UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10- Q SB
[X] Quarterly Report Pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended August 31, 1996
---------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from N/A to N/A
--- ---
Commission File No. 0-24058
TOUCH TONE AMERICA, INC.
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(Exact name of registrant as specified in its charter)
California 33-0424087
---------- ----------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
4110 N. Scottsdale Road, Suite 170, Scottsdale, Arizona 85251
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (800) 535-2211
--------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. [X]Yes [ ]No
At October 14, 1996, 3,320,800 shares of common stock, no par value
were outstanding.
Page 1 of 17 pages.
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TOUCH TONE AMERICA, INC. AND SUBSIDIARY
INDEX TO FORM 10-QSB
August 31, 1996
PAGE NO.
--------
Part I
- ------
CONSOLIDATED FINANCIAL STATEMENTS
a. Balance Sheets as of May 31, 1996 and August 31, 1996
(Unaudited) F-2
b. Statements of Operations for the Three Months Ended
August 31, 1995 and 1996 (Unaudited) F-3
c. Statements of Cash Flows for the Three Months Ended
August 31, 1995 and 1996 (Unaudited) F-4
d. Notes to the Consolidated Financial Statements F-5
MANAGEMENT'S DISCUSSION AND ANALYSIS F-10
Part II
- -------
a. Other Information
b. Signatures
F-1
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MAY 31 AUGUST 31,
1996 1996
---------- ----------
(Unaudited)
ASSETS
------
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 (NOTE 7)
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
=========== ===========
See accompanying notes to these consolidated financial statements.
F-2
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE
MONTHS ENDED
AUGUST 31,
--------------------------
1995 1996
---------- ----------
(Unaudited)
NET REVENUES:
Long distance resell $ 689,000 $ 340,000
Internet access - 176,000
----------- -----------
689,000 516,000
COST OF SALES
Long distance resell 435,000 228,000
Internet access - 142,000
----------- -----------
435,000 370,000
----------- -----------
GROSS MARGIN 254,000 146,000
OPERATING EXPENSES:
Selling 171,000 58,000
General and administrative 296,000 722,000
Amortization and depreciation 2,000 90,000
Severance agreements - 230,000
Excess volume commitments 135,000 -
----------- -----------
604,000 1,100,000
----------- -----------
LOSS FROM OPERATIONS (350,000) (954,000)
OTHER INCOME (EXPENSE) -
Interest expense, net 4,000 106,000
----------- -----------
4,000 106,000
----------- -----------
NET LOSS $ (354,000) $(1,060,000)
=========== ===========
LOSS PER SHARE $ (.19) $ (.33)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
AND EQUIVALENTS 1,833,000 3,205,000
=========== ===========
See accompanying notes to these consolidated financial statements.
F-3
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE
MONTHS ENDED
AUGUST 31,
--------------------------
1995 1996
---------- ----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (354,000) $(1,060,000)
Adjustments to reconcile net loss
to net cash from operating activities:
Depreciation and amortization 2,000 90,000
Common stock for exchange of debt
at below market - 127,000
Options issued at below market - 173,000
Bad debt expense - 67,000
Change in assets and liabilities:
Decrease (increase) in:
Trade receivables 31,000 (143,000)
Other assets - (23,000)
Increase (decrease) in:
Accounts payable (116,000) (110,000)
Accrued liabilities 2,000 (241,000)
Deferred revenue and other (9,000) 30,000
----------- -----------
Net cash used in operating
activities (444,000) (1,090,000)
CASH FLOWS FROM INVESTING ACTIVITY -
Purchase of equipment - (679,000)
----------- -----------
Net cash used in investing
activities - (679,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (4,000) (18,000)
Payment of notes payable to stockholders - (183,000)
Repayment of preferred stock - (750,000)
Proceeds from issuance of redeemable
preferred stock 113,000 -
Offering costs incurred (43,000) (67,000)
----------- -----------
Net cash provided by (used in)
financing activities 66,000 (1,018,000)
----------- -----------
NET DECREASE IN CASH (378,000) (2,787,000)
CASH, beginning of period 512,000 5,278,000
----------- -----------
CASH, end of period $ 134,000 $ 2,491,000
=========== ===========
See accompanying notes to these consolidated financial statements.
F-4
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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.
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.
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.
2. DISCLOSURE SUMMARY:
------------------
Pursuant to rules and regulations of the Securities and Exchange
Commission, the Company has elected to omit substantially all the
disclosures normally included in financial statements prepared under
generally accepted accounting principles. Readers of these financial
statements should refer to the Company's Form 10-KSB filed for the
year ended May 31, 1996, for additional disclosures.
3. UNAUDITED INFORMATION:
---------------------
The Company's balance sheet as of August 31, 1996, and the 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 presented are not necessarily indicative of results
expected for the full year.
4. ADOPTION OF NEW ACCOUNTING POLICIES:
-----------------------------------
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
F-5
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 under this accounting standard.
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.
5. 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 7, the Company has entered into sales volume
commitments with service providers.
The Company renegotiated two significant commitments under which it
was experiencing substantial shortfalls. Under the revised
agreements, the Company's future commitment has been eliminated. The
Company, however, has a continuing service commitment with AT&T of
$1,800,000 annually, which it was satisfactorily meeting at May 31,
1996. However, as discussed in Note 7, monthly revenues under this
commitment have declined, and unless related revenues increase the
Company will be unable to continue to meet this commitment. At this
time, no loss accrual has been recorded based on management's belief
that the contract will be a renegotiated on favorable terms with AT&T.
If such renegotiations are unsuccessful, substantial losses could be
recorded.
The Company's ability to continue as a going concern is dependent upon
several factors, including meeting and/or renegotiating its future
carrier commitments, and ultimately achieving and maintaining
profitable operations. The Company is also aggressively working to
increase revenues, seek 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.
F-6
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ACQUISITIONS:
------------
In August 1996, the Company entered into a letter of intent to merge
with Arcada Communications Inc. (Arcada), based in Seattle,
Washington, whereby the Company would issue to Arcada's shareholders
promissory notes totaling $1,500,000 and 12,500,000 shares of the
Company's common stock. As a result, Arcada would acquire control of
both management and the board of directors of the Company. The
completion of the merger is subject to completion of a merger
agreement and approval by the board of directors and shareholders of
both companies. If this merger is successfully completed, for
financial reporting purposes, it would be considered a purchase
transaction of Touch Tone by Arcada. Therefore, future financial
statements would include Arcada operations for all prior periods and
Touch Tone only from the date of acquisition.
In November 1995, the Company acquired the outstanding common stock of
GetNet through the issuance of 400,000 shares of its common stock,
which was valued at $800,000. This acquisition was accounted for
under purchase method of accounting. The excess of the purchase price
over the net liabilities acquired of approximately $835,000 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
AUGUST 31,
1995
----------
Net Revenues $ 789,000
==========
Net Loss $ 417,000
==========
Net Loss per Share $ (.45)
==========
The above pro-forma financial information assumes the GetNet
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.
7. Commitments and Contingencies:
-----------------------------
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
was satisfactorily meeting. However, monthly revenues have declined
substantially and unless related revenues increase the Company will be
unable to continue to meet the minimum amount of this commitment
(which is 80% of the total commitment).
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 to replace its existing SDN contract. However, there is no
F-7
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assurance that the Company will be able to ultimately renegotiate its
existing contract. If it is not renegotiated, a substantial loss
accrual may have to be recorded in fiscal 1997, the amount of which
cannot be currently estimated.
In connection with GetNet's "Internet Backbone," the Company is
currently obligated to pay approximately $70,000 per month, which
increases to approximately $95,000 in January 1997, for
telecommunication equipment and related leases, irrespective of the
related usage by the Company's Internet customers, which currently is
not sufficient to cover these costs.
In July 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. 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 also filed legal action against its former president
in August 1996. In connection with this action, 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. The president has filed an answer and the Company continues
to prosecute this matter. The ultimate resolution of this matter
cannot presently be determined.
In September 1996, two officers at GetNet (including a current
director of the Company) were terminated. These terminations are
being disputed by the former officers. The resolution of this matter
has not been resolved, but management believes the ultimate outcome
will not have a material impact on the Company's financial position.
8. Capital Transactions:
--------------------
During the quarter ended August 31, 1995, the Company repaid its
preferred shareholders $750,000. Also during the quarter ended August
31, 1996, $67,000 in additional printing costs associated with the
offering were recorded in a liability.
In August 1996, the Company issued 70,000 shares of common stock for
the exchange of a note payable of $210,000. In connection with this
exchange, the Company recorded approximately $254,000 of expense (of
which $127,000 was recorded as an expense in the three months ended
August 31, 1996 and the balance in the prior year) based on the quoted
market at the time the parties agreed to the exchange. The Company
has agreed to register these shares for sale under The Securities Act.
Also in August 1996, the Company issued 45,000 shares to a
telecommunications company in settlement of a past debt. Accrued
expenses at May 31, 1996 include $180,000 related to this debt.
In September 1996, the Company issued 1,500 shares of common stock in
settlement of a past agreement to issue shares of common stock based
an 50% of the public offering price.
F-8
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 1996, the Company terminated two employees. In connection
with their termination, 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 $172,000 of expense based on the difference
between the option exercise price and the price of the Company's
common stock on the date of the agreement.
9. Significant Sales Agent Relationship:
------------------------------------
The Company has an agreement with an independent sales agent, whereby
the agent receives maximum commissions of approximately 32% on sales
it originates. At current sales levels, the Company does not realize
a direct profit from the sales generated by the agent. Indirectly,
however, the Company realizes more profit on its other monthly usage
as a result of the increased discounts resulting from the increased
usage received from the Company's provider. Also, if the Company
successfully renegotiates its contract with its provider, the Company
believes it will then directly realize additional profit on sales
originated by the agent, if a greater discount can be obtained from
the provider. Payment of the commissions to the agent is secured by
the customer base generated by the sales agent. For the three months
ended August 31, 1995 and 1996, the sales originated by the agent have
accounted for 34% and 39%, respectively, of company sales. During
these periods, the Company has recorded a related expense to the agent
of approximately $133,000 and $32,000, respectively.
F-9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
AUGUST 31, 1996
GENERAL
- -------
The Company's net revenues were approximately $516,000 for the three months
ended August 31, 1996 and $689,000 for the three months ended August 31,
1995.
As discussed in "Commitments," the Company has, in the past, entered into
sales volume commitments with its service providers which have exceeded its
current sales volumes. The Company has renegotiated two significant
commitments under which it was experiencing substantial shortfalls. Under
the revised agreements, the Company's future commitment for these contracts
has been eliminated. The Company, however, has a continuing commitment
with AT&T to provide long distance service of $1,800,000 annually, which,
as of year end, it was satisfactorily meeting. However, monthly revenues
under this commitment have declined and the Company will be unable to
continue to meet this commitment unless related revenues increase.
Therefore, an additional loss accrual may be recorded in the fiscal year
ending May 31, 1997. In addition, the Company has service commitments,
primarily with WilTel, to lease a minimum of $70,000 per month of
telecommunication circuits in connection with its Internet backbone. This
amount increases to $95,000 in January 1997. The Company's revenues
currently do not support this commitment. There can be no assurances that
the Company's revenues will be sufficient to cover the Company's monthly
commitments.
The Company's 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'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.
CHANGE IN GETNET'S MANAGEMENT
- -----------------------------
In September 1996, the Company terminated two (2) Officers of GetNet, who
were also two (2) of the three (3) original founding shareholders of
GetNet. The Company is unable at this time to predict the ultimate effect
of these terminations. As of the date of this report, one of these
individuals remains a Director of the Company.
MERGERS/ACQUISITIONS
- --------------------
In August 1996, the Company entered into a letter of intent to merge with
Arcada Communications Inc. (Arcada), based in Seattle, Washington, whereby
the Company would issue to Arcada promissory notes totaling $1,500,000 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 preparation of a
definitive merger agreement and the approval of directors and shareholders
of both companies.
If this merger is completed, Arcada will be considered the acquiring
entity, even though Touch Tone is legally the surviving Company.
Therefore, future financial statements of the Company will reflect the
operations of Arcada for prior years and Touch Tone operations only from
the date of the merger.
In October 1996, the Company agreed to acquire a certain customer base for
the issuance of 40,000 shares of common stock. This is not considered to
be a significant acquisition from a financial perspective.
F-10
<PAGE>
RESULTS OF OPERATIONS:
- ---------------------
For the Three Months Ended August 31, 1996 compared to the Three Months
Ended August 31, 1995
Long distance resell revenue from operations for the three months ended May
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 less competitive than the currently market price for comparative
service. Currently, AT&T is offering long distance services at
approximately $.02 per minute less than the Company's cost for the same
service. 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 the Company is unable to renegotiate its contract
with AT&T, the Company intends to find another long distance reseller with
a substantial telecommunications customer base and negotiate a favorable
transfer of the Company'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 are 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 decrease 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 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. The Company, 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 at the earliest fiscal 1998.
Selling expenses were $58,000 or 11% of net revenues for the three months
ended August 31, 1996 from $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 receives commissions of
approximately 32%. At this level, the Company does not receive gross
margin on sales originated by this agent, but as a result, experiences
greater gross margin on other Company revenues due to volume discounts by
AT&T. Management believes the selling expenses attributed to Company agent
commissions will decrease as a percentage of net revenues if a new contract
with AT&T is negotiated; however, selling expenses in general will increase
because of marketing efforts and variety of services offered. GetNet's
selling expenses were $5,000 for the period ended August 31, 1996, or 3% of
its sales.
Under the Company's current contract with independent sales agents for
reselling long distance services, commissions are paid as long as the
Company receives revenues from the customer. The Company intends
F-11
<PAGE>
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.
For marketing GetNet services, the Company has four full time sales agents
on staff. These persons 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 compared to $296,000 or
43% for the three months ended August 31, 1995. During the three months
ended August 31, 1996, the Company paid increased salaries and benefits to
its employees of approximately $374,000 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, the Company has reduced its number of personnel
due to decreasing revenues. In connection with the termination of two
employees, the Company 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 traded 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 the Company 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.
The Company 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 the Company 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, the Company
had interest income of approximately $25,000 from its cash investments
received from proceeds of its public offering.
The Company had a net loss of $1,060,000 for the three months ended August
31, 1996. For the three months ended August 31, 1995, the Company 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.
F-12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash position at August 31, 1996 was $2,491,000 and net
working capital was $1,715,000. The Company's cash position reflects the
receipt of the proceeds Company's public offering of its common stock
completed in May 1996.
Cash used in operations for the Company totaled $1,090,000 during the three
months ended August 31, 1996 as compared to $444,000 for the three months
ended August 31, 1995. This increase in cash outflows can be primarily
attributed to a loss from operations, partially offset by the current
period non-cash expenses resulting from an increase in the bad debt
allowance and the non-cash cost of common share and option issuances
related to the exchange of a note payable for common stock and severance
agreements. The Company also paid certain payables from proceeds of the
public offering resulting in a decrease in accounts payable and accrued
expense.
Cash flows used in investing activities consisted primarily of additions to
equipment of $679,000 in the three months ended August 31, 1996, primarily
for constructing GetNet's Internet Backbone. The initial phase of
constructing this backbone is substantially completed and the Company does
not intend to incur substantial additional capital costs.
Cash flows used in financing activities were $1,018,000 during the three
months ended August 31, 1996 as compared to $66,000 provided by financing
activities for the three months ended August 31, 1995. During the three
months ended August 31, 1996, cash outflows can be primarily attributed to
payments made to preferred stock holders for the redemption of their
preferred stock and repayments of notes payable to stockholders. During
the three months ended August 31, 1995, cash inflows represent proceeds
from issuance of redeemable preferred stock which were partially offset by
stock offering costs incurred.
F-13
<PAGE>
TOUCH TONE AMERICA, INC.
PART II
ITEM NO. 1 Legal Proceedings
-----------------
The Company is not a party to any material legal proceedings and
no such proceedings are known to be contemplated except:
* A lawsuit has been filed in the Superior Court of the State
of Arizona, Maricopa County by the Company against Jonathan
Miller and Janeece Miller, husband and wife, on August 30,
1996. The complaint details various causes of action
against Mr. Miller, in his capacity as a former Officer and
Director of the Company. The Company has alleged Mr. Miller
is responsible to the Company for $360,835.90 in damages to
the Company. Mr. Miller filed an answer denying the
allegations. The Company is, and will vigorously pursue
this legal action.
* Janeece Miller, the wife of Mr. 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 request was filed with the
Arbitration Association on July 31, 1996 and the Company has
responded, consenting to the arbitration and contesting the
allegations in the complaint, asserting that Ms. Miller
voluntarily resigned her employ with the Company and that
the terms of the severance package do not apply in her
situation. A hearing will be set and the Company will
defend the complaint.
* Subsequent to May 31, 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. 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.
ITEM NO. 2 Changes in Securities
---------------------
None
ITEM NO. 3 Defaults Upon Senior Securities
-------------------------------
None
ITEM NO. 4 Submission of Matter to a Vote of Securities Holders
----------------------------------------------------
None
<PAGE>
ITEM NO. 5 Other Information
-----------------
None
ITEM NO. 6 Exhibits and Reports on Form 8-K
--------------------------------
On September 2, 1996, the Registrant filed a Form 8-K reporting
under Item 2 relating to the proposed business combination with
Arcada, Inc. of Seattle, Washington.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned thereunto duly authorized.
TOUCH TONE AMERICA, INC.
/s/ MICHAEL J. CANNEY
- --------------------------------
Michael J. Canney, President
Principal Executive Officer
/s/ DAVID J. SMITH
- --------------------------------
David J. Smith, Principal
Financial and Accounting Officer
Date: October 15, 1996
--------------------------
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<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> AUG-31-1996
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0
0
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