<PAGE>
As filed with the Securities and Exchange Commission on May 6, 1996
Registration No. 33-80131
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
TOUCH TONE AMERICA, INC.
(Exact name of registrant as specified in charter)
CALIFORNIA 330424087 4813
(State or other jurisdiction of (IRS Employer (Primary Standard Industrial
incorporation or organization) Identification No.) Classification Code Number)
Michael J. Canney, President
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, President
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. Bert L. Gusrae, Esq.
410 Seventeenth Street David A Carter, P.A.
Suite 1940 355 W. Palmetto Park Road
Denver, Colorado 80202 Boca Raton, Florida 33432
(303) 628-0747 (407) 750-6999
(303) 592-1846 FAX (407) 367-0960 FAX
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER EFFECTIVE DATE
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: /X/
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>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Title of Each Amount Proposed Maximum Proposed Maximum Amount of
Class of Securities to be Offering Price Offering Registration
to be Registered Registered Per Share(1) Price(1) Fee
- ------------------- ---------- ------------ -------- ---
<S> <C> <C> <C> <C>
Common Stock, 2,262,500(2)
No Par Value Shares $4.00 $ 9,050,000 $3,120.69
Warrants to Purchase
Shares of Common Stock, 1,725,000(3)
No Par Value Warrants $.125 215,625 74.35
Common Stock, No
Par Value, Underlying
Warrants to Purchase 1,725,000
Common Stock(4) Shares $4.00 6,900,000 2,379.31
Representative's
Common Stock Purchase 150,000
Warrants Warrants nil 10 nil
Common Stock Underlying 150,000
Representative's Warrants(3) Shares $4.80 720,000 248.28
Representative's Warrant 150,000
to Purchase Warrants(3) Warrants 0 0 0
Warrants Underlying
Representative's Warrant 150,000
to Purchase Warrants Warrants $ .15 22,500 7.76
Common Stock Underlying
Representative's Warrant 150,000
to Purchase Warrants(3) Shares $4.80 720,000 248.28
----------- ---------
TOTALS: $17,628,135 $6,078.67
----------- ---------
----------- ---------
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for calculation of the amount of the registration fee
calculated pursuant to Rule 457.
(2) Includes 225,000 shares to cover over-allotments, if any, and 187,500
shares of Common Stock to be issued upon the conversion of 150,000 shares
of Series A Convertible Preferred Stock upon closing of this offering and
350,000 shares of Common Stock completed in November 1995 which are being
registered hereby for resale.
(3) Includes 225,000 Warrants to cover over-allotments, if any.
(4) Pursuant to Rule 416, there are also being registered such additional
shares as may become issuable pursuant to the anti-dilution provisions of
the Warrants.
The Exhibit Index appears on page _______ of the sequentially numbered
pages of this Registration Statement. This Registration Statement, including
exhibits contains _______ pages.
<PAGE>
CROSS REFERENCE SHEET
ITEM NO. SECTIONS IN PROSPECTUS
- -------- --------------------------
1 Front of the Registration Statement and
Outside Front Cover of Prospectus . . . . . Cover Page
2 Inside Front and Outside Back Cover Pages
of Prospectus . . . . . . . . . . . . . . . Inside Front Cover Pages;
Table of Contents
3 Summary Information and Risk Factors. . . . Prospectus Summary, Risk
Factors
4 Use of Proceeds . . . . . . . . . . . . . . Prospectus Summary; Use of
Proceeds
5 Determination of Offering Price . . . . . . Cover Page; Risk Factors
6 Dilution. . . . . . . . . . . . . . . . . . Dilution
7 Selling Security Holders. . . . . . . . . . Series A Preferred Selling
Shareholders
8 Plan of Distribution. . . . . . . . . . . . Prospectus Summary;
Underwriting
9 Legal Proceedings . . . . . . . . . . . . . Business - Litigation
10 Directors, Executive Officers, Promoters and
Control Persons . . . . . . . . . . . . . . Directors, Executive
Officers, Promoters and
Control Persons
11 Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . Principal Shareholders
12 Description of Securities . . . . . . . . . Description of Securities;
Dividend Policy
13 Interest of Named Experts and Counsel . . . Experts
14 Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities . . . . . . . . . . . . . . . . Statement as to
Indemnification
15 Organization within Last Five Years . . . . The Company; Certain
Transactions
16 Description of Business . . . . . . . . . . Prospectus Summary; Risk
Factors; The Company;
Business
17 Management's Discussion and Analysis or
Plan of Operation . . . . . . . . . . . . . Management's Discussion and
Analysis or Plan of
Operation
18 Description of Property . . . . . . . . . . Business
19 Certain Relationships and Related
Transactions. . . . . . . . . . . . . . . . Certain Transactions
20 Market for Common Equity and Related
Stockholder Matters . . . . . . . . . . . . Risk Factors
21 Executive Compensation. . . . . . . . . . . Compensation of Executive
Officers and Directors
22 Financial Statements. . . . . . . . . . . . Index to Financial
Statements
23 Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosure. . . . . . . . . . . . . . . . . Not Applicable
24 Indemnification of Directors and
Officers. . . . . . . . . . . . . . . . . . Indemnification of
Directors and Officers
25 Other Expenses of Issuance and
Distribution. . . . . . . . . . . . . . . . Other Expenses of Issuance
and Distribution
26 Recent Sales of Unregistered Securities . . Recent Sales of
Unregistered Securities
27 Exhibits. . . . . . . . . . . . . . . . . . Exhibits
28 Undertakings. . . . . . . . . . . . . . . . Undertakings
<PAGE>
- --------------------------------------------------------------------------------
INFORMATION CONTAINED HEREIN IS SUBJECT OT COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION DATED MAY 6, 1996
TOUCH TONE AMERICA, INC.
1,500,000 SHARES OF COMMON STOCK AND
1,500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Touch Tone America, Inc. (the "Company") is offering hereby 1,500,000
shares of Common Stock, no par value per share (the "Common Stock"), and
1,500,000 Redeemable Common Stock Purchase Warrants (the "Warrants") of the
Company. The Common Stock and the Warrants (collectively, the "Securities") are
being separately offered and are separately transferable at any time from the
date of this Prospectus (the "Effective Date"). Each Warrant entitles the
registered holder thereof to purchase, at any time during the period commencing
on the Effective Date, one share of Common Stock at a price of $4.00 per share,
subject to adjustment under certain circumstances, for a period of three years
from the Effective Date. The Warrants offered hereby are not exercisable
unless, at the time of exercise, the Company has a current prospectus covering
the shares of Common Stock issuable upon exercise of the Warrants and such
shares have been registered, qualified or deemed to be exempt under the
securities laws of the states of residence of the exercising holders of the
Warrants. Commencing after the Effective Date, the Warrants are subject to
redemption by the Company at $.25 per Warrant on 30 days' prior written notice
if the closing bid price for the Company's Common Stock, as reported on The
Nasdaq Small Cap Market-SM- ("Nasdaq"), or the closing sale price as reported on
a national or regional securities exchange, as applicable, for 30 consecutive
trading days ending within 10 days of the notice of redemption of the Warrants,
averages at least $8.00. The Company 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. Prior to the first anniversary of
the Effective Date, the Warrants will not be redeemable by the Company without
the written consent of the Representative.
The offering price of the Common Stock and Warrants, as well as the
exercise price and other terms of the Warrants have been determined by
negotiation between the Company and Barron Chase Securities, Inc. (the
"Representative"), acting as representative of the several underwriters
identified elsewhere herein (the "Underwriters"), and bear no relationship to
the Company's asset value, net worth or other established criteria of value.
See "RISK FACTORS" at page 7 and "UNDERWRITING." After completion of this
Offering, the Company's current and past officers and directors, and their
family members will have voting control of 18% the outstanding Company Common
Stock. See "DESCRIPTION OF SECURITIES - Common Stock."
Prior to this Offering, there has been no public market for the Common
Stock or the Warrants. It is anticipated that upon completion of this Offering
the Common Stock and the Warrants will be listed on Nasdaq under the symbols
"TONE" and "TONE-W," respectively. There is no assurance that a trading market
in the Company's Common Stock or Warrants will develop or if it does develop,
that it will be sustained.
Also being offered for resale from time to time by this Prospectus are
187,500 shares of Common Stock which are being issued to holders of 150,000
shares of Series A Convertible Preferred Stock. The Series A Preferred Stock
will be automatically redeemed and converted by the Company at the Effective
Date and the holders of the Series A Preferred Stock will receive the shares of
Common Stock and $5.00 for each share of Series A Preferred Stock. The Series A
Preferred Selling Shareholders cannot sell their shares for a period of eighteen
months without the Representative's consent. See "SERIES A PREFERRED SELLING
SHAREHOLDERS." In addition, 350,000 shares of Common Stock held by certain
individuals are being offered for resale from time to time by this Prospectus.
The Additional Selling Shareholders may not sell their shares for a period of
one year without the Representative's prior written consent. See "ADDITIONAL
SELLING SHAREHOLDERS."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED
ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS" AT PAGE 6 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Underwriting Proceeds to
Price to Public Discount (1) Company (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share . . . . . $4.00 $0.40 $3.60
- --------------------------------------------------------------------------------
Per Warrant. . . . . $0.125 $.0125 $.1125
- --------------------------------------------------------------------------------
Total (3) . . . . . $6,187,500 $618,750 $5,568,750
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
SEE FOOTNOTES ON FOLLOWING PAGE OF PROSPECTUS
BARRON CHASE SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
(1) Does not include additional compensation to be received by the
Representative in the form of (i) a non-accountable expense allowance of
$185,625 ($213,188 if the Underwriters' over-allotment option is exercised
in full); (ii) warrants to purchase up to 150,000 shares of Common Stock at
$6.00 per Share (150% of the initial offering price), and 150,000 warrants
at $.1875 per warrant (150% of the initial public offering price),
exercisable over a period of five years commencing from the Effective Date
(the "Representative's Warrant"); and (iii) a financial advisory agreement
for the Representative to act as an investment banker for the Company for a
period of three years at a fee of $108,000, payable at the closing of the
Offering. In addition, the Company has agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under
the Securities Act of 1933. See "UNDERWRITING."
(2) Before deducting expenses of this Offering payable by the Company,
estimated at $505,625 (approximately 8.2% of the gross proceeds of the
Offering), including the Representative's non-accountable expense
allowance.
(3) The Company has granted to the Underwriters an option, exercisable within
forty-five (45) days of the Effective Date to purchase up to 225,000
additional shares of Common Stock and 225,000 additional Warrants on the
same terms and conditions as set forth above to cover over-allotments, if
any (the "Over-allotment Option"). If all such additional Securities are
purchased, the Price to Public, Underwriting Discounts and Commissions, and
Gross Proceeds to Company will be increased to $7,106,250, $710,625 and
$6,395,625, respectively. See "UNDERWRITING."
The Securities are offered subject to prior sale, when, as and if delivered
to and accepted by the Underwriters and subject to the approval of certain legal
matters by counsel and certain other conditions. It is expected that delivery
of certificates representing the Securities will be made at the offices of
Barron Chase Securities, Inc., 7700 W. Camino Real, Suite 200, Boca Raton,
Florida 33433-5541, on or about ___________________, 1996.
The Company is not presently required to file, and has not filed, periodic
reports with the Securities and Exchange Commission. Following consummation of
this Offering, the Company intends to furnish to its stockholders annual reports
containing financial statements audited and reported on by independent auditors
and quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year. Stockholders will be able to obtain
the most recent such reports by making written request therefor to the Company's
shareholder relations officer at the Company's principal executive offices
located at 4110 No. Scottsdale Road, Suite 170, Scottsdale, Arizona 85251.
OFFICERS AND DIRECTORS OF THE COMPANY MAY INTRODUCE THE REPRESENTATIVE TO
PERSONS TO CONSIDER THIS OFFERING AND SUBSCRIBE FOR SECURITIES EITHER THROUGH
THE REPRESENTATIVE, OTHER UNDERWRITERS OR THROUGH PARTICIPATING DEALERS. AS A
RESULT OF SUCH INTRODUCTIONS SUCH PERSONS MAY BE LIKELY TO PURCHASE THE SHARES
AND/OR WARRANTS. IN THIS CONNECTION, OFFICERS AND DIRECTORS OF THE COMPANY WILL
NOT RECEIVE ANY COMMISSIONS OR ANY OTHER COMPENSATION.
OFFICERS AND DIRECTORS MAY PURCHASE SHARES BEING OFFERED HEREBY.
INASMUCH AS A SUBSTANTIAL AMOUNT OF THE REGISTERED SECURITIES OF THE
COMPANY ISSUED IN THIS OFFERING MAY BE DISTRIBUTED TO CUSTOMERS OF THE
UNDERWRITERS, AND SUBSEQUENTLY, THESE PERSONS, AS CUSTOMERS OF THE UNDERWRITERS,
MAY BE EXPECTED TO ENGAGE IN TRANSACTIONS FOR THE SALE OR PURCHASE OF REGISTERED
SECURITIES OF THE COMPANY, SHOULD THE UNDERWRITERS DETERMINE TO MAKE A MARKET,
AND SHOULD A MARKET DEVELOP FOR THE COMPANY'S SECURITIES, THE UNDERWRITERS MAY
INITIALLY BE EXPECTED TO EXECUTE A SUBSTANTIAL PORTION OF THE TRANSACTIONS IN
THE SECURITIES OF THE COMPANY. THEREFORE, THE UNDERWRITERS MAY BE, FOR THE
FORESEEABLE FUTURE, A DOMINATING INFLUENCE, AND THEREAFTER A FACTOR OF THE
DECREASING IMPORTANCE FOR THE COMPANY'S SECURITIES, SHOULD A MARKET ARISE FOR
THE COMPANY'S SECURITIES.
IN CONNECTION WITH THIS OFFERING, THE REPRESENTATIVE MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AND/OR WARRANTS OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE EFFECTUATED
IN THE OVER-THE-COUNTER MARKET OR OTHERWISE AND MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS
ASSUMES ALL THE SHARES OFFERED HEREBY WILL BE SOLD.
THE COMPANY
Touch Tone America, Inc. (the "Company") was formed in 1989 with the goal
of becoming a full service telecommunications company providing long distance,
local dedicated access, Internet and other telecommunication services and
products. In its initial formation, the Company concentrated solely on
providing long distance services. Upon the formulation of new legislation which
allows competition in the local access markets, the Company entered into an
agreement with ICG Services, Inc. to offer this service to its customers. As
set forth below, the agreement allows the Company to provide its current and
future customers local calling at reduced rates as deregulation permits. With
the rapid growth in popularity of the Internet and its numerous applications and
resources, the Company in November 1995 acquired GetNet International, Inc. to
develop its own Internet division. The Company believes by providing Internet
services to its customers it can meet the full spectrum of its customers'
telecommunication needs.
As a carrier of long distance services, the Company attempts to reduce its
variable costs of access to long distance transmission facilities and monthly
services. The Company offers services at rates it believes to be competitive to
businesses of all sizes throughout the United States and attempts to give
personalized service through customer service practices such as welcome letters,
periodic check up calls, and 24 hour service representatives. The Company's
primary customers are small to medium sized businesses with monthly long
distance usage between $100 to $2,000. As a long distance carrier, the Company
offers its customers the routing equipment and phone lines of the large
carriers, such as AT&T, WilTel and other carriers which the Company may contract
with in the future. The Company's 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.
In February 1995, the Company entered into an agreement with ICG Access
Services, Inc. ("ICG") of Denver, Colorado to act as a national reseller for ICG
services. The primary ICG service to be offered by the Company is local
telephone service, which includes the ability to connect a local market with
telephone and data transmission services directly to long distance carriers,
thus allowing the Company to bypass part or all of the local telephone company's
(LEC, RBOC) network. An ICG's affiliate also provides network system
integration services whereby fiber optic lines connect local area networks and
telephone systems. The Company believes it will benefit from the agreement with
ICG because it allows the Company the ability to offer its present and future
customers competitive rates and services in the local access markets currently
dominated by the Bell companies ("Baby Bells") and achieve additional customers
for its other services including Internet, long distance and paging.
In September 1995, the Company 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 display and alphanumeric paging services.
The agreement further allows the Company to offer other services offered by
PageNet which includes personal 800 numbers, mini mail, page mail, and custom
greeting features. The Company believes the agreement will allow the Company to
satisfy business and individual consumers' demand for advanced personal
messaging and future innovations in the wireless communications industry.
In November 1995, the Company acquired all the outstanding stock of GetNet
International, Inc. ("GetNet") of Phoenix, Arizona. GetNet is a provider of
Internet access services to individuals and businesses in Arizona and other
parts of the United States. The Company offers subscribers complete Internet
access comprised of front-end software, integrated with 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, World Wide Web sites, USENET news
groups and database information (including graphics, data and public domain
software). GetNet's front-end software features a point-and-click graphical
user interface providing subscribers with easy-to-use access to the Internet's
applications and resources. The Company is developing software that will allow
businesses and individual users to call an individual pager anywhere in the
world and deliver a message, alpha or numeric, via the Internet without making a
long distance call. The Company will bill Internet services as a line item on
the Company's invoice with long distance and local access bills.
In April 1996, Mr. Vaughan, the Company's former Chairman of the Board and
Chief Executive Officer, brought to the attention of the Company's auditors a
previously undisclosed letter agreement signed by Mr. Miller (the Company's
former
1
<PAGE>
President and Director), with a significant sales agent, which provided for a
retroactive increase in the sales agents' commissions to 50% from 32%. This
agreement and its potential ramifications has subsequently been thoroughly
reviewed by the Company's Board of Directors and the following actions were
taken on behalf of the Company.
The Board of Directors, with the concurrence and support of Messrs. Miller
and Vaughan, 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 has been
appointed President, Chairman of the Board and Chief Executive Officer. Mr.
Miller has resigned as a Director and Officer and has elected to pursue personal
business interests. Mr. Vaughan has also resigned as Director and Officer, but
continues to serve as a consultant to the Company in locating and negotiating
potential future mergers and acquisitions. In connection with their
resignation, their employment agreements were terminated (see "Employment
Agreements").
The Company's corporate offices are presently located at 4110 N. Scottsdale
Road, Suite 170, Scottsdale, Arizona 85251. The Company's telephone number is
(800) 535-2211.
2
<PAGE>
THE OFFERING
Securities Offered . . . . . . . . 1,500,000 shares of Common Stock and
1,500,000 Warrants. The Common Stock and
Warrants are being separately offered and
are separately transferable at any time
from the date of this Prospectus (the
"Effective Date"). Each Warrant entitles
the holder to purchase one share of Common
Stock at a price of $4.00 per share for a
period of three years from the Effective
Date, when the Warrants expire. Commencing
after the Effective Date, the Warrants are
subject to redemption at $.25 per Warrant
on 30 days' prior written notice if the
closing bid price of the Company's Common
Stock as reported on Nasdaq or the closing
sale price of such Common Stock, if traded
on a national or regional securities
exchange, as applicable, averages at least
$8.00 over the 30 consecutive trading days
ending within 10 days of the notice of
redemption. The Company is required to
maintain the effectiveness of the
Registration statement of which this
Prospectus is a part, with respect to the
Common Stock underlying the Warrants, at
the time of redemption of the Warrants.
Prior to the first anniversary of the
Effective Date, the Warrants will not be
redeemable by the Company without the
written consent of the Representative.
Offering Price:
Common Stock. . . . . . . . . . $4.00 per Share.
Warrants. . . . . . . . . . . . $.125 per Warrant.
Shares of Common Stock
Outstanding:
Prior to the Offering. . . . . 1,286,800 shares of Common Stock.
After the Offering (1)(2). . . 3,019,300 shares of Common Stock.
Use of Proceeds. . . . . . . . . . To retire debt, redeem Series A Preferred
Stock, acquire related telecommunications
businesses, institute the ICG and other
product development programs and provide
for working capital. See "USE OF
PROCEEDS."
Risk Factors . . . . . . . . . . . Investment in the Company involves certain
general business risks and risks
specifically inherent in the
telecommunications industry which in part,
include the dependence on services offered
by other carriers, intense competition,
capital requirements, carrier commitments,
existing and pending governmental
regulation, technological changes and new
services, customer attrition and dependence
on agents. See "RISK FACTORS."
Common Stock Warrants
------------ --------
Proposed Nasdaq Symbols. . . . . . TONE TONE-W
- --------------------
(1) Includes 187,500 shares of Common Stock to be issued on consummation of the
Offering as partial consideration for the redemption of 150,000 shares of
Preferred Stock (as hereinafter defined) sold by the Company for $5.00 per
share (an aggregate of $750,000, which will be repaid from proceeds of the
Offering) in May 1995 and 45,000 shares of Common Stock to be issued as
payment of a past liability to a carrier in addition to $250,000 to be paid
from proceeds of this Offering.
(2) Does not give effect to (a) the issuance of up to 1,500,000 shares in the
event of exercise of Warrants issued in connection with this Offering, (b)
the issuance of up to 450,000 shares upon exercise of the Underwriters'
Over-allotment Option and exercise of the underlying Warrants, (c) the
issuance of up to 300,000 shares upon exercise of the Representative's
Warrant and the underlying Warrants. See "UNDERWRITING."
3
<PAGE>
SUMMARY FINANCIAL DATA
The following tables set forth the summary financial information and other
equity information of the Company and GetNet. The summary financial information
in the tables are derived from the financial statements of the Company and
GetNet and pro forma combined financial information, and should be read in
conjunction with the financial statements, pro forma information, related notes,
and other financial information included herein. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OR PLAN OF OPERATIONS" and "FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA (IN THOUSANDS, EXCEPT NET LOSS PER COMMON SHARE):
FOR FISCAL YEAR ENDED:
The Company GetNet(1) Pro forma(2)
----------------------------------------------- ---------- -------------
Years Ended
July 31, Ten Months Ended Year Ended Periods Ended
-------------------------- May 31, July 31, May 31,
1993 1994 1995 1995 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . $ 1,364 $ 1,461 $ 1,952 $ 115 $ 2,067
Income (loss) from
operations . . . . . . . . . . . . $ 3 $ (140) $ (234) $ (303) $ (676)
Net (loss) . . . . . . . . . . . . $ 0 $ (154) $ (294) $ (303) $ (724)
Net(loss) per share . . . . . . . . $ 0 n/a $ (0.19) n/a $ (0.24)
Shares Outstanding . . . . . . . . n/a n/a 1,508 n/a 3,053
</TABLE>
<TABLE>
<CAPTION>
FOR INTERIM PERIODS:
The Company GetNet(1) Pro forma(3)
-------------------------- ------------------------------- ------------
Two Months Three Months
Seven Months Ended Ended Ended Periods Ended
February 28, December 31, October 31, October 31, December 31,
1995 1995 1994 1995 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . $ 1,210 $ 1,399 $ 1 $ 100 $ 1,499
Income (loss) from
operations . . . . . . . . . . . . $ (76) $ (1,460) $ (16) $ (21) $ (1,551)
Net (loss) . . . . . . . . . . . . $ (134) $ (1,590) $ (16) $ (21) $ (1,668)
Net(loss) per share . . . . . . . . n/a $ (1.05) n/a n/a $ (0.55)
Shares Outstanding . . . . . . . . n/a 1,508 n/a n/a 3,053
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA (IN THOUSANDS):
The Company GetNet Pro forma(5)
------------------------------------------ -------------------------- ------------
After Public
Offering
As of As of As of As of As of As of
July 31, May 31, December 31, July 31, October 31, December 31,
1994 1995 1995(4) 1995 1995 1995
------ ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Cash . . . . . . . . . . . . . . . $ 58 $ 512 $ 144 $ 2 $ 4 $ 3,235
Working capital (deficit) $ (149) $ 79 $ (1,013) $ (84) $ (121) $ 3,382
Total assets . . . . . . . . . . . $ 280 $ 1,388 $ 1,987 $ 112 $ 179 $ 4,931
Long-term liabilities . . . . . . . $ 111 $ 162 $ 427 $ 5 $ 3 $ 296
Redeemable preferred stock . . . . $ 0 $ 750 $ 750 $ 0 $ 0 $ 0
Stockholders' equity (deficit). . . $ (172) $ (586) $ (776) $ (9) $ (9) $ 4,353
</TABLE>
- --------------------
(1) GetNet was incorporated August 24, 1994.
(2) Reflecting the combining of the Company for the ten months ended May 31,
1995 and GetNet for the period ended July 31, 1995 as if the acquisition
had occurred as of August 1, 1994. The pro forma financial information
includes certain pro forma adjustments as more fully described in the
footnotes to the pro forma combined financial statements.
(3) Reflecting the combining of the Company for the seven months ended December
31, 1995 (which includes GetNet for the two months ended December 31, 1995
after its acquisition effective November 1, 1995) and GetNet (prior to its
acquisition) for the three months ended October 31, 1995 as if the
acquisition had occurred as of August 1, 1995. The pro forma financial
information includes certain pro forma adjustments as more fully described
in the footnotes to the pro forma combined financial statements.
(4) The Company's balance sheet at December 31, 1995 represents the
consolidated balance sheet of the Company and GetNet due to the completion
of the GetNet acquisition by the Company in November 1995.
(5) Reflecting the receipt of the net proceeds by the Company from the public
offering, the related repayment of certain outstanding debt, payables and
redeemable preferred stock, as more fully described within this document,
as if completed on December 31, 1995.
4
<PAGE>
GLOSSARY
LONG DISTANCE & LOCAL ACCESS
ACCESS CHARGES - As specifically applied to the Company, expenses incurred by an
IXC and paid to LECs for accessing the local exchange networks of the LECs in
order to originate and terminate long distance calls.
AT&T - AT&T Communications, Inc. An IXC wholly owned by American Telephone and
Telegraph Company, which provides interexchange services and facilities on a
nationwide basis.
AT&T DIVESTITURE DECREE - Entered on August 24, 1982, by the United States
District Court for the District of Columbia. The AT&T Divestiture Decree, among
other things, ordered AT&T to divest its wholly owned BOCs from its Long Lines
Division and manufacturing operations and generally prohibited the BOCs from
providing long distance telephone service between LATAs.
ATM - Asnchronous transfer mode. An emerging switching technology that
integrates voice, video and data in the networks both local and wide area of the
future.
BACKBONE - A series of high-speed connections between switching and routing
equipment that creates a redundant network for customers.
BOC - Bell System Operating Company. A LEC owned by a RBOC.
CAP - Competitive Access Provider. A facilities-based carrier providing
alternative local exchange service. They are often used to provide redundant
networks, or a cost effective alternative to the presiding local exchange
company in major metropolitan markets. Only in New York state are CAPs
considered and treated as co-carriers with the local exchange carrier.
DS1 - Digital Service Level One Channel. A DS1 is also know as a T-1 and is a
digital transmission link with a capacity of 1.544 Mbps (1,544,000 bits of
information per second). DS1 service uses two pairs of twisted wires to
transmit. DS1s can handle 24 simultaneous voice conversations digitized at 64
Kbps or can also be used to transmit data in increments of 64 Kbps. A DS3 is
comprised of 28 DS1s.
EQUAL ACCESS - Connection provided by a LEC permitting a customer to be
automatically connected to the IXC of the customer's choice when the customer
dials "1."
FCC - Federal Communications Commission.
INBOUND "800" SERVICE - A company service that assesses long distance telephone
charges to the called party.
IXC - Interexchange carrier. A long distance carrier providing services between
local exchanges.
LATAS - Local Access and Transport Areas. The approximately 200 geographic
areas defined pursuant to the AT&T Divestiture Decree between which the BOCs are
generally prohibited from providing long distance service.
LEC - Local exchange carrier. A company providing local exchange telephone
services. Each BOC is a LEC.
LINE COSTS - The sum of access charges and transport charges.
LOCAL EXCHANGE - A geographic area, generally determined by a PUC, in which
calls generally are transmitted without toll charges to the calling or called
party.
5
<PAGE>
NETWORK SWITCHING CENTER - A location where the Company has installed switching
equipment that routes long distance calls and records information with respect
to calls such as the length of the call and the telephone numbers of the calling
and called parties.
PUC - Public Utilities Commission. A state regulatory body empowered to
establish and enforce rules and regulations governing public utility companies
such as the Company in many of its state jurisdictions (sometimes referred to as
a Public Service Commission, or a PSC).
PVC - Permanent Virtual Circuit. Provides high speed, connectivity using the
ATM infrastructure provided by select carriers.
RBOC - Regional Bell Operating Company. Any of seven regional Bell holding
companies established following the AT&T Divestiture Decree to serve as parent
companies for the BOCs.
TRANSPORT CHARGES - Expenses paid to facilities-based carriers for transmission
of calls between or within LATAs.
INTERNET
BACKBONE - A centralized high-speed network that connects smaller, independent
networks.
E-MAIL - Electronic mail. An application that allows a user to send or receive
text messages to or from any other user with an Internet address commonly termed
an E-mail address.
FTP - File Transfer Protocol. A protocol that allows file transfer between a
host and a remote computer.
GOPHER - An Internet navigational tool that uses a text or graphical user
interface to assist an Internet user in navigating the Internet.
INTERNET - A worldwide network of computer networks that are interconnected at
certain points and utilize a common communications protocol TCP/IP.
LAN - Local Area Network. A network designed to interconnect personal computers
within a localized environment.
ON-LINE SERVICE PROVIDERS - Commercial information services that offer a
computer user access through a modem to a specified slate of information,
entertainment and communications menus. These services are generally closed
systems and many offer limited, if any, Internet access.
POP - Point-of-Presence. An interlinked group of modems, routers and other
computer equipment, located in a particular city or metropolitan area, that
allows a nearby subscriber to access the Internet through a local telephone
call.
PPP - Point to Point Protocol. A communications protocol that allows direct
dial-up access to the Internet over phone lines. PPP can automatically
retransmit information packets if they become corrupted.
WORLD WIDE WEB - A network of servers that uses a special communications
protocol to link different servers throughout the Internet and permits
communication of text, graphics, video and sound.
6
<PAGE>
RISK FACTORS
The Securities offered hereby are speculative and involve a high degree of
risk of loss of part or all of the investment. Therefore, prospective investors
should read this entire Prospectus and carefully consider, among others, the
following risk factors in addition to the other information set forth elsewhere
in this Prospectus prior to making an investment in the Company's securities.
GENERAL
PAST FINANCIAL PERFORMANCE OF THE COMPANY AND GOING CONCERN CONSIDERATIONS.
For the ten months ended May 31, 1995 and the seven months ended December 31,
1995 the Company incurred net losses of ($294,000) and ($1,590,000),
respectively. As the Company enters new areas of the telecommunications market,
expands its marketing efforts and adds new telecommunication products, the
Company in all likelihood will incur additional losses. There is no assurance
that the Company will be able to achieve or sustain significant periods of
profitability in the future. Also the Company has, in the past, suffered from
cash flow and liquidity problems and is dependent upon the net proceeds of this
Offering in order to provide sufficient working capital to achieve its short-
term business goals. As discussed herein, the Company has also entered into
service commitments with its service providers, which exceeds its current
service volumes. The Company has renegotiated two significant commitments under
which it was experiencing substantial shortfalls. Under the revised agreements,
the Company's future commitments have been eliminated and its past contingent
liability been agreed upon. However, the Company is obligated to pay
approximately $1,016,000 (of which $180,000 will be satisfied by the issuance of
45,000 shares of common stock) to satisfactorily resolve these past
obligations, otherwise additional amounts will be due. In addition, the Company
has a continuing AT&T service commitment of $1,800,000 annually, which it is
currently satisfactorily meeting and another commitment which commences in
August 1996 to sell WilTel services of $50,000 per month. In connection with
this latter service commitment, if service does not increase substantially in
the near term, the Company will not, at lease initially, be able to meet this
commitment level.
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 the Company raising additional capital, meeting
the terms of its service commitments and achieving and maintaining profitable
operations. As a result of the above, the Company's independent auditors
included a "going concern" paragraph with respect to the audited financial
statements as of and for the ten months ended May 31, 1995. Although management
believes that funds available from this Offering and funds generated from
anticipated operations will provide the Company with sufficient financial
resources to fund its anticipated short-term cash flow requirements, there is no
assurance that this will be the case, especially if the Company continues to
sustain losses from operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the financial statements
included in this Prospectus.
RESIGNATION OF FORMER PRESIDENT AND FOUNDER/DEPENDENCY ON MANAGEMENT. The
initial growth of the Company depended upon the active participation of Jonathan
Miller, the past President and a past Director of the Company. As discussed
elsewhere within this Prospectus, in April 1996, the Board of Directors, with
the concurrence and support of Mr. Miller, 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 has been appointed President, Chairman of the Board and Chief
Executive Officer. Mr. Miller has resigned as a director and officer and has
elected to pursue his personal business interests. In the future, Mr. Miller
may compete with the Company; however, he currently is not engaged in the long
distance or Internet business. In April 1996, the Company entered into an
employment agreement with Mr. Canney. Although the loss of Mr. Miller's
services may adversely affect the Company, the Board of Directors believes
Mr. Canney's telecommunication business experience will be beneficial to the
Company and he will be a suitable replacement to Mr. Miller. Currently,
Mr. Canney devotes full time to the business of the Company. See "DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS."
EFFECTIVE CONTROL BY CURRENT AND PAST OFFICERS AND DIRECTORS. As of the
date of this Prospectus the Company's current and past Directors and family
members had beneficial ownership of approximately 549,516
7
<PAGE>
shares of Common Stock, or approximately 43% of the shares currently
outstanding. After completion of this offering such persons will continue to
beneficially own approximately 18% of the shares outstanding. Further, Mr.
Miller, a former Officer and Director, will own individually, after the public
offering, 6.3% of the Company's Common Stock. The Company's Articles of
Incorporation do not authorize cumulative voting in the election of directors.
As a result, the Company's Officers and Directors currently are, and in the
foreseeable future will continue to be, without the vote of the public
shareholders, in a position to control the Company by being able to nominate the
Company's Board of Directors. The Board of Directors, pursuant to the Company's
Articles and Bylaws, establish corporate policies and in turn have the sole
authority to nominate and elect the Company's Officers to carry out those
policies.
NO DIVIDENDS. The Company has paid no cash dividends on its Common Stock
and has no present intention of paying cash dividends in the foreseeable future.
It is the present policy of the Board of Directors to retain all earnings to
provide for the growth of the Company. Payment of cash dividends in the future
will depend, among other things, upon the Company's future earnings,
requirements for capital improvements, the operating and financial conditions of
the Company and other factors deemed relevant by the Board of Directors.
SUBSTANTIAL DILUTION TO INVESTORS. There will be an immediate and
substantial dilution to the investors who purchase shares in this offering in
that the net tangible book value per share of the Common Stock after the
offering will be substantially less than the price of the shares offered hereby.
The dilution to new investors after this offering is $2.83 per share (71%). See
"DILUTION."
ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE. Substantially all of
the 1,286,800 outstanding shares of Common Stock of the Company, except for
62,300 shares, are subject to certain lock up agreements but with the permission
of the Representative are potentially freely tradeable (including 350,000 shares
currently outstanding and 187,500 shares which will be issued upon the
redemption of the Series A Convertible Preferred all of which are registered by
this Prospectus), without restriction or registration under the Securities Act
(other than the sale volume restrictions of Rule 144 applicable to 549,516
shares held beneficially by persons who may be deemed to be affiliates of the
Company). The Company's current and past Directors, Officers and family members
of past Officers and Directors who will own, after the offering, an aggregate of
549,516 shares, 18% of the shares then outstanding, have agreed not to sell,
transfer or otherwise dispose of, or offer or contract to sell, transfer or
otherwise dispose of, directly or indirectly, any of such shares of Common Stock
for a period of two years after the date of this offering, without the prior
written consent of the Representative. Following this offering, if a public
market should develop, sales of substantial amounts of Common Stock in the
public market under Rule 144 or otherwise are likely to adversely affect, and
even the potential for such sales may adversely affect, the prevailing market
price of the Common Stock and could impair the Company's ability to raise
capital through the sale of its equity securities. See "SHARES ELIGIBLE FOR
FUTURE SALE."
ARBITRARY DETERMINATION OF OFFERING PRICE. Prior to this offering, there
was no public trading market for the Shares and Warrants. Consequently, the
price at which the Shares and Warrants are being offered have been arbitrarily
determined by negotiation between the Company and the Representative and does
not bear any relationship to such established valuation criteria as assets, book
value or prospective earnings. The offering price of the Warrants was
arbitrarily established by the Representative to be at the same price as the
public offering price of the Shares.
NASDAQ ELIGIBILITY AND MAINTENANCE; POSSIBLE DELISTING OF SECURITIES FROM
NASDAQ SYSTEM. Under the current rules promulgated by the Securities and
Exchange Commission (the "Commission"), for initial listing, a company must have
at least $4,000,000 in total assets, at least $2,000,000 in stockholders equity,
and a minimum bid price of $3.00 per share. 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.
The Company's Common Stock and Warrants (the "listed securities") are
expected to be eligible for initial listing on Nasdaq under these rules on the
effective date of this Prospectus. If at any time after issuance the Company's
Common Stock and Warrants are not listed on Nasdaq, and no other exclusion from
the definition of a "penny stock" under the Securities and Exchange Act of 1934,
as amended, were available, transactions in the
8
<PAGE>
Securities would become subject to the penny stock regulations which impose
additional sales practice requirements on broker-dealers who sell securities
(see "Risk of Low-Priced Stocks," below).
If the Company should experience losses from operations, 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 Company's Securities.
RISK OF LOW-PRICED STOCKS. If the Company's Securities were delisted from
Nasdaq, and no other exclusion from the definition of a "penny stock" under
applicable Securities and Exchange Commission regulations 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 if the investor believes he/she has been defrauded. 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 of broker-
dealers to sell the Company's Securities and the ability of purchasers in the
Offering to sell their Securities in the secondary market.
NON-REGISTRATION IN CERTAIN JURISDICTIONS OF SHARES UNDERLYING THE WARRANTS
The Warrants offered hereby are not exercisable unless, at the time of
exercise, the Company has a current prospectus covering the shares of Common
Stock issuable upon exercise of the Warrants and such shares have been
registered, qualified or deemed to be exempt under the securities laws of the
states of residence of the exercising holders of the Warrants. Although the
Company will use its best efforts to have all of the shares of Common Stock
issuable upon exercise of the Warrants registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Warrants, there is no assurance that it will be able to do so.
Although the Warrants will not knowingly be sold to purchasers in
jurisdictions in which the Securities are not registered or otherwise qualified
for sale, purchasers may buy Warrants in the after-market or may move to
jurisdictions in which the shares underlying the Warrants are not so registered
or qualified during the period that the Warrants are exercisable. In this
event, the Company would be unable to issue shares of Common Stock to those
persons desiring to exercise their Warrants (whether in response to a redemption
notice or otherwise), unless and until the shares could be qualified for sale in
the jurisdictions in which such purchasers reside, or exemptions exist in such
jurisdictions from such qualification. Warrant holders would have no choice but
to attempt to sell the Warrants or allow them to expire unexercised. See
"DESCRIPTION OF SECURITIES - Warrants."
LOCAL ACCESS AND LONG DISTANCE
DEPENDENCE ON SERVICES OFFERED BY OTHER CARRIERS. The Company does not own
any transmission facilities, and its long distance services are dependent upon
WilTel and AT&T for the transmission of its customers' calls. The Company has
not entered into long-term leases for multiple circuit capacity and has no
present plans to acquire transmission facilities. Accordingly, the Company's
long distance operations are subject to changes offered by such carriers and its
continued ability to obtain such services at bulk rates. There is no assurance
that the Company will
9
<PAGE>
continue to be able to obtain access to transmission facilities sufficient to
meet the needs of customers or that it will be able to do so on a timely and
cost-effective basis.
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. The Company competes with AT&T, MCI, Sprint
and other national and regional long distance carriers. Most of the Company's
competitors have greater name recognition, more extensive transmission networks
and greater engineering and marketing capabilities than the Company and have, or
have access to, substantially greater financial and personnel resources than
those available to the Company. Various regulatory factors can also have an
impact on the Company's ability to compete. For example, AT&T, which is the
Company's largest competitor, has achieved greater flexibility as the
divestiture laws which prohibited AT&T from anti-competitive pricing are
repealed over the years, allowing it to price its services more aggressively.
AT&T can now offer lower than tariff or "off tariff" pricing to customers in
competitive situations where a competing carrier has offered a lower price, in
writing, to the customer. The ability of the Company to compete effectively in
the telecommunications industry will depend upon its 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 the
Company will be able to compete successfully with existing or future companies.
In addition, the Company is both a customer and competitor of AT&T with
whom it has substantial carrier commitments as set forth below. The Company is
a customer of AT&T because it is provided customer support by AT&T such as
billing and the collection of accounts receivable. The Company is a competitor
to AT&T in that it directly seeks customers who are, or potentially may be
customers of AT&T.
FINANCIAL HARDSHIP OF CARRIER COMMITMENTS. The Company has been a reseller
of AT&T's Software Defined Network ("SDN") service since July of 1990,
increasing its commitment to AT&T four times since their contractual
relationship began. Under the Company's contracts with AT&T for
telecommunications services the Company has committed to resell $1,200,000 of
"800" service annually and to use approximately $1.8 million (calculated at
AT&T's cost) of AT&T domestic long distance each year through August 1999, in
accordance with the tariff rates, respectively. The Company is currently
meeting its domestic long distance commitment on a monthly basis; however,
increased competition in the industry over the remaining term of this contract
would cause difficulty in continuing to meet this commitment. The Company was
not meeting its "800" service agreement with AT&T and consequently, in April
1996, the Company has entered into a revised agreement with AT&T which provides
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. Under the revised
agreement, the Company no longer has a continuing commitment to sell "800"
services.
The Company's agreement with ICG 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. In
March 1996, the Company renegotiated its agreement with ICG whereby it agreed to
pay its then current obligation of approximately $430,000 for $250,000 from
proceeds of this public offering and the issuance of 45,000 shares valued at
$180,000, and no longer has a continuing monthly commitment.
The Company has a two year commitment commencing in August 1996 to rebill
$50,000 monthly of WilTel long distance services. The Company has not been
financially able to actively market WilTel services and therefore its related
current revenue is relatively insignificant under this agreement. No assurances
can be given the Company will be able to meet its minimum commitments.
GOVERNMENT REGULATION. The Company contracts with AT&T, which is subject
to extensive federal and state regulation, but the Company is not subject to the
same regulations being a non-facilities-based carrier. Although not currently
subject to extensive governmental regulation, there can be no assurance that the
FCC or regulatory authorities in one or more states will not take action that
would have an adverse effect on the business or financial condition of the
Company.
10
<PAGE>
PENDING LEGISLATION. Congress has recently passed a major
telecommunications bill and various state legislatures have under consideration
or have passed various proposals that would allow the local exchange carriers
and large competitors such as U.S. West to enter into the inter-LATA long
distance market. Likewise Congress and numerous state legislatures have adopted
proposals which would open up the local access currently dominated by the Bell
operating companies. The Company is unable to predict the impact of the various
legislation; however it does believe competition will increase in the long
distance markets. The Company also views the new legislation favorably as it
believes new opportunities may develop in the local markets to date controlled
by the BOCS. See "Business - Governmental Regulation."
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. The
Company believes that its future success will depend on its 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 the Company 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.
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 2.0% per month. Although the Company will
attempt to reduce the level of customer attrition in the future, there can be no
assurance that this level will not continue or increase. The Company's net
installations (installations less customer terminations) for the twelve months
ended December 31, 1995, were 3,409, with a monthly average of 284.
WORKING CAPITAL REQUIREMENTS AND LONG CASH CYCLE. Currently, customer
billings for long distance services are generated by AT&T for the Company 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 billing month. However, the Company
historically collects a large portion of receivables after the scheduled due
date, resulting in an average cash cycle of approximately 60 days. 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. While the Company 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 of this nature will not occur in the future and adversely affect the
Company.
DEPENDENCE ON AGENTS. The Company depends on continuing relationships with
its independent marketing agents to acquire new customer accounts. The majority
of the Company's current customer accounts have arisen through the Company's
network of independent marketing agents. In general, the Company's agreements
with its independent marketing agents provide that all customers introduced to
the Company 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 the Company's network by the independent
marketing agent, a right of first refusal to the Company on sale of residual
commissions and other similar restrictions. Although the Company cannot prevent
an existing agent from becoming a competitor and attempting to transfer the
Company's customers to a competing service, these contractual limitations limit
an independent marketing agent's ability to do so. The Company primarily uses
independent marketing agents to sell the Company's services through
telemarketing and direct sales efforts. Revenues derived from customers
introduced to the Company by independent marketing agents currently constitute
approximately 90% of the Company's total revenue for the year ended July 31,
1994 and for the ten months ended May 31, 1995. These percentages represent the
total revenues derived from both existing and new customers introduced to the
Company by independent marketing agents. The independent marketing agents
receive residual commissions based on billings. The loss of several key
independent marketing agents could have a material adverse effect on the
Company's ability to develop new business.
11
<PAGE>
INTERNET
COMPETITION. The market for Internet access services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company 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 the Company and its competitors;
the Company's ability to support existing and emerging industry standards; and
industry and general economic trends.
The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. GetNet 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"), 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. The
Company 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, the Company
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
the Company. 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 the Company'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 the Company. 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 the Company at a significant
competitive disadvantage.
Competition in the Company'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. The Company 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, the Company 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
the Company's services. In addition, competition could result in increased
selling and marketing expenses and related subscriber acquisition costs which
could adversely affect the Company's profitability. There can be no assurance
that the Company will be able to offset the effects of any such price
12
<PAGE>
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 the Company's market share and
adversely affect the Company's operating results. There can be no assurance
that the Company will have the financial resources, technical expertise or
marketing and support capabilities to continue to compete successfully.
DEPENDENCE ON WILTEL AND OTHER SUPPLIERS. The Company will rely on other
companies, particularly WilTel, Inc. ("WilTel"), to provide communications
capacity via leased telecommunication lines. Pursuant to an addendum to the
Company's existing agreement with WilTel, a majority of leased
telecommunications lines that the Company will lease will be provided by WilTel
upon completion of the public offering. If WilTel is unable or unwilling to
continue providing service to the Company in the future, the Company's
operations would be materially adversely effected. Although leased
telecommunications lines are available from several alternative suppliers,
including AT&T, MCI and Sprint, there can be no assurance that the Company 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, the Company is dependent on
certain third party suppliers of hardware components. Although the Company
attempts to maintain a minimum of two vendors for each required product, certain
components used by the Company 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 inability to develop alternative sources if and as required, could result in
delays which could materially adversely affect the Company.
SOFTWARE AND SERVICE DEVELOPMENT; TECHNOLOGICAL CHANGE. The Company's
success is highly dependent upon its ability to develop new software and
services that meet changing customer requirements. The market for the Company'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 the Company can successfully
identify new service opportunities and develop and bring new software and
service to market in a timely manner, or that software, services or technologies
developed by others will not render the Company's software, services or
technologies noncompetitive or obsolete. The Company 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, the Company will have
to develop new technology or modify its existing technology to accommodate these
developments. Required technological advances by the Company as the industry
evolves could include compression, full-motion video, and integration of video,
voice, data and graphics. The Company's pursuit of these technological advances
may require substantial time and expense, and there can be no assurance that the
Company will succeed in adapting its Internet service business to alternate
access devices and condition.
DEPENDENCE ON THE DEVELOPMENT OF A NETWORK INFRASTRUCTURE. The future
success of the Company's business will depend upon the capacity, reliability and
security of its proposed network infrastructure. The Company 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 the Company's proposed network
infrastructure will require substantial financial, operational and management
resources. There can be no assurance that the Company will be able to develop a
network infrastructure to meet additional demand or its customers' changing
requirements on a timely basis, at a commercially reasonable cost, or at all, or
that the Company will be able to deploy successfully the contemplated network
expansion. Any failure of the Company 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 the Company'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
13
<PAGE>
market for Internet access services may also adversely affect the Company's
ability to retain new customers, as customers unfamiliar with the Internet may
be more likely to discontinue the Company'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,
the Company's business, operating results and financial condition will be
adversely affected. Although the Company 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 the Company will be
able to conform to these new standards in a timely fashion and maintain a
competitive position in the market.
In order to continue to realize subscriber growth, the Company 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, the
Company's ability to improve operating margins will depend in part on the
Company's ability to retain its subscribers. The Company continues to invest
significant resources in its telecommunications infrastructure and customer
support resources. There can be no assurances that the Company's investments in
telecommunications infrastructure, customer support capabilities and software
releases will improve subscriber retention. Since the Internet market is new
and the utility of available services is not well understood by new and
potential subscribers, the Company 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 the Company. Private suits may also be a possibility for
Internet providers for messages posted by subscribers and disseminated through
access providers systems. The Company 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 the Company carries
insurance, it may not be adequate to compensate the Company for any liability
that may be imposed. Any imposition of liability in excess of such coverage
could have a material adverse effect on the Company.
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, Internet access
providers will have the responsibility for the material their customers put on
the Internet. At this point, the Company 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 the Company's products and increase the Company's cost
of doing business or otherwise have an adverse effect on the Company'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.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Board
of Directors does not anticipate paying cash dividends in the foreseeable future
as it intends to retain future earnings to finance the growth of the business.
The California General Corporation Law provides that dividends may only be paid
out of capital surplus or out of earnings. There are no other limitations on
the ability of the Company 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 the
Company and other factors deemed relevant by the Board of Directors.
14
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 1,500,000 shares and 1,500,000
Warrants offered hereby will be approximately $5,273,250 after deducting the
estimated expenses of the offering remaining to be paid and payment to the
Representative a consulting fee of $108,000, and without giving effect to the
exercise of the over-allotment option. The Company intends to utilize the
proceeds from this offering substantially as follows:
<TABLE>
<CAPTION>
APPLICATION OF PROCEEDS AMOUNT PERCENT OF PROCEEDS
----------------------- ----------- -------------------
<S> <C> <C>
Repayment of indebtedness to affiliates (1). . . . $ 175,000 3.3%
Redeem Series A Preferred Stock (2). . . . . . . . 750,000 14.2%
Acquisitions of Other Businesses (3) . . . . . . . 1,000,000 19.0%
Combined Product Marketing and
Development Programs (4) . . . . . . . . . . . . 800,000 15.1%
Payment of Outstanding Payables (5). . . . . . . . 1,100,000 21.9%
Repayment of Loan (6). . . . . . . . . . . . . . . 210,000 4.0%
Working Capital (7). . . . . . . . . . . . . . . . 1,238,250 23.0%
----------- ------
Total. . . . . . . . . . . . . . . . . . . . . . . $5,273,250 100.0%
----------- ------
----------- ------
</TABLE>
- --------------------
(1) The Company is indebted to Carol and Carl Peterson, major shareholders and
family members of Jonathan Miller, the Company's past President, of
approximately $132,000, and one non-affiliated stockholder in the amount of
approximately $43,000. The notes bear interest in the amount of 10% and
12%, respectively, per annum and mature in September 1996. This debt is
unsecured. See Note 4 of the Touch Tone Financial Statements and "CERTAIN
TRANSACTIONS."
(2) Upon closing of the offering, the Company will issue 187,500 shares of
Common Stock and pay $750,000 to holders of 150,000 shares of Series A
Preferred Stock in redemption of such shares. The shares of Common Stock
are being registered for sale hereby. See "SERIES A PREFERRED SELLING
SHAREHOLDERS."
(3) Any acquisition will be evaluated by management on its individual merits
with consideration being given to annual revenues, market niche, geographic
location and sales price and terms required by the acquisition candidate.
Approximately $50,000 of the $1,000,000 allocated for acquisitions will be
allocated to the evaluation of various acquisition candidates; however, the
Company is not evaluating any possible acquisitions and has no current
agreements or understandings with respect to the acquisition of any company
and is not currently conducting negotiations with respect to any
acquisition, but will actively consider acquisition opportunities as they
arise. The balance of any funds not used for acquisitions or to date
unallocated, will be used for working capital.
(4) The Company has acquired a wholly-owned subsidiary, GetNet, and will use a
portion of the funds from this offering to continue an aggressive marketing
program and intends 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 (Network Access Points) located
throughout the country. This backbone network, which will cost
approximately $350,000, gives GetNet the ability to resell Internet
connections to other ISPs (Internet Service Providers) and large
institutions requiring larger amounts of bandwith than can be provided by
most ISPs.
In addition, the Company has a reseller agreement with ICG in their
nationwide local access markets. The agreement allows the Company to
offer, under its own name, special access services (dedicated lines
connecting end users with their long distance carriers) to its current and
future customers. The customers calls are directed to ICG switches by way
of either ICG fiber optic, inter-city cables, or the LEC local network for
connection into the Company's long distance carrier and on to a destination
serviced locally by either ICG or a local phone company. The Company will
utilize a portion of the proceeds to develop a business relationship with
ICG agents in each of their markets and develop new distribution channels
through associations with interconnects (people who sell phone systems),
long distance sales personnel, BOC agents, data equipment providers and
right of entry sales executives who have access into building on the ICG
fiber loop. The Company anticipates hiring additional sales and customer
service people to develop the local access aspect of its business.
(5) The Company is expected to have outstanding delinquent accounts payable as
of the date of this Prospectus of $1,100,000. These include $250,000
payable to ICG for equipment and circuit purchases and $186,000 which was
15
<PAGE>
paid to the Company initially by AT&T, which will be repaid, because the
Company failed to meet its long distance commitment to AT&T, $300,000 for
accrued salaries and payroll taxes, $200,000 for past due obligations to
sales agents and the balance for various outstanding payables.
(6) In April 1996, Leonard Gall, a stockholder, loaned the Company $210,000.
This debt bears interest at 30% per annum and is due in June 1996. This
debt is unsecured.
(7) The Company also has an obligation to AT&T to pay $33,333 per month
commencing in June 1996 and a commitment to WilTel for $50,000 per month of
long distance service also commencing in August 1996. To the extent future
cash flows from operations are not adequate to meet these obligations,
working capital from this offering may be required to pay these
obligations.
The amounts set forth above are estimates developed by management of the
Company of the allocation of net proceeds of the offering based upon the
Company's current plans and prevailing economic and industry conditions. The
Company's proposed use of proceeds is subject to changes in general, economic
and competitive conditions, timing and management discretion, each of which may
change the amount of proceeds expended for the purposes intended. The proposed
application of proceeds is also subject to changes in market conditions and the
Company's financial condition in general.
While there can be no assurance, the Company believes the net proceeds from
the offering and internally generated funds will be adequate to satisfy the
Company's working capital needs for the next twelve months. The Company may
require additional debt or equity financing in order to finance future internal
growth or acquisitions. There can be no assurance that additional financing on
acceptable terms will be available to the Company when needed, if at all. See
"RISK FACTORS," "BUSINESS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF
OPERATION."
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1995 and on a pro forma after the public offering to reflect the
proceeds from the issuance of 1,500,000 Shares in this offering at an offering
price of $4.00 per Share and 1,500,000 Warrants at $.125 per Warrant and as
adjusted to reflect the estimated use of proceeds from the offering. See "USE
OF PROCEEDS."
<TABLE>
<CAPTION>
December 31, 1995 (in thousands)
---------------------------------
Before Public After Public
Offering Offering(1)
<S> <C> <C>
Long-term Debt . . . . . . . . . . . . . . . . . . . . . $ 238 $ 107
Redeemable Preferred Stock, Series A, 150,000
shares authorized, issued and outstanding,
no shares after the public offering . . . . . . . . . . 750 --
Stockholders' Equity:
Preferred stock, no par value,
10,000,000 shares authorized. . . . . . . . . . . . -- --
Common stock, no par value;
100,000,000 shares authorized,
1,286,800 shares issued and outstanding,
3,019,300 after the public offering . . . . . . . . 1,473 6,494
Redeemable preferred stock offering costs . . . . . . . (108) --
Accumulated deficit . . . . . . . . . . . . . . . . . . (2,141) (2,141)
-------- --------
Total Stockholders' Equity (Deficit) . . . . . . . . . . (776) 4,353
-------- --------
Total Capitalization . . . . . . . . . . . . . . . . . . $ 212 $ 4,460
-------- --------
-------- --------
</TABLE>
- --------------------
(1) Reflects the receipt of net proceeds from the public offering as if such
proceeds were received on December 31, 1995; and the Use of Proceeds for:
payment of certain debt; and the repayment of preferred stock. Also
reflects the issuance of 187,500 common shares to the Series A Preferred
Shareholders; and the issuance of 45,000 common shares in the payment of an
obligation to a carrier, which resulted in a net equity increase of
$65,000.
17
<PAGE>
DILUTION
The Company's net tangible book value (deficiency) before offering at
December 31, 1995, was $(1,773,000) or $(1.17) per share. "Net tangible book
value per share" represents the Company's total tangible assets less its total
liabilities, divided by the number of shares of Common Stock outstanding. The
net tangible book value before offering considers the issuance of 187,500 common
shares of Common Stock for the redemption of the 150,000 shares of Series A
Preferred Stock outstanding and the issuance of 45,000 common shares for the
settlement of a payable to a carrier.
After giving effect to the sale of the Shares offered, based on an offering
price of $4.00 per common share and $.125 per warrant by the Company the pro
forma net tangible value after offering would have been approximately $3,546,000
or $1.17 per share. This represents an immediate increase in net tangible book
value per share of $2.34 to existing shareholders and an immediate decrease of
$2.83 per share to the investors purchasing the shares offered hereby at the
Price to Public. The following table illustrates the per share dilution in net
tangible book value to new investors:
<TABLE>
<CAPTION>
<S> <C> <C>
Public offering price per share . . . . . . . . . . $ 4.00
Net tangible book value (deficiency)
per share before offering . . . . . . . . . . . . $ (1.17)
Increase per share attributable to sale
of Common Stock . . . . . . . . . . . . . . . . . 2.34
------
Pro forma net tangible book value per share after
offering. . . . . . . . . . . . . . . . . . . . . . 1.17
------
Dilution per share to new investors . . . . . . . . . . $ 2.83
------
------
</TABLE>
18
<PAGE>
The following table sets forth a comparison of the number of shares of
Common Stock acquired by current shareholders from the Company, the total
consideration paid for such shares of Common Stock and the average price per
share paid by such current shareholders and to be paid by the prospective
purchasers of the Shares (based upon the initial offering price of $4.00).
<TABLE>
<CAPTION>
Shares of Common Stock
Acquired Consideration (in Thousands)
---------------------- ---------------------------- Average Price
Number Amount Percent Per Share
------------ ------ ------- ---------
<S> <C> <C> <C> <C>
Current Shareholders:
Prior. . . . . . . . . . . 526,800 $ 57 1% $ .11
GetNet Acquisition . . . . 400,000 -- (1) -- --
Private Placement. . . . . 350,000 700 10% $ 2.00
---------
1,286,800
Preferred Shareholders . . . 187,500 -- -- --
ICG Payable . . . . . . . . 45,000 180 (2) 3% $ 4.00
New Investors. . . . . . . . 1,500,000 6,000 86% $ 4.00
--------- -------- ---
Totals . . . . . . . . . . . 3,019,300 $ 6,937 100%
--------- -------- ---
--------- -------- ---
</TABLE>
- --------------------
(1) Shares issued in the GetNet acquisition were valued at $800,000. Prior to
the acquisition, shareholders of GetNet paid approximately $150,000
(excluding shares issued for services) for their GetNet shares. As no
monetary amount was paid in exchange of their GetNet shares for the
Company's shares, no consideration is reflected in the above table.
(2) Represents the consideration received in the payment of a payable to a
carrier.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth the summary financial information and other
equity information of the Company and GetNet. The summary financial information
in the tables are derived from the financial statements of the Company and
GetNet and pro forma combined financial information, and should be read in
conjunction with the financial statements, pro forma information, related notes,
and other financial information included herein. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OR PLAN OF OPERATIONS" and "FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA (IN THOUSANDS, EXCEPT NET LOSS PER COMMON SHARE):
FOR FISCAL YEAR ENDED:
The Company GetNet(1) Pro forma(2)
----------------------------------------------- ---------- -------------
Years Ended
July 31, Ten Months Ended Year Ended Periods Ended
-------------------------- May 31, July 31, May 31,
1993 1994 1995 1995 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . $ 1,364 $ 1,461 $ 1,952 $ 115 $ 2,067
Income (loss) from
operations . . . . . . . . . . . . $ 3 $ (140) $ (234) $ (303) $ (676)
Net (loss) . . . . . . . . . . . . $ 0 $ (154) $ (294) $ (303) $ (724)
Net(loss) per share . . . . . . . . $ 0 n/a $ (0.19) n/a $ (0.24)
Shares Outstanding . . . . . . . . n/a n/a 1,508 n/a 3,053
</TABLE>
<TABLE>
<CAPTION>
FOR INTERIM PERIODS:
The Company GetNet(1) Pro forma(3)
-------------------------- ------------------------------- ------------
Two Months Three Months
Seven Months Ended Ended Ended Periods Ended
February 28, December 31, October 31, October 31, December 31,
1995 1995 1994 1995 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . $ 1,210 $ 1,399 $ 1 $ 100 $ 1,499
Income (loss) from
operations . . . . . . . . . . . . $ (76) $ (1,460) $ (16) $ (21) $ (1,551)
Net (loss) . . . . . . . . . . . . $ (134) $ (1,590) $ (16) $ (21) $ (1,668)
Net(loss) per share . . . . . . . . n/a $ (1.05) n/a n/a $ (0.55)
Shares Outstanding . . . . . . . . n/a 1,508 n/a n/a 3,053
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA (IN THOUSANDS):
The Company GetNet Pro forma(5)
------------------------------------------ -------------------------- ------------
After Public
Offering
As of As of As of As of As of As of
July 31, May 31, December 31, July 31, October 31, December 31,
1994 1995 1995(4) 1995 1995 1995
------ ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Cash . . . . . . . . . . . . . . . $ 58 $ 512 $ 144 $ 2 $ 4 $ 3,235
Working capital (deficit) $ (149) $ 79 $ (1,013) $ (84) $ (121) $ 3,382
Total assets . . . . . . . . . . . $ 280 $ 1,388 $ 1,987 $ 112 $ 179 $ 4,931
Long-term liabilities . . . . . . . $ 111 $ 162 $ 427 $ 5 $ 3 $ 296
Redeemable preferred stock . . . . $ 0 $ 750 $ 750 $ 0 $ 0 $ 0
Stockholders' equity (deficit). . . $ (172) $ (586) $ (776) $ (9) $ (9) $ 4,353
</TABLE>
- --------------------
(1) GetNet was incorporated August 24, 1994.
(2) Reflecting the combining of the Company for the ten months ended May 31,
1995 and GetNet for the period ended July 31, 1995 as if the acquisition
had occurred as of August 1, 1994. The pro forma financial information
includes certain pro forma adjustments as more fully described in the
footnotes to the pro forma combined financial statements.
(3) Reflecting the combining of the Company for the seven months ended December
31, 1995 (which includes GetNet for the two months ended December 31, 1995
after its acquisition effective November 1, 1995) and GetNet (prior to its
acquisition) for the three months ended October 31, 1995 as if the
acquisition had occurred as of August 1, 1995. The pro forma financial
information includes certain pro forma adjustments as more fully described
in the footnotes to the pro forma combined financial statements.
(4) The Company's balance sheet at December 31, 1995 represents the
consolidated balance sheet of the Company and GetNet due to the completion
of the GetNet acquisition by the Company in November 1995.
(5) Reflecting the receipt of the net proceeds by the Company from the public
offering, the related repayment of certain outstanding debt, payables and
redeemable preferred stock, as more fully described within this document,
as if completed on December 31, 1995.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The following review concerns the interim periods ended December 31, 1995
and the fiscal years ended of Touch Tone and GetNet and should be read in
conjunction with the financial statements and notes thereto.
GENERAL
Over the past two years, the Company's net revenues have increased to
approximately $2 million for the ten months ended May 31, 1995. The Company has
financed this growth primarily from cash flow from operations. The Company has
increased revenues through its use of marketing agents and its attention to
customer service. The Company plans to commence an aggressive campaign of the
local service market through its contracts with ICG and the continued
development of long distance sales with its contracts with AT&T and WilTel and
Internet services with the funds of the public offering.
As discussed in "Commitments" the Company has also entered into sales
volume commitments with its service providers which exceeds its current sales
volumes. The Company has renegotiated two significant commitments under which
it was experiencing substantial short falls. Under the revised agreements, the
Company's future commitment has been eliminated and its past contingent
liability been agreed upon. However, the Company is obligated to pay
approximately $1,016,000 (of which $180,000 will be satisfied by the issuance of
45,000 shares of common stock) to satisfactorily resolve these past
obligations, otherwise additional amounts will be due. In addition, the Company
has a continuing commitment with AT&T to provide long distance service of
$1,800,000 annually, which it is currently satisfactorily meeting and another
service commitment with WilTel which commences in August 1996 to sell services
of $50,000 per month. In connection with the WilTel service commitment, if
service does not increase, the Company will not be able to meet this commitment
level. 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 the Company raising additional capital, meeting
the terms of its sales commitment and achieving and maintaining profitable
operations. As a result of the above, the Company's independent auditors
included a "going concern" paragraph with respect to the audited financial
statements as of and for the ten months ended May 31, 1995.
THE GETNET ACQUISITION
In November 1995, the Company acquired all the outstanding stock of GetNet
International, Inc. ("GetNet") of Phoenix, Arizona in exchange for 400,000
shares of the Company's Common Stock. GetNet is a provider of Internet access
services to individuals and businesses in Arizona and other parts of the United
States. GetNet offers subscribers a complete Internet access consisting of
front-end software, integrated with high quality access service and 24-hour
customer support. GetNet's high-speed digital 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). GetNet's front-end
software features a point-and-click graphical user interface providing
subscribers with easy-to-use access to the Internet's applications and
resources.
CHANGE OF MANAGEMENT
In April 1996, Mr. Vaughan, the Company's former Chairman of the Board and
Chief Executive Officer, brought to the attention of the Company's auditors a
previously undisclosed letter agreement signed by Mr. Miller (the Company's
former President and Director), with a significant sales agent, which provided
for a retroactive increase in the sales agents' commissions to 50% from 32%.
This agreement and its potential ramifications has subsequently been thoroughly
reviewed by the Company's Board of Directors and the following actions were
taken on behalf of the Company.
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The Board of Directors, with the concurrence and support of Messrs. Miller
and Vaughan, 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 has been
appointed President, Chairman of the Board and Chief Executive Officer. Mr.
Miller has resigned as a Director and Officer and has elected to pursue personal
business interests. Mr. Vaughan has also resigned as Director and Officer, but
continues to serve as a consultant to the Company in locating and negotiating
potential future mergers and acquisitions. In connection with their
resignation, their employment agreements were terminated (see "Employment
Agreements").
The Company has also obtained an updated agreement with the sales agent
which reaffirms the Company's prior sales commission arrangement with the sales
agent and provides for an additional payment of $75,000 from the proceeds of
this offering.
RESULTS OF OPERATIONS
THE COMPANY - FOR THE SEVEN MONTHS ENDED DECEMBER 31, 1995 COMPARED TO THE SEVEN
MONTHS ENDED FEBRUARY 28, 1996.
Revenue from operations for the seven months ended December 31, 1995 was
$1,399,000. Revenue increased $189,000 from revenues during the seven months
ended February 28, 1995 or approximately 16.0% over fiscal 1995. The Company
has also begun, on a very limited basis, using telemarketing companies to
stimulate sales. While the Company is hopeful this will generate additional
sales, due to the limited efforts to date, such telemarketing has not had much
of an impact. The Company expects to experience most of its future growth
through acquisitions of long distance customer bases and regional switch based
carriers as well as through internal growth of Internet services and competitive
access products.
Cost of sales for the seven months ended December 31, 1995 were $947,000
which is reflective of the increased revenue for that period, resulting in a
gross margin of approximately $452,000 or 32% of net revenue. The gross margin
for the seven months ended February 28, 1995 was $390,000 or approximately 32%
of net revenue. The increase in gross margin is the result of increased
revenues while the gross margin percentage has remained relatively constant as
the Company 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. The Company's
current tier structure is as follows: on the first $10,000 the Company bills a
discount of 10% is generated, between $10,000 and $75,000 that the Company bills
a discount of 32% is generated, billings above $75,000 the Company generates a
discount of 35%.
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, which is
expected to replace its existing SDN contract. However, there is no assurance
that the Company will be able to ultimately renegotiate its existing contract.
Additionally, in October 1995 the Company entered into a carrier agreement
with WilTel that will allow the Company to provide a full range of long
distance, calling card and point-to-point services at more favorable rates than
are currently being experienced. This contract will also allow the Company to
order ATM Permanent Virtual Circuits ("PVC") for the GetNet backbone network.
The Company should realize greater volume discounts in the future as a result of
these circuits assuming the Company meets its minimum commitments under its
WilTel agreement (see "Commitments") and its AT&T long distance commitment. The
new contract will allow the Company to function as a long distance carrier
versus being a long distance reseller. The new contract allows the Company
access the AT&T network and offer services at a flat rate per minute. As a
result, the Company will directly bill its customers for long distance services.
The Company is optimistic that the new contract could increase gross margins.
Revenues through December 31, 1995 on WilTel have been insignificant, however,
as the Company is able to further market its Internet services, revenues on
WilTel are expected to substantially increase.
Furthermore, the Company has entered into a contract with ICG Access
Services, Inc. ("ICG") of Denver, Colorado to act as the reseller of ICG
services which include the ability to connect internal telephone and data
transmission services directly to long distance carriers, thus allowing the
Company to bypass part or all of the local telephone company's network. ICG's
affiliated companies also provide domestic and international satellite
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transmission services and a wide range of network integration system services.
The Company believes it will benefit from the agreement with ICG because it
allows the Company the ability to offer its present and future customers
competitive rates and services in the local access markets currently dominated
by the Bell companies ("Baby Bells") and in the process achieve additional
customers for its long distance services. Due to the lack of capital, the
Company has not been able to actively market ICG services, therefore its related
revenues to date has not been significant.
The financial statements ended December 31, 1995 also reflect the inclusion
of two months operations of GetNet which was acquired effective November 1,
1995. GetNet's sales were $54,000 for these two months with costs of $31,000.
GetNet is still a relatively young company as it was incorporated in August
1994, and has not yet been able to fully develop its market.
Selling expenses increased to $340,000 or 24% of net revenues for the
seven months ended December 31, 1995 from $211,000, or approximately 17% of
net revenues for the prior period. The increase in selling expenses as a
percent of revenue is attributed to the higher commissions earned by one of
the Company's agents that contributed a significant volume of customer usage.
The sales agent, TMO Communications, Inc. of Phoenix, Arizona ("TMO"),
accounted for approximately 35% of revenues for the seven months ended
December 31, 1995 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. In addition, in April 1996, the
Company agreed to pay TMO an additional $75,000 from the proceeds of the
public offering and 60,000 options exercisable for 5 years at $2.00 each to
settle past misunderstandings between the Company and TMO with respect to the
amount of future commissions due TMO. TMO believed it was due commissions of
50% after June 1996 compared to 32%. The Company, as noted above, settled the
misunderstanding and continues to pay TMO a 32% commission. 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 two months ended December 31, 1995, or 9%, of its sales.
As its revenues increase, market expense should substantially decrease as a
percentage of sales.
The Company uses independent agents who directly contact potential
customers and are paid on a commission basis as long as the Company receives
revenue from that customer. Management believes it may decrease its cost of
sales in the upcoming year when the Company bills its customers directly. As a
result of the ICG contract, the Company has hired a national sales director and
three sales personnel in Phoenix, Arizona and will hire additional personnel as
funds are available in each city where ICG has switching equipment which could
add to selling expenses.
Under the Company's current contract with independent sales agents,
commissions are paid as long as the Company receives revenues from the customer.
The Company intends to revise this arrangement for new agents to provide for
continuing commission payments only if certain sales levels are maintained.
General and administrative expenses increased to $825,000 or 59% of net
revenue for the seven months ended December 31, 1995 compared to $252,000 or 21%
for the seven months ended February 28, 1995. During 1995, the Company paid
increased salaries and benefits to its employees of approximately $537,000
compared to $114,000 in 1994, primarily as a result of additional employees,
including GetNet employee related expense since November 1, 1995 (date of
acquisition) of approximately $67,000. The remaining $402,000 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 the
Company and increased internal costs associated with the Company's offerings of
securities and acquisitions. The Company expects its general and administrative
expenses to increase in the future with the hiring of a chief financial officer
in October 1995, a director of customer service in September 1995, a national
sales director in October 1995, as well as other costs associated with increased
revenues and costs associated with being a public company.
The Company also incurred $347,000 of expense under its agreement with ICG
(see above) during the seven months ended December 31, 1995 which was not
incurred in the period ended February 28, 1995, as the contract was entered into
in late February 1995. This amount is recorded as a period expense under
operating
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expenses, as the Company experienced insignificant revenues associated with this
contract through December 31, 1995. Such revenues (approximately $10,000) have
been offset against the expense. The Company has only currently began marketing
these services on a very limited basis in August 1995 and has not yet opened
sales offices in the cities it has its rights. The Company has become
delinquent in the amount of approximately $430,000 on this contract as of March
20, 1996, which includes approximately $115,000 of additional charges and
expenses after December 31, 1995. The Company has renegotiated this contract
with ICG in March 1996 whereby the Company will repay $250,000 of this
obligation from proceeds of the public offering and the balance will be
satisfied in exchange for 45,000 shares of Common Stock. Under the new
agreement there will be no future service commitments. When the Company
receives funds from its proposed public offering, it intends to begin to
aggressively market these services.
The Company also expensed $400,000 during the seven months ended December
31, 1995 based on a settlement of a past contingent liability on failing to meet
its prior minimum commitment for selling "800" services. When the Company pays
this liability, it will no longer have a minimum future commitment level for
"800" services. See "Commitments" section.
In January 1996, the Company abandoned a planned acquisition of another
reseller of telecommunication services. For the period ended December 31, 1995,
the costs associated with this planned acquisition of $115,000 has been expensed
in operations. During fiscal 1995, the Company began negotiations for a
possible offering of its Common Stock. These negotiations were unsuccessful and
the Company expensed the related costs of $48,000.
The Company had a net loss of ($1,590,000) for the seven months ended
December 31, 1995. For the seven months ended February 28, 1995, the Company
had a net loss of ($134,000). 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 1995 which included indirect costs
associated with the cost of raising additional capital, hiring of additional
personnel, and other reasons discussed above.
THE COMPANY - FOR THE TEN MONTHS ENDED MAY 31, 1995 COMPARED TO THE YEAR ENDED
JULY 31, 1994.
In fiscal 1995, the Company changed its year end to May 31. The
comparisons included herein are for the ten months ended in fiscal 1995 compared
to the twelve months in 1994.
Revenue from operations for the ten months ended May 31, 1995 was
$1,952,000. Revenue increased $491,000 from revenues during the fiscal year
ended July 31, 1994 or approximately 34% over fiscal 1994. The increase in
revenues is attributed to sales of new customer accounts and increased efforts
on the part of management to stimulate sales production from its marketing
agents and in particular the addition of a new selling agent in August 1994 as
discussed below.
Cost of sales for the ten months ended May 31, 1995 was $1,310,000 which is
reflective of the increased revenue for that period, resulting in a gross margin
of approximately 642,000 or 33% of net revenue. The gross margin for fiscal
1994 was $287,000 or approximately 20% of net revenue. The increase in gross
margin is the result of the Company attaining higher levels of discount because
of increased volume on its AT&T contract. Also in July 1994 the Company's
contract with AT&T was upgraded to provide a greater discount. The AT&T
contract is structured on a tiered discount with the more volume achieved, the
greater the discount.
Selling expenses increased to $337,000 or 17% of net revenues for the ten
months ended May 31, 1995 from $135,000, or approximately 9% of net revenues for
the prior year. The increase in selling expenses as a percent of revenue is
attributed to the higher commissions earned by one of the Company's agents that
contributed a significant volume of customer usage (as discussed below).
Management believes the selling expenses attributed to Company agent commissions
will decrease as a percentage of net revenues if the new contract with AT&T is
in effect; however, selling expenses in general will increase because of
marketing efforts and variety of services offered.
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In August 1994, the Company entered into an agreement with an independent
sales agent, TMO Communications, whereby the agent receives commissions of
approximately 32% on sales it originates. At this level, the Company realized
no direct profit during fiscal 1995 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 negotiates a new
contract with its provider, the Company may then directly realize profit on
customers' 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
agent's customer base. For the ten months ended May 31, 1995, the sales
originated by the agent have accounted for 42% of Company sales. Also during
this period, the Company has recorded a related expense to the agent of
approximately $265,000.
The Company also uses other independent agents who directly contact
potential customers and are paid on a commission basis as long as the Company
receives revenue from that customer. Management believes it may decrease its
cost of sales in the upcoming year if the Company bills its customers directly,
and if a new contract can be negotiated with AT&T.
General and administrative expenses increased to $507,000 or 26% of net
revenue for the ten months ended May 31, 1995 compared to $292,000 or 20% for
the year ended July 31, 1994. The increase includes $56,000 of non-monetary
consideration recorded during 1995 in connection with the issuance of 160,000
shares of Common Stock by the Company to an Officer/Director valued at $40,000
(discussed below) and shares of Common Stock which were granted by the Company's
major shareholders to certain non-employees for minor services provided to the
Company generally during the period ended May 31, 1995. During 1995, the
Company paid increased salaries and benefits to its Officers of $255,000
(including Common Stock discussed above valued at $40,000) compared to $98,000
in 1994, principally due to the addition of one new Officer and Director.
Pursuant to the Company's employment agreement with a former Officer/Director,
$50,000 has also been expensed under a $90,000 commitment pursuant to his
employment agreement which was to be paid from proceeds of the public offering.
When the Officer/Director resigned in April 1996, he agreed to forgo payment of
the $90,000. This amount was in addition to the current salary expense.
Employment expense to the Company's Officers and Directors is expected to
decrease in the future based on the resignation of two Officers and Directors in
April 1996.
The Company had a net loss of ($294,000) for the ten months ended May 31,
1995. For the year ended July 31, 1994, the Company had a net loss of
($154,000). The increase in net loss between periods is directly attributed to
the significant increase in general and administrative costs in 1995 which
included the indirect costs associated with the cost of raising additional
capital, hiring of additional personnel and reasons discussed above.
GETNET - FOR THE PERIOD FROM ITS INCEPTION (AUGUST 24, 1994) TO JULY 31, 1995
GetNet is a development stage company as it has only realized $115,000 in
revenues from its planned operation for the period from inception to July 31,
1995. Gross profit on its revenues was $36,000 for the period from inception to
July 31, 1995. Operating expenses totalled $339,000 (of which $122,000 related
to Common Stock and options issued for services) for the period from inception
to July 31, 1995. The resulting net loss for GetNet was $303,000 for the period
from inception to July 31, 1995.
GETNET - FOR THE THREE MONTHS ENDED OCTOBER 31, 1995 COMPARED TO THE TWO MONTHS
ENDED OCTOBER 31, 1994
Revenue from operations for the three months ended October 31, 1995 was
$100,000 as compared to $1,000 in revenue for the two months ended October 31,
1994. This represents a $99,000 or 99% increase between the two periods. This
increase in revenues can be attributed to the results of additional sales people
hired since the inception of GetNet.
Gross profit on its revenues was $68,000 or 68% for the three months ended
October 31, 1995 as compared to ($8,000) or (800%) for the two months ended
October 31, 1994. This increase in gross margin can be attributed to the
increase in sales of services with up front set up fees.
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Operating expenses totalled $89,000 for the three months ended October 31,
1995 as compared to $8,000 for the two months ended October 31, 1994. This
increase is mainly due to the purchase of equipment and the wages of employees
needed to sell GetNet's services.
In connection with the acquisition of GetNet by the Company in November
1995, the principal officers of GetNet entered into employment agreements.
Under the new employment agreements, these persons would have received
approximately $50,000 more in salary for a comparable three months period in the
future.
GetNet had net loss of ($21,000) for the three months ended October 31,
1995 as compared to a loss of ($16,000) for the two months ended October 31,
1994. As indicated above, the principal cause for the decreased profitability
is the acquisition of the necessary equipment required to offer GetNet's
services.
Operations of GetNet from November 1, 1995 through December 31, 1995 are
consolidated in the Company's financial statements as GetNet was acquired by the
Company effective November 1, 1995.
PRO FORMA COMBINED
FOR THE SEVEN MONTHS ENDED DECEMBER 31, 1995 FOR THE COMPANY AND THE THREE
MONTHS ENDED OCTOBER 31, 1995 FOR GETNET (OPERATIONS OF GETNET AFTER OCTOBER 31,
1995 ARE CONSOLIDATED WITH THE COMPANY)
Pro forma revenue from operations for the periods ended December 31, 1995
was $1,499,000 and pro forma cost of sales for the same period was $979,000.
Pro forma gross margin was $520,000 or 35% during the periods ended December 31,
1995. Pro forma selling, general and administrative expenses were $2,071,000 or
138% of net revenues. Of these costs $747,000 are expenses related to minimum
carrier commitments which are not met by the Company; $342,000 in selling
expenses, approximately $100,000 in amortization expense associated with costs
capitalized in the GetNet acquisition and the balance in other general and
administrative expense. Overall, the pro forma income statement reflects a loss
of ($1,668,000) for the periods ended December 31, 1995.
FOR THE FISCAL YEAR ENDED MAY 31, 1995
Pro forma revenue from operations for the periods ended May 31, 1995 was
$2,067,000 and pro forma cost of sales for the same period was $1,389,000. Pro
forma gross margin as a percentage of sales was $678,000 or 33% during the
periods ended May 31, 1995. Pro forma selling, general and administrative
expenses were $1,354,000 or 66% of net revenues. Of these costs, $348 or
approximately 17% represent selling expenses. An additional $139,000 in
expenses associated with the amortization of the intangibles have been recorded
as a result of the acquisition of GetNet. Overall, the pro forma income
statement reflects a loss of ($724,000) for the periods ended May 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at December 31, 1995 was $144,000 and net
working capital deficit was ($1,013,000). The Company's cash position reflects
the receipts of the Company's private placement in the sale of its Common Stock
completed in November 1995. Included in the Company's current liabilities are
$186,000 associated with an initial payment from AT&T when its long distance
contract was initiated plus an additional $233,000 of a $400,000 obligation
($167,000 is included as a long term obligation) due to AT&T in settlement of
not meeting past service commitments. Also included in the Company's current
liabilities are approximately $315,000 in accrued network costs due ICG. The
Company is currently delinquent in its obligation to ICG, but ICG has agreed to
accept $250,000 and 45,000 shares of Common Stock in payment the Company's
obligation (including $115,000 billed and expensed by the Company subsequent to
December 31, 1995). See "Commitments."
Cash flows from operations for the Company totaled $206,000 during the ten
months ended May 31, 1995 as compared to $27,000 for the year ended July 31,
1994, representing a $179,000 increase between the two periods. This increase
in cash flows can be primarily attributed to an increase associated with the
payment made by AT&T of $186,000, accrued commission to TMO of $140,000 and
deferred salary of $50,000 (all included in accrued expense) and other accounts
payable over the year ended July 31, 1994, but was partially offset due to the
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timing of collections of trade receivables. Increase in accounts payable is the
result of increased costs to AT&T associated with increased revenues.
Cash outflows from investing activities were $95,000 during the ten months
ended May 31, 1995 as compared to none for the year ended July 31, 1994. The
cash out flows during fiscal 1995 are costs related to the Company's proposed
acquisition of another entity, which has subsequently been terminated.
Cash flows from financing activities were $343,000 during the ten months
ended May 31, 1995 as compared to $21,000 for the year ended July 31, 1994,
representing a $322,000 increase between the two periods. This increase is
principally attributed to $637,000 in proceeds received by the Company from the
sale and issuance of redeemable preferred stock, but was offset by $285,000 in
offering costs related to the issuance of the redeemable preferred stock and the
upcoming sale and issuance of Common Stock and a prior unsuccessful public
offering.
Cash used in operations for the Company totaled ($832,000) during the seven
months ended December 31, 1995 as compared to $79,000 provided by operations for
the seven months ended February 28, 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 aborted acquisition of Telcom and prior offering. The Company also
increased collection efforts which reduced accounts receivable and paid certain
payables from proceeds of the private offerings received in late May and October
1995 resulting in a decrease in accounts payable. Accrued expenses increased as
a result of an increase in the Company's obligation to ICG and the settlement of
the AT&T commitment liability discussed above.
Cash flows used in investing activities consisted primarily of additions to
equipment of $80,000 in the seven months ended December 31, 1995.
Cash flows from financing activities were $569,000 during the seven months
ended December 31, 1995 as compared to $(13,000) for the seven months ended
February 28, 1995. Cash flows during the seven months ended December 31, 1995
were primarily attributed to the completion of receipt of proceeds from the
issuance of redeemable preferred stock, but was partially offset by costs
incurred in connection with the Company's private and public stock offerings.
Cash flows used in financing activities during the seven months ended February
28, 1995 were primarily attributed to debt repayments and the receipt of
proceeds from the issuance of Common Stock.
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. The net
proceeds of approximately $600,000 from this offering were used primarily to
cover costs associated with the Company's public offerings and other working
capital needs.
Under the Company's current arrangement with AT&T, customer billings and
collections are performed by AT&T. Accounts receivable represents the amount
the Company's customers owe for actual usage. However, the amount the Company
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 the
Company receives. AT&T is currently responsible for maintaining the Company's
account receivable accounts and withholds payments to the Company for customer
accounts over 30 days past due. Such amounts withheld from the Company are
offset by the gross margin otherwise payable to the Company.
COMMITMENTS
OPERATING LEASES
The Company leases its office facilities and certain equipment under non-
cancelable operating leases. Rent expense for the ten months ended May 31, 1995
and for the year ended July 31, 1994 was $26,000. In September 1995, the
Company entered into an office lease for three years at approximately $5,000 per
month (or approximately $60,000 per year). The office space consists of 3,029
square feet. GetNet has a lease commitment of approximately $18,000, $24,000
and $16,000 for the 1996, 1997 and 1998 fiscal years.
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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
19.6% to 23%. The capitalized cost of $23,000 less accumulated amortization of
$2,000 at May 31, 1995 is included in property and equipment. As of March 31,
1996. the Company entered into additional capital leases and acquired GetNet
whereby equipment under capital leases increased by approximately $200,000.
The future minimum lease payments under the capital leases, including
GetNet, total approximately $7,600 per month, including interest at March 31,
1996.
SERVICE COMMITMENTS
The Company has signed the following agreements:
- Five-year commitment beginning August 1, 1994 with AT&T Software
Defined Network ("SDN") to sell $1.8 million annually.
- A commitment (as revised) beginning November 30, 1994 with AT&T to
sell $1.2 million of "800" service annually, which will be terminated
upon the payment to AT&T of $586,000.
- A commitment (as revised) beginning February 17, 1995 with ICG Access
Services ("ICG") to initially resell telecommunication services of
approximately $460,000 through March 1996, with no minimum commitment
thereafter.
- In late October 1995, the Company entered into a two-year commitment
with WilTel to be a reseller of its long distance services. Minimum
commitments of $50,000 per month to commence in August 1996 of this
agreement.
- In September 1995, the Company entered into an immaterial financial
commitment with PageNet for the purchase of pagers.
If the Company does not meet the commitment level under its service
agreements, it will be subject to penalties that are dependent upon the degree
to which the Company is short of these commitments. Additionally, if AT&T
terminates the contract due to the Company's failure to pay for the commitment
charges provided therein, the contract provides that the Company will be liable
for the minimum usage commitment charges to be incurred over the remaining term
of the contract. In general, the Company is also required to meet the annual
commitment or pay the difference. The Company is currently meeting its SDN
commitment. The Company is hopeful it will be able to renegotiate this contract
for more favorable rates; however, as of the date of this Prospectus the Company
has not entered into any negotiations with AT&T and there can be no assurance
that it will be successful in this regard. Competition in the long distance
industry may make meeting this commitment more difficult over its term.
The "800" service commitment exceeded the Company's current sales volume.
Therefore in April 1996, the Company negotiated a release under this commitment,
whereby it agreed to pay AT&T the $186,000 the Company 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 from the
proceeds of this offering. The $186,000 payment is reflected as a use of
proceeds in the Company's public offering. Revenues associated with the "800"
service has been insignificant.
The Company's commitment to ICG was to be met by the monthly costs of
circuits ordered by the Company from ICG. If, in any given quarter or month,
the charges for the circuits were less than the commitment then the difference
will be billed to the Company by ICG. As of March 30, 1996, the Company was in
arrears to ICG for approximately $430,000. Payment of this amount has been
deferred by ICG. Based on a revised agreement, the Company must pay $250,000
from the proceeds of the public offering and the balance will be
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exchanged for 45,000 shares of Common Stock. Under the revised agreement, the
Company has no further continuing minimum obligations to ICG.
The Company has a commitment with WilTel to begin in August 1996 to sell
$50,000 per month of long distance services. This currently substantially
exceeds the Company's current level of service. The Company believes through
the construction of the Internet backbone and increased marketing efforts
paid for from the proceeds of this offering, it will be able to increase its
service level with WilTel. In addition, under the agreement with WilTel,
Internet traffic is credited one and one half (1 1/2) times actual usage
thereby making the commitment more easily attainable. As of April 1996,
long distance services of approximately $15,000 per month are being credited
to the commitment.
In January 1996, the Company, on behalf of GetNet, entered into a $291,000
commitment to purchase certain routers, modems and terminal servers for the
"Internet backbone." The total commitment in connection with the construction
of the Internet backbone is expected to approximate $350,000. The equipment
will be paid from the proceeds of the Company's public offering. The Company
has no other significant commitments to purchase equipment.
EMPLOYMENT CONSULTING AGREEMENTS
In August 1995, the Company entered into employment agreements with Robert
C. Vaughan and Jonathan Miller, former Officers and Directors of the Company.
The agreements provided for base salaries per year of $120,000 and $80,000,
respectively, and options to purchase 50,000 shares of the Company's Common
Stock the first year and 50,000 shares the second year at $5.00 per share. In
addition, Mr. Vaughan 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 these persons resigned as Officers
and Directors. As such, they no longer receive salaries and under their
resignations, they retained their option rights.
Mr. Vaughan has continued as a consultant and pursuant to a consulting
agreement dated April 22, 1996 is to be paid a monthly fee of $15,000 for a
period of 120 days which may be extended by the mutual agreement of the
Company and Mr. Vaughn. In addition to being reimbursed for expenses,
Mr. Vaughan will be paid on a standard "Leman-scale" for successful mergers
for which he is responsible. The scale is computed based on 5% of the
first $1,000,000; 4% of the second $1,000,000; 3% on the third million;
2% of the fourth million; and 1% of all over four million of the total value
of the acquisition.
Mr. Michael Canney became the new President and Chief Executive Officer
in April 1996 under 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.
The Company also has employment agreements with certain other employees of
the Company. Total annual commitments under these other agreements are
approximately $700,000.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for Impairment of Long-Lived Assets." This new
standard is effective for years beginning after December 15, 1995 and would
change the Company's method of determining impairment of long-lived assets.
Although the Company has not performed a detailed analysis of the impact of this
new standard on the Company's financial statements, the Company does not believe
that adoption of the new standard will have a material effect on the financial
statements.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for Stock-Based Compensation" (FAS 123). The new
statement is effective for fiscal years beginning after December 15, 1995. FAS
123 encourages, but does not require, companies to recognize compensation
expense for grants of stock, stock options, and other equity instruments to
employees based on fair value. Companies that do not adopt the fair value
accounting rules must disclose the impact of adopting the new method in the
notes to the financial statements. Transactions in equity instruments with non-
employees for goods or services must be accounted for on the fair value method.
The Company currently does not intend to adopt the fair value accounting
prescribed by FAS 123, and will be subject only to the disclosure requirements
prescribed by FAS 123. However, the Company intends to continue its analysis of
FAS 123 and may elect to adopt its provisions in the future.
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BUSINESS
GENERAL
Touch Tone America, Inc. (the "Company") was formed in 1989 and is
currently a full service telecommunication company providing long distance,
local dedicated access, Internet services and other telecommunication products.
In its initial formation, the Company concentrated solely on providing long
distance services pursuant to its contractual agreement with AT&T; however, with
new legislation allowing competition in the local markets, the Company entered
into an exclusive national agreement with ICG Services, Inc. as a national agent
with the ability to originate long distance calls from ICG switches. This
agreement allows the Company to make the transition from long distance reseller
to long distance provider. A long distance provider typically has a network of
fiber optic or copper lines connected to switching equipment, regionally or
nationally, that carries long distance traffic. A long distance reseller buys
or leases network capacity from a long distance provider and then offers the
long distance service to customers under their own name. As set forth herein,
the agreement allows the Company to provide its current and future customers
local calling as deregulation permits at reduced rates. With the rapid growth
in popularity of the Internet and its numerous applications and resources, in
November 1995 the Company acquired GetNet International, Inc. to develop its own
Internet division.
As a carrier of long distance services, the Company attempts to reduce its
variable costs of access to long distance transmission facilities and services.
The Company offers highly personalized services at competitive prices to
businesses of all sizes throughout the United States. As a long distance
carrier, the Company offers its customers the routing equipment and phone lines
of the large carriers, such as AT&T, WilTel and other carriers which the Company
may contract with in the future. The Company's 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.
Commencing in 1990, the Company offered commissions to agents at rates
between 7% and 32%, payable as long as the customer utilized the Company's
services. Since January of 1995, agents have been offered between 10% and 20%
commissions payable, minus applicable taxes, as long as the customer utilizes
the Company's services and the agent meets minimum order levels that are
stipulated in the agent's agreement. The agents are allowed to sell the
Company's services to customers of any size. The minimum order levels are
negotiated with the agent and vary depending on the size and ability of the
agent, and the commissions are adjusted accordingly. The agent is paid a
commission only after the customer has fully paid the Company's invoices for
monthly long distance usage sent to the customer. The Company forgoes charging
the agent for non-collectible accounts in favor of a lower commission schedule.
The Company does not pay signing bonuses to agents. For the 10 months ended May
31, 1995 and the five months ended October 31, 1995, the Company paid $265,000
and $166,000, respectively, in commissions to its most significant agent.
In February 1995, the Company entered into an agreement with ICG Access
Services, Inc. ("ICG") of Denver, Colorado to act as a national reseller of ICG
special access services, which gives the Company the ability to connect internal
telephone and data transmission services directly to long distance carriers,
thus allowing the Company to bypass part or all of the local telephone company's
(LEC, RBOC) network. The agreement gives the Company the ability to compete
with the existing local phone companies. An ICG affiliate also provides network
system integration services whereby it installs fiber optics to connect local
area communication networks and telephone systems that can be connected to ICG
fiber optic loops. The Company's customers then are able to have end to end
fiber connectivity from their offices directly to their long distance carrier.
The Company believes it will benefit from the agreement with ICG because it
allows the Company the ability to offer its present and future customers
competitive rates and services in the local access markets as deregulation
occurs which are currently dominated by the Bell companies ("Baby Bells") and
achieve additional customers for its other services including Internet, long
distance and paging.
On September 25, 1995, the Company entered into a three (3) year agreement
with Paging Network of Arizona, Inc. ("PageNet") to act as a reseller of one way
paging services including tone only, digital display and alphanumeric paging
services. The agreement allows the Company to offer other services offered by
PageNet, which includes personal 800 numbers, mini mail, page mail, and custom
greeting features. The Company believes
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the agreement will allow the Company to satisfy business as well as consumers,
demand for advanced personal messaging and future innovations in the wireless
communications industry.
In November 1995, the Company acquired all the outstanding stock of GetNet
International, Inc. ("GetNet") of Phoenix, Arizona. GetNet is a provider of
Internet access services to individuals and businesses in Arizona and other
parts of the United States. The Company can now offer 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). GetNet's front-end
software features a point-and-click graphical user interface providing
subscribers with easy-to-use access to the Internet's applications and
resources. The Company is developing software that will allow businesses and
individual users to call an individual pager anywhere in the world and deliver a
message, alpha or numeric, via the Internet without making a long distance call.
The Company will bill Internet services as a line item on the Company's long
distance and local access bills.
HISTORY
The Company was formed in September 1989 and incorporated as a California
corporation in 1990 as an AT&T reseller for small business long distance
products and services. Since 1990, the Company has continued to expand its
customer base to larger business customers located primarily in the Western and
Southwestern markets of the United States. The agreement with ICG and the
acquisition of GetNet will provide the Company the ability to enter the next
phase of its business plan which is to be a facilities-based carrier providing
long distance services, access to the local markets now dominated by the local
Bell operating companies, and provide a full range of Internet services for
individual customers. The Company envisions that in the near future it will be
able to offer all forms of telecommunications services to its customers with one
bill reflecting charges for local calls, long distance, Internet access and
wireless services. A substantial portion of the proceeds from this offering
will be utilized to this end.
LONG DISTANCE DIVISION
LONG DISTANCE INDUSTRY OVERVIEW AND COMPETITION
Since the break-up of AT&T in 1984, the domestic long distance market has
roughly doubled to an estimated $65 billion in annual revenues. AT&T has
remained dominant, retaining approximately 68% of the market, with MCI and
Sprint increasing their market shares to approximately 18% and 10% of the
market, respectively. These three companies constitute what generally is
regarded as the first-tier in the long distance market. Large regional long
distance companies, some with national capabilities, such as LDDS
Communications, Inc. ("LDDS"), Allnet Communication Services, Inc. ("Allnet"),
Cable & Wireless Communications, Inc. and LCI International, constitute the
second-tier of the industry and, cumulatively, are believed to account for 13%
of the market.
First- and second-tier companies, (most notably AT&T, MCI, Sprint and
WilTel) actively have been providing long distance products for resale for a
number of years in order to capture additional incremental traffic volume.
WilTel is a first-tier company and is the fourth largest long distance company
in the United States.
Long distance companies can be categorized by several criteria. One
criteria is between facilities-based companies and non-facilities-based
companies, or resellers. Facilities-based companies own transmission
facilities, such as fiber optic cable, copper wires or digital microwave
equipment. Profitability for facilities-based carriers is dependent not only
upon their ability to generate revenues but also upon their ability to manage
complex networking and transmission costs. Substantially all of the first- and
second-tier long distance companies are facilities-based carriers and generally
offer service nationwide. Most facilities-based carriers in the third-tier of
the market generally offer their service only in a limited geographic area.
Some facilities-based carriers contract with other facilities-based carriers to
provide transmission where they have geographic gaps in their facilities.
Similarly, non-facilities-based companies contract with facilities-based
carriers to provide transmission of their customers' long
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distance traffic. Pricing in such contracts is typically either on a fixed rate
lease basis or a call volume basis. Profitability for non-facilities-based
carriers is based primarily on their ability to generate and retain sufficient
revenue volume to negotiate attractive pricing with one or more facilities-based
carriers.
A second distinction among long distance companies is that of switched
versus switchless carriers. Switched carriers have one or more switches, i.e.
computers that direct telecommunications traffic in accordance with programmed
instructions. All of the facilities-based carriers are switched carriers, as
are many non-facilities-based companies. Switchless carriers depend on one or
more facilities-based carrier to provide both transmission capacity and switch
facilities. In addition, switchless resellers enjoy the benefit of offering
their service on a nationwide basis, assuming that their underlying carrier has
a nationwide network. The Company, through its agreement with ICG, has become a
switch-based or, in other words, a switched carrier.
Competition in the long distance industry is based upon pricing, customer
service, network quality and value-added services such as voice mail, calling
cards and debit cards. The success of a non-facilities-based carrier depends
almost entirely upon the amount of traffic that it can commit to the underlying
carrier; the larger the commitment, the lower the cost of service. Subject to
contract restrictions and customer brand loyalty, resellers may competitively
bid their traffic among other national long distance carriers to gain
improvement in the cost of service. The non-facilities-based carrier devotes
its resources entirely to marketing, operations and customer service, deferring
the costs of network maintenance and management to the underlying carrier.
The relationship between carriers, such as the Company, and the major
underlying carriers is predicated primarily upon the pricing strategies of the
first-tier companies, which has resulted historically in higher rates to the
small business customer. Small customers typically are not able to make the
volume commitments necessary to negotiate reduced rates under individualized
contracts. The higher rates result from the higher cost of credit, collection,
billing and customer service per revenue dollar associated with small billing
level long distance customers. By committing to large volumes of traffic, the
Company is guaranteeing traffic to the underlying carrier and therefore receives
a lower rate than is generally available. The successful, smaller facilities-
based carrier efficiently markets its own long distance product, processes
orders, verifies credit and provides customer service to large numbers of
accounts.
The Company believes that the rapid evolution of the resale industry has
resulted in an excellent opportunity for consolidation of third-tier companies
in general, and resellers, in particular. Many of these companies are
undercapitalized and may have difficulty providing their services profitably.
The Company believes that many of the carriers that provide resale products,
particularly first-tier carriers, would welcome a consolidation that would
decrease the number of companies with whom they contract, leaving only quality,
well capitalized companies with whom to deal. Consolidation with resellers
could, in the Company's opinion, achieve additional economies in both pricing
with underlying carriers and in operating costs such as customer service. Such
economies are not certain and cannot be adequately predicted. The Company does
not have any current understanding, arrangement or agreement to consolidate with
other resellers.
LONG DISTANCE STRATEGY
In October 1995, the Company entered into a letter of understanding with
Canadian Telephone Corporation ("CTC") to market the Company's services
throughout the United States. CTC, which has offices in Toronto, Montreal,
Calgary and Vancouver, Canada and 400 employees, was honored in August 1995 by
Telemarketing Magazine as the "fastest growing, telemarketing company in North
America." The letter of understanding provides for CTC to undertake a 1,000
hour sales test in California, which began in early December, 1995, to gauge the
reaction of customers in the California market to a communications provider of
multiple services. The Company believes that telemarketing is a more beneficial
form of sales and advertising and a better way to accurately determine a sales
and marketing strategy for a particular market. The CTC relationship may
develop into a profitable method of selling the Company's services, but
management can make no assurances that this will happen. If further results
prove successful, the Company will enter into a long term contract with CTC to
market the Company's services throughout the United States. The Company has
paid CTC for the initial test marketing.
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The Company will also attempt to continue its expansion in the long
distance industry through acquisitions of existing long distance companies
and/or their customer accounts. The Company 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 the Company in terms of
operating revenues and customer base. It is anticipated that a portion of the
proceeds derived from the proposed public offering will be used to acquire other
telecommunications companies. Although the Company currently has no
understanding, arrangement or agreement to make any other acquisitions, the
Company believes from its experience that many existing resellers are willing to
be acquired due to the lack of sufficient volume vis-a-vis their current
operating expenses. The Company believes it has the ability to maximize the
potential of these acquisitions through increased operating efficiency without a
significant increase in overhead by eliminating duplicate overhead and the
enhanced use of the Company's software and existing personnel. Acquisitions may
include both switched and switchless resellers of long distance.
The Company will use a portion of the proceeds of the proposed public
offering to directly employ a in-house sales force to solicit orders from
targeted customers and referral accounts and continue to expand its base of
independent marketing agents. The Company believes it can attract qualified
sales personnel and agents due to an extensive mix of products including local
access services, favorable commission schedules and prompt customer service. In
addition the Company believes it can attract additional sales agents by enabling
them to achieve greater volumes and corresponding commissions through the
ability to acquire customer accounts in targeted geographical regions in which
ICG maintains its fiber optic networks.
LONG DISTANCE PRODUCTS AND SUPPLIERS
In October 1995, the Company signed an agreement for a two (2) year period
with WilTel for long distance, calling card and point-to-point services. The
agreement allows the Company to act as a long distance carrier in the completion
of long distance and calling card calls. In addition, the Company can order ATM
permanent virtual circuits ("PVCs") for the GetNet Internet backbone. The
monthly costs of these circuits is applied to the WilTel monthly usage
commitment and lowers the Company's cost per minute for long distance services.
The Company will bill its customers for all calls that the Company routes via
the WilTel network.
The Company's previous primary provider of underlying long distance
services is AT&T for both outbound and inbound services as noted elsewhere
herein. The Company has committed to a large annual dollar usage commitment 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, the Company has committed to sell a certain amount in AT&T long
distance each year. If the Company does not meet this commitment level in a
given year, it has agreed to pay AT&T penalties that are dependent upon the
degree to which the Company is short of those commitments. If AT&T terminates
the contract due to the Company's failure to pay the charges due thereunder, the
contract provides that the Company will be liable for the minimum usage
commitment charges to be incurred over the remaining term of the contract. AT&T
currently bills the Company's customers directly for its SDN services, however,
the Company intends to begin billing its own services in April 1996.
The Company will attempt to enter into similar agreements with other
carriers such as Sprint and MCI to offer greater network stability and backup in
the event of service interruption to the Company's customers and also to
leverage one carrier's rates and services against the other to the benefit of
the Company.
LONG DISTANCE RATES AND CHARGES
The Company 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
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than to outbound termination telephone services. The outbound product line
includes general 1+ dialing origination and "800" service which the Company's
customers use to receive and pay for calls from their respective customers and
potential customers. The Company believes that its rates are generally lower
than those charged by AT&T and competitive with or below those charged by other
long distance carriers. In addition, the Company may offer promotional
discounts based upon either duration of commitment to purchase services or
incremental increases in service. Volume discounts are also offered based upon
amount of monthly usage in the day, evening and night periods and based solely
on total volume of usage. The rates offered by the Company may be adjusted by
AT&T in the future as interexchange carriers continue to adjust their rates.
LONG DISTANCE CUSTOMERS
The Company 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 the Company's customers range from under
$100 to $5,000, and for the six months ended January 31, 1995, the monthly long
distance phone bill for an average Company customer was approximately $350 to
$400. Sales to customers as set forth below are made by independent agents who
directly contact potential customers and are paid on a commission basis as long
as the Company receives revenues from that customer. The Company does not have
contracts with its customers, vis-a-vis its agents, but receives written or
verbal authorization from new customers in connection with their order for
services as per FCC regulations.
LONG DISTANCE MARKETING
In October 1995, the Company entered into a letter of understanding with
Canadian Telephone Corporation ("CTC") to market the Company's services
throughout the United States. CTC, with offices in Toronto, Montreal, Calgary,
and Vancouver, Canada and 400 employees, was honored in August 1995 by
Telemarketing Magazine as a the "fastest growing, telemarketing company in North
America." The letter of understanding provides for CTC to undertake a 1,000
hour sales test in California of the Company's primary services including long
distance. If the results prove successful the Company will enter into a long
term contract with CTC to market the Company's services throughout the United
States. The Company has paid to CTC $17,500 for this initial test marketing.
The Company currently does not engage in advertising directly to end users
of long distance services, although the Company distributes printed marketing
materials to prospective users on a selected basis. The Company is also
evaluating the development of internal telemarketing operations to sell back
into the existing and future customer base. The Company will endeavor to offer
every customer the ability to use each product the Company offers in addition to
considering opportunities with established independent telemarketing firms.
Because of the size of the potential market in local competition, the
Company will attempt to create mass media advertising to correspond with
deregulation in the respective target cities. Through current and future direct
sales, tele-sales, and agent sales the Company will attempt to generate brand
recognition of its name, Touch Tone America, and sales of products in advance of
mass advertising.
The Company intends to use a portion of the proceeds of this offering to
establish offices in thirteen target cities in the U.S., where ICG has switches,
and hire local direct sales representatives and have local direct sales
representative that will be responsible for creating local presence, support of
local agents, right of entry for ICG and fulfill the leads generated by CTC. In
addition to its independent agents, the Company currently has four sales people
in Phoenix, Arizona and will continue to expand into the other cities after the
public offering.
The Company historically has relied on its network of independent marketing
agents to market its long distance products. Independent marketing agents are
companies that market the Company's long distance products directly to business
customers as authorized agents or sales agents of the Company and receive a
continuing commission based on the monthly usage of the customer accounts that
they have brought to the Company. The Company provides its independent
marketing agents with promotional materials and products and offers training
programs by Company employees. The Company solicits independent marketing
agents primarily through telecommunications trade periodicals and trade shows.
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Currently one sales agent, TMO, accounts for approximately 35% of the
Company's revenues for the seven months ended December 31, 1995, and it receives
commissions of 32%. At this level of commissions, the Company does not receive
any gross margin on the sales originated by this agent, but as a result of this
relationship, experiences greater gross margin on the other agents' sales due to
volume discounts from AT&T.
LOCAL ACCESS DIVISION
LOCAL ACCESS INDUSTRY OVERVIEW AND COMPETITION
Until 1984, AT&T largely monopolized telephone services in the United
States. Technological developments gradually enabled others to compete with
AT&T. In 1984, AT&T was required to divest its local telephone systems (the
"Divestiture"), which created the present structure of the telecommunications
industry. As part of the Divestiture, AT&T's former local telephone systems
were organized into seven regional Bell operating companies while AT&T retained
its long distance services operations. The separation of the RBOCs from AT&T's
long distance services created two distinct telecommunications market segments:
local exchange and long distance. The Divestiture decreed direct, open
competition in the long distance segment, but retained regulated monopolies for
local exchange services, provided within geographically defined local access
transport areas ("LATAs").
The local exchange market for telephone services in the United States is
reported to have generated approximately $87.0 billion in revenue in 1992. The
market for local exchange services consists of a number of distinct service
components. These service components are defined by specific regulatory tariff
classifications including: (I) local network services, which generally include
basic dial tone charges and private line services ($39.9 billion of revenue in
1992); (ii) network access services, which consist of access charges received by
local exchange carriers from long distance carriers ($20.4 billion of revenue in
1992 excluding $6.1 billion of end user access revenue); (iii) long distance
network services, which include the variable portion of charges received by
local exchange carriers for intra-LATA long distance calls ($12.9 billion of
revenue in 1992); and (iv) other varied services ($7.7 billion of revenue in
1992). Before the emergence of competitive access providers such as ICG, there
was virtually no competition in the local exchange markets.
Several factors have promoted competition in the local exchange market,
including: (i) customer demand for an alternative to the local telephone
companies' monopoly, partly stimulated by the development of competitive
activities in the long distance telephone market; (ii) technological advances in
the transmission of data and video requiring greater capacity and reliability
levels than the local telephone companies' copper-based twisted-pair networks
were able to accommodate; (iii) outmoded local telephone networks resulting from
their monopoly position and rate of return-based pricing structure which
provided little incentive to upgrade their networks; and (iv) the significant
access charges that long distance telephone carriers pay for access to the local
telephone networks. Numerous new entrants to the telecommunications services
market now offer customers diverse service options. The local telephone
companies generally have reacted by restricting interconnection with their
networks by new competitive equipment or service providers. However, government
regulatory policies have increasingly mandated that the local telephone
companies allow these new market entrants to access and utilize the local
telephone networks to provide competing services.
Competitors in the local exchange market, designated as "competitive access
providers" ("CAPs") by the FCC, were first established in the mid-1980s. In New
York City, Chicago and Washington, D.C., newly formed companies installed fiber
optic cable connecting long distance telephone carriers' POPs within a
metropolitan area and, in some cases, connecting end users (primarily large
businesses and government entities) with long distance carrier POPs. The
greater capacity and economies of scale inherent in fiber optic cable enabled
the CAPs to offer customers less expensive and higher quality special access and
private line services than the local telephone companies could provide with
their more antiquated copper-based transmission facilities.
The Company believes that the current trend toward enhanced competition,
both at the federal and state levels, will continue to open to competition an
increasing portion of the local exchange market. The California Public
Utilities Commission has agreed to let long distance carrier enter the local
phone market breaking the monopoly held by Pacific Bell and GTE California.
Additionally, California has legislatorialy approved local
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competition and are currently developing rules to govern competition. This
additional competition may stimulate growth in this market, much as the overall
total long distance market grew as competition increased.
In addition, the Company is unable, at this point in the deregulation of
the local market, to accurately comment on the expected level of competition
with respect to fees charged for the origination and termination of local call
traffic, bypassing origination fees charged by BOCs or direct connections to
switches from customer premises. These issues are being discussed and
determined by the various network providers such as AT&T and regulatory agencies
such as the state Public Utilities Commission and Federal Communications
Commission not by resellers such as the Company.
LOCAL ACCESS STRATEGY
On February 17, 1995, the Company entered into a National Reseller
Agreement with ICG Access Services, Inc. ("ICG") of Denver, Colorado. ICG is
one of the largest competitive access providers in the United States and the
leading CAP nationwide in Tier II and Tier III markets (cities with populations
of between 250,000 and 2,000,000) based on the number of markets served. CAPs
enable high volume customers to connect their internal telephone and data
transmission systems directly to their long distance carriers, thereby bypassing
all or most of the local telephone company's network. ICG's affiliates also
provide domestic and international satellite transmission services and a wide
range of network systems integration services. The combination of these
services enables ICG to transmit voice, video and data from the desktop to
locations within the same building or city, or to cities across the United
States and around the world.
ICG commenced operation of its first competitive access network in Denver
in May 1991 and now operates additional competitive access networks serving
Charlotte, Cleveland, Colorado Springs, Dayton, Louisville, Phoenix, Nashville,
Birmingham, Melbourne/Orlando, Florida and 20 cities serving the San Francisco
and Los Angeles metropolitan areas. A competitive access network is comprised
of fiber optic cables connecting a Competitive Access Provider's switching
equipment to the switching equipment of long distance companies and LECs. The
competitive access network is designed to allow an alternate path for routing
local and long distance calls and for the ability to use this alternate routing
to compete in local services market with the LECs. ICG's operating networks
have grown substantially from 1992 to 1994. ICG's competitive access networks
provide network reliability and redundancy and provide services at charges to
the customer which are equal to or lower than those of local telephone
companies. In providing network systems integration services, ICG designs,
engineers and manages the installation and maintenance of its own fiber optic
networks, as well as the local area networks of third-party customers.
The Company's agreement with ICG allows the Company to enter into the local
access market in select cities currently serviced by ICG circuits and fiber
optic lines. Currently, the Company can provide its customers with dedicated
access services to facilitate the completion of long distance calls to select
long distance carriers via ICG switches. Deregulation will offer local calling
and enhanced local services such as city wide networking, voice mail and calling
features such as call waiting, call forwarding and conference calling. The
Company believes that it will continue to benefit from the increasing
telecommunications demands of business and government entities that result from
computerized data processing, lower rates for long distance services and growth
in voice communications traffic, automated transaction processing and video
applications.
The agreement allows the Company to serve as a national reseller for ICG
products and services within certain designated LATAs which include Colorado,
California, North Carolina, Arizona, Ohio, Kentucky, Tennessee and Alabama. The
agreement allows the Company based on a designated volume purchasing
requirement, to operate for a five year period in the regions set forth herein
and in ICG's expanding markets as they develop. The relationship with ICG
enables the Company to offer its customers complete telecommunication services
at lower costs from their origin to final destination on one monthly invoice.
Customers' calls are connected by ICG fiber optic inter city cables, to ICG
switches for connection into the Company long distance carrier and on to a
destination serviced either by ICG or a local phone company ("LEC").
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LOCAL ACCESS MARKETING
The Company plans to undertake an aggressive program of opening sales
offices in ICG cities targeting the customers in buildings wired with ICG fiber
optic networks for local and long distance sales. The Company will utilize a
substantial portion of the public offering proceeds to create a strong marketing
presence in these cities. As a result, the Company and its agents will have the
ability to offer initially interstate special access services, then as
deregulation allows, complete local calls in addition to long distance to
virtually every business and government user in a given metropolitan area in
which ICG installs its fiber optic networks in addition to its long distance
services.
The Company expects intense competition from numerous providers such as PCS
and cellular phone companies in the local access markets; however, the Company
is unable at this time to access this form of competition because of the limited
number of PCS licenses granted to date and the ability of the cellular market to
handle both local and long distance calls with the quality demanded by
consumers.
INTERNET DIVISION
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, the Company believes, is in
large part due to the continuing penetration of computers and modems into U.S.
households. The Company 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. The Company 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 shareware applications are being created by individuals,
educational institutions and companies and are made available at little or no
cost through the Internet.
Also the increased availability of user-friendly navigational and utility
programs which enable 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 Mosiac, help users access information from the Internet.
The foregoing navigational and utility programs are not products of the company
or any affiliate of the Company.
The market for Internet access services is extremely competitive. There
are no substantial barriers in entering into the Internet and the Company
expects that competition in this market will intensify in the future. The
Company's current and prospective competitors include many large companies that
have substantially greater market presence and financial, technical, marketing
and other resources than the Company. The Company competes or expects to
compete directly or indirectly with the following categories of companies: (1)
national and regional commercial Internet service providers, such as PSI, BBN
and UUNET, (2) established on-line services companies which currently offer or
are expected to offer Internet connectivity; such as America Online ("AOL"),
CompuServe, Prodigy, GEnie and Delphi, (3) computer hardware and software and
other technology companies, such as IBM and Microsoft, (4) national long
distance carriers, such as AT&T, MCI and Sprint that currently offer electronic
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messaging services, (5) regional telephone companies, such as Pacific Bell,
which recently announced a service to provide Internet access, and (6) non-
profit or educational Internet service providers.
Although most of the established on-line services companies and
telecommunications companies currently offer only limited Internet access such
as World Wide Web browsing, many of these services have announced plans to offer
expanded Internet access such as the ability to transfer files via the Internet.
The Company expects that all of the major on-line services companies will
eventually compete fully in the Internet access market. Certain companies,
including AOL, BBN and PSI, have obtained or expanded their Internet access
products and services as a result of acquisitions. In addition, the Company
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 the Company. For example, Microsoft introduced an Internet
access solution, including front-end software and an on-line service, called
"Microsoft Network," that is expected to be competitive with the Company's
services. The application software for this on-line service has been bundled
with the Microsoft's Windows 95 operating system, which may give the service a
significant advantage over on-line and Internet services from other providers,
including the Company. In connection with its plans to enter that 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. Furthermore, MCI has also recently announced
that it intends to enter the Internet access market in 1995. The ability of
these competitors or others to bundle services and products with Internet
connectivity services could place the Company at a significant competitive
disadvantage. Increased competition, price or otherwise, could result in
erosion of the Company's market share, and may require price reductions and
increased spending on marketing and product development. Any of these events
could have a material adverse effect on the Company's financial condition and
operating results.
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 band width availability, which effects sound quality and the
potential regulation of the Internet, if possible, make it impossible for the
Company to determine the long term potential impact. However, the Company
believes quality of long distance calling on the Internet will become a reality
in the future.
INTERNET SERVICES
In November 1995, the Company acquired GetNet International, Inc.
("GetNet") of Phoenix, Arizona. The Company issued 400,000 shares of the
Company's Common Stock to the shareholders of GetNet for all of the issued and
outstanding shares of GetNet. The Company operates GetNet, its wholly-owned
subsidiary, as a separate division; however it will be a part of the total
communications package offered to its customers.
GetNet is a provider of Internet services to various individuals and
businesses in the United States. The Company offers subscribers complete
Internet access comprised of front-end software integrated with high quality
access service and 24-hour customer support. The Company'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). GetNet'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. GetNet has experienced positive
growth in its subscriber base since inception.
INTERNET BACKBONE
The Company will attempt to establish and maintain a nationwide, high-speed
digital network, known as a "backbone," connecting the main Internet NAPs
(network access points) located throughout the United States. A Cisco 7000
series router will be installed at each NAP which will allow the Company a
direct connection to the Internet. Regional exchange points ("REPs") will be
created using the Cisco 4700 router. This connection to these NAPs will allow
the Company to provide Internet access to other Internet Service Providers
("ISPs"), government
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and educational institutions as well as customers of all sizes anywhere in the
world. The Company's network will be designed to provide high quality, reliable
and fast access service, and will be designed to support expansion in both the
number of subscribers it may handle and the increasing data traffic associated
with those subscribers. In addition, the Company 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. The Company will attempt to enter an
agreement with WilTel (Worldcom) to provide circuits for the network as well as
long distance lines. The Company will also provide its customers with on-going
customer support 24 hours a day, seven days per week. The Company has committed
to pay $281,000 of the estimated total cost of $350,000 necessary to purchase
the Cisco routers.
INTERNET APPLICATIONS
GetNet provides its subscribers with access to the full range of available
Internet applications which include E-mail which, is an Internet application by
which an Internet user can 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. The Company 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 the Company or an
affiliate of the Company.
USENET News Groups is a network of thousands of computers attached to the
Internet that provide fortune, or 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
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 GetNet or in several manuals dedicated to Internet users, to aid
in their attempts to utilize the functions of these products.
Also the Internet can 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 GetNet, 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.
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Providers may also differ according to whether they provide direct or non-
direct access to the Internet. Direct access through Internet protocols such as
SLIP (Serial Line Interface Protocol) or PPP (Point-to-Point Protocol) 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.
It is GetNet's intention 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 (Network Access Points) located
throughout the country. This backbone network gives GetNet the ability to
resell Internet connections to other ISPs (Internet Service Providers) and large
institutions requiring larger amounts of bandwith than can be provided by most
ISPs.
Currently, GetNet 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. GetNet has adopted a value pricing strategy of
charging subscribers various flat monthly fees for Internet connectivity
service. GetNet believes that its value pricing attracts subscribers to and
encourages their use of the Internet. Through GetNet, 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.
GetNet'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. The Company 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
The Company's marketing plan is to capitalize on the growing demand for
Internet services and gain market share by aggressively 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 GetNet subscribers as a result of local businesses advertising their
websites located on GetNet Service. The Company and GetNet will continue to
educate and promote Internet services through its existing base of long distance
agents and the hiring of additional direct sales personnel. The Company
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.
The Company is also focused on providing access services to the individual
subscriber market, which continues to be the fastest growing segments 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. The Company's strategy is to establish a high-
quality, nationwide name identity in this market through 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.
The Company has adopted a flat rate pricing structure which the Company
believes encourages usage by eliminating subscribers' concerns about incurring
significant hourly charges which has the potential to increase subscriber
retention rates. The Company believes that its value price point will help
attract new subscribers and facilitate rapid penetration of the individual
subscriber market.
The Company is currently developing a high speed, digital network which
will allow it to resell the network's bandwidths to other ISPs and large
institutions. GetNet believes that although the subscriber market remains
viable, the development of websites and business solutions for larger customers
such as E-mail, FTP and World Wide Web advertising will generate larger profit
margins. A substantial portion of the proceeds of this offering will be used in
the development of the network.
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WIRELESS DIVISION
In September 1995, the Company 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 the Company to offer other services offered by PageNet
which includes personal 800 numbers, mini mail, page mail, and custom greeting
features. The Company has had insignificant customer sales as of the date of
this Prospectus, however, it believes the agreement will allow the Company to
satisfy business and individual consumers demand for advanced personal messaging
and future innovations in the wireless communications industry.
The Company will initially pursue small and mid-sized accounts in order to
minimize its dependence of any single customer and because the Company believes
that smaller accounts are generally more profitable. Smaller consumer type
customers are particularly attractive because these customers typically buy
rather than lease pagers and rarely require discounts on service rates.
Subscribers who use paging services have traditionally included small business
operators and employees, professionals, medical personnel, sales and service
providers, construction and tradespeople, and real estate brokers and
developers. However, paging's appeal to the mass market is growing, and the
service is increasingly being adopted by individuals for private, nonbusiness
uses such as communicating with family members and friends.
GOVERNMENTAL REGULATION
LONG DISTANCE AND LOCAL ACCESS
The terms and conditions under which the Company provides
telecommunications services are subject to government regulation. Federal laws
and FCC regulations apply to interstate and international telecommunications,
while particular state regulatory authorities have jurisdiction over intrastate
telecommunications.
FEDERAL
The Company is classified by the FCC as a non-dominant carrier. Among
domestic carriers, only AT&T and the LECs are classified as dominant carriers.
As a consequence, the FCC regulates many of their rates, charges and services to
a greater degree than the Company's, although AT&T has requested that it be
reclassified as a non-dominant carrier and the FCC is reviewing this issue. If
AT&T's designation as a dominant carrier were terminated, certain pricing
restrictions and regulatory oversight that currently apply to AT&T would be
eliminated which would make it easier for AT&T to more aggressively compete
directly with the Company for low volume long distance customers. International
carriers may also be classified as dominant if they are affiliated with foreign
carriers with substantial market share. The FCC has generally not chosen to
exercise its statutory power to regulate the charges, practices, classifications
or regulations of non-dominant carriers, although it has the power to do so. The
FCC retains the jurisdiction to act upon complaints against any common carrier
for failure to comply with its statutory obligations. The FCC also has the
authority to impose more stringent regulatory requirements on the Company and
change its regulatory classification; however, the Company is unaware of changes
in any FCC policies except as noted below.
The Company has all necessary authority to provide domestic interstate
telecommunication services.
Dominant and non-dominant carriers must maintain tariffs on file with the
FCC. Although the tariffs of non-dominant carriers, and the rates and charges
they specify, are subject to FCC review, they are presumed to be lawful and are
seldom contested. Until recently, domestic non-dominant carriers were permitted
by the FCC to file tariffs with a "reasonable range of rates" instead of the
detailed schedules of individual charges required of dominant carriers. In
reliance on the FCC's past practice of allowing relaxed tariff-filing
requirements for non-dominant domestic carriers, the Company and many of its
competitors did not maintain detailed rate schedules for domestic offerings in
their tariffs. As a domestic non-dominant carrier, the Company is permitted to
make tariff filings on a single day's notice and without cost support to justify
specific rates. The Company could be held liable for damages for its failure to
do so, and such an outcome could have a material adverse effect on it. Resale
carriers are also subject to a variety of miscellaneous regulations that, for
instance, govern the documentation and
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verifications necessary to change a consumer's long distance carrier, limit the
use of "800" numbers for pay-per-call services, require disclosure of operator
services and restrict interlocking directors and management.
To date, the FCC has exercised its regulatory authority to control rates
only with respect to the rates of dominant carriers, and it has increasingly
relaxed its control in this area. As an example, although AT&T is classified as
a dominant carrier, the FCC has exempted most of its services, including
virtually all of the carrier's commercial and "800" services, from rate
regulation because the FCC believes that these services are subject to adequate
competition. Similarly, the FCC has required reduced local transport charges
(i.e., the fee for use of the LEC transmission facilities connecting the LEC's
central offices and the interexchange carrier's access point). In addition, the
LECs are being afforded a degree of pricing flexibility in setting access
charges where adequate competition exists.
The RBOCs are currently prohibited from providing inter-LATA interexchange
telecommunication services. Several motions to remove or modify this
restriction, in whole or in part, are currently pending before the United States
District Court for the District of Columbia. Many industry observers believe
that legislation will be enacted which will authorize RBOCs to provide inter-
LATA interexchange telecommunication services, and separate bills to this effect
have been passed by the House of Representatives and Senate in 1995. The
separate bills will be considered by a conference of the House of
Representatives and Senate. Such legislation, if passed, may or may not
include safeguards against anti-competitive conduct. Anti-competitive conduct
could result from an RBOC taking advantage of its access to all customers on its
existing network as well as its potentially lower costs related to and control
of the facilities used for termination and origination of calls within its
territory. The Company is unable to predict whether any particular form of
legislation will be enacted and, if enacted, the impact that any such
legislation would have on the Company's business and prospects.
In February 1996, Congress passed legislation which will substantially
deregulate the telecommunications industry. President Clinton is expected to
approve the bill later this month. The bill will have far reaching impact on
the telecommunications industry and the Company's business in particular. The
bill will effect the long distance services by allowing the seven regional Bell
companies into the long distance phone business after they have proved to the
FCC that they have opened their local phone networks to new competitors. The
Company believes that the increased competition will have the effect of lowering
prices overall and may provide the Company the ability to offer lower costs to
its customers. The bill will effect local access service by opening local phone
markets to new competitors such as AT&T, MCI and cable TV companies and the
BOC's would lose control of their current monopoly over local phone customers.
Prices may rise initially as competitors may not have the ability to spend the
large amount of funds necessary to build their own networks and consequently
they will be forced to lease Bell lines and resell service instead. State
regulation will still dictate how the new local access and rates take place.
The Company will face increased competition but for the short term is able to
utilize its ICG relationship to enter the local access market.
STATE
The intrastate long distance telecommunications operations of the Company
are also subject to various state laws and regulations, including prior
certification, notification and registration requirements. Currently, the
Company is certified and tariffed where required to provide intrastate service
to customers throughout the United States except for five states. The Company
is subject to and complies with varying levels of regulation in the states in
which it provides intrastate telecommunications. The vast majority of the
states require the Company to apply for certification to provide
telecommunication services, or at least to register or to be found exempt from
regulation, before commencing intrastate service. The vast majority of states
also require the Company 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 of certified
carriers, assignments of carrier assets, including customer bases, carrier stock
offerings, mergers and acquisitions and incurrence by carriers of significant
debt obligations. Certificates of authority can generally be conditioned,
modified, canceled, terminated or revoked by state regulatory authorities for
failure to comply with state law and/or the rules, regulations, and policies of
the state regulatory authorities. Fines and other penalties, including the
return of all monies received for intrastate traffic from residents of a state,
may be imposed for such violations. The Company believes it is currently in
compliance
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with applicable state regulations and has filed for the ability to sell services
in the states necessary to sell its services. See "Risk Factors - Local Access
and Long Distance - Governmental Regulation."
INTERNET SERVICES
The Company'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 the Company's products and increase the Company's cost of doing business or
otherwise have an adverse effect on the Company'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 the Company'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 the Company's ability to distribute
products outside of the United States or electronically.
The new 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. The Company, as
a result, will be required to develop screening programs; however, the Company
is optimistic that the deregulation may provide lower online prices for its
customers.
EMPLOYEES
As of April 15, 1996, the Company had eleven (11) full time employees,
including Michael H. Canney, the Company's President, Chairman of the Board and
Chief Executive Officer and four (4) individuals responsible for sales and
marketing.
PROPERTIES
The Company currently leases office space consisting of 3,000 square feet
at 4110 N. Scottsdale Road, Suite 170, Scottsdale, Arizona 85251 at of
approximately $5,000 per month pursuant to a three (3) year lease. The Company
believes that its facilities are adequate to meet its current needs. The
Company may, in the future, establish branch offices in those cities with large
customer bases utilizing ICG services.
GetNet leases office space at 7325 North 16th Street, Suite 140, Phoenix,
Arizona 85020 under a noncancellable operating lease. In April 1996, GetNet
entered into a new three (3) year lease for approximately $2,000 per month.
None of these leases are with an affiliated party or entity.
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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
The Company's executive officers and directors are as follows:
<TABLE>
<CAPTION>
Name Age Position Tenure as Officer or Director
- ---- --- -------- -----------------------------
<S> <C> <C> <C>
Michael J. Canney 65 Chairman of the Board of From April 1996 to date
Directors, President, Chief
Executive Officer and Treasurer
David J. Smith 42 Chief Financial Officer and From October 2, 1995 to date
Secretary
Mathew J. Barletta 30 Director From September 12, 1995 to date
Norman B. Walko 56 Director From November 1, 1995 to date
Stephen P. Shearin 30 Director From November 29, 1995 to date
</TABLE>
All Directors hold office until the next annual meeting of shareholders or
until their successors have been duly elected and qualified. Executive officers
of the Company are appointed by and serve at the discretion of the Board of
Directors. The Board of Directors has appointed a compensation committee and an
audit committee for the upcoming fiscal year.
MICHAEL J. CANNEY. Mr. Canney has served as a Director of the Company 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. Mr.
Canney presently devotes full time to the Company.
DAVID J. SMITH. Mr. Smith joined the Company in September 1995 as a
consultant in the accounting and finance division. In October 1995 he was
appointed Chief Financial Officer and in April 1996 Secretary. 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 the Company from
September 1, 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.
NORMAN B. WALKO. Mr. Walko has been a Director of the Company since
November 1995 to the present. 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.
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STEPHEN P. SHEARIN. Mr. Shearin has served as a Director of the Company
since November 1995. Mr. Shearin founded GetNet in 1994 and currently serves as
the President of GetNet. From 1991 to 1994, Mr. Shearin managed Shearin Tile
Co. while also founding GetNet. From 1986 to 1991, Mr. Shearin owned and
operated Aqua Videos while in the U.S. Virgin Islands.
KEY CONSULTANT
ROBERT C. VAUGHAN. Mr. Vaughan served as an Officer and a Director of the
Company from April 1995 to April 1996. From May 1995 to April 1996 Mr. Vaughan
was appointed and served as Chairman of the Board of Directors and Chief
Executive Officer of the Company. From April 1981 to the present, Mr. Vaughan
has been an independent business consultant. From March 1983 to June 1984, Mr.
Vaughan was President and Chief Executive Officer of Advanced Cellular
Technology, a cellular telephone manufacturer located in San Mateo, California.
From March 1988 until November 1989, Mr. Vaughan was President and Chief
Executive Officer at Addept Systems Corporation, a computer software company
located in Santa Clara, California. Mr. Vaughan will provide consulting
services to the Company.
KEY EMPLOYEES
REBECCA F. KELLEY. Ms. Kelley joined the company in June 1995 as Director
of Competitive Access Services. From August 1992 to June 1995, Ms. Kelley was
at CTN-Custom Telecom, a facilities based long distance carrier, most recently
as its Executive Vice President, where she was responsible for the day to day
operation of the company. Ms. Kelley also wrote and filed all their FCC
tariffs. From September 1991 to June 1992, Ms. Kelley was a founding partner
and served as Executive vice President of Advanced Management Services, Inc., a
non-facilities long distance carrier. There she established the guidelines for
all parts of the business from the point of sale forward, including the billing
of all services, facility order processing with multiple Bell operating
companies, and the establishment of the customer service and collection
departments. From April 1984 to February 1991, she was employed by MCI
Telecommunications, Inc. in Denver, Colorado where she was responsible for
product development for a 15 state region.
JOHN MCMAHON. Mr. McMahon was hired by the Company in January 1995 as
Director of Marketing. Mr. McMahon has been involved in the telecommunications
industry for over 11 years, including two years with MCI and four years with
Transwest Telephone Company of Phoenix, AZ. In 1990, Mr. McMahon was the Vice
President of Marketing for Bartell Consulting of Phoenix. From 1988 to 1989,
Mr. McMahon was the Project Manager for Tele-Sales Systems of Phoenix.
JAMES J. SIMMS JR. In October 1995, Mr. Simms joined the Company as the
National Sales Director. From July 1989 to October 1995, Mr. Simms held the
position of Major Account Manager for US West Communications Services, Inc. in
Phoenix, Arizona. From August 1976 to July 1979, Mr. Simms was responsible for
system prototype design and software engineering for Northern Telecom Inc. in
Ann Arbor, Michigan. During July 1979, Mr. Simms relocated to Phoenix, Arizona
and held the position of Western Region Sales Engineer for Northern Telecom Inc.
until July 1989.
GEORGE D. WOOD. Dr. Wood joined the Company as a member of the technical
staff in November 1995. From July 1983 to June of 1985, Dr. Wood was employed
as a programmer in the product systems group at Carnegie Mellon University doing
artificial intelligence research; from June 1985 to August 1988, he was a senior
research assistant at Harvard Law School and from August 1988 to the present he
has worked as a consultant to various companies, including GetNet. Dr. Wood
received a Masters Degree from the Arizona State University in 1976 and a Ph.D.
from the University of Arizona in 1982.
CHANGE OF MANAGEMENT
In April 1996, Mr. Vaughan, the Company' former Chairman of the Board and
Chief Executive Officer, brought to the attention of the Company's auditors a
previously undisclosed letter agreement signed by Mr. Miller (the Company's
former President and Director), with a significant sales agent, which provided
for a retroactive
45
<PAGE>
increase in the sales agents' commissions to 50% from 32%. This agreement and
its potential ramifications has subsequently been thoroughly reviewed by the
Company's Board of Directors and the following actions were taken on behalf of
the Company.
The Board of Directors, with the concurrence and support of Messrs. Miller
and Vaughan, 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 has been
appointed President, Chairman of the Board and Chief Executive Officer. Mr.
Miller has resigned as a Director and Officer and has elected to pursue personal
business interests. Mr. Vaughan has also resigned as Director and Officer, but
continues to serve as a consultant, as previously disclosed, to the Company in
locating and negotiating potential future mergers and acquisitions. In
connection with their resignation, their employment agreements were terminated
(see "employment agreements").
The Company has also obtained an updated agreement with the sales agent
which reaffirms the Company's prior sales commission arrangement with the sales
agent and provides for an additional payment of $75,000 from the proceeds of
this offering.
LIMITED LIABILITY AND INDEMNIFICATION OF DIRECTORS
In accordance with the California General Corporation Law, the Company has
included a provision in its Articles of Incorporation to limit the personal
liability of its directors for violations of their fiduciary duty. The
provision eliminates directors liability to the Company or its stockholders for
monetary damages, except (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an improper personal
benefit.
Additionally, in accordance with the California General Corporation Law,
the Company's Articles of Incorporation and Bylaws indemnify its directors
against liability which they may incur in their capacity as a director against
judgments, penalties, fines, settlements and reasonable expenses incurred in
connection with threatened, pending or completed civil, criminal,
administrative, or investigative proceedings by reason of the fact that he is or
was a director, officer, employee, fiduciary or agent of the Company if such
director acted in good faith and in a manner reasonably believed to be in the
best interests of the Company.
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 small business issuer pursuant to the foregoing provisions, or
otherwise, the Company 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.
46
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth all compensation paid or accrued by the
Company for services of Michael J. Canney, Jonathan Miller and Robert C. Vaughan
during the ten months ended May 31, 1995 and the fiscal years ended July 31,
1994 and 1993. No Officer other than Mr. Miller and Mr. Vaughan received cash
compensation from the Company in excess of $100,000 during such fiscal years:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation Awards
--------------------------------------------------------------------------------------------------------------
Other All
Name Annual Restricted LTIP Other
and Compen- Stock Options/ Pay- Compen-
Principal Salary Bonus sation Award(s) SARs outs sation
Position Year(1) ($) ($) ($) ($) (#) ($) ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael J. 1995 $ 0 $ 0 $ 0 N/A -0- N/A $ 0
Canney, 1994 $ 0 $ 0 $ 0 - -0- - $ 0
President, Chief 1993 $ 0 $ 0 $ 0 - -0- - $ 0
Executive Officer
Jonathan P. 1995 $ 104,000 $ 0 $ 0 N/A -0- N/A $ 0
Miller, Former 1994 $ 98,000 $ 0 $ 0 - -0- - $ 0
President and 1993 $ 74,000 $ 0 $ 0 - -0- - $ 0
Treasurer (3)
Robert C. 1995 $ 101,000(2) $ 0 $ 0 $ 40,000 -0- - $ 0
Vaughan, Former 1994 $ 0 $ 0 $ 0 - -0- - $ 0
Chief Executive 1993 $ 0 $ 0 $ 0 - -0- - $ 0
Officer and
Secretary
</TABLE>
- --------------------
(1) Periods presented are for the years ended July 31, 1993 and 1994 and the
ten months ended May 31, 1995.
(2) In April 1996, Mr. Vaughan resigned as an Officer and Director. This
amount includes $50,000 (which has been accrued and expensed as of May 31,
1995) of a prior $90,000 commitment Mr. Vaughan was to receive for past
services pursuant to his employment agreement upon the successful
completion of the public offering. Mr. Vaughan has subsequently agreed to
forego payment of the entire $90,000. The remaining $51,000, included in
the $101,000, represents compensation Mr. Vaughan received on a current
basis.
(3) In April 1996, Mr. Miller resigned as an Officer and Director. Includes
compensation paid to Janeece Miller, the wife of Jonathan P. Miller and a
full-time employee of the Company, of $38,000 for 1995, $49,000 for 1994
and $35,000 for 1993. Janeece Miller continues as an employee of the
Company under an employment agreement whereby she receives $30,000
annually.
COMPENSATION OF DIRECTORS
The non-employee directors of the Company will receive $250 for each
meeting they attend plus expenses. Directors may also receive options as
designated by the Board of Directors.
EMPLOYMENT AGREEMENTS
In April 1996, the Company entered into a two year employment agreement
with Michael J. Canney, an Officer and Director. Mr. Canney's agreement
provides, in part, to earn an annual salary of $120,000, 100,000 stock options
exercisable over a five year period at $4.00 per share and a housing allowance
of $1,500 per month.
47
<PAGE>
In July 1995, the Company entered into two (2) year employment agreements
with Robert C. Vaughan and Jonathan P. Miller, Officers and Directors of the
Company. The agreements provided, in part, for each individual to earn an
annual base salary of $120,000 and $80,000, respectively, subject to adjustment
by the Board of Directors and 100,000 stock options exercisable over a two year
period at $5.00 per share. Also, Mr. Vaughan was also to receive $90,000 from
the proceeds of the public offering for past services rendered under his
employment agreement. The agreements were terminated upon their resignations
except each individual retains their options. The Company has entered into a
consulting agreement with Mr. Vaughan which provides for compensation of $15,000
per month plus a percentage of the valuation of any successful merger based on a
standard "Leman-scale," (described elsewhere herein) for assistance in future
mergers and acquisitions, if any.
STOCK OPTIONS
OPTIONS GRANTED
The following table sets forth the options that have been granted to
Michael J. Canney, Jonathan P. Miller, the past Chief Operating Officer ("COO")
and President and Robert C. Vaughan, the past Chief Executive Officer ("CEO")
and a Director listed in the Executive Compensation Table as of the date of this
Prospectus.
<TABLE>
<CAPTION>
Option/SAR Grants
Individual Grants
- --------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
% of Total
Options/ Options/SARs Exercise
SARs Granted to or Base
Granted Employees Price Expiration
Name (#) in Fiscal Year ($/Share) Date
---- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C>
Michael J. Canney 250,000(1) 36% $4.00 3/01
Jonathan P. Miller 100,000(2)(3) 14% $5.00 7/97
Former President
and COO
Robert C. Vaughan 100,000(3) 14% $5.00 7/97
Former CEO
</TABLE>
- --------------------
(1) Of the 250,000 options, 125,000 options are currently exercisable, 50,000
are exercisable in September 1996 and 75,000 exercisable in March 1997.
(2) Does not include 30,000 options to purchase Common Stock owned by Janeece
Miller, an employee of the Company who is the wife of Jonathan Miller, the
Company's President and a Director.
(3) Of the 100,000 options granted to both Mr. Miller and Mr. Vaughan, 50,000
become exercisable in July 1996 and the remaining 50,000 become exercisable
in July 1997.
In March 1995, the Company issued 15,900 options to three non-affiliates
which provided loans to the Company in its initial start up period. The options
extended to March 31, 1997 at $3.00 per share. In addition, the Company granted
240,000 options pursuant to employment agreements to certain key employees
excluding Mr. Miller and Mr. Vaughan included in the table above. None of these
options are exercisable for one year and are exercisable at prices ranging from
$5.00 to $6.00 per share.
In November 1995, the Company granted 60,000 options exercisable at $2.00
per share for a five year period. The options were granted to Joseph Monnig, a
significant long distance sales agent, to provide long distance consulting and
assistance with the Company's long distance agents.
48
<PAGE>
In April 1995, the Company 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 the Company in the past.
In March 1996, the Company granted a total of 450,000 warrants to purchase
Common Stock to Walko, Canney, and Barletta, Directors (150,000 each) of the
Company. The warrants are exercisable for a five (5) year period at $4.00 per
warrant. The warrants are exercised as follows: 25,000 commencing in March
1996; 50,000 in six (6) months; and 75,000 after one(1) year.
In March 1996, the Company granted 100,000 warrants to purchase Common
Stock for a five (5) year period at $4.00 per warrant. The warrants are
exercisable: 25,000 immediately; 25,000 in six (6) months; and 50,000 in one (1)
year to Norbert Zealander, a member of the audit committee.
49
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of the date of this Prospectus and
as adjusted to reflect the sale of the securities offered hereby (i) by each
person who is known by the Company to beneficially own more than five percent
(5%) of the Common Stock, (ii) by each of the Company's executive officers and
directors, and (iii) by all executive officers and directors of the Company as a
group. Unless otherwise noted, each person or group identified has sole voting
and investment power with respect to the shares shown.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Before Offering(1) After Offering(1)
-------------------- --------------------
Name and Address Shares Percent Shares Percent
- ---------------- -------- ------- ------- -------
<S> <C> <C> <C> <C>
Michael J. Canney 125,000 (2) 8.5% 125,000 (2) 3.9%
4110 N. Scottsdale Road
Suite 170
Scottsdale, Arizona 85251
Jonathan P. Miller 200,000 (3) 13.7% 200,000 (3) 6.3%
4110 N. Scottsdale Road
Suite 170
Scottsdale, Arizona 85251
Robert C. Vaughan 160,000 (4) 10.9% 160,000 5.0%
4110 N. Scottsdale Road
Suite 170
Scottsdale, Arizona 82551
Janeece Miller 200,000 (5) 13.7% 200,000 6.3%
4110 N. Scottsdale Road
Suite 170
Scottsdale, Arizona 85251
Carl and Carol Peterson 75,000 (6) 5.1% 75,000 2.3%
4110 N. Scottsdale Road
Suite 170
Scottsdale, Arizona 85251
Stephen P. Shearin 114,516 (7) 7.8% 114,516 3.6%
4110 N. Scottsdale Road
Suite 170
Scottsdale, Arizona 85251
All executive officers
and directors as a
group (6 persons) 289,516 19.8% 289,516 9.1%
</TABLE>
- --------------------
(1) 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. This calculation
includes the issuance of 400,000 shares to the shareholders of GetNet, the
issuance of 350,000 shares of Common Stock in the November 1995 private
placement, the issuance of 187,500 shares of Common Stock upon the
conversion of the Series A Convertible Preferred and the potential exercise
of 175,000 options currently vested by Officers and/or Directors.
(2) Represents 125,000 options currently exercisable.
(3) Includes 100,000 shares owned directly by Mr. Miller and 100,000 owned
indirectly by virtue of his wife's ownership of said shares but does not
include 100,000 options to purchase shares of the Company's Common Stock.
(4) Does not include 100,000 options to purchase shares of the Company's Common
Stock.
50
<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.
(6) Carol Peterson is the mother of Jonathan Miller; however, neither claim any
beneficial ownership of the others Common Stock.
(7) Does not includes 10,000 options to purchase shares of the Company's Common
Stock.
There is no arrangement or understanding known to the Company, including
any pledge by any person of securities of the Company, the operation of which
may at a subsequent date result in a change in control of the Company. Mr.
Miller and Mr. Vaughan, pursuant to their resignations, agreed not to vote their
shares for a three (3) year period.
51
<PAGE>
CERTAIN TRANSACTIONS
The Company has one note payable to two principal shareholders (Carl and
Carol Peterson) and one note payable to a non-affiliated individual:
<TABLE>
<CAPTION>
December 31,
1995
<S> <C>
Note payable to Carl and Carol Peterson bearing interest
at 1% monthly, interest and principal due
September 30, 1996, unsecured. $131,000
Note payable to non-affiliated stockholder, bearing interest
at 10%, principal and interest due upon the Company
receiving proceeds from an initial public offering,
unsecured. 42,000
---------
$ 173,000
---------
---------
</TABLE>
It is the present intention of the management to repay the above notes
payable in full together with all accrued interest from the proceeds from the
public offering.
In May 1995, the Company issued 150,000 shares of Series A Convertible
Preferred Stock to 33 accredited and non-accredited entities/individuals for a
total gross proceeds of $750,000. The shares of Series A Convertible Preferred
were issued at $5.00 per share, and are redeemable by the Company at the
Effective Date for $5.00 per share plus 1.25 shares of Common Stock. See
"SERIES A PREFERRED SELLING SHAREHOLDERS."
In November 1995, the Company issued 350,000 shares of Common Stock to 30
accredited and non-accredited entities/individuals for a total gross proceeds of
$700,000. The shares of the Common Stock were issued at $2.00 per share. See
"ADDITIONAL SELLING SHAREHOLDERS."
In November 1995, the Company issued 400,000 shares of Common Stock to all
the shareholders of GetNet to acquire all their issued and outstanding shares of
GetNet. The shares were issued at a ratio of one (1) share of the Company's
Common Stock for each 13.916 shares of GetNet. Mr. Shearin, who subsequently
became a Director of the Company, was a shareholder of GetNet, and received a
total of 114,516 shares of the Company in this transaction.
In November 1995 and March 1996, the founding shareholders, Jonathan
Miller, Janeece Miller, Carl Peterson and Carol Peterson agreed to surrender to
the Company's treasury shares of Common Stock. Mr. Miller surrendered 159,550
shares; Mrs. Miller 159,550 shares; Mr. Peterson 220,050 shares; and Mrs.
Peterson 222,050 shares and no consideration was given by the Company for the
surrender of such shares. The shares were surrendered and interest forgiven at
the request of the Representative as a condition of continuing to act in the
capacity as the Representative for the public offering.
During the ten months ended May 31, 1995:
- Feland Meadows, a founding shareholder of the Company, returned to
treasury 1,393,000 shares of Common Stock when the Company repaid a
then outstanding debt of $24,000 to that individual.
- Mantred Brisske, a founding shareholder, returned to treasury 258,000
shares of Common Stock for an agreement to repay an outstanding debt
plus accrued interest totalling $41,000.
- The Officers, Directors and major shareholders, Jonathan Miller,
Janeece Miller, Carl Peterson, Carol Peterson and Mantred Brisske,
transferred as gifts 62,300 of their own shares of the Company's
Common Stock to various non-affiliated persons consisting of friends
and family members. Certain of these individuals had also provided
minor services to the Company and the Company recorded an expense of
approximately $15,000 in connection with this transfer.
52
<PAGE>
- The Company issued a total of 160,000 shares of Common Stock to Robert
C. Vaughan, a former Officer and Director of the Company, upon his
appointment to the Board of Directors and as an Officer for services
rendered in the day-to-day operations of the Company. In connection
with this share issuance, the Company recorded an expense of $40,000
in its financial statements.
In April 1996, the Company borrowed $210,000 from a non-affiliated
stockholder which bears interest at 30% per annum. The note is due in June 1996
and will be paid from the proceeds of this Offering. The loan proceeds were
used for interim working capital.
53
<PAGE>
DESCRIPTION OF SECURITIES
As of the date of this Prospectus, the authorized capital stock of the
Company consists of 100,000,000 shares of Common Stock, no par value per share,
and 10,000,000 shares of Preferred Stock, no par value.
COMMON STOCK
All outstanding shares of 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 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 Common Stock. There are currently 1,611,800
shares of Common Stock outstanding owned by approximately 83 persons and/or
entities.
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 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 currently exists no trading market for the Company's Common Stock.
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 Representative not to issue any
additional preferred stock for a three year period without the
Representative's written consent.
SERIES A CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 150,000 shares of Series A Convertible
Preferred Stock ("Series A Preferred Stock"), of which 150,000 shares are issued
and outstanding, having a liquidation preference of $5.00 per share. The Series
A Preferred Stock are redeemable at the Effective Date from the proceeds of the
proposed public offering at $5.00 per share plus 1.25 shares of the Company's
Common Stock for each one share of Series A Preferred Stock so redeemed. The
Company has reserved 187,500 shares of its authorized, but unissued, Common
Stock for the purpose of issuance upon redemption and the shares of Common Stock
are being registered for resale in this Prospectus. The Series A Preferred
Stock will terminate upon receipt by the holder thereof of $5.00. Holders of
Series A Preferred Stock have no voting rights, except to authorize any action
which would (i) alter or change the descriptions or the powers, preferences or
rights, or qualifications, limitations or restrictions of the Series A Preferred
Stock; or (ii) reclassify the shares of Common Stock or any other shares of any
class or series of capital stock hereafter created junior to the Series A
Preferred Stock into shares of any class or series of capital stock ranking,
either as to payment of dividends, distribution or assets or which in any manner
adversely affects the holders of the Series A Preferred Stock.
54
<PAGE>
VOTING REQUIREMENTS
The Articles of Incorporation require the approval of the holders of a
majority of the Company's voting securities for the election of directors and
for certain fundamental corporate actions, such as mergers and sales of
substantial assets, or for an amendment of the Articles of Incorporation.
There exists no provision in the Articles of Incorporation or Bylaws that
would delay, defer or prevent a change in control of the Company.
TRANSFER AGENT
The transfer agent and registrar for the Company's Common Stock and the
Warrant Agent is American Securities Transfer, Inc., 1825 Lawrence Street, Suite
444, Denver, Colorado 80202. Its telephone number is (303) 234-5300.
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").
EXERCISE PRICE AND TERMS. Each Warrant entitles the holder thereof to
purchase, at any time from the date of this Prospectus through the third
anniversary of the date of this Prospectus, 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.
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 three years from the date of this Prospectus. No fractional
shares will be issued upon the exercise of the Warrants.
Commencing after the Effective Date of this Offering, the Warrants are
subject to redemption by the Company at $.25 per Warrant on 30 days' written
notice if the closing bid or trading price of the Company's Common Stock, as
applicable, over 30 consecutive days ending within 10 days of the notice of
redemption averages at least $8.00. The Company 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 the
Company 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. Redemption of the Warrants could force Warrant holders either
to (i) exercise the Warrants and pay the exercise price thereof at a time when
it may be less advantageous economically to do so, or (ii) accept the redemption
price in consideration for cancellation of the Warrant, which could be
substantially less than the market value thereof at the time of redemption
redeemed without consent. Prior to the first anniversary of the Effective Date,
the Warrants will not be redeemable by the Company without the written consent
of the Representative.
The exercise price of the Warrants bear no relation to any objective
criteria of value and should in no event be regarded as an indication of any
future market price of the Securities offered hereby.
The Company has authorized and reserved for issuance a sufficient number of
shares of Common Stock to accommodate the exercise of all Warrants to be issued
in this offering. All shares of 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.
55
<PAGE>
ADJUSTMENTS. The exercise price and the number of shares of 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 Common Stock, or sale by the Company of
shares of its Common Stock (or other securities convertible into or exercisable
for Common Stock) at a price per share or share equivalent below the then-
applicable exercise price of the Warrants or then-current market price of the
Common Stock. Additionally, an adjustment would be made in the case of a
reclassification or exchange of Common Stock, consolidation or merger of the
Company with or into another corporation, or sale of all or substantially all of
the assets of the Company, 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 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 Common Stock or for securities issued pursuant
to conversion of the Preferred Stock or pursuant to the Company's Stock Option
Plan or other 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 three years from the date of this
Prospectus, 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 the Company is unable to qualify for sale
in particular states the 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 the Company.
56
<PAGE>
UNDERWRITING
Pursuant to the terms and subject to the conditions contained in the
Underwriting Agreement, the Underwriters named below, for whom Barron Chase
Securities, Inc. is acting as Representative, have severally agreed to purchase
from the Company an aggregate of 1,500,000 Shares of Common Stock ("Shares") and
1,500,000 Warrants. The number of Securities which each Underwriter has agreed
to purchase is set forth opposite its name.
<TABLE>
<CAPTION>
Number of Number of
Shares Warrants
--------- ---------
<S> <C> <C>
Barron Chase Securities, Inc.. . . . . . . . . . .
--------- ---------
TOTAL . . . . . . . . . . . . . . . . . . . . 1,500,000 1,500,000
--------- ---------
--------- ---------
</TABLE>
The Securities are offered by the Underwriters subject to prior sale, when,
as and if delivered to and accepted by the Underwriters and subject to approval
of certain legal matters by counsel and certain other conditions. The
Underwriters are committed to purchase all Securities offered by this
Prospectus, if any are purchased.
The Company has been advised by the Representative that the Underwriters
propose initially to offer the Securities offered hereby to the public at the
offering price set forth on the cover page of this Prospectus. The
Representative has advised the Company that the Underwriters propose to offer
the Securities through members of the National Association of Securities
Dealers, Inc. ("NASD"), and may allow a concession, in their discretion, to
certain dealers who are members of the NASD and who agree to sell the Securities
in conformity with the NASD Rules of Fair Practice. In any event, such
concessions will not exceed the amount of the underwriting discount that the
Underwriters are to receive.
The Company has granted to the Underwriters an option, exercisable for 45
days from the date of this Prospectus, to purchase up to an additional 225,000
Shares and an additional 225,000 Warrants at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus (the "Over-
Allotment Option"). The Underwriters may exercise this option solely to cover
over-allotments in the sale of the Securities being offered by this Prospectus.
Officers and Directors of the Company may introduce the Representative to
persons to consider this offering and to purchase Securities either through the
Representative, other Underwriters, or through participating dealers. In this
connection, Officers and Directors will not receive any commissions or any other
compensation.
The Company has agreed to pay the Underwriters a commission of ten percent
(10%) of the gross proceeds of the offering (the "Underwriting Discount"),
including the gross proceeds from the sale of the Over-Allotment Option, if
exercised. In addition, the Company has agreed to pay to the Representative a
non-accountable expense allowance of three percent (3%) of the gross proceeds of
this offering, including proceeds from any Securities purchased pursuant to the
Over-Allotment Option. The Representative's expenses in excess of the non-
accountable expense allowance will be paid by the Representative. To the extent
that the expenses of the Representative are less than the amount of the non-
accountable expense allowance received, such excess shall be deemed to be
additional compensation to the Representative.
57
<PAGE>
The Company has agreed to engage the Representative as a financial advisor
for a period of three (3) years from the consummation of this offering, at a fee
of $108,000, all of which is payable to the Representative on the closing date.
Pursuant to the terms of a financial advisory agreement, the Representative has
agreed to provide, at the Company's request, advice to the Company concerning
potential merger and acquisition and financing proposals, whether by public
financing or otherwise.
Prior to the offering, there has been no public market for the Shares or
Warrants of the Company. Consequently, the initial public offering price for
the Securities, and the terms of the Warrants (including the exercise price of
the Warrants), have been determined by negotiation between the Company and the
Representative. Among the factors considered in determining the public offering
price were the history of, and the prospects for, the Company's business, an
assessment of the Company's management, its past and present operations, the
Company's development and the general condition of the securities market at the
time of the offering. The initial public offering prices do not necessarily
bear any relationship to the Company's assets, book value, earnings or other
established criterion of value. Such price is subject to change as a result of
market conditions and other factors, and no assurance can be given that a public
market for the Shares and/or Warrants will develop after the close of the
Offering, or if a public market in fact develops, that such public market will
be sustained, or that the Shares and/or Warrants can be resold at any time at
the offering or any other price. See "RISK FACTORS."
The Company has agreed to indemnify the Underwriters against any costs or
liabilities incurred by the Underwriters by reasons of misstatements or
omissions to state material facts in connection with the statements made in the
Registration Statement and the Prospectus. The Underwriters have in turn agreed
to indemnify the Company against any liabilities by reason of misstatements or
omissions to state material facts in connection with the statements made in the
Registration Statement, based on information relating to the Underwriters and
furnished in writing by the Underwriters. To the extent that this section may
purport to provide exculpation from possible liabilities arising from the
federal securities laws, in the opinion of the Securities and Exchange
Commission, such indemnification is contrary to public policy and, therefore,
unenforceable.
REPRESENTATIVE'S WARRANTS
At the closing of the offering, the Company will issue to the
Representative and/or persons related to the Representative, for nominal
consideration, warrants (the "Representative's Warrants") to purchase 150,000
Shares and 150,000 Warrants (the "Underlying Warrants"). The Shares and the
Underlying Warrants are substantially similar to the Securities sold to the
public except for certain provisions, including the purchase price of the Shares
and the Underlying Warrants, certain registration rights granted to the holders
thereof and may be exercised separately for the Shares and the Warrants. The
Representative's Warrants will be exercisable for a five year period commencing
from the date of this Prospectus. The initial exercise price of the
Representative's Warrants shall be $6.00 per share of Common Stock (150% of the
public offering price) and $.1875 per Underlying Warrant (150% of the public
offering price). Each Underlying Warrant will be exercisable for a three year
period commencing from the date of this Prospectus at an exercise price of $6.00
per share of Common Stock. The Representative's Warrants will not be
transferable for one year from the date of this Prospectus, except (i) to
officers of the Representative, other Underwriters, and members of the selling
group and officers and partners thereof; (ii) by will; or (iii) by operation of
law.
The Representative's Warrants and Underlying Warrants contain provisions
providing for appropriate adjustment in the event of any merger, consolidation,
recapitalization, reclassification, stock dividend, stock split or similar
transaction. The Representative's Warrants contain net issuance provisions
permitting the holders thereof to elect to exercise the Representative's
Warrants in whole or in part and instruct the Company to withhold from the
Securities issuable upon exercise, a number of Securities, valued at the current
fair market value on the date of exercise, to pay the exercise price. Such net
exercise provision has the effect of requiring the Company to issue shares of
Common Stock without a corresponding increase in capital. A net exercise of the
Representative's Warrants will have the same dilutive effect on the interests of
the Company's shareholders as will a cash exercise. The Representative's
Warrants do not entitle the Representative to any rights as a shareholder of the
Company until such Representative's Warrants are exercised and shares of Common
Stock are purchased thereunder.
58
<PAGE>
The Representative's Warrants and the securities issuable thereunder may
not be offered for sale except in compliance with the applicable provisions of
the Securities Act of 1933. The Company has agreed that if it shall cause a
post-effective amendment, a new registration statement, or similar offering
document to be filed with the Commission, the holders shall have the right, for
seven years from the date of this Prospectus, to include in such registration
statement or offering statement the Representative's Warrants and/or the
securities issuable upon their exercise at no expense to the holders.
Additionally, the Company has agreed that, upon request by the holders of 50% or
more of the Representative's Warrants and registrable Securities within the
period commencing one year from the date of this Prospectus and expiring four
years thereafter, the Company will, on no more than two separate occasions,
register the Representative's Warrants and/or any of the securities issuable
upon their exercise. The initial such registration will be at the Company's
expense, and the second such registration shall be at the expense of the holders
of the Representative's Warrants and registrable Securities.
The Company has also agreed that if the Company participates in any merger,
consolidation or other such transaction which the Representative has brought to
the Company during a period of five years after the closing of this offering,
and which is consummated after the closing of this offering (including an
acquisition of assets or stock for which it pays, in whole or in part, with
shares of the Company's Common Stock or other securities), or if the Company
retains the services of the Representative in connection with any merger,
consolidation or other such transaction, then the Company will pay for the
Representative's services an amount equal to 5% of up to one million dollars of
value paid or received in the transaction, 4% of the next million dollars of
such value, 3% of the next million dollars of such value, 2% of the next million
dollars of such value, and 1% of the next million dollars and of all such value
above $4,000,000.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to
copies of each such agreement which are filed as exhibits to the Registration
Statement. See "ADDITIONAL INFORMATION."
59
<PAGE>
SERIES A PREFERRED SELLING SHAREHOLDERS
The following table sets forth the number and percentage of shares of
Common Stock that are being registered by this Prospectus for the account of
Series A Preferred Selling Shareholders. The Series A Preferred Selling
Shareholders will receive shares of Common Stock upon conversion of the Series A
Convertible Preferred Stock. No underwriter is obligated to sell or purchase
any of such shares. The shares of Common Stock may be sold by such Series A
Preferred Selling Shareholders from time to time in the public marketplace. The
Company has agreed to update the information contained in this Prospectus to
reflect any facts or events arising after the date of this Prospectus, which,
individually, or in the aggregate, represents a fundamental change in the
information set forth in this Prospectus and to include any material information
respecting a plan of distribution materially different from the plan of
distribution disclosed in this Prospectus.
The Company also consents to the use of the Prospectus by the Series A
Preferred Selling Shareholders in connection with sales of the Common Stock
registered hereunder.
<TABLE>
<CAPTION>
Number of Total Number
Shares of of Preferred Percentage of
Common Stock Shares Common Stock Total Amount Percentage
to be Owned Prior Owned Prior Owned After Owned After
Name Registered to Offering to Offering(2) Offering (3) Offering (1)(4)
- ---- ---------- ----------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Carl T. Schramm 3,125 2,500 -- 3,125 0
Stephen Bushansky 3,125 2,500 -- 3,125 0
Dan R. Balabon 6,250 5,000 -- 6,250 0
George A Shurick 6,250 5,000 -- 6,250 0
Stanley Snyder 6,250 5,000 -- 6,250 0
Robert C. Manani 3,125 2,500 -- 3,125 0
Barney R. Stephens 12,500 10,000 -- 12,500 0
Harry Falterbauer 6,250 5,000 -- 6,250 0
Paul E. Bennett 6,250 5,000 -- 6,250 0
Dilip s. Mehia 6,250 5,000 -- 6,250 0
Norbert J. Zeelander 12,500 10,000 -- 12,500 0
Robert M. Rubin 25,000 20,000 -- 25,000 0
Almar Funding Corporation 6,250 5,000 -- 6,250 0
R. George Cherian 3,125 2,500 -- 3,125 0
Yale Farar 6,250 5,000 -- 6,250 0
Arthur Gronbach 6,250 5,000 -- 6,250 0
James D. Core 6,250 5,000 -- 6,250 0
Bill & Karen Mathews 6,250 5,000 -- 6,250 0
Mecury LP 6,250 5,000 -- 6,250 0
Cellular Rentals of America 6,250 5,000 -- 6,250 0
Michael Rosenbaum 6,250 5,000 -- 6,250 0
Marshall D. Davis 6,250 5,000 -- 6,250 0
Quad Capital Partners 6,250 5,000 -- 6,250 0
OK Associates Pension Trust 6,250 5,000 -- 6,250 0
Universal Partners, LP 6,250 5,000 -- 6,250 0
Leslie J. Pottem 6,250 5,000 -- 6,250 0
Whitehall Trust Company 6,250 5,000 -- 6,250 0
------- ------- -------
Totals 187,500 150,000 187,500
</TABLE>
- --------------------
(1) Based on 1,286,800 shares outstanding prior to this offering.
(2) Percentage of shares owned prior to this offering is equal to less than one
percent or more of the shares outstanding prior to this offering.
(3) Assuming that all shares are sold by the Series A Preferred Selling
Shareholders.
(4) Based on 3,019,300 shares outstanding; assumes all of the shares are sold
by Series A Preferred Selling Shareholders.
60
<PAGE>
SERIES A PREFERRED SELLING SHAREHOLDER PLAN OF DISTRIBUTION
The Series A Preferred Selling Shareholders are not restricted as to the
prices at which they may sell their shares and sales of such shares at less than
the market price may depress the market price of the Company's Common Stock.
Further, the Series A Preferred Selling Shareholders are not restricted as to
the number of shares which may be sold at any one time, and it is possible that
a significant number of shares could be sold at the same time which may also
have a depressive effect on the market price of the Company's Common Stock.
However, it is anticipated that the sale of the Common Stock being offered
hereby will be made through customary brokerage channels either through broker-
dealers acting as agents or brokers for the seller, or through broker-dealers
acting as principals, who may then resell the shares in the over-the-counter
market, or a private sale in the over-the-counter market or otherwise, at
negotiated prices related to prevailing market prices and customary brokerage
commissions at the time of the sales, or by a combination of such methods.
Thus, the period for sale of such shares by the Series A Preferred Selling
Shareholders may occur over an extended period of time.
There are no contractual arrangements between or among any of the Series A
Preferred Selling Shareholders and the Company with regard to the sale of the
shares and no professional underwriter in its capacity as such will be acting
for the Series A Preferred Selling Shareholders.
Each Series A Preferred Selling Shareholder has agreed in writing not to
sell, transfer or otherwise dispose of any of their Common Stock for a period of
eighteen months (18) from the date of this Prospectus without the prior written
consent of the Representative.
The Company will not receive any proceeds from the sale of the shares of
Common Stock by the Series A Preferred Selling Shareholders.
ADDITIONAL SELLING SHAREHOLDERS
The following table sets forth the number and percentage of shares of
Common Stock that are being registered by this Prospectus for the account of
certain shareholders of the Company who acquired shares of the Company in
November 1995 ("Additional Selling Shareholders"). No underwriter is obligated
to sell or purchase any of such shares. The shares of Common Stock may be sold
by the Additional Selling Shareholders from time to time in the public
marketplace. The Company has agreed to update the information contained in this
Prospectus to reflect any facts or events arising after the date of this
Prospectus, which, individually, or in the aggregate, represents a fundamental
change in the information set forth in this Prospectus and to include any
material information respecting a plan of distribution materially different from
the plan of distribution disclosed in this Prospectus.
The Company also consents to the use of the Prospectus by the Additional
Selling Shareholders in connection with sales of the Common Stock registered
hereunder.
61
<PAGE>
<TABLE>
<CAPTION>
Number of Total Number
Shares of of Common Percentage of
Common Stock Shares Common Stock Total Amount Percentage
to be Owned Prior Owned Prior Owned After Owned After
Name Registered to Offering to Offering(2) Offering (3) Offering (1)(4)
- ---- ---------- ----------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Joseph G. Schweighhardt 10,000 10,000 -- 10,000 --
Drew J. Salperto 10,000 10,000 -- 10,000 --
Arthur Gronbach 12,500 12,500 -- 12,500 --
Steven Rothstein 10,000 10,000 -- 10,000 --
Matt Tomaszewski 10,000 10,000 -- 10,000 --
Robert Lafayette 5,000 5,000 -- 5,000 --
Elizabeth A. Huston 10,000 10,000 -- 10,000 --
Robert E. Wagner 10,000 10,000 -- 10,000 --
Barney R. Stephens 20,000 20,000 -- 20,000 --
Regina Milton 5,000 5,000 -- 5,000 --
Leonard Marshall 12,500 12,500 -- 12,500 --
Dillip S. Mehla 10,000 10,000 -- 10,000 --
Al Whitehead 5,000 5,000 -- 5,000 --
Mark Bruce 10,000 10,000 -- 10,000 --
Mark P. Brinkmann 5,000 5,000 -- 5,000 --
Ronald Moret 20,000 20,000 -- 20,000 --
Oded Rancus 10,000 10,000 -- 10,000 --
Robert P. Reske 10,000 10,000 -- 10,000 --
Joseph J. Assenza 10,000 10,000 -- 10,000 --
Jui-Hsia Hisen 10,000 10,000 -- 10,000 --
Linda Forness 5,000 5,000 -- 5,000 --
Ting Li 10,000 10,000 -- 10,000 --
Greg Drexler 5,000 5,000 -- 5,000 --
Ron Leggett 7,500 7,500 -- 7,500 --
Dwayne Parnell 25,000 25,000 -- 25,000 --
Samuel T. Jackson 10,000 10,000 -- 10,000 --
Tsue Ming Lin 7,500 7,500 -- 7,500 --
Leonard S. Gall 55,000 55,000 -- 55,000 --
Alma Nichols Estate 10,000 10,000 -- 10,000 --
CLFS Equities LTD 10,000 10,000 -- 10,000 --
------- ------- -------
Totals 350,000 350,000 350,000
</TABLE>
- --------------------
(1) Based on 1,286,800 shares outstanding prior to this offering.
(2) Percentage of shares owned prior to this offering is equal to less than one
percent or more of the shares outstanding prior to this offering.
(3) Assuming that all shares are sold by the Additional Selling Shareholders.
(4) Based on 3,019,300 shares outstanding; assumes all of the shares are sold
by Additional Selling Shareholders.
There are no contractual arrangements between or among any of the
Additional Selling Shareholders and the Company with regard to the sale of the
shares and no professional underwriter in its capacity as such will be acting
for the Additional Selling Shareholders.
Each Additional Selling Shareholder has agreed in writing not to sell,
transfer or otherwise dispose of any of their Common Stock for a period of one
(1) year from the date of this Prospectus without the prior written consent of
the Representative.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 3,304,300 shares of
Common Stock outstanding, including 187,500 shares issued to holders of Series A
Preferred Stock in partial payment for the redemption of their Series A
Preferred Stock, 350,000 shares issued to shareholders in the November 1995
private placement, and 400,000 shares issued to the shareholders of GetNet. Of
the 1,611,800 shares presently outstanding, 760,000 shares of Common Stock are
beneficially held by "affiliates" of the Company. In addition, options and
warrants to purchase 1,325,900 shares of Common Stock will be outstanding,
including the Representative's Warrant. This excludes 350,000 options to
officers and employees which vest over two (2) years. All shares of Common
Stock purchased in this offering will be freely transferable without restriction
or registration under the Securities Act, except to the extent purchased or
owned by "affiliates" of the Company as defined for purposes of the Securities
Act. Each of the Company's Officers, Directors and Series A Preferred
Shareholders have agreed not to sell any shares beneficially held by them for
eighteen months (18) from the date of this Prospectus without the prior written
consent of the Representative. The shareholders of 350,000 shares issued in
November 1995 have agreed not to sell their shares for one year from the date of
this Prospectus without the prior written consent of the Representative.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned "restricted" securities for at least two years, including
persons who may be deemed to be "affiliates" of the Company, may sell publicly
without registration under the Securities Act, within any three-month period,
assuming compliance with other provisions of the Rule, a number of shares that
does not exceed the greater of (i) one percent of the Common Stock then
outstanding, or (ii) the average weekly trading volume in the Common Stock
during the four calendar weeks preceding such sale. A person who is not deemed
an "affiliate" of the Company and who has beneficially owned shares for at least
three years would be entitled to sell such shares under Rule 144 without regard
to the volume and other limitations described above.
Prior to this offering, there has been no market for the Common Stock, and
no prediction can be made of the effect, if any, of future public sales of
"restricted" shares or the availability of "restricted" shares for sale in the
public market at the market price prevailing from time to time. Nevertheless,
sales of substantial amounts of the Company's "restricted" shares in any public
market that may develop could adversely affect prevailing market prices.
LEGAL PROCEEDINGS
The Company is not a party to, nor is it aware of, any threatened
litigation of a material nature; however, the Company terminated its agreement
to acquire certain assets of National Telcom Management, Inc. due to the
deterioration of that company's asset base and the requirement that the closing
occur prior to February 1, 1996. The Company cannot predict if legal action
will ensue based on the termination of the agreement; however, the termination
was permitted by the agreement between the parties by either party if the public
offering was not completed prior to February 1, 1996. The Company forfeited a
$90,000 good faith deposit towards the purchase price upon the termination of
the agreement.
LEGAL MATTERS
The validity of the securities offered hereby is being passed upon for the
Company by John B. Wills, Esq., 410 17th Street, Suite 1940, Denver, Colorado
80202.
Certain legal matters will be passed upon for the Underwriters by David A.
Carter, P.A., 355 West Palmetto Park Road, Boca Raton, Florida 33432.
EXPERTS
The financial statements of the Company for the ten months ended May 31,
1995 and the year ended July 31, 1994 and GetNet International, Inc. for the
period ended July 31, 1995 appearing in this Prospectus and Registration
Statement have been audited by Hein + Associates LLP, independent auditors, as
set forth in their
63
<PAGE>
report thereon appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
KPMG Peat Marwick LLP was previously the principal accountants of the
Company. On about May 15, 1995, that firms's appointment as principal
accountants was terminated. Hein + Associates LLP, independent certified public
accountants, was appointed as independent auditors of the Company for the years
ended July 31, 1994 and ten months ended May 31, 1995. The change in
independent auditors was approved by the Company's Board of Directors and was
based primarily on fees.
KPMG Peat Marwick LLP had previously audited the Company's interim balance
sheet as of January 31, 1995, which is not included herein. In connection with
the audit of the Company's balance sheet as of January 31, 1995, and the
subsequent interim period through May 15, 1995, there were no disagreements
between the Company and KPMG Peat Marwick LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion to the subject
matter of the disagreement. The audit report of KPMG Peat Marwick LLP on the
balance sheet of the Company as of January 31, 1995 did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
audit scope or accounting principles, except for it did include an explanatory
paragraph as to the uncertainty of the Company continuing as a going concern.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Act with respect to the
securities offered hereby. This Prospectus, filed as a part of the Registration
Statement, does not contain certain information set forth in or annexed as
exhibits to the Registration Statement, and reference is made to such exhibits
to the Registration Statement for the complete text thereof. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement and to the exhibits filed as
part thereof, which may be inspected at the office of the Commission without
charge, or copies thereof may be obtained therefrom upon payment of a fee
prescribed by the Commission.
64
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
PRO FORMA COMBINING, CONDENSED FINANCIAL INFORMATION (UNAUDITED):
INTRODUCTION.................................................................F-3
CONDENSED, CONSOLIDATED BALANCE SHEETS - As of December 31, 1995.............F-4
COMBINING, CONDENSED STATEMENT OF OPERATIONS:
Touch Tone America, Inc. - For the 10 Months Ended May 31, 1995
GetNet International, Inc. - From Inception (August 24, 1994) to
July 31, 1995............................................................F-5
COMBINING, CONDENSED STATEMENT OF OPERATIONS:
Touch Tone America, Inc. - For the Seven Months Ended December 31, 1995
GetNet International, Inc. - For the Three Months Ended
October 31, 1995.........................................................F-6
NOTES TO COMBINING, CONDENSED FINANCIAL INFORMATION..........................F-7
TOUCH TONE AMERICA, INC.:
INDEPENDENT AUDITOR'S REPORT.................................................F-8
BALANCE SHEETS - May 31, 1995 and December 31, 1995 (Unaudited) .............F-9
CONSOLIDATED STATEMENTS OF OPERATIONS - For the Year Ended July 31, 1994,
the Ten Months Ended May 31, 1995, the Seven Months Ended February 28,
1995 (Unaudited) and the Seven Months Ended December 31, 1995
(Unaudited).............................................................F-10
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT - For the Year
Ended July 31, 1994, the Ten Months Ended May 31, 1995 and the
Seven Months Ended December 31, 1995 (Unaudited)........................F-11
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Year Ended July 31, 1994,
the Ten Months Ended May 31, 1995, the Seven Months Ended
February 28, 1995 (Unaudited) and the Seven Months Ended
December 31, 1995 (Unaudited)...........................................F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-13
F-1
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
GETNET INTERNATIONAL, INC.:
INDEPENDENT AUDITOR'S REPORT................................................F-23
BALANCE SHEETS - July 31, 1995 and October 31, 1995 (Unaudited).............F-24
STATEMENTS OF OPERATIONS - From Inception (August 24, 1994) 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).............F-25
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT - From Inception
(August 24, 1994) to July 31, 1995 and for the Three Months Ended
October 31, 1995 (Unaudited)............................................F-26
STATEMENTS OF CASH FLOWS - From Inception (August 24, 1994) 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).............F-27
NOTES TO FINANCIAL STATEMENTS...............................................F-28
F-2
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
PRO FORMA COMBINING, CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
INTRODUCTION
The accompanying unaudited proforma condensed consolidated balance sheet of
Touch Tone America, Inc. (Touch Tone) and its wholly owned subsidiary, GetNet
International, Inc. (GetNet), as of December 31, 1995, is adjusted to reflect
the receipt of the estimated net proceeds from the proposed offering, as if the
offering was completed on December 31, 1995.
The accompanying unaudited proforma combining, condensed statement of operations
combines the operations of Touch Tone and GetNet for the periods as indicated in
the statements, as if the acquisitions were completed on June 1, 1994 (beginning
of the period presented) under the purchase method of accounting and based upon
the assumptions as included in the notes to the pro forma financial information.
These statements are not necessarily indicative of future operations or the
actual results that would have occurred had the merger been consummated at the
beginning of the period indicated.
The unaudited pro forma combined financial statements should be read in
conjunction with the historical financial statements and notes thereto, included
elsewhere in this document.
F-3
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONDENSED, CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PUBLIC PRO FORMA
OFFERING AFTER
TOUCH TONE ADJUSTMENTS OFFERING
-------------- --------------- ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 144,000 $ 3,091,000 (1) $ 3,235,000
Other current assets 429,000 - 429,000
---------- ----------- -----------
Total current assets 573,000 3,091,000 3,664,000
OTHER ASSETS 1,414,000 108,000 (1) 1,267,000
(255,000)(1)
---------- ----------- -----------
TOTAL ASSETS $1,987,000 $ 2,944,000 $ 4,931,000
---------- ----------- -----------
---------- ----------- -----------
CURRENT LIABILITIES:
Notes payable $ 48,000 $ (44,000)(1) $ 4,000
Other current liabilities 1,538,000 (1,195,000)(1) 278,000
(65,000)(2)
---------- ----------- -----------
Total current liabilities 1,586,000 (1,304,000) 282,000
NOTES PAYABLE 131,000 (131,000)(1) -
OTHER LONG-TERM LIABILITIES 296,000 - 296,000
REDEEMABLE PREFERRED STOCK 750,000 (750,000)(1) -
STOCKHOLDERS' EQUITY (DEFICIT) 5,064,000 (1)
(776,000) 65,000 (2) 4,353,000
---------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $1,987,000 $ 2,944,000 $ 4,931,000
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
SEE NOTES TO COMBINING, PRO FORMA FINANCIAL INFORMATION.
F-4
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
COMBINING, CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
TOUCH TONE GETNET
(TEN MONTHS (INCEPTION
ENDED [AUGUST 24, 1994] PRO FORMA PRO FORMA
MAY 31, 1995) TO JULY 31, 1995) ADJUSTMENTS COMBINED
-------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 1,952,000 $ 115,000 $ - $2,067,000
COST OF SALES (1,310,000) (79,000) - (1,389,000)
----------- ----------- --------- ----------
GROSS MARGIN 642,000 36,000 - 678,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 876,000 339,000 139,000 (3) 1,354,000
----------- ----------- --------- ----------
LOSS FROM OPERATIONS (234,000) (303,000) (139,000) (676,000)
Other expense, net (60,000) - 12,000 (4) (48,000)
----------- ----------- --------- ----------
NET LOSS $ (294,000) $ (303,000) $(127,000) $ (724,000)
----------- ----------- --------- ----------
----------- ----------- --------- ----------
NET LOSS PER SHARE $ (.19) $ N/A $ (.24)
----------- ----------- ----------
----------- ----------- ----------
COMMON SHARES OUTSTANDING 1,508,000 N/A 3,053,000
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO COMBINING, CONDENSED FINANCIAL INFORMATION.
F-5
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
COMBINING, CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
TOUCH TONE GETNET
------------ ------------
SEVEN MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, OCTOBER 31, PRO FORMA PRO FORMA
1995 1995 ADJUSTMENTS COMBINED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 1,399,000 $100,000 $ - $ 1,499,000
COST OF SALES (947,000) (32,000) - (979,000)
----------- -------- -------- -----------
GROSS MARGIN 452,000 68,000 - 520,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,912,000 89,000 70,000 (3) 2,071,000
----------- -------- -------- -----------
LOSS FROM OPERATIONS (1,460,000) (21,000) (70,000) (1,551,000)
Other expense, net (130,000) - 13,000 (4) (117,000)
----------- -------- -------- -----------
NET LOSS $(1,590,000) $(21,000) $(57,000) $(1,668,000)
----------- -------- -------- -----------
----------- -------- -------- -----------
LOSS PER SHARE $ (1.05) $ N/A $ (.55)
----------- -------- -----------
----------- -------- -----------
SHARES OUTSTANDING 1,508,000 N/A 3,053,000
----------- -------- -----------
----------- -------- -----------
</TABLE>
- ---------------------------
Note: GetNet operations from November 1, 1995 through December 31, 1995 are
consolidated with Touch Tone's financial statement, as GetNet was
acquired by Touch Tone effective November 1, 1995.
SEE ACCOMPANYING NOTES TO COMBINING, CONDENSED FINANCIAL INFORMATION.
F-6
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO COMBINING, CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
1. To reflect the receipt of the net proceeds from the sale of common stock
and warrants as more fully described within this document less repayments
of payables, debt (excluding $210,000 of debt incurred in April 1996, which
is expected to be repaid from proceeds of this offering), and redeemable
preferred stock summarized as follows:
<TABLE>
<S> <C>
Gross proceeds $ 6,188,000
Less estimated offering costs (1,124,000)
-----------
Net increase in equity 5,064,000
Less use of proceeds:
Payment to preferred stockholders (750,000)
Payment to noteholders (175,000)
Payment of accounts payable and accrued expenses,
including $95,000 of offering costs payable (1,195,000)
Payment to Representative for future consulting
services (108,000)
Plus offering costs as of December 31, 1995 255,000
-----------
Net increase in cash $ 3,091,000
-----------
-----------
</TABLE>
2. To record the issuance of 45,000 shares of common stock in payment of a
payable to a carrier of $180,000. Of this amount, approximately $115,000
related to expenses incurred subsequent to December 31, 1995. Therefore,
amount is reflected at the net amount of $65,000, which was accrued as of
December 31, 1995.
3. To record additional expenses associated with the amortization of the
intangibles, which will be amortized over five years, recorded in the
acquisition of GetNet of $139,000 and $70,000 for the fiscal year ended May
31, 1995 and the seven months ended December 31, 1995, respectively.
4. To reduce interest expense related to debt repaid from proceeds received in
the public offering of $12,000 and $13,000 for the fiscal year ended May
31, 1995 and the seven months ended December 31, 1995, respectively.
(There would be no material change in the pro forma adjusted loss per
share, based on reducing shares outstanding after the offering for net
proceeds used to repay debt and reducing net loss by the interest expense
related to this debt.)
F-7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Touch Tone America, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheet of Touch Tone
America, Inc. as of May 31, 1995, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the year ended July 31,
1994 and for the ten months ended May 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Touch
Tone America, Inc. as of May 31, 1995, and the results of their operations and
their cash flows for the year ended July 31, 1994 and for the ten months ended
May 31, 1995, 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 Notes 2 and 6. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
HEIN + ASSOCIATES LLP
Denver, Colorado
June 23, 1995
F-8
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31,
1995 1995
------------ -------------
(Unaudited)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 512,000 $ 144,000
Trade receivables, net allowance for doubtful
accounts of $25,000 and $50,000, respectively 516,000 429,000
Receivables, stock subscriptions 113,000 -
----------- -----------
Total current assets 1,141,000 573,000
EQUIPMENT, net of $6,000 and $47,000,
respectively, for accumulated depreciation 22,000 291,000
OTHER:
Intangibles, net - 807,000
Deferred offering costs 130,000 255,000
Deferred acquisition cost 95,000 -
Refundable deposits - 61,000
----------- -----------
TOTAL ASSETS $ 1,388,000 $ 1,987,000
----------- -----------
----------- -----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
---------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $470,000 $357,000
Accrued liabilities 534,000 1,092,000
Deferred revenues 17,000 89,000
Notes payable to stockholders 41,000 48,000
----------- -----------
Total current liabilities 1,062,000 1,586,000
DEFERRED REVENUE AND OTHER OBLIGATIONS 25,000 189,000
NOTES PAYABLE TO STOCKHOLDERS 123,000 131,000
CAPITAL LEASE OBLIGATIONS 14,000 107,000
COMMITMENTS (NOTE 5)
REDEEMABLE PREFERRED STOCK, Series A,
150,000 shares authorized, issued, and outstanding
(liquidation preference of $750,000) 750,000 750,000
COMMON STOCK AND OTHER STOCKHOLDERS' (DEFICIT):
Preferred stock, 9,850,000 shares authorized - -
Common stock, no par value, 100,000,000 shares
authorized, 1,300,000 and 1,286,800, respectively,
issued and outstanding 73,000 1,473,000
Redeemable preferred stock offering costs (108,000) (108,000)
Accumulated deficit (551,000) (2,141,000)
----------- -----------
Total stockholders' (deficit) (586,000) (776,000)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $1,388,000 $1,987,000
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-9
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE TEN SEVEN MONTHS ENDED
YEAR ENDED MONTHS ENDED ----------------------------
JULY 31, MAY 31, FEBRUARY 28, DECEMBER 31,
1994 1995 1995 1995
------------ ------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET REVENUES:
Long distance resell $ 1,461,000 $ 1,952,000 $ 1,210,000 $ 1,345,000
Internet access - - - 54,000
----------- ----------- ----------- -----------
1,461,000 1,952,000 1,210,000 1,399,000
COST OF SALES
Long distance resell (1,174,000) (1,310,000) (820,000) (916,000)
Internet access - - - (31,000)
----------- ----------- ----------- -----------
(1,174,000) (1,310,000) (820,000) (947,000)
----------- ----------- ----------- -----------
GROSS MARGIN 287,000 642,000 390,000 452,000
OPERATING EXPENSES:
Selling 135,000 337,000 211,000 340,000
General and administrative 292,000 507,000 252,000 825,000
Excess volume commitments - 32,000 3,000 747,000
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (140,000) (234,000) (76,000) (1,460,000)
OTHER INCOME (EXPENSE):
Interest expense, primarily related
parties (14,000) (12,000) (10,000) (15,000)
Absorbed offering and acquisition - (48,000) (48,000) (115,000)
----------- ----------- ----------- -----------
(14,000) (60,000) (58,000) (130,000)
----------- ----------- ----------- -----------
NET LOSS $ (154,000) $ (294,000) $ (134,000) $(1,590,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PRO FORMA LOSS PER SHARE $ (.19) $ (1.05)
----------- -----------
----------- -----------
PRO FORMA SHARES OUTSTANDING 1,508,000 1,508,000
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-10
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- PREFERRED
NUMBER STOCK ACCUMULATED
OF SHARES AMOUNT ISSUANCE COSTS DEFICIT TOTAL
----------- ------------ -------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, August 1, 1993 2,785,000 $ 2,000 $ - $ (103,000) $(101,000)
Net loss - - - (154,000) (154,000)
----------- ---------- ------------ ------------- ----------
BALANCE, July 31, 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 6,000 15,000 - - 15,000
Issuance cost of redeemable preferred stock - - (108,000) - (108,000)
Net loss - - - (294,000) (294,000)
----------- ---------- ------------ ------------- ----------
BALANCE, May 31, 1995 1,300,000 73,000 (108,000) (551,000) (586,000)
Issuance of common stock in a private
placement, net of offering costs (unaudited) 350,000 600,000 - - 600,000
Issuance of common stock for acquisition of
GetNet, net of acquisition costs (unaudited) 400,000 800,000 - - 800,000
Surrender of common stock (unaudited) (763,200) - - - -
Net loss (unaudited) - - - (1,590,000) (1,590,000)
----------- ---------- ------------ ------------- ----------
BALANCE, December 31, 1995 (Unaudited) 1,286,800 $1,473,000 $ (108,000) $(2,141,000) $(776,000)
----------- ---------- ------------ ------------- ----------
----------- ---------- ------------ ------------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-11
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE TEN SEVEN MONTHS ENDED
YEAR ENDED MONTHS ENDED ---------------------------
JULY 31, MAY 31, FEBRUARY 28, DECEMBER 31,
1994 1995 1995 1995
---------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (154,000) $ (294,000) $ (134,000) $(1,590,000)
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation and amortization - 2,000 - 52,000
Common stock for services - 56,000 - -
Bad debt expense - 17,000 - 25,000
Absorbed acquisition costs - 48,000 48,000 115,000
Change in assets and liabilities:
Decrease (increase) in:
Trade receivables (50,000) (311,000) (41,000) 126,000
Other assets - - - (56,000)
Increase (decrease) in:
Accounts payable 94,000 274,000 35,000 (182,000)
Accrued liabilities 95,000 422,000 171,000 490,000
Deferred revenue and
other 42,000 (8,000) - 188,000
---------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities 27,000 206,000 79,000 (832,000)
CASH FLOWS FROM INVESTING
ACTIVITY:
Acquisition costs incurred - (95,000) - (25,000)
Purchase of equipment - - - (80,000)
---------- ----------- ----------- -----------
Net cash used in investing
activities - (95,000) - (105,000)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from note payable - 50,000 50,000 -
Payment of note payable - (50,000) (50,000) -
Payment of capital lease obligations - - - (19,000)
Proceeds from notes payable to
stockholders 24,000 - - -
Payment of notes payable to
stockholders (3,000) (24,000) (24,000) -
Proceeds from issuance of redeemable
preferred stock - 637,000 - 113,000
Issuance of common stock - 15,000 15,000 700,000
Offering costs incurred - (285,000) (4,000) (225,000)
---------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities 21,000 343,000 (13,000) 569,000
---------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 48,000 454,000 66,000 (368,000)
CASH, beginning of period 10,000 58,000 58,000 512,000
---------- ----------- ----------- -----------
CASH, end of period $ 58,000 $ 512,000 $ 124,000 $ 144,000
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-12
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1995 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 resell 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 are performed by a third party long distance 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 gross margin the Company receives. The Provider is
responsible for maintaining the Company's accounts receivable and withholds
payments to the Company for past due customer amounts. Such amounts
withheld from the Company are offset by the gross margin otherwise payable
to the Company.
EQUIPMENT - Equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful life of the equipment,
generally five years. Repairs and maintenance are charged to expense as
incurred. Material expenditures, which increase the life of an asset, are
capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of equipment sold, or otherwise disposed of, and the
related accumulated depreciation or amortization are removed from the
accounts, and any gains or losses are reflected in current operations.
F-13
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1995 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 $11,000 was recognized during the ten months ended May 31,
1995 and the seven months ended December 31, 1995, respectively.
- Current month's advance billings by GetNet for subscriber services and
revenue received in advance for services under contract. This amount
will be recognized as revenue when earned.
DEFERRED OFFERING COSTS - This amount represents costs incurred in
connection with the private and public offerings. This amount will be
offset against the proceeds if the offerings are successful, or expensed in
operations if the offerings are unsuccessful. The Company expensed $48,000
during the ten months ended May 31, 1995, for amounts paid to a prior
underwriter after preliminary discussions were aborted. Costs associated
with the redeemable preferred stock offering were recorded as a contra
equity account.
DEFERRED ACQUISITION COSTS - Costs associated with the Company's proposed
business acquisitions (see Note 3) have been deferred and will be included
in the cost of the business, if the acquisition is successful, or expensed
in operations if the acquisition is not successful. For the seven months
ended December 31, 1995, the Company expensed costs associated with the NTM
acquisition as it was subsequently abandoned.
INTANGIBLES - Intangibles represent the excess of the purchase price paid
over the net liabilities acquired in the GetNet acquisition of $835,000.
This amount is being amortized over five years.
CONCENTRATION OF CREDIT RISK - Credit risk represents the accounting loss
that would be recognized at the reporting date if counterparties failed
completely to perform as contracted. Concentrations of credit risk
(whether on or off balance sheet) that arise from financial instruments
exist for groups of customers or counterparties when they have similar
economic characteristics that would cause their ability to meet contractual
obligations to be similarly effected by changes in economic or other
conditions. The Corporation does not have a significant exposure to any
individual customer or counterparty.
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,
F-14
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1995 IS UNAUDITED)
especially in light of increased competition and technology changes, it is
reasonably possible that the estimated life of intangibles could materially
change in the forthcoming year.
PRO FORMA 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 issued prior to the
filing of the Company's registration statement, at prices below the
$4.00 per share minimum price (which is anticipated for the Company's
proposed public offering), including the common stock to be issued for the
redeemable preferred stock and common stock options (using the treasury
stock method and the anticipated minimum public offering price) have been
included in the weighted average calculation, as if they were outstanding
for the periods presented.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In March 1995, the
Financial Accounting Standards Board issued a new statement titled
"Accounting for Impairment of Long-Lived Assets." This new standard is
effective for years beginning after December 15, 1995 and would change the
Company's method of determining impairment of long-lived assets. Although
the Company has not performed a detailed analysis of the impact of this new
standard on the Company's consolidated financial statements, the Company
does not believe that adoption of the new standard will have a material
effect on the consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for Stock-Based Compensation" (FAS 123). The
new statement is effective for fiscal years beginning after December 15,
1995. FAS 123 encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options, and other equity
instruments to employees based on fair value. Companies that do not adopt
the fair value accounting rules must disclose the impact of adopting the
new method in the notes to the financial statements. Transactions in
equity instruments with non-employees for goods or services must be
accounted for on the fair value method. The Company currently does not
intend to adopt the fair value accounting prescribed by FAS 123, and will
be subject only to the disclosure requirements prescribed by FAS 123.
However, the Company intends to continue its analysis of FAS 123 and may
elect to adopt its provisions in the future.
UNAUDITED INFORMATION - The balance sheet of the Company as of December 31,
1995, and the statements of operations and cash flows for the seven-month
periods ended February 28, 1995 and December 31, 1995 were taken from the
Company'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 financial
position of the Company as of December 31, 1995, and the results of
operations for the seven months ended February 28, 1995 and December 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 seven months ended December 31,
1995 are not necessarily indicative of the results to be expected for the
full year.
F-15
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1995 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
related in prior fiscal years and losses are continuing. Furthermore, as
discussed in Note 5, the Company has entered into sales volume commitments
with service providers.
The Company has renegotiated two significant commitments under which it was
experiencing substantial shortfalls. Under the revised agreements, the
Company's future commitment has been eliminated and its past contingent
liability has been agreed upon. However, the Company is obligated to pay
approximately $1,016,000 (of which $180,000 will be satisfied by the
issuance of 45,000 shares of common stock) to satisfactorily resolve these
past obligations, otherwise additional amounts will be due. In addition,
the Company has a continuing service commitment with AT&T of $1,800,000
annually, which it is currently satisfactorily meeting and another
commitment with WilTel which commences in August 1996 to sell services of
$50,000 per month. If competitive conditions change it may be difficult to
continue to meet its obligation during the term of its AT&T commitment. If
WilTel service does not increase, the Company will not, at least initially,
be able to meet this commitment level.
The Company's ability to continue as a going concern is dependent upon
several factors, including the Company raising additional capital, meeting
its future carrier commitments, and ultimately achieving and maintaining
profitable operations. As discussed in Note 6, the Company has signed a
letter of intent with an underwriter for a proposed public offering of
1,500,000 shares of its common stock and 1,500,000 warrants. The Company
is also aggressively working to increase revenues, which it believes will
ultimately lead to profitable operations and enable the Company to meet its
continuing service commitments. The accompanying consolidated financial
statements do not include any adjustments that might result from the
outcome of these uncertainties.
3. ACQUISITIONS:
In August 1995, the Company entered into an acquisition agreement with
National Telcom Management, Inc. (NTM) to purchase NTM's long distance
customer base (Telcom). Under this agreement, the Company paid a $90,000
deposit in May 1995, which was held in an escrow account. In January 1996,
the Company terminated the contract with NTM, under the terms of the
acquisition agreement, and forfeited its $90,000 escrow deposit.
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 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. GetNet is a provider of Internet and World Wide
Wed access services to individuals and businesses in Arizona and other
parts of the United States. This acquisition was accounted for under
purchase method of accounting. The excess of the purchase price over the
net liabilities acquired of approximately $835,000 will be amortized over a
period not to exceed five years. All other assets and liabilities were
recorded at book values, which approximated fair value. Pro forma
financial information is included elsewhere in this document.
F-16
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1995 IS UNAUDITED)
In March 1994, the Company entered into an agreement to acquire another
business for $500,000. The Company made a deposit of $100,000, but was
unable to obtain the additional financing required to complete the
transaction. The deposit was financed by third parties, who forgave their
advance to the Company, when they elected not to finance the balance of the
acquisition. For financial statement presentation purposes, these amounts
have been offset.
4. NOTES PAYABLE TO STOCKHOLDERS:
Notes payable to stockholders consists of the following:
<TABLE>
<CAPTION>
<S> <C>
May 31,
1995
-----------
Note payable to stockholder with interest at 12%,
interest and principal due September 30, 1996, unsecured. $ 123,000
Notes payable to stockholders with interest at 10%,
principal and interest due when proceeds from an
initial public offering are received, unsecured. 41,000
---------
164,000
Less current portion (41,000)
---------
Total 123,000
---------
---------
</TABLE>
Interest expense to stockholders for the ten months ended May 31, 1995 and
for the year ended July 31, 1994 totaled $12,000, and $14,000,
respectively.
In April 1996, a stockholder loaned the Company $210,000 which accrues
interest at a rate of 30% per annum and matures in June 1996. This debt is
unsecured and is expected to be repaid from proceeds of the initial public
offering.
5. COMMITMENTS:
OPERATING LEASES - The Company leases its office facilities and certain
equipment under non-cancelable operating leases. Rent expense for the ten
months ended May 31, 1995 and for the year ended July 31, 1994 was $26,000.
At December 31, 1995, future lease obligations under leases with lease
terms in excess of one year provide for annual lease payments of
approximating $84,000 per year for the next three years, including a new
three-year lease entered into by GetNet in April 1996.
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 19.6% to 23%. The capitalized cost of
$23,000 and $173,000 less accumulated amortization of $2,000 and $17,000,
are included in property and equipment at May 31, 1995 and December 31,
1995, respectively. At December 31, 1995, the future minimum lease
payments under the capital leases total $206,000 (at approximately $5,000
per month) including
F-17
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1995 IS UNAUDITED)
$55,000 of future interest. Subsequent to December 31, 1995, additional capital
leases of $50,000 were entered into.
SERVICE COMMITMENTS - The Company signed the following commitments:
- A commitment which commenced in November 1994 (as revised) with
AT&T to sell $1,200,000 of "800" service annually, which will be
terminated in the payment to AT&T of $586,000 with no minimum
commitments thereafter.
- Five-year commitment beginning August 1994 with AT&T Software
Defined Network (SDN) line to sell $1.8 million annually.
- A commitment which commenced February 1995 and extends through
March 1996 (as revised), with ICG Access Services (ICG) to resell
approximately $495,000 of telecommunications services, with no
minimum commitments thereafter.
- Two-year commitment beginning October 1995 with WilTel to be a
reseller of its long distance services. Minimum commitments of
$50,000 per month to commence in August 1996.
- Three-year commitment beginning September 1995 with Paging
Network of Arizona, Inc. to be a reseller of paging services.
The Company is required to resell a minimum number of paging
service agreements by various dates or otherwise risk termination
of its agreement. The Company does not consider this commitment
to be significant to future operations.
The Company was not meeting its "800" service agreement commitment with
AT&T, and consequently, in April 1996, the Company has entered into a
revised agreement with AT&T, which provides 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 seven months ended
December 31, 1996, the Company has recorded $400,000 of expense in
connection with settlement of this commitment. As of December 31, 1995,
$167,000 of this obligation is reflected in other long-term obligations and
the balance is included in accrued liabilities.
The Company's agreement with ICG 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 December 31, 1995 and May 31, 1995, the Company
has recorded $347,000 and $32,000, respectively, of expense under this
agreement. For the period subsequent to December 31, 1995 through the
expiration of the initial agreement, the Company expensed an additional
$115,000. 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 proposed public offering and
the issuance of 45,000 shares valued at $180,000. There has been
relatively insignificant revenue associated with this expense as the
Company had only began marketing services under the ICG agreement on a very
limited basis.
F-18
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1995 IS UNAUDITED)
The Company has not been financially able to actively market WilTel
services and therefore current revenue is relatively insignificant under
this agreement. Beginning in August 1996, the Company has a minimum
commitment of $50,000 per month.
EMPLOYMENT AGREEMENTS - Subsequent to May 31, 1995, the Company entered
into employment agreements with various individuals, including three
officers of GetNet. The base salary under the agreements aggregate
approximately $400,000 in fiscal 1996, $705,000 in fiscal 1997 and $255,000
in fiscal 1998. The Company may terminate the agreements for cause. If
terminated for any other reason, the Company will pay six months salary and
benefit allowance if termination occurs in the first year of the agreement
and nine months salary and benefit allowance if after the first year. In
connection with the employment agreements, certain options were granted as
discussed in Note 6. In April 1996, two of the Company's officers resigned
and terminated their employment agreements and the Company hired a new
president/chief executive officer. The above commitments have been revised
to reflect these changes.
In April 1996, the Company entered a consulting agreement with the former
chief executive officer of the Company to assist the Company in various
future endeavors. Under this agreement, the Company will pay a base
compensation of approximately $15,000 per month, for a minimum of four
months, plus additional compensation based on the level of success of future
endeavors.
OTHER - In January 1996, the Company, on behalf of GetNet, has entered into
a $291,000 commitment to purchase various pieces of equipment to expand its
Internet access capabilities. The total cost of expanding its Internet
access network is expected to be approximately $350,000. The Company
intends to finance this purchase from proceeds of its purposed public
offering.
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 Series A preferred shares have
no voting rights, but have a liquidation preference of $5.00 per share.
The shares will be redeemed from proceeds received in the Company's
proposed public offering at $5.00 per share ($750,000), plus 1.25 shares of
common stock. In the event the proposed public offering is terminated for
any reason, the Company will then issue on June 1, 1996, 1.25 shares of
common stock for each share of Series A preferred stock and the Company
will commence paying quarterly dividends at $.40 until such time as each
Series A shareholder has received $5.00 per share. Afterwhich, the Series
A preferred shares will be terminated.
The Company has authorized, but unissued 9,850,000 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 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
F-19
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1995 IS UNAUDITED)
interest totaling $41,000 from proceeds of the proposed public offering.
The surrendered shares were canceled by the Company.
The majority shareholders have transferred 62,300 of their shares of common
stock to persons who in the past have 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 has issued 60,000 and 100,000 shares of common stock for
services in February and May 1995 to an officer/director. For financial
statement presentation purposes, such shares have been recorded based on
the estimated value of the services rendered (aggregating $40,000), which
approximated the value of the common stock at the time of issuance, as
determined by the Company's Board of Directors.
The Company sold 6,000 shares of common stock to an unrelated party based
on a prior agreement to issue common stock at a price 50% of an initial
public offering price.
In November 1995, the Company completed a private placement of its common
stock whereby it sold 350,000 shares of common stock for $700,000. The
Company incurred costs associated with this offering of approximately
$100,000.
Pursuant to an understanding with the Company's Representative, in November
1995 and March 1996, the founding shareholders surrendered an aggregate of
438,200 and 325,000, respectively, shares of common stock back to the
Company. For financial statement presentation purposes, these shares have
been reflected as surrendered as of December 31, 1995.
Also, see Note 3 for the common stock issued in connection with the GetNet
acquisition.
COMMON STOCK OPTIONS AND DIRECTOR WARRANTS - In April 1995, the Company has
issued common stock options to certain persons who have provided previously
loan 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 October 31, 1995, no
options have been exercised.
In November 1995, 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 part of the various employment agreements, stock options were granted to
purchase a total of 540,000 shares. Options for 100,000 shares are
exercisable in April 1996 at $4.00 per share and expire in 2001. The
remaining options will vest over two years at prices ranging from $5 to $6
per share, generally beginning in August 1996 and expire three years after
vesting. No options were exercisable as of December 31, 1995.
In March 1996, the Company issued 450,000 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 100,000 warrants currently
exercisable,
F-20
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1995 IS UNAUDITED)
175,000 warrants vesting in six months, and the balance vesting in one
year. One of the new directors became president of the Company in April
1996.
PROPOSED PUBLIC OFFERING - The Company has entered into a letter of intent
(LOI) with a Representative to offer common stock and warrants in a
proposed public offering. Under the LOI, the Company intends to sell
1,500,000 shares of common stock at a price between $4 to $6 per share and
1,500,000 warrants at $.125 per warrant with a possible over-allotment
provision for an additional 15%. Each warrant shall be exercisable
immediately upon issuance and enables the holder to purchase one share of
common stock at the public offering price of the common stock per share for
a three-year period commencing the effective date of the Company's
registration statement. The Company may redeem the warrants at $.25 per
warrant, under certain circumstances. The Representative will also receive
a warrant for the purchase of 150,000 shares of common stock and 150,000
warrants exercisable at 120% of the public offering price for four years
commencing one year after the effective date of the Company's registration
statement. At the closing of the public offering, the Company will engage
the Representative as a financial advisor to the Company for a fee of
$108,000, payable at closing of the offering. The LOI is subject to
cancellation or change by either party.
7. INCOME TAXES:
As of May 31, 1995, the Company has a net operating loss (NOL) carryforward
for tax reporting purposes of approximately $340,000, however, a
substantial portion may be limited due to changes in ownership of the
Company in fiscal 1995, pursuant to Section 382. This NOL expires in the
years 2009 through 2010. However, the NOL will be further limited due to
changes in ownership of the Company from the issuances of common stock in
its offerings and acquisition of GetNet in fiscal 1996.
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:
<TABLE>
<S> <C>
Net operating loss carryforward $ 125,000
Other 70,000
-------------
Total 195,000
Less valuation allowance (195,000)
-------------
Net deferred tax asset $ -
-------------
-------------
</TABLE>
The valuation allowance for deferred tax assets increased from $90,000 at
July 31, 1994 to $195,000 at May 31, 1995, due primarily to an increase in
the Company NOL carryforwards.
F-21
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1995 IS UNAUDITED)
8. SIGNIFICANT SALES AGENT RELATIONSHIP:
The Company has an agreement with an independent sales agent, whereby the
agent receives maximum commissions of approximately 32% on sales it
originates. At current sales levels, the Company does not realize a direct
profit from the sales generated by the agent. Indirectly, however, the
Company realizes more profit on its other monthly usage as a result of the
increased discounts resulting from the increased usage received from the
Company's provider. Also, if the Company successfully renegotiates its
contract with its provider, the Company believes it will then directly
realize additional profit on sales originated by the agent, if a greater
discount can be obtained from the provider. Payment of the commissions to
the agent is secured by the customer base generated by the sale agent. For
the ten months ended May 31, 1995 and the seven months ended December 31,
1995, the sales originated by the agent have accounted for 42% and 35%,
respectively, of company sales. During these periods, the Company has
recorded a related expense to the agent of approximately $265,000 and
$271,000, respectively. In April 1996, the Company agreed to settle past
misunderstandings between the parties with an agreement to pay an
additional $75,000 from proceeds of the proposed public offering.
9. SUPPLEMENTAL CASH FLOW INFORMATION:
The supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE TEN SEVEN MONTHS ENDED
YEAR ENDED MONTHS ENDED --------------------------
JULY 31, MAY 31, FEBRUARY 28, DECEMBER 31,
1994 1995 1995 1995
---------- ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Equipment acquired through capital
leases $ - $ 24,000 $ 12,000 $ 140,000
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
Issuance of preferred stock for
receivables $ - $ 113,000 $ - $ -
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
Issuance of common stock for GetNet
acquisition $ - $ - $ - $ 800,000
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
F-22
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
GetNet International, Inc.
Phoenix, Arizona
We have audited the balance sheet of GetNet International, Inc. (A Development
Stage Company) as of July 31, 1995 and the related 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-23
<PAGE>
GETNET INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1995 1995
--------- ----------
(Unaudited)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,000 $ 4,000
Accounts receivable, net of allowance for doubtful accounts of $14,000
and $14,000, respectively 30,000 60,000
-------- --------
Total current assets 32,000 64,000
COMPUTER EQUIPMENT, net of accumulated depreciation of $14,000 and
$16,000, respectively 75,000 110,000
OTHER ASSETS 5,000 5,000
-------- --------
TOTAL ASSETS $112,000 $179,000
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 37,000 $ 58,000
Accrued liabilities 42,000 32,000
Capital lease obligations 5,000 5,000
Deferred revenues 26,000 48,000
Advance from stockholder 6,000 6,000
Advance from Touch Tone - 36,000
-------- --------
Total current liabilities 116,000 185,000
CAPITAL LEASE OBLIGATION, net of current portion 5,000 3,000
COMMITMENTS (NOTE 4)
STOCKHOLDERS' DEFICIT:
Common stock, no par, 10,000,000 shares authorized,
5,482,000 and 5,566,000 shares issued and outstanding,
respectively 294,000 315,000
Deficit accumulated during the developmental stage (303,000) (324,000)
-------- --------
Total stockholders' deficit (9,000) (9,000)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $112,000 $179,000
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-24
<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>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-25
<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-26
<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 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-27
<PAGE>
GETNET INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO JULY 31, 1995 IS UNAUDITED)
1. NATURE OF OPERATIONS 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.
COMPUTER EQUIPMENT - Computer equipment is stated at cost. Depreciation of
equipment is calculated using the straight-line method over the estimated
useful lives (approximately 3 years) of the respective assets. The cost of
normal maintenance and repairs are charged to operating expenses 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In March 1995, the
Financial Accounting Standards Board issued a new statement titled
"Accounting for Impairment of Long-Lived Assets." This new standard is
effective for years beginning after December 15, 1995 and would change the
Company's method of determining impairment of long-lived assets. Although
the Company has not performed a detailed analysis of the impact of this new
standard on the Company's financial statements, the Company does not
believe that adoption of the new standard will have a material effect on
the financial statements.
UNAUDITED INFORMATION - The balance sheet of GetNet as of October 31, 1995
and 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 financial position of GetNet as of October 31, 1995
and the results of operations 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
F-28
<PAGE>
GETNET INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO JULY 31, 1995 IS UNAUDITED)
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 is in the process of a public
offering of its common stock, which if successful, will 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:
<TABLE>
<S> <C>
Net operating loss carryforward $ 110,000
Less valuation allowance (110,000)
----------
Net deferred tax asset $ -
----------
----------
</TABLE>
As of July 31, 1995, GetNet has an income tax loss carryforward of
approximately $280,000 which will expire in 2010.
F-29
<PAGE>
GETNET INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO JULY 31, 1995 IS UNAUDITED)
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.
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.
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
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 and an accrued liability in the
financial statements at July 31, 1995 and October 31, 1995 of $21,000 and
$-0-, respectively.
F-30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES PERSON REPRESENTATIVE, OR OTHER PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY, ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
Page
----
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Management's Discussion and Analysis
or Plan of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Directors, Executive Officers, Promoters
and Control Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
Compensation of Executive Officers
and Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . .54
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
Series A Preferred Selling Shareholders. . . . . . . . . . . . . . . . . . . .60
Additional Selling Shareholders. . . . . . . . . . . . . . . . . . . . . . . .61
Shares Eligible for Future Sale. . . . . . . . . . . . . . . . . . . . . . . .63
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
Change in Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
Available Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . F-1
-----------------
UNTIL _____________ , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,500,000 SHARES
OF COMMON STOCK
1,500,000 REDEEMABLE WARRANTS
TO PURCHASE COMMON STOCK
TOUCH TONE AMERICA, INC.
-----------------
PROSPECTUS
-----------------
BARRON CHASE SECURITIES,
INCORPORATED
7700 W. Camino Real
Suite 200
Boca Raton, Florida 33433
(407) 750-6081
Atlanta, Georgia
Beverly Hills, California
Boston, Massachusetts
Chicago, Illinois
Clearwater, Florida
Dallas, Texas
Denver, Colorado
East Boca Raton, Florida
Hoopeston, Illinois
Miami, Florida
Middletown, New Jersey
Minneapolis, Minnesota
Oklahoma City, Oklahoma
Phoenix, Arizona
Sarasota Florida
Tampa, Florida
Tulsa, Oklahoma
__________________, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with California General Corporation Law, the Company 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 the Company or
its stockholders for monetary damages, except for (i) any breach of the
director's duty of loyalty to the Company 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, the Company 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 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimates of fees and expenses incurred or to be incurred in connection
with the issuance and distribution of securities being registered, all of which
are being paid exclusively by the Company, other than underwriting discounts and
commissions are as follows:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission filing fee . . . . . . . $ 6,078.67
National Association of Securities Dealers filing fee . . . 1,593.35
Nasdaq filing fees. . . . . . . . . . . . . . . . . . . . . 8,750.00*
State Securities Laws (Blue Sky) fees and expenses. . . . . 15,000.00*
Printing and mailing costs and fees . . . . . . . . . . . . 40,000.00*
Legal fees and costs. . . . . . . . . . . . . . . . . . . . 60,000.00*
Accounting fees and costs . . . . . . . . . . . . . . . . . 130,000.00*
Due diligence and travel. . . . . . . . . . . . . . . . . . 18,835.15*
Transfer Agent fees . . . . . . . . . . . . . . . . . . . . 500.00*
Miscellaneous expenses. . . . . . . . . . . . . . . . . . . 39,242.83*
-----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . $320,000.00*
-----------
-----------
</TABLE>
Of this amount, approximately $210,000 has been paid, therefore an
estimated $110,000 will be paid from proceeds of this offering
- --------------------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
A. In May 1995, the Company issued 150,000 shares of Series A Convertible
Preferred Stock to 33 entities/individuals for a total cash proceeds of
$750,000. The shares of Series A Convertible Preferred were issued at $5.00 per
share, and for a two year period are redeemable by the Company for $5.00 per
share plus 1.25 shares of Common Stock.
II-1
<PAGE>
The following sets forth the name and number of shares of Series A
Convertible Preferred Stock purchased in the Company's private placement of the
Series A Convertible Preferred Stock:
<TABLE>
<CAPTION>
Name Number of Preferred Shares Price Paid
- ---- -------------------------- ----------
<S> <C> <C>
Carl T. Schramm 2,500 $ 12,500
Stephen Bushansky 2,500 12,500
Dan R. Balabon 5,000 25,000
George A Shurick 5,000 25,000
Stanley Snyder 5,000 25,000
Robert C. Manani 2,500 12,500
Barney R. Stephens 10,000 50,000
Harry Falterbauer 5,000 25,000
Paul E. Bennett 5,000 25,000
Dilip S. Mehia 5,000 25,000
Norbert J. Zeelander 10,000 50,000
Robert M. Rubin 20,000 100,000
Almar Funding Corporation 5,000 25,000
R. George Cherian 2,500 12,500
Yale Farar 5,000 25,000
Arthur Gronbach 5,000 25,000
James D. Core 5,000 25,000
Bill & Karen Mathews 5,000 25,000
Mecury LP 5,000 25,000
Cellular Rentals of America 5,000 25,000
Michael Rosenbaum 5,000 25,000
Marshall D. Davis 5,000 25,000
Quad Capital Partners 5,000 25,000
OK Associates Pension Trust 5,000 25,000
Universal Partners, LP 5,000 25,000
Leslie J. Pottem 5,000 25,000
Whitehall Trust Company 5,000 25,000
-------- --------
Total 150,000 $750,000
-------- --------
-------- --------
</TABLE>
The Company relied on Section 4(2) of the Securities Act of 1933, as
amended, and Regulation D and Rule 506 promulgated thereunder in conjunction
with the sale of these securities. All investors except one (1) individual were
"accredited investors" pursuant to Regulation D and were given access to
complete information concerning the Company. The securities were offered for
investment only and not for the purpose of resale or distribution, and each
certificate was issued with a form of restrictive legend and the transfer agent
advised thereof. Commissions of 10% of the gross proceeds received in the
private placement were paid to Barron Chase Securities, Inc., a licensed NASD
broker/dealer in connection with the sale of the Series A Convertible Preferred
Stock.
B. In November 1995, the Company issued 350,000 shares of Common Stock to
31 accredited and non-accredited entities/individuals for a total cash proceeds
of $700,000. The shares of the Common Stock were issued at $2.00 per share.
II-2
<PAGE>
The following sets forth the name and number of shares of Common Stock
purchased in the Company's private placement of Common Stock:
<TABLE>
<CAPTION>
Name Number of Common Shares Price Paid
- ---- ----------------------- ----------
<S> <C> <C>
Joseph G. Schweighhardt 10,000 $ 20,000
Drew J. Salperto 10,000 20,000
Arthur Gronbach 12,500 25,000
Steven Rothstein 10,000 20,000
Matt Tomaszewski 10,000 20,000
Robert Lafayette 5,000 10,000
Elizabeth A. Huston 10,000 20,000
Robert E. Wagner 10,000 20,000
Barney R. Stephens 20,000 40,000
Regina Milton 5,000 10,000
Leonard Marshall 12,500 25,000
Dillip S. Mehla 10,000 20,000
Al Whitehead 5,000 10,000
Mark Bruce 10,000 20,000
Mark P. Brinkmann 5,000 10,000
Ronald Moret 20,000 40,000
Oded Rancus 10,000 20,000
Robert P. Reske 10,000 20,000
Joseph J. Assenza 10,000 20,000
Jui-Hsia Hisen 10,000 20,000
Linda Forness 5,000 10,000
Ting Li 10,000 20,000
Greg Drexler 5,000 10,000
Ron Leggett 7,500 15,000
Dwayne Parnell 25,000 50,000
Samuel T. Jackson 10,000 20,000
Tsue Ming Lin 7,500 15,000
Leonard S. Gall 55,000 110,000
Alma Nichols Estate 10,000 20,000
CLFS Equities LTD 10,000 20,000
------- -------
Totals 350,000 700,000
------- -------
------- -------
</TABLE>
- --------------------
(1) Based on 1,611,800 shares outstanding prior to this offering.
(2) Percentage of shares owned prior to this offering is equal to less than one
percent or more of the shares outstanding prior to this offering.
(3) Assuming that all shares are sold by the Additional Selling Shareholders.
(4) Based on 1,611,800 shares outstanding; assumes all of the shares are sold
by Additional Selling Shareholders.
The Company relied on Section 4(2) of the Securities Act of 1933, as
amended, and Regulation D and Rule 506 promulgated thereunder in conjunction
with the sale of these securities. All but one of the investors were
"accredited investors" pursuant to Regulation D and all were given access to
complete information concerning the Company. The securities were offered for
investment only and not for the purpose of resale or distribution, and each
certificate was issued with a form of restrictive legend and the transfer agent
advised thereof. Commissions of 10% of the gross proceeds received in the
private placement were paid to Barron Chase Securities, Inc., a licensed NASD
broker/dealer, in connection with the sale of the Common Stock.
II-3
<PAGE>
C. In November 1995, the Company issued 400,000 shares to the
shareholders of GetNet to acquire all the issued and outstanding shares of
GetNet from 27 individuals. The shares were issued at a ratio of one share of
the Company for each 13.916 shares of GetNet and the Company's shares were
valued at $2.00 per share.
The following sets forth the name and number of shares of the Company's
Common Stock exchanged with GetNet.
<TABLE>
<CAPTION>
Number of Shares Shares of
Name of Touch Tone GetNet Exchanged
-------------------- ------------- ----------------
<S> <C> <C>
Douglas Baldwin 1,725 24,000
Raymond K. Bassett 7,186 100,000
Raymond C. & Shirley Bassett 3,593 50,000
Charles Bassett 719 10,000
Steven R. & Teri Bassett 3,593 50,000
Curt Bellar 3,593 50,000
Gregg Beltz 14,372 200,000
William "Skip" Brand 1,437 20,000
Daniel Burnstein 7,186 100,000
Sara Chase 7,186 100,000
Laura Giacoppo 1,796 25,000
Gil Gillenwater 1,437 20,000
Douglas J. & Mary A. Guenther 14,372 200,000
Forest Henderson 3,593 50,000
Howard Lindzon 35,211 490,000
Mary K. Long 1,796 25,000
Jonathan Mazinter 60,995 848,800
Jake & Beverly Nelson 1,437 20,000
John C. & Ronalee Romine 7,186 100,000
Joe Sicari 1,078 15,000
Michelle DeJean Schechner 4,671 65,000
Stephen Shearin 114,516 1,593,600
Darin Wayrynen 2,874 40,000
Brian Werle 2,874 40,000
Scott Williams 2,156 30,000
Betty L. Wolfe 21,558 300,000
George Darlington Wood 71,860 1,000,000
------- ---------
TOTAL 400,000 5,566,400
------- ---------
------- ---------
</TABLE>
The Company relied on Section 4(2) of the Securities Act of 1933, as
amended, and Regulation D and Rule 506 promulgated thereunder in conjunction
with the sale of these securities. The investors were given access to complete
information concerning the Company. The securities were offered for investment
only and not for the purpose of resale or distribution, and each certificate was
issued with a form of restrictive legend and the transfer agent advised thereof.
No Commissions were paid in connection with the exchange of the shares to the
shareholders of GetNet.
II-4
<PAGE>
ITEM 27. EXHIBITS.
EXHIBIT NO. DESCRIPTION
----------- -----------
1.1 Form of Underwriting Agreement between the Company and Barron
Chase Securities, Inc.*
1.2 Form of Representative's Warrant Agreement Option or Warrant
Agreement.*
1.3 Form of Agreement Among Underwriters.*
1.4 Form of Selected Dealer Agreement.*
3.1 Certificate of Incorporation dated July 31, 1990 and Amendments
thereto.*
3.2 Bylaws.*
3.3 Form of Specimen Common Stock Certificate*
3.4 Form of Specimen Warrant Certificate*
4.0 Warrant Agreement between the Company and American Securities
Stock Transfer, Inc.*
5.0 Form of Opinion of John B. Wills, Esq.*
10.1 Acquisition Agreement and addendum thereto between the Company
and National Telcom Management, Inc.*
10.2 Form of Financial Advisory Agreement between the Company and
Barron Chase Securities, Inc.*
10.3 Form of Merger and Acquisition Agreement between the Company and
Barron Chase Securities, Inc.*
10.4 Agreement between AT&T and the Company.*
10.5 Telecommunications Services Agreement between WilTel and the
Company.*
10.6 Sales and Distribution Agreement between Paging Network of
Arizona and the Company.*
10.7 Employment Agreement with Jonathan Miller and the Company.*
10.8 Employment Agreement with Robert C. Vaughan and the Company.*
10.9 Employment Agreement with David J. Smith and the Company.*
II-5
<PAGE>
10.10 Agreement between TMO Communications and the Company.*
10.11 National Reseller Agreement between the Company and ICG Access
Services, Inc.*
10.12 Release and Settlement Agreement between AT&T and Touch Tone
America, Inc.*
10.13 Release and Settlement Agreement between ICG Access Services,
Inc. and Touch Tone America, Inc.*
10.14 Agreement with TMO and the Company dated April 18, 1996.*
10.15 Employment Agreement between Michael J. Canney and the Company.
10.16 Consulting Agreement between Robert C. Vaughn and the Company.
11.0 Statement Concerning Computation of Per Share Earnings.*
16.0 Letter on Change in Certifying Accountants.*
24.1 Consent of Hein + Associates LLP*
24.2 Consent of John B. Wills, Esq.*
24.3 Consent of Hein + Associates LLP*
24.4 Consent of Hein + Associates LLP*
24.5 Consent of Hein + Associates LLP
- --------------------
* previously filed
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes the following:
(a)(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or event which,
individually or together, represent a fundamental change in the information
in the registration statement; and
(iii) Include any additional or changed material information on
the plan of distribution.
(a)(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
II-6
<PAGE>
(a)(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(d) Will provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriter to permit prompt delivery to each
purchaser.
(e) 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
and 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 Securities Act and will be governed by the final adjudication
of such issue.
(f)(2) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Amendment
No. 2 to the Registration Statement to be signed on its behalf by the
undersigned, in the City of Phoenix, State of Arizona on May 6, 1996.
TOUCH TONE AMERICA, INC.
By: /s/ Michael J. Canney
------------------------------------
Michael J. Canney
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE DATE
/s/ Michael J. Canney May 6, 1996
- -------------------------------------------- -----------------------------
Michael J. Canney
President, Director, Chief Executive Officer
- -------------------------------------------- -----------------------------
Mathew J. Barletta
Director
/s/ David J. Smith May 6, 1996
- -------------------------------------------- -----------------------------
David J. Smith
Principal Financial and Accounting Officer
/s/ Norman B. Walko May 6, 1996
- -------------------------------------------- -----------------------------
Norman B Walko
Director
/s/ Stephen D. Shearin May 6, 1996
- -------------------------------------------- -----------------------------
Stephen D. Shearin
Director
II-8
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Amendment
No. 2 to the Registration Statement to be signed on its behalf by the
undersigned, in the City of Phoenix, State of Arizona on May 6, 1996.
TOUCH TONE AMERICA, INC.
By:
------------------------------------
Michael J. Canney
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE DATE
- -------------------------------------------- -----------------------------
Michael J. Canney
President, Director, Chief Executive Officer
- -------------------------------------------- -----------------------------
Mathew J. Barletta
Director
- -------------------------------------------- -----------------------------
David J. Smith
Principal Financial and Accounting Officer
- -------------------------------------------- -----------------------------
Norman B Walko
Director
- -------------------------------------------- -----------------------------
Stephen D. Shearin
Director
II-8
<PAGE>
TOUCH TONE AMERICA, INC.
EXHIBIT INDEX
Sequentially
Exhibit Description Numbered Page
------- ----------- -------------
1.1 Form of Underwriting Agreement between the
Company and Barron Chase Securities, Inc.*
1.2 Form of Representative's Warrant Agreement
Option or Warrant Agreement.*
1.3 Form of Agreement Among Underwriters.*
1.4 Form of Selected Dealer Agreement.*
3.1 Certificate of Incorporation dated July 31, 1990
and Amendments thereto.*
3.2 Bylaws.*
3.3 Form of Specimen Common Stock Certificate*
3.4 Form of Specimen Warrant Certificate*
4.0 Warrant Agreement between the Company and
American Securities Stock Transfer, Inc.*
5.0 Form of Opinion of John B. Wills, Esq.*
10.1 Acquisition Agreement and addendum thereto
between the Company and National Telcom
Management, Inc.*
10.2 Form of Financial Advisory Agreement between
the Company and Barron Chase Securities, Inc.*
10.3 Form of Merger and Acquisition Agreement between
the Company and Barron Chase Securities, Inc.*
10.4 Agreement between AT&T and the Company.*
10.5 Telecommunications Services Agreement between
WilTel and the Company.*
10.6 Sales and Distribution Agreement between Paging
Network of Arizona and the Company.*
10.7 Employment Agreement with Jonathan Miller and the
Company.*
10.8 Employment Agreement with Robert C. Vaughan and
the Company.*
10.9 Employment Agreement with David J. Smith and
the Company.*
10.10 Agreement between TMO Communications and the
Company.*
10.11 National Reseller Agreement between the Company
and ICG Access Services, Inc.*
<PAGE>
10.12 Release and Settlement Agreement between AT&T and
Touch Tone America, Inc.*
10.13 Release and Settlement Agreement between ICG
Access Services, Inc. and Touch Tone America, Inc.*
10.14 Agreement with TMO and the Company dated
April 18, 1996.*
10.15 Employment Agreement between Michael J. Canney
and the Company.
10.16 Consulting Agreement between Robert C. Vaughn and the Company
11.0 Statement Concerning Computation of Per Share
Earnings.
16.0 Letter on Change in Certifying Accountants.
24.1 Consent of Hein + Associates LLP*
24.2 Consent of John B. Wills, Esq.*
24.3 Consent of Hein + Associates LLP*
24.4 Consent of Hein + Associates LLP*
24.5 Consent of Hein + Associates LLP
- --------------------
* previously filed
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated the 8th day of April, 1996, is by and between
Touch Tone America, Inc., a California, corporation, (Company), and Michael J.
Canney (Employee), an Arizona, resident.
RECITALS
A. Employee possesses certain unique skills, talents, contacts, judgment
and knowledge of the Company's businesses, strategies, ethics and objectives.
B. In order to provide for continuity in the executive management of the
Company, which continuity is deemed to be vital to the continued growth and
success of the Company, and in order that the Company may continue to avail
itself of the unique skills, talents, contacts, judgment and knowledge of
Employee, the Company desires to ensure the retention of Michael J. Canney in
the employ of the Company.
C. Employee desires to be assured of a secure tenure with the Company,
duties and responsibilities commensurate with Employee's education,
experience and background, and salary, bonus, incentive compensation and
other benefits and perquisites at levels that reflect Employee's anticipated
future contributions to the Company.
IN CONSIDERATION of the foregoing promises and the parties' mutual
covenants and undertakings contained in this Agreement, the Company and
Employee agree as follows:
ARTICLE 1. DEFINITIONS
Capitalized terms used in this Agreement shall have their defined
meaning throughout the Agreement. The following terms shall have the meanings
set forth below, unless the context clearly requires otherwise:
1.1 "Agreement" means this Employment Agreement, as from time to time
amended.
1.2 "Base Salary" means the total annual cash compensation payable on a
regular periodic basis, without regard to voluntary or mandatory
deferrals, as set forth at paragraph 3.1 of this Agreement.
1.3 "Beneficiary" means the person or persons designated in writing to
the Company by Employee to receive benefits payable after Employee's
death. In the absence of such designation or in the event that all of
the persons so designated predecease Employee, Beneficiary means the
executor, administrator or personal representative of Employee's estate.
1.4 "Board" means the Board of Directors of the Company.
1.5 "Cause" has the meaning set forth at paragraph 4.2 of this
Agreement.
1.6 "Company" means all of the following, jointly and severally:
(a) Touch Tone America, Inc.; (b) any Subsidiary; and (c) any
Successor.
1.7 "Confidential Information: means information that is proprietary
to the Company or proprietary to others and entrusted to the Company,
whether or not trade secrets. Confidential Information includes, but is
not limited to, information relating to business plans and to business
as conducted or anticipated to be conducted, and to past or current or
anticipated products. Confidential Information also includes, without
limitation, information
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concerning research, development, purchasing, accounting, marketing,
selling and services. All information that has a reasonable basis to
consider confidential is Confidential Information, whether or not
originated by and without regard to the manner in which Employee obtains
access to this and any other proprietary information.
1.8 "Date of Termination" has the meaning set forth at paragraph 4.6(b)
of this Agreement.
1.9 "Disability" means the unwillingness or inability of Employee to
perform Employee's duties under this Agreement because of incapacity
due to physical or mental illness, bodily injury or disease for a period
of four (4) months.
1.10 "Employee" means Michael J. Canney.
1.11 "Good Reason" has the meaning set forth at paragraph 4.3 of this
Agreement.
1.12 "Notice of Termination" has the meaning set forth at paragraph
4.6(a) of this Agreement.
1.13 "Parent Corporation" means Touch Tone America, Inc. and any
Successor. Parent Corporation shall not include any Subsidiary.
1.14 "Plan" means any bonus or incentive compensation agreement, plan,
program, policy or arrangement sponsored, maintained or contributed to
by the Company, to which the Company is a party or under which employees
of the Company are covered, including, without limitation, any stock
option, restricted stock or any other equity-based compensation plan,
annual or long-term incentive (bonus) plan, and any employee benefit
plan, such as a thrift, pension, profit sharing, deferred compensation,
medical, dental, disability, accident, life insurance, automobile
allowance, perquisite, fringe benefit, vacation, sick or parental leave,
severance or relocation plan or policy or any other agreement, plan,
program, policy, or arrangement intended to benefit employees or
executive officers of the Company.
1.15 "Subsidiary" means any corporation, at least a majority of whose
securities having ordinary voting power for the election of directors
(other than securities having such power only by reason of the
occurrence of a contingency), at the time owned by the Parent
Corporation, the Company and/or one (1) or more Subsidiaries.
1.16 "Successor" has the meaning set forth at paragraph 7.2 of this
Agreement.
1.17 "Inventions" means ideas, improvements and discoveries, whether or
not such are patentable or copyrightable, and whether or not in writing
or reduced to practice.
1.18 "Works of Authorship" means writings, drawings, software,
semiconductor mask works, and any other works of authorship, whether or
not such are copyrightable.
ARTICLE 2. EMPLOYMENT, DUTIES AND TERM
2.1 EMPLOYMENT. Upon the terms and conditions set forth in this
Agreement, the Company hereby employs Employee, and Employee accepts such
employment, as President of the Company. Except as expressly provided
herein, termination of this Agreement by either party or by mutual agreement
of the parties shall also terminate Employee's employment by Company.
2.2 DUTIES. During the term of this Agreement, and excluding any
periods of vacation, disability or other leave to which Employee is entitled,
Employee agrees to devote reasonable attention and time during normal business
hours to the business and affairs of the Company and to the extent necessary
to discharge the responsibilities assigned to
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Employee hereunder and under the Company's bylaws, as amended from time to
time, to use Employees's reasonable best efforts to perform faithfully and
efficiently such responsibilities. During the term of this Agreement, it
shall not be a violation of this Agreement to serve on corporate, civic or
charitable boards or committees, deliver lectures, fulfill speaking
engagements or teach at educational institutions and manage personal
investments, so long as such activities do not significantly interfere with
the performance of Employee's responsibilities as an employee of the Company
in accordance with this Agreement. It is expressly understood and agreed that
to the extent that any such activities have been conducted by Employee prior
to the date of this Agreement, the continued conduct of such activities (or
the conduct of activities similar in nature and scope thereto) subsequent
to the date of this Agreement shall not thereafter be deemed to interfere
with the performance of Employee's responsibilities to the Company. Employee
shall comply with the Company's policies and procedures; provided, that to
the extent such policies and procedures are inconsistent with this Agreement,
the provisions of this Agreement shall control.
2.3 CERTAIN PROPRIETARY INFORMATION. If Employee possesses any
proprietary information of another person or entity as a result of prior
employment or relationship, Employee shall honor any legal obligation that
has been entered into with that person or entity with respect to such
proprietary information.
2.4 TERM. Subject to the provisions of Article 4, the term of employment
of under this Agreement shall continue until two (2) years from the date
first set forth. The terms of the Agreement shall require renegotiation and
this current Agreement will not automatically renew without the written
consent of the Parties. The Agreement can be renewed with the written consent
of both parties.
2.5 RETURN OF PROPRIETARY PROPERTY. Employee agrees that all property
in Employee's possession belonging to Company, including, without limitation,
all documents, reports, manuals, memoranda, computer print-outs, customer
lists, credit cards, keys, identification, products, access cards,
automobiles and all other property relating in any way to the business of the
Company are the exclusive property of the Company, even if Employee authored,
created or assisted in authoring or creating, such property. Employee shall
return to the Company all such documents and property immediately upon
termination of employment or at such earlier time as the Company may
reasonably request.
ARTICLE 3. COMPENSATION, BENEFITS AND EXPENSES
3.1 BASE SALARY. During the term of Employee's employment under this
Agreement and for as long thereafter as required pursuant to Article 4, the
Company shall pay a Base Salary of $120,000.00 per year to be payable at the
rate of $10,000.00 per month, or at such higher rate as may from time to time
be approved by the Board. Such Base Salary is to be paid in substantially
equal regular periodic payments in accordance with the Company's regular
payroll practices. If Employee's Base Salary is increased from time to time
during the term of Employee's employment under this Agreement, the increased
amount shall become the Base Salary for the remainder of the term and any
extensions of Employee's term of employment under this Agreement and for as
long thereafter as required pursuant to Article 4, subject to any subsequent
increases.
3.1.1 STOCK. Employee shall have the option of purchasing 50,000
shares of Touch Tone stock at a price of $4.00 per share on or after the
1st anniversary of this Employment Contract and an Option to buy 50,000
shares of Touch Tone America stock at a price of $4.00 per share on the
2nd anniversary of this Employment Contract. Notice of the intent to
exercise the option must be received by the Company 60 days prior to the
date of the purchase, in writing from the Employee for each year.
Employee must exercise the option within 90 days of the date of notice
and Notice for each option must be given by Employee for each option
within 1 year of the anniversary date for each option.
3.1.2 MOVE AND LIVING ALLOWANCE. Employee shall receive a living
allowance of $1,500 per month in recognition of the costs associated
with relocating from Arkansas. Employee shall also receive up to $5,000
as an allowance for moving expenses to relocate from Arkansas to
Arizona. Employee shall submit expense reports and receipt to be
reimbursed by the Company.
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3.1.3 TERMINATION ALLOWANCE. Should the Employee be terminated
from employment of the Company, within the first year of this
Employment contract, under section 4.3, a Termination Allowance of
6 months wages and benefits shall be paid to Employee. The Termination
Allowance shall be 9 months paid wages and benefits if the termination
occurs during the second year of this Employment agreement. The payments
shall be made periodically or in one lump sum at the sole discretion of
the Company. This provision will not be effective if the Employee is
terminated by the Company for Cause.
3.2 OTHER COMPENSATION AND BENEFITS. Full health and dental insurance
coverage of Employee's immediate family and life insurance on Employee in the
amount of $100,000 with the cost of the physical to be borne by the Company.
Employee shall also receive an allowance of $3,000.00 in legal, financial
planning and tax assistance through firms associated with the company per
year. Employee shall receive 5 days of paid sick leave and 3 weeks of paid
vacation that may be accrued in the second year and must be used and not
cashed out. Nothing paid to Employee under any Plan presently in effect or
made available in the future shall be deemed to be in lieu of the Base Salary,
bonuses, incentives or compensation of any other nature otherwise payable to
Employee.
3.3 BUSINESS EXPENSES. During the term of Employees's employment under
this Agreement and for as long thereafter as required pursuant to Article 4,
the Company shall, in accordance with, and to the extent of, its uniform
policies in effect from time to time, bear all ordinary and necessary business
expenses incurred by in performing Employee's duties as an employee of the
Company, including, without limitation, all travel and living expenses when
away from home on business in the service of the Company.
3.4 OFFICE AND FACILITIES. During the term of Employee's employment
under this Agreement, the Company shall furnish Employee with office space,
and secretarial service, together with such other reasonable facilities and
services as are suitable, necessary and appropriate.
ARTICLE 4. EARLY TERMINATION
4.1 EARLY TERMINATION. Subject to the respective continuing obligations
of the parties pursuant to Article 5, this Article 4 sets forth the terms for
early termination of Employee's employment under this Agreement.
4.2 TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate this
Agreement for Cause. For purposes of this Agreement, "Cause" means (a) an act
or acts of personal dishonesty taken by and intended to result in substantial
personal enrichment of Employee at the expense of the Company, (b) violations
by Employee of Employee's obligations under paragraph 2.2 and which are not
remedied within a reasonable period after Employee's receipt of notice of
such violations from the Company or (c) the engaging by Employee in illegal
conduct that is materially and demonstrably injurious to the Company. For
purposes of this paragraph 4.2, no act, or failure to act, on Employee's part
shall be considered "dishonest," or "intended" unless done, or omitted to be
done, by Employee in bad faith and without reasonable belief that Employee's
action or omission was in, or not opposed to, the best interest of the
Company. If the employee is terminated under this provision will not result
in Employee receiving the Termination Allowance as detailed in preceding
paragraph 3.1.3.
4.3 TERMINATION BY EMPLOYEE FOR GOOD REASON. Employee may terminate
Employee's employment under this Agreement for Good Reason in accordance with
the ensuing provisions of this paragraph 4.3. Termination by Employee for "Good
Reason" shall mean termination of employment based on any one or more of
the following:
(a) An adverse change in Employee's status or position as an
Employee of the Company, including, without limitation, any adverse
change in Employee's status or position as a result of a material
diminution in Employee's duties, responsibilities or authority as of
the date of this Agreement (except in connection with the termination
of Employee's employment for Cause in accordance with paragraph 4.2
hereof or Disability or death in accordance with paragraph 4.4 hereof);
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(b) A reduction by the Company in Employee's Base Salary as in
effect on the date of this Agreement or as the same may be increased
from time to time or a change in the eligibility requirements or
performance criteria under any Plan under which Employee is covered
immediately prior to the date of this Agreement, which adversely affects
Employee;
(c) Without replacement by a Plan providing benefits to Employee
equal to or greater than those discontinued, the failure by the Company
to continue in effect, within its maximum stated term, any Plan in which
Employee is participating on the date of this Agreement or the taking
of any action by the Company that would adversely affect Employee's
participation or materially reduce Employee's benefits under any Plan;
(d) The taking of any action by the Company that would
materially, adversely affect the physical conditions existing
immediately prior to the date of this Agreement in or under which
Employee performs their employment duties;
(e) The Company's requiring Employee to be based anywhere other
than where Employee's office is located as of the date of this
Agreement, except for required travel on the Company's business to an
extent substantially consistent with the business travel obligations
which undertook on behalf of the Company prior to the date of this
Agreement;
(f) The failure by the Company to obtain from any Successor an
assent to this Agreement contemplated by paragraph 7.2; or
(g) Any purported termination by the Company of this Agreement or
the employment of the Employee by the Company which is not expressly
authorized by this Agreement or any breach of this Agreement by the
Company other than an isolated, insubstantial and inadvertent failure
not occurring in bad faith and which is remedied by the Company within
a reasonable period after the Company's receipt of notice thereof from
the Employee.
Notwithstanding any other provision of this Agreement to the contrary,
any termination by Employee of employment for any reason during the thirty
(30) day period immediately following a Change-of-Control of the Company
shall be a termination for Good Reason.
4.4 TERMINATION IN THE EVENT OF DEATH OR DISABILITY. The term of
Employee's employment under this Agreement shall terminate in the event of
Employee's death or Disability.
4.5 TERMINATION BY MUTUAL AGREEMENT. The parties may terminate
Employee's employment under this Agreement at any time by mutual written
agreement.
4.6 NOTICE OF TERMINATION; DATE OF TERMINATION; OFFER OF CONTINUED
EMPLOYMENT. The provisions of this paragraph 4.6 shall apply in connection
with any early termination of Employee's employment under this Agreement
pursuant to this Article 4.
(a) For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination
provisions in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide the
bases for such termination. Any purported termination by the Company
or by Employee pursuant to this Article 4 (other than a termination by
mutual agreement pursuant to paragraph 4.5 or death) shall be
communicated by written Notice of Termination to the other party hereto.
(b) For purposes of this Agreement, "Date of Termination" shall
mean: (1) if Employee's employment is terminated due to death, the last
day of the month first following the month during which Employee's death
occurs; (2) if Employee's employment is to be terminated for
Disability, thirty (30) calendar days after Notice of Termination is
given; (3) if Employee's employment is terminated by the Company for
Cause or by or for Good Reason, the date specified in the Notice of
Termination; (4) if Employee's employment is terminated by
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mutual agreement of the parties, the date specified in such agreement; or
(5) if Employee's employment is terminated for any other reason, the
date specified in the Notice of Termination, which in no event shall be
a date earlier than ninety (90) calendar days after the date on which a
Notice of Termination is given, unless an earlier date has been
expressly agreed to by Company in writing either in advance of, or
after, receiving such Notice of Termination; provided however, if within
thirty (30) calendar days after giving of a Notice of Termination the
recipient of the Notice of Termination notifies the other party that a
dispute exists concerning the termination, then the Date of Termination
shall be the date on which the dispute is finally determined, whether by
mutual written agreement of the parties, by final and binding
arbitration or by final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired or
no appeal having been perfected). During the pendency of any such
dispute and until the dispute is resolved in the manner provided in the
immediately preceding sentence, the Company will continue to pay all
compensation and benefits to which Employee was entitled pursuant to
Article 3 immediately prior to the time the Notice of Termination is
given.
(c) If this Agreement is terminated other than by reason of (1)
the expiration of the term hereof as described at paragraph 2.3, (2)
Employee's Disability or death, (3) Employee's termination for Cause
pursuant to paragraph 4.2 which termination for Cause has been agreed
to by or has been determined in a proceeding as provided in
paragraph 7.3 or (4) by mutual agreement of the parties pursuant to
paragraph 4.5, may, but shall not be required to, not later than ten
(10) days after the Date of Termination, provide a written offer of
continued employment with the Company in accordance with the terms of
this Agreement which terms shall, in the case of a termination by Employee
for Good Reason pursuant to paragraph 4.3, include the Company taking
any such steps as may be necessary to eliminate, in a manner reasonably
satisfactory to any conditions which created such good reason for
termination. Within ten (10) days of its receipt of such offer, the
Company shall provide Employee with a written acceptance or rejection of
such offer. Failure of the Company to so accept or reject such offer
within such period shall be deemed to be a rejection of such offer.
The parties hereby acknowledge that Employee's failure to provide such
offer to the Company shall in no way impair, affect or constitute a
waiver of Employee's right to enforce the Company's obligations under
this Agreement and the Company shall not assert such failure as a
defense in any action or proceeding by to enforce the Company's
obligation under this Agreement.
ARTICLE 5. CONFIDENTIAL INFORMATION
5.1 PROHIBITIONS AGAINST USE. Employee will not during or subsequent to
the termination of Employee's employment under this Agreement use or
disclose, other than in connection with Employee's employment with the
Company, any Confidential Information to any person not employed by the
Company or not authorized by the Company to receive such Confidential
Information, without the prior written consent of the Company. Employee will
use reasonable and prudent care to safeguard and protect and prevent the
unauthorized use and disclosure of Confidential Information. The obligations
contained in this paragraph 5.1 will survive for as long as the Company in
its sole judgment considers the information to be Confidential Information.
The obligations under this paragraph 5.1 will not apply to any Confidential
Information that is now or becomes generally available to the public through
no fault of Employee or to Employee's disclosure of any confidential
Information required by law or judicial or administrative process.
ARTICLE 6. NON-COMPETITION
6.1 NON-COMPETITION. Subject to paragraph 6.2 and 6.3, Employee agrees
that during the term of this Agreement and for a period of three (3) years
following termination of employment for any reason, Employee will not
directly or indirectly, alone or as a partner, officer, director, shareholder
or employee of any other firm or entity, engage in any commercial activity in
competition with any part of the Company's business as conducted during the
term of the Agreement or as of the date of such termination of employment or
with any part of the Company's contemplated business with respect to which
has Confidential Information as governed by Article 5. This provision shall
apply to the United States of America and its territories and possessions for
the duration of the terms of this non-competition clause. For
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purposes of this clause (a), "shareholder" shall not include beneficial
ownership of less than five percent (5%) of the combined voting power of all
issued and outstanding voting securities of a publicly held corporation whose
stock is traded on a major stock exchange or quoted on NASDAQ.
6.2 EARLY TERMINATION. Notwithstanding paragraph 6.1, if Employee's
employment terminates under circumstances which entitle Employee to receive
damages for breach of this Agreement pursuant to paragraph 4.7(e) and the
Company fails to provide Employee with any compensation of benefits due
Employee pursuant to paragraph 4.7(e) and does not remedy such failure within
ten (10) days after receipt of notice of such failure from Employee, the
restrictions set forth in paragraph 6.1 shall cease to apply to for the
remainder of the period to which such restrictions would otherwise apply
notwithstanding any subsequent remedy of such failure by the Company.
6.3 EMPLOYER'S OPTION TO REVISE. At its sole option, the Company may, by
written notice to Employee within thirty (30) days after the effective date
of the termination of Employee's employment, waive or limit the time and/or
geographic area in which is prohibited from engaging in competitive activity.
6.4 COVENANT NOT TO RECRUIT. Employee recognizes that the Company's
workforce constitutes an important and vital aspect of its business on a
world-wide basis. Employee agrees that for a period of (1) one year following
the termination of this agreement, for any reason whatsoever, Employee shall
not solicit, or assist anyone else in the solicitation of, any of the
Company's then-current employees, to terminate their employment with the
Company and to become employed by any business enterprise with which the
Employee may then be associated, affiliated or connected.
ARTICLE 7. GENERAL PROVISIONS
7.1 NO ADEQUATE REMEDY. The parties declare that it is impossible to
accurately measure in money the damages which will accrue to either party by
reason of a failure to perform any of the obligations under this Agreement.
Therefore, if either party shall institute any action or proceeding to
enforce the provisions hereof the party against whom such action or
proceeding is brought hereby waives the claim or defense that such party has
an adequate remedy at law, and such party shall not assert in any such action
or proceeding the claim or defenses that such party has an adequate remedy at
law.
7.2 SUCCESSORS AND ASSIGNS.
(a) This Agreement shall be binding upon and inure to the benefit
of any Successor of the Parent Corporation, the Company and each
Subsidiary, and any such Successor shall absolutely and unconditionally
assume all of the Company's and any Subsidiary's obligations hereunder.
Upon Employee's written request, the Company will seek to have any
Successor, by agreement in form and substance satisfactory to Employee,
assent to the fulfillment by the Company of their obligations under this
Agreement. Failure to obtain such assent at least three (3) business days
prior to the time a person or entity becomes a Successor (or Where the
Company does not have at least three (3) business days' advance notice
that a person or entity may become a Successor, within one (1) business
day after having notice that such person or entity may become or has
become a Successor) shall constitute Good Reason for termination by
Employee of employment pursuant to paragraph 4.3. For purposes of this
Agreement, "Successor" shall mean any corporation, individual, group,
association, partnership, firm, venture or other entity or person that,
subsequent to the date hereof, succeeds to the actual or practical
ability to control (either immediately or with the passage of time), all
or substantially all of the Parent corporation's and/or the Company's
business and/or assets, directly or indirectly, by merger, consolidation,
recapitalization, purchase, liquidation, redemption, assignment, similar
corporate transaction, operation of law or otherwise.
(b) This Agreement and all rights hereunder shall inure to the
benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If Employee should die while
any amounts would still be payable to Employee hereunder if Employee
had continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance
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with the terms of this Agreement to Employee's devisee, legatee, or other
designee or, if there be no such designee, to Employee's estate. Employee
may not assign this Agreement, in whole or in any part, without the prior
written consent of the Company.
7.3 DISPUTES. Any dispute, controversy or claim for damages arising
under or in connection with this Agreement shall, in Company's sole
discretion, be settled exclusively by such judicial remedies as Company may
seek to pursue or by Arbitration in Phoenix, Arizona in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrators' award in any court having jurisdiction; provided,
however, that Employee shall be entitled to seek specific performance of
Employee's right to be paid until the Date of Termination during the pendency
of any dispute or controversy arising under or in connection with this
Agreement. The Company and the Employee shall each bear their own costs and
expenses, including attorney's fees, arising in connection with any
arbitration proceeding pursuant to this paragraph 7.3. The Company shall be
entitled to seek an injunction or restraining order in a court of competent
jurisdiction to enforce the provisions of Articles 5 and 6.
7.4 NO OFFSETS. In no event shall any amount payable to Employee
pursuant to this Agreement be reduced for purposes of offsetting, either
directly or indirectly, any indebtedness or liability of Employee to the
Company.
7.5 WAIVER OF CLAIMS. Employee hereby releases, waives and discharges
any and all claims, whether legal, equitable or otherwise, against the
Company, the Parent Corporation or any director, officer, employee or agent
thereof, which Employee may now or at any time in the future have to any
payments under any agreement between Employee and the Company, in excess of
the amounts determined under the express provisions of such agreement.
7.6 NOTICES. All notices, requests and demands given to or made
pursuant hereto shall, except as otherwise specified herein, be in writing
and be personally delivered or mailed postage prepaid, registered or
certified U.S. mail, to any party as its address set forth on the last page
of this Agreement. Either party may, by notice hereunder, designate a changed
address. Any notice hereunder shall be deemed effectively given and received:
(a) if personally delivered, upon delivery; or (b) if mailed, on the
registered date or the date stamped on the certified mail receipt.
7.7 WITHHOLDING. To the extent required by any applicable law,
including, without limitation, any federal or state income tax or excise tax
law or laws, the Federal Insurance Contributions Act, the Federal
Unemployment Tax Act or any comparable federal, state or local laws, the
Company retains the right to withhold such portion of any amount or amounts
payable to under this Agreement as the Company (on the written advice of
outside counsel) deems necessary.
7.8 CAPTIONS. The various headings or captions in this Agreement are
for convenience only and shall not affect the meaning or interpretation of
this Agreement.
7.9 GOVERNING LAW. The validity, interpretation, construction,
performance, enforcement and remedies of or relating to this Agreement, and
the rights and obligations of the parties hereunder, shall be governed by the
substantive laws of the State of Arizona (without regard to the conflict of
laws rules or statutes of any jurisdiction), and any and every legal
proceeding arising out of or in connection with this Agreement shall be
brought in the appropriate courts of the State of Arizona, each of the
parties hereby consenting to the exclusive jurisdiction of said courts for
this purpose.
7.10 CONSTRUCTION. Wherever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by
or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
7.11 WAIVERS. No failure on the part of either party to exercise, and
no delay in exercising, any right or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any right or
remedy hereunder preclude any other or further exercise thereof or the
exercise of any other right or remedy granted hereby or by any related
document or by law.
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7.12 MODIFICATIONS. This Agreement may not be modified or amended
except by written instrument signed by the parties hereto.
7.13 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
and understanding between the parties hereto in reference to all the matters
herein agreed upon. This Agreement replaces in full all prior employment
agreements or understandings of the parties hereto, and any and all such
prior agreements or understandings are hereby rescinded by mutual agreement.
7.14 COUNTERPARTS. This Agreement may be executed in one (1) or more
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one (1) and the same instrument.
7.15 SURVIVAL. The parties expressly acknowledge and agree that the
provisions of this Agreement which by their express or implied terms extend
beyond the termination of Employee's employment hereunder or beyond the
termination of this Agreement shall continue in full force and effect
notwithstanding Employee's termination of employment hereunder or the
termination of this Agreement, respectively.
ARTICLE 8. INVENTIONS
8.1 DISCLOSURE AND ASSIGNMENT OF INVENTIONS AND OTHER WORKS. Employee
shall promptly disclose to the Company in writing all inventions and works of
authorship which are conceived, made, discovered, written or created by alone
or jointly with another person, group or entity, whether during the normal
hours of my employment at the Company or on Employee's own time, during the
term of this Agreement and for one year after termination of this Agreement,
shall assign all rights to all such inventions and works of authorship to the
Company, shall give the Company all the assistance it reasonably requires in
order for Company to perfect, protect, and use its rights to inventions and
works of authorship. Employee shall sign all such documents, take all such
actions and supply all such information that the Company considers necessary
or desirable in order to transfer or record the transfer of Employee's entire
right, title and interest in such inventions and works of authorship; and in
order to enable the Company to obtain exclusive patent, copyright, or other
legal protection for inventions and works of authorship. The company shall
bear any reasonable expenses in this regard.
8.2 EXEMPTION. An exemption shall exist for an invention for which no
equipment, supplies, facility or trade secret information of the employer was
used and which was developed entirely on the Employee's own time, and (1)
which does not relate (a) directly to the business of the employer or (b) to
the employer's actual or demonstrably anticipated research or development, or
(2) which does not result from any work performed by the employee for the
employer.
8.3 ADDITIONAL EXCLUSIONS. The inventions and works of authorship set
forth in Schedule A to this Agreement which Employee owns or controls shall
also be excluded from operation of paragraph 8.1 of this Agreement, and
represents that such inventions and works of authorship were conceived, made,
written, or created by him prior to employment with the Company (although
they may be useful to the Company), its subsidiaries or affiliates. Other
than the inventions and works of authorship listed in Schedule A, does not
own or control rights in any inventions or works of authorship and shall not
assert any such rights against the Company. If no Schedule A is attached to
this agreement, Employee makes no claim of exclusion.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be duly executed and delivered as of the day and year first
above written.
EMPLOYEE COMPANY
Michael J. Canney Touch Tone America, Inc.,
/s/ Michael J. Canney a California Corporation
By: /s/
Title: Director
Address: Address:
4110 N. Scottsdale Rd. #170 4110 North Scottsdale Road
Scottsdale, AZ Suite 170
Scottsdale, Arizona 85251
10
<PAGE>
CONSULTING AGREEMENT
This Agreement for Consulting Services ("AGREEMENT") is made and entered
into on this 22nd day of April, 1996 by and between Robert C. Vaughan ("RCV")
DBA The Orbis Group LLP with principal offices at 1861 Longleaf Road, Cocoa,
Florida 32926, U.S.A., and Touch Tone America Inc. ("CLIENT"), a California
corporation with principal offices at 4110 North Scottsdale Road, Scottsdale,
Arizona 85251.
1. SERVICES
CLIENT hereby agrees to retain RCV to assist CLIENT as described on
Exhibit A to this AGREEMENT. RCV agrees to exercise reasonable efforts in
providing such services.
2. COMPENSATION
CLIENT agrees to compensate RCV for the services provided under this
AGREEMENT as described on Exhibit A to this AGREEMENT.
a. If Exhibit A lists services of "Funding," "Sale," "Acquisition,"
or "Merger," if any person, company, group, organization or entity introduced
to CLIENT by or through RCV's efforts ("RCV SOURCE") executes an agreement
for funding, purchase, acquisition of or by, or merger, of CLIENT, all gross
funds or other consideration placed into CLIENT's business or under its
control, or received by CLIENT or CLIENT's Shareholders or Owners from such
RCV SOURCE, and any subsequent funding or other consideration paid to CLIENT
or CLIENT's or CLIENT's Shareholders or Owners by such RCV SOURCE, shall be
deemed an "RCV FUNDING." CLIENT shall pay RCV the commission or finder's fee
on such RCV FUNDING in the amount and manner described in Exhibit A
immediately upon the receipt by CLIENT thereof of the proceeds from such RCV
FUNDING, or, if an escrow is utilized therefor, then directly from said
escrow. This AGREEMENT shall act as an escrow instruction from CLIENT to the
escrow agent for payment of such commissions or finder's fee directly from
said escrow to RCV.
b. CLIENT agrees to pay all fees immediately upon billing by RCV plus
expenses not to exceed $5,000.00 per month without the prior approval of
CLIENT. Such fees and expenses shall accrue from the date this Agreement is
entered into.
3. TERM OF CONTRACT
This AGREEMENT is for the period as outlined in Exhibit A hereto, but in
no event for less than 120 days. This AGREEMENT may be extended upon mutual
agreement of the parties hereto, and terminated by either party on 30 days
notice. The compensation obligations arising under section 2.a. of this
AGREEMENT shall survive termination of this AGREEMENT.
Page 1
<PAGE>
4. CONFIDENTIAL INFORMATION
a. CONFIDENTIAL INFORMATION shall mean all information related to
CLIENT's business provided by CLIENT to RCV and identified in writing as
confidential at that time or within 15 (fifteen) days of its disclosure to
RCV. CONFIDENTIAL INFORMATION does not include any material or information of
CLIENT which has been or may hereafter be acquired by RCV from any third
party not under binder of secrecy to CLIENT, which is made public by CLIENT,
or which is otherwise in the public domain.
b. RCV shall not in any manner communicate the CONFIDENTIAL
INFORMATION of CLIENT to any third party without CLIENT's prior consent. RCV
shall not use the CONFIDENTIAL INFORMATION except for the purpose of
providing services for the benefit of CLIENT. RCV shall treat the
CONFIDENTIAL INFORMATION with the same care which RCV uses to safeguard its
own proprietary information.
5. INDEPENDENT PARTIES
CLIENT and RCV are independent parties and nothing contained herein
shall be construed to mean otherwise. Any incidences of agency or other
relationship shall be specifically outlined and attached hereto as Exhibit B.
RCV are not employees or officers of CLIENT and further indemnify CLIENT
against claim by any Federal or State agency regarding the payment or
withholding of employment-related taxes on fees or commissions paid by CLIENT
in accordance with this AGREEMENT.
6. INSURANCE
CLIENT hereby agrees that such insurance as CLIENT normally provides to
cover the presence and activities of employees and third parties on CLIENT's
premises or when on travel assignment for CLIENT shall apply to the
activities of RCV.
7. REQUISITE AUTHORITY
Each party represents to the other party that all necessary corporate
and/or such other approvals and authorizations needed to make this AGREEMENT
enforceable have been obtained by the undersigned. Each party will provide
the other with documentation regarding such approvals and authorizations
within five (5) days upon the request by the other therefor.
8. LIABILITY/INDEMNIFICATION
RCV shall in no way be held liable or responsible to CLIENT or any other
party for the performance of CLIENT or the failure of CLIENT to obtain
acceptable or adequate fundings. CLIENT shall defend and hold harmless RCV
against any and all liability, claim, or demand on account of property loss
or damage to others arising out of or in any manner connected with the
performance of this AGREEMENT, whether such injury, loss, or damage shall be
caused by the negligence of CLIENT, its employees, or any other party for
whom CLIENT is responsible, and CLIENT, at its own expense, shall defend any
and all actions based thereon and shall pay all attorney's fees and all costs
and other expenses arising therefrom; provided however, that this indemnity
shall not cover any liability for damages caused by or resulting from the
sole negligence of RCV, its representatives, employees, or agents.
Page 2
<PAGE>
9. NO ASSIGNMENT
Neither party shall assign this AGREEMENT or any rights or obligations
under this AGREEMENT without the prior written consent of the other party.
Subject to the foregoing, this AGREEMENT shall bind and inure to the benefit
of the respective parties hereto and their heirs, personal representatives
successors and assigns.
10. AMENDMENT OR MODIFICATION
This AGREEMENT may be amended or modified by, and only by, a written
instrument executed by the parties.
11. NO WAIVER
The waiver of one breach or default hereunder shall not constitute the
waiver of any subsequent breach or default.
12. SEVERABILITY
In the event any one or more provisions of this AGREEMENT are determined
to be invalid or unenforceable, such provision or provisions shall be deemed
severable from the remainder of this AGREEMENT and shall not cause the
invalidity or unenforceability of the remainder of this AGREEMENT.
13. GOVERNING LAW
This AGREEMENT shall be governed by and construed in accordance with the
laws of the State of California, U.S.A.
14. NOTICES
Any notice or report required or permitted by this AGREEMENT shall be in
writing and shall be sufficient if delivered personally or if sent by
registered or certified mail, postage prepaid, addressed to the appropriate
address for such party as set forth above, or to any other address of which
the sending party has received written notice from the receiving party.
15. ARBITRATION
Any controversy, claim, or dispute between the parties directly or
indirectly concerning this AGREEMENT or the breach thereof, or the subject
matter hereof, including questions concerning the scope and applicability of
this arbitration clause, shall be finally settled by arbitration in San Mateo
County, California, U.S.A., in accordance with the rules then obtaining of
the American Arbitration Association with regard to commercial arbitration.
16. ENTIRE AGREEMENT
This AGREEMENT and the Exhibits hereto, as signed by the parties, sets
forth the entire agreement and understanding of the parties and merges all
prior discussions and writings between them with regard to the services to be
provided under this AGREEMENT.
17. HEADINGS
Headings are provided for convenience only and shall have no force and
effect on their own.
Page 3
<PAGE>
In witness hereto the parties have executed this AGREEMENT as of the
date first set forth above.
"RCV" "CLIENT"
Robert C. Vaughan Michael J. Canney
- ---------------------------------- -----------------------------------
Robert C. Vaughan, Sr. Partner Michael J. Canney, President
dba The Orbis Group LLP Touch Tone America
Seal of CLIENT:
-----------------------------------
Page 4
<PAGE>
ROBERT C. VAUGHAN
EXHIBIT A
To AGREEMENT between RCV and TOUCH TONE AMERICA INC.
<TABLE>
<S> <C>
Services to be performed by RCV Compensation
2.1.1 Assistance in planning the 2.1.2, 2.3 and 6 and 2.1.7:
corporate debt and capital Fifteen thousand dollars per
structure month ($15,000)
2.1.2 Assistance in planning
shareholder control devices
and interparty agreement
2.1.3 Assistance in establishing and 2.1.4 and 2.1.5: Per Lehman scale:
implementing shareholder and 5% of first one million
investment community relations 4% of second one million
programs 3% of third one million
2% of fourth one million
1% of all over four million of
total value
2.1.4 Assistant in locating unrelated
companies that the client may
acquire or that the client may
be interested in acquiring,
domestic and foreign.
2.1.5 Assistance in developing and
implementing finance plans for
acquisition and/or business
expansion purposes including
but not limited to follow on
offerings, public or private.
2.1.6 Assistance in the location,
development, and the securing of
a banking network (domestic
and/or foreign) consistent with
the stated goals of the company.
2.1.7 Assistance in any other
activities as agreed upon and
directed by the board of Touch
Tone America.
</TABLE>
CONSULTING AGREEMENT Page 5
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in the Registration Statement and Prospectus of Touch
Tone America, Inc. of our reports dated June 23, 1995 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 Prospectus.
HEIN + ASSOCIATES LLP
Certified Public Accountants
Denver, Colorado
May 3, 1996
24.5
