, Touch Tone is
generally obligated to conduct its business in the ordinary course and
consistent with past practice and prudent business practice. In addition,
Touch Tone has agreed to use its best efforts to preserve its business
organizations, keep available the present services of its employees and
preserve the goodwill of its customers and other business relationships. The
Merger Agreement also provides that, prior to the Effective Time, except as
otherwise consented to by Arcada, as permitted by the Merger Agreement or as
required by law, Touch Tone will not: (i) change any provisions of its
articles of incorporation or bylaws; (ii) change the number of shares of its
authorized or issued capital stock, except upon the exercise of certain
existing stock options; (iii) issue, grant or amend any options, warrants or
other rights to purchase capital stock; (iv) split, combine or reclassify any
shares of its capital stock; (v) declare, set aside or pay any dividends or
other distributions on its capital stock; (vi) redeem or otherwise acquire
any shares of its capital stock; (vii) grant any severance or termination pay
to or enter into or amend any employment agreement with or increase the
amount of payments or fees to its employees, officers or directors; (viii)
make capital expenditures in excess of $40,000 per project or $200,000 in the
aggregate; (ix) change in any material manner its pricing policies or any
other business or customer policies; (x) guarantee the obligations of any
other person except in the ordinary course of business consistent with past
practice; (xi) acquire, sell, transfer, assign, encumber or otherwise dispose
of assets other than in the ordinary course of business; (xii) enter into,
amend or terminate certain contracts having a term of one year or more or
calling for the payment of $25,000 or more; (xiii) engage or participate in
any material transaction or incur or sustain any material obligation except
as one in the ordinary course of business consistent with past practice;
(xiv) make any contributions to any benefit plans except in amounts
consistent with past practice; (xv) increase the number of Touch Tone's
full-time employees above 30; (xvi) acquire any real property; (xvii)
renegotiate any debts or take any action to change the characteristics of any
short term or long term debt or (xviii) agree to do any of the foregoing.
WAIVER AND AMENDMENT
At any time prior to the consummation of the Merger, the parties to the
Merger Agreement may (i) amend the Merger Agreement, (ii) extend the time for
the performance of any of the obligations or other acts of any other party
thereto, (iii) waive any inaccuracies in the representations and warranties
of any other party contained therein or in any document delivered pursuant
thereto, or (iv) waive compliance with any of the agreements or conditions
contained therein; provided, however, that after any approval of the Merger
by the Touch Tone and Arcada Shareholders, there may not be, without further
approval of such shareholders, any amendment or waiver of the Merger
Agreement that reduces the amount or changes the form of the Merger
Consideration to be delivered to the Touch Tone Shareholders or Arcada
Shareholders, respectively.
TERMINATION
The Merger Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the Merger by the Touch
Tone and Arcada Shareholders:
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(a) by mutual written consent of all the parties to the Merger
Agreement;
(b) by any party to the Merger Agreement (i) if the Effective Time
has not occurred on or prior to March 1, 1997 unless the failure of such
occurrence is due to the failure of the party seeking to terminate the Merger
Agreement to perform or observe its agreements and conditions set forth in
the Merger Agreement; or (ii) 10 days after written certification of the vote
of the Touch Tone Shareholders is delivered to Arcada indicating that the
Touch Tone Shareholders failed to approve the Merger at the Special Meeting
(or any adjournment thereof); or (iii) 10 days after written certification of
the vote of the Arcada Shareholders is delivered to Touch Tone indicating
that the Arcada Shareholders failed to approve the Merger at the Special
Meeting (or any adjournment thereof).
(c) by Arcada if (i) at the time of such termination there has been
a material adverse change in the consolidated financial condition of Touch
Tone from that set forth in Touch Tone's financial statements for the year
ended May 31, 1996 and the quarter ended August 31, 1996 (except for changes
resulting from market and economic conditions that generally affect the
telecommunications industry as a whole, including changes in regulation);
(ii) there has been any material breach of any covenant of Touch Tone or
Touch Tone - Washington under the Merger Agreement and such breach has not
been remedied within 45 days after receipt by Touch Tone or Touch Tone -
Washington of notice in writing from Arcada specifying the nature of such
breach and requesting that it be remedied; or (iii) the directors of Arcada,
after receiving advice of counsel, determine in their good faith judgment, in
order to discharge their fiduciary duties, to withdraw or modify or resolve
to withdraw or modify their recommendation that Arcada Shareholders vote in
favor of the Merger; or
(d) by Touch Tone if (i) at the time of such termination there has
been a material adverse change in the consolidated financial condition of
Arcada from that set forth in Arcada's financial statements for the year
ended December 31, 1995 (except for changes resulting from market and
economic conditions that generally affect the telecommunications industry as
a whole, including changes in regulations); (ii) there has been any material
breach of any covenant of Arcada under the Merger Agreement and such breach
has not been remedied within 45 days after receipt by Arcada of notice in
writing from Touch Tone specifying the nature of such breach and requesting
that it be remedied; or (iii) the directors of Touch Tone, after receiving
advice of counsel, determine in their good faith judgment, in order to
discharge their fiduciary duties, to withdraw or modify or resolve to
withdraw or modify their recommendation that Touch Tone Shareholders vote in
favor of the Merger.
BREAK-UP FEES
As part of the Merger Agreement, Touch Tone and Arcada agreed to pay
liquidated damages to each other under certain circumstances.
To compensate Touch Tone for certain costs incurred in connection with
the Merger and to induce Touch Tone to forego initiating discussions with
other potential acquirors Arcada will pay to Touch Tone $200,000, on demand,
if (i) Arcada terminates the Merger Agreement for any reason other than the
mutual consent of the parties, expiration of the term for the occurrence of
the Effective Time for the Merger Agreement, or any material change in the
financial condition of Touch Tone; (ii) the Merger Agreement terminates
because Arcada did not use all reasonable efforts to consummate the Merger;
(iii) the Arcada Board withdraws its recommendation that Arcada Shareholders
vote for approval of the Merger; or (iv) Touch Tone terminates the Merger
Agreement because of a material breach of any covenant of Arcada and such
breach is not remedied within 45 days after receipt by Arcada of written
notice from Touch Tone of such breach.
To compensate Arcada for certain costs incurred in connection with the
Merger and to induce Arcada to forego initiating discussions with other
potential acquirors Touch Tone will pay to Arcada $200,000 on demand if: (i)
Touch Tone terminates the Merger Agreement for any reason other than the
mutual consent of the parties, expiration of the term for the occurrence of
the Effective Time for the Merger Agreement or any material change in the
financial condition of Arcada; (ii) the Merger Agreement terminates because
Touch Tone or Merger Sub did not use all reasonable efforts to consummate the
Merger; (iii) the Touch Tone Board withdraws its recommendation that Touch
Tone Shareholders vote for approval of the Merger; or (iv) Arcada terminates
the Merger Agreement because of a material breach of any covenant by Touch
Tone or Merger Sub that is not remedied within 45 days after receipt by Touch
Tone or Merger Sub as the case may be, of written notice from Arcada of such
breach.
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The liquidated damages described above could increase the likelihood
that the Merger will be consummated on the terms set forth in the Merger
Agreement.
LOCK-UP
As part of the Merger Agreement, the Arcada Shareholders will be
restricted from selling shares of Touch Tone Common Stock received in the
Merger (the "Lock-up") except as follows: (i) an aggregate of 250,000 shares
of Touch Tone Common Stock may be sold prior to May 1997, (ii) an additional
250,000 shares may be sold between May 1997 and November 1997 and (iii) an
additional 500,000 shares may be sold between November 1997 and November
1998. After November 1998, there will be no further restrictions under the
terms of the Lock-up. See "RISK FACTORS - Restrictions on Transfer."
EXCHANGE OF STOCK CERTIFICATES
Promptly after the Effective Date, an agreed upon exchange agent (the
"Exchange Agent") will mail written transmittal materials concerning the
exchange of stock certificates to each record holder of shares of Arcada
Common Stock outstanding at the Effective Date. The transmittal materials
will contain instructions with respect to the proper method of surrender of
certificates that immediately prior to the Effective Date represented shares
of Arcada Common Stock. ARCADA SHAREHOLDERS SHOULD NOT SENT STOCK
CERTIFICATES AT THIS TIME.
Upon surrender to the Exchange Agent of Certificates formerly
representing shares of Arcada Common Stock for cancellation, together with
properly completed transmittal material, an Arcada Shareholder will be
entitled to receive the number of shares of Touch Tone Common Stock and a
Promissory Note (and cash in lieu of any fractional shares of Touch Tone
Common Stock) to which such holder is entitled as merger consideration.
Arcada Shareholders will not be entitled to receive interest on any cash
payment received in the Merger.
Until surrendered, each certificate that, prior to the Effective Date,
represented Arcada Common Stock (other than shares delivered to Touch Tone
after the Effective Date pursuant to the exercise of dissenters' rights) will
be deemed for all corporate purposes to evidence ownership of the number of
whole shares of Touch Tone Common Stock into which the shares of Arcada
Common Stock formerly represented thereby were converted. All certificates so
surrendered will be canceled. However, until surrendered, no dividends
payable to holders of record of Touch Tone common Stock will be paid to any
holder of such unsurrendered certificates. Upon surrender and exchange for
such outstanding certificates, the holder thereof will be paid, without
interest, the amount of any dividend or other distributions with a record
date occurring on or after the Effective Date, theretofore paid with respect
to whole shares of Touch Tone Common Stock, but withheld with respect to such
shares. After the Effective Date, there will be no further registration or
transfers on the records of Arcada of outstanding certificates representing
shares of Touch Tone Common Stock.
If any new certificate for Touch Tone Common Stock is to be issued in a
name other than that in which the certificate surrendered in exchange
therefore is registered, the new certificate will not be issued unless the
certificate surrendered in exchange is properly endorsed and otherwise in
proper form for transfer. In addition, the person requesting such transfer
must pay any transfer or other taxes required by the issuance of a new
certificate for shares of Touch Tone Common Stock to a person other than the
registered holder of the certificate surrendered, or must establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
Fractional shares of Touch Tone Common Stock will not be issued in the
Merger. Instead, each Arcada Shareholder who would otherwise be entitled to a
fractional share will receive cash in lieu thereof.
EXPENSES
All legal and other costs and expenses incurred in connection with the
Merger Agreement and the transactions contemplated thereby will be borne by
the party incurring such costs and expenses unless otherwise specified in the
Merger Agreement.
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POST-MERGER DIVIDEND POLICY
Dividends may be paid out on the Touch Tone Common Stock as and when
declared by the Touch Tone Board out of funds legally available for the
payment of dividends. Touch Tone has not ever paid cash dividends on its
Common Stock. Arcada, as a closely held corporation, has paid dividends from
time to time to its shareholders. However, the boards of directors of each of
Touch Tone and Arcada do not anticipate paying cash dividends in the
foreseeable future after the Merger as they intend to retain future earnings
to finance the growth of the business.
According to Washington Law, Touch Tone dividends may be paid only if,
after giving effect to the dividend, Touch Tone will be able to pay its debts
as they become due in the ordinary course of business and Touch Tone's total
assets will not be less than the sum of its total liabilities plus the amount
that would be needed, if Touch Tone were to be dissolved at the time of the
dividend, to satisfy the preferential rights of persons whose right to
payment is superior to those receiving the dividend. There are no other
limitations on the ability of Touch Tone to pay dividends to its
shareholders. The payment of future cash dividends will depend on such
factors as earnings levels, anticipated capital requirements, the operating
and financial conditions of Touch Tone and other factors deemed relevant by
the Touch Tone Board.
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BUSINESS OF TOUCH TONE
Touch Tone currently provides long distance and Internet services, and
to a limited degree, paging products. Touch Tone has a small long distance
customer base which is primarily located in the Southwestern United States.
Due to intense competition in the long distance industry and the high cost of
its AT&T long distance contracts, Touch Tone focused its efforts on the
development of a national Internet "backbone." An Internet backbone consists
of a centralized high-speed computer network that allows access to the
Internet and connects smaller computer networks around the United States.
With the continued development of the Internet backbone, Touch Tone is able
to offer Internet services to Internet Service Providers ("ISPs") and
individual, dial up customer accounts. Touch Tone was organized under the
laws of the State of California in 1990.
GENERAL
In its early operations, Touch Tone concentrated solely on reselling
long distance services provided pursuant to agreements with AT&T as a long
distance provider. Long distance providers have a network of fiber optic or
copper lines connected to switching equipment, regionally or nationally, that
carries long distance traffic. Touch Tone, as a long distance reseller, buys
or leases network capacity from a long distance provider such as AT&T and
then resells the long distance service to its own customers under its own
name through independent sales agents. Profits, if any, are derived from the
difference between the cost per minute of access bought from the carrier and
the cost per minute sold to the customer.
Touch Tone's long distance revenues have declined from $1,952,000 for the ten
months ended May 31, 1995 to $1,951,000 for the year ended May 31, 1996 to
$340,000 for the three months ended August 31, 1996 and is expected to
decline further. Revenues have decreased because the prices at which Touch
Tone can buy long distance under its AT&T agreements are, management
believes, non-competitive in the marketplace. Under its contract Touch Tone
must pay AT&T $0.17 per minute and, due to its commission structure must
resell this service at rates between $0.23 and $0.26 per minute to make a
profit. Touch Tone believes their rates to be above prevailing market rates
and in certain cases, above the rates charged by AT&T in the retail market.
As a result, Touch Tone has lost agents who are able to offer their customers
more competitive rates attainable with other long distance resellers. Unless
this agreement can be renegotiated to allow Touch Tone to offer competitive
pricing, revenue will continue to decrease. See "TOUCH TONES MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
In November 1995, Touch Tone acquired all the outstanding stock of
GetNet International, Inc. of Phoenix, Arizona ("GetNet"). GetNet is a
provider of Internet access services to individuals and businesses in Arizona
and other parts of the United States. GetNet currently offers subscribers
complete Internet access which is comprised of front-end software, integrated
with high quality access service and 24-hour customer support. GetNet's
high-speed digital telecommunications network provides subscribers with
direct access to the full range of Internet applications and resources
including E-mail, file transfer, World Wide Web sites, USENET news groups and
database information (including graphics, data and public domain software).
See "Internet Services" and "Internet Backbone" below.
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INTERNET DIVISION
GENERAL. As is more fully described below, Touch Tone has shifted its
emphasis to becoming an Internet service provider and to developing an
Internet backbone. A backbone connects to the Internet as a gateway carrying
computer-generated and stored digital information across the United States
and connects with other major backbone networks. Although monthly revenues
attributed to the Internet Division currently are approximately $65,000 per
month, of which approximately $49,000 is attributable to Touch Tone's "dial
up" base, $4,000 is attributable to web page design and maintenance and
$12,000 is attributable to the backbone. Touch Tone believes it can increase
revenues from the backbone network by providing access to the Internet to
numerous ISPs and their customers. As of October 1996, the backbone has been
completed to five cities.
INTERNET OVERVIEW AND COMPETITION. Use of the Internet has grown rapidly
since the commercialization of the Internet in the early 1990s. According to
industry sources, there were approximately 37 million Internet users in the
United States and Canada in 1995. The rapid growth in popularity of the
Internet, Touch Tone believes, is in large part due to the continuing
penetration of computers into U.S. households. Touch Tone also believes an
increasing percentage of computer owners also own modems, which are now
pre-installed in a growing number of new computers. Other industry sources
note that it is estimated in 1995, approximately 70 million people own
computers worldwide and approximately 39% of all households in the United
States own computers. Touch Tone believes that this growth is accompanied by
increasing use of the computer for communications such as facsimile
transmissions and E-mail.
In addition, there has been substantial growth of the informational,
entertainment and commercial applications and resources of the Internet and
the growing awareness of such resources among individuals. Many computers
connected to the Internet are repositories of vast amounts of information,
graphics and public domain software. Through an Internet connection, users
can access commercial, educational and governmental databases, entertainment
software, photographs and videos, newspapers, magazines, library card
catalogs, industry newsletters, weather updates and other information.
Traditional and emerging Internet applications are also increasing in
popularity, including E-mail, File Transfer Protocol ("FTP"), web sites on
the World Wide Web and USENET news groups. Finally, new applications are
being created by individuals, educational institutions and companies and are
made available at little or no cost through the Internet.
The increased availability of user-friendly navigational and utility
programs provides easier access to the Internet's resources. Internet use is
also being promoted by the development of software tools that simplify access
to the Internet's applications and resources. Navigational and search tools
such as Gopher, Archie, Veronica and WAE, as well as new browsing programs
and search tools such as Mosaic, help users access information from the
Internet. The foregoing navigational and utility programs are not products of
Touch Tone nor any affiliate of Touch Tone.
The market for Internet access services is extremely competitive, and
Touch Tone expects that competition in this market will intensify in the
future. Touch Tone's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than Touch Tone. See "RISK FACTORS -
Internet."
The potential impact of the Internet on the future of long distance with
regard to the origination and termination of long distance calls is currently
unknown as the Internet and its potential uses continues to rapidly evolve.
Issues such as bandwidth availability, which affects sound quality and the
potential regulation of the Internet, if possible, make it impossible for
Touch Tone to determine the long term potential impact. However, Touch Tone
believes quality of long distance calling on the Internet will become a
reality in the future.
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INTERNET SERVICES. In November 1995, Touch Tone acquired GetNet for
400,000 shares of Touch Tone Common Stock in exchange for all of the then
issued and outstanding shares of GetNet. Touch Tone operates GetNet, its
wholly-owned subsidiary, as a separate division; however it is a part of the
communications package offered to its customers.
Touch Tone, through GetNet, was initially a provider of Internet
services to various individuals and businesses in the United States. Touch
Tone offers subscribers complete Internet access comprised of front-end
software integrated with high quality access service and 24-hour customer
support. Touch Tone's high-speed, digital telecommunications network provides
subscribers with direct access to the full range of Internet applications and
resources including E-mail, World Wide Web sites, USENET news groups and
database information (including graphics, data and public domain software).
Touch Tone's front-end software features a point-and-click graphical user
interface, providing subscribers with an easy-to-use access to the Internet's
applications and resources.
INTERNET BACKBONE. Touch Tone has established and maintains a
nationwide, high-speed digital network, known as a "backbone," connecting
main Internet NAPs (network access points) located throughout the United
States. A Cisco 7000 series router has been installed at various NAPs which
allow Touch Tone a direct connection to the Internet. Regional exchange
points ("REPs") have been created using the smaller Cisco 4700 router. This
connection to these NAPs allows Touch Tone to provide Internet access to
other ISPs, government and educational institutions as well as customers of
all sizes anywhere in the world. Touch Tone's network has been designed to
provide high quality, reliable and fast access service, and designed to
support expansion in both the number of subscribers it may handle and the
increasing data traffic associated with those subscribers. In addition, Touch
Tone believes that its network will be upgradable and will in the future, be
able to support new types of data traffic, such as sound and video.
Touch Tone's eventual goal is to become a "gateway" Internet provider by
building a fully redundant backbone network of routers, servers, and
point-to-point connections anchored at strategic NAPs located throughout the
country. This backbone network gives Touch Tone the ability to resell
Internet connections to other ISPs and large institutions requiring larger
amounts of bandwidth than can be provided by most ISPs. In October, 1996,
Touch Tone completed the initial phase of building its Internet backbone,
which is comprised of two NAPs in Santa Clara, California and Washington,
D.C. In addition, Touch Tone has installed network Points of Presence
("POPs") in three other cities; Phoenix, Arizona; Baltimore, Maryland; and
Pittsburgh, Pennsylvania. A POP consists of routers that provide access to
and egress from the backbone.
INTERNET APPLICATIONS. Touch Tone, as a service provider, enables its
subscribers to have access to the full range of available Internet
applications which include E-mail. E-mail allows an Internet user to exchange
messages with any other user who has an E-mail address. Messages can be sent
almost instantly to designated individuals or groups on a mailing list.
The World Wide Web is a browsing and searching system comprised of
thousands of computer servers, referred to as home pages, each linked by a
special communications protocol called Hypertext. This open protocol allows
Internet users to view and access text, graphics, video and audio resident on
a home page or to connect instantaneously to related and linked information
on the same server or other home pages. Since the Internet is an open system,
any company can create a home page on the World Wide Web in order to provide
users with product or service information. Users can then solicit more
information and, in some cases, make purchases electronically. Browsing
programs such as Netscape and Mosaic have helped contribute to the rapid
growth of the World Wide Web. Touch Tone expects the World Wide Web to
continue to grow rapidly as more businesses and consumers become aware of the
advantages of communications on the Internet. Neither Netscape nor Mosaic are
products of Touch Tone nor affiliates of Touch Tone.
USENET News Groups is a network of thousands of computers attached to
the Internet that provide news groups that allow users to exchange
information on a variety of topics of shared interest. Internet users can
seek or provide information on diverse topics ranging from sports or other
hobbies, to job opportunities, to restaurant and travel suggestions.
In addition, many of the computers connected to the Internet are
repositories for vast and growing amounts of data, graphics, public domain
software and other programs that have been made available to the public. For
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example, with an Internet connection, a user can access commercial,
educational and government databases, newspapers, magazines, library card
catalogs, industry newsletters, weather updates, and other information.
Gopher, Archie, Veronica, WAIS and Telnet are Internet products that assist a
user in searching these databases and retrieving data. In addition, customer
support is available on-line by calling Touch Tone or in several manuals
dedicated to Internet users, to aid in their attempts to utilize the
functions of these products.
The Internet can also be easily used to move electronic files (including
data, programs or text) from one computer to another. This can be very useful
for parties that collaborate on data files where the parties are separated by
great distances. Unlike a transmission via a fax machine, data transferred
over the Internet remains in digital format and does not need to be
re-entered by a receiving party. It can be manipulated and then
re-transmitted to other Internet users.
INTERNET SERVICE PROVIDERS. With the growth and increasing
commercialization of the Internet, a number of companies, including Touch
Tone, have emerged to provide Internet software and access services. Access
providers vary widely in the geographic coverage, customer focus and levels
of Internet access provided to subscribers. For example, many access
providers are regional in scope, requiring subscribers outside a local or
regional calling area to incur long distance charges. Access providers may
also concentrate on certain types of subscribers such as businesses or
individuals which differ substantially in the type of service and support
required.
Providers may also differ according to whether they provide direct or
non-direct access to the Internet. Direct access through Internet protocols
such as Serial Line Interface Protocol ("SLIP") or Point-to-Point Protocol
("PPP") enable users to establish direct connections to other computers on
the Internet including Web sites or other users. A number of the major
on-line service providers, such as AOL and Prodigy, currently offer
non-direct access to the Internet which requires users to access the Internet
through a host computer controlled by the service provider. Under this type
of service, users are dependent on the service provider to determine which
Internet applications are available to them. Other regional and national
Internet access providers generally offer direct Internet access to customers
which enables users to access the full range of Internet resources.
Currently, Touch Tone provides individuals seeking direct access to the
Internet with front-end software integrated with high quality access service
and 24-hour a day customer support. Touch Tone has adopted a value pricing
strategy of charging subscribers various flat monthly fees for Internet
connectivity service. Touch Tone believes that its value pricing attracts
subscribers to and encourages their use of the Internet. Through Touch Tone,
users can also bypass the complex UNIX commands normally associated with the
Internet through an easy-to-use, point-and-click, Windows-based graphical
user interface.
Touch Tone's objective is to capitalize on the growing demand for
Internet services and gain market share by aggressively building its
subscriber base of small users, other ISPs and large institutions. Touch Tone
believes that by continuing to expand its subscriber base through providing
high quality software and services it can build a nationwide brand identity,
increase customer loyalty and achieve higher retention rates.
INTERNET MARKETING. Touch Tone's marketing plan is to capitalize on the
growing demand for Internet services and gain market share by building its
backbone network and customer base through direct sales by its own sales
personnel and agents responding to inbound calls and E-mail largely generated
by referrals from other Touch Tone subscribers as a result of local
businesses advertising their websites located on Touch Tone's service. Touch
Tone will continue to educate and promote Internet services through its
existing base of long distance agents and the hiring of additional direct
sales personnel. Touch Tone believes that by continuing to expand its
backbone network and agreements with third party carriers for global access
to the backbone, it can build an international identity and increase customer
loyalty and achieve higher customer retention rates.
Touch Tone is also focused on providing access services to the
individual subscriber market, which continues to be the fastest growing
segment of the Internet market. In the past, individual users have had
difficulty accessing the Internet because of the difficulty in integrating
software packages and services from different vendors. Touch Tone's strategy
is to establish a high-quality, nationwide name identity in this market by
offering a complete Internet solution comprised of easy-to-use front-end
software, integrated with high quality access service and 24-hour-a-day
customer support. With the development of the backbone, Touch Tone will be
able to resell the network's bandwidths to other ISPs and large institutions.
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Touch Tone has adopted a flat rate pricing structure which Touch Tone
believes encourages usage by eliminating subscribers' concerns about
incurring significant hourly charges, which has the potential to increase
subscriber retention rates. Touch Tone believes that its value price point
will help attract new subscribers and facilitate rapid penetration of the
individual subscriber market.
LONG DISTANCE DIVISION
LONG DISTANCE INDUSTRY OVERVIEW AND COMPETITION. See BUSINESS OF ARCADA
- - Industry Background" for a review of the long distance telecommunications
industry and the competition within that industry.
LONG DISTANCE STRATEGY. Management believes it would be able to reduce
the current burden of its carrier commitments and declining long distance
sales through acquisitions of other existing long distance companies and/or
their customer accounts. Touch Tone believes, based on information obtained
from the Telecommunications Resellers Association, that there are in excess
of 1,000 small- to medium-sized long distance resellers operating throughout
the United States which are similar to Touch Tone in terms of operating
revenues and customer base. Touch Tone believes an acquisition(s) would
enable it to renegotiate its existing contracts with AT&T and WilTel due to
increased total long distance revenues and operating efficiencies without a
significant increase in overhead. Acquisitions may include both switched and
switchless resellers of long distance.
PRIMARY LONG DISTANCE PROVIDER. Touch Tone's primary provider of
underlying long distance services is AT&T for both outbound and inbound
services as discussed elsewhere herein. Touch Tone has committed to a $1.8
million annual dollar usage for Software Defined Network ("SDN"). The SDN
product was designed by AT&T to allow large, multi-location businesses the
ability to create a long distance network by receiving one bill from AT&T for
the collective usage of the locations. AT&T also provides the customer with
the ability to manage their network by issuing their own calling card numbers
and account codes, and designating which locations would receive bills and
which would not. By combining their locations on one bill, the customer is
able to receive larger volume discounts. Under this contract, Touch Tone has
committed to sell a certain amount in AT&T long distance each month through
July, 1999. Touch Tone is not meeting the minimum usage commitments and is
obligated to pay AT&T penalties that are dependent upon the degree to which
Touch Tone is short of those commitments. If AT&T terminates the contract due
to Touch Tone's failure to pay the charges due thereunder, the contract
provides that Touch Tone will be liable for the minimum usage commitment
charges to be incurred over the remaining term of the contract. See "RISK
FACTORS - Potential Liability to AT&T."
ADDITIONAL LONG DISTANCE SUPPLIERS. In October 1995, Touch Tone signed
an agreement for a two year period with WilTel for long distance, calling
card and point-to-point services. The agreement provides for a $50,000
monthly commitment. The agreement allows Touch Tone to act as a long distance
carrier in the completion of long distance and calling card calls at rates
substantially more competitive than its AT&T SDN contract. Touch Tone is
currently meeting this commitment because Touch Tone orders from WilTel for
certain circuits used in the Internet backbone are credited against the
WilTel long distance contract.
LONG DISTANCE RATES AND CHARGES. Touch Tone charges customers primarily
on a 18 second initial rate and 6 second intervals thereafter irrespective of
the volume of usage, the distance of the call, the time of day of the call
and the origination region of the call. The rates charged are not affected by
the particular transmission facilities selected by the network switching
centers for transmission of the call. Different rates are applied to inbound
origination telephone services than to outbound termination telephone
services. The product line includes general 1+ dialing origination and "800"
service which Touch Tone's customers use to receive and pay for calls from
their respective customers and potential customers. The rates offered by
Touch Tone may be adjusted by AT&T in the future as interexchange carriers
continue to adjust their rates.
LONG DISTANCE CUSTOMERS. Touch Tone markets its long distance services
primarily to small business customers with monthly long distance bills of
less than $10,000. Currently, the monthly long distance phone bills for Touch
Tone's customers range from under $100 to $5,000, with the monthly long
distance phone bill for an average Company customer averaging approximately
$350 to $400. Sales to customers are made by independent agents who directly
contact potential customers and are paid on a commission basis as long as
Touch Tone receives revenues from that customer. Touch Tone does not have
contracts with its customers, vis-a-vis its agents, but receives written or
telephonic authorization from new customers in connection with their order
for services as per FCC regulations.
LONG DISTANCE MARKETING. Touch Tone historically has relied on its
network of independent marketing agents to market its long distance products.
Independent marketing agents are companies that market Touch Tone's long
distance products directly to business customers as authorized sales agents
of Touch Tone and receive a continuing commission based on the monthly usage
of the customer accounts that they have brought to Touch Tone. Touch Tone
provides its independent marketing agents with promotional materials and
products and offers training programs by Company employees. Touch Tone
solicits independent marketing agents primarily through telecommunications
trade periodicals and trade shows.
For the ten months ended May 31, 1995, one sales agent, TMO
Communications ("TMO"), accounted for approximately 42% of Touch Tone's
revenues on which it received commissions of 32%. For both the fiscal year
ended May 31, 1996 and the three months ended August 31, 1996 TMO, accounted
for approximately 39% of Touch Tone's revenues. At this level of commissions
Touch Tone does not receive any gross margin on the sales originated by this
agent.
Touch Tone currently does not engage in advertising directly to end
users of long distance services, although Touch Tone distributes a limited
amount of printed marketing materials to prospective users on a selected
basis.
LOCAL ACCESS DIVISION
On February 17, 1995, Touch Tone entered into an agreement with ICG to
act as a reseller for local access in cities around the United States where
ICG has established circuits and fiber optic lines. This agreement was
amended in March, 1996. Due to high marketing costs and competitive nature of
the local access market, Touch Tone has to date been unable to penetrate this
market. For the three months ended August 31, 1996 Touch Tone has revenues of
approximately $3,000 a month from local access customers. Touch Tone
management intends to evaluate this division as to its future viability.
WIRELESS DIVISION
In September 1995, Touch Tone entered into an agreement with Paging
Network of Arizona, Inc. ("PageNet") to act as a reseller of one way paging
services including tone only, digital and alphanumeric paging services. The
agreement further allows Touch Tone to offer other services offered by
PageNet which includes personal 800 numbers, mini mail, page mail, and custom
greeting features. Touch Tone has had insignificant customer sales of the
PageNet product and has undertaken only minimal marketing activities in this
regard. Touch Tone management intends to evaluate this division as to its
future viability.
GOVERNMENT REGULATION
LONG DISTANCE AND LOCAL ACCESS. See "BUSINESS OF ARCADA -Regulations"
for a discussion of the various governmental regulations which impact the
long distance telecommunications business.
INTERNET SERVICES. Touch Tone's Internet services are not currently
subject to direct regulation by any government agency, other than regulations
applicable to businesses generally, and there are currently few laws or
regulations directly applicable to access to or commence on the Internet.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. For example, the Exon
Bill (which was recently approved by the Senate) would prohibit distribution
of obscene, lascivious or indecent communications on the Internet. The
adoption of any such laws or regulations may decrease the growth of the
Internet, which could in turn decrease the demand for Touch Tone's products
and increase Touch Tone's cost of doing business or otherwise have an adverse
effect on Touch Tone's business, operating results or financial condition.
Moreover, the applicability to the Internet of existing laws governing issues
such as property ownership, libel and personal privacy is uncertain. Further,
due to the encryption technology contained in Touch Tone's products, such
products are subject to U.S. export controls. There can be no assurance that
such export controls, either in their current form or as may be subsequently
enacted, will not limit Touch Tone's ability to distribute products outside
of the United States or electronically.
The recently passed telecommunications bill includes provisions that
would prohibit online services or users from transmitting indecent material
without restricting minors access. Online providers are required to make a
"good faith" effort to provide users with a means to screen out
pornographic material. Touch Tone, as a result, will be required to develop
screening programs; however, Touch Tone is optimistic that the deregulation
may provide lower online prices for its customers.
EMPLOYEES
As of December 1, 1996, Touch Tone had twenty-seven (27) full-time
employees. 2 of such employees serve in sales and marketing, 12
serve in customer service and technical support, 4 serve in network
operations, 4 serve web page design and support and 5 serve in administration.
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LITIGATION
On August 30, 1996 a lawsuit was filed in the Superior Court of the
State of Arizona, Maricopa County by Touch Tone against Touch Tone's former
President, Jonathan Miller and his wife, Janeece Miller. The complaint
details various causes of action against Mr. Miller, in his capacity as a
former Officer and Director of Touch Tone and seeks damages in the amount of
$360,835 from the defendants. Mr. Miller filed an answer in September 1996
denying the allegations of the complaint. Touch Tone is, and will vigorously
pursue this legal action. The case is in the discovery stage and no date has
been set for trial.
Mrs. Janeece Miller filed a request with the American Arbitration
Association regarding an alleged breach of her employment agreement. She has
made a claim for $32,500 plus attorney's fees and costs as part of her
severance package. This claim was filed with the Arbitration Association on
July 31, 1996 and Touch Tone has responded, consenting to the arbitration but
contesting the allegations in the complaint, asserting that Ms. Miller
voluntarily resigned her employment with Touch Tone and that the terms of the
severance package do not apply in her situation. No hearing date has yet been
set and Touch Tone will defend the claim.
In July 1996, an unknown party fraudulently charged over $1,000,000 in
long distance charges on Touch Tone's account. Touch Tone has been
dilligently investigating the matter and has contacted the carrier, AT&T, who
denies any responsibility. Touch Tone has retained counsel to represent it in
this claim and has submitted a letter to AT&T stating its position that it
has no liability for the fraud. As of the date of this Joint Proxy
Statement/Prospectus, AT&T has not formally responded to Touch Tone's letter
although discussions are ongoing between the parties. AT&T is also withholding
payments to Touch Tone on its long distance service until this matter is
resolved. It is a condition to Arcada's obligation to consummate the Merger
that Touch Tone settle this dispute with AT&T prior to the Effective Time in
a manner satisfactory to Arcada. Touch Tone believes it has recourse against
AT&T and will not be held responsible for these charges, but the outcome of
this matter cannot be predicted at this time. See "RISK FACTORS - Potential
Liability to AT&T."
On October 10, 1996, two identical lawsuits were filed in Superior Court
of the State of Arizona, Maricopa County by two former officers and employees
of GetNet, including Stephen Shearin, a current director of Touch Tone, for
compensation due pursuant to employment agreements pending final resolution
of their respective employment agreements. The plaintiffs have requested
specific performance as it relates to past compensation, attorneys' fees and
costs. The Company will vigorously defend these suits and maintains the
employment agreements were terminated for cause.
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TOUCH TONE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR TOUCH TONE SHOULD BE READ IN CONJUNCTION WITH THE TOUCH TONE
FINANCIAL STATEMENTS AND NOTES THERETO ATTACHED HERETO.
FORWARD-LOOKING STATEMENTS MAY NOT PROVE ACCURATE. When used in this
Joint Proxy Statement/ Prospectus, the words "anticipate," "estimate,"
"expect," "project" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated,
expected or projected. Several key factors that have a direct bearing on the
ability of Arcada, Touch Tone and the combined company to attain their goals
are discussed in "RISK FACTORS."
RECENT DEVELOPMENTS; SIGNIFICANT DECREASE IN LONG DISTANCE REVENUES; NEED
FOR ADDITIONAL FINANCING
Through November 1996, Touch Tone's long distance revenues have
continued to decline. Touch Tone's management believes the AT&T SDN contract
discussed herein is non-competitive with AT&T's own customers and other long
distance carriers. Specifically, Touch Tone pays approximately $.17 per
minute wherein its competitors, including AT&T, sell long distance at rates
of $.15 and below. As a result, Touch Tone has experienced greater than
normal customer attrition and the loss of several of its independent agents.
In addition, in August 1996, AT&T made a claim against Touch Tone for long
distance charges of over $1,000,000 fraudulently charged by an unknown third
party to Touch Tone's account. As a consequence, AT&T is holding all payments
made by long distance customers on Touch Tone's account and is applying these
funds to the $1,000,000 claim. Consequently, Touch Tone has been unable to
pay its independent agents, resulting in their switching their customer bases
to other long distance resellers.
Accounts receivable and related allowances for bad debt have also
increased substantially due to Touch Tone's inability to receive accurate
billing records from AT&T and Touch Tone's lack of clerical personnel to
assist in their collection and the failure of one of Touch Tone's agents to
remit certain long distance payments it has collected.
Touch Tone is trying to renegotiate with AT&T both of these situations,
however, negotiations to date have been limited to discussions between
the parties and their respective legal counsel. If the Company is
unsuccessful in its negotiations with AT&T, in all probability the parties
will litigate this matter.
Further, Touch Tone's working capital resources have declined
significantly since its initial public offering in May, 1996. If the merger
should not be consummated for any reason, Touch Tone will be in need of
immediate financing to fund expected operating and other working capital
needs. See "RISK FACTORS-Past Financial Performance of Touch Tone and Going
Concern Considerations."
On November 13, 1996, Touch Tone entered into the Merger Agreement
providing for the Merger of Arcada with and into a wholly-owned
subsidiary of Touch Tone in exchange for 12.5 million shares of Touch
Tone Common Stock and $1.5 million in Promissory Notes. As a result of
the Merger, Arcada would acquire control of both management and the
Touch Tone Board. The completion of the Merger is subject to the
satisfaction of certain closing conditions set forth in the Merger
Agreement and the approval of the shareholders of Touch Tone and Arcada.
If the Merger is completed, Arcada will be considered the acquiring
entity, even though Touch Tone is legally the surviving company.
Therefore, future financial statements of Touch Tone will reflect the
operations of Arcada for prior years and Touch Tone operations only from
the date of the Merger.
GENERAL
In May 1996, Touch Tone completed its initial public offering of
securities from which it received net proceeds of approximately $5,763,000
from the sale of 1,725,000 shares of Common Stock (the Public Shares) and
1,725,000 Common Stock Purchase Warrants (the "Public Warrants")
(collectively, the "Public Shares and Warrants"). As of August 31, 1996,
working capital was approximately $1,715,000. Touch Tone intends to use its
remaining funds for future Internet development (including the completion of
the initial stage of the backbone) and to fund current losses. These
remaining funds are not sufficient to fund Touch Tone's future development
and the continued payment of existing carrier commitments and general and
administrative expenses.
Touch Tone's financial statements have been prepared on the basis that
Touch Tone will continue operating as a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. Touch Tone's ability to continue as a going concern is dependent
upon several factors, including meeting the terms of its commitments and
achieving and maintaining profitable operations. Touch Tone's financial
statements were audited by its independent certified public accountants,
whose report includes an explanatory paragraph stating that the financial
statements have been prepared assuming Touch Tone will continue as a going
concern and that Touch Tone has incurred losses from operations and has
entered into significant sales volume commitments that raise substantial
doubt about its ability to continue as a going concern.
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To increase revenues to a sufficient level to meet its carrier
commitments, general and overhead expenses and future expansion, Touch Tone
has been actively seeking acquisition candidates (as set forth below) with
existing customer and revenue bases. Touch Tone will attempt to issue shares
of its authorized, but unissued, Common Stock to acquire customer bases
and/or assets of acquisition candidates and retain its existing cash for
further development of its Internet backbone and to fund current losses.
There can be no assurance that Touch Tone will be successful in this regard.
Touch Tone's net revenues were approximately $2.2 million for the year
ended May 31, 1996, $2.0 million for the ten months ended May 31, 1995 and
$516,000 for the three months ended August 31, 1996 compared to $689,000 for
the three months ended August 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Touch Tone's cash position at August 31, 1996 was $2,491,000 and net
working capital was $1,715,000. Touch Tone's cash position reflects the
receipt of proceeds from Touch Tone's public offering of its Common Stock and
Warrants completed in May 1996. Included in Touch Tone's current liabilities
is $267,000 for monthly payments of $33,000 due to AT&T through May 1997 in
settlement of not meeting past service commitments.
Cash used in operations for Touch Tone totaled $1,891,000 for the year
ended May 31, 1996 and $1,090,000 for the three month period ended August 31,
1996. This increase in cash outflows can be primarily attributed to a loss
from operations, increases in trade receivables and decreases in accrued
payables.
Cash flows used in investing activities consisted primarily of additions
to equipment of $101,000 in the year ended May 31, 1996 and $679,000 for the
three month period ended August 31, 1996 used primarily in the construction
of the Internet backbone.
Cash flows provided by financing activities were $6,783,000 during the
year ended May 31, 1996. Cash flows used from financing activities were
$1,018,000 for the three month period ended August 31, 1996. Cash flows for
the year ended May 31, 1996 were primarily attributed to the receipt of
proceeds from the issuance of Common Stock and Warrants in Touch Tone's
initial public offering, but were partially offset by costs incurred in
connection with Touch Tone's private and public stock offerings. In May 1996,
Touch Tone completed its public offering of its Common Stock and Warrants
whereby it sold 1,725,000 shares of Common Stock and Warrants and received
net proceeds of approximately $5,763,000. In November 1995, Touch Tone
completed a private placement of its Common Stock whereby it sold 350,000
shares of Common Stock. The net proceeds of approximately $600,000 from this
offering were used primarily to cover costs associated with Touch Tone's
public offerings and other working capital needs. Cash flows used in
financing activities for the three months ended August 31, 1996 were
primarily associated with repayment of notes payable to stockholders,
redemption of preferred stock and payment of public offering costs.
Under Touch Tone's current arrangement with AT&T, customer billings and
collections are performed by AT&T. Accounts receivable represents the amount
Touch Tone's customers owe for actual usage. However, the amount Touch Tone
will receive from AT&T will be offset by the payable due to AT&T for the cost
of providing the service, which is reflected as an account payable in the
financial statements. The net of the receivable and payable is the gross
margin Touch Tone receives. AT&T is currently responsible for maintaining
Touch Tone's account receivable accounts and withholds payments to Touch Tone
for customer accounts over 30 days past due. Such amounts withheld from Touch
Tone are offset by the gross margin otherwise payable to Touch Tone.
CONTINGENCIES
Commencing in June through July 1996, an unknown party fraudulently
charged over $1,000,000 in long distance charges on Touch Tone's account.
Touch Tone has been diligently investigating the matter and has contacted the
carrier, AT&T, who denies any responsibility. Touch Tone has retained counsel
to represent it in this claim and has submitted a letter to AT&T stating its
position that it has no liability for the fraud. As of the date of this Joint
Proxy Statement/Prospectus, AT&T has not formally responded to Touch Tone's
letter although discussions are ongoing between the parties. AT&T is also
withholding payments to Touch Tone on its long distance service until this
matter is resolved. It is a condition to Arcada's obligation to consummate
the Merger that Touch Tone settle this dispute with AT&T prior to the
Effective Time in a manner satisfactory to Arcada. Touch Tone believes it has
recourse against AT&T and will not be held responsible for these charges, but
the outcome of this matter cannot be predicted at this time. See "RISK
FACTORS - Potential Liability to AT&T."
On October 10, 1996, two identical lawsuits were filed in Superior Court
of the State of Arizona, Maricopa County by two former officers and employees
of GetNet, including Stephen Shearin, a current director of Touch Tone, for
compensation due pursuant to employment agreements pending final resolution
of their respective employment agreements. The plaintiffs have requested
specific performance as it relates to past compensation, attorneys' fees and
costs. The Company will vigorously defend these suits and maintains the
employment agreements were terminated for cause.
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THE GETNET ACQUISITION
In November 1995, Touch Tone acquired all the outstanding stock of
GetNet International, Inc. ("GetNet") of Phoenix, Arizona in exchange for
400,000 shares of Touch Tone's Common Stock. GetNet is a provider of Internet
access services to individuals and businesses in Arizona and other parts of
the United States. Revenues from GetNet for the period from its acquisition
on November 1, 1995 to May 31, 1996 were $287,000 and $176,000 for the three
month period ended August 31, 1996. See BUSINESS OF TOUCH TONE - Internet
Division.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 31, 1996 COMPARED TO THE THREEMONTHS ENDED
AUGUST 31, 1995
Long distance resell revenue from operations for the three months ended
August 31, 1996 was $340,000 compared to revenues of $689,000 during the
three months ended August 31, 1995. The Company currently has an "SDN"
contract which extends through July 1999 with AT&T. Due to competition within
the telecommunications industry, the price the Company is required to pay
AT&T has become substantially less competitive than the current market price
for comparative service and is more than AT&T is charging for its own
customer accounts. Currently, AT&T is offering long distance services to its
network customers at approximately $.02 per minute less than Touch Tone's
wholesale cost for the same service. Touch Tone believes 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 Touch Tone will be able to ultimately renegotiate its
existing contract. If Touch Tone is unable to renegotiate its contract with
AT&T, Touch Tone intends to find another long distance reseller with a
substantial telecommunications customer base and negotiate a favorable
transfer of Touch Tone's SDN long distance base and obligations to that SDN
reseller or to AT&T. At this time, no loss accrual has been recorded in the
financial statements based on management's belief that the contract will be
renegotiated on favorable terms with AT&T. It such renegotiations are
unsuccessful, substantial losses could be recorded.
The Company expects to experience most of its future growth through
acquisitions of long distance customer bases with regional switch-based
carriers as well as through the growth of its Internet services, especially
its backbone facilities and services which were in service as of October 1996.
Cost of sales for long distance service for the three months ended
August 31, 1996 was $228,000, resulting in a gross margin of approximately
$112,000 or 33% of net revenue. The gross margin for the three months ended
August 31, 1995 was $254,000, approximately 37% of net revenue. The gross
margin percentage has decreased due to lower volume. The AT&T contract is
structured on a tiered discount, with the more volume achieved, the greater
the discount.
Financial statements for the three month period ended August 31, 1996,
reflect the inclusion of the operation of GetNet which was acquired effective
November 1, 1995. GetNet's sales were $176,000 for these three months with
cost of sales of $142,000. GetNet is still a development stage company and
has not yet begun to develop its market. All of GetNet fees are from
subscriber fees for Internet access. The Internet backbone was not
operational until after August 31, 1996. Touch Tone, however, expects the
ramp-up of revenue on the Internet backbone to take an extended period and
this operation will most likely not be profitable until fiscal 1998 at the
earliest.
Selling expenses were $58,000 or 11% of net revenues for the three
months ended August 31, 1996, as compared to $171,000, or approximately 25%
of net revenues for the prior comparable quarter. A significant sales agent,
TMO Communications, Inc. ("TMO"), accounted for approximately 39% of revenues
for the three months ended August 31, 1996 and received commissions of
approximately 32%. At this level, Touch Tone does not receive gross margin on
sales originated by this agent. GetNet's selling expenses were $5,000 for the
period ended August 31, 1996, or 3% of its sales.
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Under Touch Tone's current contract with independent sales agents for
reselling long distance services, commissions are paid as long as Touch Tone
receives revenues from the customer. Touch Tone intends to revise this
arrangement for new agents to provide for continuing commission payments only
if certain sales levels are maintained, however, no such contracts have been
entered into.
Touch Tone has four full time sales agents on staff marketing GetNet
services. These sales agents are paid a combination of salary and commissions.
General and administrative expenses increased to $722,000 or 140% of net
revenue for the three months ended August 31, 1996 as compared to $296,000 or
43% for the three months ended August 31, 1995. During the three months ended
August 31, 1996, Touch Tone paid increased salaries and benefits to its
employees of approximately $374,000 as compared to $203,000 in the prior
comparable quarter, primarily as a result of additional employees, including
GetNet employee related expenses of approximately $235,000. The remaining
$255,000 increase in general and administrative costs between the two periods
is mainly due to increased office and travel costs, increased internal costs
associated with search for potential acquisition candidates, the inclusion of
GetNet's other general and administrative expenses, which totaled $79,000,
and bad debt expense, which increased by $67,000 in the three months ended
August 31, 1996, as compared to the prior comparable period. Since May 1996,
Touch Tone has reduced its number of personnel due to decreasing revenues. In
connection with the termination of two employees, Touch Tone granted options
at below the then market price of its Common Stock. Therefore, an additional
$172,000 of expense was recorded in the three months ended August 31, 1996
based on the difference of the exercise price and trading price of its Common
Stock. Total general and administrative expense, relative to fiscal 1996 is,
however, expected to increase due to compensation commitments to Officers of
Touch Tone and a contract entered into with a significant consultant (who
previously was the Chairman of the Board and an Officer) of $15,000 per month
(see "Commitments").
Amortization and depreciation expense increased by approximately $88,000
related primarily to amortization of goodwill recorded in connection with the
GetNet acquisition.
Touch Tone incurred $135,000 of expense under its agreement with ICG
during the three months ended August 31, 1995 and none was incurred in the
three-month period ended August 31, 1996, as the contract was terminated in
April 1996. This amount is recorded as a period expense under operating
expenses, as Touch Tone experienced insignificant revenues associated with
this contract.
Interest expense, net of interest income, increased from $4,000 in 1995
to $106,000 in 1996 primarily as a result of 70,000 shares of Common Stock
being issued in August 1996 to satisfy an outstanding debt of $210,000. The
difference of approximately $254,000 between the then market price of Common
Stock and the related debt is being expensed in operations over the period
the note was outstanding. For the three months ended August 31, 1996,
$127,000 was expensed and the balance was previously expensed in fiscal 1996.
During the three months ended August 31, 1996, Touch Tone had interest income
of approximately $25,000 from its cash investments received from proceeds of
its public offering.
Touch Tone had a net loss of $1,060,000 for the three months ended
August 31, 1996. For the three months ended August 31, 1995, Touch Tone had a
net loss of $354,000. The increase in net loss between periods is directly
attributed to the decreasing revenues, the cost of share and option issuances
at less than market, the increase in selling, general and administrative
costs in fiscal 1997, and other reasons discussed above.
FOR THE YEAR ENDED MAY 31, 1996 COMPARED TO THE TEN MONTHS ENDED MAY 31, 1995.
Revenues from operations for the year ended May 31, 1996 was $2,238,000,
compared to revenues of $1,952,000 during the ten months ended May 31, 1995,
which had two fewer months than fiscal 1996 due to a change in year end in
1995. Therefore, monthly revenues actually decreased for the year ended May
31, 1996 based on a comparable twelve month period. Touch Tone currently has
an SDN contract which extends through July 1999 with AT&T. Due to competition
within the telecommunications industry the price Touch Tone is required to
pay AT&T has, subsequent to May 31, 1996, become less competitive than the
current market price for comparative service. Touch Tone 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 Touch
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Tone will be able to ultimately renegotiate its existing contract. If Touch
Tone is unable to re-negotiate its contract with AT&T, Touch Tone intends to
find another long distance reseller with a substantial SDN base and negotiate
a favorable transfer of Touch Tone's SDN distance base and obligations to
that SDN reseller.
Touch Tone expects to experience most of its future growth through
acquisitions of long distance customer bases and regional switch-based
carriers as well as through the growth of its Internet services, especially
its backbone facilities and services which were placed in service effective
October, 1996.
Cost of sales for the year ended May 31, 1996 was $1,406,000, resulting
in a gross margin of approximately $832,000 or 37% of net revenue. The gross
margin for the ten months ended May 31, 1995 was $642,000, approximately 33%
of net revenue. The gross margin percentage has remained relatively constant
as Touch Tone has achieved the highest margin currently allowed on its AT&T
contract for incremental sales. The AT&T contract is structured on a tiered
discount with the more volume achieved, the greater the discount. Touch
Tone's current tier structure is as follows: on the first $10,000 Touch Tone
bills, a discount of 10% is generated; between $10,000 and $75,000 that Touch
Tone bills, a discount of 32% is generated; on billings above $75,000, Touch
Tone generates a discount of 35%.
Financial statements for the fiscal year ended May 31, 1996 reflect the
inclusion of seven months operations of GetNet, which was acquired effective
November 1, 1995. GetNet's sales were $287,000 for these seven months with
cost of sales of $122,000. GetNet is still a development stage company and
has just begun to develop its market.
Selling expenses increased to $620,000 or 28% of net revenues for the
year ended May 31, 1996 from $337,000, or approximately 17% of net revenues
for the prior ten month fiscal year. The increase in selling expenses as a
percent of revenue is attributed to the higher commissions earned by one of
Touch Tone's agents that contributed a significant volume of customer usage.
The sales agent, TMO, accounted for approximately 36% of revenues for the
year ended May 31, 1996 and received commissions of approximately 32%. At
this level, Touch Tone does not receive gross margin on sales originated by
this agent, but as a result, experiences greater gross margin on other Touch
Tone revenues due to volume discounts by AT&T. In addition, in April 1996,
Touch Tone agreed to pay TMO an additional $75,000 to settle past
misunderstandings between Touch Tone and TMO with respect to the amount of
commissions due TMO. GetNet's selling expenses were $17,000 for the period
ended May 31, 1996, or 6%, of its sales.
General and administrative expenses increased to $1,724,000 or 77% of
net revenue for the year ended May 31, 1996, as compared to $505,000 or 26%
for the ten months ended May 31, 1995. During fiscal 1996, Touch Tone paid
increased salaries and benefits to its employees of approximately $1,074,000
compared to $374,000 in fiscal 1995, primarily as a result of additional
employees, including GetNet employee related expense since November 1, 1995
(date of acquisition) of approximately $311,000. The remaining $519,000
increase in general and administrative costs between the two periods is
mainly due to increased office and travel costs associated with the
anticipated growth of Touch Tone and increased internal costs associated with
Touch Tone's offerings of securities, attempted acquisitions and the
inclusion of GetNet's other general and administrative expense from November
1, 1995, which totaled $115,000. Also included in general and administrative
expense is bad debt expense, which increased by $162,000 in fiscal 1996.
Since May 1996, Touch Tone has reduced its number of employees due to
decreasing revenues. Total general and administrative expense, relative to
fiscal 1996 is, however, expected to increase due to compensation commitments
to Officers of Touch Tone and a contract entered into with a significant
consultant (who previously was the Chairman of the Board and an Officer) of
$15,000 per month. See "Commitments."
Amortizaton and depreciation expanses increased by approximately $127,000
related primarily to amortization of goodwill recorded in connection with the
GetNet acquisition.
Touch Tone also incurred $471,000 of expense under its agreement with
ICG during the year ended May 31, 1996; only $32,000 was incurred in the ten
month period ended May 31, 1995, as the contract was entered into in late
February 1995. This amount is recorded as a period expense under operating
expenses, as Touch Tone experienced insignificant revenues associated with
this contract. Such revenues (approximately $34,000) have been offset against
the expense. See "Commitments."
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Touch Tone also expensed $400,000 during the year ended May 31, 1996
based on a settlement of a past contingent liability from the failure to meet
its prior minimum commitment for selling "800" services with AT&T. When Touch
Tone pays this liability, it will no longer have a minimum future commitment
level for "800" services. See "Commitments."
Interest expense increased from $12,000 in fiscal 1995 to $172,000 in
fiscal 1996 primarily as a result of 70,000 shares of common stock being
issued after year end to satisfy an outstanding debt of $210,000. The
difference of approximately $254,000 between the then market price of common
stock and the related debt is being expensed in operations over the period
the note was outstanding. For the year ended May 31, 1996, $127,000 was
expensed and the balance will be expensed in the first quarter of fiscal 1997.
In January 1996, Touch Tone abandoned a planned acquisition of another
reseller of telecommunication services. For the year ended May 31, 1996, the
costs associated with this planned acquisition of $118,000 have been expensed
in operations.
Touch Tone had a net loss of ($2,802,000) for the year ended May 31,
1996. For the ten months ended May 31, 1995, Touch Tone had a net loss of
($294,000). The increase in net loss between periods is directly attributed
to the expense associated with not meeting minimum service commitment levels
with its carriers, the significant increase in selling, general and
administrative costs in fiscal 1996 which included indirect costs associated
with the cost of raising additional capital, hiring of additional personnel,
and other reasons discussed above.
COMMITMENTS
INTERNET BACKBOND CIRCUIT LEASES. Touch Tone leases certain
telecommunications 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 31, 1996 future minimum lease obligations under leases with lease
terms in excess of one year are as follows:
FOR THE YEARS ENDING
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
----------
----------
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Included in the above amounts is a three-year commitment beginning in
January 1997 with WilTel, whereby Touch Tone 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 one and one-half times actual
usage against Touch Tone's long distance service commitment described below.
Touch Tone is obligated to pay for actual usage of telecommunication
circuits, which for August 1996 approximated $70,000. This amount will
increase to approximately $95,000 in January 1997, when the minimum
commitment level increases, irrespective of related revenue from Touch Tone's
Internet users, which was nominal through November 1996. If Touch Tone is
unsuccessful in marketing its Internet services, these commitments will result
in substantial future losses, including the possibility of impairing the
capitalized costs associated with building the backbone and the tangible
assets recorded in the acquisition by Touch Tone of GetNet.
LONG DISTANT SERVICE COMMITMENTS. Touch Tone has a continuing commitment
with AT&T to provide long distance service of $1,800,000 annually, which as
of May 31, 1996, it had satisfactorily met. However, monthly revenues have
declined substantially due to increased competition and more competitive
prices being offered by other service providers. Touch Tone's current
contract with AT&T provides for the purchase by Touch Tone of
telecommunications services at a greater whole sale rate per minute than
currently being offered by AT&T to its retail customers. Therefore, it is
expected that revenues will continue to decrease under Touch Tone's SDN
contract.
Touch Tone 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 Touch
Tone will be able to ultimately renegotiate its existing contract. If it is
not renegotiated, it is expected that the Parties will litigate this matter
the outcome of which litigation cannot be predicted. Should Touch Tone be
unsuccessful in these efforts, the loss incurred by Touch Tone, while cannot
be estimated, would be substantial whereby it would jeopardize Touch Tone's
ability to continue operations.
Touchtone had an "800" service commitment, which exceeded Touch Tone's
current sales volume. Therefore in April 1996, Touch Tone negotiated a
release under this commitment, whereby it agreed to pay AT&T the $186,000
Touch Tone initially received upon signing its contract plus $400,000 payable
at $33,333 per month beginning in June 1996. If it does not meet this
commitment it will be obligated to pay its shortfall of approximately
$1,027,000 less amounts previously paid. Touch Tone is current on its
obligations under the commitments.
Touch Tone has a two-year commitment with WilTel beginning in August
1996 to sell $50,000 per month of long distance services. Touch Tone expects
to effectively meet this commitment as a result of its lease commitments for
its Internet backbone telecommunication circuits with WilTel.
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EMPLOYMENT AGREEMENTS. During the year ended May 31, 1996, Touch Tone
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. Touch Tone may terminate the
agreements for cause. If terminated for any other reason, Touch Tone 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 April 1996, Touch Tone entered a consulting agreement with Robert
Vaughn, the former chief executive officer of Touch Tone to assist Touch Tone
in mergers and acquisitions. Under this agreement, Touch Tone 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. If
the proposed Arcada acquisition is approved, Mr. Vaughn will receive $150,000
plus 250,000 shares of common stock for his efforts on this Merger. When,
and if, these shares are issued, an expense will be recorded in the
financial statements based on the then market price of Touch Tone's common
shares to be issued. This expense, based on current trading prices, would be
significant.
If the Merger is approved, Michael Canney, the current president of
Touch Tone will receive options to purchase 125,000 shares of common stock
exercisable at $.01 per share for a three-year period. The options are
granted as part of a consulting agreement to be entered into between Touch
Tone and Mr. Canney upon consummation of the Merger and in connection with
settlement of obligations to Mr. Canney under his current employment
agreement. Touch Tone has further agreed to register the shares underlying
the warrant. When, and if granted, this will result in expense being recorded
in Touch Tone's financial statements for the difference between the
then-market price of Touch Tone's common shares and the $.01 exercise price
multiplied by the 125,000 shares underlying the warrant. This expense, based
on current trading prices, would be significant.
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BUSINESS OF ARCADA
INTRODUCTION
Arcada is a growing provider of long distance voice and data
telecommunication services in 17 states and in 1996 began reselling
cellular airtime and providing long distance and other services to cellular
telephone users. Arcada offers a broad array of services designed to provide
discount telecommunications services to small and medium-sized commercial
customers and residential users.
Arcada targets commercial customers with telecommunications usage of
under $2,000 per month. Arcada believes that it is able to offer rates for basic
long distance that are between 30% and 40% less than the rates commercial
customers of the size targeted by Arcada typically are charged by the major
carriers. In addition to basic "1 plus" and "800" long distance, Arcada offers
its customers a number of other telecommunication services including data
transmission, debit cards and calling cards. Arcada strives to be flexible,
innovative and responsive to the needs of its customers. Outside its target
market and without any significant advertising, Arcada has developed a base of
residential customers which for the nine months ended September 30, 1996
represented approximately 52% of Arcada's revenues. Like Arcada's target market,
the residential market has grown primarily through referrals from other Arcada
customers.
In 1994, Arcada began providing long distance service to cellular
telephone users. Arcada entered the wireless market in 1994 by offering discount
paging services. In June, 1994, Arcada was selected to be one of the long
distance service choices for customers of AT&T/McCaw Communications, Inc., as
required by the June 15, 1994 U.S. Department of Justice consent decree signed
by AT&T. Arcada was chosen by approximately 19,000 new customers, representing
significantly less than 1% of the AT&T/McCaw customers. Arcada has leveraged its
participation in the AT&T/McCaw consent decree process to expand its sales of
cellular airtime and long distance services.
According to industry sources, the U.S. long distance reseller market
was over $9 billion in 1995, while the total U.S. long distance market was over
$60 billion in 1995. The telecommunications industry is highly competitive and
is dominated by three carriers, AT&T, MCI and Sprint.
Since Arcada contracts with other long distance carriers to provide
network transmission other than its investment in its three long distance
switches, it has not needed to commit capital for its own network and
transmission facilities. As a result, Arcada can expand without the capacity,
geographic coverage or configuration limitations of a particular network. In
three metropolitan markets, Seattle, Portland and Denver, Arcada owns switches
to direct call traffic over selected transmission networks, which provides
higher margins.
INDUSTRY BACKGROUND
Today's domestic long distance telecommunications industry was
principally shaped by a 1984 court decree (the "Decree") that required the
divestiture by AT&T of its 22 Bell operating companies ("BOCs") and divided
the country into some 200 Local Access Transport Areas or "LATAs." The local
exchange carriers ("LECs"), which include the seven regional Bell operating
companies ("RBOCs" -- the parent companies of the BOCs) as well as independent
local exchange carriers, were given the right to provide local telephone
service, local access service to long distance carriers and intra-LATA long
distance service (service within LATAs), but the RBOCs were prohibited from
providing inter-LATA service (service between LATAs). The right to provide
inter-LATA service was given to AT&T and the other interexchange carriers
("IXCS").
As a result of the Decree, an inter-LATA long distance telephone call
begins with the LEC transmitting the call by means of its local network to a
point of connection with an interexchange carrier. The interexchange carrier,
through its switching and transmission network, transmits the call to the LEC
serving the area where the recipient of the call is located, and the receiving
LEC then completes the call over its local facilities. For each long distance
call, the originating LEC charges an access fee. The interexchange career also
charges a fee for its transmission of the call, a portion of which consists of a
terminating fee which is passed on to the LEC used to deliver the call. To
encourage the development of competition in the long distance market, the Decree
required LECs to provide all IXCs with access to local exchange services that is
"equal in type, quality and price" to that provided to AT&T.
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These so-called "equal access" and related provisions were intended to
prevent preferential treatment of AT&T and to level the access charges that
the LECs could charge interexchange carriers, regardless of their volume of
traffic. As a result of the Decree, customers of all long distance companies
were eventually allowed to initiate their calls by utilizing simple "1 plus"
dialing, rather than having to dial longer access or identification numbers
and codes.
On February 1, 1996, Congress passed the Telecommunications Act of
1996 (the "Act"). The Act is a comprehensive revision of the Communications
Act of 1934, and radically changes the rules for competition and regulation
in virtually all sectors of the telecommunications industry. The Act was
signed into law on February 8, 1996, and its provisions became effective
immediately.
Prior to enactment of the Act, communications policy has been set
largely by the Federal Communications Commission ("FCC"), state public
utility commissions ("PUCs"), and the federal courts' enforcement of the 1984
antitrust consent decree that dismantled the Bell System. While the Act's
provisions cover many areas of communications (telephone service,
telecommunications equipment manufacturing, cable, radio and television
broadcasting, and Internet services), the Act's primary importance to Arcada
is its sweeping changes to local and long distance telephone services.
The Act eliminates all state restrictions on competition in local and
long-distance telephone service. The RBOCs are freed to provide long
distance service outside their regions immediately, and inside their regions
once completing a series of steps to remove entry barriers for local
telephone competition. Further, the antitrust consent decrees are repealed,
but their requirements for "equal access" ("1+" dialing) to all long distance
carriers are maintained. Competitive safeguards, and a prohibition on
"cross-subsidization" are mandated to protect long distance carriers such as
Arcada against anticompetitive behavior by local telephone companies.
Legislative, judicial and technological factors have helped to create
the foundation for small long distance providers to emerge as legitimate
alternatives to AT&T, MCI and Sprint for long distance telecommunication
services. The FCC has required that all IXCs allow the resale of their
services, and the Decree substantially eliminated different access
arrangements as distinguishing features among long distance carriers. In
recent years, national and regional network providers have substantially
upgraded the quality and capacity of their domestic long distance networks,
resulting in significant excess transmission capacity for voice and data
communications. Due to anticipated advances in the technology involved in
digital fiber optic transmission, excess capacity is expected to continue to
be an important factor in long distance telecommunications. As a consequence,
not only have small long distance service providers received legal protection
to compete with the network-based carriers, they also represent a valuable
source of traffic to carriers with excess capacity.
The large national carriers generally focus on residential and large
commercial accounts, creating opportunities for small long distance service
providers. Industry observers estimate that over 500 small firms have emerged
to compete for these customers, many of whom are quickly able to build
sizable customer bases on the strength of their selling skills. However,
sustaining a small firm's growth generally requires abilities to manage a
growing enterprise, as well as to attract the capital necessary to finance
receivables and develop a management and systems infrastructure.
An integral component of long distance telecommunications transmission
is the switching equipment necessary to direct calls or data over the
appropriate transmission line. Facilities-based carriers maintain their own
switches as part of their networks. Smaller nonfacilities-based providers
generally contract for the use of switches in connection with their
contractual arrangements for the use of a network. As an alternative, these
providers may install their own switches in those areas where they have
sufficient volume to justify the capital expense and ongoing maintenance
costs.
COMPANY STRATEGY
Arcada's principal objective is to achieve continued growth by
providing small to medium-sized commercial users and residential customers
with a variety of innovative products, a high quality digital network,
competitive pricing and a level of service not generally provided to these
customers directly from the major long distance carriers. Key elements of
Arcada's strategy include:
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RETAIN AND INCREASE CUSTOMER BASE. Arcada believes that its direct
sales force is effective at acquiring its target customer while its Customer
Care Group focuses on the care and retention of customers. Arcada emphasizes
customer support and service in order to minimize attrition and to expand the
volume of business from its existing customers. Arcada intends to continue to
grow its inside sales force supplemented by strong customer support and
service operations, and to augment its direct sales efforts with outside
sales representatives. The customer service functions are important to
Arcada, in that Arcada believes that in 1995 it acquired over 70% of its new
customers through referrals from other customers.
EXPAND AND LEVERAGE CELLULAR PRODUCTS. Arcada believes that significant
growth opportunities exist in the cellular telecommunications industry. Arcada
intends to grow its cellular division and leverage its customer base to sell
additional Arcada cellular and long distance products.
EXPAND LONG DISTANCE PRODUCT LINE. Arcada packages a variety of
innovative and cost-effective telecommunications services to meet the needs of
its customers. Arcada intends to continue its efforts to acquire, develop and
market products and services that meet the expanding needs of its target
customers by utilizing different suppliers and adding switching facilities.
Arcada is able to customize its service offerings while optimizing call routing
by purchasing its network transmissions services from several vendors.
LEVERAGE BILLING SYSTEM. Arcada believes that a sophisticated and
reliable billing system is a key element for growth and success in the
telecommunications industry. In order to meet this challenge, Arcada has
implemented a new billing system, portions of which it helped to develop and
are proprietary to Arcada. Since that time, Arcada has worked closely with the
billing system's developer to enhance and refine the billing system. Arcada's
goal is to establish a reliable and integrated billing and management
information system providing sophisticated billing information tailored to the
requirements of each customer, prompt and accurate responses to customer queries
and needs and support for Arcada's operations and collection efforts.
ACQUIRE ADDITIONAL SWITCHING FACILITIES. Arcada continually evaluates
opportunities to install switches in selected markets where the volume of its
customers' traffic makes such an investment economically beneficial. In
addition, utilization of its switches allows Arcada to route customers' calls
over multiple networks to minimize costs. Arcada currently operates switches
for its call traffic in three locations.
MARKETING AND SALES
Arcada markets its services in 17 states through two distinct channels:
direct sales and independent agents. Arcada targets commercial customers with
telecommunications usage of under $2,000 per month. Arcada believes that AT&T,
MCI and Sprint historically have chosen not to concentrate their direct selling
efforts on this segment of the market and that Arcada's target customers
generally do not qualify for the major carriers' volume discounts or for the
level of support services made available to higher volume users.
In addition, Arcada has developed a significant number of residential
customers from unsolicited "walk-in" customers and referrals. Revenues from
"walk-in" customers constituted 45% of Arcada's total long distance revenues
for the nine months ended September 30, 1996.
DIRECT SALES. Arcada relies heavily on its direct sales force, Arcada's
Account Executives. Typically, businesses become customers of Arcada by
purchasing long distance service from Arcada's Account Executives. Thereafter,
Account Executives and customer service representatives follow up with existing
customers by offering them new value-added services. Arcada believes that direct
sales activities are more effective than advertising for securing and
maintaining the business of small to medium-sized commercial customers. Account
Executives are compensated with a base salary supplemented by a commission based
on 10% of customer collections over six months. In October 1996, Arcada had nine
Account Executives, together with two managerial and administrative employees
who also engage in long distance sales. Arcada intends to expand its direct
sales force in the near term. 41% of Arcada's revenues for the nine months ended
September 30, 1996 resulted from this sales channel.
INDEPENDENT AGENTS. Arcada supplements its direct sales efforts by
marketing through a network of approximately 100 independent agents, which are
typically equipment consultants and distributors of interconnect equipment or
other office equipment and supplies. Such firms generally enter into agreements
providing for
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commissions on business generated for Arcada. Arcada typically grants a
nonexclusive right to solicit customers and pays commissions of 10% on
amounts collected. 14% of Arcada's revenues for the nine months
ended September 30, 1996 resulted from this sales channel.
RESIDENTIAL SALES. In each of Arcada's sales offices, one individual
is responsible for taking orders from new residential customers. Arcada is
not aggressively marketing its services to the residential market, but does
cultivate sales through direct mail and financial incentives for referrals.
CUSTOMER SERVICE
Arcada strives to provide superior customer service and believes that
personal contact with potential and existing customers is a significant
factor in customer acquisition and retention. Arcada believes that as the
telecommunications industry becomes more competitive, customer service will
become an even more important component of the sales and customer retention
effort.
New customer accounts are processed by Arcada's Customer Care
department located at Arcada's corporate offices. There, Arcada's staff is
dedicated to providing new customers with a smooth transition to its
services. Arcada obtains account information from new customers, which it
processes and forwards to the applicable LEC or interexchange carrier. In
areas where Arcada operates switches, it has on-line access to the local
exchange carrier's database system to expedite the transfer process.
Arcada believes that proactive customer service is helping Arcada
retain customers. Arcada's customer service team, in addition to responding
to customer questions, makes phone calls to new customers two to three weeks
after they join the Arcada system and after the first bill is sent. Arcada is
also implementing a system whereby each customer will be contacted several
months into its relationship with Arcada to address any problems, to attempt
to "upsell" Arcada's other products and generally try to reinforce the
business relationship and cut down on customer turnover. The Customer Care
department also serves as a "first stage" collections department in order to
try to collect past due accounts in a way that will maintain the customer
relationship.
Customer questions about bills and services are directed to Arcada's
Customer Care department, which had a combined staff of six customer service
representatives as of October 1996. Arcada has expanded its Customer Care
department's hours to 8:00-8:00, Monday through Friday to better serve its
customers.
During 1995 and to date in 1996, no one customer accounted for more
than 5% of Arcada's revenues. Arcada believes that the loss of any single
customer would not have a material adverse effect on its results of
operations.
WIRELESS OPERATIONS
BACKGROUND. The cellular industry is a fast-growing segment of the
telecommunications business. Industry sources indicate that there were 25
million cellular phone users in 1995 and that number is expected to grow to
45 million by 2000.
In 1994, Arcada entered the wireless telecommunications business by
offering discount paging services.
In 1994, AT&T acquired McCaw Communications, Inc. ("Cellular One"). As
a condition of approving that transaction, the U.S. Department of Justice
("DOJ") required that AT&T agree in a Consent Decree that long distance
service for cellular customers of Cellular One must be offered on an "equal
access" basis nationally. To comply with the DOJ Consent Decree, AT&T/McCaw
gave each Cellular One customer an opportunity to select their long distance
service provider by marking and returning a ballot. Arcada was accepted on
the ballot in every one of the 17 states it requested. Arcada, AT&T, MCI and
Sprint were the only long distance carriers named on ballots in every one of
those states. Since 1994, Arcada was chosen to provide long distance service
by 19,000 Cellular One customers; approximately 12,000 remain customers of
Arcada as of September, 1996.
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In 1995, Arcada began reselling cellular airtime under a reselling
agreement with AT&T in the Portland, Oregon market. Arcada has since added
the Denver, Colorado and Seattle, Washington markets and has entered into a
reseller agreement with U.S. West/AirTouch Cellular
MARKETING AND SALES. Arcada markets and sells its cellular airtime and
long distance products through its Wireless Communications division. The
Wireless Communications division has three sales professionals, along with
one management employee who also engages in sales.
Arcada is leveraging its success in being listed on the Cellular One
ballots by focusing on selling cellular airtime to new cellular long distance
customers. Additionally, Arcada believes that its current "wired" long
distance customers will be a good potential target for future cellular
airtime and long distance sales.
Arcada intends to expand its sales efforts in the future by: (i)
retaining independent agents to sell Arcada products on a commission basis;
(ii) contracting with retail stores which market cellular phones to sell
Arcada products "packaged" with cellular phones; and/or (iii) opening one or
more retail stores to sell cellular phones and services. Arcada is also
currently negotiating with Motorola to become one of the few wireless
resellers classified as a "Signature Dealer" permitting it to obtain wireless
hardware at favorable prices and participate in joint marketing efforts.
Arcada is aggressively pricing its cellular products and management
believes that its prices are up to 40% less than Arcada's major competitors.
To date, revenues from cellular airtime and long distance sales have not been
a significant portion of total revenues, 5% for the nine months ended
September 30, 1996. However, Arcada expects that both in absolute dollars and
on a percentage of revenues basis, cellular revenues will increase in the
future.
PRODUCTS AND SERVICES
Through contractual arrangements with facilities-based carriers,
Arcada currently offers a wide-variety of long distance telecommunication
services to small and medium-sized businesses. Historically, substantially
all of Arcada's revenues have been generated by provision of alternate access
long distance. Over the past two years this has changed and presently
substantially all of Arcada's long distance revenues are derived from basic
"1 plus" and "800" long distance services. Arcada offers switched and
dedicated, inbound and outbound long distance service carried by large
national or regional interexchange carriers. Arcada believes it has been
successful as a provider of these basic services because of the volume
discounts it has been able to negotiate with underlying carriers and its
ability to route its customers' traffic over the transmission networks of
more than one carrier. In markets where it has switches, Arcada can direct a
single customer's calls among different carriers' networks to take advantage
of the most favorable rates to different destinations at different times of
the day.
Arcada has also recently introduced cellular and cellular long
distance products. Arcada believes that revenue from its cellular products
will grow as a percentage of total revenues and it will become a significant
factor in Arcada's future business. At present, the "wireless" products
offered by Arcada include:
- CELLULAR AIRTIME. Arcada offers cellular service as a
reseller of AT&T Wireless Services.
- ONE NUMBER "FOLLOW ME" SERVICE. Arcada offers the ability for
customers to link their telephone, cellular phone and pager
together so that a customer needs only one telephone number for
any call, at any time, anywhere in the world.
- PAGING. Arcada currently offers digital and alphanumeric paging
in Colorado, Washington and Oregon.
- CELLULAR TELEPHONES, PAGERS, ACCESSORIES. Arcada has begun
retail sales of cellular telephones, pagers, pager watches and
related accessories to complement its wireless operations.
Arcada also offers enhanced billing reports. Arcada believes that its
value-added billing capabilities and other customer support services enable
its customers to manage their telecommunications costs more effectively.
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For example, Arcada's customers can choose from many different features
available in the Arcada billing system, including summaries of calls by
authorization code, project code, area code, longest call, and most-called
number.
Arcada believes that its customers typically realize savings from 30%
to 40% from the rates they would have been charged directly by the major
carriers for basic long distance service. Actual savings vary depending on
the service the customer was using prior to becoming a customer of Arcada.
BILLING SYSTEM
Arcada believes that maintaining sophisticated and reliable billing
and customer service information systems capable of integrating billing,
accounts receivable and customer support is a core capability necessary to
record and process the massive amounts of data that are generated by a
telecommunications service provider. Arcada currently processes approximately
2,000,000 call records per month.
In order to process, organize and analyze this volume, in June, 1995
Arcada implemented a new billing system designed to Arcada's specifications
by EXL, Inc. ("EXL"), a Canadian software manufacturer specializing in
billing systems. This system was put in place to replace Arcada's original
long distance billing and report-generating system which had become outdated
due to the increase volume of call records being generated by Arcada's
customers. After an initial phase-in period, Arcada was able to generate
customer bills utilizing the new systems. Since that time, Arcada and EXL
have worked closely to increase the system's reliability and versatility.
Arcada believes the system is currently operating within industry standards.
See "RISK FACTORS - Dependence on Effective Billing System."
While the billing system has accommodated Arcada's increased billing
volume, Arcada and EXL have been striving to enhance the system's ability to
generate sophisticated reports and to provide collections, customer and
administrative support. To this end, Arcada and EXL have developed several
additions and modifications to the billing system and anticipate continued
enhancements and refinements in the future. Arcada believes that the current
billing system is capable of accommodating increased growth and will, over
time, provide Arcada with a competitive advantage in administrative and
customer support matters.
Arcada has a perpetual, non-exclusive license to use the billing
system and also has proprietary rights in certain customized aspects of the
system, including the software allowing Arcada to bill customers for specific
"call packages" allowing flat monthly billing for a specific number of calls
of a specified duration during a given month.
In addition to its long distance billing system, Arcada also relies on
an independent, "in-house" billing and reporting system for its cellular
customers. Arcada owns all rights in this system. Arcada and EXL are working
closely to integrate the cellular billing system into the long distance
billing system and anticipate integrating the two systems in 1997.
BILLING AND MANAGEMENT REPORTS. Arcada is currently able to collect
many call data items for each phone call placed by a customer, including
customer name, call origination point, call destination point, billing code
minutes, date, time and rate code. From this data, Arcada can organize the
customer's monthly phone calls into a wide variety of report formats.
ACQUISITIONS
Arcada intends to supplement its growth through selective acquisitions
of providers of telecommunication services. Arcada believes that in some
instances it is faster and less expensive to buy customers than to develop
them through its internal marketing or sales efforts. Arcada believes that
many firms are willing to sell their customer bases because they have been
unable to manage the growth of their enterprise or attract the capital
necessary to finance receivables and develop a management and systems
infrastructure. Arcada will also consider acquisitions that would enable it
to expand its product line.
While acquisitions can offer important growth opportunities,
assimilating new businesses gives rise to certain risks, including the risk
that high customer attrition from acquired customer bases can make the
acquisition less attractive financially. The acquisition process also places
demands on senior management and its systems
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during periods of rapid growth. There can be no assurance that there will not
be adverse consequences to Arcada from pursuing acquisitions in the future.
SUPPLIERS
Historically, Arcada has entered into two- to three-year supply contracts
with its major interstate long distance and cellular air time suppliers, such as
Frontier, Sprint and AT&T. Many of the major long distance agreements are
currently in the process of being renewed. In addition to its contracts with its
major interstate long distance and cellular air time suppliers, Arcada has
entered or otherwise acquired contracts with other suppliers for intrastate long
distance, including Electric Lightwave, Inc., ICG, TCG, GTE and US West. In
order to obtain favorable pricing from its interstate long distance carriers,
Arcada has committed to purchase minimum volumes of interstate long distance
services during stated periods whether or not such volumes are used. For 1996,
these commitments total approximately $1,800,000.
Arcada utilizes "least cost routing" to minimize the cost of
connecting customers' calls. With this process, Arcada's switches are
programmed to automatically select the lowest cost long distance carrier from
among Arcada's underlying long distance carriers for each call carried
through the switch. This routing system serves to minimize Arcada's reliance
on any one underlying carrier by automatically selecting alternate service
should one carrier discontinue service.
Arcada is unable to use its "least cost routing" system in providing
inbound "800" calls. Arcada is dependent on Sprint to handle this traffic,
which constitutes approximately 10% of Arcada's total minutes billed. In the
event Sprint were to discontinue Arcada's "800" service without sufficient
notice for Arcada to make alternate arrangements, Arcada's "800" customers
would temporarily be without such service. Such a loss of service could have
an adverse effect on Arcada's business.
Arcada, like all other long distance providers, is dependent upon
local exchange carriers for call origination (carrying the call from the
customer's location to the long distance network of the interexchange carrier
selected to carry the call) and termination (carrying the call off the
interexchange carrier's network to the call's destination). FCC policy
currently requires interexchange carriers to provide resale of the use of
their transmission facilities. The FCC also requires local exchange carriers
to provide all interexchange carriers, including Arcada, with equal access to
the origination and termination of calls. If either or both of these
requirements were relaxed, Arcada could be adversely affected. See "BUSINESS
OF ARCADA - Regulation."
Each month Arcada receives invoices from its underlying carriers. Due to
the multitude of billing rates and discount rates and discounts which must be
applied by carriers to the calls completed by Arcada's customers, and due to
discrepancies in information contained in suppliers' bills when compared with
Arcada's records, Arcada has disagreements with its carriers concerning the sums
invoiced for its customers' traffic. It has been Arcada's experience that the
amounts it is invoiced regularly do not precisely reflect actual call traffic.
These disputes have generally been resolved on terms favorable to Arcada,
although there can be no assurance that this will continue to be the case. No
dispute over billing discrepancies or failure to meet volume commitments has had
a material adverse effect on Arcada to date, but there could be no assurance
that this will continue to be the case.
ACQUISITION OF SWITCHING FACILITIES
Arcada owns switches for call traffic transmission in three locations:
Seattle, Portland and Denver. Use of a switch results in lower overall call
transmission costs. Arcada's ownership and potential future acquisition of
switching equipment can improve gross margins and provide greater control
over service to its customers. These increased margins are somewhat offset by
costs associated with operating its own switches. In areas where Arcada owns
switches, it can immediately access call records, provide customers with
instant access to different networks and implement differentiating features
and billing enhancements without the involvement of the underlying carrier.
Arcada believes that the ability to exercise direct control over a customer's
calls and reduce their cost can be an important competitive advantage.
COMPETITION
The telecommunications industry is highly competitive and affected by
regulatory and rapid technological change. Arcada's competitors range from
nationally-recognized Fortune 500 companies (AT&T, MCI) to small regional and
local resellers. Many competitors have greater resources than Arcada and
barriers to entry are low. There can be no assurance that it will remain
competitive in this environment. Arcada believes that the principal competitive
factors in its business include pricing, customer service, network quality,
value-added services and the flexibility to adapt to changing market conditions.
While Arcada believes that AT&T, MCI and Sprint historically have chosen not to
concentrate their direct sales efforts on small to medium-sized businesses,
these carriers are dominant in the industry. In addition, AT&T, MCI and Sprint
have recently introduced new service and pricing
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options that are attractive to smaller commercial users, and there can be no
assurance that they will not market to these customers more aggressively. A
significant number of large regional long distance carriers and newer
entrants in the industry compete directly with Arcada by concentrating their
marketing and direct sales efforts on small and medium-sized commercial users.
Arcada believes it competes favorably in its targeted market segment,
principally due to its pricing, personalized service and enhanced billing and
reporting. Arcada also believes that its success will increasingly depend on
its ability to offer on a timely basis new services based on evolving
technologies and industry standards. There can be no assurance that new
technologies or services will be made available to Arcada on favorable terms.
Regulatory trends have had and may have in the future, significant
effects on competition in the industry. See "BUSINESS OF ARCADA -
Regulation." Under current industry conditions, both the interexchange
carriers and local exchange carriers have access to information regarding
Arcada's customers for which they provide the actual call transmission.
Because these interexchange and local exchange carriers are potential
competitors of Arcada, they could use information about Arcada's customers,
such as their calling volume and patterns of use, to their advantage in
attempts to gain such customers' business, although Arcada believes that the
FCC would find such practices to be unlawful. In addition, Arcada's future
success will depend, in part, on its ability to continue to buy transmission
services from these carriers at a significant discount below the rates these
carriers otherwise make available to Arcada's target customers.
REGULATION
The terms and conditions under which Arcada provides communications
services are subject to government regulations. Federal laws and FCC
regulations apply to interstate telecommunications, while particular state
regulatory authorities have jurisdiction over intra state telecommunications.
FEDERAL. In early 1996, Congress passed the Telecommunications Act of
1996 (the "Act"). The Act is an extensive and broad revision of the
telecommunications rules and regulations. Under the Act, Congress set the
stage to dramatically reduce the competitive barriers facing all
telecommunications companies, especially AT&T and the RBOCs. Since 1984,
judicially imposed restrictions barred the RBOCs from providing inter-LATA
long distance. AT&T was barred from providing local exchange services. Under
the Act, after a transition phase, and subject to each RBOC meeting criteria
set forth in the Act and established by the FCC, each RBOC will be able to
provide both local and long distance services (intra and inter-LATA long
distance). Recently, certain FCC rules dictating pricing for the resale of
local service were held invalid. The United States Supreme Court has refused
to review the lower court's ruling. As a result, many state regulatory
agencies have actively intervened and are establishing pricing and rules
under which LECs must allow resale of local service.
It is difficult to estimate the resulting impact of the Act. However,
Arcada anticipates increased competition from the RBOC's as they are allowed
to enter the inter-LATA long distance markets. Further, Arcada anticipated
additional competition from AT&T as they are able to offer broader ranges of
products and services, such as local exchange services.
Many LECs are in the process of allowing equal access to their
intra-LATA long distance services. This means that Arcada's customers may
soon be able to dial 1+ to make intra-LATA calls. Presently, in order to make
intra-LATA calls, Arcada's customers, and all other long distance company's
customers, must first dial 10xxx, (in Arcada's case, 10644), prior to dialing
the called number. The "xxx" refers to the Carrier Identification Code
("CIC"). If a customer fails to dial the CIC prior to making intra-LATA
calls, the call is carried by the LEC. Dialing the CIC bypasses the local
exchange carrier's local long distance. Even if a customer has chosen Arcada
as their long distance company, the customer must dial the 10xxx to have the
call routed through Arcada's services. Arcada believes that many of its
customers do not use the 10xxx number prior to making intra-LATA calls, and
therefore, Arcada does not receive significant long distance revenue from its
existing customers. Allowing all IXCs equal access to the intra-LATA markets
via 1+dialing could result in significant additional price competition in the
intra-LATA markets. Since the incumbent LEC has access to all customers in
its region, and since the incumbent LEC owns and controls virtually all of
the equipment necessary to make intra-LATA calls, Arcada anticipates that the
incumbent LEC may have a significant competitive advantage in the intra-LATA
markets.
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Arcada is classified by the FCC as a non-dominant carrier. Among domestic
carriers, only the LECs are classified as dominant carriers. The FCC has
recently classified AT&T as a non-dominant carrier. As a result, AT&T is capable
of competing much more effectively with Arcada because they are no longer
subject to certain pricing and regulatory restrictions. Further, by order dated
October 29, 1996, the FCC ruled under the new forbearance authority granted to
the FCC under the Act, that non-dominant carriers will no longer be required to
file tariffs for their interstate inter-LATA long distance services. After a
nine month transition period, the relationship between carriers and their
customers will be set by contract. The FCC has generally not chosen to exercise
its statutory right to regulate the charges, policies, classifications or
procedures of non-dominant carriers, although it has the power to do so.
Further, It is unclear whether the Act contains sufficient safeguards to prevent
anti-competitive practices. Anti-competitive practices can result from the RBOCs
access to a large group of present customers for local exchange services. Also,
interexchange carriers such as Arcada, heavily rely on the RBOCs for access to
local exchange networks. Problems arising from delays or errors caused by the
local RBOC or any other local exchange carrier's inability or difficulty to
implement or repair necessary services can severely impact Arcada's operations.
Despite the order phasing out tariff filings, all interchange carriers
will be required to retain and make available information as to the rates and
terms of their services. Consumers may still file complaints with the FCC
regarding the interexchange companies services. In addition, when complete
detariffing is implemented, consumer will be able to take advantage of state
consumer protection laws and contract law. Previously, consumer's legal rights
over billings were often limited by the terms of the tariff. The detariffing
order will not change an interexchange carriers obligations to charge rates that
are just and reasonable and not unjustly or unreasonable discriminatory. It is
anticipated that the recent FCC detariffing decisions could provide a
competitive advantage to large interexchange carriers, such as AT&T. In light of
the recent FCC order, it is, and will remain, difficult to determine the nature
and extent of continued federal rules, regulations, and oversight.
Arcada has been authorized to provide domestic interstate and
international telecommunications services. The FCC conditions the authority to
continue to conduct interstate and international telecommunication services upon
compliance with the FCC's rules and regulations. The FCC reserves the right to
condition, modify or revoke the authority it has granted.
Until the detariffing order is fully effective, Arcada and other domestic
and international interexchange carriers must maintain tariffs on file with the
FCC. Although the tariffs are subject to FCC review and approval, they are
presumed to be lawful and seldom contested. In reliance on the FCC's practice of
relaxed enforcement of the rules and regulations of companies of the size of
Arcada, Arcada and many, if not most, of its competitors, have not continuously
updated their tariffs with the FCC and state regulatory agencies. Until the
statute of limitations expires, Arcada could be held liable for damages for its
failure to strictly maintain its tariff filing, although Arcada believes that
such an outcome is unlikely and even if it did occur, would not have a
materially adverse effect on Arcada. In order to recover damages, a competing
telecommunications service provided would have to show that Arcada's failure to
strictly maintain its tariff caused the complaining carrier to lose customers.
The possible amount of any such liability cannot be calculated by Arcada.
STATE. The intrastate long distance telecommunications operations of
Arcada are also subject to various state laws and regulations, including
certification and registration requirements. Currently, Arcada is authorized
to do business and is properly tariffed, or has substantially completed the
process of doing so, where required to provide intrastate services to customers.
Arcada monitors the regulatory developments in the states where it presently
conducts business. Arcada intends to continue to investigate whether it should
conduct business in additional states.
Arcada is currently subject to varying levels of regulation in the 17
states in which it provides intrastate telecommunications services. The vast
majority of the states require Arcada to apply for certification to provide
telecommunications service, or at least to register or to be found exempt from
registration, prior to commencing services. The vast majority of states also
require Arcada to file and maintain detailed tariffs listing their rates for
intrastate service. Many states also impose various reporting requirements
and/or require prior approval for transfers of control, assignment of assets,
including customers passes, offering of securities, and the incurrence of
significant debt. Certification of authority to conduct business can be
terminated, modified, conditioned, or revoked by state regulatory authorities.
Fines and other penalties, including the return of all monies received for
intrastate
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traffic from residents of a state may be imposed for a violation. In certain
states, prior regulatory approval may be required for acquisition of
telecommunications operations. In the past, Arcada generally has not obtained
such prior approvals for its acquisitions. However, Arcada does not believe
that its prior failure to obtain regulatory approval will have a materially
adverse effect on Arcada.
LOCAL. Arcada currently collects utility taxes from its customers and
remits local utility taxes in those jurisdictions where it has both customers
and offices or other assets. Arcada does not collect or remit utility taxes
from its customers located in jurisdictions where Arcada does not have
properties or assets. Certain of those localities have requested that Arcada
collect and remit local utility taxes but Arcada believes that such taxes do
not apply to its operations in these localities. Arcada believes that the
vast majority of other switched and non-switched resellers do not collect or
remit such taxes. In the event that Arcada is required to collect and remit
these taxes in localities where Arcada does not have property or assets, such
requirement could have a material adverse effect on Arcada. See "RISK FACTORS
- - Risk of Liability for Local Utility Taxes."
EMPLOYEES
As of September 1, 1996. Arcada employed 59 persons on a full-time
basis, with 20 in sales and marketing, 14 in customer service and
provisioning, 4 in administration, 7 in finance, 9 in technical and 5 in
information systems. None of Arcada's employees are members of a labor union
or are covered by a collective bargaining agreement.
PROPERTIES
Arcada's headquarters in Seattle consists of approximately
8,850 square feet of office space under a lease that expires on December 31,
1999, and requires minimum annual lease payments in 1996 of
$187,680. Arcada also leases 975,640 and 1,328 square feet in Vancouver,
Washington, Portland, Oregon and Denver, Colorado, respectively, requiring
minimum annual lease payments in 1996 of $28,128, $12,000 and $36,336,
respectively. Management believes its present office facilities are adequate
for its operations for the foreseeable future and that similar additional
space can readily be obtained as needed.
CERTAIN TRANSACTIONS
In April, 1996, Arcada entered into an agreement with KBFT, Inc.
("KBFT"), a corporation owned by Frank Bonadio, President, director and
shareholder of Arcada, and Keith Leppaluoto and Robert Leppaluoto, directors
and shareholders of Arcada. Pursuant to the Agreement, KBFT serves as a
procurement agent for Arcada. Payments to KBFT have aggregated approximately
$373,000 through November 30, 1996. Arcada believes that the pricing and
other terms and conditions of the agreement are no less favorable to Arcada
than Arcada could obtain from non-affiliated third parties. It is anticipated
that KBFT will be sold to an unaffiliated party in December, 1996.
Commencing in 1994, certain of Arcade's stockholders loaned cash to Arcada
pursuant to the terms of unsecured, four-year promissory notes. Interest on
such notes is payable at a rate of 15% per annum. Interest expense related to
these borrowings approximated $8,000 and $74,000 during the years ended
December 31, 1994 and 1995. The notes are subordinated to borrowings under
Arcada's line of credit.
In 1995 and 1996 Arcada entered into a severance agreement with two
former employee pursuant to which Arcada has agreed to make payments totaling
an aggregate of $1,260,000 in the event of a sale of Arcada or the occurrence
of certain other events, including the Merger. The two principal
shareholders of Arcada have reached an understanding with these individuals
pursuant to which the Arcada Shareholders will instruct Touch Tone to issue
an aggregate 400,000 shares of the Touch Tone Common Stock (which shares were
to be issued to such Arcada Shareholders in the Merger) directly to the
former employees in full satisfaction of Arcada's obligations to the two
former employees under the severence agreement.
LEGAL PROCEEDINGS
Arcada is involved in certain other disputes that arise in the ordinary
course of business. Arcada believes that no current dispute will have a
material adverse effect on its financial condition or results of operations.
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ARCADA MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This following should be read in conjunction with the Arcada financial
statements and notes related thereto appearing elsewhere in this Joint Proxy
Statement/Prospectus.
FORWARD-LOOKING STATEMENTS MAY NOT PROVE ACCURATE. When used in this Joint
Proxy Statement/Prospectus, the words "anticipate," "estimate,"
"expect," "project" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated,
expected or projected. Several key factors that have a direct bearing on the
ability of Arcada, Touch Tone and the combined company to attain their goals
are discussed in "RISK FACTORS."
GENERAL
Due to the commercial nature of its customer base, Arcada experiences
general decreases in customer usage and revenue around national holidays and
traditional vacation periods. Accordingly, Arcada anticipates revenues from
existing customers during the last two quarters of the year to be somewhat
lower than during the first two quarters. Historically, results have been
affected more significantly by the addition of new customers in connection
with internal sales growth.
A high level of customer attrition is inherent in the long distance
industry, and Arcada's revenues are also affected by such attrition.
Attrition is attributable to a variety of factors including the initiatives
of existing and new competitors as they engage in, among other things,
national advertising campaigns, telemarketing programs and the issuance of
cash or other forms of incentives. Although Arcada is aware of the
significance of attrition on its business, telecommunications providers
generally find it difficult to measure customer attrition in a consistently
meaningful manner for a number of reasons including, among others, the
limitations of their data processing systems, the wide range of revenues
attributable to individual customers, the fact that service to an individual
customer may be provided by more than one underlying carrier and the variety
of reasons for changes in the volume of services provided to an individual
customer. As a consequence, Arcada has not formulated a statistical basis for
measuring or reporting its attrition.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------------
1994 1995 1995 1996
------ ------- ------ ------
<S> <C> <C> <C> <C>
Revenues $9,060,000 $10,954,000 $8,292,000 $9,429,000
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Excess of revenues over line charges $4,129,000 $4,138,000 $3,144,000 $3,493,000
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Earnings (loss) before interest and tax (1) $216,000 ($328,000) ($362,000) $181,000
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Net income (loss) $154,000 ($559,000) ($521,000) $36,000
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
</TABLE>
(1) Includes depreciation and amortization expense of $240,000 and $470,000
for the years ended December 31, 1994 and 1995 and $325,000 and $410,000
for the nine months ended September 30, 1995 and 1996.
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NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
REVENUES. Total revenues for the nine months ended September 30, 1996
increased 14% to $9.4 million over the corresponding prior year period due
primarily to the increase in Arcada's long distance customer base and
Arcada's expanded cellular and cellular long distance businesses.
EXCESS OF REVENUES OVER LINE CHARGES. The excess of revenues over line
charges increased $349,000 or 11% during the nine months ended September 30,
1996 over the comparative prior year period. The excess of revenues over line
charges expressed as a percentage declined slightly from 38% of revenues to
37% of revenues in the nine months ended September 30, 1996 compared to the
nine months ended September 30, 1995. This resulted from increased
utilization of lower margin services by Arcada's customers and reduced
pricing due to competitive pressures on Arcada's rates.
EARNINGS (LOSS) BEFORE INTEREST AND TAXES. Earnings (loss) before interest
and taxes increased from a loss of ($362,000) for the nine months ended
September 30, 1995 to income of $181,000 for the comparative 1996 period.
Approximately half of the improvement was due to a $295,000 provision for
severance obligations recorded during 1995, and the remaining increase was
due to increased excess of revenues over line charges of $349,000 offset by
slight increases of $101,000 (3%) in other operating expenses.
1995 COMPARED TO 1994
REVENUES. Total revenues in 1995 increased 17% to $11.0 million from $9.1
million in 1994 due primarily to increases in Arcada's long distance customer
base. To a lesser extent, 1995 revenues increased as a result of the
expansion of Arcada's products and services, including the introduction of
cellular services in the Seattle, Denver and Portland metropolitan areas.
EXCESS OF REVENUES OVER LINE CHARGES. The excess of revenues over line
charges was essentially the same in 1994 and 1995. Although Arcada
experienced increased revenues, these revenues were offset by a 38% increase
in line charges from 1994 to 1995. This increase in line charges resulted
from increased volume from lower margin services such as "1-plus" and
cellular products in 1995.
EARNINGS (LOSS) BEFORE INTEREST AND TAXES. Earnings (loss) before interest
and taxes decreased from income of $216,000 in 1994 to a loss of ($328,000)
in 1995. Of the decline , over half was due to a $295,000 provision for
severance obligations recorded during 1995 with the remaining decline due
principally to increased depreciation and amortization related to substantial
capital expenditures undertaken in the later part of 1994 and 1995 resulting
in a 96% increase in depreciation and amortization expense from 1994 to 1995,
together with a modest increase in other operating expenses (less than 1%).
LIQUIDITY AND CAPITAL RESOURCES
Historically Arcada has experienced growth, which has required
substantial working capital to finance receivables and capital expenditures.
Given Arcada's billing and collection cycle with its customers and suppliers,
Arcada generally pays its underlying suppliers from fifteen to thirty days
prior to the time it is paid by its customers for the same services. Arcada
has financed its growth primarily through loans from shareholders, vendor
financing, capital leases and cash flow from operations.
Net cash provided by operating activities was $776,000, $308,000,
$114,000 and $456,000 in 1994, 1995 and the first nine months of 1995 and
1996, respectively. This decrease in cash provided by operating activities
during 1995 as compared to 1994 results primarily from the $713,000 decrease
in net income during the period offset by a non-cash charge of $295,000
relating to severance. The increase in net cash provided by operating
activities in the first nine months of 1996 as compared to the corresponding
period in 1995 is primarily attributable to an increase in net income during
the later period.
Net cash used in investing activities approximated $1.2 million,
$661,000 and $231,000 in 1994 and 1995 and the first nine months of 1996 and
consisted primarily of capital expenditures.
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Net cash provided (used) by financing activities was $403,000, $127,000
and ($239,000) in 1994, 1995 and the first nine months of 1996, respectively.
The decrease in net cash provided by financing in 1995 compared to 1994
resulted primarily from increased payments on capital lease obligations and
dividends paid to shareholders in 1995, offset somewhat by borrowings under
Arcada's line of credit and from Arcada's shareholders. The decrease in net
cash provided by financing in the nine months ended September 30, 1996 is
principally attributable to decreased borrowings.
The Company maintains line-of-credit borrowing agreements with banks. In
August 1996, the Company entered into a $400,000 line-of-credit agreement.
Borrowing availability approximated $250,000 and $300,000 during 1994 and
1995, respectively. Borrowings are secured by accounts receivable,
certificates of deposits, and personal guarantees of Company shareholders.
Line-of-credit agreements provide for interest, payable monthly, at prime
plus 2% during 1994 and 1995 and at prime plus 1% on the 1996 line.
Commencing in 1994, certain of the Company's stockholders loaned cash
to the Company pursuant to terms of unsecured, four-year promissory notes.
Interest is payable monthly at a rate of 15% per annum. These payables are
subordinate to line-of-credit bank borrowings.
IMPACT OF INFLATION
Arcada believes that the effects of inflation have not had a significant
effect on its financial condition or results of operations and anticipates
that the level of inflation, if moderate, will not have a significant effect
on operations.
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TOUCH TONE MANAGEMENT
The following table sets forth, with respect to each person who is
currently a director or executive officer of Touch Tone, the person's age and
the person's positions and offices with Touch Tone. Individual background
information concerning each of such persons follows the table.
<TABLE>
<CAPTION>
Name Age Position with Touch Tone Tenure as Officer or Director
---- --- ----------------------------- ----------------------------------
<S> <C> <C> <C>
Michael J. Canney(1) 65 Chairman of the the Board of Director on January 12, 1996
Directors, President and
Chief Executive Officer from
April 8, 1996
David J. Smith 43 Chief Financial Officer and From October 2, 1995 to present
Secretary/Treasurer
Matthew J. Barletta (2) 30 Director From September 12, 1995 to present
Norman B. Walko 56 Director From November 1, 1995 to present
Stephen P. Shearin (2) 31 Director From November 29, 1995 to present
Benjamin W. Bronston (2) 32 Director From June 7, 1996 to present
</TABLE>
_________________
(1) Will resign as President, Chairman of the Board and Chief Executive
Officer but will remain a director as of the Effective Time.
(2) Will resign as a Director at the Effective Time.
The directors of Touch Tone are elected to hold office until the next
annual meeting of shareholders and until their respective successors have
been elected and qualified. Officers of Touch Tone are elected by the Board
of Directors and hold office until their successors are elected and qualified.
Touch Tone has an Audit Committee comprised of Norbert Zeelander, Norman
B. Walco and Michael J. Canney and a Compensation Committee composed of Michael
J. Canney, Norman B. Walko and Norbert Zeelander.
MICHAEL J. CANNEY. Mr. Canney has served as a Director of Touch Tone
from January 1996 to the present and in April 1996 became President and Chief
Executive Officer. From February 1966 to August of 1987 Mr. Canney was
employed by Mountain Bell, (later known as U.S. West) in Albuquerque, New
Mexico and Denver, Colorado in various management capacities. While at
Mountain Bell, Mr. Canney served in various capacities including director of
marketing, director of mechanized systems, and director of contract
negotiations and purchasing.
DAVID J. SMITH. Mr. Smith joined Touch Tone in September 1995 as a
consultant in the accounting and finance division. In October 1995 he was
appointed Chief Financial Officer and in June 1996 Secretary/Treasurer. From
September 1994 until July 1995, Mr. Smith served as Controller/Accounting
Manager for the Phoenix, Arizona branch of Poe & Brown Insurance, a
nationwide insurance agency/brokerage based in Daytona Beach, Florida. From
July 1982 until September 1994, Mr. Smith served as Controller for Alliance
Insurance Group, a regional insurance agency/brokerage based in Phoenix,
Arizona.
MATHEW J. BARLETTA. Mr. Barletta has been a Director of Touch Tone from
September 12, 1995 to the present. From July 1993 to the present, Mr.
Barletta has been the ATM Product Marketing Engineer for Cisco Systems, Inc.
of San Jose, California. From March 1989 to July 1993 Mr. Barletta was a
member of the technical staff for AT&T Bell Laboratories in Liberty Corner,
New Jersey.
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NORMAN B. WALKO. Mr. Walko has been a Director of Touch Tone from
November 1995 to the present. Recently he joined Next Wave Telecom as Vice
President in charge of the Southeast Region. From March 1994 to the present
Mr. Walko has been Chief Operating Officer of QuestCom Communications of
Portola Valley, California, a company formed to participate in wireless
telecommunications license auctions. From June 1992 to February 1994, he was
General Manager, Central/North Florida with McCaw Cellular Communications,
Inc. of Kirkland Washington, a company engaged in cellular telephone service.
From March 1989 to June 1992, Mr. Walko was employed by U.S. West Corporation
as a general manager. Mr. Walko received a B.S. in Computer Science from
Purdue University and a M.B.A. in Marketing from the University of Southern
California.
STEPHEN P. SHEARIN. Mr. Shearin has served as a Director of Touch Tone
since November 1995. Mr. Shearin founded GetNet in 1994 and served as the
President of GetNet until August 1996 when he was terminated by Touch Tone.
From 1991 to 1994, Mr. Shearin managed Shearin Tile Co. while also founding
GetNet.
BENJAMIN W. BRONSTON. Mr. Bronston has served as a Director since June
7, 1996. Mr. Bronston has practiced telecommunications and corporate law for
the past five (5) years as a principal with Nowalsky & Bronston LLP.
Touch Tone's Bylaws provides that any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
by reason of the fact that such person is or was a director, officer,
employee or agent of the corporation, partnership, joint venture, trust or
other enterprise, may be indemnified by the corporation against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such action, suit
or proceeding.
California corporate law permits a corporation to indemnify officers,
directors, employees and agents for actions taken in good faith and in a
manner they reasonably believed to be in, or not opposed to, the best
interests of the corporation, and with respect to any criminal action, which
they had no reasonable cause to believe was unlawful. California corporate
law also provides that a corporation may advance expenses of defense (upon
receipt of a written undertaking to reimburse the corporation if
indemnification is not appropriate) and must reimburse a successful defendant
for expenses, including attorney's fees, actually and reasonably incurred,
and permit a corporation to purchase and maintain liability insurance for its
directors and officers. California corporate law further provides that
indemnification may not be made in connection with a proceeding by or in the
right of a corporation in which a director has been adjudged by a court of
competent jurisdiction to be liable to the corporation or that the director
was adjudged liable to the corporation on the basis that the director derived
an improper personal benefit.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of Touch Tone pursuant to the foregoing provisions, or
otherwise, Touch Tone has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
CHANGE OF MANAGEMENT
In April 1996, Mr. Vaughn, Touch Tone's former Chairman of the Board and
Chief Executive Officer, brought to the attention of Touch Tone's auditors a
previously undisclosed letter agreement signed by Mr. Miller (Touch Tone's
former President and Director), with a significant sales agent, which
provided for a retroactive increase in the sales agent's commissions to 50%
from 32%. This agreement and its potential ramifications has subsequently
been thoroughly reviewed by Touch Tone's Board of Directors and the following
actions were taken on behalf of Touch Tone.
The Board of Directors, with the concurrence and support of Messrs.
Miller and Vaughn, determined it appropriate to bring in an experienced
manager to institute tighter controls in the areas of finance, overhead,
carrier commitments and corporate governance. Accordingly, Mr. Michael Canney
was appointed President, Chairman of the Board and Chief Executive Officer.
Mr. Miller resigned as a Director and Officer, and Mr. Vaughn also resigned
as a Director and Officer, but continues to serve as a consultant to Touch
Tone in locating and negotiating potential future mergers and acquisitions.
In connection with their resignation, their employment agreements were
terminated. Subsequently in June 1996, Mr. Vaughn entered into an eighteen
month consulting contract with Touch Tone.
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<PAGE>
Touch Tone also obtained an updated agreement with the sales agent which
substantially reaffirmed Touch Tone's prior sales commission arrangement with
the sales agent.
EMPLOYMENT AND CONSULTING AGREEMENTS. In August 1995, Touch Tone entered
into employment agreements with Robert C. Vaughn and Jonathan Miller, former
Officers and Directors of Touch Tone. The agreements provided for base
salaries per year of $120,000 and $80,000, respectively, and options to
purchase 50,000 shares of Touch Tone's Common Stock the first year and 50,000
shares the second year at $5.00 per share. In addition, Mr. Vaughn was to
receive $90,000 from proceeds of the public offering for services rendered
pursuant to his employment agreement. The agreements were terminated in April
1996 when Messrs. Vaughn and Miller resigned as Officers and Directors. While
they no longer receive salaries, they did retain their option rights.
Michael J. Canney, Touch Tone's President, deemed it advisable that Mr.
Vaughn continue as a consultant to Touch Tone pursuant to an amended
consulting agreement (the "Vaughn Consulting Agreement") dated June 5,
1996, and is to be paid a monthly fee of $15,000 for a period of eighteen
months, together with a finders fee for successful merger and acquisitions
for which he is responsible. This Agreement will terminate as of the
Effective Time and Mr. Vaughn will enter into a revised consulting agreement
with Touch Tone. See "MANAGEMENT AND OPERATIONS OF TOUCH TONE FOLLOWING THE
MERGER - Employment and Consulting Agreements."
Mr. Michael Canney became the new President and Chief Executive Officer
in April 1996 under an employment agreement (the "Canney Employment
Agreement") which he will receive an annual salary of $120,000 plus options
for 100,000 shares of Common Stock exercisable at $4.00 per share. This
Agreement will terminate as of the Effective Time and Mr. Canney will enter
into a consulting agreement with Touch Tone. See "MANAGEMENT AND OPERATIONS
OF TOUCH TONE FOLLOWING THE MERGER - Employment and Consulting Agreements."
Touch Tone also has employment agreements with certain other employees of
Touch Tone.
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation paid or accrued by Touch
Tone for services of Michael J. Canney, Touch Tone's President and Chief
Executive Officer, for the fiscal year ended May 31, 1996, during the ten
months ended May 31, 1995 and the fiscal year ended July 31, 1994. No Officer
received cash compensation from Touch Tone in excess of $100,000 during such
fiscal years.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
-----------------------------------------------------------------------------------------------
Other All
Name Annual Restricted LTIP Other
and Compen- Stock Options/ Pay- Compen-
Principal Salary Bonus sation Award(s) SARs outs sation
Position Year (1) ($) ($) ($) ($) (#) ($) ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael J. Canney 1996 $20,000 $ 0 $ 0 N/A -0- N/A $3,000
President and Chief 1995 $ 0 $ 0 $ 0 -- -0- -- $ 0
Executive Officer 1994 $ 0 $ 0 $ 0 -- -0- -- $ 0
</TABLE>
- -----------------
(1) Periods presented are for the years ended May 31, 1996, the ten months
ended May 31, 1995 and the year ended July 31, 1994.
COMPENSATION OF DIRECTORS
The non-employee directors of Touch Tone will receive $250 for each
meeting they attend plus expenses. Directors may also receive options as
designated by the Board of Directors.
OPTION/SAR GRANTS TABLE
OPTIONS GRANTED. The following table sets forth the options that have
been granted to Michael J. Canney, Touch Tone's President and Chief Executive
Officer, listed in the Executive Compensation Table.
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<PAGE>
<TABLE>
<CAPTION>
Option/SAR Grants
Individual Grants
- --------------------------------------------------------------------------------------
% of Total
Options/ Options/SARs Exercise
SARs Granted to or Base
Granted Employees Price Expiration
Name (#) in Fiscal Year ($/Share) Date
---- ----------- -------------- ---------- ----------
<S> <C> <C> <C> <C>
Michael J. Canney, 250,000 (1) 36% $4.00 3/2001
President and Chief
Executive Officer
</TABLE>
- --------------
(1) Of the 250,000 options, 125,000 options are currently exercisable,
50,000 become exercisable in September 1996 and 75,000 become exercisable
in March 1997.
In November 1995, Touch Tone granted 60,000 options exercisable at $2.00
per share for a five year period. The options were granted to Joseph Monnig,
a long distance sales agent, to provide long distance consulting and
assistance with Touch Tone's long distance agents.
In April 1995, Touch Tone granted 15,900 options exercisable at $3.00
per share for a five year period to certain non-affiliated persons, who have
provided short term loans to Touch Tone in the past.
In March 1996, Touch Tone granted a total of 450,000 warrants to
purchase Common Stock to Messrs. Walko, Canney and Barletta, Directors
(150,000 each) of Touch Tone. The warrants are exercisable for a five (5)
year period at $4.00 per warrant. Each Director's warrants become exercisable
as follows: 25,000 commencing in March 1996; 50,000 in six (6) months; and
75,000 after one (1) year.
In March 1996, Touch Tone granted 100,000 warrants to purchase Common
Stock to Norbert Zeelander, a member of the Audit Committee. The Warrants are
exercisable for a five (5) year period at $4.00 per warrant, pursuant to the
following schedule: 25,000 in March, 1996; 25,000 in September, 1996; and
50,000 in March, 1997.
In connection with its recent public offering, Touch Tone granted the
underwriter, Barron Chase Securities, Inc., warrants to purchase 150,000
shares of Common Stock and 150,000 Warrants at an exercise price of $4.80.
The warrants are exercisable through May 17, 2001.
Mr. Canney did not exercise any options in the last fiscal year and all
options held by Mr. Canney have exercise prices above current market prices
for Touch Tone Common Stock.
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<PAGE>
SECURITY OWNERSHIP OF MANAGEMET
AND CERTAIN BENEFICIAL OWNERS OF TOUCH TONE
TOUCH TONE
The following table sets forth certain information regarding the
beneficial ownership of Touch Tone Common Stock as of November 22, 1996 by
(i) each director of Touch Tone, each executive officer of Touch Tone, all
directors and executive officers of Touch Tone as a group, each Arcada
Designee and each person known by Touch Tone to be the beneficial owner of
more than 5% of the Touch Tone Common Stock and (ii) the beneficial ownership
of Touch Tone Common Stock as of November 22, 1996, after giving effect to
the issuance of 12,500,000 shares of Touch Tone Common Stock in the Merger.
BENEFICIAL OWNERSHIP OF TOUCH TONE
COMMON STOCK (2)
--------------------------------------
NAME AND ADDRESS OF BENEFICIAL SHARES PERCENT PERCENT AFTER
OWNER (1) GIVING EFFECT TO
THE MERGER
- ------------------------------ ---------- --------- ----------------
Michael J. Canney 175,000(3) 5.7% 1.1%
Jonathan P. Miller 260,000(4) 8.4 1.6
Janeece Miller 260,000(5) 8.4 1.6
Robert C. Vaughn 210,000(6) 6.8 1.3
Stephen P. Shearin 114,516 3.5 *
Matthew J. Barletta 75,000(7) 2.4 *
Norman B. Walko 75,000(8) 2.4 *
Benjamin W. Bronston 75,000 2.4 *
All Executive Officers 514,516 16.7 3.2
and Directors as a
group (five persons)
- ----------------------
* Less than one percent (1%).
(1) All of the individuals listed above have their principal place of business
at 4110 N. Scottsdale Road, Suite 170, Scottsdale, Arizona 85251.
(2) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934. Unless otherwise stated below, each such person has sole voting and
investment power with respect to all such shares. Under Rule 13d-3(d),
shares not outstanding which are subject to options, warrants, rights or
conversion privileges exercisable within 60 days are deemed outstanding
for the purpose of calculating the number and percentage owned by such
person, but are not deemed outstanding for the purpose of calculating the
number and percentage owned by each other person listed.
(3) Represents 175,000 options currently exercisable.
(4) Includes 100,000 shares owned directly by Mr. Miller and 100,000 owned
indirectly by virtue of his wife's ownership of said shares and includes
50,000 options to purchase shares of the Company's Common Stock owned by
Mr. Miller and 10,000 options currently exercisable by his wife, Janeece
Miller.
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<PAGE>
(5) Includes 100,000 shares owned by Ms. Miller and 100,000 shares owned
indirectly by virtue of her husband's ownership of said shares and 10,000
options currently exercisable and 50,000 options currently exercisable
owned by her husband, Jonathan Miller.
(6) Includes 50,000 options currently exercisable.
(7) Includes 50,000 options currently exercisable.
(8) Includes 50,000 options currently exercisable.
(9) Includes 50,000 options currently exercisable.
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<PAGE>
ARCADA MANAGEMENT
The following table sets forth, with respect to each person who is
currently a director or executive officer of Arcada, the person's age and the
person's positions and offices with Arcada. Individual background information
concerning each of such persons follow the table.
NAME AGE POSITION WITH ARCADA
---- --- --------------------
Robert W. Leppaluoto (1) 56 Chairman of the Board and Director
Frank J. Bonadio (1) 45 President, Chief Financial
Officer and Director
Keith Leppaluoto (1) 58 Director
- --------------
(1) Will become a director of Touch Tone at the Effective Time.
The directors of Arcada are elected to hold office until the next annual
meeting of shareholders and until their respective successors have been
elected and qualified. Offices of Arcada are elected by the Board of
Directors and hold office until their successors are elected and qualified.
FRANK J. BONADIO. Mr. Bonadio has served as a Director of Arcada since
August, 1993 and as President since May, 1996. Mr. Bonadio served as
Secretary and Treasurer of Arcada from July, 1994 until his appointment as
President. Mr. Bonadio has also served as Chief Financial Officer of Arcada
from 1991 to present and as Vice President of Operations and Controller from
1994 to 1996.
KEITH LEPPALUOTO. Mr. Leppaluoto has served as a Director of Arcada since
May, 1996. Mr. Leppaluoto also served as a Director of Arcada from August,
1993 until January 1, 1996. Mr. Leppaluoto has also been Vice President of
Leppaluoto Offshore Marine, a private maritime charter company, since 1990.
Mr. Leppaluoto's brother is Robert Leppaluoto, Director, the Chairman and
a shareholder of Arcada.
ROBERT LEPPALUOTO. Mr. Leppaluoto has served as a Director of Arcada since
January, 1996 and its Chairman since September, 1996. Mr. Leppaluoto also
served as a Director of Arcada from August, 1993 to July, 1994. Mr. Leppaluoto
has also been President of Leppaluoto Offshore Marine, a private maritime
charter company, since 1975. Mr. Leppaluoto's brother is Keith Leppaluoto,
a Director and shareholder of Arcada.
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<PAGE>
INDEMNIFICATION OF ARCADA OFFICERS AND DIRECTORS
Arcada's Articles of Incorporation provide that Arcada shall indemnify
its officers and directors to the fullest extent required or permitted
by the WBCA, as the same may be amended and supplemented from time to
time, except that it is will not indemnify directors for (i) intentional
misconduct or a knowing violation of law; (ii) unlawful payment of
dividends under RCW 23B.08.310 or (iii) any transaction in which the
director personally received a benefit to which he or she was not
legally entitled. Any repeal or modification of such provision of the
Articles of Incorporation by Arcada's stockholders shall be prospective
only and shall not adversely affect any right or protection of a
director of Arcada existing at the time of such repeal or modification.
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<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS OF ARCADA
The following table sets forth certain information regarding the
beneficial ownership of Arcada Common Stock as of the Effective Date by (i)
each director of Arcada, each executive officer of Arcada, all directors and
executive officers of Arcada as a group and each person known by Arcada to be
the beneficial owner of more than 5% of the Arcada Common Stock and (ii) the
beneficial ownership of Touch Tone Common Stock after giving effect to the
Merger, each of the persons referred to in clause (i) above.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP OF
OF ARCADA COMMON STOCK TOUCH TONE COMMON STOCK
AFTER GIVING EFFECT TO THE
MERGER
---------------------- --------------------------
NAME AND ADDRESS OF SHARES PERCENT SHARES PERCENT
BENEFICIAL OWNER (1)
- ----------------------------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Keith Leppaluoto 20,000 40% 5,000,000
Robert W. Leppaluoto 20,000 40% 5,000,000
Frank J. Bonadio 9,000 18% 2,250,000
All directors and executive 49,000 98% 12,250,000
officers of Arcada as a group
(3 persons)
</TABLE>
(1) All of the individuals listed below have their principal place of business
at 2001 Sixth Avenue, Suite 3210, Seattle, Washington 98121.
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<PAGE>
MANAGEMENT AND OPERATIONS OF TOUCH TONE
FOLLOWING THE MERGER
OPERATIONS
The Merger of Touch Tone and Arcada will combine the two companies'
current operations. After the Effective Time, Touch Tone will integrate the
sales functions of the combined companies basing them primarily in Arcada's
current offices in Seattle, Washington, but maintaining a marketing and sales
operation from Touch Tone's offices in Scottsdale, Arizona. It is currently
intended that after the Effective Time, Touch Tone will market and sell
Arcada's long distance and cellular products and will adopt Arcada's customer
service and other approaches throughout their system. The combined company
will also continue to focus on the Internet access product developed by Touch
Tone prior to the Merger and will use its sales force, as supplemented by
independent agents, to market that service. After the Effective Time, Touch
Tone will adopt Arcada's fiscal year end of December 31 and the principal
office of Touch Tone will be at Arcada's offices at 2001 Sixth Avenue,
Suite 3210, Seattle, Washington 98121.
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<PAGE>
MANAGEMENT
BOARD OF DIRECTORS. The following table sets forth, with respect to each
person who will be a director or executive officer of Touch Tone at the
Effective Time, the persons' age and the person's positions and offices with
touch Tone. Individuals background information concerning each of such
persons is set forth under "Touch Tone Management" or "Arcada Management"
as the case may be.
NAME AGE POSITION WITH TOUCH TONE PREVIOUS POSITION
---- --- ------------------------ -----------------
Frank J. Bonadio 45 President and Chief Executive President and Director
Officer, Director of Arcada
Robert W. Leppaluoto 56 Chairman of the Board Chairman of the Board
and Director and Director of Arcada
Keith Leppaluoto 58 Director Director of Arcada
Michael J. Canney 65 Director Chairman of the Board,
President,
Chief Executive
Officer and Director
of Touch Tone
In addition, Arcada has the right to name one additional Director to the
Touch Tone Board, effective at the Effective Time. Arcada has not yet
designated this Director.
The directors of Touch Tone set forth above will hold office until the
next annual meeting of shareholders of Touch Tone and until their respective
successors have been elected and qualified. Officers of Touch Tone are
elected by the Board of Directors and hold office until their successors are
elected and qualified.
After giving effect to the Reincorporation Merger, Touch Tone's Charter
will provide that any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative by
reason of the fact that he is or was a director, officer, employee or agent
of the Touch Tone may be indemnified by Touch Tone against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit
or proceeding. See "REINCORPORATION OF TOUCH TONE IN THE STATE OF
WASHINGTON - Indemnification."
After the Effective Time, Touch Tone will enter into indemnification
agreements with certain of its directors and executive officers effective as
of the Effective Time. These agreements provide that the directors and
executive officers will be indemnified to the fullest extent permitted by
Washington law against all expenses (including attorneys' fees), judgments,
fines, penalties, taxes and settlement amounts paid or incurred by them in
any action or proceeding, including any action by or in the right of Touch
Tone or any of its subsidiaries or affiliates, on account of their services
as directors, officers, employees, fiduciaries or agents of Touch Tone or any
of its subsidiaries or affiliates, and this service at the request of Touch
Tone or any of its subsidiaries or affiliates as directors, officers,
employees, fiduciaries or agents of another corporation, partnership, joint
venture, trust, employer benefit plan or other enterprise. In addition it is
contemplated that Touch Tone will obtain liability insurance for directors
and officers covering certain losses arising from claims or charges made
against them while acting in their capacities as directors or officers of
Touch Tone.
Insofar as indemnification for liabilities arising under the 1933 Act
may be permitted to directors, officers and controlling persons of Touch Tone
pursuant to the foregoing provisions, or otherwise, Touch Tone has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable.
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<PAGE>
MANAGEMENT. In connection with the Merger, all of the executive officers
of Touch Tone will resign, effective as of the Effective Time. Mr. Bonadio
will replace Mr. Canney as President and Chief Executive Officer of Touch
Tone and Mr. Canney will become a consultant to Touch Tone.
EMPLOYMENT AND CONSULTING AGREEMENTS
BONADIO EMPLOYMENT AGREEMENT. In connection with the Merger, Touch Tone
and Frank Bonadio, a director and the President and Chief Executive Officer
of Arcada, have entered into an Employment Agreement (the "Bonadio Employment
Agreement"). Providing that commencing on the Effective Date, until December
31, 1999, Mr. Bonadio will serve as President and Chief Executive Officer of
Touch Tone. Mr. Bonadio will receive $150,000 per annum, together with
options to purchase an aggregate of 100,000 shares of Touch Tone Common
Stock (the "Bonadio Options"). The Bonadio Options are to be granted at the
first meeting of the Compensation Committee of the Touch Tone Board after the
Effective Time and will have an exercise price equal to the fair market value
of Touch Tone Common Stock on the date of grant. The Bonadio Options are
vesting ratably on a three-year period commencing on the first anniversary of
the date of grant.
CANNEY CONSULTING AGREEMENT. In connection with the proposed Merger and
in settlement of certain obligations owed to Mr. Canney under his current
employment agreement with Touch Tone, in October, 1996, Touch Tone and Michael
Canney, a director and the President and Chief Executive Officer of Touch
Tone, entered into a Consulting Agreement (the "Canney Consulting
Agreement"). The Canney Consulting Agreement provides that, for a one-year
period commencing on the Effective Date, Canney will resign as President and
Chief Executive Officer and will become a consultant to Touch Tone. Mr.
Canney will receive $500 for each eight-hour day of consulting services
performed. In addition, on the Effective Date, the Canney Consulting
Agreement provides that Mr. Canney will receive an option to purchase up to
125,000 shares of Touch Tone Common Stock, at an exercise price of $.01 per
share, at any time during a three-year period on the Effective Date (the
"Canney Option"). The Canney Consulting Agreement provides that Touch Tone
will agree to register under the 1933 Act shares of Touch Tone Common Stock
obtained by Canney pursuant to the exercise of the Canney Option.
Commencing on the Effective Date, Robert C. Vaughn, a consultant to Touch
Tone, will enter into a consulting agreement with Touch Tone providing for
the payment of a commission to Mr. Vaughn of $150,000 in cash and 250,000
shares of Touch Tone Common Stock in connection with the Merger. The
consulting agreement provides that Mr. Vaughn will serve as consultant to
Touch Tone for a period of one year following the Effective Time at an annual
salary of $120,000. Mr. Vaughn will also receive commissions for introducing
Touch Tone to future merger and acquisition candidates, which commissions
will be paid on the sliding scale formula based on the dollar value of such
mergers or acquisitions.
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<PAGE>
REINCORPORATION OF TOUCH TONE IN WASHINGTON
SUMMARY
For the reasons set forth below, the Touch Tone Board believes that the
best interests of Touch Tone and Touch Tone Shareholders will be served by
changing Touch Tone's state of incorporation from California to the State of
Washington (the "Reincorporation"). The Board of Directors has approved the
Reincorporation, which would be accomplished by merging Touch Tone with and
into its newly formed Washington subsidiary, Touch Tone - Washington, Inc.
("Touch Tone - Washington"). Upon effectiveness of the merger
("Reincorporation Merger"), Touch Tone - Washington's name will be changed to
Touch Tone America, Inc., the name under which Touch Tone has operated since
its initial incorporation. The Touch Tone Shareholders will be asked to
approve the Reincorporation Merger at the Special Meeting.
PRINCIPAL REASONS FOR THE PROPOSED REINCORPORATION
Through the Reincorporation, Touch Tone intends to further its
identification with the state in which its principal subsidiary, Arcada, will
be located after the Merger and where over 99% of its employees will be
located after giving effect to the Merger. In addition, as a consequence of
the Washington Legislature's adoption of a comprehensive revision of the
Washington Business Corporation Act, Touch Tone believes that Washington law
is clearer and better addresses Touch Tone's concerns with respect to
limitation on director liability and indemnification of officers and
directors than does California law. The Board of Directors views these issues
as extremely important to recruiting and retaining directors and officers of
the highest caliber who are essential to the continuing successful operation
of Touch Tone. Although Touch Tone has not incurred any recent problems in
recruiting or retaining directors and officers, the cost and availability of
adequate directors and officers insurance and the uncertainties relating to
indemnification have been a recurring concern of the Board.
Another factor in the Board's recommendation to reincorporate Washington
was that Touch Tone's franchise fees will be substantially less in Washington
than in California.
TOUCH TONE'S REINCORPORATION IS A CONDITION TO ARCADA'S OBLIGATION TO
CONSUMMATE THE MERGER.
PLAN OF REINCORPORATION MERGER
THE FOLLOWING IS A SUMMARY OF CERTAIN PROVISIONS OF THE REINCORPORATION
MERGER AGREEMENT WHICH APPEARS AS APPENDIX D TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING
SUMMARY INCLUDES THE MATERIAL TERMS OF SUCH AGREEMENT BUT IS NOT NECESSARILY
COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE REINCORPORATION
MERGER AGREEMENT.
Touch Tone will be merged with and into Touch Tone - Washington (the
"Reincorporation Merger") pursuant to the terms of the proposed Agreement and
Plan of Merger (the "Reincorporation Merger Agreement"), a copy of which is
attached as Appendix D to this Joint Proxy Statement/Prospectus). Upon the
completion of the Reincorporation Merger, the owner of each outstanding share
of Touch Tone Common Stock will automatically own one share of Touch Tone -
Washington common stock. Each outstanding certificate representing a share or
shares of Touch Tone Common Stock will continue to represent the same number
of shares in Touch Tone - Washington (i.e., a certificate representing one
share of Touch Tone Common Stock will then equal one share of Touch Tone -
Washington common stock). Thus, it will not be necessary for shareholders of
Touch Tone to exchange their existing stock certificates. The common stock of
Touch Tone will continue to be traded on the over-the-counter market and
reported on the NASDAQ SmallCap Market under the same TONE symbol subsequent
to the Reincorporation Merger.
The Touch Tone - Washington Articles of Incorporation and Bylaws will be
the Articles of Incorporation and Bylaws of the surviving corporation, except
that, upon the effectiveness of the merger, Touch Tone - Washington's name
will be changed to Touch Tone America, Inc. The Articles of Incorporation and
Bylaws of Touch Tone - Washington are attached hereto as Appendix E.
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<PAGE>
EFFECT OF REINCORPORATION AND REINCORPORATION MERGER
The Reincorporation and the Reincorporation Merger will effect a change
in the legal domicile of Touch Tone and other changes of a legal nature, the
most significant of which are described in this Joint Proxy
Statement/Prospectus. However, the Reincorporation and the Reincorporation
Merger will not result in any change in the name, business, management,
location of Touch Tone's assets, liabilities, net worth or accounting
practices. Moreover, as noted above, the shares of Touch Tone's Common Stock
will continue to be traded on the over-the-counter market and reported on the
NASDAQ SmallCap Market. The Reincorporation Merger will not give rise to any
appraisal or dissenters' rights.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK OF TOUCH TONE
THE FOLLOWING STATEMENTS ARE BRIEF SUMMARIES OF CERTAIN PROVISIONS RELATING
TO TOUCH TONE'S CAPITAL STOCK AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE
TO THE PROVISIONS OF TOUCH TONE'S CERTIFICATE OF INCORPORATION, AS AMENDED (THE
"TOUCH TONE CHARTER"), AND BYLAWS (THE "TOUCH TONE BYLAWS"), WHICH ARE
INCLUDED AS EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS JOINT PROXY
STATEMENT/PROSPECTUS IS A PART.
As of December 15, 1996, the authorized capital stock of the Touch Tone
consists of 100,000,000 shares of Touch Tone Common Stock, no par value per
share, and 10,000,000 shares of Preferred Stock, no par value.
COMMON STOCK
All outstanding shares of Touch Tone Common Stock are duly authorized,
validly issued, fully paid and nonassessable. Holders of Common Stock are
entitled to receive dividends, when and if declared by the Board of Directors,
out of funds legally available therefore and to share ratably in the net assets
of the Company upon liquidation. Holders of Touch Tone Common Stock do not have
preemptive or other rights to subscribe for additional shares, nor are there
any redemption or sinking fund provisions associated with the Touch Tone
Common Stock. As of November 22, 1996, there are currently 3,320,800 shares
of Touch Tone Common Stock outstanding owned of record by approximately 700
persons and/or entities.
Holders of Touch Tone Common Stock are entitled to one vote per share on
all matters requiring a vote of shareholders. Since the Touch Tone Common Stock
does not have cumulative voting rights in electing directors, the holders of
more than a majority of the outstanding shares of Touch Tone Common Stock
voting for the election of directors can elect all of the directors whose terms
expire that year, if they choose to do so.
The Touch Tone Common Stock was approved for listing on the Nasdaq SmallCap
Market effective May 17, 1996, and trades under the symbol "TONE".
PREFERRED STOCK
The Board of Directors of the Company is empowered, without approval of the
Company's shareholders, to cause up to 9,850,000 shares of Preferred Stock to
be issued in one or more series and to establish the number of shares to be
included in each such series and the designations, preferences, limitations and
relative rights, including voting rights, of the shares of any series. Because
the Board of Directors has the power to establish the preferences and rights of
each series, it may afford the holders of any series of Preferred Stock
preferences, powers and rights, voting or otherwise, senior to the rights of
holders of Common Stock. This includes, among other things, voting rights,
conversion privileges, divided rates, redemption rights, sinking fund
provisions and liquidation rights which shall be superior to the Common Stock.
The issuance of shares of Preferred Stock could have the effect of delaying or
preventing a change in control of the Company. Except as set forth below, no
shares of Preferred Stock will be outstanding at the close of this Offering,
and the Board of Directors has no current plans to issue any shares of
Preferred Stock. The Company has agreed with the underwriter of its initial
public offering (the "Representative") not to issue any additional preferred
stock for a three year period without the Representative's written consent.
WARRANTS
The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects
by reference to the actual text of the Warrant Agreement between the Company
and American Securities Transfer, Inc. (the "Warrant Agent").
OUTSTANDING. As of the Record Date, there were Warrants to purchase
1,725,000 shares of Touch Tone Common Stock outstanding.
EXERCISE PRICE AND TERMS. Each Warrant entitles the holder thereof to
purchase, at any time for three years beginning May 17, 1996, one share of
Common Stock at a price of $4.00 per share, subject to adjustment in accordance
with the anti-dilution and other provisions referred to below.
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<PAGE>
The holder of any Warrant may exercise such Warrant by surrendering the
certificate representing the Warrant to the Warrant Agent, with the subscription
form on the reverse side of such certificate properly completed and executed,
together with payment of the exercise price. The Warrants may be exercised at
any time in whole or in part at the applicable exercise price until expiration
of the Warrants on May 17, 1999. No fractional shares will be issued upon the
exercise of the Warrants.
REDEMPTION. The Warrants are subject to redemption by Touch Tone at $.25
per Warrant on 30 days' written notice if the closing bid or trading price of
Touch Tone's Common Stock, as applicable, over 30 consecutive days ending
within 10 days of the notice of redemption averages at least $8.00. Touch
Tone is required to maintain an effective registration statement with respect
to the Common Stock underlying the Warrants at the time of redemption of the
Warrants. In the event Touch Tone exercises the right to redeem the Warrants,
such Warrants will be exercisable until the close of business on the date for
redemption fixed in such notice. If any Warrant called for redemption is not
exercised by such time, it will cease to be exercisable and the holder will
be entitled only to the redemption price.
The Company has authorized and reserved for issuance a sufficient number of
shares of Common Stock to accommodate the exercise of all Warrants. All shares
of Touch Tone Common Stock to be issued upon exercise of the Warrants, if
exercised in accordance with their terms, will be validly issued, fully paid
and non-assessable.
ADJUSTMENTS. The exercise price and the number of shares of Touch Tone
Common Stock purchasable upon exercise of the Warrants are subject to
adjustment upon the occurrence of certain events, including stock dividends,
stock splits, combinations or reclassification of the Touch Tone Common
Stock, or sale by Touch Tone of shares of Touch Tone's Common Stock (or other
securities convertible into or exercisable for Touch Tone Common Stock).
Additionally, an adjustment would be made in the case of a reclassification
or exchange of Touch Tone Common Stock, consolidation or merger of Touch Tone
with or into another corporation, or sale of all or substantially all of the
assets of Touch Tone, in order to enable Warrant holders to acquire the kind
and number of shares of stock or other securities or property receivable in
such event by a holder of that number of shares of Touch Tone Common Stock
that would have been issued upon exercise of the Warrant immediately prior to
such event. No adjustments will be made until the cumulative adjustments in
the exercise price per share amount to $.05 or more. No adjustment to the
exercise price of the shares subject to the Warrants will be made for
dividends (other than stock dividends), if any, paid on the Touch Tone Common
Stock or pursuant to any employee benefit plans of the Company, or upon
exercise of the Warrants, the Representative's Warrant or any other options
or warrants outstanding as of the date of this Prospectus.
TRANSFER, EXCHANGE AND EXERCISE. The Warrants are in registered form
and may be presented to the Warrant Agent for transfer, exchange or exercise
at any time prior to their expiration date, at which time the Warrants become
wholly void and of no value. If a market for the Warrants develops, the
holder may sell the Warrants instead of exercising them. There can be no
assurance, however, that a market for the Warrants will develop or continue.
If Touch Tone is unable to qualify for sale in particular states the Touch
Tone Common Stock underlying the Warrants, holders of the Warrants residing
in such states and desiring to exercise the Warrants will have no choice but
to sell such Warrants or allow them to expire.
WARRANT HOLDER NOT A SHAREHOLDER. The Warrants do not confer upon
holders any voting or any other rights as shareholders of Touch Tone.
The Warrants were approved for listing on the Nasdaq SmallCap Market-SM,
effective May 17, 1996 and trade under the symbol "TONEW."
TRANSFER AGENT
The transfer agent and registrar for the Company's Common Stock and the
Warrants is American Securities Transfer, Inc., 1825 Lawrence Street, Suite 444,
Denver, Colorado 80202. Its telephone number is (303) 234-5300.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK OF ARCADA
As of the date of this Prospectus, the authorized capital stock of Arcada
consists of 50,000 shares of Common Stock, no par value per share, all of which
will be outstanding on the Effective Date.
All outstanding shares of Common Stock are duly authorized, validly issued,
fully paid and nonassessable. Holders of Arcada Common Stock are entitled to
receive dividends, when and if declared by the Arcada Board of Directors, out
of funds legally available therefore and to share ratably in the net assets of
Arcada upon liquidation. Holders of Arcada Common Stock do not have preemptive
or other rights to subscribe for additional shares, nor are there any redemption
or sinking fund provisions associated with the Arcada Common Stock.
Holders of Common Stock are entitled to one vote per share on all matters
requiring a vote of shareholders. Since the Common Stock does not have
cumulative voting rights in electing directors, the holders of more than a
majority of the outstanding shares of Arcada Common Stock voting for the
election of directors can elect all of the directors whose terms expire that
year, if they choose to do so.
There is no trading market for the Arcada Common Stock.
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<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF TOUCH TONE COMMON STOCK
AND TOUCH TONE - WASHINGTON COMMON STOCK
THE CHARTER AND BYLAWS OF TOUCH TONE - WASHINGTON ARE SUBSTANTIALLY THE
SAME AS THOSE OF ARCADA AND, ACCORDINGLY, ASSUMING THE REINCORPORATION MERGER IS
CONSUMMATED, THE RIGHTS OF HOLDER OF ARCADA COMMON STOCK WILL NOT BE
SUBSTANTIALLY DIFFERENT AFTER THE MERGER.
GENERAL
If the Merger is consummated, and assuming the Reincorporation Merger is
consummated, holders of Touch Tone Common Stock will become shareholders of
Touch Tone - Washington, and the rights of such former Touch Tone shareholders
will thereafter be governed by the Touch Tone - Washington Charter, the Touch
Tone - Washington Bylaws and the laws of the state of Washington, including
the Washington Business Corporation Act ("WBCA"). The following summary,
which does not purport to be a complete statement of the differences between
the rights of the shareholders of Touch Tone and the shareholders of Touch
Tone - Washington, sets forth certain differences between the Touch Tone
Charter and the Touch Tone - Washington Charter and the Touch Tone bylaws and
the Touch Tone - Washington bylaws. This summary is qualified in its entirety
by reference to the full text of each of such documents and the applicable
corporate statutes.
VOTING RIGHTS
The WBCA provides that, unless otherwise provided in the charter of a
corporation or by applicable law, each shareholder is entitled to one vote for
each share of capital stock held by such shareholder.
The Touch Tone - Washington Bylaws provide that each holder of Arcada
Common Stock is entitled to one vote for each share held by such holder on each
matter upon which holders of Touch Tone - Washington Common Stock are entitled
or afforded the opportunity to vote. Except as otherwise provided in the Touch
Tone - Washington Charter, the Touch Tone - Washington Bylaws or the WBCA,
corporate action taken by vote of shareholders must be authorized by the vote
of the holders of a majority of the outstanding shares of all classes of stock
entitled to vote thereon present in person or by proxy at the meeting.
The Touch Tone Charter provides that each shareholder of Touch Tone Common
Stock is entitled to one vote for every share of such stock held by such
shareholder. Except as otherwise provided in the Touch Tone Charter, the
Touch Tone Bylaws or the CCC, whenever any corporate action is to be taken by
vote of the shareholders of Touch Tone, it must be authorized by a majority
of the votes cast at a meeting of shareholders by the holders of shares entitled
to vote thereon.
NUMBER OF DIRECTORS
The number of directors of a Washington and California corporation is fixed
by, or in the manner provided in, the charter or bylaws of such corporation. The
Touch Tone - Washington Charter and Bylaws provide that the number of directors
may be fixed from time to time by resolution of the Board of Directors of Touch
Tone - Washington adopted by a majority of the board, but in no case may the
Touch Tone - Washington Board consist of fewer than two members. The number of
directors of Touch Tone - Washington is currently fixed at five.
The Touch Tone Bylaws provide that the number of directors will be
determined by the Board of Directors of Touch Tone, but in no case may the board
consist of fewer than three unless such change is approved in the manner
provided in the Touch Tone Bylaws. The number of directors of Touch Tone is
currently fixed at five. Directors of Touch Tone are elected at each annual
meeting of shareholders or at a special meeting of the shareholders.
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<PAGE>
REMOVAL OF DIRECTORS
Both the WBCA and the CCC allow the shareholders to remove a director,
with or without cause, at any meeting of shareholders called for such
purpose, provided that the charter or bylaws so allow. They further provide
that any director may be removed, with or without cause, by a majority of the
shares then entitled to vote at an election of directors.
The Touch Tone - Washington Bylaws provide that any director may be removed
from office, with or without, by the affirmative vote of the holders of at
least a majority of the total votes of all shares of stock entitled to vote in
an election of directors. The Touch Tone Bylaws provide that any director may
be removed, with or without cause, by the holders of a majority of the shares
then entitled to vote at a meeting of shareholders.
CALL OF SPECIAL SHAREHOLDER MEETINGS
Under the WBCA and CCC, special meetings of shareholders may be called by
the Board of Directors or by such other person or persons authorized to do so by
the corporation's Charter or bylaws.
The Touch Tone - Washington Bylaws provide that special meetings of the
shareholders may be called by the Chairman of the Board, the President or the
Board of Directors of Touch Tone - Washington and must be called at the request
of the holders of 10% or more of the issued and outstanding stock entitled to
vote at the meeting. The Touch Tone Bylaws provide that special meetings of the
shareholders may be called by the President or by the Touch Tone Board of
Directors, and must be called by the President at the request of the holders
of 10% or more of the issued and outstanding stock entitled to vote at the
meeting.
SHAREHOLDERS' ACTION WITHOUT A MEETING
The WBCA provides that any action required by the WBCA to be taken at any
annual or special meeting of shareholders, or any action which may be taken at
any annual or special meeting of shareholders, may be taken without a vote, if
a consent or consents in writing, setting forth the action so taken, shall have
been signed by the holders of all shares entitled to vote on such action. The
CCC provides that, unless the articles of incorporation provide otherwise,
shareholders may take any action without a meeting by written consent signed
by all of the shareholders entitled to vote thereon.
Touch Tone - Washington's Bylaws and Touch Tone's Bylaws each provide that
any action that may be taken at an annual or special meeting may be taken
without a meeting only by written unanimous consent of the shareholders.
AMENDMENTS TO CHARTER
Under the WBCA and the CCC, a corporation generally can amend its charter
in any respect; provided that the amendment contains only provisions which
would have been required or permitted in the original Charter. The WBCA
provides that an amendment may be authorized by the adoption of such amendment
by the Board of Directors followed by a vote of at least two-thirds of the
corporation's outstanding shares entitled to vote therefor. The WBCA does allow
for the articles of incorporation to reduce (to not less than a majority) or
increase this two-thirds vote requirement, but the Touch Tone - Washington
charter does not so provide. The CCC provides that an amendment may be
authorized by the adoption of a resolution setting forth the amendment by the
Board of Directors followed by a majority vote of shares entitled to vote
thereon.
PREEMPTIVE RIGHTS
Under the WBCA, shareholders of a corporation have preemptive rights to
acquire additional, unissued, or treasury shares of the corporation, or
securities of the corporation, except to the extent limited by the articles of
incorporation. The CCC does not provide for preemptive rights.
The Touch Tone - Washington Charter and the Touch Tone Charter state that
no shareholder shall have preemptive rights.
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<PAGE>
LIMITATIONS ON DIRECTORS' LIABILITY
The WBCA and the CCC permit a corporation to include a provision in its
charter eliminating or limiting the personal liability of a director to the
corporation or its shareholders for monetary damages for breach of the
director's fiduciary duty, subject to certain limitations. The Touch Tone -
Washington Charter and the Touch Tone Charter each include a provision which
eliminates personal liability of directors to the maximum extent permitted
by law.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The WBCA and the CCC permit a corporation to indemnify officers,
directors, employees and agents for actions taken in good faith and in a manner
they reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, which they had not
reasonable cause to believe was unlawful. The termination of any action, suit
or proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a presumption
that the person did not meet the standard of conduct required by the Section.
The WBCA and CCC also provide that a corporation may advance expenses of
defense (upon receipt of a written undertaking to reimburse the corporation if
indemnification is not appropriate) and must reimburse a successful defendant
for expenses, including attorney's fees, actually and reasonably incurred, and
permit a corporation to purchase and maintain liability insurance for its
directors and officers. The WBCA and CCC further provide that indemnification
may not be made in connection with a proceeding by or in the right of a
corporation in which a director has been adjudged by a court of competent
jurisdiction to be liable to the corporation on the basis that the director
derived an improper personal benefit.
The Touch Tone Charter provides that any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, partnership, joint venture, trust or other enterprise, may
be indemnified by the corporation against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding.
The Touch Tone - Washington Charter provides for indemnification of
officers, directors, employees and agents to the fullest extent permissible
under the WBCA.
DISSENTERS' RIGHTS
The WBCA set forth the requirements pursuant to which shareholders may
exercise their dissenters' rights. The WBCA generally entitles a shareholder to
exercise appraisal rights upon a merger or share exchange for which shareholder
approval is required unless (i) the corporation is on a national securities
exchange (not Nasdaq) or the shares are held of record by at least 2,000 holders
and (ii) the shareholders receive only the shares of the surviving corporation
listed on a national securities exchange or the shares will be held of record
by at least 2,000 holders, or cash in lieu of fractional shares. By exercising
dissenters' rights, any such shareholder would have the fair value of his or
her shares of Cowboys Common Stock determined by a court and paid to him or
her in cash.
As holders of Arcada Common Stock will receive (i) Touch Tone Common Stock,
which is listed on Nasdaq, but not on a national securities exchange; and
(ii) cash they are entitled to appraisal rights under the TBCA. See
"THE MERGER - Dissenters' Rights."
The CCC provide that dissenters' rights shall be available to shareholders
in any merger if shareholder approval is required, certain parent/subsidiary
mergers, certain share exchanges, upon the sale, lease, exchange or other
disposition of all, or substantially all, or the corporation for which a
shareholders' vote is required, amendments to the articles of incorporation
that materially and adversely affects rights in respect of shares, such as
altering or abolishing a preferential right of the shares, creating, altering
or abolishing a right in respect of redemption of the shares.
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<PAGE>
EXPERTS
The consolidated financial statements of Touch Tone and the financial
statements of GetNet have been audited by Hein + Associates LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing eleswhere herein, and are included in reliance upon
such reports given upon the authority of said firm as experts in auditing and
accounting.
The combined financial statements of Arcada and affiliates have been
audited by BDO Seidman, LLP, independent certified public accountants, to the
extent and for the periods set forth in their report appearing elsewhere
herein, and are included in reliance upon such report given upon the
authority of said firm as experts in auditing and accounting.
Representatives of Hein + Associates LLP and BDO Seidman, LLP are expected
to be present at the Touch Tone and Arcada Special Meetings, respectively, where
they will have the opportunity to make a statement if they desire to do so and
will be available to respond to appropriate questions.
LEGAL MATTERS
The legality of the Touch Tone Common Stock being offered hereby is being
passed upon for Touch Tone by John B. Wills, Esq.
OTHER INFORMATION AND STOCKHOLDER PROPOSALS
The management of Touch Tone and Arcada know of no other matters that may
properly be, or which are likely to be, brought before the Touch Tone and
Arcada Special Meetings. However, if any other matters are properly brought
before such Touch Tone and Arcada Special Meetings, the persons named in the
enclosed proxy or their substitutes will vote the proxies in accordance with
the recommendations of management.
In order to be considered for inclusion in the proxy statement for the
next annual meeting of stockholders of Touch Tone, any stockholder proposal
intended to be presented at the meeting must have been received by Touch Tone
on or before December 15, 1997.
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<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Page No.
--------
1. UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
a. Introduction F-3
b. Pro Forma Condensed Balance Sheet F-5
c. Pro Forma Interim Condensed Statement of Operations F-6
d. Pro Forma Fiscal Condensed Statement of Operations F-7
e. Notes to Pro Forma Financial Information F-8
2. TOUCH TONE AMERICA, INC. AND SUBSIDIARY
a. Independent Auditor's Report F-9
b. Consolidated Balance Sheets as of May 31, 1996 and August F-10
31, 1996 (Unaudited)
c. Consolidated Statements of Operations for the Ten Months F-11
Ended May 31, 1995, the Year Ended May 31, 1995, and for
the Three Months Ended August 31, 1995 and 1996
(Unaudited)
d. Consolidated Statement of Changes in Stockholders' Equity F-12
for the Period from August 1, 1995 to August 31, 1996
(Unaudited)
e. Consolidated Statements of Cash Flows for the Ten Months F-13
Ended May 31, 1995, the Year Ended May 31, 1996, and for
the Three Months Ended August 31, 1995 and 1996
(Unaudited)
f. Notes to the Consolidated Financial Statements F-14
F-1
<PAGE>
3. ARCADA COMMUNICATIONS AND AFFILIATES
a. Report of Independent Certified Public Accountants F-28
b. Combined Balance Sheets as of December 31, 1994 and 1995 F-29
and (Unaudited) September 30, 1996
c. Combined Statements of Operations for the Years Ended F-30
December 31, 1994 and 1995 and (Unaudited) for the Nine
Months Ended September 30, 1995 and 1996
d. Combined Statement of Shareholders' Equity for the Years Ended
December 31, 1994 and 1995 and (Unaudited) for the Nine Months
Ended September 30, 1996
e. Combined Statements of Cash Flows for the Years Ended F-32
December 31, 1994 and 1995 and (Unaudited) for the Nine
Months Ended September 30, 1995 and 1996
f. Notes to Combined Financial Statements F-33
4. GETNET INTERNATIONAL, INC.
a. Independent Auditor's Report F-40
b. Statements of Operations from Inception (August 24, 1994) F-41
to July 31, 1995, for the Three Months Ended October 31,
1995 (Unaudited), from Inception (August 24, 1994 to
October 31, 1994 (Unaudited), and Cumulative from
Inception (August 24, 1994) to October 31, 1995
(Unaudited)
c. Statement of Changes in Stockholders' Deficit from F-42
Inception (August 24, 1994) to October 31, 1995
(Unaudited)
d. Statements of Cash Flows from Inception (August 24, 1994) F-43
to July 31, 1995, for the Three Months Ended October 31,
1995 (Unaudited), from Inception (August 24, 1994) to
October 31, 1994 (Unaudited), and Cumulative from
Inception (August 24, 1994) to October 31, 1995
(Unaudited)
e. Notes to Financial Statements F-44
F-2
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
PRO FORMA CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
INTRODUCTION
The following unaudited pro forma condensed financial information has been
prepared in accordance with guidelines established by regulations promulgated by
the Securities and Exchange Commission.
The accompanying unaudited pro forma condensed balance sheet presents the
consolidated balance sheet of Touch Tone America, Inc. and Subsidiary (Touch
Tone) as of August 31, 1996 together with the combined balance sheet of
Arcada and Affiliates (Arcada) as of September 30, 1996 and gives effect to (i)
the merger of Arcada into a wholly-owned subsidiary of Touch Tone resulting
from the exchange of Arcada common stock for 12.5 million shares of Touch
Tone common stock and issuance of a $1.5 million promissory note payable to
former Arcada shareholders, and (ii) the payment of fees directly
attributable to the merger. The unaudited pro forma condensed statements of
operations for the year ended December 31, 1995 and for the nine months ended
September 30, 1996 include the results of operations of Arcada and Touch Tone
for their respective periods and give effect to the pro forma adjustments as
if all such transactions had occurred at the beginning of the periods
presented.
Furthermore, for pro forma presentation, Touch Tone's financial statements have
been recast to conform with Arcada's year-end. The pro forma financial
information for the year ended December 31, 1995 also includes GetNet
International, Inc. (GetNet) statement of operations for the period prior to its
November 1, 1995 acquisition by Touch Tone.
The following pro forma adjustments have been determined on the basis as
described below:
1. The business combination involving Touch Tone and Arcada is accounted
for utilizing the purchase method of accounting. Inasmuch as the
former Arcada shareholders will own a majority of Touch Tone common
stock after the business combination, Arcada is considered to be the
acquiring corporation for purposes of purchase accounting, and
subsequent to the merger, the successor entity to Touch Tone for
purposes of financial reporting. This business combination is also
referred to as a "Reverse Acquisition."
2. Consideration in a Reverse Acquisition is determined no differently
than in a normal acquisition (i.e., fair value of stock issued or the
fair value of assets received and liabilities assumed, whichever is
more indicative of fair value). However, in a Reverse Acquisition the
stock issued goes to the accounting acquirer, which in this instance
is Arcada. Accordingly, it is the fair market value of Touch Tone's
stock at date of acquisition (the "Fair Value of Touch Tone") that is
valued with a write-up (or write down) of Touch Tone's net assets
depending on whether the stock is trading in excess of (less than)
book value, respectively. While Touch Tone stock is reported as
trading in the range of $3 to $4 per share, which is in excess of its
book value per share of approximately $1.06 at August 31, 1996, due to
the limited trading volume of Touch Tone stock and certain other
circumstances and conditions, the Fair Value of Touch Tone cannot be
determined utilizing shares outstanding times the recent stock
F-3
<PAGE>
price. Accordingly cost is determined based on the fair market value
of Touch Tone's recorded net assets without recognition of any goodwill
to be recorded as a result of this business combination.
3. Touch Tone's financial statements have been recast to conform with
Arcada's December 31 fiscal year-end.
4. Pro forma condensed results of operations for the year ended
December 31, 1995 include pro forma purchase accounting adjustments
relating to Touch Tone's November 1, 1995 acquisition of GetNet
International, Inc. (GetNet).
5. Consistent with the application of purchase accounting for this
business combination as described above, estimated fees and other
costs of $400,000 that are directly attributable to the merger have
been presented as a period expense (which has the same effect on
shareholders' equity as a direct charge to capital).
6. The owners of Arcada common stock have agreed in principle to fully
satisfy obligations relating to Arcada severance agreements with two
individuals which provide for the payment of $1.26 million under
certain conditions, the consummation of this merger being one of
such events, by delivery of 400,000 shares of Touch Tone common
stock. The Arcada shareholders have agreed to contribute such
400,000 shares out of the 12.5 million shares of Touch Tone Common
Stock to be received in connection with the Merger. Inasmuch as the
value attributable to the contributed shares equals the value of the
obligation, there is no net effect on shareholders' equity as a
result of these transactions. In accordance with guidelines established
by the Securities and Exchange Commission, pro forma net loss does not
include this related expense to be recorded on consummation of the
Merger.
7. In the event the Merger is consummated, pursuant to two separate
agreements with a Touch Tone officer and consultant, Touch Tone will
issue (i) options to purchase 125,000 shares of Touch Tone Common
Stock at an exercise price of $0.01 and (ii) 250,000 shares of Touch
Tone Common Stock. Utilizing a market price of $3.00 per share, the
value of such securities approximates $1.1 million and, consistent
with the application of purchase accounting for this business
combination as described above, such amount would be recorded as a
period expense (which has the same effect on shareholders' equity as
a direct charge to capital). Inasmuch as the value attributable to
the issued securities will be recorded as an increase in common
stock and additional paid in capital, there is no net effect on
shareholders' equity as a result of these transactions. In
accordance with guidelines established by the Securities and
Exchange Commission, pro forma net loss does not include this
related expense to be recorded on consummation of the Merger.
These unaudited pro forma statements are not necessarily indicative of future
financial positions or results of operations or the actual results that would
have occurred had the merger been consummated at the beginning of the periods
presented and should be read in conjunction with the historical financial
statements included elsewhere in this Joint Proxy Statement/Prospectus.
F-4
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
TOUCH TONE ARCADA
AUGUST 31, SEPTEMBER 30, PRO FORMA
1996 1996 ADJUSTMENTS PRO FORMA
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $2,491,000 $ 101,000 $ (400,000)(A) $2,192,000
Other current assets 376,000 2,537,000 - 2,913,000
---------- ---------- ---------- ----------
Total current assets 2,867,000 2,638,000 (400,000) 5,105,000
EQUIPMENT, net 1,061,000 1,960,000 - 3,021,000
OTHER ASSETS 901,000 275,000 - 1,176,000
---------- ---------- ---------- ----------
TOTAL ASSETS $4,829,000 $4,873,000 $ (400,000) $9,302,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
CURRENT LIABILITIES:
Notes payable $ - $ 480,000 $ - $ 480,000
Accounts payable and accrued
liabilities 1,152,000 2,331,000 - 3,483,000
---------- ---------- ---------- ----------
Total current liabilities 1,152,000 2,811,000 - 3,963,000
NOTES PAYABLE TO STOCKHOLDER - 469,000 1,500,000 (B) 1,969,000
OTHER LONG-TERM LIABILITIES 145,000 1,296,000 - 1,441,000
STOCKHOLDERS' EQUITY (400,000) (A)
3,532,000 297,000 (1,500,000) (B) 1,929,000
---------- ---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $4,829,000 $4,873,000 $ (400,000) $9,302,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA FINANCIAL INFORMATION.
F-5
<PAGE>
<TABLE>
<CAPTION>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
UNAUDITED CONDENSED INTERIM STATEMENT OF OPERATIONS
TOUCH TONE ARCADA
EIGHT MONTHS NINE-MONTHS
ENDED ENDED
AUGUST 31, SEPTEMBER 30, PRO FORMA
1996 1996 ADJUSTMENTS PRO FORMA
----------- ----------- ----------- -----------
(Recasted)
<S> <C> <C> <C> <C>
REVENUES $ 1,355,000 $ 9,429,000 $ - $10,784,000
LINE CHARGES (829,000) (5,936,000) - (6,765,000)
----------- ----------- ----------- -----------
EXCESS OF REVENUES OVER
LINE CHARGES 526,000 3,493,000 - 4,019,000
OTHER OPERATING EXPENSES:
Selling, general and
administrative 2,011,000 2,902,000 - 4,913,000
Excess volume commitments 124,000 - - 124,000
Depreciation and amortization 167,000 410,000 - 577,000
Provision for Severance
Obligations 230,000 - - 230,000
----------- ----------- ----------- -----------
INCOME (LOSS) FROM
OPERATIONS (2,006,000) 181,000 - (1,825,000)
OTHER EXPENSE, NET (266,000) (145,000) (90,000)(C) (501,000)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(2,272,000) $ 36,000 $ (90,000) $(2,326,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET LOSS PER SHARE $ (.14)
-----------
-----------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 16,069,300 (E)
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA FINANCIAL INFORMATION.
F-6
<PAGE>
<TABLE>
<CAPTION>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
PRO FORMA
TOUCH TONE GETNET ARCADA ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------ ------------
(Recasted)(1) (Recasted)(2)
<S> <C> <C> <C> <C>
REVENUES $ 2,570,000 $ 210,000 $ 10,954,000 $ - $ 13,734,000
LINE CHARGES (1,769,000) (94,000) (6,816,000) - (8,679,000)
------------ ------------ ------------ ------------ ------------
EXCESS OF REVENUES OVER LINE CHARGES 801,000 116,000 4,138,000 - 5,055,000
OTHER OPERATING EXPENSES:
Selling, general and administrative 1,715,000 292,000 3,701,000 140,000 (D) 5,848,000
Excess volume commitments 779,000 - - - 779,000
Depreciation and amortization 54,000 21,000 470,000 - 545,000
Provision for Severance Obligations - - 295,000 - 295,000
------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,747,000) (197,000) (328,000) (140,000) (2,412,000)
OTHER EXPENSE, NET (109,000) - (231,000) (120,000)(C) (460,000)
------------ ------------ ------------ ------------ ------------
NET LOSS $ (1,856,000) $ (197,000) $ (559,000) $ (260,000) $ (2,872,000)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
NET LOSS PER SHARE $ (.18)
------------
------------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 16,069,300 (E)
------------
------------
________________________
(1) Touch Tone recasted for the twelve months ended December 31, 1995.
(2) GetNet operations are recasted for the ten months ended October 31, 1995, as it was acquired by Touch Tone effective
November 1, 1995.
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA CONDENSED FINANCIAL INFORMATION.
F-7
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO PRO FORMA FINANCIAL INFORMATION
A To record estimated fees and other costs of $400,000 that are directly
attributable to the merger, which will be recognized as a period expense.
In accordance with guidelines established by the SEC, pro forma net loss
does not include these expenses.
B To record notes payable to Arcada shareholders aggregating $1,500,000
issued in connection with the merger. The notes are due fifteen months,
after the merger, including 8% interest. Such amount is presented as a
decrease in stockholders' equity similar to a capital distribution.
C To record interest expense associated with the $1,500,000 notes
payable to be issued to former Arcada shareholders.
D To record amortization expense associated with intangible assets capitalized
in the GetNet acquisition for the period prior to November 1, 1995 (the
date it was acquired by Touch Tone).
E Common shares outstanding on pro forma basis represents Touch Tone shares
outstanding as of August 31, 1996, plus the 12,500,000 shares to be issued
in the Arcada acquisition and the 250,000 shares to be issued to a
consultant to the transaction.
F The owners of Arcada common stock have agreed in principle to fully
satisfy obligations relating to Arcada severance agreements with two
individuals which provide for the payment of $1.26 million under certain
conditions, the consummation of this merger being one of such events, by
delivery of 400,000 shares of Touch Tone common stock. The Arcada
shareholders have agreed to contribute such 400,000 shares out of the
12.5 million shares of Touch Tone Common Stock to be received in
connection with the merger. Inasmuch as the value attributable to the
contributed shares equals the value of the obligation, there is no net
effect on shareholders' equity as a result of these transactions. In
accordance with guidelines established by the Securities and Exchange
Commission, pro forma net loss does not include this related expense to
be recorded on consummation of the Merger.
G In the event the Merger is consummated, pursuant to two separate
agreements with a Touch Tone officer and consultant, Touch Tone will
issue (i) options to purchase 125,000 shares of Touch Tone Common Stock
at an exercise price of $0.01 and (ii) 250,000 shares of Touch Tone Common
Stock. Utilizing a market price of $3.00 per share, the value of such
securities approximates $1.1 million and, consistent with the
application of purchase accounting for this business combination as
described above, such amount would be recorded as a period expense (which
has the same effect on shareholders' equity as a direct charge to
capital). Inasmuch as the value attributable to the issued securities
will be recorded as an increase in common stock and additional paid in
capital, there is no net effect on shareholders' equity as a result of
these transactions. In accordance with guidelines established by the
Securities and Exchange Commission, pro forma net loss does not include
this related expense to be recorded on consummation of the Merger.
F-8
<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. and Subsidiary 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. and Subsidiary 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-9
<PAGE>
<TABLE>
<CAPTION>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MAY 31 AUGUST 31,
1996 1996
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 5,278,000 $ 2,491,000
Trade receivables, net allowance for doubtful accounts of
$124,000 and $182,000, respectively 264,000 340,000
Prepaid expense - 36,000
----------- -----------
Total current assets 5,542,000 2,867,000
EQUIPMENT, net of accumulated depreciation of $62,000 and
$109,000, respectively 429,000 1,061,000
OTHER:
Intangibles, net of accumulated amortization of $97,000 and
$139,000, respectively 738,000 696,000
Refundable deposits 76,000 80,000
Other 143,000 125,000
----------- -----------
TOTAL ASSETS $ 6,928,000 $ 4,829,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 477,000 $ 367,000
Accrued liabilities 1,170,000 622,000
Deferred revenues 76,000 106,000
Notes payable to stockholders 393,000 -
Current portion of capital lease obligations 61,000 57,000
----------- -----------
Total current liabilities 2,177,000 1,152,000
DEFERRED REVENUE 25,000 25,000
CAPITAL LEASE OBLIGATIONS, net of current portion 134,000 120,000
COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 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,
and 3,204,300 and 3,319,300 shares issued and outstanding,
respectively 7,195,000 7,945,000
Accumulated deficit (3,353,000) (4,413,000)
----------- -----------
Total stockholders' equity 3,842,000 3,532,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,928,000 $ 4,829,000
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-10
<PAGE>
<TABLE>
<CAPTION>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FOR THE THREE
TEN MONTHS FOR THE MONTHS ENDED
ENDED YEAR ENDED AUGUST 31,
MAY 31, MAY 31, --------------------------
1995 1996 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES:
Long distance resell $ 1,952,000 $ 1,951,000 $ 689,000 $ 340,000
Internet access - 287,000 - 176,000
----------- ----------- ----------- -----------
1,952,000 2,238,000 689,000 516,000
COST OF SALES
Long distance resell (1,310,000) (1,284,000) (435,000) (228,000)
Internet access - (122,000) - (142,000)
----------- ----------- ----------- -----------
(1,310,000) (1,406,000) (435,000) (370,000)
----------- ----------- ----------- -----------
GROSS MARGIN 642,000 832,000 254,000 146,000
OPERATING EXPENSES:
Selling 337,000 620,000 171,000 58,000
General and administrative 505,000 1,724,000 296,000 722,000
Amortization and depreciation 2,000 129,000 2,000 90,000
Severance agreements - - - 230,000
Excess volume commitments 32,000 871,000 135,000 -
----------- ----------- ----------- -----------
876,000 3,344,000 604,000 1,100,000
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (234,000) (2,512,000) (350,000) (954,000)
OTHER INCOME (EXPENSE):
Interest (expense) income, net (12,000) (172,000) (4,000) (106,000)
Absorbed offering and acquisition costs (48,000) (118,000) - -
----------- ----------- ----------- -----------
(60,000) (290,000) (4,000) (106,000)
----------- ----------- ----------- -----------
NET LOSS $ (294,000) $(2,802,000) $ (354,000) $(1,060,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
LOSS PER SHARE $ (.19) $ (1.81) $ (.19) $ (.33)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE COMMON SHARES AND
EQUIVALENTS 1,508,000 1,552,000 1,833,000 3,205,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
F-11
<PAGE>
<TABLE>
<CAPTION>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK
------------------------- PREFERRED
NUMBER STOCK ACCUMULATED
OF SHARES AMOUNT ISSUANCE 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
Additional offering costs (unaudited) - (67,000) - - (67,000)
Issuance of common stock for debt (unaudited) 70,000 464,000 - - 464,000
Issuance of common stock for settlement of
past payable (unaudited) 45,000 180,000 - - 180,000
Stock options issued at below market
(unaudited) - 173,000 - - 173,000
Net loss (unaudited) - - - (1,060,000) (1,060,000)
----------- ----------- ----------- ----------- -----------
BALANCE, AUGUST 31, 1996 (Unaudited) 3,319,300 $ 7,945,000 $ - $ 4,413,000 $ 3,532,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-12
<PAGE>
<TABLE>
<CAPTION>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOR THE THREE
TEN MONTHS FOR THE MONTHS ENDED
ENDED YEAR ENDED AUGUST 31,
MAY 31, MAY 31, -------------------------
1995 1996 1995 1996
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (294,000) $(2,802,000) $ (354,000) $(1,060,000)
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation and amortization 2,000 129,000 2,000 90,000
Common stock for exchange of debt
or services 56,000 - - 127,000
Options issued at below market - - - 173,000
Bad debt expense 17,000 185,000 - 67,000
Absorbed acquisition costs 48,000 118,000 - -
Change in assets and liabilities:
Decrease (increase) in:
Trade receivables (311,000) 128,000 31,000 (143,000)
Other assets - (214,000) - (23,000)
Increase (decrease) in:
Accounts payable 274,000 (71,000) (116,000) (110,000)
Accrued liabilities 422,000 625,000 2,000 (241,000)
Deferred revenue and other (8,000) 11,000 (9,000) 30,000
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities 206,000 (1,891,000) (444,000) (1,090,000)
CASH FLOWS FROM INVESTING ACTIVITY:
Acquisition costs incurred (95,000) (25,000) - -
Purchase of equipment - (101,000) - (679,000)
----------- ----------- ----------- -----------
Net cash used in investing activities (95,000) (126,000) - (679,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 50,000 - - -
Payment of note payable (50,000) - - -
Payment of capital lease obligations - (100,000) (4,000) (18,000)
Proceeds from notes payable to stockholders - 210,000 - -
Payment of notes payable to
stockholders (24,000) - - (183,000)
Proceeds from issuance of redeemable
preferred stock 637,000 113,000 113,000 -
Repayment of preferred stock - - - (750,000)
Proceeds from issuance of common stock 15,000 7,816,000 - -
Offering costs incurred (285,000) (1,256,000) (43,000) (67,000)
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities 343,000 6,783,000 66,000 (1,018,000)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 454,000 4,766,000 (378,000) (2,787,000)
CASH, beginning of period 58,000 512,000 512,000 5,278,000
----------- ----------- ----------- -----------
CASH, end of period $ 512,000 $ 5,278,000 $ 134,000 $ 2,491,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-13
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
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 of 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.
Depreciation expense charged to operations was $2,000 and $32,000 for the
ten months end May 31, 1995 and the year ended May 31, 1996, respectively.
F-14
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
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.
Subsequent to May 31, 1996, it has become apparent the Company
may not be able to meet its continuing commitment (see Note 5)
under which the deferred revenues were being recognized.
Therefore, recognition of such amount as revenue has been
suspended until such time as it is resolved to the ultimate
liability the Company may have to AT&T.
- 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.
IMPAIRMENT OF LONG-LIVED ASSETS - Effective June 1, 1996, the Company
adopted Financial Accounting Standards Board Statement 121 (FAS 121). In
the event that facts and circumstances indicate that the cost of assets or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted
cash flows associated with the asset would be compared to the asset's
carrying amount to determine if a write-down to market value or discounted
cash flow value is required. Adoption of FAS 121 had no effect on the
unaudited August 31, 1996 financial statements. GetNet is still in the
developmental stages and has not yet experienced significant revenues from
its "Internet Backbone" operations, however, if future revenues do not
support the cost capitalized associated with this system, the Company could
be required to impair such costs, including the related intangible costs,
under this accounting standard.
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.
F-15
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
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,
and increased competition and technology changes in the telecommunications
industry, it is reasonably possible that the estimated life of intangibles
and the ultimate liability the Company could have to AT&T under its SDN
commitment (see Note 5) 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 trade receivables,
accounts payable, and notes payable to stockholders, approximates the
carrying value in the financial statements at May 31, 1996 and August 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 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.
STOCK-BASED COMPENSATION - In October 1995, the Financial Accounting
Standards Board issued a new statement titled "Accounting for Stock-Based
Compensation" (FAS 123), which the Company adopted effective June 1, 1996.
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 has elected not to
adopt the fair value accounting prescribed by FAS 123 for employees, but is
subject to the disclosure requirements prescribed by FAS 123.
UNAUDITED INFORMATION - The Company's consolidated balance sheet as of
August 31, 1996, and the consolidated statement of operations for the three
months ended August 31, 1995 and 1996 are taken from the Company's books
and records without audit. Management believes, however, that such
information includes all accruals, which are considered recurring in
nature, required for the fair presentation of the Company's financial
position and results of their operations as of and for the periods then
ended. The results of operations for the interim periods are not
necessarily indicative of results expected for the full year.
F-16
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
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 has a continuing service commitment with AT&T of $1,800,000
annually, which as of May 31, 1996, the Company had satisfactorily met.
However, as discussed in Note 5, monthly revenues under this commitment
have declined, and it is unlikely revenues will increase, whereby the
Company will be able to continue to meet this commitment. As of August 31,
1996, no loss accrual has been recorded on management's belief that the
contract will be renegotiated on favorable terms with AT&T. If such
renegotiations are unsuccessful, the parties will most likely litigate the
contract. Furthermore, AT&T has claimed the Company owes approximately
$1,000,000 for the fraudulent use of the Company's long-distance service.
The Company also has other significant telecommunications commitments by
an unknown party for its Internet backbone and the Company has experienced
only nominal revenues from its backbone. If the Company is unsuccessful in
renegotiating its contract with AT&T, does not favorably resolve the
fraudulent usage matter, or if revenues on its Internet backbone fail to
materialize, substantial losses, the amount of which cannot currently be
estimated, could be recorded.
The Company's ability to continue as a going concern is dependent upon
several factors, including meeting and/or renegotiating its carrier
commitments, and ultimately achieving and maintaining profitable
operations. The Company is also aggressively working to increase revenues
through a merger with a larger entity, and renegotiate its contract with
AT&T, 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.
3. ACQUISITIONS
In November 1996, the Company signed an agreement to merge with Arcada
Communications Inc. (Arcada), based in Seattle, Washington, whereby the
Company would issue to Arcada a $1,500,000 promissory note to the
shareholders of Arcada 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 approval by shareholders of both companies and resolution of
various contingencies generally to the satisfaction of Arcada. (Also see
Note 6 regarding common stock options and common stock grants to be
issued in connection with this merger, if approved.)
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
F-17
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
acquired of approximately $835,000 is being 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:
THREE MONTHS
ENDED
FISCAL YEAR FISCAL YEAR AUGUST 31,
1995 1996 1995
------------ ------------ ------------
Net Revenues $ 2,067,000 $ 2,388,000 $ 789,000
------------ ------------ ------------
------------ ------------ ------------
Net Loss $ (724,000) $ (2,823,000) $ (417,000)
------------ ------------ ------------
------------ ------------ ------------
Net Loss per Share $ (.24) $ (1.88) $ (.45)
------------ ------------ ------------
------------ ------------ ------------
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. 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.
In November 1996, the Company acquired certain long-distance customers
through the future issuance of its common stock. After three months
shares will be issued based upon a multiple of revenues generated by
the customer base acquired and the then average price of the Company's
common stock. It is estimated that the total common shares to be
issued will range between 40,000 and 50,000 shares. This acquisition
is not expected to have a material effect on the Company's net loss.
4. NOTES PAYABLE TO STOCKHOLDERS:
As of May 31, 1996, 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 recorded interest and
finance charges totaling $254,000, based upon the value of
the shares issued, of which $127,000 is included in accrued
liabilities as of May 31, 1996 based on the period the note
was outstanding. The balance was expensed in the first
quarter of fiscal 1997. $210,000
F-18
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
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 AND CONTINGENCIES:
INTERNET BACKBONE CIRCUIT LEASES - The Company leases certain
telecommunication circuits, primarily in connection with its Internet
backbone, under non-cancelable operating leases. The Internet backbone was
not completed until after year-end, therefore, 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 31, 1996, future minimum lease obligations under leases
with lease terms in excess of one year approximate the following:
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.
The Company, however, is obligated to pay for actual monthly usage of
telecommunication circuits, which for August 1996 approximated $70,000 and
increases in January 1997 to approximately $95,000 per month, irrespective
of the related usage by the Company's Internet customers. Revenues related
to the Internet backbone have continued to be nominal through November
1996. If the Company is unsuccessful in marketing its Internet services,
these commitments will result in a substantial loss to the Company,
including the possibility of impairing the capitalized costs associated
with building the backbone and the intangible cost recorded in connection
with the acquisition of GetNet by Touch Tone.
F-19
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
SERVICE COMMITMENTS - The Company has a continuing commitment with AT&T
to provide long distance service of $1,800,000 annually, which as of May
31, 1996, it had satisfactorily met. However, monthly revenues have
declined substantially due to increased competition and more competitive
rates being offered by other service providers. The Company's current
contract with AT&T provides for the purchase by the Company of
telecommunications services generally at a greater wholesale rate per
minute than currently being offered by AT&T to its retail customers.
Therefore, it is expected that revenues will continue to decrease under
the Company's SDN contract.
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. If
it is not renegotiated, it is expected the parties will litigate this
contract, the outcome of which cannot be predicted. Should the Company be
unsuccessful in these efforts, the loss incurred by the Company, the amount
of which cannot be estimated, would be substantial, whereby it would
jeopardize the Company's ability to continue operations.
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 Internet backbone
circuit leases previously discussed. WilTel, however, has asserted the
Company owes approximately $120,000 for failing to meet its commitment
prior to the phase-in of the Internet backbone circuit commitments. This
amount has not been recorded as a liability (the amount which would be
applicable to the period prior to August 31, 1996 is not significant),
because the Company is disputing the commencement date.
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 $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 the 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 in August 1996. There has been relatively
insignificant revenue associated with this expense as the Company has
marketed services under the ICG agreement on a very limited basis.
The Company had an "800" service agreement commitment with AT&T, which it
was not meeting. 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.
F-20
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
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 September 1996, two officers at GetNet (including a current director of
the Company) were terminated. These terminations are being disputed
through legal action instituted by the former officers. The resolution of
this matter cannot be determined, but management believes the ultimate
outcome will not have a material impact on the Company's financial
position. Their prior salaries are included in aggregate amounts discussed
above.
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. Subsequently, 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 $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. If the proposed Arcada acquisition is approved, this
person will receive $150,000 plus 250,000 shares of common stock for his
efforts on this merger and a new consulting agreement will be entered
into.
Also see Note 6 regarding an option to be granted to the Company's
president, if the merger with Arcada is approved.
OTHER CONTINGENCIES - Commencing in June 1996, 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. AT&T has
made a claim to the Company indicating it owes for this fraudulent usage,
and is currently withholding funds otherwise payable to the Company for its
long-distance service. 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.
The Company has filed legal action against its former president in August
1996. The former president has filed a response to the Company's claim.
In addition, the former president has made various allegations that he
intends to pursue legal action for unspecified damages against the
Company, however, none have been formally filed. If such action occurs,
the Company intends to defend itself vigorously and believes no adverse
material consequences would result. Company continues to pursue this
matter. The ultimate resolution of this matter cannot presently be
determined.
F-21
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
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
----------
----------
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
----------
----------
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 shares were effectively issued at the
time of the public offering in May 1996, even though the preferred stock
liability was paid in June 1996).
F-22
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
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 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 160,000 shares of common stock for services in 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 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. Subsequent to August 31, 1996, an
additional 1,500 shares were issued based on a change in the 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 fiscal
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 $5,763,000. Each warrant enables the
holder to purchase one share of common stock at the public offering price
of $4 per share through May 1999. 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
F-23
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
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.
If the merger with Arcada is approved, the Company's former chief
executive officer will receive 250,000 shares of common stock for his
efforts in the merger (see Note 5).
Also, see Note 3 for the common stock issued in connection with the GetNet
acquisition and Notes 4 and 5 for shares issued to settle past debts.
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 August 31, 1996, no
options have been exercised.
In fiscal 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
August 31, 1996, no options have been exercised.
As part of the various employment agreements, stock options were granted to
purchase a total of 480,000 shares (including 200,000 to former officers
and directors). At May 31, 1996, no options are exercisable. Options for
210,000 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.
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 350,000 warrants currently
exercisable, and the balance vesting in March 1997. One of the new
directors became president of the Company in April 1996. As of May 31,
1996, no options have been exercised.
In July 1996, the Company terminated two employees by mutual agreement. In
connection with their termination, their prior option agreements were
amended, whereby they were granted options to purchase in the aggregate
45,000 shares of common stock at $4.00 and 40,000 shares at $5.00. In
connection with this severance agreement, the Company has recorded
approximately $173,000 of expense based on the difference between the
option exercise price and the price of the Company's common stock on the
date of new option terms were agreed upon.
If the merger with Arcada is approved, the current president of the Company
will receive an option to purchase 125,000 shares of common stock
exercisable at $.01 per share for a three-year period. The Company has
further agreed to register the shares underlying the option. When, and if
granted, this will result in expense being recorded in the Company's
financial statements for the difference between the
F-24
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
then market price of the Company's common stock and the $.01 exercise price
multiplied by the shares underlying the option. This expense, based on
current trading prices, would be significant.
RESERVED SHARES - Excluding the 12,750,000 shares and the option to
purchase 125,000 shares which would be issued if the Company successfully
completed the proposed merger with Arcada, the Company has approximately
3,366,000 shares reserved for possible issuance under existing option and
warrants outstanding, as previously discussed herein.
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.
8. SIGNIFICANT SALES AGENT RELATIONSHIP:
The Company has an agreement with an independent sales agent, whereby the
agent receives 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
F-25
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
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, and the three months ended
August 31, 1995 and 1996, the sales originated by the agent have accounted
for 42%, 36%, 34%, and 39%, respectively, of company sales. During these
periods, the Company has recorded a related expense to the agent of
approximately $265,000, $299,000, $133,000, and $32,000, 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:
<TABLE>
<CAPTION>
FOR THE
TEN FOR THE THREE MONTHS
MONTHS YEAR ENDED
ENDED ENDED AUGUST 31,
MAY 31, MAY 31, --------------------
1995 1996 1995 1996
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
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 $ - $ -
--------- --------- -------- ---------
--------- --------- -------- ---------
Issuance of common stock for repayment
of notes and interest $ - $ - $ - $ 464,000
--------- --------- -------- ---------
--------- --------- -------- ---------
Issuance of common stock for settlement
of a liability $ - $ - $ - $ 180,000
--------- --------- -------- ---------
--------- --------- -------- ---------
Issuance of options to former employees $ - $ - $ - $ 173,000
--------- --------- -------- ---------
--------- --------- -------- ---------
</TABLE>
F-26
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
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 11,000 118,000 129,000
Capital expenditures 106,000 260,000 366,000
Identifiable assets 5,832,000 1,096,000 6,928,000
F-27
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Arcada Communications and Affiliates
We have audited the accompanying combined balance sheets of Arcada
Communications and Affiliates, (the "Company") as of December 31, 1994 and
1995 and the related combined statements of operations, shareholders' equity
and cash flows for each of the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the combined financial position of Arcada Communications and
Affiliates as of December 31, 1994 and 1995, and the results of their
operations and cash flows for each of the years then ended in conformity with
generally accepted accounting principles.
BDO Seidman, LLP
November 22, 1996
F-28
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------- -------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 341,000 $ 115,000 $ 101,000
Certificates of Deposit - Restricted(Note 4) - 200,000 312,000
Accounts receivable, net of allowance for doubtful
accounts of $160,000, $144,000 and $300,000(Note 4) 1,302,000 1,760,000 1,864,000
Carrier security deposits 264,000 282,000 248,000
Prepaid expenses and other 2,000 105,000 113,000
---------- ---------- ----------
Total Current Assets 1,909,000 2,462,000 2,638,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization(Note 3) 2,120,000 2,131,000 1,960,000
OTHER ASSETS 98,000 265,000 275,000
---------- ---------- ----------
Total Assets $4,127,000 $4,858,000 $4,873,000
---------- ---------- ----------
---------- ---------- ----------
CURRENT LIABILITIES
Line of credit borrowings $ - $ 260,000 $ 223,000
Accounts payable 1,435,000 1,795,000 1,959,000
Accrued compensation and related 117,000 141,000 104,000
Other accrued liabilities 89,000 136,000 128,000
Dividends payable - - 140,000
Current portion of long-term liabilities 258,000 235,000 257,000
---------- ---------- ----------
Total Current Liabilities 1,899,000 2,567,000 2,811,000
---------- ---------- ----------
LONG-TERM LIABILITIES
Capital lease obligations, net of current portion(Note 5) 582,000 663,000 589,000
Long-term debt, net of current portion(Note 6) 193,000 452,000 392,000
Notes payable to shareholders(Note 8) 254,000 456,000 469,000
Other long-term liabilities 42,000 292,000 315,000
---------- ---------- ----------
Total Long-term Liabilities 1,071,000 1,863,000 1,765,000
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES(Notes 5 and 10)
SHAREHOLDERS' EQUITY
Common stock and additional paid in capital(Note 7) 560,000 558,000 558,000
Retained earnings (accumulated deficit) 597,000 (130,000) (261,000)
---------- ---------- ----------
Total Shareholders' Equity 1,157,000 428,000 297,000
---------- ---------- ----------
Total Liabilities and Shareholders' Equity $4,127,000 $4,858,000 $4,873,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-29
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -----------------------
1994 1995 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited)
REVENUES $9,060,000 $10,954,000 $8,292,000 $9,429,000
Line charges 4,931,000 6,816,000 5,148,000 5,936,000
---------- ----------- ---------- ----------
EXCESS OF REVENUES OVER LINE CHARGES 4,129,000 4,138,000 3,144,000 3,493,000
Other operating expenses:
Salaries, wages and related 2,107,000 2,094,000 1,571,000 1,584,000
General and administrative 526,000 531,000 431,000 487,000
Facilities and switch expense 490,000 409,000 364,000 321,000
Depreciation and Amortization 240,000 470,000 325,000 410,000
Sales and marketing 311,000 332,000 255,000 284,000
Provision for doubtful accounts 144,000 160,000 145,000 131,000
Provision for severance obligation(Note 10) - 295,000 295,000 -
Legal and other consulting 95,000 175,000 120,000 95,000
---------- ----------- ---------- ----------
EARNINGS (LOSS) BEFORE INTEREST AND TAX 216,000 (328,000) (362,000) 181,000
Interest expense, net of interest income 42,000 231,000 159,000 145,000
---------- ----------- ---------- ----------
EARNINGS (LOSS) BEFORE INCOME TAX 174,000 (559,000) (521,000) 36,000
Provision For Income Tax 20,000 - - -
---------- ----------- ---------- ----------
NET INCOME (LOSS) $ 154,000 $ (559,000) $ (521,000) $ 36,000
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-30
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------- Retained Earnings
Shares Amount (Accumulated Deficit) Total
------ ------ --------------------- -----
<S> <C> <C> <C> <C>
BALANCE, January 1, 1994(Note 6) 52,000 $560,000 $ 490,000 $1,050,000
Dividends - - (47,000) (47,000)
Net income - - 154,000 154,000
------ -------- --------- ----------
BALANCE, December 31, 1994 52,000 560,000 597,000 1,157,000
Redemption of common stock(Note 6) (10,000) (2,000) - (2,000)
Dividends - - (168,000) (168,000)
Net loss - - (559,000) (559,000)
------ -------- --------- ----------
BALANCE, December 31, 1995 42,000 558,000 (130,000) 428,000
Redemption of common
stock (Unaudited)(Note 6) (5,000) - - -
Dividends (Unaudited) - - (167,000) (167,000)
Net income (Unaudited) - - 36,000 36,000
------ -------- --------- ----------
BALANCE, September 30, 1996 (Unaudited) 37,000 $558,000 $(261,000) $ 297,000
------ -------- --------- ----------
------ -------- --------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-31
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------ -------------------
1994 1995 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
(unaudited) (unaudited)
NET INCOME (LOSS) $ 154,000 $(559,000) $(521,000) $ 36,000
Adjustments to reconcile net income(loss)
to cash flows from operating activities
Depreciation and amortization 240,000 476,000 330,000 430,000
Decrease in accounts receivable (233,000) (459,000) (689,000) (104,000)
Increase in accounts payable 670,000 687,000 810,000 185,000
Increase in deposits and prepaid expenses (37,000) (88,000) (68,000) (34,000)
Provision for severance obligation - 295,000 295,000 -
Payments of severance obligation - (43,000) (14,000) (32,000)
Increase in deferred income tax liabilities 12,000 26,000 26,000 -
Other (30,000) (27,000) (55,000) (25,000)
----------- --------- --------- ---------
Net Cash Provided by Operating Activities 776,000 308,000 114,000 456,000
----------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment (1,146,000) (262,000) (216,000) (80,000)
Investment in other assets (20,000) (199,000) (199,000) (51,000)
Purchase of Certificates of Deposit - Restricted - (200,000) (200,000) (100,000)
----------- --------- --------- ---------
Net Cash Used by Investing Activities (1,166,000) (661,000) (615,000) (231,000)
----------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Line-of-credit borrowings - 460,000 450,000 223,000
Repayment of line-of-credit borrowings - (200,000) (200,000) (260,000)
Proceeds from Notes Payable to Shareholders 258,000 436,000 421,000 160,000
Repayments of Notes Payable to Shareholders (4,000) (234,000) (210,000) (146,000)
Proceeds from long-term debt 253,000 - - -
Repayment of long-term debt and capital
lease obligations (57,000) (165,000) (91,000) (189,000)
Redemption of common stock - (2,000) (2,000) -
Dividends paid (47,000) (168,000) (168,000) (27,000)
----------- --------- --------- ---------
Net Cash Provided (Used) by Financing Activities 403,000 127,000 200,000 (239,000)
----------- --------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 13,000 (226,000) (301,000) (14,000)
CASH AND CASH EQUIVALENTS
Beginning of period 328,000 341,000 341,000 115,000
----------- --------- --------- ---------
End of period $ 341,000 $ 115,000 $ 40,000 $ 101,000
----------- --------- --------- ---------
----------- --------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
Accounts payable exchanged for Note Payable - 326,000 326,000 -
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-32
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
NOTE 1: OPERATIONS - Arcada Communications and Affiliates
DESCRIPTION OF (together, "Arcada" or the "Company") provides
BUSINESS long-distance telecommunication services. The Company
currently serves over 20,000 customers in 17 states,
with an emphasis in the Pacific Northwest. The Company's
corporate offices are located in Seattle, Washington
with marketing offices in Vancouver, Washington and
Denver, Colorado. Arcada also provides cellular air
time and other cellular telecommunication products and
services.
PLANNED MERGER - In November 1996, the Company entered
into an Agreement and Plan of Merger, as amended (the
"Merger Agreement"), to merge with Touch Tone
America, Inc. ("Touch Tone"), public company based in
Phoenix, Arizona, which provides Internet services,
local dedicated access and other telecommunications
products. The proposed merger provides for, among other
things, Touch Tone to issue to Arcada shareholders
promissory notes totaling $1.5 million and 12.5 million
shares of Touch Tone common stock. As a result, Arcada
would acquire shareholder control as well as control of
both management and the board of directors of Touch
Tone. Consummation of the merger is subject to approval
of the Merger Agreement by the shareholders of both
companies. The business combination would be considered
a purchase of Touch Tone by Arcada for financial
reporting purposes and would be accounted for utilizing
purchase accounting. Inasmuch as Arcada stockholders
will own the majority of Touch Tone capital stock after
the merger, Arcada is considered to be the acquiring
corporation for purposes of purchase accounting and
will be the predecessor entity for purposes of future
financial reporting by Touch Tone.
NOTE 2: PRINCIPLES OF COMBINATION - The combined financial
SUMMARY OF statements include S.V.V. Sales, Inc., dba Arcada
SIGNIFICANT Communications ("SVV"), LeBanco, Ltd. ("LeBanco"),
ACCOUNTING and Stellar Telecommunications Services , Inc.
POLICIES ("Stellar"), which are affiliated through common
ownership. Stellar and LeBanco own certain equipment
and switches utilized in the Company's operations,
which are leased to Arcada. All significant
intercompany balances and transactions have been
eliminated in combination in a manner similar to
consolidation.
USE OF ESTIMATES - The financial statements are
prepared in conformity with generally accepted
accounting principles which 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 statement and the reported amounts of revenue
and expenses during the reporting period. Actual
results could differ from the estimates.
REVENUE RECOGNITION - Revenues are recognized as
services are provided and billed monthly in arrears.
INTERIM FINANCIAL STATEMENTS - The interim financial
data as of and for the nine months ended September 30,
1995 and 1996 is unaudited; however, in the opinion of
Company management, the interim data includes all
adjustments, consisting only of normal recurring
adjustments necessary for a fair statement of results
for the interim periods. The 1996 interim period
results of operations are not necessarily indicative of
results for the entire year.
CASH AND CASH EQUIVALENTS - The Company considers cash
on hand, cash in banks, certificates of deposits, time
deposits and other short-term securities with
maturities of three months or less as cash and cash
equivalents. Cash and cash equivalents are comprised
primarily of funds on deposit with banks and are
recorded at market value.
PROPERTY AND EQUIPMENT - Property and equipment are
stated at cost. Depreciation is computed on the
straight-line method over estimated useful lives
ranging from
F-33
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
three to ten years. Leasehold improvements are
amortized over the lesser of lease term or useful life
of property. Maintenance and repairs are expensed while
major improvements are capitalized.
DEFERRED CUSTOMER ACQUISITION COSTS AND OTHER INTANGIBLE
ASSETS - The Company is one of five long-distance
carriers that customers with AT&T Wireless Services
("AT&T Wireless") may select for long distance in the
17 states in which Arcada does business. The Company
pays a one-time equal access charge to AT&T Wireless
for each customer subscribing to the Company's
services. Intangible assets are included in other
assets, consist primarily of deferred customer
acquisition costs and are amortized on the
straight-line method over estimated productive lives
ranging from 2 to 4 years. Intangible assets
approximate $21,000 and $211,000 at December 31, 1994
and 1995, and accumulated amortization approximated
$1,000 and $53,000 at December 31, 1994 and 1995.
INCOME TAXES - SVV and LeBanco, with consents of their
shareholders, have elected under the Internal Revenue
Code to be taxed as S corporations, and as a result in
lieu of these companies paying corporate income tax,
the shareholders are taxed on their proportionate share
of taxable income. Stellar is a C corporation and
accordingly, income taxes are provided for the tax
effect of Stellar operating results reported in the
financial statements. The provision consists of tax
currently due or refundable plus deferred taxes related
to differences in financial statement and tax bases of
assets and liabilities. Deferred tax assets and
liabilities represent estimated future tax return
consequences of such differences, which will either be
taxable or deductible when the assets and liabilities
are recovered or settled.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying
amounts of current assets and liabilities are
considered to be reasonable estimates of fair value
due to the short maturity of these items. The carrying
amounts of long-term debt are considered to be
reasonable estimates of fair value because they bear
interest at relatively recently established market
rates. It is not practicable to estimate the fair value
of notes payable to shareholders as the related party
nature of these financial instruments allow for
possible modification to their terms and maturities.
CONCENTRATION OF CREDIT RISK - Financial instruments
that potentially subject the Company to concentrations
of credit risk include primarily cash deposits and
accounts receivable. The Company places its deposits
and short term investments with high credit quality
financial institutions; at times deposits exceed
federally-insured limits. Accounts receivable consist
of many small account balances due from individuals and
companies dispersed across the United States, with a
concentration in the Pacific Northwest. Collateral is
generally not required.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS -
Recently issued accounting standards having relevant
applicability to the Company consist primarily of
Statement of Financial Accounting Standards No.
("SFAS 121"), which establishes accounting standards
for, among other things, the impairment of long-lived
assets and certain identifiable intangibles. SFAS
No. 121 is effective for fiscal years beginning after
December 15, 1995, and is not expected to have a
significant effect, if any, on the Company's financial
condition or results of operations.
F-34
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NOTE 3:
Property and Property and equipment consists of the following (in thousands):
POWER AND EQUIPMENT
December 31, September 30,
------------ -------------
1994 1995 1996
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Equipment and switches $1,222 $1,477 $1,557
Equipment under capital lease 853 1,008 1,085
Vehicles 353 353 353
Leasehold improvements 70 77 78
-----------------------------------------------------------------------
2,498 2,915 3,073
Accumulated depreciation and
amortization (378) (784) (1,113)
-----------------------------------------------------------------------
Property, and equipment, net $2,120 $2,131 $1,960
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
Accumulated amortization of equipment under
capital leases approximated $103,000 and
$216,000 at December 31, 1994 and 1995.
Property and equipment are pledged as security
for borrowings as described in Note 6.
NOTE 4: The Company maintains line-of-credit borrowing
LINE-OF-CREDIT agreements with banks. In August 1996, the
Company entered into a $400,000 line-of-credit
agreement. Borrowing availability approximated
$250,000 and $300,000 during 1994 and 1995,
respectively. Borrowings are secured by
accounts receivable, certificates of deposits,
and personal guarantees of Company shareholders.
Line-of-credit agreements provide for interest,
payable monthly, at prime plus 2% during 1994
and 1995 (10.25% at December 31, 1995) and at
prime plus 1% on the 1996 line
The Company has pledged and assigned as security
for line of credit borrowing certificates of
deposit which are reported as Restricted in the
accompanying balance sheet as such amounts are
legally restricted as to withdrawal.
NOTE 5: The Company has various lease agreements for
LEASES certain equipment and switches, office premises
and office equipment. Most leases contain
renewal options and some contain purchase
options. Rent expense for operating leases
approximated $342,000 and $317,000 during the
years ended December 31, 1994 and 1995.
F-35
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
Minimum annual future obligations for leases in
effect at December 31, 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>
Capital Operating
Years Ending December 31, Leases Leases
-------------------------------------------------------------------------
-------------------------------------------------------------------------
<S> <C> <C>
1996 $281 $286
1997 292 88
1998 292 64
1999 209 24
2000 70 11
-------------------------------------------------------------------------
Total minimum lease payments 1,144 $473
----
----
Amount representing interest (318)
and other charges
-------------------------------------------------------------------------
Present value of minimum lease payments 826
Less current portion 163
-------------------------------------------------------------------------
Capital lease obligations, net of current portion $663
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
F-36
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NOTE 6: Long-term debt consists of the following (in thousands):
LONG-TERM DEBT
December 31, September 30,
------------ -------------
1994 1996 1995
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Note payable to vendor, due in 2002 in
$5 monthly installments, including
annual interest at approximately 14%,
secured by switching equipment. $ - $ 321 $ 307
Notes payable to vendor, due in 2002 in
$5 monthly installments,
including annual interest at approximately 5%,
secured by vehicles. 223 177 143
Other secured notes payable bearing
interest at approximately 8% to 10%. 28 26 19
-------------------------------------------------------------------------------------
251 524 469
Less amounts due within one year 58 72 77
-------------------------------------------------------------------------------------
Long-term debt, net of current portion $ 193 $ 452 $ 392
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Long-term debt annual principal payment obligations are as follows
(in thousands):
Years Ending December 31,
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
<S> <S>
1996 $ 72
1997 115
1998 157
1999 112
2000 68
-------------------------------------------------------------------------------------
$ 524
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
Interest paid in cash, including interest
attributable to capital lease obligations and
interest paid on notes payable to
shareholders, approximated $91,000 and
$279,000 during the years ended December 31,
1994 and 1995.
F-37
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
NOTE 7: SVV commenced operations in 1992 as a result of the
COMMON STOCK contribution and assignment by the Company's then
sole stockholder, an individual who subsequently
transferred stock ownership to his two sons (the
"Majority Shareholders"), of certain assets
comprised primarily of accounts receivable, and
assumption of various operating liabilities and
other accrued liabilities. The Company recorded
assets assigned and liabilities assumed at their
historical net book value of approximately $557,000,
such net amount being recorded as common stock and
additional paid in capital. Inasmuch as most assets
and liabilities were current and subsequently
recovered and extinguished in the ordinary course of
business, net book value approximated fair value.
Stellar and LeBanco were capitalized with cash of
approximately $1,000 and $2,000 and are also owned
by SVV stockholders. Common stock information for
each of the companies in the combined financial
statements are summarized below:
<TABLE>
<CAPTION>
OUTSTANDING
------------------------------
JANUARY 1, DECEMBER 31,
---------- ------------
COMPANY PAR VALUE AUTHORIZED ISSUED 1994 1994 1995
------- --------- ---------- ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
SVV No Par 50,000 50,000 50,000 50,000 40,000
Stellar No Par 1,000 980 980 980 700
LeBanco $1 1,000 1,000 1,000 1,000 900
</TABLE>
During 1994, the Majority Shareholders sold
42% of SVV common stock (21,000 shares) to
five individuals, all of whom were Company
employees, in exchange for promissory notes
secured by such shares. The shares sold are
subject to terms of a buy-sell agreement which
among other things, provides the Company an
option to purchase shares from a selling
shareholder under certain circumstances
including termination of employment. During
1995, pursuant to terms of the buy-sell
agreement the Company acquired 5,000 shares
from each of two shareholders for a combined
total purchase price of approximately $2,000.
In addition, during 1995 the Company also
acquired for nominal consideration 280 shares
of Stellar and 100 shares of LeBanco common
stock pursuant to terms of buy-sell agreements.
Shares of common stock acquired by the Company
have been canceled.
Effective in June 1996, pursuant to terms of
buy-sell agreements, the Company acquired for
nominal consideration as provided for in such
agreements 5,000 shares of SVV common stock,
140 shares of Stellar common stock and 100
shares of LeBanco common stock.
NOTE 8: Commencing in 1994, certain of the Company's
RELATED PARTY shareholders, including and primarily the
TRANSACTIONS Majority Shareholders, loaned cash to the
Company pursuant to terms of unsecured,
four-year promissory notes. Interest is
payable monthly at rates of 30% during 1994,
and 15% thereafter. Interest expense related to
these borrowings approximated $8,000 and
$74,000 during the years ended December 31,
1994 and 1995. Related party payables are
subordinate to line-of-credit bank borrowings.
In April 1996, the Company entered into an agreement
with a supplier, which is a business owned by certain
of the Company's shareholders, including and
primarily the Majority Shareholders. During the
nine months ended September 30, 1996, purchases by
the Company from this supplier approximated
$256,000.
NOTE 9: The provision for income tax relates solely to
FEDERAL INCOME Stellar as described in Note 1. The 1994 income
TAXES tax provision approximates that which would
result from applying federal statutory tax
rates to pre-tax income, adjusted for the
effect of graduated tax rates. As a result of
pre-tax losses, there is no tax provision for
1995 or 1996. The Company has recorded deferred
income tax liabilities of approximately $20,000
and $40,000 at December 31, 1994 and 1995.
Deferred tax liabilities relate to depreciation
and are included in other long-term
liabilities.
Cash paid for income taxes approximated $15,000
during the year ended December 31, 1994.
NOTE 10: The Company does not own any transmission
COMMITMENTS AND facilities, other than its investments in its long
CONTINGENCIES distance switches, thus its long distance services
are dependent upon other carriers for the
F-38
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
NOTE 10: transmission of its customers' calls. The Company
COMMITMENTS AND procures such services at bulk rates pursuant to
CONTINGENCIES short-term agreements from several suppliers,
(CONTINUED) including three major suppliers.
The Company serves customers in numerous localities.
The Company currently collects and remits local
utility taxes only in jurisdictions where it has
offices or holds other assets. The Company has been
contacted in the past by other localities where it
has customers, but no other assets or operations,
requesting that the Company collect and remit local
utility taxes in such jurisdictions. The Company
does not believe such local utility taxes apply to
its operations, has not historically collected such
taxes, and does not intend to do so in the future.
However, there can be no assurance that localities
will not actively seek to collect such taxes from
the Company for past or future services.
The Company is subject to various legal proceedings
and claims that arise in the ordinary course of
business. Company management currently believes
that resolving these matters, some of which have
already been settled, will not have a material
adverse impact on the Company's financial position
or results of operation.
During 1995, the Company entered into a severance
agreement with a former employee pursuant to which
the Company committed to make payments totaling
$400,000 over a seven year period, subject to
acceleration under certain circumstances, including
a change in control. Accordingly, during 1995 the
Company has recorded a liability and compensation
expense of approximately $295,000 at the discounted
net present value of the payments. The severance
obligation, net of the current portion, is included
in other long-term liabilities.
In addition, during 1995, the Company entered into a
severance agreement with another employee. Pursuant
to terms of the agreement, among other things, the
Company is contingently committed to make payments
totaling $560,000 in the event of a sale of the
Company, or certain other future events. Inasmuch
as the event which would require a commitment on
behalf of the Company to make these payments has not
occurred, no expense or obligation has been
recorded.
During the nine months ended September 30, 1996, the
Company entered into a severance agreement with an
employee. Pursuant to terms of the agreement, among
other things, the Company is contingently committed
to make payments totaling $700,000 in the event of a
sale of the Company, or certain other future events.
Inasmuch as the event which would require a
commitment on behalf of the Company to make these
payments has not occurred, no expense or obligation
has been recorded.
As described in Note 1, the Company has entered into
a Merger Agreement which provides for, among other
things, the Company to merge with Touch Tone.
Consummation of the merger is subject to, among
other things including certain conditions of merger,
approval by the shareholders of both companies. In
the event the merger is consummated, the Company
would be obligated to make severance payments
totaling $1,260,000 pursuant to terms of two
severance agreements and would record such
obligation as expense.
F-39
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
GetNet International, Inc.
Phoenix, Arizona
We have audited the balance sheet (not separately included herein) of GetNet
International, Inc. (A Development Stage Company) as of July 31, 1995 and the
related accompanying statements of operations and changes in stockholders'
deficit, and cash flows from inception (August 24, 1994) to July 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion of these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GetNet International, Inc. (A
Development Stage Company) as of July 31, 1995 and the results of its operations
and its cash flows from inception (August 24, 1994) to July 31, 1995 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred substantial losses from
operations and has a working capital deficit as of July 31, 1995. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans with regard to these matters are 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 31, 1995
F-40
<PAGE>
GETNET INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FROM CUMULATIVE
FROM INCEPTION FOR THE THREE INCEPTION FROM INCEPTION
(AUGUST 24, 1994) MONTHS ENDED (AUGUST 24, 1994) (AUGUST 24, 1994)
TO JULY 31, OCTOBER 31, TO OCTOBER 31, TO OCTOBER 31,
1995 1995 1994 1995
----------------- --------------- ------------------ ------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET REVENUES $ 115,000 $ 100,000 $ 1,000 $ 215,000
COST OF SALES (79,000) (32,000) (9,000) (111,000)
----------- ----------- ----------- -----------
Gross profit 36,000 68,000 (8,000) 104,000
OPERATING EXPENSES:
Selling 11,000 2,000 - 13,000
Common stock and options issued for services 122,000 - - 122,000
Other general and administrative 206,000 87,000 8,000 293,000
----------- ----------- ----------- -----------
339,000 89,000 8,000 428,000
----------- ----------- ----------- -----------
NET LOSS $ (303,000) $ (21,000) $ (16,000) $ (324,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
F-41
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
<PAGE>
GETNET INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK DURING THE
------------------------ DEVELOPMENTAL
SHARES AMOUNT STAGE TOTAL
----------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
BALANCE, Inception (August 24, 1994) - $ - $ - $ -
Issuance of common stock for cash and subscription at $.001 per share
in August 1994 to officers/directors 1,600,000 2,000 - 2,000
Additional capital contributed by stockholders - 15,000 - 15,000
Issuance of common stock in October:
.025 for cash 400,000 10,000 - 10,000
.05 for cash 200,000 10,000 - 10,000
.10 for cash 100,000 10,000 - 10,000
.10 for services to employee 10,000 1,000 - 1,000
Issuance of common stock in November at $.10 for cash 375,000 38,000 - 38,000
Compensation recorded on extension of option rights in
November 1994 - 37,000 - 37,000
Exercise of option at $.025 for services by officers/directors in
December 1994 1,640,000 41,000 - 41,000
Exercise of rights' option by stockholder
in December at $.05 100,000 5,000 - 5,000
Issuance of common stock from December 1994 to July 1995
for cash at $.25:
Shareholders 284,000 71,000 - 71,000
Officers/directors 34,400 9,000 - 9,000
Exercise of options by officers/directors in February 1995 500,000 13,000 - 13,000
Exercise of right's option by stockholders in February 1995:
$.05 100,000 5,000 - 5,000
$.10 50,000 5,000 - 5,000
Issuance of common stock to employee for services, February 1995 to
July 1995 at $.25 per share 89,000 22,000 - 22,000
Net Loss - - (303,000) (303,000)
--------- -------- --------- --------
BALANCE, July 31, 1995 5,482,400 294,000 (303,000) (9,000)
Issuance of common stock to employees for prior services at
$.25 per share (unaudited) 84,000 21,000 - 21,000
Net Loss (unaudited) - - (21,000) (21,000)
--------- -------- --------- --------
BALANCE, October 31, 1995 (Unaudited) 5,566,400 $315,000 $(324,000) $ (9,000)
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-42
<PAGE>
GETNET INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FROM FOR THE FROM CUMULATIVE
INCEPTION THREE MONTHS INCEPTION FROM INCEPTION
(AUGUST 24, 1994) ENDED (AUGUST 24, 1994) (AUGUST 24, 1994)
TO JULY 31, OCTOBER 31, TO OCTOBER 31, TO OCTOBER 31,
1995 1995 1994 1995
----------------- -------------- ----------------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(303,000) $ (21,000) $ (16,000) $(324,000)
Adjustments to reconcile net loss to net
cash from operating activities:
Issuance of common stock and options
for services 122,000 - 1,000 122,000
Provision for bad debts 14,000 - - 14,000
Depreciation expense 14,000 9,000 - 23,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (44,000) (30,000) - (74,000)
Other assets (5,000) - (10,000) (5,000)
Increase (decrease) in:
Accounts payable 37,000 21,000 5,000 58,000
Accrued liabilities 34,000 11,000 - 45,000
Deferred revenues 26,000 22,000 - 48,000
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities (105,000) 12,000 (20,000) (93,000)
CASH FLOWS FROM INVESTING
ACTIVITIES -
PURCHASES OF COMPUTER EQUIPMENT (77,000) (44,000) (19,000) (121,000)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of common stock for cash 193,000 - 47,000 193,000
Advances from stockholder (6,000) - - (6,000)
Payments on capital leases (3,000) (2,000) - (5,000)
Advances from touch tone - 36,000 - 36,000
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities 184,000 34,000 47,000 218,000
--------- --------- --------- ---------
NET INCREASE IN CASH 2,000 2,000 8,000 4,000
CASH, beginning of period - 2,000 - -
--------- --------- --------- ---------
CASH, end of period $ 2,000 $ 4,000 $ 8,000 $ 4,000
--------- --------- --------- ---------
--------- --------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Equipment acquired through capital leases $ 12,000 $ - $ 12,000 $ 12,000
--------- --------- --------- ---------
--------- --------- --------- ---------
Issuance of stock as repayment of advances
from stockholder $ 6,000 $ - $ 6,000 $ 6,000
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-43
<PAGE>
GETNET INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO JULY 31, 1995 IS UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS- GetNet International, Inc. (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. As GetNet has not yet experienced
significant revenues from its planned operations, it is considered to be in
the developmental stage.
INCOME TAXES - GetNet 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 - GetNet recognizes revenue during the period of
performance of the related services. Deferred revenues represent current
month's advance billings for subscriber services and revenue received in
advance for services under contract. This amount will be recognized as
revenue when earned.
UNAUDITED INFORMATION - The statement of operations and cash flows for the
period from inception (August 24, 1994) to October 31, 1994 and the
three-month period ended October 31, 1995 were taken from GetNet's books
and records without audit. However, in the opinion of management, such
information includes all adjustments (consisting only of normal accruals),
which are necessary to properly reflect the results of operations of GetNet
for the period from inception (August 24, 1994) to October 31, 1994 and the
three-month period ended October 31, 1995. Certain information and
footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles for the interim
periods have been condensed or omitted. The results of operations for the
three months ended October 31, 1995 are not necessarily indicative of the
results to be expected for the full year.
2. CONTINUED OPERATIONS:
The accompanying financial statements have been prepared assuming that
GetNet will continue operation as a going concern, which contemplates the
realization of assets, including liquidation of liabilities in the normal
course of business. GetNet is a developmental stage company and has
incurred a substantial loss and has a working capital deficit of $121,000
as of October 31, 1995. GetNet's ability to continue as a going concern is
dependent upon obtaining long-term debt and/or equity financing to meet its
obligations, as well as, achieving and maintaining profitable operations.
The accompanying financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
Effective November 1, 1995, GetNet merged with Touch Tone America, Inc.,
(Touch Tone) in a stock exchange. Touch Tone completed a public offering
in May 1996 of its common stock, which should
F-44
<PAGE>
GETNET INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO JULY 31, 1995 IS UNAUDITED)
provide additional funds to the Company. The Company believes, for which
there can be no assurance, that with additional marketing and capital
development, it can become profitable and continue operations.
3. INCOME TAXES:
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.
At July 31, 1995, deferred tax assets resulting from these differences
consist of the following:
Net operating loss carryforward $ 110,000
Less valuation allowance (110,000)
----------
Net deferred tax asset $ -
----------
----------
As of July 31, 1995, GetNet has an income tax loss carryforward of
approximately $280,000 which will expire in 2010.
4. COMMITMENTS:
OFFICE LEASE - GetNet leases office space under a noncancellable operating
lease which expires in March 1996. Total rental expense was $8,000 for the
period from inception (August 24, 1994) to July 31, 1995. The total
minimum rental commitments at July 31, 1995 total approximately $10,000 for
the 1996 fiscal year and expires in March 1996.
CAPITAL LEASE OBLIGATIONS - GetNet leases certain computer equipment under
agreements classified as capital leases. Equipment under these leases has
a cost of $12,000 and accumulated depreciation of $2,000 and $3,000 as of
July 31, 1995 and October 31, 1995, respectively. Minimum lease payments
continue through December 1997. The following is a schedule of future
minimum lease payments under capital leases at July 31, 1995.
Future minimum lease payments $ 12,000
Less amount representing interest (2,000)
---------
Present value of net minimum lease payments 10,000
Less current portion (5,000)
---------
$ 5,000
---------
---------
F-45
<PAGE>
GETNET INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO JULY 31, 1995 IS UNAUDITED)
5. STOCKHOLDERS' DEFICIT:
At inception, the funding stockholder issued common stock at approximately
$.001 per share. Subsequently, certain funding stockholders made capital
contributions of $15,000 and granted themselves options to acquire
additional shares at $.025 per share through December 1994. In December
1994, 1,640,000 shares were issued under this option in lieu of past
compensation and $41,000 was recorded as expense. In November 1994, the
option right was extended and for financial statement presentation purposes
an additional $37,000 of expenses was recorded as shares were then being
sold for a greater amount. These options were exercised in February and
any remaining options have expired without being exercised.
During the period from inception to July 31, 1995, the Company has issued
shares of common stock at various prices for cash to third parties
aggregating approximately $193,000. During this period, stockholders were
given the right to purchase additional shares based on their initial
subscription price per share.
During the period since inception, the Company has also granted shares of
common stock to employees in lieu of compensation. Compensation expense
has been recorded based upon the price per share paid by other
stockholders. In August and September 1995, the Company issued
84,000 shares of stock to several employees for services provided prior to
July 31, 1995. For financial statement presentation purposes, the value of
such services aggregating approximately $21,000, have been reflected as an
expense in the period ended July 31, 1995.
F-46
<PAGE>
APPENDICES:
A. Merger Agreement Including Plan of Merger
B. Form of Promissory Note
C. Washington Dissenters' Rights Statute (RCW 23B.13)
D. Form of Agreement and Plan of Reincorporation Merger
E. Articles of Incorporation and Bylaws of Touch Tone -
Washington
<PAGE>
APPENDIX A
AGREEMENT FOR MERGER
DATED AS OF NOVEMBER 13, 1996
BY AND AMONG
TOUCH TONE AMERICA, INC.,
TOUCH TONE/ARCADA, INC.
AND
S.V.V. SALES, INC. d/b/a
ARCADA COMMUNICATIONS, INC.
<PAGE>
TABLE OF CONTENTS
AGREEMENT FOR MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. EFFECTIVE TIME; CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . 3
3. REPRESENTATIONS AND WARRANTIES OF NEWCO. . . . . . . . . . . . . . . . . 3
3.1 Corporate Organization. . . . . . . . . . . . . . . . . . . . . . . . 3
3.2 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.3 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.4 Consents and Approvals. . . . . . . . . . . . . . . . . . . . . . . . 4
3.5 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4. REPRESENTATIONS AND WARRANTIES OF TTA. . . . . . . . . . . . . . . . . . 4
4.1 Organization, Power, Good Standing, Etc.. . . . . . . . . . . . . . . 5
4.2 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.3 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.4 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.5 No Violation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.6 Consents and Approvals. . . . . . . . . . . . . . . . . . . . . . . . 8
4.7 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . 8
4.8 Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.9 Absence of Certain Changes or Events. . . . . . . . . . . . . . . . . 8
4.10 Litigation, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.11 Taxes and Tax Returns. . . . . . . . . . . . . . . . . . . . . . . . 9
4.12 Employees; Employee Benefit Plans. . . . . . . . . . . . . . . . . .10
4.13 TTA Information. . . . . . . . . . . . . . . . . . . . . . . . . . .12
4.14 Compliance With Applicable Law . . . . . . . . . . . . . . . . . . .12
4.15 Contracts and Agreements . . . . . . . . . . . . . . . . . . . . . .13
4.16 Affiliate Transactions . . . . . . . . . . . . . . . . . . . . . . .13
4.17 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
4.18 Title to Property. . . . . . . . . . . . . . . . . . . . . . . . . .14
4.19 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
4.20 Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . .16
4.21 Sufficient Resources . . . . . . . . . . . . . . . . . . . . . . . .16
4.22 SEC Filings. . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
4.23 Bank Accounts, Etc.. . . . . . . . . . . . . . . . . . . . . . . . .16
5. REPRESENTATIONS OF ARCADA. . . . . . . . . . . . . . . . . . . . . . . .17
5.1 Organization, Power, Good Standing, Etc.. . . . . . . . . . . . . . .17
5.2 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . .18
5.3 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
5.4 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
5.5 No Violation. . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.6 Consents and Approvals. . . . . . . . . . . . . . . . . . . . . . . .19
5.7 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . .19
5.8 Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
5.9 Absence of Certain Changes or Events. . . . . . . . . . . . . . . . .20
5.10 Litigation, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . .20
5.11 Taxes and Tax Returns. . . . . . . . . . . . . . . . . . . . . . . .20
5.12 Employees; Employee Benefit Plans. . . . . . . . . . . . . . . . . .21
i
<PAGE>
5.13 Arcada Information . . . . . . . . . . . . . . . . . . . . . . . . .24
5.14 Compliance With Applicable Law . . . . . . . . . . . . . . . . . . .24
5.15 Contracts and Agreements . . . . . . . . . . . . . . . . . . . . . .24
5.16 Affiliate Transactions . . . . . . . . . . . . . . . . . . . . . . .24
5.17 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
5.18 Title to Property. . . . . . . . . . . . . . . . . . . . . . . . . .25
5.19 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
5.20 Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . .27
5.21 Bank Accounts, Etc.. . . . . . . . . . . . . . . . . . . . . . . . .27
6. COVENANTS OF THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . .27
6.1 Redemption of Redeemable Warrants . . . . . . . . . . . . . . . . . .27
6.2 Reincorporation in Washington State . . . . . . . . . . . . . . . . .27
6.3 Conduct of the Business of TTA. . . . . . . . . . . . . . . . . . . .28
6.4 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . .29
6.5 Current Information . . . . . . . . . . . . . . . . . . . . . . . . .30
6.6 Access to Properties and Records Confidentiality. . . . . . . . . . .30
6.7 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
6.8 Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . .31
6.9 Approval of TTA Stockholders. . . . . . . . . . . . . . . . . . . . .32
6.10 Approval of Arcada Stockholders. . . . . . . . . . . . . . . . . . .32
6.11 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . .33
6.12 Public Announcements . . . . . . . . . . . . . . . . . . . . . . . .33
6.13 Assignment of Contract Rights. . . . . . . . . . . . . . . . . . . .33
6.14 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
6.15 Indemnification of Arcada Directors and Officers . . . . . . . . . .33
6.16 Current Public Information . . . . . . . . . . . . . . . . . . . . .34
6.17 Resolution of Certain Matters. . . . . . . . . . . . . . . . . . . .34
6.18 Purchase Accounting. . . . . . . . . . . . . . . . . . . . . . . . .34
7. CLOSING CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .35
7.1 Conditions to Each Party's Obligations Under This Agreement . . . . .35
7.2 Conditions to the Obligations of TTA Under This Agreement . . . . . .35
7.3 Conditions to the Obligations of Arcada Under This Agreement. . . . .36
8. TERMINATION, AMENDMENT AND WAIVER. . . . . . . . . . . . . . . . . . . .37
8.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
8.2 Break-up Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
8.3 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . .39
8.4 Amendment, Extension and Waiver . . . . . . . . . . . . . . . . . . .40
9. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
9.1 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
9.2 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
9.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
9.4 Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . .41
9.5 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . .41
9.6 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
9.7 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
9.8 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
ii
<PAGE>
AGREEMENT FOR MERGER
This Agreement for Merger ("Agreement") is made and entered into as of
November 13, 1996 by and among Touch Tone America, Inc., a California
corporation ("TTA"), Touch Tone/Arcada, Inc., a Washington corporation and
wholly-owned subsidiary of TTA ("Newco"), and S.V.V. Sales, Inc., a Washington
corporation d/b/a Arcada Communications, Inc. ("Arcada").
Newco is a wholly owned subsidiary of TTA. The parties desire that TTA and
Newco enter into a transaction with Arcada which will result in a merger (the
"Merger") of Arcada with and into Newco, which shall be the surviving
institution.
The shareholders of Arcada are also all of the shareholders of each of
Stellar Telecommunications Services, Inc., a Washington corporation ("Stellar")
and LeBanco, Ltd., an Oregon corporation ("LeBanco"). Prior to the consummation
of the transactions contemplated hereby, each of Stellar and LeBanco shall be
merged into Arcada. For all purposes of this Agreement references to Arcada
shall be deemed references to all three entities.
Therefore, in consideration of the mutual covenants, representations,
warranties and agreements herein contained, the parties hereto agree as follows:
1. MERGER. Subject to the terms and conditions of this Agreement, the
Merger is to be accomplished in the manner described herein.
(a) MERGER OF ARCADA AND NEWCO. At the Effective Time (as defined in
Section 2), Arcada shall be merged with and into Newco, with Newco being the
surviving institution, in accordance with the Plan of Merger by and among TTA,
Newco and Arcada substantially in the form attached hereto as Exhibit A (the
"Plan of Merger"). The Plan of Merger provides for the terms of the Merger and
the manner of carrying it into effect. The terms and conditions of the Plan of
Merger are incorporated herein and made a part hereof.
(b) CONVERSION OF ARCADA COMMON STOCK. Subject to the provisions
below and in the Plan of Merger, at the Effective Time, all of the outstanding
shares of common stock, no par value per share, of Arcada ("Arcada Common
Stock") shall be converted into the right to receive shares of common stock, no
par value per share, of TTA ("TTA Common Stock"), as described below and in the
Plan of Merger.
(i) Subject to the provisions below and the provisions of the
Plan of Merger, each outstanding share of Arcada Common Stock will at the
Effective Time be converted into the right to receive 250 newly issued shares of
TTA Common Stock and a one-year, eight percent (8%) promissory note of TTA in
the original principal amount of $30.00, (collectively, the Merger
Consideration), subject to the conditions set forth in this Agreement and in the
Plan of Merger. No fractional shares of TTA Common Stock shall be issued. In
lieu of any fractional shares, any holder of Arcada Common Stock who would
otherwise be entitled to a fractional share of TTA Common Stock will, upon
surrender of his certificate or certificates
<PAGE>
representing Arcada Common Stock outstanding immediately prior to the Effective
Time, be paid the cash value of such fractional share interest, which shall be
equal to the product of the fraction multiplied by the Average Price (as
hereinafter defined). For the purposes of determining any such fractional share
interests, all shares of Arcada Common Stock owned by an Arcada stockholder
shall be combined so as to calculate the maximum number of whole shares of TTA
Common Stock issuable to such Arcada stockholder.
(ii) If between the date of this Agreement and the third Nasdaq
Stock Market trading day prior to the Effective Time, the shares of TTA Common
Stock shall be changed into a different number of shares by reason of any
recapitalization, split-up, combination or exchange of shares, or if a stock
dividend thereon shall be declared with a record date within such period, the
number of shares of TTA Common Stock issued in exchange for each share of Arcada
Common Stock specified in Section l(b)(i) shall be adjusted accordingly.
(c) STOCKHOLDERS' MEETINGS. (i) TTA shall, as soon as practicable,
hold a meeting of its stockholders (the "TTA Stockholders' Meeting") to submit
for stockholder approval (the "TTA Stockholder Approval") (a) this Agreement,
(b) the Plan of Merger and (c) the reincorporation of TTA in the State of
Washington and (ii) Arcada shall, as soon as practicable, hold a meeting of its
stockholders (the "Arcada Stockholders' Meeting") to submit for stockholder
approval (the "Arcada Stockholder Approval") (a) this Agreement and (b) the Plan
of Merger.
(d) PROXY STATEMENT/PROSPECTUS.
(i) The parties hereto will cooperate in the preparation of an
appropriate proxy statement/prospectus satisfying all applicable requirements of
federal and state law (such proxy statement/prospectus in the form mailed to TTA
and Arcada stockholders, together with any and all amendments or supplements
thereto, being herein referred to as the "Proxy Statement/Prospectus").
(ii) Arcada will furnish such information concerning itself as
is necessary in order to cause the Proxy Statement/Prospectus, insofar as it
relates to Arcada, to comply with Section l(e)(i). Arcada agrees promptly to
advise TTA if at any time prior to the TTA and Arcada Stockholders' Meetings any
information provided by Arcada for inclusion in the Proxy Statement/Prospectus
becomes incorrect or incomplete in any material respect and to provide the
information needed to correct such inaccuracy or omission. Arcada will continue
to furnish TTA with such supplemental information as may be necessary in order
to cause such Proxy Statement/Prospectus, insofar as it relates to Arcada, to
comply with Section l(e)(i) after the mailing thereof to TTA and Arcada
stockholders.
(iii) TTA will furnish such information concerning itself as is
necessary in order to cause the Proxy Statement/Prospectus, insofar as it
relates to TTA, to comply with Section l(e)(i). TTA agrees promptly to advise
Arcada if at any time prior to the TTA and Arcada Stockholders' Meetings any
information provided by TTA for inclusion in the Proxy Statement/Prospectus
becomes incorrect or incomplete in any material respect and to provide the
information needed to correct such inaccuracy or omission. TTA will continue to
furnish Arcada
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with such supplemental information as may be necessary in order to cause such
Proxy Statement/Prospectus, insofar as it relates to TTA, to comply with Section
l(e)(i) after the mailing thereof to TTA and Arcada stockholders.
(iv) TTA will prepare and file with the SEC a registration
statement on Form S-4 (together with amendments thereto, the "Registration
Statement") containing the Proxy Statement/Prospectus in connection with the
registration under the 1933 Act, and the rules and regulations promulgated
thereunder (the "1933 Act") of the TTA Common Stock to be issued in connection
with the Merger, will use all reasonable efforts to have or cause the
Registration Statement to become effective as promptly as practicable, will use
all reasonable efforts to have or cause such TTA Common Stock to be listed on
the Nasdaq SmallCap Market-SM, and will take any other action required to be
taken under any applicable federal or state securities laws in connection with
the issuance of TTA Common Stock in the Merger. TTA will advise Arcada promptly
when the Proxy Statement/Prospectus has been approved for use in all necessary
states. The parties shall cooperate with each other in taking any other
appropriate actions that may be necessary to cause the TTA Common Stock to be
issued in connection with the Merger to be registered under the 1933 Act.
2. EFFECTIVE TIME; CLOSING. As used herein, the term Effective Time'
shall mean the date and time when the Merger becomes effective. As used herein,
the term Effective Date' shall mean the day on which the Effective Time occurs.
The parties intend that the Effective Time shall occur as soon as reasonably
practicable following the satisfaction of the conditions set out in Section 7.
l(a) and (b) below. A closing (the "Closing") shall take place prior to the
Effective Time at the offices of Cairncross & Hempelmann, 701 Fifth Avenue, 70th
Floor, Seattle, Washington, or at such other place as the parties hereto may
mutually agree upon for the Closing to take place.
3. REPRESENTATIONS AND WARRANTIES OF NEWCO. Each of TTA and Newco,
jointly and severally, hereby represent and warrant to Arcada as follows:
3.1 CORPORATE ORGANIZATION. Newco is a corporation duly organized,
validly existing and in good standing under the laws of the state of Washington.
Newco has all the requisite power and authority to own, lease and operate all of
its properties and assets and to carry on its business as currently conducted.
Newco is duly licensed or qualified to do business and is in good standing in
each jurisdiction in which the nature of the business conducted by it makes such
licensing or qualification necessary and where the failure to be so qualified
would, individually or in the aggregate, have a Material Adverse Effect (as
defined below) on TTA.
3.2 AUTHORITY. Newco has requisite corporate power and authority to
execute and deliver this Agreement and the Plan of Merger and, subject to
applicable regulatory approvals, to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement and the Plan
of Merger and the consummation of the transactions contemplated hereby and
thereby have been duly and validly approved by the Board of Directors of Newco.
This Agreement has been duly and validly executed and delivered by Newco.
Assuming the due authorization, execution and delivery hereof by the other
parties hereto, this
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Agreement constitutes the valid and binding obligation of Newco, enforceable
against it in accordance with its respective terms.
3.3 NO VIOLATIONS. Neither the execution and delivery of this
Agreement or the Plan of Merger nor the consummation by Newco of the
transactions contemplated hereby and thereby, nor compliance by Newco with any
of the terms or provisions hereof or thereof, will (i) violate any provision of
the Articles or bylaws of TTA, (ii) assuming the consents and approvals referred
to in Section 7.1 hereof are duly obtained, violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to Newco or any of its respective properties or assets, or (iii)
violate, conflict with, result in a breach of any provisions of, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of, accelerate the
performance required by, or result in the creation of any lien, security
interest, charge or other encumbrance upon any of the properties or assets of
Newco under any of the terms, conditions or provisions of any note, bond,
mortgage indenture, deed of trust, license, lease, agreement or other instrument
or obligation to which Newco is a party, or by which it or any of its properties
or assets may be bound or affected, except with respect to (iii) above, for such
violations, conflicts, breaches, defaults, termination's, accelerations and
encumbrances which would not in the aggregate (a) have a Material Adverse Effect
on TTA or (b) otherwise prevent or delay the consummation of the transactions
contemplated hereby.
3.4 CONSENTS AND APPROVALS. Except for consents and approvals of or
filings, deliveries or registrations with the SEC or other applicable
governmental authorities, no consents or approvals of or filings or
registrations with any third party or public body or authority, except for
consents, approvals, filings or registrations where the failure to obtain such
consents or approvals or to make such filings or registrations would not prevent
or delay the Merger and would not in the aggregate have a Material Adverse
Effect on TTA, are necessary in connection with the execution and delivery by
Newco of this Agreement and the consummation of the transactions contemplated
hereby.
3.5 CAPITALIZATION. The authorized capital stock of Newco as of the
date hereof consists of 100,000 shares of common stock, no par value per share,
of which 50,000 shares are duly issued and outstanding, fully paid and
nonassessable. All such shares of common stock are owned by TTA. There are
outstanding no options, convertible securities, warrants or other rights to
purchase or acquire capital stock of Newco and there is no commitment of TTA or
Newco to issue any of the same.
4. REPRESENTATIONS AND WARRANTIES OF TTA. The TTA Disclosure Schedules'
shall mean all of the disclosure schedules required by this Agreement, dated as
of the date hereof, which have been delivered to Arcada. TTA hereby represents
and warrants to Arcada as follows:
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4.1 ORGANIZATION, POWER, GOOD STANDING, ETC.
(a) TTA is a corporation duly organized, validly existing and in good
standing under the laws of the State of California. TTA has all the requisite
corporate power and authority to own, lease and operate all of its properties
and assets and to carry on its business as currently conducted. TTA is duly
licensed or qualified to do business and is in good standing in each
jurisdiction in which the nature of the business conducted by it makes such
licensing or qualification necessary and where the failure to be so qualified
would, individually or in the aggregate, have a Material Adverse Effect on TTA.
TTA owns all of the outstanding capital stock of Newco. TTA has heretofore
delivered or made available to Arcada true and correct copies of its Articles of
Incorporation (the "Articles") and its bylaws as in effect on the date hereof.
As used in this Agreement, the term Material Adverse Effect' with respect to a
party shall mean any change or effect that is reasonably likely to be materially
adverse to the business, operations, properties, condition (financial or
otherwise), assets or liabilities of such party and such party's subsidiaries
taken as a whole.
(b) Except for Newco and GetNet International, Inc. ("GetNet"), there
is no firm, corporation, partnership, joint venture or similar organization
which is consolidated with TTA for financial reporting purposes or any
corporation a majority of the outstanding capital stock of which is owned by
TTA. All of the issued and outstanding capital stock of GetNet is owned by TTA.
GetNet is a corporation duly organized, validly existing and in good standing
under the laws of the State of Arizona GetNet has all requisite corporate power
and authority to carry on its business as currently conducted. GetNet is duly
licensed or qualified to do business and is in good standing in each
jurisdiction in which the nature of the business conducted by it makes such
licensing or qualification necessary and where the failure to be so qualified
would have a Material Adverse Effect on TTA. Disclosure Schedule 4.l(b)
correctly sets forth a list of each firm, corporation, partnership, joint
venture or similar organization in which TTA has a direct or indirect
controlling, or 10 percent or greater, equity interest.
(c) The minute books of TTA and its subsidiaries contain materially
complete and accurate records of all meetings held and other corporate action
taken, since its date of organization, by such entities stockholders and Board
of Directors.
(d) Except for Newco and GetNet or as set forth on Disclosure
Schedule 4.1(d), TTA does not own (beneficially or otherwise) any capital stock
or other equity interest in any corporation or other entity.
(e) TTA has previously delivered or made available for inspection by,
Arcada, true and complete copies of all agreements to which it or any of its
subsidiaries is a party or by which it or any of its subsidiaries or any of
their respective assets may be bound, (i) which relate to any ownership interest
by TTA or any of its subsidiaries of an equity interest in any partnership,
joint venture, or similar enterprise or (ii) pursuant to which TTA or any of its
subsidiaries may be required to transfer funds in respect of an equity interest
to, make an investment in, or guarantee or assume any debt, dividend or other
obligation of, any person or entity, partnership, joint venture or similar
enterprise.
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4.2 CAPITALIZATION.
(a) The authorized capital stock of TTA consists of (a) 100,000,000
shares of common stock, of which 3,318,300 shares are issued and outstanding,
and of which (i) 1,725,000 shares are reserved for issuance pursuant to
redeemable common stock purchase warrants issued by TTA in May 1996 pursuant to
a Warrant Agreement dated May 31, 1996 between TTA and American Securities
Transfer, Inc. (the "Warrant Agreement"), (ii) 1,668,400 shares are reserved for
issuance pursuant to warrants, rights and options heretofore granted by TTA, and
(iii) 200,000 shares are reserved for issuance by the board of directors and/or
management of TTA and (b) 10,000,000 shares of preferred stock of which
9,850,000 shares are unclassified and 150,000 shares are designated as Series A
Convertible Preferred Stock. No shares of preferred stock are outstanding.
(b) Except as disclosed on Disclosure Schedule 4.2(b), TTA has not in
the past two years repurchased or retired any shares of its capital stock.
(c) All of the issued and outstanding shares of TTA Common Stock have
been duly authorized, validly issued, and are fully paid and non-assessable,
with no personal liability attaching to the ownership thereof.
(d) Disclosure Schedule 4.2 sets forth a list of all individuals who
hold stock options, the number of shares for which options have been granted to
such individuals and the exercise price for each option. Except as set forth in
Disclosure Schedule 4.2, TTA is not bound by any outstanding subscriptions,
options, warrants, calls, commitments or agreements of any character calling for
the transfer, purchase, or issuance of any shares of its capital stock or any
securities representing the right to purchase or otherwise receive any shares of
its capital stock or any securities convertible into or representing the right
to purchase or subscribe for any such shares, and there are no agreements or
understandings to which TTA is a party with respect to voting any such shares.
(e) Except as set forth in Section 4.2(a) above, there are no
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the transfer, purchase, or issuance of any shares
of its capital stock or any securities representing the right to purchase or
otherwise receive any shares of its capital stock or any securities convertible
into or representing the right to purchase or subscribe for any such shares, and
there are no agreements or understandings to which TTA is a party with respect
to voting any such shares.
(f) The authorized capital stock of GetNet as of the date hereof
consists of 10,000,000 shares of common stock, no par value per share, of which
5,566,400 shares are duly issued and outstanding, fully paid and nonassessable.
All such shares of common stock are owned by TTA. There are outstanding no
options, convertible securities, warrants or other rights to purchase or acquire
capital stock of GetNet and there is no commitment of TTA or GetNet to issue any
of the same.
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(g) The common stock of TTA to be issued in the Merger will have been
duly authorized and, when issued in accordance with the Plan of Merger, (i) will
be validly authorized and issued and fully paid and nonassessable and no
stockholder of TTA will have any preemptive rights thereto and (ii) will be
registered under the Securities Act of 1933 ,as amended, and the rules and
regulations promulgated thereunder (the "1933 Act") and listed for trading on a
national securities exchange of the Nasdaq Stock Market.
4.3 REPORTS.
(a) TTA has previously delivered or made available to Arcada an
accurate and complete copy of each (a) report delivered by TTA to its
stockholders since its inception and (b) other communications (other than
general advertising materials) mailed by TTA to its stockholders since its
inception and no such report or communication, as of its date, contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
4.4 AUTHORITY. TTA has requisite corporate power and authority to
execute and deliver this Agreement and the Plan of Merger and, subject to the
TTA Stockholder Approval and applicable regulatory approvals, to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Plan of Merger and the consummation of the transactions
contemplated hereby and thereby have been duly and validly approved by the Board
of Directors of TTA. This Agreement has been duly and validly executed and
delivered by TTA. Assuming the due authorization, execution and delivery hereof
by the other parties hereto, this Agreement constitutes the valid and binding
obligation of TTA, enforceable against it in accordance with its respective
terms.
4.5 NO VIOLATION. Neither the execution and delivery of this
Agreement or the Plan of Merger nor the consummation by TTA of the transactions
contemplated hereby and thereby, nor compliance by TTA with any of the terms or
provisions hereof or thereof, including, without limitation, TTA's
reincorporation in the state of Washington will (i) assuming TTA Stockholder
Approval, violate any provision of the Articles or bylaws of TTA, (ii) assuming
the consents and approvals referred to in Section 7.1 hereof are duly obtained,
violate any statute, code, ordinance, rule, regulation, judgment, order, writ,
decree or injunction applicable to TTA or any of its subsidiaries or any of
their respective properties or assets, or (iii) except as set forth on
Disclosure Schedule 4.5, violate, conflict with, result in a breach of any
provisions of, constitute a default (or an event which, with notice or lapse of
time, or both, would constitute a default) under, result in the termination of,
accelerate the performance required by, or result in the creation of any lien,
security interest, charge or other encumbrance upon any of the properties or
assets of TTA or any of its subsidiaries under any of the terms, conditions or
provisions of any note, bond, mortgage indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which TTA or any of its
subsidiaries is a party, or by which it or any of TTA's or its subsidiaries'
respective properties or assets may be bound or affected, except with respect to
(iii) above, for such violations, conflicts, breaches, defaults, termination's,
accelerations and encumbrances which would not in the aggregate have a Material
Adverse Effect on TTA.
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4.6 CONSENTS AND APPROVALS. Except for (i) consents and approvals of
or filings, deliveries or registrations with the SEC or other applicable
governmental authorities, (ii) the approval of the stockholders of TTA and (iii)
the consents, approvals, filings or registrations set forth on Disclosure
Schedule 4.7, no consents or approvals of or filings or registrations with any
third party or public body or authority, except for consents, approvals, filings
or registrations where the failure to obtain such consents or approvals or to
make such filings or registrations would not prevent or delay the Merger and
would not in the aggregate have a Material Adverse Effect on TTA, are necessary
in connection with the execution and delivery by TTA of this Agreement and the
consummation of the transactions contemplated hereby.
4.7 FINANCIAL STATEMENTS.
(a) TTA has previously delivered or made available to Arcada copies
of (i) the audited consolidated financial statements and unaudited interim
financial statements of TTA and any subsidiary of TTA included in TTA's annual
report on Form 10-KSB for TTA's fiscal year ended May 31, 1996 (the "May 1996
Financial Statements") and TTA's quarterly report on Form 10-QSB for TTA's
quarter ended August 30, 1996 (the "August 1996 Financial Statements") The TTA
Financial Statements referred to herein (including the related notes) have been
prepared in accordance with generally accepted accounting principals ("GAAP")
consistently followed throughout the periods covered thereby, and fairly and
accurately present the consolidated financial position of TTA as of the
respective dates set forth therein and the results of operations for the periods
included therein, except that interim unaudited financial statements are subject
to normal year-end adjustments.
(b) Each of the TTA Financial Statements referred to in Section
4.8(a) (including the related notes) has been prepared in accordance with GAAP
consistently applied during the periods involved (except as indicated in the
notes thereto). The books and records of TTA have been, and are being,
maintained in accordance with applicable legal and accounting requirements and
reflect only actual transactions.
4.8 BROKERAGE. Except for commissions owed by TTA to Robert C.
Vaughn, there are no claims for investment banking fees, brokerage commissions,
finder's fees or similar compensation arising out of or due to any act of TTA in
connection with the transactions contemplated by this Agreement.
4.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. As of the date hereof,
except as disclosed in Disclosure Schedule 4.9, there has not been any material
adverse change in the business, operations, properties, assets or financial
condition of TTA or any of its subsidiaries from that described in the TTA May
1996 Financial Statements or the TTA August 1996 Financial Statements, and, to
the best of TTA's knowledge, no fact or condition existed as of the date hereof
that TTA had reason to believe would cause such a material adverse change after
the date hereof.
4.10 LITIGATION, ETC. As of the date hereof, except as disclosed on
Disclosure Schedule 4.10, there were no actions, suits, claims, inquiries,
proceedings or, to the knowledge of TTA, investigations before any court,
commission, bureau, regulatory, administrative or
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governmental agency, arbitrator, body or authority pending or, to the knowledge
of TTA, threatened against TTA or any of its subsidiaries which would reasonably
be expected to result in any liabilities, including defense costs, in excess of
$5,000 in the aggregate. Except as disclosed on Disclosure Schedule 4.10,
neither TTA nor any of its subsidiaries is subject to any order, judgment or
decree and neither TTA nor any of its subsidiaries is in default with respect to
any such order, judgment or decree.
4.11 TAXES AND TAX RETURNS.
(a) The amounts set up as provisions for taxes on the TTA May 1996
Financial Statements are sufficient for all material accrued and unpaid federal,
state, county and local taxes, interest and penalties of TTA and each of its
subsidiaries, whether or not disputed, for the period ended May 31, 1996 and for
all fiscal periods prior thereto. Neither TTA nor any of its subsidiaries has
entered into any agreements or understandings with the Internal Revenue Service
or other applicable taxing authorities to extend or waive any statute of
limitations or time for assessment. Complete and correct copies of the income
tax returns of TTA and its subsidiaries for the three fiscal years ending May
31, 1996, as filed with the Internal Revenue Service and all state, county and
local taxing authorities, together with all related correspondence and notices,
have previously been or will be delivered and made available to Arcada when
filed in November 1996.
(b) Except as set forth on Schedule 4.11(b), TTA and each of its
subsidiaries has timely and correctly filed all federal, state, county and local
tax and other returns and reports (collectively, "Returns") required by
applicable law to be filed (including, without limitation, estimated tax
returns, income tax returns, excise tax returns, sales tax returns, use tax
returns, property tax returns, franchise tax returns, information returns and
withholding, employment and payroll tax returns), except to the extent that the
failure to timely or correctly file such Returns does not result in aggregate
penalties or assessments of more than $25,000, and has paid all taxes, levies,
license and registration fees, charges or withholdings of any nature whatsoever
shown by such Returns to be owed, or which are otherwise due and payable
(hereinafter called "Taxes"), and to the extent any material liabilities for
Taxes have not been fully discharged, full and complete reserves have been
established on the TTA May 1996 Financial Statements. Neither TTA nor any of
its subsidiaries is in default in the payment of any Taxes due or payable or any
assessments received in respect thereof except for Taxes which are being
contested in good faith. No additional assessments of Taxes are known to TTA to
be proposed, pending or threatened, other than Taxes for periods for which
returns are not yet filed.
(c) Neither TTA nor any of its subsidiaries has filed a consent to
the application of Section 341(f) of the Internal Revenue Code of 1986, as
amended.
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4.12 EMPLOYEES; EMPLOYEE BENEFIT PLANS.
(a) Except as set forth on Disclosure Schedule 4.12(a), as of the
date hereof, neither TTA nor any of its subsidiaries is a party to or bound by
any contract, arrangement or understanding (whether written or oral) with
respect to the employment or compensation of any officers, employees or
consultants and except as provided herein, and under those Benefit Plans (as
defined below) set forth on Disclosure Schedule 4.12(a), consummation of the
transactions contemplated by this Agreement will not (either alone or upon the
occurrence of any additional acts or events) result in any payment (whether of
severance pay or otherwise) becoming due from TTA or any of its subsidiaries to
any officer or employee thereof. TTA has previously delivered or made available
to Arcada true and complete copies of all employment, consulting and deferred
compensation agreements that are in writing, to which TTA or any of its
subsidiaries is a party.
(b) Except as set forth on Disclosure Schedule 4.12(b), as of the
date hereof, no officer or employee of TTA or any of its subsidiaries is
receiving aggregate remuneration bonus, salary and commissions) at a rate which,
if annualized, would exceed $40,000 in 1996.
(c) Except as disclosed on Disclosure Schedule 4.12(c), as of the
date hereof, there are not, and have not been at any time in the past three
years, any actions, suits, claims or proceedings before any court (which have
been served on TTA or any of its subsidiaries), commission, bureau, regulatory,
administrative or governmental agency, arbitrator, body or authority pending or,
to the best of TTA's knowledge, threatened by any employees, former employees or
other persons relating to the employment practices or activities of TTA or its
subsidiaries (except for threatened actions which have subsequently been
resolved). Neither TTA nor any of its subsidiaries is a party to any collective
bargaining agreement, and no union organization efforts are pending or, to the
best of TTA's knowledge, threatened nor have any occurred during the last three
years.
(d) TTA has made available to Arcada true and complete copies of all
personnel codes, practices, procedures, policies, manuals, affirmative action
programs and similar materials.
(e) With respect to all employee benefit plans, TTA represents and
warrants as follows:
(i) All employee benefit plans, as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
any other pension, bonus, deferred compensation, stock bonus, stock purchase,
post-retirement medical, hospitalization, health and other employee benefit
plan, program or arrangement, whether formal or informal, under which TTA or any
of its subsidiaries has any obligation or liability, or under which any employee
or former employee has any rights to benefits or any cafeteria plans,' as
described in Section 125 of the Internal Revenue Code of 1986, as amended (the
"Code") (together, the "Benefit Plans") are set forth on Disclosure Schedule
4.12(e)(i). Except as set forth on Disclosure Schedule 4.12(e)(i), none of the
Benefit Plans is subject to Title IV of ERISA, is a multiemployer plan,' as
such term is defined in Section 3(37) and 4001(a)(3) of
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ERISA and Section 414(f) of the Code, or is subject to the funding requirements
of Section 412 of the Code or Title I, Subtitle B, Part 3 of ERISA.
(ii) In all material respects, except as discussed on Disclosure
Schedule 4.12(e)(ii), the terms of the Benefit Plans are, and the Benefit Plans
have been administered, in accordance with the requirements of ERISA, the Code,
applicable law and the respective plan documents. Except as disclosed on
Disclosure Schedule 4.12(e)(ii), none of the Benefit Plans is under audit or is
the subject of an investigation by the Internal Revenue Service, the U.S.
Department of Labor or any other federal or state governmental agency. Except
as disclosed on Disclosure Schedule 4.12(e)(ii), all material reports and
information required to be filed with, or provided to, the United States
Department of Labor, Internal Revenue Service, the Pension Benefit Guaranty
Corporation (the "PBGC") and plan participants and beneficiaries with respect to
each Benefit Plan have been timely filed or provided. With respect to each
Benefit Plan for which an annual report has been filed, no material change has
occurred with respect to the matters covered by the most recent annual report
since the date thereof.
(iii) TTA is not aware of any facts regarding any Benefit Plan
which is an employee pension benefit plan' as defined in Section 3(2) of ERISA
(collectively, the "Employee Pension Benefit Plans") that would present a
significant risk that any Employee Pension Benefit Plan would not be determined
by the appropriate District Director of the Internal Revenue Service to be
'qualified' within the meaning of Section 401(a) of the Code, or with respect to
which any trust maintained pursuant thereto is not exempt from federal income
taxation pursuant to Section 501 of the Code, or with respect to which a
favorable determination letter could not be issued by the Internal Revenue
Service with respect to each such Employee Pension Benefit Plan.
(iv) Prior to the Closing, TTA shall deliver or make available
to Arcada complete and correct copies (if any) of (w) the most recent Internal
Revenue Service determination letter relating to each Employee Pension Benefit
Plan intended to be tax qualified under Section 401(a) and 501(a) of the Code,
(x) the most recent annual report (Form 5500 Series) and accompanying schedules
of each Benefit Plan, filed with the Internal Revenue Service or an explanation
of why such annual report is not required, (y) the most current summary plan
description for each Benefit Plan, and (z) the most recent audited financial
+statements of each Benefit Plan.
(v) With respect to each Benefit Plan, all contributions,
premiums or other payments due or required to be made to such plans as of the
Effective Time have been or will be made or accrued prior to the Effective Time.
(vi) To the best of TTA's knowledge, there are not now, nor have
there been, any prohibited transactions', as such term is defined in Section
4975 of the Code or Section 406 of ERISA, involving TTA or any of its
subsidiaries, or any officer, director or employee of TTA or any of its
subsidiaries, with respect to the Benefit Plans that could subject TTA or any
other party-in-interest to the penalty or tax imposed under Section 502(i) of
ERISA and Section 4975 of the Code.
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(vii) As of the date hereof, no claim, lawsuit, arbitration or
other action has been instituted, asserted (and no such lawsuit has been served
on TTA or any of its subsidiaries) or, to the best of TTA's knowledge,
threatened by or on behalf of such Benefit Plan or by any employee alleging a
breach or breaches of fiduciary duty or violations of other applicable state or
federal law with respect to such Benefit Plans, which could result in liability
on the part of TTA or any of its subsidiaries or a Benefit Plan under ERISA or
any other law, nor is there any known basis for successful prosecution of such a
claim, and Arcada will be notified promptly in writing of any such threatened or
pending claim arising between the date hereof and the Closing.
(viii) Except as may be required by the Consolidated Omnibus
Budget and Reconciliation Act of 1985, as amended ("COBRA"), no Benefit Plan
which is an employee welfare benefit plan (within the meaning of Section 3(1) of
ERISA) provides for continuing benefits or coverage for any participant or
beneficiary of a participant after such participant's termination of employment
nor does TTA or any of its subsidiaries have any current or projected liability
under any such plans.
(ix) Neither TTA nor any of its subsidiaries has maintained or
contributed to, and does not currently maintain or contribute to, any severance
pay plan. All payments (other than regular wages and vacation pay) made to
employees of TTA or any of its subsidiaries coincident with or in connection
with termination of employment since January 1, 1994 are disclosed on Disclosure
Schedule 4.12(e)(ix).
(x) No individual will accrue or receive any additional
benefits, service, or accelerated rights to payment or vesting of benefits under
any Benefit Plan, or otherwise obtain rights to any parachute payment,' as
defined in Section 280G(b)(2) of the Code, as a result of the transactions
contemplated by this Agreement.
(xi) TTA and each of its subsidiaries has complied in all
material respects with all of the requirements of COBRA.
4.13 TTA INFORMATION. The information relating to TTA and each of its
subsidiaries to be contained in the Proxy Statement/Prospectus contemplated by
Section l(e) hereof will not, at the time it is filed with the applicable
governmental authorities, as of the date thereof, or at the date actions of TTA
stockholders are taken with respect to the transactions contemplated therein,
contain any untrue statement of a material fact or omit to state a material fact
necessary to make such statements, in light of the circumstances under which
such statements were made, not misleading.
4.14 COMPLIANCE WITH APPLICABLE LAW.
(a) Except as set forth on Disclosure Schedule 4.14(a), TTA and each
of its subsidiaries holds all licenses, certificates, franchises, permits and
other governmental authorizations ("Permits") necessary for the lawful conduct
of its respective businesses and such Permits are in full force and effect, and
TTA and each of its subsidiaries is in all respects
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complying therewith, except where the failure to possess or comply with such
Permits would not have a Material Adverse Effect on TTA.
(b) Except as set forth on Disclosure Schedule 4.14(b), TTA and each
of its subsidiaries is and for the past three years has been in compliance with
all foreign, federal, state and local laws, statutes, ordinances, rules,
regulations and orders applicable to the operation, conduct or ownership of its
business or properties except for any noncompliance which is not reasonably
likely to have in the aggregate a Material Adverse Effect on TTA.
4.15 CONTRACTS AND AGREEMENTS.
As of the date hereof, except as disclosed in Disclosure Schedule
4.15, (i) neither TTA nor any of its subsidiaries is a party to or bound by any
commitment, contract, agreement or other instrument which involves or could
involve aggregate future payments by TTA or any of its subsidiaries of more than
$25,000, (ii) neither TTA nor any of its subsidiaries is a party to nor was it
bound by any commitment, contract, agreement or other instrument which is
material to the business, operations, properties, assets or financial condition
of TTA and (iii) no commitment, contract, agreement or other instrument other
than TTA's and its subsidiaries' respective charter documents, to which TTA or
any of its subsidiaries is a party or by which TTA or any of its subsidiaries is
bound, limits the freedom of TTA or any of its subsidiaries to compete in any
line of business or with any person.
4.16 AFFILIATE TRANSACTIONS.
(a) Except as disclosed in Disclosure Schedule 4.16, and except as
specifically contemplated by this Agreement, since May 31, 1996, neither TTA nor
any of its subsidiaries has engaged in, or is not currently obligated to engage
in (whether in writing or orally), any transaction with any Affiliated Person
(as defined below) involving aggregate payments by or to TTA or any of its
subsidiaries of $30,000 or more during any consecutive 12 month period.
(b) For purposes of this Section 4.16, Affiliated Person' means:
(i) a director, executive officer or Controlling Person (as
defined below) of TTA or any of its subsidiaries
(ii) a spouse of a director, executive officer or Controlling
Person of TTA or any of its subsidiaries;
(iii) a member of the immediate family of a director,
executive officer, or Controlling Person of TTA or any of its subsidiaries who
has the same home as such person;
(iv) any corporation or organization (other than TTA or any of
its subsidiaries) of which a director, executive officer or Controlling Person
of TTA or any of its subsidiaries (w) is a chief executive officer, chief
financial officer, or a person performing similar functions; (x) is a general
partner; (y) is a limited partner who, directly or indirectly, either alone or
with his spouse and the members of his immediate family who are also Affiliated
Persons, owns an interest of five percent or more in the partnership (based on
the value of his contribution) or who, directly or indirectly through other
directors, executive officers and Controlling Persons of TTA or any of its
subsidiaries and their spouses and their immediate family members who are also
Affiliated Persons,
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owns an interest in 25 percent or more of the partnership; or (z) directly or
indirectly either alone or with his spouse and the members of his immediate
family who are also Affiliated Persons, owns or controls ten percent or more of
any class of equity securities, or owns or controls, with other directors,
executive officers, and Controlling Persons of TTA or any of its subsidiaries
and their spouses and their immediate family members who are also Affiliated
Persons, 25 percent or more of any class of equity securities;
(v) any trust or estate in which a director, executive officer,
or Controlling Person of TTA or any of its subsidiaries or the spouse of such
person has a substantial beneficial interest or as to which such person or his
spouse serves as trustee or in a similar fiduciary capacity.
(c) For purposes of this Section 4.16 Controlling Person' means any
person or entity which, either directly or indirectly, or acting in concert with
one or more other persons or entities owns, controls or holds with power to
vote, or holds proxies representing ten percent or more of the outstanding TTA
Common Stock or of any subsidiary of TTA.
(d) For purposes of this Section 4.16, the term director' means any
director, trustee, or other person performing similar functions with respect to
any organization whether incorporated or unincorporated.
(e) For purposes of this Section 4.16, the term executive officer'
means the president, any executive vice president, any senior vice president,
the secretary, the treasurer, the comptroller, and any other person performing
similar functions with respect to any organization whether incorporated or
unincorporated.
4.17 DISCLOSURE. To the knowledge of TTA, no representation or
warranty of TTA contained in this Agreement, and no statement contained in the
Disclosure Schedules delivered by TTA hereunder, contains any untrue statement
of a material fact or omits to state a material fact necessary in order to make
a statement herein or therein, in light of the circumstances under which it was
made, not misleading.
4.18 TITLE TO PROPERTY.
(a) REAL PROPERTY. Disclosure Schedule 4.18(a) contains a true and
correct description of all interests in real property (other than real property
security interests received in the ordinary course of business), whether owned,
leased or otherwise claimed, including a list of all leases of real property, in
which TTA or any of its subsidiaries has or claims an interest as of the date
hereof and any guarantees of any such leases by TTA or any of its subsidiaries.
True and complete copies of such leases have previously been delivered or made
available to Arcada, together with all amendments, modifications, agreements or
other writings related thereto. Except as disclosed on Disclosure Schedule
4.18(a), each such lease is legal, valid and binding as
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between TTA or its subsidiaries and the other party or parties thereto, and the
occupant is a tenant or possessor in good standing thereunder, free of any
default or breach whatsoever and quietly enjoys the premises provided for
therein. Except as disclosed on Disclosure Schedule 4.18(a), TTA and each of
its subsidiaries has good, valid and marketable title to all real property owned
by it on the date hereof, free and clear of all mortgages, liens, pledges,
charges or encumbrances of any nature whatsoever, except liens for current taxes
not yet due and payable, and such encumbrances and imperfections of title, if
any, as do not materially detract from the value of the properties and do not
materially interfere with the present or proposed use of such properties or
otherwise materially impair such operations. All real property and fixtures
material to the business, operations or financial condition of TTA or any of its
subsidiaries are in substantially good condition and repair.
(b) ENVIRONMENTAL MATTERS. Except as set forth on Disclosure
Schedule 4.18(b), to the knowledge of TTA, the real property owned or leased by
TTA or any of its subsidiaries on the date hereof does not contain any
underground storage tanks, asbestos, ureaformaldehyde, uncontained
polychlorinated biphenyls, or, except for materials which are ordinarily used in
office buildings and office equipment such as janitorial supplies and do not
give rise to financial liability therefor under the hereafter defined
Environmental Laws, releases of hazardous substances as such terms may be
defined by all applicable federal, state or local environmental protection laws
and regulations ("Environmental Laws"). As of the date hereof (i) no part of
any such real property has been listed, or to the knowledge of TTA, proposed for
listing on the National Priorities List pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") or on a
registry or inventory of inactive hazardous waste sites maintained by any state,
and, (ii) except as set forth on Disclosure Schedule 4.18(b), no notices have
been received alleging that TTA or any of its subsidiaries was a potentially
responsible person under CERCLA or any similar statute, rule or regulation. TTA
knows of no violation of law, regulation, ordinance (including, without
limitation, laws, regulations and ordinances with respect to hazardous waste,
zoning, environmental, city planning or other similar matters) relating to its
or any of its subsidiaries' respective properties, which violations could have
in the aggregate a Materially Adverse Effect on TTA.
(c) PERSONAL PROPERTY. Disclosure Schedule 4.18(c) contains a true
and correct list of (i) each item of machinery, equipment, or furniture,
including without limitation computers and vehicles, of TTA and each of its
subsidiaries, included on the TTA May 1996 Financial Statements at a carrying
value of, or, if acquired after May 31, 1996, for a purchase price of, more than
$50,000, (ii) each lease or other agreement under which any such item of
personal property is leased, rented, held or operated where the current fair
market value of such item is more than $25,000 and (iii) all trademarks, trade
names or service marks currently used, owned, or registered for use by TTA or
any of its subsidiaries. Except as disclosed on Schedule 4,18(c), TTA and each
of its subsidiaries has good, valid and marketable title to all personal
property owned by it, free and clear of all liens, pledges, charges or
encumbrances of any nature whatsoever.
4.19 INSURANCE. Disclosure Schedule 4.19 contains a true and complete
list and a brief description (including name of insurer, agent, coverage and
expiration date) of all insurance policies in force on the date hereof with
respect to the business and assets of TTA and
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each of its subsidiaries. TTA and each of its subsidiaries is in compliance
with all of the material provisions of its insurance policies and are not in
default under any of the terms thereof. Each such policy is outstanding and in
full force and effect and, except as set forth on Disclosure Schedule 4.19, TTA
or one of its subsidiaries is the sole beneficiary of such policies. Al
premiums and other payments due under any such policy have been paid. TTA has
previously delivered to, or made available for inspection by, Arcada, each
insurance policy to which TTA or any of its subsidiaries is a party.
4.20 POWERS OF ATTORNEY. Neither TTA nor any of its subsidiaries has
any powers of attorney outstanding other than those in the ordinary course of
business with respect to routine matters.
4.21 SUFFICIENT RESOURCES. TTA has and will have available at the
Effective Time sufficient authorized but unissued shares of TTA Common Stock, to
enable it lawfully to satisfy its payment obligations pursuant to this
Agreement. TTA has and will have sufficient management and financial resources
to obtain the required regulatory approvals for the Merger. On the date of this
Agreement, there is no pending or, to the knowledge of TTA, threatened legal or
governmental proceeding, against TTA or any subsidiary or affiliate of TTA which
would affect TTA's or Newco's ability to obtain any of the required regulatory
approvals or satisfy any of the other conditions required to be satisfied in
order to consummate the transactions contemplated by this Agreement. TTA will
promptly notify Arcada if any of the representations contained in this Section
4.21 cease to be true and correct.
4.22 SEC FILINGS. (a) TTA has delivered to Arcada its annual report
on Form 10-KSB for TTA's fiscal year ended May 31, 1996 and TTA's quarterly
report of 10-QSB for TTA's first quarter ended August 31, 1996, and all of
Purchaser's other reports, statements ,schedules and registration statements
filed with the Securities and Exchange Commission (the "SEC") since its
inception, (b) as of its filing date, each such report or statement filed
pursuant to the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder (the "1934 Act"), complied as to form in all
material respects with the 1934 Act and did not contain any untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading and (c) each such registration statement, as amended
or supplemented, if applicable, filed pursuant to the 1933 Act as of the date
such statement or amendment became effective complied as to form in all material
respects with the 1933 Act and did not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
4.23 BANK ACCOUNTS, ETC. Set forth on SCHEDULE 4.23 hereto is a true
and complete list of all bank accounts, safe deposit boxes and lock boxes of TTA
and each of its subsidiaries, including, with respect to each such account and
lock box: (a) identification of all authorized signatories, (b) identification
of the business purpose of such account or lock box, including identification of
any accounts or lock boxes representing escrow funds or otherwise subject to
restriction; and (c) identification of the amount on deposit as of September 30,
1996.
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5. REPRESENTATIONS OF ARCADA: The 'Arcada Disclosure Schedules' shall
mean all of the disclosure schedules required by this Agreement, dated as of the
date hereof, which have been delivered to Arcada. Arcada hereby represents and
warrants to each of TTA and Newco as follows:
5.1 ORGANIZATION, POWER, GOOD STANDING, ETC.
(a) Arcada is a corporation duly organized, validly existing and in
good standing under the laws of the State of Washington. Arcada has all the
requisite corporate power and authority to own, lease and operate all of its
properties and assets and to carry on its business as currently conducted.
Arcada is duly licensed or qualified to do business and is in good standing in
each jurisdiction in which the nature of the business conducted by it makes such
licensing or qualification necessary and where the failure to be so qualified
would, individually or in the aggregate, have a Material Adverse Effect on
Arcada. Arcada has heretofore delivered or made available to Arcada true and
correct copies of its Articles of Incorporation (the "Articles") and its bylaws
as in effect on the date hereof.
(b) There is no firm, corporation, partnership, joint venture or
similar organization which is consolidated with Arcada for financial reporting
purposes or any corporation a majority of the outstanding capital stock of which
is owned by Arcada. Disclosure Schedule 5.l(b) correctly sets forth a list of
each firm, corporation, partnership, joint venture or similar organization in
which Arcada has a direct or indirect controlling, or 10 percent or greater,
equity interest.
(c) The minute books of Arcada and its subsidiaries contain
materially complete and accurate records of all meetings held and other
corporate action taken, since its date of organization, by its stockholders and
Board of Directors.
(d) Except as set forth on Disclosure Schedule 5.1(d), Arcada does
not own (beneficially or otherwise) any capital stock or other equity interest
in any corporation or other entity.
(e) Arcada has previously delivered or made available for inspection
by, TTA, true and complete copies of all agreements to which it is a party or by
which its assets may be bound, (i) which relate to any ownership interest by
Arcada of an equity interest in any partnership, joint venture, or similar
enterprise or (ii) pursuant to which Arcada may be required to transfer funds in
respect of an equity interest to, make an investment in, or guarantee or assume
any debt, dividend or other obligation of, any person or entity, partnership,
joint venture or similar enterprise.
5.2 CAPITALIZATION.
(a) The authorized capital stock of Arcada consists of 50,000 shares
of common stock, all of which shares shall be issued and outstanding as of the
Effective Date.
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(b) Except as set forth on Schedule 5.2(b), Arcada has not in the
past two years repurchased or retired any shares of its capital stock.
(c) All of the issued and outstanding shares of Arcada Common Stock
have been duly authorized, validly issued, and are fully paid and
non-assessable, with no personal liability attaching to the ownership thereof.
(d) Arcada is not bound by any outstanding subscriptions, options,
warrants, calls, commitments or agreements of any character calling for the
transfer, purchase, or issuance of any shares of its capital stock or any
securities representing the right to purchase or otherwise receive any shares of
its capital stock or any securities convertible into or representing the right
to purchase or subscribe for any such shares, and there are no agreements or
understandings to which Arcada is a party with respect to voting any such
shares.
(e) There are no outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the transfer, purchase,
or issuance of any shares of its capital stock or any securities representing
the right to purchase or otherwise receive any shares of its capital stock or
any securities convertible into or representing the right to purchase or
subscribe for any such shares, and there are no agreements or understandings to
which Arcada is a party with respect to voting any such shares.
5.3 REPORTS.
(a) Arcada has previously delivered or made available to TTA an
accurate and complete copy of each (a) report delivered by Arcada to its
stockholders since January, 1993, and (b) other communications (other than
general advertising materials) mailed by Arcada to its stockholders since
January, 1993 and no such report or communication, as of its date, contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
5.4 AUTHORITY. Arcada has requisite corporate power and authority to
execute and deliver this Agreement and the Plan of Merger and, subject to the
Arcada Stockholder Approval and applicable regulatory approvals, to consummate
the transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Plan of Merger and the consummation of the transactions
contemplated hereby and thereby have been duly and validly approved by the Board
of Directors of Arcada. This Agreement has been duly and validly executed and
delivered by Arcada. Assuming the due authorization, execution and delivery
hereof by the other parties hereto, this Agreement constitutes the valid and
binding obligation of Arcada, enforceable against it in accordance with its
respective terms.
5.5 NO VIOLATION. Neither the execution and delivery of this
Agreement or the Plan of Merger nor the consummation by Arcada of the
transactions contemplated hereby and thereby, nor compliance by Arcada with any
of the terms or provisions hereof or thereof, will (i) assuming Arcada
Stockholder Approval, violate any provision of the Articles or bylaws of Arcada,
(ii) assuming the consents and approvals referred to in Section 7.1 hereof are
duly
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obtained, violate any statute, code, ordinance, rule, regulation, judgment,
order, writ, decree or injunction applicable to Arcada or any of its properties
or assets, or (iii) except as set forth on Disclosure Schedule 5.5, violate,
conflict with, result in a breach of any provisions of, constitute a default (or
an event which, with notice or lapse of time, or both, would constitute a
default) under, result in the termination of, accelerate the performance
required by, or result in the creation of any lien, security interest, charge or
other encumbrance upon any of the properties or assets of Arcada under any of
the terms, conditions or provisions of any note, bond, mortgage indenture, deed
of trust, license, lease, agreement or other instrument or obligation to which
Arcada is a party, or by which its properties or assets may be bound or
affected, except with respect to (iii) above, for such violations, conflicts,
breaches, defaults, termination's, accelerations and encumbrances which would
not in the aggregate have a Material Adverse Effect on Arcada.
5.6 CONSENTS AND APPROVALS. Except for (i) consents and approvals of
or filings, deliveries or registrations with the SEC or other applicable
governmental authorities, (ii) the approval of the stockholders of Arcada and
(iii) the consents, approvals, filings or registrations set forth on Disclosure
Schedule 5.6, no consents or approvals of or filings or registrations with any
third party or public body or authority, except for consents, approvals, filings
or registrations where the failure to obtain such consents or approvals or to
make such filings or registrations would not prevent or delay the Merger and
would not in the aggregate have a Material Adverse Effect on Arcada, are
necessary in connection with the execution and delivery by Arcada of this
Agreement and the consummation of the transactions contemplated hereby.
5.7 FINANCIAL STATEMENTS.
(a) Arcada has previously delivered or made available to TTA copies
of (i) the reviewed combined financial statements and unaudited interim
financial statements of Arcada and any subsidiary of Arcada for fiscal year
ended December 31, 1995 (the "December 1995 Financial Statements") and Arcada's
quarterly financial statements for the six months ended June 30, 1996 (the "June
1996 Financial Statements") The Arcada Financial Statements referred to herein
(including the related notes) have been prepared in accordance with GAAP
consistently followed throughout the periods covered thereby, and fairly and
accurately present the consolidated financial position of Arcada as of the
respective dates set forth therein and the results of operations for the periods
included therein, except that interim unaudited financial statements are subject
to normal year-end adjustments.
(b) Each of the Arcada Financial Statements referred to in Section
5.8(a) (including the related notes) has been prepared in accordance with GAAP
consistently applied during the periods involved (except as indicated in the
notes thereto). The books and records of Arcada have been, and are being,
maintained in accordance with applicable legal and accounting requirements and
reflect only actual transactions.
5.8 BROKERAGE. There are no claims for investment banking fees,
brokerage commissions, finder's fees or similar compensation arising out of or
due to any act of Arcada in connection with the transactions contemplated by
this Agreement.
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5.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. As of the date hereof,
except as disclosed in Disclosure Schedule 5.9, there has not been any material
adverse change in the business, operations, properties, assets or financial
condition of Arcada or any of its subsidiaries from that described in the Arcada
December 1995 Financial Statements or the Arcada June 1996 Financial Statements,
and, to the best of Arcada's knowledge, no fact or condition existed as of the
date hereof that Arcada had reason to believe would cause such a material
adverse change after the date hereof.
5.10 LITIGATION, ETC. As of the date hereof, except as disclosed on
Disclosure Schedule 5.10, there were no actions, suits, claims, inquiries,
proceedings or, to the knowledge of Arcada, investigations before any court,
commission, bureau, regulatory, administrative or governmental agency,
arbitrator, body or authority pending or, to the knowledge of Arcada, threatened
against Arcada which would reasonably be expected to result in any liabilities,
including defense costs, in excess of $5,000 in the aggregate. Except as
disclosed on Disclosure Schedule 5.10, Arcada is not subject to any order,
judgment or decree and Arcada is not in default with respect to any such order,
judgment or decree.
5.11 TAXES AND TAX RETURNS.
(a) The amounts set up as provisions for taxes on the Arcada December
1995 Financial Statements are sufficient for all material accrued and unpaid
federal, state, county and local taxes, interest and penalties of Arcada and
each of its subsidiaries, whether or not disputed, for the period ended December
31, 1995 and for all fiscal periods prior thereto. Arcada has not entered into
any agreements or understandings with the Internal Revenue Service or other
applicable taxing authorities to extend or waive any statute of limitations or
time for assessment. Complete and correct copies of the income tax returns of
Arcada for the three fiscal years ending December 31, 1995, as filed with the
Internal Revenue Service and all state, county and local taxing authorities,
together with all related correspondence and notices, have previously been
delivered or made available to Arcada.
(b) Arcada has timely and correctly filed all federal, state, county
and local tax and other returns and reports (collectively, "Returns") required
by applicable law to be filed (including, without limitation, estimated tax
returns, income tax returns, excise tax returns, sales tax returns, use tax
returns, property tax returns, franchise tax returns, information returns and
withholding, employment and payroll tax returns), except to the extent that the
failure to timely or correctly file such Returns does not result in aggregate
penalties or assessments of more than $25,000, and has paid all taxes, levies,
license and registration fees, charges or withholdings of any nature whatsoever
shown by such Returns to be owed, or which are otherwise due and payable
(hereinafter called "Taxes"), and to the extent any material liabilities for
Taxes have not been fully discharged, full and complete reserves have been
established on the Arcada December 1995 Financial Statements. Arcada is not in
default in the payment of any Taxes due or payable or any assessments received
in respect thereof except for Taxes which are being contested in good faith. No
additional assessments of Taxes are known to Arcada to be proposed, pending or
threatened, other than Taxes for periods for which returns are not yet filed.
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(c) Arcada has not filed a consent to the application of Section
341(f) of the Internal Revenue Code of 1986, as amended.
5.12 EMPLOYEES; EMPLOYEE BENEFIT PLANS.
(a) Except as set forth on Disclosure Schedule 5.12(a), as of the
date hereof, Arcada is not a party to or bound by any contract, arrangement or
understanding (whether written or oral) with respect to the employment or
compensation of any officers, employees or consultants and except as provided
herein, and under those Benefit Plans (as defined below) set forth on Disclosure
Schedule 5.12(a), consummation of the transactions contemplated by this
Agreement will not (either alone or upon the occurrence of any additional acts
or events) result in any payment (whether of severance pay or otherwise)
becoming due from Arcada to any officer or employee thereof. Arcada has
previously delivered or made available to Arcada true and complete copies of all
employment, consulting and deferred compensation agreements that are in writing,
to which Arcada is a party.
(b) Except as set forth on Disclosure Schedule 5.12(b), as of the
date hereof, no officer or employee of Arcada is receiving aggregate
remuneration bonus, salary and commissions) at a rate which, if annualized,
would exceed $40,000 in 1996.
(c) Except as disclosed on Disclosure Schedule 5.12(c), as of the
date hereof, there are not, and have not been at any time in the past three
years, any actions, suits, claims or proceedings before any court (which have
been served on Arcada), commission, bureau, regulatory, administrative or
governmental agency, arbitrator, body or authority pending or, to the best of
Arcada's knowledge, threatened by any employees, former employees or other
persons relating to the employment practices or activities of Arcada (except for
threatened actions which have subsequently been resolved). Arcada is not a
party to any collective bargaining agreement, and no union organization efforts
are pending or, to the best of Arcada's knowledge, threatened nor have any
occurred during the last three years.
(d) Arcada has made available to TTA true and complete copies of all
personnel codes, practices, procedures, policies, manuals, affirmative action
programs and similar materials.
(e) With respect to all employee benefit plans, Arcada represents and
warrants as follows:
(i) All employee benefit plans, as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
any other pension, bonus, deferred compensation, stock bonus, stock purchase,
post-retirement medical, hospitalization, health and other employee benefit
plan, program or arrangement, whether formal or informal, under which Arcada has
any obligation or liability, or under which any employee or former employee has
any rights to benefits or any 'cafeteria plans,' as described in Section 125 of
the Internal Revenue Code of 1986, as amended (the "Code") (together, the
"Benefit Plans") are set forth on Disclosure Schedule 5.12(e)(i). Except as set
forth on Disclosure Schedule 5.13(e)(i), none of the Benefit Plans is subject to
Title IV of ERISA, is a 'multiemployer plan,'
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as such term is defined in Section 3(37) and 4001(a)(3) of ERISA and Section
414(f) of the Code, or is subject to the funding requirements of Section 412 of
the Code or Title I, Subtitle B, Part 3 of ERISA.
(ii) In all material respects, except as discussed on Disclosure
Schedule 5.12(e)(ii), the terms of the Benefit Plans are, and the Benefit Plans
have been administered, in accordance with the requirements of ERISA, the Code,
applicable law and the respective plan documents. Except as disclosed on
Disclosure Schedule 5.12(e)(ii), none of the Benefit Plans is under audit or is
the subject of an investigation by the Internal Revenue Service, the U.S.
Department of Labor or any other federal or state governmental agency. Except
as disclosed on Disclosure Schedule 5.12(e)(ii), all material reports and
information required to be filed with, or provided to, the United States
Department of Labor, Internal Revenue Service, the Pension Benefit Guaranty
Corporation (the "PBGC") and plan participants and beneficiaries with respect to
each Benefit Plan have been timely filed or provided. With respect to each
Benefit Plan for which an annual report has been filed, no material change has
occurred with respect to the matters covered by the most recent annual report
since the date thereof.
(iii) Arcada is not aware of any facts regarding any Benefit Plan
which is an 'employee pension benefit plan' as defined in Section 3(2) of ERISA
(collectively, the "Employee Pension Benefit Plans") that would present a
significant risk that any Employee Pension Benefit Plan would not be determined
by the appropriate District Director of the Internal Revenue Service to be
'qualified' within the meaning of Section 401(a) of the Code, or with respect to
which any trust maintained pursuant thereto is not exempt from federal income
taxation pursuant to Section 501 of the Code, or with respect to which a
favorable determination letter could not be issued by the Internal Revenue
Service with respect to each such Employee Pension Benefit Plan.
(iv) Prior to the Closing, Arcada shall deliver or make available
to TTA complete and correct copies (if any) of (w) the most recent Internal
Revenue Service determination letter relating to each Employee Pension Benefit
Plan intended to be tax qualified under Section 401(a) and 501(a) of the Code,
(x) the most recent annual report (Form 5500 Series) and accompanying schedules
of each Benefit Plan, filed with the Internal Revenue Service or an explanation
of why such annual report is not required, (y) the most current summary plan
description for each Benefit Plan, and (z) the most recent audited financial
statements of each Benefit Plan.
(v) With respect to each Benefit Plan, all contributions,
premiums or other payments due or required to be made to such plans as of the
Effective Time have been or will be made or accrued prior to the Effective Time.
(vi) To the best of Arcada's knowledge, there are not now, nor
have there been, any 'prohibited transactions', as such term is defined in
Section 4975 of the Code or Section 406 of ERISA, involving Arcada or any of its
subsidiaries, or any officer, director or employee of Arcada or any of its
subsidiaries, with respect to the Benefit Plans that could subject Arcada or any
other party-in-interest to the penalty or tax imposed under Section 502(i) of
ERISA and Section 4975 of the Code.
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(vii) As of the date hereof, no claim, lawsuit, arbitration or
other action has been instituted, asserted (and no such lawsuit has been served
on Arcada) or, to the best of Arcada's knowledge, threatened by or on behalf of
such Benefit Plan or by any employee alleging a breach or breaches of fiduciary
duty or violations of other applicable state or federal law with respect to such
Benefit Plans, which could result in liability on the part of Arcada or any of
its subsidiaries or a Benefit Plan under ERISA or any other law, nor is there
any known basis for successful prosecution of such a claim, and TTA will be
notified promptly in writing of any such threatened or pending claim arising
between the date hereof and the Closing.
(viii) Except as may be required by the Consolidated Omnibus
Budget and Reconciliation Act of 1985, as amended ("COBRA"), no Benefit Plan
which is an employee welfare benefit plan (within the meaning of Section 3(1) of
ERISA) provides for continuing benefits or coverage for any participant or
beneficiary of a participant after such participant's termination of employment
nor does Arcada have any current or projected liability under any such plans.
(ix) Arcada has not maintained or contributed to, and does not
currently maintain or contribute to, any severance pay plan. All payments
(other than regular wages and vacation pay) made to employees of Arcada
coincident with or in connection with termination of employment since January 1,
1994 are disclosed on Disclosure Schedule 5.12(e)(ix).
(x) No individual will accrue or receive any additional
benefits, service, or accelerated rights to payment or vesting of benefits under
any Benefit Plan, or otherwise obtain rights to any parachute payment,' as
defined in Section 280G(b)(2) of the Code, as a result of the transactions
contemplated by this Agreement.
(xi) Arcada has complied in all material respects with all of
the requirements of COBRA.
5.13 ARCADA INFORMATION. The information relating to Arcada to be
contained in the Proxy Statement/Prospectus contemplated by Section l(e) hereof
will not, at the time it is filed with the applicable governmental authorities,
as of the date thereof, or at the date actions of Arcada stockholders are taken
with respect to the transactions contemplated therein, contain any untrue
statement of a material fact or omit to state a material fact necessary to make
such statements, in light of the circumstances under which such statements were
made, not misleading.
5.14 COMPLIANCE WITH APPLICABLE LAW.
(a) Except as set forth on Disclosure Schedule 5.14(a), Arcada holds
all licenses, certificates, franchises, permits and other governmental
authorizations ("Permits") necessary for the lawful conduct of its businesses
and such Permits are in full force and effect, and Arcada is in all respects
complying therewith, except where the failure to possess or comply with such
Permits would not have a Material Adverse Effect on Arcada.
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(b) Except as set forth on Disclosure Schedule 5.14(b), Arcada is and
for the past three years has been in compliance with all foreign, federal, state
and local laws, statutes, ordinances, rules, regulations and orders applicable
to the operation, conduct or ownership of its business or properties except for
any noncompliance which is not reasonably likely to have in the aggregate a
Material Adverse Effect on Arcada.
5.15 CONTRACTS AND AGREEMENTS.
As of the date hereof, except as disclosed in Disclosure Schedule
5.15, (i) Arcada is not a party to or bound by any commitment, contract,
agreement or other instrument which involves or could involve aggregate future
payments by Arcada of more than $25,000, (ii) Arcada is not a party to nor was
it bound by any commitment, contract, agreement or other instrument which is
material to the business, operations, properties, assets or financial condition
of Arcada and (iii) no commitment, contract, agreement or other instrument other
than Arcada's charter documents, to which Arcada is a party or by which Arcada
is bound, limits the freedom of Arcada to compete in any line of business or
with any person.
5.16 AFFILIATE TRANSACTIONS.
(a) Except as disclosed in Disclosure Schedule 5.16, and except as
specifically contemplated by this Agreement, since May 31, 1996, Arcada has not
engaged in, or is not currently obligated to engage in (whether in writing or
orally), any transaction with any Affiliated Person (as defined below) involving
aggregate payments by or to Arcada of $30,000 or more during any consecutive 12
month period.
(b) For purposes of this Section 5.16, 'Affiliated Person' means:
(i) a director, executive officer or Controlling Person (as
defined below) of Arcada;
(ii) a spouse of a director, executive officer or Controlling
Person of Arcada;
(iii)a member of the immediate family of a director, executive
officer, or Controlling Person of Arcada who has the same home as such person;
(iv) any corporation or organization (other than Arcada) of which
a director, executive officer or Controlling Person of Arcada (w) is a chief
executive officer, chief financial officer, or a person performing similar
functions; (x) is a general partner; (y) is a limited partner who, directly or
indirectly, either alone or with his spouse and the members of his immediate
family who are also Affiliated Persons, owns or controls ten percent
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or more of any class of equity securities, or owns or controls, with other
directors, executive officers, and Controlling Persons of Arcada and their
spouses and their immediate family members who are also Affiliated Persons, 25
percent or more of any class of equity securities;
(v) any trust or estate in which a director, executive officer,
or Controlling Person of Arcada or the spouse of such person has a substantial
beneficial interest or as to which such person or his spouse serves as trustee
or in a similar fiduciary capacity.
(c) For purposes of this Section 5.16 'Controlling Person' means any
person or entity which, either directly or indirectly, or acting in concert with
one or more other persons or entities owns, controls or holds with power to
vote, or holds proxies representing ten percent or more of the outstanding
Arcada Common Stock.
(d) For purposes of this Section 5.16, the term 'director' means any
director, trustee, or other person performing similar functions with respect to
any organization whether incorporated or unincorporated.
(e) For purposes of this Section 5.16, the term 'executive officer'
means the president, any executive vice president, any senior vice president,
the secretary, the treasurer, the comptroller, and any other person performing
similar functions with respect to any organization whether incorporated or
unincorporated.
5.17 DISCLOSURE. To the knowledge of Arcada, no representation or
warranty of Arcada contained in this Agreement, and no statement contained in
the Disclosure Schedules delivered by Arcada hereunder, contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make a statement herein or therein, in light of the circumstances under
which it was made, not misleading.
5.18 TITLE TO PROPERTY.
(a) REAL PROPERTY. Disclosure Schedule 5.18(a) contains a true and
correct description of all interests in real property (other than real
property security interests received in the ordinary course of business),
whether owned, leased or otherwise claimed, including a list of all leases of
real property, in which Arcada has or claims an interest as of the date
hereof and any guarantees of any such leases by Arcada. True and complete
copies of such leases have previously been delivered or made available to
TTA, together with all amendments, modifications, agreements or other
writings related thereto. Except as disclosed on Disclosure Schedule
5.18(a), each such lease is legal, valid and binding as between Arcada and
the other party or parties thereto, and the occupant is a tenant or possessor
in good standing thereunder, free of any default or breach whatsoever and
quietly enjoys the premises provided for therein. Except as disclosed on
Disclosure Schedule 5.18(a), Arcada has good, valid and marketable title to
all real property owned by it on the date hereof, free and clear of all
mortgages, liens, pledges, charges or encumbrances of any nature whatsoever,
except liens for current taxes not yet due and payable, and such encumbrances
and imperfections of title, if any, as do not materially detract from the
value of the properties and do not materially interfere with the present or
proposed use of such properties or otherwise materially impair such
operations. All real property and fixtures
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material to the business, operations or financial condition of Arcada are in
substantially good condition and repair.
(b) ENVIRONMENTAL MATTERS. Except as set forth on Disclosure
Schedule 5.18(b), to the knowledge of Arcada, the real property owned or leased
by Arcada on the date hereof does not contain any underground storage tanks,
asbestos, ureaformaldehyde, uncontained polychlorinated biphenyls, or, except
for materials which are ordinarily used in office buildings and office equipment
such as janitorial supplies and do not give rise to financial liability therefor
under the hereafter defined Environmental Laws, releases of hazardous substances
as such terms may be defined by all applicable federal, state or local
environmental protection laws and regulations ("Environmental Laws"). As of the
date hereof (i) no part of any such real property has been listed, or to the
knowledge of Arcada, proposed for listing on the National Priorities List
pursuant to the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA") or on a registry or inventory of inactive hazardous waste sites
maintained by any state, and, (ii) except as set forth on Disclosure Schedule
5.18(b), no notices have been received alleging that Arcada or any of its
subsidiaries was a potentially responsible person under CERCLA or any similar
statute, rule or regulation. Arcada knows of no violation of law, regulation,
ordinance (including, without limitation, laws, regulations and ordinances with
respect to hazardous waste, zoning, environmental, city planning or other
similar matters) relating to its properties, which violations could have in the
aggregate a Materially Adverse Effect on Arcada.
(c) PERSONAL PROPERTY. Disclosure Schedule 5.18(c) contains a true
and correct list of (i) each item of machinery, equipment, or furniture,
including without limitation computers and vehicles, of Arcada, included on the
Arcada December 1995 Financial Statements at a carrying value of, or, if
acquired after December 31, 1995, for a purchase price of, more than $50,000,
(ii) each lease or other agreement under which any such item of personal
property is leased, rented, held or operated where the current fair market value
of such item is more than $25,000 and (iii) all trademarks, trade names or
service marks currently used, owned, or registered for use by Arcada. Except as
disclosed on Schedule 5,18(c), Arcada has good, valid and marketable title to
all personal property owned by it, free and clear of all liens, pledges, charges
or encumbrances of any nature whatsoever.
5.19 INSURANCE. Disclosure Schedule 5.19 contains a true and complete
list and a brief description (including name of insurer, agent, coverage and
expiration date) of all insurance policies in force on the date hereof with
respect to the business and assets of Arcada. Arcada and each of its
subsidiaries is in compliance with all of the material provisions of its
insurance policies and are not in default under any of the terms thereof. Each
such policy is outstanding and in full force and effect and, except as set forth
on Disclosure Schedule 5.19, Arcada or one of its subsidiaries is the sole
beneficiary of such policies. All premiums and other payments due under any
such policy have been paid or arrangements for payment are being made. Arcada
has previously delivered to, or made available for inspection by, Arcada, each
insurance policy to which Arcada or any of its subsidiaries is a party (other
than insurance policies under which Arcada is named as a loss payee or
additional insured as a result of its position as a secured lender).
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5.20 POWERS OF ATTORNEY. Arcada does not have any powers of attorney
outstanding other than those in the ordinary course of business with respect to
routine matters.
5.21 BANK ACCOUNTS, ETC. Set forth on Schedule 5.21 hereto is a true
and complete list of all bank accounts, safe deposit boxes and lock boxes of
Arcada and each of its subsidiaries, including, with respect to each such
account and lock box: (a) identification of all authorized signatories, (b)
identification of the business purpose of such account or lock box, including
identification of any accounts or lock boxes representing escrow funds or
otherwise subject to restriction; and (c) identification of the amount on
deposit as of September 30, 1996.
6. COVENANTS OF THE PARTIES.
6.1 REDEMPTION OF REDEEMABLE WARRANTS. From and including the date
of this Agreement through the Effective Time, if the closing price or trading
price of the TTA Common Stock, as applicable, over thirty (30) consecutive
trading days averages at least $8.00 per share (as more particularly described
in the Warrant Agreement), TTA shall, within ten (10) days of such event,
exercise its redemption right and call all outstanding Redeemable Warrants on
the terms and in the manner set forth in the Warrant Agreement.
6.2 REINCORPORATION IN WASHINGTON STATE. Immediately prior to the
Effective Time, TTA shall cause its state of incorporation to be changed from
California to Washington and to take any and all appropriate action that may be
necessary or desirable to maintain in full force and effect TTA's qualification
as a foreign corporation in all states where it is so qualified.
6.3 CONDUCT OF THE BUSINESS OF TTA. During the period from the date
of this Agreement to the Effective Time, TTA will conduct the business of TTA
and will engage in transactions only in the ordinary course and consistent with
past practice and with prudent business practice, except with the written
consent of Arcada (which will not be unreasonably withheld, delayed or
conditioned). During such period, TTA will use its best efforts to (x) preserve
the business organizations of TTA intact, (y) keep available to it and to Arcada
the present services of the employees of TTA, and (z) preserve for itself and
for Arcada the goodwill of the customers of TTA and others with whom business
relationships exist. In addition, without limiting the generality of the
foregoing, TTA agrees that from the date hereof to the Effective Time, except as
otherwise consented to or approved by Arcada in writing (which consent or
approval shall not be unreasonably withheld, delayed or conditioned) or as
permitted or required by this Agreement or as required by law (in which case TTA
shall notify Arcada in writing), TTA will not:
(a) change any provisions of its Articles or bylaws or any similar
governing documents of TTA
(b) change the number of shares of its authorized or issued capital
stock (other than issuance of stock as a result of the exercise of options
issued as of the date hereof and described on Disclosure Schedule 4.2) or issue,
grant or amend any option, warrant, call, commitment, subscription, right to
purchase or agreement of any character relating to the authorized or issued
capital stock of TTA, or any securities convertible into shares of such stock,
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or split, combine or reclassify any shares of its capital stock, or declare, set
aside or pay any dividend, or other distributions (whether in cash, stock or
property or any combination thereof) in respect of the capital stock of TTA, or
redeem or otherwise acquire any shares of such capital stock;
(c) except as permitted pursuant to Section 6.13 hereof, grant any
severance or termination pay to or enter into or amend any employment agreement
with, or increase the amount of payments or fees to, any of its employees,
officers or directors other than salary increases to employees (other than those
executing Employment Agreements) consistent with past increases;
(d) make any capital expenditures in excess of (i) $40,000 per
project or related series of projects or (ii) $200,000 in the aggregate, other
than pursuant to binding commitments existing on the date hereof and
expenditures necessary to maintain existing assets in good repair;
(e) change in any material manner its pricing policies or any other
material business or customer policies;
(f) guarantee the obligations of any other persons except in the
ordinary course of business consistent with past practice;
(g) acquire assets other than those necessary in the conduct of its
business in the ordinary course;
(h) sell, transfer, assign, encumber or otherwise dispose of assets
other than has been customary in its ordinary course of business;
(i) enter into or amend or terminate any long-term (one-year or more)
contracts (including real property leases) except for contracts which are in the
ordinary course of business consistent with past practice
(j) enter into or amend any contract that calls for the payment by
TTA of $25,000 or more after the date of this Agreement (a "Material Contract")
that cannot be terminated on not more than 30 days' notice without cause and
without payment or loss of any material amount as a penalty, bonus, premium or
other compensation for termination;
(k) engage or participate in any material transaction or incur or
sustain any material obligation except for transactions otherwise permitted
under this Section 6.1 which are in the ordinary course of business consistent
with past practices and which are of similar kinds and involve similar amounts;
(l) make any contributions to any Benefit Plans except in such
amounts and at such times as consistent with past practice;
(m) increase the number of full time equivalent employees of TTA
above 30;
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(n) except after having followed reasonable procedures with respect
to the investigation of potential environmental problems, which procedures have
been approved in writing by Arcada (which approval shall not be unreasonably
withheld, delayed or conditioned), acquire any real property;
(o) renegotiate any debts or take any action to change the
characterization of any short term or long term debt; or
(o) agree to do any of the foregoing.
6.4 NO SOLICITATION. Neither TTA nor any of its directors, officers,
representatives, agents or other persons controlled by any of them, shall,
directly or indirectly encourage or solicit, or (except to the extent that the
directors of TTA in their good faith judgment after receipt of advice of counsel
determine that such response is reasonably required in order to discharge their
fiduciary duties) hold discussions or negotiations with, or provide any
information to, any person, entity or group other than Arcada concerning any
merger, sale of substantial assets not in the ordinary course of business, sale
of shares of capital stock or similar transactions involving TTA. TTA will
promptly communicate to Arcada the terms of any proposal that it may receive in
respect of any such transaction. Notwithstanding the foregoing two sentences,
if the board of directors of TTA receives an unsolicited offer or inquiry with
respect to such a transaction, the board may respond to such offer if the board
determines in its good faith judgment (after receiving advice of counsel) that
such response is reasonably required in order to discharge its fiduciary duties.
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6.5 CURRENT INFORMATION.
(a) No later than ten days after the date of this Agreement, TTA and
Arcada shall each designate an individual acceptable to the other party (a
"Designated Representative" and, together, the "Designated Representatives") to
be the primary point of contact between the parties. During the period from the
date of their designation to the Closing, the Designated Representatives or
their representatives shall confer on a regular basis so that Arcada is kept
advised as to the general status of the ongoing operations of TTA. Without
limiting the foregoing, TTA agrees to confer with the Arcada Designated
Representative regarding any proposed significant changes to TTA's management
policies and objectives. TTA agrees to provide access to members of Arcada's
acquisition team and to work with them in order to plan, prepare for and
facilitate the coordination of the parties' (i) accounting, billing and other
data processing systems, (ii) billing structure, (iii) sales and marketing
systems and structures with each other as well as other matters arising from the
Merger. TTA will promptly notify the Arcada Designated Representative or his or
her representatives of any material change in the normal course of business or
in the operation of the properties of TTA or of any governmental complaints,
investigations or hearings (or communications indicating that the same may be
contemplated) or the institution or the threat of any litigation involving TTA,
and have kept and will keep the Arcada Designated Representative or his or her
representatives fully informed of such events and the progress of any already
existing litigation. Without limiting the foregoing, TTA shall immediately
notify the Arcada Designated Representative if it appears that there has
occurred any change in its financial or other condition or any other event that
will or may affect TTA's ability to complete the Merger or have a Material
Adverse Effect on TTA.
6.6 ACCESS TO PROPERTIES AND RECORDS CONFIDENTIALITY.
(a) TTA shall permit Arcada reasonable access to its properties, and
shall disclose and make available to Arcada all books, papers and records
relating to the assets, stock, ownership, properties, obligations, operations
and liabilities of TTA, including but not limited to, all books of account
(including the general ledger), tax records, minute books of directors and
stockholders meetings, organizational documents, bylaws, material contracts and
agreements, filings with any regulatory authority, accountants work papers,
litigation files, plans affecting employees, and any other business activities
or prospects in which Arcada may have a reasonable interest, including, without
limitation, all loan files in each case during normal business hours and upon
reasonable notice. TTA shall not be required to provide access to or disclose
information where such access or disclosure would jeopardize the attorney-client
privilege of TTA or would contravene any law, rule, regulation, order, judgment,
decree or binding agreement entered into prior to the date hereof. The parties
will use all reasonable efforts to make appropriate substitute disclosure
arrangements under circumstances in which the restrictions of the preceding
sentence apply.
(b) All information furnished by TTA to Arcada or the representatives
or affiliates of either pursuant to, or in any negotiation in connection with,
this Agreement shall be treated as the sole property of TTA until consummation
of the Merger and, if the Merger shall not occur, Arcada and their affiliates,
agents and advisers shall upon written request return to TTA, all documents or
other materials containing, reflecting, referring to such information, and
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shall keep confidential all such information and shall not disclose or use such
information for competitive purposes. The obligation to keep such information
confidential shall not apply to (i) any information which (w) Arcada can
establish by convincing evidence was already in its possession (subject to no
obligations of confidentiality) prior to the disclosure thereof by TTA; (x) was
then generally known to the public; (y) becomes known to the public other than
as a result of actions by Arcada or by the directors, officers or employees or
agents of either; or (z) was disclosed to Arcada, or to the directors, officers
or employees of either, solely by a third party not bound by any obligation of
confidentiality; or (ii) disclosure in accordance with the federal securities
laws, or pursuant to an order of a court or agency of competent jurisdiction.
(c) All information furnished by Arcada to TTA or the representatives
or affiliates of TTA pursuant to, or in any negotiation in connection with, this
Agreement shall be treated as the sole property of Arcada until consummation of
the Merger and, if the Merger shall not occur, TTA and its affiliates, agents
and advisors shall upon written request return to Arcada, all documents or other
materials containing, reflecting, referring to such information, and shall keep
confidential all such information and shall not disclose or use such information
for competitive purposes. The obligation to keep such information confidential
shall not apply to (i) any information which (w) TTA can establish by convincing
evidence was already in its possession (subject to no obligations or
confidentiality) prior to the disclosure thereof by TTA; (x) was then generally
known to the public; (y) becomes known to the public other than as a result of
actions by TTA or by the directors, officers or employees or agents of TTA; or
(z) was disclosed to TTA, or to the directors, officers or employees of TTA,
solely by a third party not bound by any obligation of confidentiality; or (ii)
disclosure in accordance with the federal securities laws, federal banking laws,
or pursuant to an order of a court or agency of competent jurisdiction.
6.7 REPORTS.
(a) As soon as reasonably available, but in no event more than 45
days after the end of each fiscal quarter ending after the date hereof (other
than the last quarter of any fiscal year), TTA will deliver to Arcada its
quarterly report on Form 10-QSB, as filed under the 1934 Act. As soon as
reasonably available, but in no event more than 120 days after the end of each
fiscal year ending after the date of this Agreement, TTA will deliver to Arcada
its annual report on Form 10-KSB as filed under the 1934 Act.
6.8 REGULATORY MATTERS.
(a) The parties hereto will cooperate with each other and use all
reasonable efforts to prepare all necessary documentation, to effect all
necessary filings and to obtain all necessary permits, consents, approvals and
authorizations of all third parties and governmental bodies necessary to
consummate the transactions contemplated by this Agreement including, without
limitation, those that may be required from the SEC, other regulatory
authorities, or the holders of TTA Common Stock. Arcada and TTA shall each have
the right to review reasonably in advance all information relating to Arcada or
TTA, as the case may be, and any of their respective subsidiaries, together with
any other information reasonably requested, which appears
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in any filing made with or written material submitted to any governmental body
in connection with the transactions contemplated by this Agreement.
(b) Arcada and TTA shall furnish each other with all reasonable
information concerning themselves, their subsidiaries, directors, officers and
stockholders and such other matters as may be necessary or advisable in
connection with the Proxy Statement/Prospectus, or any other statement or
application made by or on behalf of Arcada or TTA, or any of their respective
subsidiaries to any governmental body in connection with the Merger and the
other transactions, applications or filings contemplated by this Agreement.
(c) Arcada and TTA will promptly furnish each other with copies of
written communications received by Arcada or TTA or any of their respective
subsidiaries from, or delivered by any of the foregoing to, any governmental
body in respect of the transactions contemplated hereby.
6.9 APPROVAL OF TTA STOCKHOLDERS. TTA will (a) take all steps
necessary duly to call, give notice of, convene and hold a meeting of its
stockholders as soon as practicable for the purpose of voting on this Agreement
and the transactions contemplated hereby and with the consent of Arcada (which
consent shall not be unreasonably withheld, delayed or conditioned), for such
other purposes as may be necessary or desirable, (b) include in the Proxy
Statement/Prospectus the recommendation of TTA's Board of Directors that the
stockholders approve this Agreement and the other transactions contemplated
hereby, including, without limitation, the reincorporation of TTA in the State
of Washington, and such other matters as may be submitted to its stockholders in
connection with this Agreement, (c) cooperate and consult with Arcada with
respect to each of the foregoing matters, and (d) use all reasonable efforts to
obtain, as promptly as practicable, the necessary approvals by TTA stockholders
of this Agreement and the transactions contemplated hereby, including, without
limitation, the reincorporation of TTA in the State of Washington, except, in
each case, where the directors of TTA determine in their good faith judgment
(after receiving advice of counsel) that they are required to do otherwise in
order to discharge their fiduciary duties.
6.10 APPROVAL OF ARCADA STOCKHOLDERS. Arcada will (a) take all steps
necessary duly to call, give notice of, convene and hold a meeting of its
stockholders as soon as practicable for the purpose of voting on this Agreement
and the transactions contemplated hereby and with the consent of TTA (which
consent shall not be unreasonably withheld, delayed or conditioned), for such
other purposes as may be necessary or desirable, (b) include in the Proxy
Statement/Prospectus the recommendation of Arcada's Board of Directors that the
stockholders approve this Agreement and the other transactions contemplated
hereby, and such other matters as may be submitted to its stockholders in
connection with this Agreement, (c) cooperate and consult with TTA with respect
to each of the foregoing matters, and (d) use all reasonable efforts to obtain,
as promptly as practicable, the necessary approvals by Arcada stockholders of
this Agreement and the transactions contemplated hereby, except, in each case,
where the directors of TTA determine in their good faith judgment (after
receiving advice of counsel) that they are required to do otherwise in order to
discharge their fiduciary duties.
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6.11 FURTHER ASSURANCES. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
6.12 PUBLIC ANNOUNCEMENTS. Neither party will issue or distribute any
information to its shareholders or employees, any news releases or any other
public information disclosures with respect to this Agreement or any of the
transactions contemplated hereby without the consent of the other party, except
as may be otherwise required by law.
6.13 ASSIGNMENT OF CONTRACT RIGHTS. Arcada shall use its reasonable
efforts to obtain any consents, waivers or revisions necessary to allow TTA to
accede to all of the rights of Arcada under any existing real property leases
and all material personal property leases, licenses and other contracts, which
TTA wishes to have continue in effect after the Effective Time, without
incurring substantial costs in connection therewith. TTA will offer its
reasonable cooperation with Arcada in obtaining such consents, waivers and
revisions, it being understood that the obligation to obtain such consents,
waivers and revisions shall nevertheless be the obligation of Arcada.
6.14 EMPLOYEES. TTA and Frank Bonadio shall have entered into a
mutually satisfactory employment agreement to be effective upon the Closing of
the Merger.
6.15 INDEMNIFICATION OF ARCADA DIRECTORS AND OFFICERS.
(a) TTA will use all reasonable efforts, in cooperation with Arcada,
to arrange for insurance coverage for prior acts for all current and former
directors and officers of Arcada, provided that such coverage must be available
from normal carriers at a reasonable cost in light of the cost of similar
policies under similar circumstances. TTA shall not cancel such prior acts
coverage for three years after the Effective Date.
(b) From and after the Effective Time, TTA will, to the extent
permitted by then applicable law, indemnify current and former directors,
officers and employees of Arcada (each an "Indemnified Party ") as though they
had been directors, officers and/or employees of TTA, for acts or omissions
occurring prior to, and including, the Effective Time.
Any Indemnified Party wishing to claim indemnification under this provision
shall, upon learning of any claim, action, suit, proceeding or investigation
(hereinafter a "Claim"), promptly notify TTA thereof. TTA shall have the right
to assume the defense of any such Claim and upon so doing shall not thereafter
be liable to such Indemnified Party for any expenses, of other counsel or
otherwise, subsequently incurred by such Indemnified Party in connection with
such Claim. If TTA elects not to assume such defense, or counsel for the
Indemnified Party advises that there are issues which raise conflicts of
interest between TTA and the Indemnified Party, the Indemnified Party may retain
counsel satisfactory to such Indemnified Party and TTA will pay all reasonable
fees and expenses of such counsel incurred in defending the Claim; provided,
however, that (i) in the event that more than one Indemnified Party is involved
in the same
33
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Claim, TTA shall not be obligated to pay for more than one firm of counsel for
all Indemnified Parties in any one jurisdiction (unless counsel for the
Indemnified Parties advises that there are issues which raise conflicts of
interest between the Indemnified Parties), (ii) the Indemnified Parties will
cooperate in the defense of the Claim, and (iii) TTA shall not be liable for any
settlement effected without its prior written consent. If, upon the conclusion
of the proceedings in any Claim, it is determined by TTA that the Indemnified
Party was not entitled to such indemnification, such party shall be required to
reimburse TTA for all cost expended in defending such Indemnified Party.
(c) This Section 6.14 is intended to be for the benefit of, and shall
be enforceable by, the Indemnified Parties, their heirs and personal
representatives and shall be binding on TTA and its successors and assigns.
6.16 CURRENT PUBLIC INFORMATION. TTA shall continue to satisfy the
current public information requirements of Rules 144 and 145 of the SEC with
respect to the TTA Common Stock, and to provide affiliates of Arcada with such
information as they may reasonably require and to otherwise cooperate with them
to facilitate sales of TTA Common Stock in compliance with Rules 144 and 145 of
the SEC.
6.17 RESOLUTION OF CERTAIN MATTERS. On or prior to the Closing, TTA
shall have:
(a) reached a final, binding settlement satisfactory to Arcada and
obtained unconditional releases from all adverse parties in connection with the
litigation matter set forth as item 8 to Disclosure Schedule 4.10 hereto;
(b) renegotiated, amended, canceled or otherwise modified to the
satisfaction of Arcada the agreements set forth as Service Commitments 1, 2, and
3 to Disclosure Schedule 4.15 hereto; and
(c) Achieved and furnished evidence, satisfactory to Arcada of
revenue of at least $100,000 per month attributable to TTA's internet "backbone"
operations.
6.18 PURCHASE ACCOUNTING. TTA and Arcada shall cooperate and assist
in the preparation of any and all materials reasonably required by Arcada or TTA
in connection with establishing appropriate values for assets and liabilities of
Touch Tone or Arcada for purchase accounting purposes.
7. CLOSING CONDITIONS.
7.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS UNDER THIS AGREEMENT. The
respective obligations of each party under this Agreement to consummate the
Merger shall be subject to the fulfillment at or prior to the Effective Time of
the following conditions:
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<PAGE>
(a) This Agreement and the transactions contemplated hereby,
including, without limitation, the reincorporation of TTA in the State of
Washington, shall have been approved by the requisite vote of the stockholders
of TTA and Arcada.
(b) All necessary regulatory or governmental approvals and consents
required to consummate the transactions contemplated hereby shall have been
obtained and shall remain in full force and effect and all statutory or
regulatory waiting periods in respect thereof shall have expired.
(c) No party hereto shall be subject to any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits the consummation of the Merger.
(d) ANTITRUST LAW. Any applicable pre-merger notification provisions
of Section 7A of the Clayton Act shall have been complied with by the parties
hereto, and no other statutory or regulatory requirements with respect to the
Clayton Act shall be applicable. There shall be no pending or threatened
proceedings under any applicable antitrust law of the State of Washington or
California.
(e) SECURITIES LAWS. The shares of TTA Common Stock to be issued to
the stockholders of Arcada in exchange for their shares shall have been
qualified or registered for offering and sale under the federal securities law
and the state securities or Blue Sky laws of each jurisdiction in which
stockholders of Arcada reside, and no order suspending the sale of such shares
of TTA Common Stock in any such jurisdiction shall have been issued prior to the
Effective Time and no proceedings for that purpose shall have been instituted or
shall be contemplated; provided, that TTA shall not have been obligated to
execute or file any general consent to service of process or to qualify as a
foreign corporation in any jurisdiction in which it is not qualified. As soon
as reasonably practicable, Arcada shall advise TTA of each jurisdiction in which
stockholders of Arcada reside.
7.2 CONDITIONS TO THE OBLIGATIONS OF TTA UNDER THIS AGREEMENT. The
obligations of TTA under this Agreement shall be further subject to the
satisfaction, at or prior to the Closing, of all of the following conditions,
any one or more of which may be waived by TTA:
(a) (i) Each of the obligations or covenants of Arcada required to
be performed by it on or prior to the Closing pursuant to the terms of this
Agreement shall have been duly performed and complied with in all material
respects.
(ii) Each of the representations and warranties of Arcada
contained in this Agreement shall be true and correct in all material respects
as of the date of this Agreement and as of the Effective Time as though made at
and as of the Effective Time except as to any representation or warranty which
specifically relates to an earlier date, which shall be true and correct as of
such earlier date, except in the case of such representations and warranties,
where the failure to be true would not have a Material Adverse Effect on Arcada.
35
<PAGE>
(b) Any consents, waivers, clearances, approvals and authorizations
of regulatory or governmental bodies that are necessary in connection with the
consummation of the transactions contemplated hereby shall have been obtained,
and none of such consents, waivers, clearances, approvals or authorizations
shall contain any term or condition that is a term or condition that has not
heretofore been normally imposed in such transactions and which would have a
Material Adverse Effect on Arcada or TTA.
(c) TTA shall have received an opinion, dated the Effective Date,
from Cairncross & Hempelmann, counsel to Arcada, reasonably satisfactory to TTA
with respect to the matters set forth herein.
(d) Since the date of this Agreement there shall have been no
Material Adverse Effect with respect to Arcada (except for changes resulting
from market and economic conditions which generally affect the
telecommunications industry as a whole including, without limitation, changes in
law or regulation or interpretations thereof); provided, however, that the
following expenses and adjustments shall be excluded in determining whether a
material adverse change has occurred: (i) fees and expenses relating to the
consummation of the transactions contemplated hereby, (ii) charges for severance
and other payments to officers and employees made or expected to be made in
connection with the transactions contemplated hereby, and (iii) costs and
expenses related to any transactions of the type set forth in Section 6.1
undertaken by Arcada with the prior written consent of TTA.
(e) Dissenters' rights shall not have been preserved by stockholders
of Arcada with respect to more than five percent of the outstanding shares of
Arcada Common Stock and each affiliate of Arcada shall have delivered to Arcada
stock certificates evidencing all shares of Arcada Common Stock owned by such
affiliate as provided in Section l(f) hereof and delivered to TTA assurance that
such affiliate has voted for the Merger, together with any other assurances
requested by TTA, that such affiliates will not have dissenters' rights.
(g) Arcada shall have furnished TTA with such certificates of its
officers and such other documents to evidence fulfillment of the conditions set
forth in this Section 7.2 as TTA may reasonably request.
7.3 CONDITIONS TO THE OBLIGATIONS OF ARCADA UNDER THIS AGREEMENT.
The obligations of Arcada under this Agreement shall be further subject to the
satisfaction, at or prior to the Closing, of all of the following conditions,
any one or more of which may be waived by Arcada:
(a) Each of the obligations or covenants of TTA and Newco required to
be performed by them at or prior to the Closing pursuant to the terms of this
Agreement shall have been duly performed and complied with in all material
respects.
(b) Each of the representations and warranties of TTA and Newco
contained in this Agreement shall be true and correct in all material respects
as of the date of this Agreement and as of the Effective Time as though made at
and as of the Effective Time except as to any representation or warranty which
specifically relates to an earlier date, which shall be
36
<PAGE>
true and correct as of such earlier date, except in the case of such
representations and warranties, where the failure to be true would not have a
Material Adverse Effect on TTA.
(c) The amount of TTA's unrestricted working capital (as determined
in accordance with GAAP) at the Closing shall be at least $1,500,000.
(d) Arcada shall have received an opinion, dated the date of the
Closing, from John B. Wills, Esq., counsel to TTA and Newco, reasonably
satisfactory to Arcada with respect to the matters set forth herein.
(e) Each of Matthew J. Barletta, Norman B. Walco, Stephen P. Shearin
and Benjamin W. Bronston shall have resigned as Directors of TTA effective as of
the Closing Time.
(f) Michael J. Canney, as the sole remaining Director of TTA, shall
have appointed Robert W. Leppaluoto, Keith Leppaluoto, Frank J. Bonadio and an
individual to be designated by Arcada on or prior to the Closing to fill the
vacancies on TTA's Board of Directors created by the resignations called for by
Section 7.3(d) above;
(g) All of the officers of TTA shall have resigned, effective as of
the Effective Time;
(h) Since the date of this Agreement, there shall have been no
Material Adverse Effect with respect to TTA (except for changes resulting from
market and economic conditions which generally affect the telecommunications
industry as a whole including, without limitation, changes in law or regulation
or changes in interpretations thereof).
(i) TTA shall have furnished Arcada with such certificates of its
officers or others and such other documents to evidence fulfillment of the
conditions set forth in this Section 7.3 as Arcada may reasonably request.
(j) TTA shall have instructed its transfer agent with respect to the
issuance of TTA Common Stock to the Arcada stockholders at least two days prior
to Closing.
8. TERMINATION, AMENDMENT AND WAIVER.
8.1 TERMINATION. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval of the Merger by the TTA
stockholders:
(a) by mutual written consent of all the parties hereto;
(b) by any party hereto (i) if the Effective Time shall not have
occurred on or prior to March 1, 1997 unless the failure of such occurrence
shall be due to the failure of the party seeking to terminate this Agreement to
perform or observe its agreements and conditions set forth herein to be
performed or observed by such party at or before the Effective Time; (ii) 10
days after written certification of the vote of TTA's stockholders is delivered
to Arcada indicating that such stockholders failed to adopt the resolution to
approve this Agreement and the
37
<PAGE>
transactions contemplated hereby at the stockholders' meeting (or any
adjournment thereof) contemplated by Section l(d) hereof; or (iii) 10 days after
written certification of the vote of Arcada' shareholders is delivered to TTA
indicating that such stockholders failed to adopt the resolution to approve this
Agreement and the transactions contemplated hereby at the stockholders' meeting
(or any adjournment thereof) contemplated by Section 1(d) hereof ;
(c) by Arcada (i) if at the time of such termination there shall have
been a material adverse change in the consolidated financial condition of TTA
from that set forth in TTA's May 1996 Financial Statements and August 1996
Financial Statements (except for changes resulting from market and economic
conditions which generally affect the telecommunications industry as a whole,
including changes in regulation), it being understood that any of the matters
set forth in TTA's Disclosure Schedules as of the date of this Agreement or any
of the matters described in clauses (i), (ii) or (iii) of Section 7.2(d) are not
deemed to be a material adverse change for purposes of this paragraph (c); or
(ii) if there shall have been any material breach of any covenant of TTA
hereunder and such breach shall not have been remedied within 45 days after
receipt by TTA of notice in writing from Arcada specifying the nature of such
breach and requesting that it be remedied.
(d) by TTA (i) if at the time of such termination there shall have
been a material adverse change in the consolidated financial condition of Arcada
from that set forth in the December 1995 Financial Statements (except for
changes resulting from market and economic conditions which generally affect the
telecommunications industry as a whole), it being understood that any of the
matters set forth in Arcada's Disclosure Schedules as of the date of this
Agreement are not deemed to be a material adverse change for purposes of this
paragraph (d); or (ii) if there shall have been any material breach of any
covenant of Arcada hereunder and such breach shall have not been remedied within
45 days after receipt by Arcada of notice in writing from TTA specifying the
nature of such breach and requesting that it be remedied or (iii) if the
directors of TTA, after receiving advice of counsel, determine in their good
faith judgment that they are required to do so in order to discharge their
fiduciary duties, shall withdraw or modify or resolve to withdraw or modify its
recommendation that stockholders vote in favor of the transactions contemplated
hereby.
8.2 BREAK-UP FEE.
(a) The parties hereby acknowledge that, in negotiating and executing
this Agreement and in taking the steps necessary or appropriate to effect the
transactions contemplated hereby, Arcada has incurred and will incur direct and
indirect monetary and other costs (including without limitation attorneys' fees
and costs, costs of Arcada management and employee time and potential damage to
Arcada's business and franchises as a result of the announcement of the pending
Merger), will forego discussion with other potential merger candidates and will
forego various business activities which it would have otherwise undertaken if
it remained an independent institution. To compensate Arcada for such costs and
to induce it to forego initiating discussion with other potential merger
candidates, (i) if this Agreement terminates because TTA (or Newco) does not use
all reasonable efforts to consummate the transactions contemplated by this
Agreement in accordance with the terms of this Agreement (unless a condition set
forth in Section 7.3 is not satisfied and such nonsatisfaction has not been
38
<PAGE>
the result of the failure of TTA (or Newco) to use all reasonable efforts to
consummate this Agreement in accordance with the terms of this Agreement), (ii)
if TTA terminates this Agreement for any reason other than the grounds for
termination set out in Section 8.1(a), 8.1(b) or 8.1(d) or (iii) if Arcada
terminates this Agreement pursuant to Section 8.1(c)(ii), then TTA shall pay to
Arcada on demand (and in no event more than three days after such demand) in
immediately available funds, Two Hundred Thousand Dollars ($200,000.00).
(b) The parties hereby acknowledge that, in negotiating and executing
this Agreement and in taking the steps necessary or appropriate to effect the
transactions contemplated hereby, TTA has incurred and will incur direct and
indirect monetary and other costs (including without limitation attorneys' fees
and costs, costs of TTA management and employee time and potential damage to
TTA's business and franchises as a result of the announcement of the pending
Merger), will forego discussion with other potential merger candidates and will
forego various business activities which it would have otherwise undertaken if
it remained an independent institution. To compensate TTA for such costs and to
induce it to forego initiating discussion with other potential merger
candidates, (i) if this Agreement terminates because Arcada does not use all
reasonable efforts to consummate the transactions contemplated by this Agreement
in accordance with the terms of this Agreement (unless a condition set forth in
Section 7.2 is not satisfied and such nonsatisfaction has not been the result of
the failure of Arcada to use all reasonable efforts to consummate this Agreement
in accordance with the terms of this Agreement), (ii) if Arcada terminates this
Agreement for any reason other than the grounds for termination set out in
Section 8.1(a), 8.1(b) or 8.1(d) or (iii) if TTA terminates this Agreement
pursuant to Section 8.1(c)(ii), then Arcada shall pay to TTA on demand (and in
no event more than three days after such demand) in immediately available funds,
Two Hundred Thousand Dollars ($200,000.00).
(c) Notwithstanding the foregoing, the parties hereto hereby
acknowledge and agree that non-compliance with the provisions of Section 6.17(a)
or Section 7.3(c) above is not the basis for any party hereto to be entitled to
the break-up fee set forth in this Section 8.3.
8.3 EFFECT OF TERMINATION. In the event of termination of this
Agreement by any party, this Agreement shall forthwith become void (other than
Section 6.4(b) hereof, which shall remain in full force and effect) and, except
as and to the extent provided in Section 8.2, there shall be no further
liability on the part of any party or its officers or directors except for the
liability of TTA under Section 6.6(b).
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<PAGE>
8.4 AMENDMENT, EXTENSION AND WAIVER. Subject to applicable law, at
any time prior to the consummation of the Merger, whether before or after
approval thereof by the stockholders of TTA, the parties may (a) amend this
Agreement (including the Plan of Merger incorporated herein), (b) extend the
time for the performance of any of the obligations or other acts of any other
party hereto, (c) waive any inaccuracies in the representations and warranties
of any other party contained herein or in any document delivered pursuant
hereto, or (d) waive compliance with any of the agreements or conditions
contained herein; provided, however, that after any approval of the Merger by
the TTA and Arcada stockholders, there may not be, without further approval of
such stockholders, any amendment or waiver of this Agreement (or the Plan of
Merger) that reduces the amount or changes the form of consideration to be
delivered to the TTA stockholders or Arcada stockholders, respectively. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto. Any agreement on the part of a party hereto to
any extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party, but such waiver or failure to insist on
strict compliance with such obligation, covenant, agreement or condition shall
not operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
9. MISCELLANEOUS.
9.1 EXPENSES. All legal and other costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
borne by the party incurring such costs and expenses unless otherwise specified
in this Agreement.
9.2 SURVIVAL. Except for the covenants of Sections 6.13, 6.14, 6.15,
6.16 and 6.17, the respective representations and warranties, covenants and
agreements set forth in this Agreement and all Disclosure Schedules shall not
survive the Effective Time.
9.3 NOTICES. All notices, requests, claims, demands or other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly received if so given) by delivery, by registered or
certified mail (return receipt requested) or by cable, telecopier, or telex to
the respective parties as follows:
(a) If to TTA, to:
Touch Tone America, Inc.
4110 North Scottsdale Road
Scottsdale, Arizona 85251
Attn: Michael Canney
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With a copy to:
John Wills, Esq.
410 - 17th Street , Suite 1940
Denver, Colorado 80202
(b) If to Arcada, to:
Arcada Communications, Inc.
2001 Sixth Avenue, Suite 3210
Seattle, Washington 98121-2516
Attn: Frank Bonadio
With a copy to:
Cairncross & Hempelmann
701 Fifth Avenue, 70th Floor
Seattle, Washington 98104
Attn: David M. Otto
or such other address as shall be furnished in writing by any party to the
others in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
9.4 PARTIES IN INTEREST. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns; provided, however, that neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any party hereto
without the prior written consent of the other parties. Nothing in this
Agreement is intended to confer, expressly or by implication, upon any other
person any rights or remedies under or by reason of this Agreement (except for
Sections 1, 6.13, 6.14, 6.15, 6.16 and 6.17, which are intended to benefit third
party beneficiaries).
9.5 ENTIRE AGREEMENT. This Agreement, including the documents and
other writings referred to herein or delivered pursuant hereto, contains the
final expression of the parties with respect to its subject matter. There are
no restrictions, agreements, promises, warranties, covenants or undertakings
between the parties other than those expressly set forth herein or therein.
This Agreement supersedes all prior agreements and understandings between the
parties, both written and oral, with respect to its subject matter.
9.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
9.7 GOVERNING LAW. This Agreement, in all respects, including all
matters of construction, validity and performance, is governed by the internal
laws of the state of Washington as applicable to contracts executed and
delivered in Washington by citizens of such state to be performed wholly within
such state without giving effect to the principles of conflicts of laws thereof.
This Agreement is being delivered in Seattle, Washington.
41
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[This Space Intentionally Blank]
42
<PAGE>
9.8 HEADINGS. The Section headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
TOUCH TONE AMERICA, INC.
By: /s/ Michael J. Canney
------------------------------------
Its: President
S.V.V. SALES, INC.
By: /s/ Frank Bonadio
------------------------------------
Its: President
TOUCH TONE/ARCADA, INC.
By: /s/ Michael J. Canney
------------------------------------
Its: President
43
<PAGE>
FIRST AMENDMENT TO AGREEMENT FOR MERGER
This First Amendment dated as of November 19, 1996 to that certain
Agreement for Merger dated November 13, 1996 (the "Merger Agreement"), is by and
among Touch Tone America, a California corporation ("TTA"), Touch Tone/Arcada,
Inc., a Washington corporation and wholly-owned subsidiary of TTA ("Newco"), and
S.V.V. Sales, Inc., a Washington corporation d/b/a Arcada Communications, Inc.
("Arcada"). Capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed to them in the Merger Agreement.
TTA, Newco and Arcada hereby desire to amend certain portions of the Merger
Agreement.
In consideration of the above and the mutual covenants, terms and
conditions set forth below, TTA, Newco and Arcada hereby agree as follows:
1. AMENDMENTS TO MERGER AGREEMENT
A. Section 1(b) of the Merger Agreement is hereby amended by adding
a new Section 1(b)(iii) at the end thereof as follows:
"(iii) Notwithstanding the foregoing, TTA shall, at the
written request of Arcada (the "Adjustment Notice"), reduce the number of
shares of TTA Common Stock to be received in the Merger for each share of
Arcada Common Stock by (a) the number of shares as specified in the
Adjustment Notice ("Adjustment Shares") divided by (b) 50,000. At the
Effective Time, TTA shall issue the Adjustment Shares to the individuals
and in the amounts as specified in the Adjustment Notice; provided however,
that in no event shall the aggregate Merger Consideration exceed the Merger
Consideration as it exists without giving effect to this Section 1(b)(iii);
and provided further that TTA shall be under no obligation to cause any
shares issued pursuant to such Adjustment Notice to be registered under the
1933 Act or to otherwise to comply with the provisions of Section 1(d)(iv)
hereof with respect to such shares."
B. Section 6 of the Merger Agreement is hereby amended by adding a
new Section 6.19 at the end thereof as follows:
"6.19 LOCKUP. Arcada shall cause each of its Shareholders who
receive TTA Common Stock in the Merger to covenant and agree that they
shall not sell any such shares of TTA Common Stock, except in according
with the following limits:
RESTRICTION PERIOD TTA COMMON STOCK NOT SUBJECT TO LOCKUP
------------------ --------------------------------------
Commencing on November 19, 1996
(the "Lock-up Date") Until the six-month
anniversary of the Lock-up Date Up to an aggregate of 250,000 shares
1
<PAGE>
Commencing on the six-month anniversary
of the Lock-up Date until the one year Up to an aggregate of 500,000 shares
anniversary of the Lock-up Date (including sales in prior periods)
Commencing on the one year anniversary
of the Lock-up Date until the two year Up to an aggregate of 1,000,000 shares
anniversary of the Lock-up (including sales in prior periods)
On and after the two year anniversary of
the Lock-up Date All shares of TTA Common Stock
It is understood and agreed that the number of shares of TTA Common Stock
exempt from the "lock-up" pursuant to the foregoing schedule shall be
cumulative such that any shares not sold in one period may be sold in any
subsequent period without reducing the aggregate number of shares of TTA
Common Stock which may be sold in such period(s)."
C. Section 6 of the Merger Agreement is hereby amended by adding a
new Section 6.20 at the end thereof as follows:
"6.20 ASSURANCE LETTERS. TTA shall have used its best efforts to
cause each of the directors, executive officers and each of the ten (10)
largest beneficial owners of TTA Common Stock on the date hereof to execute
a letter substantially in the form of Exhibit B hereto providing for, among
other things, the agreement of each such person to vote in favor of the
Merger Agreement."
D. The Merger Agreement is hereby amended by adding a new Exhibit B
at the end thereof in the form attached hereto as Annex 1.
2. MISCELLANEOUS
A. RATIFICATION. The parties hereto hereby ratify and approve the
Merger Agreement, as amended hereby, and the parties hereto acknowledge that all
of the terms and provisions of the Merger Agreement as amended hereby, are and
remain in full force and effect.
B. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
C. GOVERNING LAW. This Amendment, in all respects, including all
matters of construction, validity and performance, is governed by the internal
laws of the state of Washington as applicable to contracts executed and
delivered in Washington by citizens of such state to be performed wholly within
such state without giving effect to the principles of conflicts of laws thereof.
This agreement is being delivered in Seattle, Washington.
2
<PAGE>
The parties hereto have executed this First Amendment as of the date first
set forth above.
TOUCH TONE AMERICA, INC.
By: /s/ Michael J. Canney
------------------------------------
Its: President
S.V.V. SALES, INC.
By: /s/ Frank Bonadio
------------------------------------
Its: President
TOUCH TONE/ARCADA, INC.
By: /s/ Michael J. Canney
------------------------------------
Its: President
3
<PAGE>
SECOND AMENDMENT TO AGREEMENT FOR MERGER
This Second Amendment dated as of December 4, 1996 to that certain
Agreement for Merger dated November 13, 1996, as previously amended by that
certain First Amendment to Merger Agreement dated as of November 19, 1996 (the
"Merger Agreement"), is by and among Touch Tone America, a California
corporation ("TTA"), Touch Tone/Arcada, Inc., a Washington corporation and
wholly-owned subsidiary of TTA ("Newco"), and S.V.V. Sales, Inc., a Washington
corporation d/b/a Arcada Communications, Inc. ("Arcada"). Capitalized terms
used herein and not otherwise defined herein shall have the meanings ascribed to
them in the Merger Agreement.
TTA, Newco and Arcada hereby desire to amend certain portions of the Merger
Agreement.
In consideration of the above and the mutual covenants, terms and
conditions set forth below, TTA, Newco and Arcada hereby agree as follows:
1. AMENDMENT TO MERGER AGREEMENT
A. Section 1(b)(i) of the Merger Agreement is hereby amended by
deleting reference in the first sentence thereof to a "one year, eight percent
(8%) promissory note of TTA" and substituting therefor a reference to a "fifteen
(15) month, eight percent (8%) promissory note of TTA".
2. MISCELLANEOUS
A. RATIFICATION. The parties hereto hereby ratify and approve the
Merger Agreement, as amended hereby, and the parties hereto acknowledge that all
of the terms and provisions of the Merger Agreement as amended hereby, are and
remain in full force and effect.
B. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
C. GOVERNING LAW. This Amendment, in all respects, including all
matters of construction, validity and performance, is governed by the internal
laws of the state of Washington as applicable to contracts executed and
delivered in Washington by citizens of such state to be performed wholly within
such state without giving effect to the principles of conflicts of laws thereof.
This agreement is being delivered in Seattle, Washington.
1
<PAGE>
The parties hereto have executed this Second Amendment as of the date first
set forth above.
TOUCH TONE AMERICA, INC.
By: /S/ Michael J. Canney
-------------------------------
Its: President
S.V.V. SALES, INC.
By: /S/ Frank Bonadio
-------------------------------
Its: President
TOUCH TONE/ARCADA, INC.
By: /S/ Michael J. Canney
-------------------------------
Its: President
2
<PAGE>
APPENDIX B
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR QUALIFIED UNDER STATE SECURITIES LAWS AND MAY NOT BE
SOLD, PLEDGED, OR OTHERWISE TRANSFERRED UNLESS (A) COVERED BY AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND QUALIFIED UNDER APPLICABLE
STATE SECURITIES LAWS, OR (B) THE COMPANY HAS BEEN FURNISHED WITH AN OPINION OF
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY TO THE EFFECT THAT NO REGISTRATION
OR QUALIFICATION IS LEGALLY REQUIRED FOR SUCH TRANSFER
PROMISSORY NOTE
$ January __, 1997
---------- Seattle, Washington
FOR VALUE RECEIVED, TOUCH TONE AMERICA, INC., a Washington corporation
("Maker") promises to pay, upon the terms stated below, to the order of
______________ ("Payee") the principal sum of ______________________
($________) (the "Principal Amount"), plus interest thereon to accrue
commencing on the date hereof at a fixed rate equal to eight percent (8%) per
annum (the "Interest Rate") such interest to be paid quarterly, in arrears,
commencing on April __, 1997 through and including April __, 1998 at which
time the Principal Amount, together with all outstanding accrued and unpaid
interest thereon shall be due and payable. After maturity (whether by
acceleration or otherwise) or after the occurrence and during the continuance
of an Event of Default (as defined below), and whether or not judgment has
been issued thereon, interest on the amount outstanding hereunder shall
accrue and be payable at a rate per annum equal to the lesser of (a) the
Interest Rate plus three percentage points (3%) or (b) the maximum rate
permitted by law. Principal and interest shall be payable in lawful money of
the United States, at such place as the holder of this Note may designate in
writing.
The Payee shall have the right, without any notice, the Maker having waived
any and all rights to receive any such notice, to accelerate this Note and to
declare the entire unpaid balance hereof and the obligations evidenced hereby
immediately due and payable upon the occurrence and during the continuance of
any one or more of the following events (each, an "Event of Default"):
(1) the Maker shall default in any payment of the principal amount hereof
or interest hereon for thirty days after the date due thereof, whether at
maturity, by acceleration or otherwise.
<PAGE>
(2) The Maker shall (i) admit in writing its inability to pay its debts
generally as they become due; (ii) file a petition in bankruptcy; (iii) make an
assignment for the benefit of creditors; or (iv) be adjudicated bankrupt.
After the occurrence and during the continuance of an Event of Default, all
payments on this Note shall be applied first to the payment of any costs, fees
or other charges incurred in connection with the collection of the indebtedness
evidenced hereby, next to the payment of accrued interest and then to the
reduction of the Principal Amount.
In the event of any Event of Default hereunder, the Maker agrees to pay to
the Payee all expenses, including, without limitation, reasonable fees and
disbursements of counsel, incurred by the Payee in the enforcement and
collection of this Note, whether suit be brought or not, and whether through
courts of original jurisdiction, courts of appellate jurisdiction or through a
bankruptcy court or other legal proceeding.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF WASHINGTON (WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES). THE
UNDERSIGNED FURTHER WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND
OR NATURE IN ANY COURT WITH RESPECT TO, OR ARISING OUT OF THIS NOTE AND/OR THE
ENDORSEMENT OF ANY OF ITS RIGHTS AND REMEDIES.
The Maker waives presentment and protest and also notice of protest, notice
of dishonor and notice of maturity. Any delay by the Payee in exercising any
power or right hereunder shall not operate as a waiver hereof, not shall the
exercise of single or partial rights hereunder create any other or further
exercise thereof or exercise of any other power or right. In addition, the
Maker waives and agrees not to assert: (a) any right to require the Payee to
pursue any other remedy available to the Payee or to pursue any remedy in any
particular order or manner; (b) the benefits or any statute of limitations
affecting its liability hereunder or the enforcement hereof; (c) the benefits of
any legal or equitable doctrine or principle of marshaling; (d) any defense
arising by reason of any disability or other defense of the Maker or by reason
of the cessation from any cause whatsoever (other than payment in full) of the
liability of the Maker for payment of this Note and (e) the benefits of any
statutory provision limiting the right of the Payee to recover a deficiency
judgment or to otherwise proceed against any person or entity obligated for
payment of this Note.
This note shall be binding upon the Maker and its successors and assigns
and shall inure to the benefit of and shall be binding upon Payee and its
successors and assigns.
TOUCH TONE AMERICA, INC.
By:
-------------------------
Name:
Title:
2
<PAGE>
APPENDIX C
CHAPTER 23B.13
DISSENTERS' RIGHTS
Sec.
23B.13.010. Definitions.
23B.13.020. Right to Dissent.
23B.13.030. Dissent by nominees and beneficial owners.
23B.13.200. Notice of dissenters' rights.
23B.13.210. Notice of intent to demand payment.
23B.13.220. Dissenters' notice.
23B.13.230. Duty to demand payment.
23B.13.240. Share restrictions.
23B.13.250. Payment.
23B.13.260. Failure to take action.
23B.13.270. After-acquired shares.
23B.13.280. Procedure if shareholder dissatisfied with payment or offer.
23B.13.300. Court action.
23B.13.310. Court costs and counsel fees.
Section 23B.13.010. DEFINITIONS.
As used in this chapter:
(1) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under RCW 23B.13.020 and who exercises that right when and in
the manner required by RCW 23B.13.200 through 23B.13.280.
(3) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder. [1989 c 165 Section 140.]
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<PAGE>
Section 23B.13.020. RIGHT TO DISSENT.
(1) A shareholder is entitled to dissent from, and obtain payment of the
fair value of the shareholder's shares in the event of, any of the following
corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party
(i) if shareholder approval is required for the merger by RCW 23B.11.030,
23B.11.080, or the articles of incorporation and the shareholder is entitled to
vote on the merger, or (ii) if the corporation is a subsidiary that is merged
with its parent under RCW 23B.11.040;
(b) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale will be distributed to the shareholders within one
year after the date of sale;
(d) An amendment of the articles of incorporation that materially reduces
the number of shares owned by the shareholder to a fraction of a share if the
fractional share so created is to be acquired for cash under RCW 23B.06.040; or
(e) Any corporate action taken pursuant to a shareholder vote to the extent
the articles of incorporation, bylaws, or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to dissent and
obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action fails to comply with
the procedural requirements imposed by this title, RCW 25.10.900 through
25.10.955, the articles of incorporation, or the bylaws, or is fraudulent with
respect to the shareholder or the corporation.
(3) The right of a dissenting shareholder to obtain payment of the fair value
of the shareholder's shares shall terminate upon the occurrence of any one of
the following events:
(a) The proposed corporate action is abandoned or rescinded;
(b) A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
(c) The shareholder's demand for payment is withdrawn with the written
consent of the corporation. [1991 c 269 Section 37; 1989 c 165 Section 141.]
Section 23B.13.030. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(1) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in the shareholder's name only if the shareholder
dissents with respect to all shares beneficially owned by any one person and
notifies the corporation in writing of the name and address of each person on
whose behalf the shareholder asserts dissenters' rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to which the
dissenter dissents and the dissenter's other shares were registered in the names
of different shareholders.
(2) A beneficial shareholder may assert dissenters' fights as to shares
held on the beneficial shareholder's behalf only if:
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<PAGE>
(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares of which
such shareholder is the beneficial shareholder or over which such shareholder
has power to direct the vote. [1989 c 165 Section 142.]
Section 23B.13.200. NOTICE OF DISSENTERS' RIGHTS.
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this chapter and be accompanied by a copy of this chapter.
(2) If corporate action creating dissenters' rights under RCW 23B.13.020 is
taken without a vote of shareholders, the corporation, within ten days after
[the] effective date of such corporate action, shall notify in writing all
shareholders entitled to assert dissenters' rights that the action was taken and
send them the dissenters' notice described in RCW 23B.13.220. [1989 c 165
Section 143.]
Section 23B.13.220. DISSENTERS' NOTICE.
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of RCW 23B.13.210.
(2) The dissenters' notice must be sent within ten days after the effective
date of the corporate action, and must:
(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not the person acquired beneficial ownership of the shares
before that date;
(d) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after the date
the notice in subsection (1) of this section is delivered; and
(e) Be accompanied by a copy of this chapter. [1989 c 165 Section 145.]
Section 23B.13.230. DUTY TO DEMAND PAYMENT.
(1) A shareholder sent a dissenters' notice described in RCW 23B.13.220
must demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to RCW 23B.13.220(2)(c), and deposit the
shareholder's certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits the shareholder's
share certificates under subsection (1) of this section retains all other rights
of a shareholder until the proposed corporate action is effected.
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<PAGE>
(3) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter. [1989 c 165 Section 146.]
Section 23B.13.240. SHARE RESTRICTIONS.
(1) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is effected or the restriction is released under RCW 23B.13.260.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until the
effective date of the proposed corporate action. [1989 c 165 Section 147.]
Section 23B.13.250. PAYMENT.
(1) Except as provided in RCW 23B.13.270, within thirty days of the later
of the effective date of the proposed corporate action, or the date the payment
demand is received, the corporation shall pay each dissenter who complied with
RCW 23B. 13.230 the amount the corporation estimates to be the fair value of the
shareholder's shares, plus accrued interest.
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year ending
not more than sixteen months before the date of payment, an income statement for
that year, a statement of changes in shareholders' equity for that year, and the
latest available interim financial statements, if any;
(b) An explanation of how the corporation estimated the fair value of the
shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under RCW
23B.13.280; and
(e) A copy of this chapter. [1989 c 165 Section 148.]
Section 23B.13.260. FAILURE TO TAKE ACTION.
(1) If the corporation does not effect the proposed action within sixty
days after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release any transfer
restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it must
send a new dissenters' notice under RCW 23B.13.220 and repeat the payment demand
procedure. [1989 c 165 Section 149.]
Section 23B.13.270. AFTER-ACQUIRED SHARES.
(1) A corporation may elect to withhold payment required by RCW 23B.13.250
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of the dissenter's demand. The corporation shall send with its
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<PAGE>
offer an explanation of how it estimated the fair value of the shares, an
explanation of how the interest was calculated, and statement of the dissenter's
right to demand payment under RCW 23B.13.280. [1989 c 165 Section 150.]
Section 23B.13.280. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR
OFFER.
(1) A dissenter may notify the corporation in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate, less any payment under RCW
23B.13.250, or reject the corporation's offer under RCW 23B.13.270 and demand
payment of the dissenter's estimate of the fair value of the dissenter's shares
and interest due, if:
(a) The dissenter believes that the amount paid under RCW 23B.13.250 or
offered under RCW 23B.l3.270 calculated; is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under RCW 23B.13.250 within sixty
days after the date set for demanding payment; or
(c) The corporation does not effect the proposed action and does not return
the deposited certificates or release the transfer restrictions imposed on
uncertificated shares within sixty days after the date set for demanding
payment.
(2) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (1) of this section within thirty days after the
corporation made or offered payment for the dissenter's shares. [1989 c 165
Section 151.]
Section 23B.13.300. COURT ACTION.
(1) If a demand for payment under RCW 23B.13.280 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the sixty-day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
(2) The corporation shall commence the proceeding in the superior court of
the county where a corporation's principal office, or, if none in this state,
its registered office, is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled, parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provisions of this chapter. If the court determines that such
shareholder has not complied with the provisions of this chapter, the
shareholder shall be dismissed as a party.
(5) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more
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<PAGE>
persons as appraisers to receive evidence and recommend decision on the question
of fair value. The appraisers have the powers described in the order appointing
them, or in any amendment to it. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
(6) Each dissenter made a party to the proceeding is entitled to judgment
(a) for the amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the corporation,
or (b) for the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under RCW 23B.13.270. [1989 c 165 Section 152.]
Section 23B.13.310. COURT COSTS AND COUNSEL FEES.
(1) The court in a proceeding commenced under RCW 23B.13.300 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall assess the costs
against the corporation, except that the court may assess the costs against all
or some of the dissenters, in amounts the court finds equitable, to the extent
the court finds the dissenters acted arbitrarily, vexatiously, or not in good
faith in demanding payment under RCW 23B.13.280.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the requirements
of RCW 23B. 13.200 through 23B. 13.280; or
(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by chapter 23B.13 RCW.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited. [1989 c 165 Section 153.]
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<PAGE>
APPENDIX D
PLAN AND AGREEMENT OF MERGER BETWEEN
TOUCH TONE - WASHINGTON, INC.
AND
TOUCH TONE AMERICA, INC.
The Plan and Agreement of Merger (this "Agreement") is entered into this
____ day of January 1997, by and between Touch Tone - Washington, Inc., a
Washington corporation (the "Surviving Corporation"), and Touch Tone America,
Inc., a California corporation ("TTA"). The Surviving Corporation and TTA are
sometimes referred to jointly as the "Constituent Corporations."
RECITALS
A. Each of the Constituent Corporations are corporations organized and
existing under the laws of the respective states as indicated in the first
paragraph of this Agreement.
B. The shareholders and directors of each of the Constituent Corporations
have deemed it advisable for the mutual benefit of the Constituent corporations
and their respective shareholders that TTA be merged into the Surviving
Corporation pursuant to the provisions of the Washington Business Corporation
Act, Title 23B of the Revised Code of Washington and the California General
Corporation Law (the "Merger").
NOW, THEREFORE, in accordance with the laws of the states of Washington and
California, the Constituent Corporations agree that, subject to the following
terms and conditions, (i) TTA shall be merged into the Surviving Corporation,
(ii) the Surviving Corporation shall continue to be governed by the laws of the
state of Washington, and (iii) the terms of the Merger, and the mode of carrying
them into effect, shall be as follows:
ARTICLE I
ARTICLES OF SURVIVING CORPORATION
The Articles of Incorporation of the Surviving Corporation in effect
immediately prior to the Effective Time of the Merger shall constitute the
"Articles" of the Surviving Corporation within the meaning of Section
23B.01.400(1) of the Washington Business Corporation Act and Section 200 of the
California General Corporation law, except that Article I of the Articles of
Incorporation of the Surviving Corporation is hereby amended in its entirety to
read as follows:
1
<PAGE>
ARTICLE 1
NAME
The name of the corporation is Touch Tone America, Inc.
ARTICLE II
CONVERSION OF SHARES
2.1 TTA SHARES. At the Effective Time of the Merger each outstanding
share of the common stock of TTA shall automatically convert to one share of
Touch Tone - Washington, Inc. It will not be necessary for shareholders of TTA
to exchange their existing stock certificates for stock certificates of the
Surviving Corporation.
2.2 SURVIVING CORPORATION SHARES. At the Effective Time of the Merger
each outstanding share of the common stock of the Surviving Corporation shall be
automatically canceled and returned to the status of authorized but unissued
shares.
ARTICLE III
BYLAWS
The Bylaws of the Surviving Corporation shall be the governing Bylaws.
ARTICLE IV
DIRECTORS AND OFFICERS
The directors and officers of TTA shall be the directors and officers of
the Surviving Corporation.
2
<PAGE>
ARTICLE V
EFFECT OF THE MERGER
The effect of the Merger shall be as provided by the applicable provisions
of the laws of Washington and California. Without limiting the generality of
the foregoing, and subject thereto, at the Effective time of the Merger: the
separate existence of TTA shall cease; the Surviving Corporation shall possess
all assets and property of every description, and every interest therein,
wherever located, and the rights, privileges, immunities, powers, franchises,
and authority, of a public as well as a private nature, of all of the
Constituent Corporations; all obligations belonging to or due any of the
Constituent Corporations shall be vested in and become the obligations of, the
Surviving Corporation without further act or deed; title to any real estate or
any interest therein vested in any of the Constituent Corporations shall be
vested in and become the obligations of the Surviving Corporation without
further act or deed; title to any real estate or any interest therein shall not
revert or in any way be impaired by reason of the Merger; all rights of
creditors and all liens upon any property of any of the Constituent Corporations
shall be preserved unimpaired; and the Surviving Corporation shall be liable for
all the obligations of the Constituent Corporations and any claim existing, or
action or proceeding pending, by or against any of the Constituent Corporations
may be prosecuted to judgment with right of appeal, as if the Merger had not
taken place.
If at any time after the Effective Time of the Merger the Surviving
Corporation shall consider it to be advisable that any further conveyances,
agreements, documents, instruments, and assurances of law or any other things
are necessary or desirable to vest, perfect, confirm, or record in the Surviving
Corporation the title to any property, rights, privileges, powers, and
franchises of the Constituent Corporations or otherwise to carry out the
provisions of this Agreement, the proper directors and officers of the
Constituent Corporations last in office shall execute and deliver, upon the
Surviving Corporations' request, any and all proper conveyances, agreements,
documents, instruments, and assurances of law, and do all things necessary or
proper to vest, perfect, or confirm title to such property, rights, privileges,
powers, and title to such property, rights, privileges, powers, and franchises
in the Surviving Corporation, and otherwise to carry out the provisions of this
Agreement.
ARTICLE VI
EFFECTIVE TIME OF THE MERGER
As used in this Agreement, the "Effective Time of the Merger" shall mean
the time at which executed counterparts of this Agreement or conformed copies
thereof, together with duly executed Certificates of Articles of Merger have
been duly filed by the Constituent Corporations in the office of the Washington
Secretary of State pursuant to Section 23B.11.050 of the Washington Business
Corporation Act and the Office of the California Secretary of State pursuant to
Section 1108 of the California General Corporation Law or at such time
thereafter as is provided in such Certificate or Articles of Merger.
3
<PAGE>
ARTICLE VII
TERMINATION
This Agreement may be terminated and the Merger abandoned by mutual consent
of the directors of the Constituent Corporations at any time prior to the
Effective Time of the Merger.
ARTICLE VIII
NO THIRD PARTY BENEFICIARIES
Except as otherwise specifically provided herein, nothing expressed or
implied in this Agreement is intended, or shall be construed, to confer upon or
give any person, firm, or corporation, other than the Constituent Corporations
and their respective shareholders, any rights or remedies under or by reason of
this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Plan and Agreement
of Merger to be executed as of the date first above written.
TOUCH TONE - WASHINGTON, INC.
A Washington Corporation
By
---------------------------------
Michael J. Canney, PRESIDENT
ATTEST:
- --------------------------------
David Smith, SECRETARY
TOUCH TONE AMERICA, INC.
A California Corporation
-----------------------------------
Michael J. Canney, PRESIDENT
ATTEST:
- --------------------------------
David Smith, SECRETARY
4
<PAGE>
APPENDIX E
ARTICLES OF INCORPORATION
OF
TOUCH TONE - WASHINGTON, INC.
The above-named Corporation existing under the Washington Business Corporation
Act, adopts the following Restated Articles of Incorporation:
ARTICLE 1. NAME
The name of the Corporation is TOUCH TONE - WASHINGTON, INC.
ARTICLE 2. DURATION
The period of the Corporation's duration shall be perpetual.
ARTICLE 3. PURPOSES AND POWERS
The purpose for which the Corporation is organized is to engage in any business,
trade or activity which may be conducted lawfully by a corporation organized
under the Washington Business Corporation Act.
The Corporation shall have the authority to engage in any and all such
activities as are incidental or conducive to the attainment of the purposes of
the Corporation, and to exercise any and all powers authorized or permitted
under any laws that now or hereafter may be applicable or available to the
Corporation.
ARTICLE 4. AUTHORIZED CAPITAL
The total number of shares which the corporation is authorized to issue is one
hundred and ten million (110,000,000), consisting of one hundred million
(100,000,000) shares of common stock and ten million (10,000,000) shares of
preferred stock.
The preferred stock may be issued from time to time in one or more series in any
manner permitted by law and the provisions of these
Page 1 - ARTICLES OF INCORPORATION
<PAGE>
Articles of Incorporation of the corporation, as determined from time to time by
the board of directors and stated in the resolution or resolutions providing for
the issuance thereof, prior to the issuance of any shares thereof. The board of
directors shall have the authority to fix and determine and to amend, subject to
the provisions hereof, the rights and preferences of the shares of any series
that is wholly unissued or to be established. Unless otherwise specifically
provided in the resolution establishing any series, the board of directors shall
further have the authority, after the issuance of shares of a series whose
number it has designated, to amend the resolutions establishing such series to
decrease the number of shares of that series, but not below the number of shares
of such series then outstanding.
The holders of shares of the common stock shall be entitled to receive
dividends out of funds of the Corporation legally available by the Board of
Directors. The holders of shares of Common Stock, on the basis of one vote per
share, shall have the right to vote for the election of members of the Board of
Directors of the Corporation and the right to vote on all other matters and
shall not have cumulative voting rights. The holders of the shares of the
Common Stock shall be entitled to receive distributions legally payable to
shareholders on the liquidation of the Corporation and shall have no preemptive
rights.
ARTICLE 5. BYLAWS
The Board of Directors shall have the power to adopt, amend or repeal the Bylaws
of the Corporation and to adopt new Bylaws, subject to the power of the
shareholders to amend or repeal such Bylaws. The shareholders shall also have
the power to adopt, amend or repeal the Bylaws of the Corporation and to adopt
new Bylaws.
ARTICLE 6. REGISTERED OFFICE AND AGENT
The name of the registered agent of the Corporation and the address of its
registered office are as follows:
Page 2 - ARTICLES OF INCORPORATION
<PAGE>
Cairncross & Hempelmann
701 Fifth Avenue
70th Floor, Columbia Tower
Seattle, Washington 98104
ARTICLE 7. DIRECTORS
7.1 NUMBER. The number of Directors of the Corporation shall be determined in
the manner provided in the Bylaws, and may be increased or decreased from
time to time in the manner provided therein.
7.2 VACANCIES. Any vacancy occurring on the Board of Directors may be filled
by the affirmative vote of a majority of the remaining Directors, though
less than a quorum of the Board of Directors, or by a sole remaining
Director. Any directorship to be filled by reason of an increase in the
number of Directors of the Corporation may be filled by the affirmative
vote of a majority of the number of Directors fixed by the Bylaws prior to
such increase. Any such directorship not so filled by the Directors shall
be filled by election at the next annual meeting of shareholders or at a
special meeting of shareholders called for that purpose.
ARTICLE 8. LIMITATION OF DIRECTOR LIABILITY
To the full extent that the Washington Business Corporation Act, as it exists on
the date hereof or hereafter may be amended, permits the limitation or
elimination of the liability of Directors, a Director of the Corporation shall
not be liable to the Corporation or its shareholders for any monetary damages
for conduct as a Director. Any amendment to or repeal of this Article 8 or to
the Washington Business Corporation Act shall not adversely affect any right or
protection of a Director of the Corporation for or with respect to any acts or
omissions of such Director occurring prior to such amendment or repeal.
Page 3 - ARTICLES OF INCORPORATION
<PAGE>
ARTICLE 9. INDEMNIFICATION
The Corporation shall provide any indemnification required by the Washington
Business Corporation Act and may indemnify directors, officers, agents and
employees as follows:
9.1 The Corporation shall indemnify its officers and directors to the full
extent required and may indemnify its officers and directors to the full
extent permitted by the Washington Business Corporation Act now or
hereafter in force, whether they are serving the Corporation or, at its
request, any other entity, as an officer, director, or in any other
capacity; provided no such indemnity shall indemnify any director from or
on account of any (a) acts or omissions of the director finally adjudged to
be intentional misconduct or a knowing violation of law; (b) conduct of the
director finally adjudged to be in violation of RCW 23B.08.310, or (c) any
transaction with respect to which it was finally adjudged that such
director personally received a benefit in money, property or services to
which the director was not legally entitled.
9.2 The Board of Directors may take such action as is necessary or appropriate
to carry out these indemnification provisions and is expressly empowered to
adopt, approve and amend from time to time such Bylaws, resolutions or
contracts implementing these provisions, including but not limited to
implementing the manner in which determinations as to any indemnity or
advancement of expenses shall be made, or such further indemnification
agreements as may be permitted by law.
9.3 The Corporation shall indemnify other employees and agents to the extent
that shall be authorized by the Board of Directors or the Bylaws of the
Corporation and that may be permitted by law, whether the employees and
agents are serving the Corporation or, at its request, any other entity.
9.4 The foregoing rights of indemnification shall not be exclusive of any other
rights to which those seeking indemnification may be entitled under any
statute, provision of the Articles of Incorporation, the Bylaws of the
Corporation or other agreements and contracts.
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<PAGE>
9.5 No amendment or appeal of this Article shall apply to or have any effect on
any right to indemnification provided hereunder with respect to acts or
omissions occurring prior to such amendment or repeal.
ARTICLE 10. AMENDMENTS TO ARTICLES OF INCORPORATION
The Corporation reserves the right to amend or repeal any of the provisions
contained in these Articles of Incorporation, in any manner now or hereafter
permitted by law, and the rights of the shareholders of the Corporation are
granted subject to this reservation.
ARTICLE 11. NOTICES
The address where the State of Washington Office of Secretary of State may mail
notices to the Corporation is:
c/o Cairncross & Hempelmann
701 Fifth Avenue
70th Floor, Columbia Center
Seattle, Washington 98104
ARTICLE 12. EFFECTIVE DATE
These Articles are adopted as of _________, 1996.
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<PAGE>
ARTICLE 13. SHAREHOLDER APPROVAL
These Amendments were duly approved by the shareholders in accordance with RCW
23B.10.030 and 23B.10.040
Dated this ___ day of _________, 1996.
TOUCH TONE - WASHINGTON, INC.
By:
-----------------------------
Its
By:
-----------------------------
Its
Page 6 - ARTICLES OF INCORPORATION
<PAGE>
CONSENT TO APPOINTMENT AS REGISTERED AGENT
Cairncross & Hempelmann, P.S. hereby consents to serve as Registered Agent,
in the State of Washington, for Touch Tone - Washington, Inc. It understands
that, as agent for the Corporation, it will be my responsibility to receive
service of process in the name of the Corporation; to forward all mail to the
Corporation; and to immediately notify the office of the Secretary of State in
the event of its resignation, or of any changes in the registered office address
of the Corporation for which it is agent.
DATED: ________, 1996
CAIRNCROSS & HEMPELMANN, P.S.
By:
--------------------------
Print Name
-------------------
Its:
-------------------------
70th Floor, Columbia Center
701 Fifth Avenue
Seattle, Washington 98104
Page 7 - ARTICLES OF INCORPORATION
<PAGE>
BYLAWS
OF
TOUCH TONE - WASHINGTON, INC.
<PAGE>
TOUCH TONE - WASHINGTON, INC.
SECTION 1. OFFICES
The principal office of the Corporation shall be located at the principal place
of business or such other place as the Board of Directors (the "Board") may
designate. The Corporation may have such other offices, either within or
without the State of Washington, as the Board may designate or as the business
of the Corporation may require from time to time.
SECTION 2. SHAREHOLDERS
2.1 ANNUAL MEETING. The annual meeting of the shareholders shall be held on
the day chosen by the Board of Directors each year at the principal office
of the Corporation or such other place as fixed by the Board, for the
purpose of electing Directors and transacting such other business as may
properly come before the meeting. If the day fixed for the annual meeting
is a legal holiday, the meeting shall be held on the next succeeding
business day. If the annual meeting is not held at the designated time,
the President or the Board may call the annual meeting at a time fixed by
them not more than sixty (60) days after such designated time by proper
notice designating the meeting as the annual meeting. If the annual
meeting is not held at the designated time or during the sixty (60) day
period thereafter, the annual meeting may be called by the holders of not
less than one-tenth (1/10th) of all the outstanding shares of the
Corporation entitled to vote at the meeting. In such event, notice shall
be given not more than fifteen (15) days after the expiration of such sixty
(60) day period. Any such notice shall fix the time of the meeting at the
earliest date permissible under the applicable notice requirements.
2.2 SPECIAL MEETINGS. The Chairman of the Board, the President, or the Board
may call special meetings of the shareholders for any purpose, and the
holders of not less than one-tenth (1/10th) of all the outstanding shares
of the Corporation entitled to vote on any issue proposed to be considered
at the proposed special meeting, may call a special meeting of the
shareholders, if they sign, date and deliver to the Corporation's Secretary
a demand for a special meeting describing the purpose(s) for which it is to
be held.
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<PAGE>
2.3 PLACE OF MEETING. All meetings shall be held at the principal office of
the Corporation or at such other place within or without the State of
Washington designated by the Board, by any persons entitled to call a
meeting hereunder or by a waiver of notice signed by all of the
shareholders entitled to vote at the meeting.
2.4 MEETING NOTICE REQUIREMENTS.
2.4.1NOTICE OF MEETING. The Chairman of the Board, the President, the
Secretary, the Board, or shareholders calling an annual or
special meeting of shareholders, as provided for herein, shall
cause to be delivered to each shareholder entitled to notice of
or to vote at the meeting, either personally or by mail, not less
than ten (10) nor more than sixty (60) days before the meeting,
written notice stating the place, day and hour of the meeting,
and in the case of a special meeting, the purpose(s) for which
the meeting is called. At any time, upon properly executed
written demand of the holders of not less than one-tenth (1/10th)
of all of the outstanding shares of the Corporation entitled to
vote on any issue proposed to be considered at the proposed
meeting, it shall be the duty of the Secretary to give notice of
such special meeting of shareholders to be held on such date and
at such place and hour as shall be fixed in accordance with these
Bylaws, not less than ten (10) nor more than sixty (60) days
after receipt of said request, and if the Secretary shall neglect
or refuse to issue such notice, the person(s) making the request
may do so and may so fix the date for such meeting. If such
notice is mailed, it shall be deemed delivered when deposited in
the U.S. mail properly addressed to the shareholder at his or her
address as it appears on the stock transfer books of the
Corporation, with postage prepaid. If the notice is telegraphed,
it shall be deemed delivered when the content of the telegram is
delivered to the telegraph company.
2.4.2NOTICE OF ADJOURNMENT OF MEETING. A majority of the shares
represented at the meeting, even if less
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<PAGE>
than a quorum, may adjourn the meeting from time to time. At a
reconvened meeting at which a quorum is present, any business may
be transacted which might have been transacted at the meeting as
originally noticed. If a meeting is adjourned to a different
date, time or place, notice need not be given of the new date,
time or place if a new date, time or place is announced at the
meeting before adjournment; however, if a new record date for the
adjourned meeting is or must be fixed in accordance with the
corporate laws of the State of Washington, notice of the
adjourned meeting must be given to persons who are shareholders
as of the new record date.
2.5 WAIVER OF NOTICE.
2.5.1Whenever any notice is required to be given to any shareholder under
the provisions of these Bylaws, the Articles of Incorporation of
the Corporation or the Washington Business Corporation Act, a
waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before or after the time stated
therein, and delivered to the Corporation for inclusion in the
minutes of the Corporation, shall be deemed equivalent to the
giving of such notice.
2.5.2The attendance of a shareholder at a meeting waives objection to lack
of, or defective notice of such meeting or consideration of a
particular matter at the meeting, unless a shareholder at the
beginning of the meeting or the consideration of such matter
objects to holding the meeting, transacting business at the
meeting or considering the matter when presented at the meeting.
2.6 FIXING OF RECORD DATE FOR DETERMINING OF SHAREHOLDERS. For purposes of
determining shareholders entitled to notice of, or to vote at any meeting
of shareholders or at any adjournment thereof, or shareholders entitled to
demand a special meeting, or shareholders entitled to receive payment of
any dividend, or in order to make a determination of shareholders of the
Corporation for any other purpose, the Board may fix in advance a date as
the record date for any
Page 3 -BYLAWS
<PAGE>
such determination. Such record date shall be not more than seventy (70)
days, and in case of a meeting of shareholders, not less than ten (10)
days, prior to the date on which the particular action requiring such
determination is to be taken. If no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a
meeting, or to demand a special meeting or to receive payment of a
dividend, the date on which the notice of meeting is mailed or on which the
resolution of the Board declaring such dividend is adopted, as applicable,
shall be the record date for such determination. Such determination shall
apply to any adjournment of the meeting.
2.7 SHAREHOLDERS' LIST.
2.7.1THE LIST. Beginning two (2) business days after notice of a meeting
of shareholders has been given, a complete alphabetical list of
the shareholders entitled to vote at such meeting, or at any
adjournment thereof, shall be compiled, arranged by voting group,
and within each voting group by class or series, with the address
of and number of shares held by each shareholder. This record
shall be kept on file at the Corporation's principal office or at
a place identified in the meeting notice in the city where the
meeting will be held, and on written demand shall be subject to
inspection by any shareholder at any time during normal business
hours. Such record shall also be kept open at such meeting for
inspection by any shareholder.
2.7.2COPYING. A shareholder may, on written demand, copy the shareholders'
list at such shareholder's expense during regular business hours,
provided that:
a. Such shareholder's demand is made in good faith and for a
proper purpose;
b. Such shareholder has described with reasonable particularity
his/her/its purpose in the written demand; and
Page 4 -BYLAWS
<PAGE>
c. The shareholders' list is directly connected with such
shareholder's purpose.
2.8 QUORUM. A majority of the votes entitled to be cast on a matter at a
meeting by a voting group, represented in person or by proxy, shall
constitute a quorum of that voting group for action on that matter at a
meeting of the shareholders. If the presiding officer at a meeting of the
shareholders determines that a quorum is not present, he shall not call the
meeting to order. If a quorum is present or represented at a reconvened
meeting following an adjournment, any business may be transacted that might
have been transacted at the meeting as originally called. The shareholders
present at a duly convened meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave
less than a quorum.
2.9 MANNER OF ACTING.
2.9.1GENERALLY. If a quorum exists, action on a matter, other than the
election of directors, by a voting group is approved if the votes
cast within the voting group favoring the action exceed the votes
cast opposing the action, unless the affirmative vote of a
greater number is required by these Bylaws, the Articles of
Incorporation or the Washington Business Corporation Act.
2.9.2SINGLE VOTING GROUP. If a matter is to be voted upon by a single
group, action on that matter is taken when voted upon by that
voting group; if a matter is to be voted on by two (2) or more
voting groups, action on that matter is taken only when voted
upon by each of those voting groups counted separately. Action
may be taken by one (1) voting group on a matter even though no
action is taken by another voting group entitled to vote on such
matter.
2.10 PROXIES. A shareholder may vote by proxy executed in writing by the
shareholder or by his or her attorney-in-fact. Such proxy shall be filed
with the Secretary of the Corporation before or at the time of the meeting.
A proxy shall become invalid eleven (11) months after the date of its
execution, unless otherwise expressly provided in the proxy. A proxy
Page 5 -BYLAWS
<PAGE>
with respect to a specified meeting shall entitle the holder thereof to
vote at any adjournment of such meeting but shall not be valid after the
final adjournment thereof.
2.11 VOTING OF SHARES. Each outstanding share entitled to vote shall be
entitled to one vote upon each matter submitted to a vote at a meeting of
shareholders.
2.12 VOTING FOR DIRECTORS.
2.12.1 NON-CUMULATIVE VOTING. Unless the Articles of Incorporation
permit cumulative voting, each shareholder entitled to vote at an
election of Directors may vote, in person or by proxy, the number
of shares owned by such shareholder for each position on the
Board of Directors that is to be filled by election, and for
which such shareholder has a right to vote. The candidate
receiving the plurality of the votes cast for that position on
the Board of Directors shall be deemed elected to that position;
provided, however, that no candidate may be elected to serve in
more than one position on the Board of Directors at the same
time.
2.12.2 CUMULATIVE VOTING. If cumulative voting is authorized by the
Articles of Incorporation, each shareholder entitled to vote
shall be entitled to cast cumulative votes in a total equal to
the number of shares held by such shareholder multiplied by the
number of Directors to be elected. Such cumulative votes may all
be cast for one Director candidate, or distributed among any
number of such candidates. In the case of cumulative voting,
voting shall be for the Board of Directors as a whole, and the
candidates receiving the highest number of votes shall be deemed
elected to the positions to be filled by election.
2.13 ACTION BY SHAREHOLDERS WITHOUT A MEETING. Any action which could be taken
at a meeting of the shareholders may be taken without a meeting if a
written consent setting forth the action so taken is signed by all
shareholders entitled to vote with respect to the subject matter thereof.
The action
Page 6 -BYLAWS
<PAGE>
shall be effective on the date on which the last signature is placed on the
consent, or at such earlier or later time as is set forth therein. Such
written consent, which shall have the same force and effect as a unanimous
vote of the shareholders, shall be inserted in the minute book as if it
were the minutes of a meeting of the shareholders.
2.14 VOTING OF SHARES BY CERTAIN HOLDERS.
2.14.1 SHARES HELD BY ANOTHER CORPORATION. Shares in the name of
another corporation may be voted by such officer, agent or proxy
as the bylaws of such other corporation may prescribe, or, in the
absence of such provision, as the Board of Directors of such
corporation may determine; provided, however, that such shares
are not entitled to vote if the Corporation owns, directly or
indirectly, a majority of the shares entitled to vote for
Directors of such other corporation.
2.14.2 SHARES HELD BY PERSONAL REPRESENTATIVE, GUARDIAN, CONSERVATOR OR
TRUSTEE. Shares held by a personal representative,
administrator, executor, guardian or conservator may be voted by
the holder, either in person or by proxy, without a transfer of
such shares into the holder's name. Shares standing in the name
of a trustee may be voted by that trustee either in person or by
proxy, but no trustee shall be entitled to vote shares without a
transfer of such shares into the trustee's name.
2.14.3 SHARES HELD BY RECEIVER OR TRUSTEE IN BANKRUPTCY. Shares in the
name of a receiver or trustee in bankruptcy may be voted by such
receiver or trustee in bankruptcy, and shares held by or under
the control of a receiver or trustee in bankruptcy may be voted
by such receiver or trustee in bankruptcy without the transfer
thereof into the name of such receiver or trustee if authority to
do so is contained in an appropriate order of the court by which
such receiver or trustee in bankruptcy was appointed.
2.14.4 PLEDGED SHARES. A shareholder whose shares are pledged shall be
entitled to vote such shares
Page 7 -BYLAWS
<PAGE>
until the shares have been transferred into the name of the
pledgee, and thereafter the pledgee shall be entitled to vote the
shares so transferred.
2.14.5 TREASURY SHARES; FIDUCIARY STOCK. Treasury shares shall not be
voted or counted for determining whether a quorum exists at any
meeting or counted in determining the total number of outstanding
shares at any given time; shares of its own stock held by the
Corporation in a fiduciary capacity may be voted by the
Corporation.
2.15 CONFERENCE TELEPHONE. Meetings of the shareholders may be conducted by
means of a conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear one
another at the same time, and participation by such means shall constitute
presence in person at such meeting.
SECTION 3. BOARD OF DIRECTORS
3.1 GENERAL POWERS. The business affairs of the Corporation shall be managed
by the Board, except as may be otherwise provided in these Bylaws, the
Articles of Incorporation, or the Washington Business Corporation Act.
3.2 NUMBER AND TENURE. The Board shall consist of five (5) Directors. The
number of Directors may be changed from time to time by amendment to these
Bylaws, but no decrease in the number of Directors shall have the effect of
shortening the term of any incumbent Director. Unless a Director dies,
resigns, or is removed from office, he or she shall hold office until the
next annual meeting of shareholders or until his or her successor is
elected and qualified, whichever is later. Directors need not be
shareholders of the Corporation or residents of the State of Washington.
Page 8 -BYLAWS
<PAGE>
3.3 ANNUAL AND REGULAR MEETINGS. An annual Board meeting shall be held without
notice immediately after and at the same place as the annual meeting of
shareholders. By resolution, the Board, or any committee thereof, may
specify the time and place, either within or without the State of
Washington, for holding regular meetings thereof without other notice than
such resolution.
3.4 SPECIAL MEETINGS. Special meetings of the Board or of any committee
designated by the Board may be called by or at the request of the Chairman
of the Board, the President, the Secretary or any two (2) Directors and, in
the case of any special meeting of any committee designated by the Board,
by the Chairman thereof. The person(s) authorized to call special meetings
may fix any place either within or without the State of Washington as the
place for holding any special Board or committee meeting called by such
person(s).
3.5 MEETINGS BY TELEPHONE. Members of the Board or of any committee designated
by the Board may participate in a meeting of such Board or committee by
means of a conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each
other. Participation by such means shall constitute presence in person at
a meeting.
3.6 NOTICE OF SPECIAL MEETINGS. Notice of a special Board or committee
meeting, stating the place, day and hour of the meeting, shall be given to
a Director in writing, in person or orally by telephone. Neither the
business to be transacted at, nor the purpose of, any special meeting need
be specified in the notice of such meeting.
3.6.1PERSONAL DELIVERY. If delivery is by personal service, the notice
shall be effective if delivered at the Director's address at
least two (2) days before the meeting.
3.6.2DELIVERY BY MAIL. If notice is delivered by mail, the notice shall be
deemed effective if deposited in the U.S. mail at least five (5)
days before the meeting, properly addressed to a Director at his
or her address shown on the records of the Corporation, with
postage prepaid.
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<PAGE>
3.6.3DELIVERY BY ELECTRONIC MEANS. If notice is delivered by any
electronic means including, but not limited to, telegraph or
facsimile, the notice shall be deemed effective if the content
thereof is delivered to the telegraph company for delivery to
a Director at his or her address shown on the records of the
Corporation, or transmitted by facsimile machine to a
facsimile number for the Director shown on the records of the
Corporation, at least three (3) days before the meeting.
3.6.4ORAL NOTICE. If notice is delivered orally, by telephone or in
person, the notice shall be effective if personally given to a
Director at least two (2) days before the meeting.
3.7 WAIVER OF NOTICE.
3.7.1WRITTEN WAIVER. Whenever any notice is required to be given to any
Director under the provisions of these Bylaws, the Articles of
Incorporation or the Washington Business Corporation Act, a
waiver thereof in writing, specifying the meeting for which
notice is waived, signed by the person or persons entitled to
such notice and whether before or after the time stated therein,
shall be deemed equivalent to the giving of such notice. Neither
the business to be transacted at, nor the purpose of, any regular
or special meeting of the Board or any committee appointed by the
Board need be specified in the waiver of notice of such meeting.
3.7.2WAIVER BY ATTENDANCE. The attendance of a Director at a Board or
committee meeting shall constitute a waiver of notice of such
meeting, unless a Director, at the beginning of the meeting, or
promptly upon such Director's arrival, objects to holding the
meeting or transacting any business and does not thereafter vote
for or assent to action taken at the meeting.
3.8 QUORUM. A majority of the number of Directors fixed by, or in the manner
provided by, these Bylaws shall constitute a quorum for the transaction of
business at any Board meeting.
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<PAGE>
If the Chairman of the Board determines that less than a quorum is present
he shall not call the meeting to order.
3.9 MANNER OF ACTING AND ADJOURNMENT. The act of the majority of the Directors
present at a Board meeting at which there is a quorum shall be the act
of the Board, unless the vote of a greater number is required by these
Bylaws, the Articles of Incorporation or the Washington Business
Corporation Act. Any meeting of the Board may be adjourned and continued
at a later time, including a meeting at which a quorum is not present.
Notwithstanding Section 3.6, notice of the adjourned meeting or of the
business to be transacted there, other than by announcement at the
meeting of which the adjournment is taken, shall not be necessary. At
any adjourned meeting at which a quorum is present, any business may be
transacted which could have been transacted at the meeting as originally
called.
3.10 PRESUMPTION OF ASSENT. A Director of the Corporation present at a Board or
committee meeting at which action on any corporate matter is taken shall be
deemed to have assented to the action taken unless such Director objects at
the beginning of the meeting, or promptly upon such Director's arrival, to
holding the meeting or transacting business at the meeting, and his or her
dissent is entered in the minutes of the meeting, or unless such Director
delivers a written notice of dissent or abstention to such action with the
presiding officer of the meeting before the adjournment thereof, or
forwards such notice by registered mail to the Secretary of the Corporation
immediately after the adjournment of the meeting. A Director who voted in
favor of such action may not thereafter dissent or abstain.
3.11 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING. Any action which could be
taken at a meeting of the Board or of any committee appointed by the Board
may be taken without a meeting if a written consent setting forth the
action so taken is signed by each of the Directors or by each committee
member. The action shall be effective on the date on which the last
signature is placed on the consent, or at such other time as is set forth
therein. Such written consent, which shall have the same effect as a
unanimous vote of the Directors or of such committee, shall be inserted in
the minute book as if it were the minutes of the Board or committee
meeting.
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<PAGE>
3.12 RESIGNATION. Any Director may resign at any time by delivering written
notice thereof to the Chairman of the Board, the Board, or to the
registered office of the Corporation. Such resignation shall take effect
at the time specified therein, or if the time is not specified therein,
upon delivery thereof and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Once delivered, a notice of resignation is irrevocable unless revocation is
permitted by the Board.
3.13 REMOVAL. At a meeting of shareholders called expressly for that purpose,
one (1) or more members of the Board (including the entire Board) may be
removed, with or without cause, unless the Articles of Incorporation permit
removal for cause only, by a vote of the holders of a majority of the
shares then entitled to vote on the election of Director(s). A Director
may be removed only if the number of votes cast to remove the Director
exceeds the number of votes cast to not remove the Director. If a Director
is elected by a voting group of shareholders, only the shareholders of that
voting group may participate in the vote to remove such Director.
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<PAGE>
3.14 VACANCIES. Any vacancy occurring on the Board, including a vacancy
resulting from an increase in the number of Directors, may be filled by the
shareholders, by the Board or by the affirmative vote of a majority of the
remaining Directors though less than a quorum of the Board, or by a sole
remaining Director. A Director elected to fill a vacancy shall be elected
for the unexpired term of his or her predecessor in office. Any
directorship to be filled by reason of an increase in the number of
Directors may be filled by the affirmative vote of a majority of the number
of Directors fixed by the Bylaws prior to such increase for a term of
office continuing only until the next election of Directors by the
shareholders. Any directorship not so filled by the Directors shall be
filled by election at the next annual meeting of shareholders or at a
special meeting of shareholders called for that purpose. If the vacant
directorship is filled by the shareholders and was held by a Director
elected by a voting group of shareholders, then only the holders of shares
of that voting group are entitled to vote to fill such vacancy. A vacancy
that will occur at a specific later date by reason of a resignation
effective at such later date, or otherwise, may be filled before the
vacancy occurs, but the new Director may not take office until the vacancy
occurs.
3.15 EXECUTIVE AND OTHER COMMITTEES.
3.15.1 CREATION OF COMMITTEES. The Board, by resolution adopted in the
manner provided by these Bylaws by a majority of the number of
Directors in office when such action is taken, may appoint
standing or temporary committees, including an Executive
Committee, from its own number and consisting of no fewer than
two (2) Directors, and invest such committee(s) with such powers
as it may see fit, subject to such conditions as may be
prescribed by the Board, these Bylaws, the Articles of
Incorporation or the Washington Business Corporation Act.
3.15.2 AUTHORITY OF COMMITTEES. Each committee shall have and may
exercise all of the authority of the Board to the extent provided
in the resolution of the Board designating the committee and any
subsequent resolutions pertaining thereto and
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adopted in like manner, except that no such committee shall have
the authority to: (a) authorize distributions; (b) approve or
propose to shareholders actions required by the Washington
Business Corporation Act to be approved by shareholders; (c) fill
vacancies on the Board or on any committee thereof; (d) adopt,
amend or repeal these Bylaws; (e) amend the Articles of
Incorporation; (f) approve a plan of merger not requiring
shareholder approval; (g) authorize or approve reacquisition of
shares, except according to a formula or method prescribed by the
Board; or (h) authorize or approve the issuance or sale or
contract for the sale of shares, or determine the designation of
relative rights, preferences and limitations of a class or series
of shares of the Corporation, except that the Board may authorize
a committee or a senior executive officer of the Corporation to
do so within limits specifically prescribed by the Board.
3.15.3 QUORUM AND MANNER OF ACTING. A majority of the number of
Directors composing any committee of the Board, as established
and fixed by resolution of the Board, shall constitute a quorum
for the transaction of business at any meeting of such committee.
If the presiding officer determines that less than a quorum is
present, (s)he shall not call the meeting to order. Except as
may be otherwise provided in the Washington Business Corporation
Act, the Articles of Incorporation, or these Bylaws, the act of a
majority of the members of a committee present shall be the act
of the committee.
3.15.4 MINUTES OF MEETINGS. All committees so appointed shall keep
regular minutes of their meetings and shall cause them to be
recorded in books kept for that purpose.
3.15.5 RESIGNATION. Any member of any committee may resign at any time
by delivering written notice thereof to the Board, the Chairman
of the Board or the Corporation. Such resignation shall take
effect at the time specified therein, or if the
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time is not specified, upon delivery thereof and the acceptance
of such resignation shall not be necessary to make it effective.
Once delivered, a notice of resignation is irrevocable unless
revocation is permitted by the Board.
3.15.6 REMOVAL. The Board may remove from office any member of any
committee elected or appointed by it, but only by the affirmative
vote of not less than a majority of the number of Directors fixed
by or in the manner provided by these Bylaws.
3.16 COMPENSATION. By Board resolution, Directors and committee members may be
paid their expenses, if any, of attendance at each Board or committee
meeting, or a fixed sum for attendance at each Board or committee meeting,
or a stated salary as Director or a committee member, or a combination of
the foregoing. No such payment shall preclude any Director or committee
member from serving the Corporation in any other capacity and receiving
compensation therefor.
3.17 TRANSACTIONS WITH DIRECTORS.
3.17.1 Any contract or other transaction or determination between the
Corporation and one or more of its Directors, or between the
Corporation and another party in which one or more of its
Directors are interested, shall be valid notwithstanding the
relationship or interest or the presence or participation of such
Director(s) in a meeting of the Board or of a committee thereof
which acts upon or in reference to such contract, transaction, or
determination, if: (a) the material facts and the Directors'
interest(s) were disclosed or known to the Board or the committee
and the Board or committee authorized, approved, or ratified the
transactions; (b) the material facts and the Directors or
Directors' interest(s) were disclosed or known to the
shareholders entitled to vote and they authorized, approved or
ratified the transaction; or (c) the transaction was fair to the
Corporation.
3.17.2 Common or interested Directors may be counted in determining the
presence of a quorum at a meeting
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of the Board or committee which authorizes or ratifies such
contract, transaction or determination. A transaction with a
Director may not be authorized, approved or ratified by a single
Director unless such Director is the sole Director and the sole
shareholder of the Corporation and otherwise complies with the
requirements of Section 3.17 herein and applicable law. The
interested Director(s) shall not be disqualified from voting as
shareholders for ratification or approval of such contract,
transaction or determination.
3.17.3 None of the provisions of this Section shall invalidate any
contract, transaction or determination which would otherwise be
valid under applicable law.
SECTION 4. OFFICERS
4.1 NUMBER. The officers of the Corporation shall be a President and a
Secretary, each of whom shall be appointed by the Board; and one or more
Vice Presidents, a Treasurer and such other officers and assistant
officers, including a Chairman of the Board, may be appointed by the Board;
such officers and assistant officers to hold office for such period, have
such authority and perform such duties as are provided in these Bylaws or
as may be provided by resolution of the Board. Any officer may be assigned
by the Board any additional title that the Board deems appropriate. The
Board may delegate to any officer or agent the power to appoint any such
subordinate officers or agents and to prescribe their respective terms of
office, authority and duties and to remove any subordinate officers or
agents so appointed. Any two (2) or more offices may be held by the same
person.
4.2 APPOINTMENT AND TERM OF OFFICE. The officers of the Corporation shall be
appointed annually by the Board at the meeting held following the annual
meeting of the shareholders. If the appointment of officers is not made at
such meeting, such appointment shall be made as soon thereafter as a Board
meeting may conveniently be held. Unless an officer dies, resigns or is
removed from office, he or she shall hold office until the next annual
meeting of the Board or until his or her successor is appointed and
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qualified. The appointment of an officer does not itself create contract
rights.
4.3 RESIGNATION. Any officer may resign at any time by delivering written
notice to the Corporation. Such resignation shall take effect at the time
specified therein, or if the time is not specified, upon delivery thereof
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective. Once delivered, a notice of
resignation is irrevocable unless revocation is permitted by the Board.
4.4 REMOVAL. Any officer or agent appointed by the Board may be removed by the
Board at any time, with or without cause, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed.
Appointment of an officer or agent shall not of itself create contract
rights.
4.5 VACANCIES. A vacancy in any office because of death, resignation, removal,
disqualification, creation of a new office or any other cause may be filled
by the Board for the unexpired portion of the term, or for a new term
established by the Board.
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4.6 CHAIRMAN OF THE BOARD. If elected, the Chairman of the Board shall perform
such duties as shall be assigned to him by the Board from time to time and
shall preside over meetings of the Board and of shareholders unless another
officer is appointed or designated by the Board as Chairman of such
meeting.
4.7 PRESIDENT. The President shall be the chief executive officer of the
Corporation unless some other officer is so designated by the Board, shall
preside over meetings of the Board and shareholders in the absence of a
Chairman of the Board and, subject to the Board's control, shall supervise
and control all of the assets, business and affairs of the Corporation.
The President may sign certificates for shares of the Corporation, deeds,
mortgages, bonds, contracts and other instruments, except when the signing
and execution thereof have been expressly delegated by the Board or by
these Bylaws to some other officer or agent of the Corporation, or are
required by law to be otherwise signed or executed by some other officer or
in some other manner. In general, the President shall perform all duties
incident to the office of President and such other duties as are prescribed
by the Board from time to time.
4.8 VICE PRESIDENT. In the event of the death of the President or his or her
inability to act, the Vice President (or if there is more than one (1) Vice
President, the Vice President who was designated by the Board as the
successor to the President, or if no Vice President is so designated, the
Vice President first elected to such office) shall perform the duties of
the President, except as may be limited by resolution of the Board, with
all the powers of and subject to all the restrictions upon the President.
Any Vice President may sign, with the Secretary or Assistant Secretary,
certificates for shares of the Corporation. Vice Presidents shall have, to
the extent authorized by the President or the Board, the same powers as the
President to sign deeds, mortgages, bonds, contracts and other instruments.
Vice Presidents shall perform such other duties as from time to time may be
assigned to them by the President or the Board.
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4.9 SECRETARY. The Secretary shall: (a) keep the minutes of meetings of the
shareholders and of the Board in one (1) or more books designated for that
purpose; (b) ensure that all notices are duly given in accordance with the
provisions of these Bylaws or as required by law; (c) be custodian of the
corporate records and seal of the Corporation; (d) keep registers of the
post office address of each shareholder and Director; (e) sign, with the
President or a Vice President, certificates for shares of the Corporation;
(f) have general charge of the stock transfer books of the Corporation; (g)
sign, with the President or other officer authorized by the President or
the Board, deeds, mortgages, bonds, contracts and other instruments; and
(h) perform all duties generally incident to the office of Secretary and
such other duties as from time to time may be assigned to him or her by the
President or by the Board. In the absence of the Secretary, an Assistant
Secretary may perform the duties of the Secretary.
4.10 TREASURER. If required by the Board, the Treasurer shall give a bond for
the faithful discharge of his or her duties in such amount and with such
surety or sureties as the Board shall determine. The Treasurer shall have
charge and custody of and be responsible for all funds and securities of
the Corporation; receive and give receipts for moneys paid to the
Corporation from any source whatsoever, and deposit all such moneys in the
name of the Corporation in banks, trust companies or other depositories
selected in accordance with these Bylaws; and in general perform all of the
duties incident to the office of Treasurer and such other duties as from
time to time may be assigned to him or her by the President or by the
Board. In the absence of the Treasurer, an Assistant Treasurer may perform
the duties of the Treasurer.
4.11 SALARIES. The salaries of the officers shall be fixed from time to time by
the Board or by any person or persons to whom the Board shall have
delegated such authority. No officer shall be prevented from receiving
such salary by reason of the fact that he or she is also a Director of the
Corporation.
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SECTION 5. CONTRACTS, LOANS, CHECKS, AND DEPOSITS
5.1 CONTRACTS. The Board may authorize any officer or officers, or agent or
agents, to enter into any contract or execute and deliver any instrument in
the name of and on behalf of the Corporation. Such authority may be
general or confined to specific instances.
5.2 LOANS TO THE CORPORATION. No loans shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued in its name
unless authorized by a resolution of the Board. Such authority may be
general or confined to specific instances.
5.3 LOANS TO DIRECTORS. The Corporation shall not lend money to or guarantee
the obligation of a Director unless: (a) the particular loan or guarantee
is approved by a majority of the votes represented by the outstanding
voting shares of all classes, voting as a single voting group, excluding
the votes of the shares owned by or voted under the control of the
benefitted Director; or (b) the Board determines that the loan or guarantee
benefits the Corporation and either approves the specific loan or guarantee
or a general plan authorizing loans to and guarantees for Directors.
5.4 CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for the payment
of money, notes or other evidences of indebtedness issued in the name of
the Corporation shall be signed by such officer or officers, or agent or
agents, of the Corporation and in such manner as is from time to time
determined by resolution of the Board.
5.5 DEPOSITS. All funds of the Corporation not otherwise employed shall be
deposited from time to time to the credit of the Corporation in such banks,
trust companies or other depositories as the Board may select.
SECTION 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 ISSUANCE OF SHARES. No shares of the Corporation shall be issued unless
authorized by the Board, and such authorization shall specify the maximum
number of shares to be issued and the consideration to be received for each
share.
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6.2 CERTIFICATES FOR SHARES. Certificates representing shares of the
Corporation shall be in such form as shall be determined by the Board.
Such certificates shall be signed by the Chairman or Vice Chairman of the
Board, or the President or a Vice President, and by the Secretary or an
Assistant Secretary. Any or all of the signatures on a certificate may be
a facsimile if the certificate is manually signed on behalf of a transfer
agent or a registrar other than the Corporation itself or an employee of
the Corporation. All certificates shall include on their face written
notice of any restrictions which may be imposed on the transferability of
such shares. All certificates shall be consecutively numbered or otherwise
identified.
6.3 STOCK RECORDS. The stock transfer books shall be kept at the registered
office or principal place of business of the Corporation or at the office
of the Corporation's transfer agent or registrar. The name and address of
each person to whom a certificate for shares is issued, together with the
class and number of shares represented by each such certificate and the
date of issue thereof, shall be entered on the stock transfer books of the
Corporation. The person in whose name shares stand on the books of the
Corporation shall be deemed by the Corporation to be the owner thereof for
all purposes.
6.4 RESTRICTION ON TRANSFER. Except to the extent that the Corporation has
obtained an opinion of counsel acceptable to the Corporation that transfer
restrictions are not required under applicable securities laws, or has
otherwise satisfied itself that such transfer restrictions are not
required, all certificates representing shares of the Corporation shall
bear the following legend on the face of the certificate or on the reverse
of the certificate if a reference to the legend is contained on the face,
which reads substantially as follows:
The securities evidenced by this certificate have not been registered
under the Securities Act of 1933, as amended, (the "Act") or any
applicable state securities law, and no interest therein may be sold,
distributed, assigned, offered, pledged, or otherwise transferred
unless (a) there is an effective registration statement under the Act
and applicable state securities laws covering any such
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transaction involving said securities or (b) this Corporation receives
an opinion of legal counsel for the holder of these securities
(concurred in by legal counsel for this Corporation) stating that such
transaction is exempt from registration or this Corporation otherwise
satisfies itself that such transaction is exempt from registration.
6.5 TRANSFER OF SHARES. Transfer of shares of the Corporation shall be made
only on the stock transfer books of the Corporation pursuant to
authorization or document of transfer made by the holder of record thereof,
or by his or her legal representative who shall furnish proper evidence of
authority to transfer, or by his or her attorney-in-fact authorized by
power of attorney duly executed and filed with the Secretary of the
Corporation. All certificates surrendered to the Corporation for transfer
shall be cancelled and no new certificate shall be issued until the former
certificates for like number of shares shall have been surrendered and
cancelled.
6.6 LOST OR DESTROYED CERTIFICATES. In the case of a lost, destroyed or
mutilated certificate, a new certificate may be issued therefor upon such
terms and indemnity to the Corporation as the Board shall prescribe.
6.7 TRANSFER AGENT AND REGISTRAR. The Board may from time to time appoint one
(1) or more Transfer Agents and one (1) or more Registrars for the shares
of the Corporation, with such powers and duties as the Board shall
determine by resolution.
6.8 OFFICER CEASING TO ACT. If any officer who has signed or whose facsimile
signature has been placed upon a stock certificate shall have ceased to be
such officer before such certificate is issued, the certificate may be
issued by the Corporation with the same effect as if the signer were such
officer at the date of its issuance.
6.9 FRACTIONAL SHARES. The Corporation shall not issue certificates for
fractional shares.
6.10 VOTING RECORD. The officer or agent having charge of the stock transfer
books for shares of the Corporation shall at least ten (10) days before
each meeting of shareholders compile a complete record of the shareholders
entitled to
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vote at such meeting or any adjournment thereof, arranged in alphabetical
order, with the address of and the number of shares held by each. Such
record shall be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any shareholder during the whole
time of the meeting for the purposes thereof.
SECTION 7. BOOKS AND RECORDS
7.1 MAINTAINING CORPORATE RECORDS. The Corporation shall keep correct and
complete books and records of account, stock transfer books, minutes of the
proceedings of its shareholders and Board and such other records as may be
necessary or advisable.
7.2 INSPECTION OF CORPORATE RECORDS. A shareholder is entitled to inspect and
copy during regular business hours those corporate books and records
described in RCW 23B. subject to the requirements therein.
7.3 FINANCIAL STATEMENTS. Not later than four (4) months following the close
of its fiscal year, and in any event prior to the annual meeting of
shareholders, the Corporation shall prepare a balance sheet and income
statement as of the close of the fiscal year. Upon written request, the
Corporation shall mail to any shareholder a copy of the most recent balance
sheet and income statement. If the annual financial statements are
reported upon by a public accountant, the accountant's report must
accompany them. If not, the statements must be accompanied by the
statement required in RCW 23B.16.200, which is to be signed by the
President or a person responsible for the Corporation's accounting records.
SECTION 8. FISCAL YEAR
The fiscal year of the Corporation shall be the calendar year, provided that if
a different fiscal year is at any time selected for purposes of federal income
taxes, the fiscal year shall be the year so selected.
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SECTION 9. SEAL
The Corporation may use a seal. If it does so, the seal of the Corporation
shall consist of the name of the Corporation, the year of its incorporation and
the state of its incorporation.
SECTION 10. INDEMNIFICATION
10.1 DEFINITIONS. As used in this Section 10:
10.1.1 "Act" means the Washington Business Corporation Act, as now or
hereafter amended.
10.1.2 "Another Enterprise" means a corporation (other than the
Corporation), partnership, joint venture, trust, association,
committee, employee benefit plan, or other group or entity.
10.1.3 "Corporation" means S.V.V. SALES, INC., and any domestic or
foreign predecessor entity which, in merger or other
transactions, ceased to exist.
10.1.4 "Director" means each individual who is or was a director of the
Corporation or an individual who, while a director of the
Corporation, is or was serving, at the request of the
Corporation, as a director, officer, partner, trustee, employee
or agent of Another Enterprise.
10.1.5 "Expenses" include counsel fees.
10.1.6 "Indemnitee" means each person who was, is, or is threatened to
be made a party to or is involved (including, without limitation,
as a witness) in any proceeding because the person is or was a
director, officer, employee or agent of the Corporation and who
possesses indemnification rights pursuant to the Articles of
Incorporation of the Corporation, these Bylaws, or other action
by the Corporation. The term shall also include, for officers,
employees or agents, service at the Corporation's request as a
director, officer, partner, trustee, employee or agent of Another
Enterprise.
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10.1.7 "Loss" means the obligation to pay a judgment, settlement,
penalty, fine, including an excise tax assessed with respect to
an employee benefit plan, or reasonable Expenses incurred with
respect to a Proceeding.
10.1.8 "Party" includes an individual who was, is, or is threatened to
be named a defendant or respondent in a Proceeding.
10.1.9 "Proceeding" means any threatened, pending or completed action,
suit, or proceeding, whether civil, criminal, administrative, or
investigative and whether formal or informal Proceeding shall
include derivative shareholders' actions.
10.2 RIGHT TO INDEMNIFICATION. The Corporation may indemnify and hold each
director and officer harmless against any and all Loss except for Losses
arising out of: (a) the Indemnitee's acts or omissions finally adjudged to
be intentional misconduct or a knowing violation of law, (b) the
Indemnitee's approval of certain distributions or loans by such Indemnitee
which are finally adjudged to be in violation of RCW 23B.08.310, or (c) any
transaction in which it is finally adjudged that the Indemnitee personally
received a benefit in money, property, or services to which the Indemnitee
was not legally entitled. Except as provided in Section 10.5, the
Corporation shall not indemnify an Indemnitee in connection with a
Proceeding (or part thereof) initiated by the Indemnitee unless such
Proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. If, after the effective date of this Article, the Act is
amended to authorize further indemnification of directors and officers,
then directors and officers of this Corporation may be indemnified to the
fullest extent permitted by the Act, as so amended.
10.3 CONTRIBUTION. If the indemnification provided in Section 10.2 is not
available to be paid to Indemnitee for any reason other than those set
forth in subparagraphs (a), (b), and (c) of Section 10.2 (for example,
because indemnification is held to be against public policy even though
otherwise permitted under Section 10.2, then in respect of any Proceeding
in which the Corporation is jointly liable with Indemnitee (or would be if
joined in such
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Proceeding), the Corporation may contribute to the amount of Loss paid or
payable by Indemnitee in such proportion as is appropriate to reflect
(a) the relative benefits received by the Corporation and the Indemnitee
from the transaction from which such Proceeding arose, and (b) the relative
fault of the Corporation and the Indemnitee in connection with the events
which resulted in such Loss, as well as any other relevant equitable
consideration. The relative fault of the Corporation and the Indemnitee
shall be determined by a court of appropriate jurisdiction (which may be
the same court in which the Proceeding took place) with reference to, among
other things, the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent the circumstances
resulting in such Loss. The Corporation agrees that it would not be just
and equitable if contribution pursuant to this Section 10.3 was determined
by pro rata allocation or any other method of allocation which does not
take account of the foregoing equitable considerations.
10.4 NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by Indemnitee of
notice of commencement of any Proceeding against Indemnitee, Indemnitee
must, if a claim in respect thereof is to be made against the Corporation
under this Article, notify the Corporation of the commencement thereof.
With respect to any such Proceeding as to which Indemnitee has notified the
Corporation:
10.4.1 The Corporation will be entitled to participate therein at its
own expense;
10.4.2 Except as otherwise provided below, to the extent that it may
wish to do so, the Corporation, jointly with any other
indemnifying party similarly notified, will be entitled to assume
the defense thereof, with counsel satisfactory to Indemnitee.
After notice from the Corporation to Indemnitee of its election
to assume the defense thereof, the Corporation will not be liable
to Indemnitee under this Article for any legal or other Expenses
subsequently incurred by Indemnitee in connection with the
defense thereof, other than reasonable costs of investigation or
as otherwise provided below. Indemnitee shall have the right to
employ its counsel in such Proceeding, but the fees and Expenses
of such counsel incurred after
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notice from the Corporation of its assumption of the defense
thereof shall be at the expense of Indemnitee unless (1) the
employment of counsel by Indemnitee has been authorized by the
Corporation, (2) Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Corporation and
Indemnitee in the conduct of the defense of such Proceeding, or
(3) the Corporation shall not in fact have employed counsel to
assume the defense of such Proceeding, in any of which events,
the fees and Expenses of counsel shall be at the expense of the
Corporation. The Corporation shall not be entitled to assume the
defense of any proceeding brought by or on behalf of the
Corporation or as to which Indemnitee shall have made the
conclusion provided in (2) of this subparagraph; and
10.4.3 The Corporation shall not be liable to indemnify Indemnitee under
this Article for any amounts paid in settlement of any Proceeding
effected without its written consent. The Corporation shall not
settle any Proceeding in any manner which would impose any
penalty or limitation on Indemnitee without Indemnitee's written
consent. Neither the Corporation nor Indemnitee will
unreasonably withhold its consent to a proposed settlement.
10.5 CERTAIN PROCEDURES RELATING TO INDEMNIFICATION. For the purpose of
pursuing rights to indemnification under this Article, the Indemnitee shall
(a) submit to the Board a sworn statement of request of indemnification
("Indemnification Statement") stating that he is entitled to
indemnification hereunder; and (b) present to the Corporation reasonable
evidence of all amounts for which indemnification is requested. Submission
of an Indemnification Statement to the Board shall create a presumption
that the Indemnitee is entitled to indemnification hereunder, and the
Corporation shall, within sixty (60) calendar days after submission of the
Indemnification Statement, make the payments requested in the
Indemnification Statement to or for the benefit of the Indemnitee, unless
(i) within such sixty (60) calendar day period it shall be resolved by a
majority vote of the Directors who were not and are not parties to the
threatened Proceeding (Disinterested Director) that the Indemnitee is
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not entitled to the indemnification under this Article; PROVIDED, HOWEVER,
that in no event shall the number of Directors voting be less than two (2);
(ii) such vote shall be based upon clear and convincing evidence
(sufficient to rebut the foregoing presumption); and (iii) the Indemnitee
shall receive within such sixty (60) day period notice in writing of such
vote, which notice shall disclose with particularity the evidence upon
which the vote is based.
If there are not at least two (2) Disinterested Directors, then the Board
of Directors shall send notice to all shareholders indicating that the
Indemnitee will be entitled to receive payment unless shareholders owning
at least fifty percent (50%) of the outstanding shares object to the
payment and such objection complies with Sections 10.5(a)(ii) and (iii).
The notice shall also contain a copy of the Indemnification Statement. If
the necessary number of shareholders do not object, then the payment shall
be made.
The provisions of this Section are intended to be procedural only and shall
not affect the right of the Indemnitee to indemnification under this
Article so long as the Indemnitee follows the prescribed procedure, and any
determination that the Indemnitee is not entitled to indemnification and
any failure to make the payments requested in the Indemnification Statement
shall be subject to judicial review by any court of competent jurisdiction.
The right to indemnification conferred in this Article shall include the
right to be paid by the Corporation all Expenses incurred in defending a
Proceeding in advance of its final disposition; PROVIDED, HOWEVER, that the
payment of such Expenses in advance of the final disposition of any
Proceeding shall be made upon delivery to the Corporation of an
undertaking, by or on behalf of such Indemnitee, to repay all amounts so
advanced in the event and only to the extent it shall ultimately be
determined that such director or officer is not entitled to be indemnified
by the Corporation under the Act, Articles of Incorporation, this Article,
or otherwise, for such Expenses.
10.6 RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under this Article is not
paid in full by the Corporation within sixty (60) days after a written
claim has been received by the Corporation, except in the case of a claim
for expenses
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incurred in defending a Proceeding in advance of its final disposition, in
which case the applicable period shall be twenty (20) days, the Indemnitee
may at any time thereafter bring suit against the Corporation to recover
the unpaid amount of the claim and, to the extent successful in whole or in
part, the Indemnitee shall be entitled to be also paid the expense of
prosecuting such claim. Neither the failure of the Corporation (including
its Board of Directors, its shareholders, or independent legal counsel) to
have made a determination prior to the commencement of such Proceeding that
indemnification of or reimbursement or advancement of Expenses to the
Indemnitee is proper in the circumstances, nor an actual determination by
the Corporation (including its Board of Directors, its shareholders, or
independent legal counsel) that the Indemnitee is not entitled to
indemnification or to the reimbursement or advancement of Expenses, shall
be a defense to the Proceeding or create a presumption that the Indemnitee
is not so entitled.
10.7 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The
Corporation may, by action of its Board of Directors from time to time,
provide indemnification and pay Expenses in advance of the final
disposition of a Proceeding against employees and agents of the
Corporation, with the same scope and effect as the provisions of this
Article with respect to the indemnification and of advancement of Expenses
of its Directors and officers of the Corporation, or pursuant to rights
granted pursuant to, or provided by, the Act or otherwise.
10.8 CONTRACT RIGHT. Rights of indemnification under this Article shall
continue as to an Indemnitee who has ceased to be a director or officer, as
long as Indemnitee shall be subject to any possible Proceeding, by reason
of the fact that Indemnitee was a director or officer of the Corporation or
serving in any other capacity referred to herein, and shall inure to the
benefit of his or her heirs, executors, and administrators. The right to
indemnification conferred in this Article shall be a contract right upon
which each director or officer shall be presumed to have relied in
determining to serve or to continue to serve as such. Any amendment to or
repeal of this Article shall not adversely affect any right or protection
of a director or officer of the Corporation for or with respect to any acts
or omissions
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of such director or officer occurring prior to such amendment or repeal.
10.9 SEVERABILITY. If any provision of this Article or any application thereof
shall be invalid, unenforceable or contrary to applicable law, the
remainder of this Article, or the application of such provisions to persons
or circumstances other than those as to which it is held invalid,
unenforceable or contrary to applicable law, shall not be affected thereby
and shall continue in full force and effect.
SECTION 11. AMENDMENTS
These Bylaws may be altered, amended, or repealed and new Bylaws may be adopted
by the Board at any regular or special meeting of the Board. The shareholders
may also make, alter, amend and repeal the Bylaws of the Corporation at any
annual meeting or at a special meeting called for that purpose. All Bylaws made
by the Board may be amended, repealed, altered or modified by the shareholders
at any regular or special meeting called for that purpose.
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PROXY
TOUCH TONE AMERICA, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Michael J. Canney as proxy, with full power
of substitution, with authority to represent and vote, as designated below, all
shares of common stock of Touch Tone America, Inc. held of record by the
undersigned on January __, 1997 at the Special Meeting of Shareholders to be
held at the corporate offices of S.V.V. Sales, Inc. d/b/a Arcada Communications
located at 2001 Sixth Avenue, Suite 3210, Seattle, Washington on January __,
1997, at 10:00 a.m., local time, or at any adjournment or postponement thereof,
upon the matters set forth below, all in accordance with and as more fully
described in the Notice of Special Meeting and Joint Proxy Statement and
Prospectus dated January __, 1997.
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1 AND 2.
The Board of Directors recommends a vote "FOR" the following proposals:
Please mark boxes / / or /x/ in blue or black ink.
1. Proposal to approve and adopt the Agreement and Plan of Merger
dated as of November 13, 1996, among S.V.V. Sales, Inc. d/b/a Arcada
Communications ("Arcad"), Touch Tone/Arcada, Inc. ("Merger Sub") and Touch
Tone America, Inc. ("Touch Tone"), as amended November 19, 1996 and as
further amended on December 4, 1996 (the "Merger Agreement"), and to approve
the merger (the "Merger") of Arcada with and into Merger Sub pursuant to the
Merger Agreement. As a result of the Merger, Arcada shareholders will
receive 250 shares of Touch Tone Common Stock, subject to certain resale
restrictions and adjustment under certain circumstances, and a 15 month 8%
unsecured promissory note in the principal amount of $30.00 for each share
of their Arcada Common Stock, and Merger Sub, as survivor in the Merger,
will remain a wholly owned subsidiary of Touch Tone.
/ / FOR / / AGAINST / / ABSTAIN
2. To approve a proposal to change Touch Tone's state of
incorporation from California to Washington by a merger with and into a
newly formed, wholly owned Washington subsidiary, which merger will be
effected immediately prior to the Merger.
/ / FOR / / AGAINST / / ABSTAIN
Date: , 1996
--------------------
Signed:
------------------------------
------------------------------
(Please sign exactly as your name appears on the proxy.
When shares are held jointly, each party should sign.
When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such.
If a corporation, please sign in full corporate name,
by president or other authorized officer. If a
partnership, please sign in partnership name by
authorized person.)
Please Mark, Sign, Date and Return the Proxy Promptly Using the Enclosed
Envelope.
<PAGE>
PROXY
S.V.V. SALES, INC.
D/B/A/ ARCADA COMMUNICATIONS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Frank Bonadio as proxy, with full power of
substitution, with authority to represent and vote, as designated below, all
shares of common stock of S.V.V. Sales, Inc. d/b/a Arcada Communications held of
record by the undersigned on January __, 1997 at the Special Meeting of
Shareholders to be held at the corporate offices of S.V.V. Sales, Inc. d/b/a
Arcada Communications located at 2001 Sixth Avenue, Suite 3210, Seattle,
Washington on January __, 1997, at 1 p.m., local time, or at any adjournment or
postponement thereof, upon the matters set forth below, all in accordance with
and as more fully described in the Notice of Special Meeting and Joint Proxy
Statement and Prospectus dated January __, 1997.
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1.
The Board of Directors recommends a vote "FOR" the following proposal:
Please mark boxes / / or /x/ in blue or black ink.
1. Proposal to approve and adopt the Agreement and Plan of Merger
dated as of November 13, 1996, among S.V.V. Sales, Inc. d/b/a/ Arcada
Communications ("Arcada"), Touch Tone/Arcada, Inc. ("Merger Sub") and Touch
Tone America, Inc. ("Touch Tone"), as amended November 19, 1996 and as
further amended December 4, 1996 (the "Merger Agreement"), and to approve
the merger (the "Merger") of Arcada with and into Merger Sub pursuant to
the Merger Agreement. As a result of the Merger, Arcada shareholders will
receive 250 shares of Touch Tone Common Stock, subject to certain resale
restrictions and adjustment under certain circumstances, and a 15 month
8% unsecured promissory note in the principal amount of $30.00 for each
share of their Arcada Common Stock, and Merger Sub, as survivor in the
Merger, will remain a wholly owned subsidiary of Touch Tone.
/ / FOR / / AGAINST / / ABSTAIN
Date: , 1996
--------------------
Signed:
------------------------------
------------------------------
(Please sign exactly as your name appears on the proxy.
When shares are held jointly, each party should sign.
When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such.
If a corporation, please sign in full corporate name,
by president or other authorized officer. If a
partnership, please sign in partnership name by
authorized person.)
Please Mark, Sign, Date and Return the Proxy Promptly Using the Enclosed
Envelope.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with California General Corporation Law, Registrant
has included a provision in its Articles of Incorporation to limit the
personal liability of its directors to the fullest extent possible under
California law. The provision serves to eliminate such directors' liability
to Registrant or its stockholders for monetary damages, except for (i) any
breach of the director's duty of loyalty to Registrant or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) unlawful payment of dividends
or unlawful stock purchases or redemptions, or (iv) any transaction from
which a director derived an improper personal benefit.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers,
or persons controlling the Company pursuant to the foregoing provisions,
Registrant has been informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act of 1933, as amended, and is therefore unenforceable.
ITEM 21. EXHIBITS
1.2 Form of Representative's Warrant Agreement Option or Warrant
Agreement.*
3.1 Certificate of Incorporation of Registrant dated July 31, 1990
and Amendments thereto.*
3.2 Bylaws.*
4.0 Warrant Agreement between the Registrant and American
Securities Stock Transfer, Inc.*
5.0 Opinion of John B. Wills, Esq.**
10.1 Agreement for Merger dated November 13, 1996 by and among
the Registrant, S.V.V. Sales, Inc. d/b/a Arcada
Communications ("Arcada") and Touch Tone/Arcada, Inc.*
10.2 First Amendment to Agreement for Merger dated November 19,
1996 by and among the Registrant, Arcada and Touch
Tone/Arcada, Inc.*
10.3 Second Amendment to Agreement for Merger dated December 4,
1996 by and among the Registrant, Arcada and Touch Tone/
Arcada, Inc.
10.4 Form of Plan of Merger by and among the Registrant, Arcada
and Touch Tone/Arcada, Inc.*
10.5 Acquisition Agreement and addendum thereto between the
Registrant and National Telcom Management, Inc.*
10.6 Form of Financial Advisory Agreement between the Registrant
and Barron Chase Securities, Inc.*
10.7 Form of Merger and Acquisition Agreement between the
Registrant and Barron Chase Securities, Inc.*
10.8 Agreement between AT&T and the Registrant.*
10.9 Telecommunications Services Agreement between WilTel and the
Registrant.*
10.10 Sales and Distribution Agreement between Paging Network of
Arizona and the Registrant.*
10.11 Employment Agreement with David J. Smith and the Registrant.*
10.12 Agreement between TMO Communications and the Registrant.*
10.13 National Reseller Agreement between the Registrant and ICG
Access Services, Inc.*
II-1
<PAGE>
10.14 Release and Settlement Agreement between AT&T and Touch Tone
America, Inc.*
10.15 Release and Settlement Agreement between ICG Access Services,
Inc. and Registrant.*
10.16 Agreement with TMO and the Registrant dated April 18, 1996.*
10.17 Employment Agreement between Frank J. Bonadio and the
Registrant.**
10.18 Consulting Agreement between Michael J. Canney and the
Registrant.
10.19 Consulting Agreement between Robert C. Vaughn and the
Registrant.**
11.0 Statement Concerning Computation of Per Share Earnings.*
24.1 Consent of Hein + Associates LLP.
24.2 Consent of BDO Seidman, LLP.
24.3 Consent of John B. Wills, Esq.**
- --------------------
* Previously filed.
** To be filed by amendment.
(b) Financial statement schedules have been omitted because they are not
required or the information is included in the financial statements and notes
thereto.
II-2
<PAGE>
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1993;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect
to reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(c) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (a) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new
II-3
<PAGE>
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(d) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference in the prospectus
pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first
class marl or other equally prompt means. This includes information contained
in documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(f) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion
of the Securities Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Scottsdale, State of Arizona on November 27, 1996.
Date: November 27, 1996 TOUCH TONE AMERICA, INC.
By /s/ Michael J. Canney
---------------------------
Michael J. Canney, Chairman
of the Board, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael J. Canney and David J. Smith,
or either of them, his or her attorneys-in-fact, with the power of
substitution, for him or her in any and all capacities, to sign any
amendments to this Registration Statement, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact, or their substitute or substitutes, may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael J. Canney Chairman of the Board, President and
- ------------------------- Chief Executive Officer November 27, 1996
Michael J. Canney
/s/ David J. Smith Secretary and Chief Financial Officer
- ------------------------- (Principal Financial and Accounting Officer) November 27, 1996
David J. Smith
Director November __, 1996
- -------------------------
Mathew J. Barletta
/s/ Stephen P. Shearin Director November 30, 1996
- -------------------------
Stephen P. Shearin
/s/ Norman B. Walko Director November 27, 1996
- -------------------------
Norman B. Walko
Director November __, 1996
- -------------------------
Benjamin W. Bronston
</TABLE>
II-5
<PAGE>
SECOND AMENDMENT TO AGREEMENT FOR MERGER
This Second Amendment dated as of December 4, 1996 to that certain
Agreement for Merger dated November 13, 1996, as previously amended by that
certain First Amendment to Merger Agreement dated as of November 19, 1996 (the
"Merger Agreement"), is by and among Touch Tone America, a California
corporation ("TTA"), Touch Tone/Arcada, Inc., a Washington corporation and
wholly-owned subsidiary of TTA ("Newco"), and S.V.V. Sales, Inc., a Washington
corporation d/b/a Arcada Communications, Inc. ("Arcada"). Capitalized terms
used herein and not otherwise defined herein shall have the meanings ascribed to
them in the Merger Agreement.
TTA, Newco and Arcada hereby desire to amend certain portions of the Merger
Agreement.
In consideration of the above and the mutual covenants, terms and
conditions set forth below, TTA, Newco and Arcada hereby agree as follows:
1. AMENDMENT TO MERGER AGREEMENT
A. Section 1(b)(i) of the Merger Agreement is hereby amended by
deleting reference in the first sentence thereof to a "one year, eight percent
(8%) promissory note of TTA" and substituting therefor a reference to a "fifteen
(15) month, eight percent (8%) promissory note of TTA".
2. MISCELLANEOUS
A. RATIFICATION. The parties hereto hereby ratify and approve the
Merger Agreement, as amended hereby, and the parties hereto acknowledge that all
of the terms and provisions of the Merger Agreement as amended hereby, are and
remain in full force and effect.
B. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
C. GOVERNING LAW. This Amendment, in all respects, including all
matters of construction, validity and performance, is governed by the internal
laws of the state of Washington as applicable to contracts executed and
delivered in Washington by citizens of such state to be performed wholly within
such state without giving effect to the principles of conflicts of laws thereof.
This agreement is being delivered in Seattle, Washington.
1
<PAGE>
The parties hereto have executed this Second Amendment as of the date first
set forth above.
TOUCH TONE AMERICA, INC.
By: /S/ Michael J. Canney
-------------------------------
Its: President
S.V.V. SALES, INC.
By: /S/ Frank Bonadio
-------------------------------
Its: President
TOUCH TONE/ARCADA, INC.
By: /S/ Michael J. Canney
-------------------------------
Its: President
2
<PAGE>
TOUCH TONE AMERICA, INC.
CANNEY CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("Agreement") is made and entered into as of
October 23, 1996 by and between TOUCH TONE AMERICA, INC. (the "Corporation"),
and MICHAEL CANNEY ("Consultant").
RECITALS
A. Consultant has been employed as the Chief Executive Officer of
Corporation.
B. Corporation is party to a transaction pursuant to which it will be the
survivor of a merger with SVV Sales d/b/a Arcada Communications (the "Merger").
C. Pursuant to the Merger, Consultant will resign as the Chief Executive
Officer of Corporation, and thenceforth will act merely as a consultant to the
Corporation.
D. The parties wish to enter into this Agreement to memorialize the terms
upon which the Consultant will provide consulting services to the Corporation.
AGREEMENT
In consideration of the mutual promises contained herein, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. TERM. The Corporation hereby retains Consultant, and Consultant
hereby agrees to be retained by the Corporation, for the consideration and upon
the terms and conditions herein set forth, to consult, counsel and advise with
the Corporation as set forth herein for a term commencing upon the consummation
of the Merger (the "Commencement Date") and continuing for one (1) year (the
"Term"). The Term may be extended by mutual agreement of the parties.
2. DUTIES. Consultant agrees to render counsel and advice to the
Corporation from time to time, as reasonably requested by and at the sole
discretion of the Corporation, for the profit, benefit and advantage of the
Corporation. The services of Consultant hereunder shall be rendered at such
times and places as shall be mutually convenient to the Corporation and the
Consultant. Consultant shall perform no work except at the request and with the
consent of the Corporation. Nothing in this Agreement shall prevent Consultant
from performing services for persons or entities other than the Corporation,
provided that performance of such services shall not be contrary to any of the
provisions of Sections 6 through 8 and shall not interfere with the Consultant's
performance of his duties hereunder unless Consultant has obtained the prior
written consent of the Corporation.
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<PAGE>
3. CASH CONSIDERATION. Consultant shall be paid Five Hundred Dollars
($500) for every eight hour day of consulting activity actually performed
pursuant to this Agreement, which amount shall be pro-rated for any partial day
of consulting activity. Cash consideration shall be paid monthly.
4. STOCK CONSIDERATION.
4.1 GRANT OF STOCK OPTION. In consideration of Consultant's
agreement to resign as Chief Executive Officer of Corporation and to act as a
consultant hereunder, Corporation hereby grants an option (the "Option") to
purchase One Hundred Twenty-Five Thousand (125,000) shares of Corporation's
common stock (the "Option Shares"), subject to adjustments provided in Section
4.8 below, and on the terms and conditions hereinafter set forth.
4.2 DATE OF GRANT. The date of grant of the Option shall be deemed
to be the Commencement Date.
4.3 EXERCISE PRICE. The exercise price for the Option Shares shall
be $.01 per share.
4.4 EXPIRATION DATE. The Option shall expire three (3) years
following the expiration of the Term. If Consultant shall die during the term of
the Option, Consultant's legal representative or representatives, or the person
or persons entitled to do so under Consultant's last will and testament or under
applicable intestate laws, shall have the right to exercise the Option, but only
for the number of shares as to which Consultant was entitled to exercise the
Option in accordance with Section 4.5 hereof on the date of his death, and such
right shall expire and the Option shall terminate three (3) years and six (6)
months after the date of Consultant's death or on the expiration date of the
Option, whichever date is sooner.
4.5 VESTING. The Option shall be deemed fully vested as of the
Commencement Date.
4.6 NON-TRANSFERABILITY OF OPTION. Consultant may not transfer the
Option except by will or the laws of descent and distribution. The Option shall
not be otherwise transferred, assigned, pledged, hypothecated or disposed of in
any way, whether by operation of law or otherwise, and shall be exercisable
during the Consultant's lifetime only by the Consultant or his guardian or legal
representative.
4.7 LIMITED TRANSFERABILITY OF STOCK. Consultant may not transfer
any Option Shares, whether or not such Option Shares registered pursuant to
Section 4.13 hereof, for a one (1) year period beginning on the Commencement
Date.
4.8 STOCK ADJUSTMENT AND CORPORATE REORGANIZATION. If the Option
Shares are increased or decreased, or are changed into or exchanged for a
different number or kind of shares or securities, as a result of one or more
reorganizations, recapitalizations, stock splits, reverse stock splits, stock
dividends or the like occurring after the Commencement Date, appropriate
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<PAGE>
adjustments shall be made in the number and/or kind of shares or securities for
which the unexercised portion of the Option may thereafter be exercised, all
without any change in the aggregate exercise price applicable to the unexercised
portion of the Option, but with a corresponding adjustment in the exercise price
per share or other unit. No fractional share of stock shall be issued under the
Option or in connection with any such adjustment. Such adjustments shall be
made by or under authority of the Corporation's board of directors whose
determinations as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive.
Upon the dissolution or liquidation of the Corporation, or upon a
reorganization, merger, statutory share exchange or consolidation of the
Corporation after the Commencement Date as a result of which the outstanding
securities of the class then subject to the Option are changed into or exchanged
for cash or property or securities not of the Corporation's issue, or upon a
sale of substantially all the property of the Corporation to, or the acquisition
of stock representing more than eighty percent (80%) of the voting power of the
stock of the Corporation then outstanding by, another corporation or person, the
Option shall terminate, unless provision be made in writing in connection with
such transaction for the assumption of options theretofore granted, or the
substitution for such options of any options covering the stock of a successor
corporation, or a parent or subsidiary thereof, with appropriate adjustments as
to the number and kind of shares and prices, in which event the Option shall
continue in the manner and under the terms so provided. If the Option shall
terminate pursuant to the foregoing sentence, the Consultant shall have the
right, at such time prior to the consummation of the transaction causing such
termination as the Corporation shall designate, to exercise any unexercised
portion of the Option including the portions thereof which would, but for this
Section 4.8
Notwithstanding anything to the contrary contained herein, the parties
acknowledge that the Option has shall be deemed granted upon the consummation of
the Merger, and the Merger shall not be deemed an event giving rise to any
adjustment or termination under this Section.
4.9 EXERCISE; PAYMENT FOR AND DELIVERY OF STOCK. The Option may be
exercised by the Consultant or other person then entitled to exercise it by
giving four (4) business days' written notice of exercise to the Corporation
specifying the number of shares to be purchased and the total purchase price,
accompanied by a check to the order of the Corporation in payment of such price.
If the Corporation is required to withhold on account of any present or future
tax imposed as a result of such exercise, the notice of exercise shall be
accompanied by a check to the order of the Corporation in payment of the amount
of such withholding.
4.10 ALTERNATIVE PAYMENT WITH STOCK. Notwithstanding the foregoing
provisions requiring payment by check, payment of such purchase price or any
portion thereof may be made with shares of stock of the same class as the shares
then subject to the Option, if shares of that class are then publicly traded (as
defined below), such shares to be credited toward such purchase price on the
valuation basis set forth below, in which event the stock certificates
evidencing the shares so to be used shall accompany the notice of exercise and
shall be duly endorsed or accompanied by duly executed stock powers to transfer
the same to the Corporation; provided, however, that such payment in stock
instead of cash shall not be effective and shall be
-3-
<PAGE>
rejected by the Corporation if (i) the Corporation is then prohibited from
purchasing or acquiring shares of the class of its stock thus tendered to it, or
(ii) the right or power of the person exercising the Option to deliver such
shares in payment of said purchase price is subject to the prior interests of
any other person (excepting the Corporation), as indicated by legends upon the
certificate(s) or as known to the Corporation. For purposes of this paragraph:
(a) "publicly traded" shares are those which are listed or admitted to unlisted
trading privileges on a national securities exchange or as to which sales or bid
and offer quotations are reported in the automated quotation system ("NASDAQ")
operated by the National Association of Securities Dealers, Inc. ("NASD"); and
(b) for credit toward the purchase price, shares so surrendered shall be valued
as of the day immediately preceding the delivery to the Corporation of the
certificate(s) evidencing such shares (or, if such day is not a trading day in
the U.S. securities markets, on the nearest preceding trading day), on the basis
of the closing price of stock of that class as reported with respect to the
market (or the composite of the markets, if more than one) in which such shares
are then traded, or if no such closing prices are reported, the lowest
independent offer quotation reported therefor in NASDAQ, or if no such
quotations are reported, on the basis of the most nearly comparable valuation
method acceptable to the Corporation. If the Corporation rejects the payment in
stock, the tendered notice of exercise shall not be effective hereunder unless
promptly after being notified of such rejection the person exercising the Option
pays the purchase price in acceptable form. If and while payment of the
purchase price with stock is permitted in accordance with the foregoing
provisions, the person then entitled to exercise the Option may, in lieu of
using previously outstanding shares therefor, use some of the shares as to which
the Option is then being exercised, in which case the notice of exercise need
not be accompanied by any stock certificates but shall include a statement
directing the Corporation to withhold so many of the shares that would otherwise
have been delivered upon that exercise of the Option as equals the number of
shares that would have been transferred to the Corporation if the purchase price
had been paid with previously issued stock.
4.11 RIGHTS IN SHARES BEFORE ISSUANCE. No person shall be entitled to
the privileges of stock ownership in respect of any Option Shares, unless and
until such shares have been issued to such person as fully paid shares.
4.12 REQUIREMENTS OF LAW AND OF STOCK EXCHANGES. By accepting the
Option, the Consultant represents and agrees for himself and his transferees by
will or the laws of descent and distribution that, unless a registration
statement under the Securities Act of 1933, as amended. and the rules and
regulations promulgated thereunder (the "1933 Act") is in effect as to the
Option Shares or are otherwise eligible for resale under the 1933 Act and Rule
144 promulgated thereunder, (i) any and all shares so purchased shall be
acquired for his personal account and not with a view to or for sale in
connection with any distribution, and (ii) each notice of the exercise of any
portion of the Option shall be accompanied by a representation and warranty in
writing, signed by the person entitled to exercise the same, that the shares are
being so acquired in good faith for his personal account and not with a view to
or for sale in connection with any distribution.
No certificate or certificates for shares of stock purchased upon exercise
of the Option shall be issued and delivered prior to the admission of such
shares to listing on notice of issuance
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<PAGE>
on any stock exchange on which shares of that class are then listed, nor unless
and until, in the opinion of counsel for the Corporation, such securities may be
issued and delivered without causing the Corporation to be in violation of or
incur any liability under any federal, state or other securities law, any
requirement of any securities exchange listing agreement to which the
Corporation may be a party, or any other requirement of law or of any regulatory
body having jurisdiction.
4.13 REGISTRATION OF STOCK. In the event that, at any time or from
time to time after the date hereof, the Corporation proposes to register any
securities (the "Registration Stock"), including shares of stock, under the 1933
Act other than pursuant to a registration statement on Forms S-4 or S-8, or any
successor to such Forms, for the purpose of the sale or other transfer of the
Registration Stock by the Corporation or by any present or future holder of
securities of the Corporation, Consultant and/or any transferee of any Option
Shares held by Consultant to whom Consultant expressly transfers such person's
rights hereunder in accordance with the provisions hereof (collectively, the
"Transferees") shall have the right to request that the Corporation effect the
registration under the 1933 Act, of any or all of the Option Shares which are
beneficially owned by Consultant and/or Transferees (the "Requested Registration
Shares"). In such event, the Corporation shall use its best efforts to cause
the Requested Registration Shares to be registered under the 1933 Act; provided,
however, that the Corporation shall not be obligated to file and cause to become
effective more than one registration statement for the consultant and the
Transferees in which Requested Registration Shares are sold pursuant to this
Section 4.13. Consultant's and the Transferees' rights under this Section 4.13
shall terminate on the tenth anniversary of the Commencement Date.
5. EXPENSES. The Corporation shall reimburse Consultant for all
expenses, including travel expenses, reasonably incurred by Consultant and
directly relating to the provision by Consultant of his services pursuant to
this Agreement.
6. NONCOMPETITION. During the term of this Agreement and for a period of
at least three (3) years thereafter, Consultant shall not at any time, directly
or indirectly, in any capacity whatsoever, own, manage, operate, join in,
control, participate in, invest in, work for, or otherwise be connected with, in
any manner, whether as an officer, director, consultant, partner, investor,
consultant, agent or otherwise, any business entity or person which is engaged,
or proposes to engage, in activities that are directly competitive with the then
current or proposed activities of the Corporation. The parties hereto
acknowledge that this noncompetition covenant is made to induce the Corporation
to retain Consultant and is required for the purpose of preserving for the
Corporation the goodwill of its current and future business.
7. COVENANT NOT TO DISCLOSE. Consultant shall not at any time, without
the express prior written consent of the Corporation, disclose or otherwise make
known or available to any person, firm, corporation or other entity other than
the Corporation, or use for his own account, any Confidential Information of the
Corporation, whether made available to Consultant in the course of the provision
of his services to the Corporation, or in negotiations leading up to the
provision of such services, or otherwise, that relates to the Corporation, the
existing business of the Corporation, or the reasonably foreseeable business of
the Corporation.
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<PAGE>
8. CONFIDENTIAL INFORMATION. As used in this Agreement, "Confidential
Information" means any non-public information obtained by Consultant from
Corporation, whether during or prior to the Term, including but not limited to
financial projections and performance information, billing information, customer
lists, business plans, marketing plans, and other proprietary business
information of the Corporation; any and all subject matter claimed in or
disclosed by any patent application prepared or filed by or on behalf of by the
Corporation, in any jurisdiction, and any amendments or supplements thereto; and
any and all "know how," methods, information, procedures or processes related to
any invention, invention report, trade secret, or proprietary information of the
Corporation.
Confidential Information includes any of the foregoing information whether
or not such information was developed, devised or otherwise created in whole or
in part by the efforts of Consultant. Confidential Information may be written,
oral, electronically stored, contained in magnetic media, simulated, or
manifested physically, or in or by other forms, but shall be protected as
Confidential Information regardless of form. Confidential Information shall not
include matters of public knowledge, unless such matters become public knowledge
as a result of any disclosure by Consultant or by any other party who is bound
by obligations of confidence to the Corporation, or unless the combination of
such matters would amount to Confidential Information. In any dispute over
whether information or matter is Confidential Information for purposes of
enforcement of this Agreement, it shall be the burden of Consultant to show both
that such contested information or matter is not Confidential Information within
the meaning of this Section 8, and that it does not constitute a trade secret
under the laws of the State of Washington.
9. RETURN OF CONFIDENTIAL INFORMATION. Immediately upon termination of
this Agreement, howsoever arising, or at any time upon the written request of
the Corporation or upon the oral request of any of Consultant's supervisors,
Consultant shall immediately return to the Corporation all Confidential
Information in any written or other manifestation or form, and shall further
surrender and deliver to the Corporation all records, materials, equipment,
drawings, documents and data of any nature pertaining to the Corporation, the
retention of Consultant's services, or the performance of any of Consultant's
duties as a consultant of the Corporation.
10. SPECIFIC PERFORMANCE. Consultant acknowledges and agrees that: (a)
but for the agreement of Consultant to comply with the covenants of this
Agreement, the Corporation would not contemplate retaining or continuing to
retain Consultant; (b) the Corporation will not have no adequate remedy at law
if Consultant violates the terms of this Agreement or fails to perform any other
obligation hereunder; and (c) the Corporation shall have the right, in addition
to any other rights it may have, to obtain in any court of competent
jurisdiction, temporary, preliminary and permanent injunctive relief to restrain
any breach, threatened breach, or otherwise to specifically enforce any, of such
covenants or any other obligations of Consultant, if Consultant fails to perform
any of his obligations under this Agreement.
11. SEVERABILITY. The invalidity of all or any part of any section of
this Agreement shall not render invalid the remainder of this Agreement or the
remainder of such section.
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Consultant acknowledges and stipulates that the covenants set forth in
Sections 6 through 9 above are fair and reasonably necessary for the protection
of the Corporation's protectable interests. In the event a court of competent
jurisdiction should decline to enforce any provision of Sections 6 through 9,
such section(s) shall be reformed to the extent necessary in the judgment of
such court to make such section(s) enforceable to the maximum extent which the
court shall find enforceable.
12. NOTICES. Any notices given under this Agreement shall be in writing,
personally delivered, or sent by certified mail, postage prepaid, or sent via
telefacsimile, receipt confirmed, to the following addresses and telephone
numbers, which a party may change from time to time by prior written notice to
the other party:
Corporation: Touch Tone America, Inc.
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Attention:
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With a copy to: Cairncross & Hempelmann, P.S.
701 Fifth Avenue, Suite 7000
Seattle, Washington 98104-7016
Attention: David M. Otto
Consultant: Michael Canney
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13. INDEPENDENT CONTRACTOR. Consultant shall during the Term be deemed to
be an independent contractor.
14. MISCELLANEOUS. This Agreement shall be binding upon and inure to the
benefit of the parties' respective successors and assigns. The waiver of any
breach of any provision of this Agreement or failure to enforce any provision
hereof shall not operate or be construed as a waiver of any subsequent breach.
In the event of any dispute between the parties that arises out of this
Agreement, the substantially prevailing party shall be entitled to reimbursement
for its attorneys' and experts' costs, fees and expenses. The provisions of
this Agreement shall not be construed as limiting any rights or remedies that
either party may otherwise have under applicable law, and shall be in addition
to all other rights and remedies of such party, including any which may arise
out of any other written agreement involving the parties.
15. GOVERNING LAW; VENUE. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Washington
without regard to conflicts of laws principles. The obligations set forth in
this Agreement are intended to supplement and not to supersede the protections
afforded the Corporation under the Uniform Trade Secrets Act, or similar law or
laws as may be in effect from time to time within the State of Washington. The
exclusive jurisdiction and venue of any lawsuit between the parties arising
under this Agreement
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<PAGE>
or out of the transactions contemplated hereby shall be the Superior Court of
Washington for King County, or the United States District Court for the Western
District of Washington at Seattle, and each of the parties hereby submits itself
to the exclusive jurisdiction and venue of such court for the purposes of such
lawsuit.
16. PRIOR AGREEMENTS. This Agreement amends, restates and supersedes all
prior oral and written agreements between the parties.
DATED as of the day and year first written above.
TOUCH TONE AMERICA, INC.
By /s/ David Smith
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Its Chief Financial Officer
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/s/ Michael Canney
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MICHAEL CANNEY
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INDEPENDENT AUDITOR'S CONSENT
We consent to the use in the Joint Proxy Statement/Prospectus of Touch Tone
America, Inc. of our reports dated August 9, 1996 and August 31, 1995,
accompanying the financial statements of Touch Tone America, Inc. and GetNet
International, Inc., respectively, contained in such Registration Statement, and
to the use of our name and the statements with respect to us, as appearing under
the heading "Experts" in the Joint Proxy Statement/Prospectus.
/s/ Hein + Associates LLP
HEIN + ASSOCIATES LLP
Denver, Colorado
December 3, 1996
<PAGE>
Exhibit 24.2
Consent of Independent
Certified Public Accountants
Arcada Communications and Affiliates
We hereby consent to the use in the Touch Tone America, Inc. Joint Proxy
Statement/Propectus constituting a part of this Registration Statement on Form
S-4 of our report dated November 22, 1996, relating to the financial statements
of Arcada Communications and Affiliates, which is contained in that Joint Proxy
Statement/Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Joint Proxy Statement/Prospectus.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Seattle, Washington
December 4, 1996
