UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q SB
[X] Quarterly Report Pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended August 31, 1997
---------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from N/A to N/A
--- ---
Commission File No. 0-24058
TOUCH TONE AMERICA, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 33-0424087
------------------------------ ----------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
4110 N. Scottsdale Road, Suite 170, Scottsdale, Arizona 85251
-------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (800) 535-2211
--------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. [X]Yes [ ]No
At October 10, 1997, 4,568,245 shares of common stock, no par value
were outstanding.
Page 1 of 15 pages.
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
INDEX TO FORM 10-QSB
AUGUST 31, 1997
PAGE NO.
PART I --------
- ------
CONSOLIDATED FINANCIAL STATEMENTS
a. Balance Sheets as of May 31, 1997 and
August 31, 1997 (Unaudited). . . . . . . . . . . . . . . . .F-2
b. Statements of Operations for the Three Months Ended
August 31, 1996 and 1997 (Unaudited) . . . . . . . . . . . .F-3
c. Statements of Cash Flows for the Three Months Ended
August 31, 1996 and 1997 (Unaudited) . . . . . . . . . . . .F-4
d. Notes to Consolidated Financial Statements . . . . . . . . .F-5
MANAGEMENT'S DISCUSSION AND ANALYSIS . . . . . . . . . . . . . . . . .F-8
PART II
- -------
a. Other Information. . . . . . . . . . . . . . . . . . . . . F-11
b. Signatures . . . . . . . . . . . . . . . . . . . . . . . . F-13
F-1
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MAY 31, AUGUST 31,
1997 1997
---------- ----------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 160,000 $ 73,000
Trade receivables, net allowance
for doubtful accounts of $156,000
and $133,000, respectively 154,000 130,000
Prepaid expense 80,000 31,000
---------- ----------
Total current assets 394,000 234,000
EQUIPMENT, net of accumulated
depreciation of $275,000 and
$326,000, respectively 962,000 911,000
OTHER:
Intangibles, net of accumulated
amortization of $264,000 and
$306,000, respectively 571,000 529,000
Refundable deposits 80,000 79,000
---------- ----------
TOTAL ASSETS $2,007,000 $1,753,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 686,000 $ 797,000
Accrued liabilities 816,000 793,000
Deferred revenues 65,000 33,000
Current portion of capital lease
obligations 68,000 59,000
---------- ----------
Total current liabilities 1,635,000 1,682,000
CAPITAL LEASE OBLIGATIONS, net of
current portion 65,000 57,000
COMMITMENTS AND CONTINGENCIES
(Notes 4 and 6)
COMMON STOCK AND OTHER STOCKHOLDERS'
EQUITY:
Preferred stock, no par value,
10,000,000 shares authorized;
none outstanding - -
Common stock, no par value,
100,000,000 shares authorized,
and 3,368,245 and 4,568,245
shares issued and outstanding,
respectively 8,017,000 8,437,000
Accumulated deficit (7,710,000) (8,423,000)
---------- ----------
Total stockholders' equity 307,000 14,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $2,007,000 $1,753,000
========== ==========
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE
MONTHS ENDED
AUGUST 31,
--------------------------
1996 1997
---------- ----------
NET REVENUES:
Long distance resell $ 340,000 $ 177,000
Internet access 176,000 265,000
---------- ----------
516,000 442,000
COST OF SALES:
Long distance resell (228,000) (148,000)
Internet access (142,000) (461,000)
---------- ----------
(370,000) (609,000)
---------- ----------
GROSS MARGIN 146,000 (167,000)
OPERATING EXPENSES:
Selling 58,000 31,000
General and administrative 722,000 420,000
Amortization and depreciation 90,000 93,000
Severance agreements 230,000 -
---------- ----------
1,100,000 544,000
---------- ----------
LOSS FROM OPERATIONS (954,000) (711,000)
OTHER EXPENSE -
Interest expense (income), net 106,000 2,000
---------- ----------
NET LOSS $(1,060,000) $ (713,000)
========== ==========
LOSS PER SHARE $ (.33) $ (.19)
========== ==========
WEIGHTED AVERAGE COMMON SHARES
AND EQUIVALENTS 3,205,000 3,768,000
========== ==========
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE
MONTHS ENDED
AUGUST 31,
---------------------------
1996 1997
---------- -----------
Net loss $(1,060,000) $(713,000)
Adjustments to reconcile net loss
to net cash from operating
activities:
Depreciation and amortization 90,000 93,000
Common stock for exchange of
debt at below market 127,000 -
Options issued at below market 173,000 -
Bad debt expense (recovery) 67,000 (23,000)
Change in assets and liabilities:
Decrease (increase) in:
Trade receivables (143,000) 47,000
Other assets (23,000) 50,000
Increase (decrease) in:
Accounts payable (110,000) 111,000
Accrued liabilities (241,000) (23,000)
Deferred revenue and other 30,000 (32,000)
---------- ----------
Net cash used in operating
activities (1,090,000) (490,000)
CASH FLOWS FROM INVESTING ACTIVITY -
Purchase of equipment (679,000) -
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (18,000) (17,000)
Payment of notes payable to
stockholders (183,000) -
Repayment of preferred stock (750,000) -
Proceeds from issuance of
common stock - 420,000
Offering costs incurred (67,000) -
---------- ----------
Net cash provided by (used in)
financing activities (1,018,000) 403,000
---------- ----------
NET DECREASE IN CASH (2,787,000) (87,000)
CASH, beginning of period 5,278,000 160,000
---------- ----------
CASH, end of period $2,491,000 $ 73,000
========== ==========
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
--------------------
The consolidated financial statements include the accounts of Touch
Tone America, Inc. (Touch Tone) and from November 1, 1995, GetNet
International, Inc. (GetNet) (collectively referred to as "the
Company"). Touch Tone acquired the outstanding common stock of GetNet
effective November 1, 1995.
Touch Tone is engaged in the reselling of long distance
telecommunications products and services primarily in the western and
southwestern United States. As a reseller of long distance services,
Touch Tone offers its customers the use of routing equipment and phone
lines of large carriers; in turn, the large carriers offer Touch Tone
volume discounts based on the use of this equipment.
GetNet is a provider of Internet and World Wide Web access services to
individuals and businesses in Arizona and other parts of the United
States. The Internet is a network of millions of computers around the
world which are able to communicate with one another, as well as
access the World Wide Web which is a system of documents on a
multitude of subjects.
2. DISCLOSURE SUMMARY:
------------------
Pursuant to rules and regulations of the Securities and Exchange
Commission, the Company has elected to omit substantially all the
disclosures normally included in financial statements prepared under
generally accepted accounting principles. Readers of these financial
statements should refer to the Company's Form 10-KSB filed for the
year ended May 31, 1997, for additional disclosures as well as other
filings with the Securities and Exchange Commission.
3. UNAUDITED INFORMATION:
---------------------
The Company's balance sheet as of August 31, 1997, and the statement
of operations for the three months ended August 31, 1996 and 1997 are
taken from the Company's books and records without audit. Management
believes, however, that such information includes all accruals, which
are considered recurring in nature, required for the fair presentation
of the Company's financial position and results of their operations as
of and for the periods then ended. The results of operations for the
interim periods presented are not necessarily indicative of results
expected for the full year.
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 and estimated losses for contingencies. Due to the
uncertainties inherent in the life of intangibles, and increased
competition and technology changes in the telecommunications industry,
it is reasonably possible that the estimated life of intangibles could
materially change in the forthcoming year.
F-5
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. CONTINUED OPERATIONS:
--------------------
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue operating as a going concern,
which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has
incurred significant losses since inception and as of August 31, 1997
has a working capital deficit of $1,448,000.
Furthermore, the Company has significant telecommunications
commitments for its Internet backbone from which it has not
experienced adequate revenues to generate a gross margin. If an
increase in revenues on its Internet backbone fail to materialize,
additional losses, the amount of which cannot currently be estimated,
could be recorded. In addition, the Company has significant
liabilities to, among others, its Internet circuit providers, AT&T,
and the IRS for payroll taxes, which if not paid could jeopardize the
Company's ability to continue its operations. Specifically, AT&T has
alleged that amounts in excess of $6,000,000 would be due under past
agreements, if the agreed upon settlement is not paid (see Note 6).
The Company's ability to continue as a going concern is dependent upon
several factors, including, but not limited to, the Company's raising
additional capital, making payment on its current obligations,
including AT&T, carrier commitments and the IRS for payroll taxes,
meeting the terms of its continuing service commitments and achieving
and maintaining profitable operations. The accompanying consolidated
financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
The Company is aggressively working to increase revenues through a
merger, which it believes will ultimately lead to profitable
operations and enable the Company to meet its continuing service
commitments. Subsequent to year-end, the Company also has reached a
settlement with AT&T, raised additional capital, and entered into a
merger agreement with another entity. The Company is continuing its
efforts to raise additional capital, which will be required, among
other things, to satisfy current obligations, including AT&T and fund
operations.
5. PROPOSED MERGER:
---------------
In August 1997, the Company entered into an agreement and plan of
reorganization whereby the Company will acquire all the issued and
outstanding shares of Orix Global Communications, Inc. (Orix), based
in Las Vegas, Nevada. The Company will issue to the Orix
stockholders, 4,500,000 shares of its common stock and 6,000,000
shares of a newly authorized Series C preferred stock. The Series C
preferred stock will be non-voting and will pay cumulative annual
dividends of 8%. Each share of Series C preferred stock is redeemable
for cash at the election of the holder or convertible into shares of
the Company's common stock at any time for a period of three years.
After three years, the Company must either convert or redeem the
Series C preferred stock. The Series C preferred stock is redeemable
at $1.50 per share or converts to .67 shares of the Company's common
stock. The completion of the merger is subject to approval by the
Board of Directors and stockholders of both companies.
F-6
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. CONTINGENCIES:
-------------
On September 19, 1997, the Company entered into a settlement agreement
with AT&T in connection with certain disagreements surrounding
fraudulent use of the Company's long-distance service and the
Company's failure to meet certain minimum commitments during fiscal
1997. AT&T is the Company's primary provider for long distance
service. Under the settlement, the Company is obligated to make
certain payments to AT&T on stipulated dates prior to December 12,
1997, when the final payment is due. As a remedy to this settlement,
if agreed upon amounts are not paid on a timely basis, AT&T has the
right and the Company would be liable for amounts due under prior
agreements. AT&T has alleged this amount is in excess of $6,000,000,
which is disputed by the Company. While the Company has recorded its
obligation under the settlement as a liability as of May 31, 1997, the
Company does not currently have the funds to make the required
payments. Therefore, additional capital will need to be raised by the
Company to satisfy this obligation. In addition, the Company will
forego receiving certain amounts previously withheld by AT&T.
Pursuant to the settlement, the Company also transferred to AT&T its
long-distance service for which AT&T was the provider and the Company
has no future service commitments with AT&T. Revenues from this
service totaled approximately $266,000 and $118,000 for the three
months ended August 31, 1996 and 1997.
7. SIGNIFICANT SALES AGENT RELATIONSHIP:
------------------------------------
The Company has an agreement with an independent sales agent, whereby
the agent receives maximum commissions of 32% on AT&T long distance
sales it originates. At current sales levels, the Company does not
realize a direct profit from the sales generated by the agent. For
the three months ended August 31, 1996 and 1997, the sales originated
by the agent have accounted for 34% and 36%, respectively, of company
AT&T long distance sales. As the AT&T long distance customer base was
transferred to AT&T with the settlement, the Company expects to
discontinue its relationship with this sales agent.
F-7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
AUGUST 31, 1997
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR TOUCH TONE SHOULD BE READ IN CONJUNCTION WITH
THE TOUCH TONE FINANCIAL STATEMENTS AND NOTES HERETO ATTACHED
HERETO.
FORWARD-LOOKING STATEMENTS MAY NOT PROVE ACCURATE
When used in this Form 10-QSB, the words "anticipate," "estimate,"
"expect," "project," and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks,
uncertainties and assumptions including the possibility that the Company's
Internet backbone will fail to generate projected revenues. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected.
GENERAL
In September 1997, the Company entered into a settlement agreement with
AT&T in connection with certain disagreements surrounding fraudulent use of
the Company's long distance service and the Company's failure to meet
certain minimum commitments during fiscal 1997. Pursuant to the
settlement, the Company transferred to AT&T its long distance service for
which AT&T was the provider, whose revenues totaled approximately $266,000
and $118,000 for the three months ended August 31, 1996 and 1997 and the
Company has no future service commitments with AT&T. Under the settlement,
the Company is obligated to make payments to AT&T on stipulated dates with
the final payment due on December 12, 1997. As a remedy to this
settlement, if such payments are not made timely, AT&T has the right, and
the Company would be liable, for amounts due under prior agreements. AT&T
has alleged this amount is in excess of $6,000,000, which is disputed by
the Company. While the obligation under the settlement agreement has been
recorded as a liability at May 31, 1997, the Company does not currently
have the funds to make these payments.
Furthermore, the Company has significant telecommunications commitments for
its Internet backbone from which it has not experienced adequate revenues
to generate a gross margin. If an increase in revenues on its Internet
backbone fail to materialize, additional losses, the amount of which cannot
currently be estimated, could be recorded. In addition, the Company has
significant liabilities to, among others, its Internet circuit providers,
AT&T, and the IRS for payroll taxes, which if not paid could jeopardize
the Company's ability to continue its operations.
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, but not limited to, the
Company's raising additional capital, making payment on its current
obligations, including AT&T, carrier commitments and the IRS for payroll
taxes, meeting the terms of its continuing service commitments and
achieving and maintaining profitable operations. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties. The Company is
aggressively working to increase revenues through a merger, which it
believes will ultimately lead to profitable operations and enable the
Company to meet its continuing service commitments. During the quarter,
the Company also has reached a settlement with AT&T, raised additional
capital, and entered into a merger agreement with another entity. The
Company is continuing its efforts to raise additional capital, which will
be required, among other things, to satisfy current obligations
F-8
<PAGE>
including AT&T and fund operations. As a result of continuing operating
losses and negative working capital, the Company's independent auditors
included a "going concern" paragraph with respect to the audited financial
statements as of and for the year ended May 31, 1997.
MERGER AGREEMENT
On August 11, 1997, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") whereby the Company will acquire all of
the issued and outstanding shares of Orix Global Communications, Inc.
(Orix) of Las Vegas, Nevada. Orix is a licensed reseller of international
telecommunications services, with operations in North America, Latin
America and various Asian countries. In turn, the Company will issue to
the Orix shareholders 4,500,000 shares of its "restricted" Common Stock and
6,000,000 shares of a newly authorized Series C Preferred Stock. The
Series C Preferred Stock is non-voting and will pay cumulative dividends of
8% per annum payable annually. Each share of Series C Preferred Stock is
redeemable for cash at the election of the holder or convertible into
shares of the Company's Common Stock at the election of the holder at any
time for a period of three years. After three years, the Company must
either convert or redeem the Series C Preferred Stock (subject to certain
adjustments). The Series C Preferred Stock is redeemable at $1.50 per
share or converts to 0.6667 shares of the Company's Common Stock. The
Series C Preferred Stock has a liquidation preference of $1.50 per share.
As a result of the Agreement, Orix would acquire control of both management
and the Company's Board. The completion of the Agreement is subject to the
satisfaction of certain closing conditions set forth in the Agreement and
the approval of the shareholders of the Company and Orix.
If the Agreement is completed, Orix will be considered the acquiring
entity, even though the Company is legally the surviving company.
Therefore, future financial statements of the Company will reflect the
operations of Orix for prior years and the Company's operations only from
the date the merger is completed.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED AUGUST 31, 1997
COMPARED TO THE THREE MONTHS ENDED AUGUST 31, 1996
Long distance resell revenue for the three months ended August 31, 1997 was
$176,000 compared to revenues of $340,000 during the three months ended
August 31, 1996. As the Company transferred its AT&T customer base to AT&T
as part of its settlement, future revenues for long distance telephone
service is expected to decrease. AT&T long distance revenue was $118,000
for the three months ended August 31, 1997.
Cost of sales for long distance service for the three months ended August
31, 1997 was $148,000, resulting in a gross margin of approximately $28,000
or 16% of net revenue. The gross margin for the three months ended August
31, 1996 was $112,000 or 33% of net revenue. The gross margin percentage
has decreased due to lower volume. Cost of sales for Internet access for
the three months ended August 31, 1997 was $461,000, resulting in a
negative gross margin of $(196,000). This negative gross margin is a
result of fixed costs for the Internet backbone that exceed revenues
currently generated from the service.
Selling expenses were $31,000 or 7% of net revenues for the three months
ended August 31, 1997 from $58,000 or 11% of net revenues for the prior
comparable period. The decrease in selling expense is due to lower
commissions paid on lower long distance sales.
General and administrative expenses decreased to $420,000 or 95% of net
revenue for the three months ended August 31, 1997 compared to $722,000 or
140% for the three months ended August 31, 1996. This decrease is, due
primarily to lower payroll costs of $137,000 for the three months ended
August 31, 1997 as compared to $374,000 for three months ended August 1996,
as well as, lower travel and legal costs.
F-9
<PAGE>
Interest expense, net of interest income in the three-month period ended
August 31, 1997, decreased from $106,000 in 1996 to $3,000 in 1997
primarily as a result of 70,000 shares of common stock being issued in
August 1996 to satisfy an outstanding debt of $210,000. The difference of
approximately $254,000 between the then market price of common stock and
the related debt was expensed in operations over the period the note was
outstanding. For the three months ended August 31, 1996, $127,000 was
expensed and the balance was previously expensed in fiscal 1997.
The Company had a net loss of $713,000 for the three months ended August
31, 1997. For the three months ended August 31, 1996, the Company had a
net loss of $1,060,000. The decrease in net loss between periods is
directly attributed to the decreasing general and administrative and
severance costs, and other reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at August 31, 1997 was $73,000 and net working
capital deficiency was $1,448,000. During the quarter ended August 31,
1997, the Company received approximately $420,000 from the issuance of
1,200,000 shares of the Company's common stock in a private placement.
However, the Company's cash position has decreased since May 31, 1997 due
primarily to the Company's significant operating losses and fixed
commitments.
Cash used in operations for the Company totaled $490,000 during the three
months ended August 31, 1997 as compared to $1,090,000 for the three months
ended August 31, 1996. This decrease in cash outflows can be primarily
attributed to the decreased loss from operations and improved cash flows
from receivables and payables.
Cash flows used in investing activities were $-0- during the three months
ended August 31, 1997 as compared to $679,000 during the three months ended
August 31, 1996. During the three months ended August 31, 1997, the
Company's investing activities consisted primarily of costs in constructing
GetNet's Internet backbone.
Cash flows provided by financing activities were $403,000 during the three
months ended August 31, 1997 as compared to $1,018,000 used by financing
activities for the three months ended August 31, 1996. During the three
months ended August 31, 1997, cash in flows represent proceeds form the
issuance of common stock in a private placement. During the three months
ended August 1996, cash out flows can be primarily attributed to payments
made to preferred stockholders for the redemption of their preferred stock
and repayments of notes payable to stockholders.
F-10
<PAGE>
TOUCH TONE AMERICA, INC.
PART II
ITEM NO. 1 LEGAL PROCEEDINGS
-----------------
The Company is a party to the following legal proceedings:
On August 30, 1996 a lawsuit was filed in the superior Court of
the State of Arizona, Maricopa County by the Company against the
Company's former President, Jonathan Miller and his wife, Janeece
Miller. The complaint details various causes of action against
Mr. Miller, in his capacity as a former Officer and Director of
the Company and seeks damages in the amount of $360,835 from the
defendants. Mr. Miller filed an answer in September 1996 denying
the allegations of the complaint. The Company dismissed this
action in 1997 to facilitate the Orix business combination.
Mrs. Janeece Miller filed a request with the American Arbitration
association regarding an alleged breach of her employment
agreement. She has made a claim for $32,500 plus attorney's fees
and costs as part of her severance package. This claim was filed
with the Arbitration Association on July 31, 1996 and the Company
responded, consenting to the arbitration but contesting the
allegations in the complaint, asserting that Ms. Miller
voluntarily resigned her employment with the Company and that the
terms of the severance package do not apply in her situation.
The action was dismissed in 1997 with each party paying its own
costs and expenses.
In July 1996, an unknown party fraudulently charged over
$1,000,000 in calling card long distance charges on the Company's
account. The Company has been diligently investigating the
matter and has contacted the carrier, AT&T, who denies any
responsibility. The Company retained counsel to represent it in
this claim and has submitted a letter to AT&T stating its
position that it has no liability for the fraud. In September
1997, the Company entered into a settlement agreement with AT&T
which settled this dispute, as well as other issues between the
parties.
On October 10, 1996, two identical lawsuits were filed in
Superior Court of the State of Arizona, Maricopa County by two
former officers and employees of GetNet for compensation due
pursuant to employment agreements. The plaintiffs requested
specific performance as it relates to past compensation,
attorneys' fees and costs. The Company settled both lawsuits in
March 1997 by paying each plaintiff a sum of $65,000.
Rebecca F. Kelley, a former employee, filed a lawsuit against the
Company in Superior Court, Maricopa County, Arizona, case number
CV96-22519 on December 13, 1996. She has alleged Breach of
Contract and Breach of the Covenant of Good Faith And Fair
Dealing and requested damages in the amount of $43,735. The
Company settled the lawsuit in March 1997 by paying the plaintiff
the sum of $30,000 cash and executing a promissory note for
approximately $17,000, which as of the date of this Report, has
been paid off.
F-11
<PAGE>
John McMahon, a former employee, filed a lawsuit against the
Company in Superior Court, Maricopa County, Arizona, case No.
CV97-05535 on March 26, 1997. He alleged Breach of Contract and
Breach of Covenant of Good Faith and Fair Dealing and requested
damages in the amount of $33,750. The Company did not prevail on
the merits of this case and was required to pay Mr. McMahon
approximately $38,000.
On March 7, 1997, the Company received notification that S.V.V.
Sales, Inc. dba Arcada Communications had terminated its merger
agreement with the Company. Subsequently, Arcada brought legal
action seeking a "break up" fee of $200,000 pursuant to the
Merger Agreement. In conjunction with this claim, Arcada
withheld payment to the Company of approximately $150,000 of
monies billed and supposedly collected from the Company's
customers under a "Billing and Collection Agreement" entered into
between Arcada and the Company prior to the termination of the
Merger Agreement. The Company settled this lawsuit in 1997 by
allowing Arcada to retain monies collected under the Billing and
Collection Agreement.
In June 1997, Michael J. Canney, the Company's former President
and Chief Executive Officer, filed a lawsuit in Maricopa County,
Arizona for monies owing pursuant to his two year employment
agreement with the Company. This action is set for arbitration,
however the Company has been advised by its attorneys that it may
not prevail in this action and may be liable for damages of from
$70,000 to $130,000.
A discussion of this litigation and other matters also under
"Commitments and Contingencies" appears at Footnote 7 of the
Financial Statements.
ITEM NO. 2 CHANGES IN SECURITIES
---------------------
None
ITEM NO. 3 DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None
ITEM NO. 4 SUBMISSION OF MATTER TO A VOTE OF SECURITIES HOLDERS
----------------------------------------------------
None
ITEM NO. 5 OTHER INFORMATION
-----------------
None
F-12
<PAGE>
ITEM NO. 6 EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
On June 12, 1997, the Registrant filed a Report on Form 8-K under
Item 4, "Changes in Registrant's Certifying Accountants;" on June
27, 1997, the Registrant filed a Report on Form 8-K/A under Item
4, "Changes in Registrant's Certifying Accountants;" on July 7,
1997, the Registrant filed a Report on Form 8-K under Item 4,
"Changes in Registrant's Certifying Accountants;" and on August
27, 1997, the Registrant filed a Report on Form 8-K under Item 2,
"Acquisition or Disposition of Assets."
F-13
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned thereunto duly authorized.
TOUCH TONE AMERICA, INC.
/s/ DR. EDWARD D. WIRTH
- ---------------------------------
Dr. Edward D. Wirth
Director
/s/ N. BRUCE WALKO
- ---------------------------------
N. Bruce Walko
Director
Date: October 13, 1997
F-14
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<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1997
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0
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