<PAGE>
As filed with the Securities and Exchange Commission on January 30, 1997
Registration No. 333-17403
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
under the
SECURITIES ACT OF 1933
TOUCH TONE AMERICA, INC.
(Exact name of registrant as specified in charter)
California 4813 33-0424087
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
Touch Tone America, Inc.
4110 N. Scottsdale Road, Suite 170
Scottsdale, Arizona 85251
(800) 535-2211
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
_______________
Michael J. Canney
Touch Tone America, Inc.
4110 N. Scottsdale Road, Suite 170
Scottsdale, Arizona 85251
(800) 535-2211
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES OF ALL COMMUNICATIONS TO:
John B. Wills, Esq. David M. Otto, Esq.
410 Seventeenth Street Robert C. Seidel, Esq.
Suite 1940 John P. Stokke, Esq.
Denver, Colorado 80202 Cairncross & Hempelmann, P.C.
(303) 628-0747 70th Floor, Columbia Center
(303) 592-1846 FAX 701 Fifth Avenue
Seattle, Washington 98104-7016
(206) 587-0700
(206) 587-2308 FAX
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO PUBLIC: As
soon as practicable after the effective date of this Registration Statement and
after the satisfaction or waiver of all conditions to the Merger of Arcada
Communications, Inc. with and into a wholly-owned subsidiary of the Registrant
pursuant to the Merger Agreement described in the enclosed Joint Proxy
Statement/Prospectus.
<PAGE>
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
<PAGE>
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of each Proposed
class of Amount Proposed maximum Amount of
securities to to be maximum aggregate registration
be registered registered offering price offering price fee
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 12,500,000 (1) (1) $102.41(1)(2)
- ------------------------------------------------------------------------------------------------------------------------------
Series B Preferred Stock 1,500,000 (1) (1) (1)
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock issuable 600,000 (1) (1) (1)
upon conversion of
Series B Preferred Stock
- ------------------------------------------------------------------------------------------------------------------------------
Total 297,000(1) $102.41(2)
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------
(1) Based on the book value of the securities to be received by the Registrant
as of September 30, 1996 for the purpose of computing the registration fee
as required by Rule 457(f).
(2) $100 of such filing fee was paid upon filing on December 6, 1996.
________________________
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said section 8(a)
may determine.
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM S-4
ITEM NO. CAPTION SECTIONS IN PROSPECTUS
- --------------------------------------------------------------------------------
<S> <C> <C>
A. INFORMATION ABOUT THE TRANSACTION
1 Forepart of the Registration Statement Outside Front Cover Page
and Outside Front Cover Page of
Prospectus
2 Inside Front and Outside Back Cover Inside Front Cover Pages (i)(ii);
Pages of Prospectus Table of Contents
3 Risk Factors, Ratio of Earnings to Risk Factors; Prospectus
Fixed Charges and Other Information Summary
4 Terms of the Transaction Terms of the Transaction
5 Pro Forma Financial Information Unaudited Pro Forma Condensed
Financial Information
6 Material Contracts with Company Being Not Applicable
Acquired
7 Additional Information Required for Not Applicable
Reoffering by Persons and Parties
Deemed to Be Underwriters
8 Interest of Named Experts and Counsel Experts
9 Disclosure of Commission Position on Statement as to Indemnification
Indemnification for Securities Act
Liabilities
B. INFORMATION ABOUT THE REGISTRANT
10 Information with Respect to S-3 Not Applicable
Registrants
11 Incorporation of Certain Information Not Applicable
by Reference
12 Information with Respect to S-2 or S-3 Not Applicable
Registrants
13 Incorporation of Certain Information Not Applicable
by Reference
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORM S-4
ITEM NO. CAPTION SECTIONS IN PROSPECTUS
- --------------------------------------------------------------------------------------
<S> <C> <C>
14 Information with Respect to Registrants Summary; Selected Consolidated Other Than
S-3 or S-2 Registrants Financial Data; Business of Touch-Tone,
Description of Securities; Dividend Policy; Material Changes;
Merger Profile and Strategy; Touch Tone Management's Discussion and
Analysis of Financial Condition and Results of
Operations
C. INFORMATION ABOUT COMPANY BEING
ACQUIRED
15 Information with Respect to S-3 Not Applicable
Companies
16 Information with Respect to S-2 or S-3 Not Applicable
Companies
17 Information with Respect to Companies Summary; Selected Combined
Other Than S-3 or S-2 Companies Financial Data; Business of
Arcada; Arcada Management's
Discussion and Analysis of Financial
Condition and Results of Operations
D. VOTING AND MANAGEMENT INFORMATION
18 Information if Proxies, Consents or The Special Meeting
Authorizations are to be Solicited
19 Information if Proxies, Consents or Rights of Arcada Shareholders
Authorizations are not to be
Solicited or in an Exchange Offer
20 Indemnification of Directors and Indemnification of Directors and Officers
Officers
21 Exhibits and Financial Statement Exhibits
Schedules
22 Undertakings Undertakings
</TABLE>
<PAGE>
TOUCH TONE AMERICA, INC.
January 28, 1997
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders of
Touch Tone America, Inc. ("Touch Tone") to be held at 10:00 a.m., local time, on
February 27, 1997, at 2001 Sixth Avenue, Suite 3210, Seattle, Washington 98181.
At this meeting, you will be asked to consider and vote upon a proposal to
approve and adopt the Agreement and Plan of Merger dated as of November 13,
1996, among Touch Tone, Touch Tone/Arcada, Inc. ("Merger Sub") and Arcada
Communications, Inc. ("Arcada"), as amended November 19, 1996, December 4, 1996
and January 22, 1997 (the "Merger Agreement"), and to approve the merger (the
"Merger") of Arcada with and into Merger Sub pursuant to the Merger Agreement.
As a result of the Merger, Arcada shareholders will receive 250 shares of Touch
Tone Common Stock and thirty (30) shares of Touch Tone Series B Preferred Stock,
subject to certain resale restrictions and adjustment under certain
circumstances, for each share of their Arcada Common Stock. As a result of the
Merger, Merger Sub, as survivor in the Merger, will continue to be a wholly
owned subsidiary of Touch Tone.
Based upon the number of shares of Arcada Common Stock outstanding as of
the date hereof, there would be approximately 12.5 million shares of Touch Tone
Common Stock and an aggregate of 1.5 million shares of Touch Tone Series B
Preferred Stock issued in the Merger. The Merger will constitute a reverse
acquisition of Touch Tone by Arcada in that Touch Tone will continue after the
Merger but it will be owned 78% by former Arcada shareholders (without giving
effect to the conversion of the shares of Series B Preferred Stock issued in the
Merger). Pursuant to the terms of the Merger Agreement, 11.5 million of the 12.5
million shares of Touch Tone Common Stock and any shares of Touch Tone Common
Stock issued upon conversion of the Touch Tone Series B Preferred Stock issued
in the Merger will be subject to resale restrictions until November, 1998.
You will also be asked to consider and vote upon a proposal to approve a
proposal to change Touch Tone's state of incorporation from California to
Washington by a merger with and into a newly formed, wholly owned Washington
subsidiary, which merger (the "Reincorporation Merger") will be effected
immediately prior to the Merger. APPROVAL OF THE REINCORPORATION MERGER IS A
CONDITION TO ARCADA'S OBLIGATION TO CONSUMMATE THE MERGER.
THE TOUCH TONE BOARD OF DIRECTORS HAS APPROVED THE MERGER AND
REINCORPORATION MERGER AND RECOMMENDS THAT YOU VOTE FOR EACH OF SUCH PROPOSALS.
Details of the proposed Merger and other important information concerning
Arcada and Touch Tone appear in the accompanying Joint Proxy
Statement/Prospectus. Please give this material your careful attention.
Whether or not you plan to attend the Special Meeting, please complete,
sign and date the accompanying proxy card and return it in the enclosed prepaid
envelope. You may revoke your proxy in the manner described in the accompanying
Joint Proxy Statement/Prospectus at any time before it has been voted at the
Special Meeting. If you attend the Special Meeting, you may vote in person even
if you have previously returned your proxy card. Your prompt cooperation will be
greatly appreciated.
Sincerely,
Michael J. Canney
<PAGE>
President
<PAGE>
TOUCH TONE AMERICA, INC.
__________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
January 28, 1997
TO THE SHAREHOLDERS OF TOUCH TONE AMERICA, INC.
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Touch Tone
America, Inc. ("Touch Tone"), a California corporation, will be held at 10:00
a.m., local time, on February 27, 1997, at 2001 Sixth Avenue, Suite 3210,
Seattle, Washington, to consider and vote upon the following proposals:
1. To approve and adopt the Agreement and Plan of Merger dated as of
November 13, 1996, among Touch Tone, Touch Tone/Arcada, Inc. ("Merger Sub")
and Arcada Communications, Inc. ("Arcada"), as amended November 19, 1996,
December 4, 1996 and January 22, 1997 (the "Merger Agreement"), and to
approve the merger (the "Merger") of Arcada with and into Merger Sub
pursuant to the Merger Agreement. As a result of the Merger, Arcada
shareholders will receive 250 shares of Touch Tone Common Stock and
thirty (30) shares of Touch Tone Series B Preferred Stock, in each case
subject to certain resale restrictions and adjustment under certain
circumstances, for each share of their Arcada Common Stock. As a result of
the Merger, Merger Sub, as survivor in the Merger, will remain a wholly
owned subsidiary of Touch Tone.
2. To approve a proposal to change Touch Tone's state of
incorporation from California to Washington by a merger with and into a
newly formed, wholly owned Washington subsidiary, which merger (the
"Reincorporation Merger") will be effected immediately prior to the Merger.
3. To transact such other business as may properly come before the
meeting or any postponements or adjournments thereof.
APPROVAL OF THE REINCORPORATION MERGER IS A CONDITION TO ARCADA'S
OBLIGATION TO CONSUMMATE THE MERGER.
Only shareholders of record at the close of business on January 15, 1997
are entitled to notice of and to vote at the Special Meeting.
All shareholders are cordially invited to attend the meeting in person.
However, to ensure your representation at the meeting, you are urged to
complete, sign, date and return the enclosed proxy card as promptly as possible
in the postage-prepaid envelope enclosed for that purpose. YOU MAY REVOKE YOUR
PROXY IN THE MANNER DESCRIBED IN THE ACCOMPANYING JOINT PROXY
STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE SPECIAL
MEETING. ANY SHAREHOLDER ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON EVEN
IF HE OR SHE HAS RETURNED A PROXY.
Sincerely,
Michael J. Canney
President
Scottsdale, Arizona
January 28, 1997
<PAGE>
ARCADA COMMUNICATIONS, INC.
January 28, 1997
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders of
Arcada Communications, Inc. ("Arcada") to be held at 10:00 a.m., local time, on
February 27, 1997, at 2001 Sixth Avenue, Suite 3210, Seattle, Washington 98181.
At this meeting, you will be asked to consider and vote upon a proposal to
approve and adopt the Agreement and Plan of Merger dated as of November 13,
1996, among Arcada, Touch Tone/Arcada, Inc. ("Merger Sub") and Touch Tone
America, Inc. ("Touch Tone"), as amended November 19, 1996, December 4, 1996 and
January 22, 1997 (the "Merger Agreement"), and to approve the merger (the
"Merger") of Arcada with and into Merger Sub pursuant to the Merger Agreement.
As a result of the Merger, Arcada shareholders will receive 250 shares of Touch
Tone Common Stock and thirty (30) shares of Touch Tone Series B Preferred Stock,
in each case subject to certain resale restrictions and adjustment under certain
circumstances for each share of their Arcada Common Stock, and Merger Sub, as
survivor in the Merger, will remain a wholly owned subsidiary of Touch Tone.
THE ARCADA BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND
RECOMMENDS THAT YOU VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT
AND APPROVAL OF THE MERGER.
Details of the proposed Merger and other important information concerning
Arcada and Touch Tone appear in the accompanying Joint Proxy
Statement/Prospectus. Please give this material your careful attention.
Whether or not you plan to attend the Special Meeting, please complete,
sign and date the accompanying proxy card and return it in the enclosed prepaid
envelope. You may revoke your proxy in the manner described in the accompanying
Joint Proxy Statement/Prospectus at any time before it has been voted at the
Special Meeting. If you attend the Special Meeting, you may vote in person even
if you have previously returned your proxy card. Your prompt cooperation will be
greatly appreciated.
Sincerely,
Frank J. Bonadio
President
Seattle, Washington
January 28, 1997
<PAGE>
ARCADA COMMUNICATIONS, INC.
______________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
January 28, 1997
TO THE SHAREHOLDERS OF ARCADA COMMUNICATIONS, INC.
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Arcada
Communications, Inc. ("Arcada"), a Washington corporation, will be held at 10:00
a.m., local time, on February 27, 1997, at 2001 Sixth Avenue, Suite 3210,
Seattle, Washington, to consider and vote upon the following proposals:
1. To approve and adopt the Agreement and Plan of Merger dated as of
November 13, 1996, among Arcada, Touch Tone/Arcada, Inc. ("Merger Sub") and
Touch Tone America, Inc. ("Touch Tone"), as amended November 19, 1996,
December 4, 1996 and January 22, 1997 (the "Merger Agreement"), and to
approve the merger (the "Merger") of Arcada with and into Merger Sub
pursuant to the Merger Agreement. As a result of the Merger, Arcada
shareholders will receive 250 shares of Touch Tone Common Stock and thirty
(30) shares of Touch Tone Series B Preferred Stock, in each case subject to
certain resale restrictions and adjustment under certain circumstances, for
each share of their Arcada Common Stock, and Merger Sub, as survivor in the
Merger, will remain a wholly owned subsidiary of Touch Tone.
2. To transact such other business as may properly come before the
meeting or any postponements or adjournments thereof.
Only holders of shares of Arcada Common Stock of record at the close of
business on January 15, 1997 are entitled to notice of and to vote at the
Special Meeting. Holders of Arcada Common Stock are entitled to assert
dissenters' rights in connection with the Merger.
All shareholders are cordially invited to attend the meeting in person.
However, to ensure your representation at the meeting, you are urged to
complete, sign, date and return the enclosed proxy care as promptly as possible
in the postage-prepaid envelope enclosed for that purpose. YOU MAY REVOKE YOUR
PROXY IN THE MANNER DESCRIBED IN THE ACCOMPANYING JOINT PROXY
STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE SPECIAL
MEETING. ANY SHAREHOLDER ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON EVEN
IF HE OR SHE HAS RETURNED A PROXY.
Sincerely,
Frank J. Bonadio
President
Seattle, Washington
January 28, 1997
<PAGE>
TOUCH TONE AMERICA, INC.
AND
ARCADA COMMUNICATIONS, INC.
________________________
JOINT PROXY STATEMENT
________________________
TOUCH TONE AMERICA, INC.
PROSPECTUS
________________________
This Joint Proxy Statement/Prospectus is being furnished to holders of
common stock, no par value, of Touch Tone America, Inc. ("Touch Tone Common
Stock"), a California corporation ("Touch Tone"), in connection with the
solicitation of proxies by the Board of Directors of Touch Tone (the "Touch Tone
Board") for the use at the Special Meeting of the Shareholders of Touch Tone
(the "Touch Tone Shareholders"), to be held at 10:00 a.m., local time, on
February 27, 1997, or at any adjournments or postponements thereof, for the
purposes set forth herein and in the accompanying Notice of Special Meeting of
Shareholders of Touch Tone (the "Touch Tone Special Meeting"). The Touch Tone
Special Meeting will be held at 2001 Sixth Avenue, Suite 3210, Seattle,
Washington.
This Joint Proxy Statement/Prospectus is also being furnished to holders of
common stock, no par value, of Arcada Communications, Inc. ("Arcada Common
Stock"), a Washington corporation ("Arcada"), in connection with the
solicitation of proxies by the Board of Directors of Arcada (the "Arcada Board")
for use at the Special Meeting of the Shareholders of Arcada (the "Arcada
Shareholders") to be held at 1:00 p.m., local time, on February 27, 1997, or at
any adjournments or postponements thereof, for the purposes set forth herein and
in the accompanying Notice of Special Meeting of Shareholders of Arcada (the
"Arcada Special Meeting"). The Arcada Special Meeting will be held at 2001 Sixth
Avenue, Suite 3210, Seattle, Washington.
This Joint Proxy Statement/Prospectus constitutes a prospectus of Touch
Tone with respect to the shares of Touch Tone Common Stock and the shares of
Touch Tone Series B Preferred Stock to be issued in connection with the
merger (the "Merger") of Arcada with and into Touch Tone/Arcada, Inc., a
Washington corporation and wholly owned subsidiary of Touch Tone ("Merger
Sub"), pursuant to the Agreement and Plan of Merger, dated as of November 13,
1996, among Touch Tone, Merger Sub and Arcada, as amended November 19, 1996,
December 4, 1996 and January 22, 1997 substantially in the form attached
hereto as Appendix A (the "Merger Agreement"). As a result of the Merger,
Merger Sub, the survivor in the Merger, will be a wholly owned subsidiary of
Touch Tone. Upon the effectiveness of the Merger, each outstanding share of
Arcada Common Stock will be converted into the right to receive 250 shares of
Touch Tone Common Stock and thirty (30) shares of Touch Tone Series B
Preferred Stock, in each case subject to adjustment under certain
circumstances. Based upon the number of shares of Arcada Common Stock
outstanding as of the date hereof, there would be approximately 12.5 million
shares of Touch Tone Common Stock and an aggregate of 1.5 million shares of
Touch Tone Series B Preferred Stock issued in the Merger. The Merger will
constitute a reverse acquisition of Touch Tone by Arcada in that Touch Tone
will continue after the Merger but it will be owned 78% by former Arcada
Shareholders (without giving effect to the conversion of the shares of Series
B Preferred Stock issued in The Merger). Pursuant to the terms of the Merger
Agreement, 11.5 million of the 12.5 million shares of Touch Tone Common Stock
and any shares of Touch Tone Common Stock issued upon conversion of the Touch
Tone Series B Preferred Stock issued in the Merger will be subject to resale
restrictions until November, 1998. All information contained in this Joint
Proxy Statement/Prospectus relating to Touch Tone has been supplied by Touch
Tone, and all information contained herein relating to Arcada has been
supplied by Arcada.
On November 15, 1996, the last trading day prior to announcement of the
Merger, the closing sale price on the Nasdaq SmallCap Market ("Nasdaq") of
Touch Tone Common Stock and warrants was $3.00 and $1.00, respectively. On
January 28, 1997, the closing sale price on Nasdaq of Touch Tone Common Stock
and warrants was $3.00 and $15/16ths, respectively.
Touch Tone is dependent on the Merger to increase revenues and operating
efficiencies. If the Merger should not be consummated for any reason, Touch Tone
will be in need of immediate financing to offset declining revenues and
short-falls on its carrier commitment. There can be no assurance such financing
would be available or on what terms. SEE "RISK FACTORS" COMMENCING ON PAGE 17
FOR A DESCRIPTION OF CERTAIN RISKS INVOLVED IN THE MERGER.
<PAGE>
This Joint Proxy Statement/Prospectus, the accompanying forms of proxy and
the other enclosed documents are first being mailed to shareholders of Touch
Tone and Arcada on or about January 28, 1997.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Joint Proxy Statement/Prospectus is January 28, 1997.
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . 1
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
THE COMPANIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
DATE AND PLACE OF THE MEETINGS. . . . . . . . . . . . . . . . . . . . . 3
PURPOSE OF THE MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . 3
VOTE REQUIRED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECURITY OWNERSHIP OF MANAGEMENT. . . . . . . . . . . . . . . . . . . . 4
THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
LOCK-UP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
INTERESTS OF CERTAIN PERSONS IN THE MERGER. . . . . . . . . . . . . . . 6
THE MERGER AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 7
ABSENCE OF REGULATORY FILINGS AND APPROVALS . . . . . . . . . . . . . . 8
MANAGEMENT AND OPERATIONS AFTER THE MERGER. . . . . . . . . . . . . . . 8
COMPARATIVE RIGHTS OF SHAREHOLDERS. . . . . . . . . . . . . . . . . . . 8
RESALES OF TOUCH TONE COMMON STOCK. . . . . . . . . . . . . . . . . . . 9
MARKET PRICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
SUMMARY CONSOLIDATED FINANCIAL DATA. . . . . . . . . . . . . . . . . . .12
STATEMENT OF OPERATIONS DATA. . . . . . . . . . . . . . . . . . . . . .12
BALANCE SHEET DATA. . . . . . . . . . . . . . . . . . . . . . . . . . .12
SUMMARY COMBINED FINANCIAL DATA OF ARCADA COMMUNICATIONS . . . . . . . .13
STATEMENT OF OPERATIONS DATA. . . . . . . . . . . . . . . . . . . . . .13
i
<PAGE>
BALANCE SHEET DATA. . . . . . . . . . . . . . . . . . . . . . . . . . .13
SUMMARY PRO FORMA CONDENSED FINANCIAL DATA . . . . . . . . . . . . . . .14
PRO FORMA CONDENSED STATEMENTS OF INCOME DATA . . . . . . . . . . . . .14
PRO FORMA CONDENSED BALANCE SHEET DATA. . . . . . . . . . . . . . . . .15
COMPARATIVE PER SHARE DATA. . . . . . . . . . . . . . . . . . . . . . .16
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
PAST FINANCIAL PERFORMANCE OF TOUCH TONE AND GOING CONCERN
CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
POTENTIAL LIABILITIES TO AT&T . . . . . . . . . . . . . . . . . . . . .18
CHANGE OF BUSINESS FOCUS. . . . . . . . . . . . . . . . . . . . . . . .19
THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
LONG DISTANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
INTERNET. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
THE TOUCH TONE SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . .29
MATTERS TO BE CONSIDERED AT THE TOUCH TONE SPECIAL MEETING. . . . . . .29
VOTING OF PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . .29
REVOCABILITY OF PROXIES; QUORUM . . . . . . . . . . . . . . . . . . . .29
VOTE REQUIRED FOR APPROVAL. . . . . . . . . . . . . . . . . . . . . . .30
APPRAISAL RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .30
SOLICITATION OF PROXIES . . . . . . . . . . . . . . . . . . . . . . . .30
THE ARCADA SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . .31
MATTERS TO BE CONSIDERED AT THE ARCADA SPECIAL MEETING. . . . . . . . .31
VOTING OF PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . .31
REVOCABILITY OF PROXIES; QUORUM . . . . . . . . . . . . . . . . . . . .31
VOTE REQUIRED FOR APPROVAL. . . . . . . . . . . . . . . . . . . . . . .32
APPRAISAL RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .32
ii
<PAGE>
SOLICITATION OF PROXIES . . . . . . . . . . . . . . . . . . . . . . . .32
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
BACKGROUND OF THE MERGER. . . . . . . . . . . . . . . . . . . . . . . .33
RECOMMENDATION OF THE BOARDS OF DIRECTORS; REASONS FOR THE MERGER . . .34
INTERESTS OF CERTAIN PERSONS IN THE MERGER. . . . . . . . . . . . . . .36
GOVERNMENTAL AND REGULATORY APPROVALS . . . . . . . . . . . . . . . . .37
FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . .37
ANTICIPATED ACCOUNTING TREATMENT. . . . . . . . . . . . . . . . . . . .38
DISSENTERS' RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . .39
NASDAQ LISTING. . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
RESALE OF TOUCH TONE COMMON STOCK . . . . . . . . . . . . . . . . . . .40
THE MERGER AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . .42
EFFECTIVE DATE AND TIME OF THE MERGER . . . . . . . . . . . . . . . . .42
CONDITIONS TO THE CONSUMMATION OF THE MERGER. . . . . . . . . . . . . .42
BUSINESS OF TOUCH TONE PENDING THE MERGER . . . . . . . . . . . . . . .43
WAIVER AND AMENDMENT. . . . . . . . . . . . . . . . . . . . . . . . . .43
TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
BREAK-UP FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
LOCK-UP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
EXCHANGE OF STOCK CERTIFICATES. . . . . . . . . . . . . . . . . . . . .45
EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
POST-MERGER DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . .46
BUSINESS OF TOUCH TONE . . . . . . . . . . . . . . . . . . . . . . . . .47
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
iii
<PAGE>
INTERNET DIVISION . . . . . . . . . . . . . . . . . . . . . . . . . . .48
LONG DISTANCE DIVISION. . . . . . . . . . . . . . . . . . . . . . . . .51
LOCAL ACCESS DIVISION . . . . . . . . . . . . . . . . . . . . . . . . .52
WIRELESS DIVISION . . . . . . . . . . . . . . . . . . . . . . . . . . .52
GOVERNMENT REGULATION . . . . . . . . . . . . . . . . . . . . . . . . .52
EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
TOUCH TONE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . .54
RECENT DEVELOPMENTS; SIGNIFICANT DECREASE IN LONG DISTANCE REVENUES;
NEED FOR ADDITIONAL FINANCING. . . . . . . . . . . . . . . . . . . . .54
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
LIQUIDITY AND CAPITAL RESOURCES . . . . . . . . . . . . . . . . . . . .55
THE GETNET ACQUISITION. . . . . . . . . . . . . . . . . . . . . . . . .57
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . .57
COMMITMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
BUSINESS OF ARCADA . . . . . . . . . . . . . . . . . . . . . . . . . . .63
INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
INDUSTRY BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . .63
COMPANY STRATEGY. . . . . . . . . . . . . . . . . . . . . . . . . . . .65
MARKETING AND SALES . . . . . . . . . . . . . . . . . . . . . . . . . .65
CUSTOMER SERVICE. . . . . . . . . . . . . . . . . . . . . . . . . . . .66
WIRELESS OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . .66
PRODUCTS AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . .67
BILLING SYSTEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
ACQUISITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
SUPPLIERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
ACQUISITION OF SWITCHING FACILITIES . . . . . . . . . . . . . . . . . .70
iv
<PAGE>
COMPETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70
REGULATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70
EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72
PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73
CERTAIN TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . .73
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . .73
ARCADA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . .74
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . .75
1995 COMPARED TO 1994 . . . . . . . . . . . . . . . . . . . . . . . . .75
LIQUIDITY AND CAPITAL RESOURCES . . . . . . . . . . . . . . . . . . . .75
IMPACT OF INFLATION . . . . . . . . . . . . . . . . . . . . . . . . . .76
TOUCH TONE MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . .77
CHANGE OF MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . .79
SUMMARY COMPENSATION TABLE. . . . . . . . . . . . . . . . . . . . . . .80
COMPENSATION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . .80
OPTION/SAR GRANTS TABLE . . . . . . . . . . . . . . . . . . . . . . . .80
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS OF
ARCADA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .82
TOUCH TONE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .82
ARCADA MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . .84
INDEMNIFICATION OF ARCADA OFFICERS AND DIRECTORS. . . . . . . . . . . .84
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS OF
ARCADA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85
MANAGEMENT AND OPERATIONS OF TOUCH TONE FOLLOWING THE MERGER . . . . . .86
OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86
v
<PAGE>
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86
EMPLOYMENT AND CONSULTING AGREEMENTS. . . . . . . . . . . . . . . . . .87
REINCORPORATION OF TOUCH TONE IN WASHINGTON. . . . . . . . . . . . . . .89
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89
PRINCIPAL REASONS FOR THE PROPOSED REINCORPORATION. . . . . . . . . . .89
PLAN OF REINCORPORATION MERGER. . . . . . . . . . . . . . . . . . . . .89
EFFECT OF REINCORPORATION AND REINCORPORATION MERGER. . . . . . . . . .90
DESCRIPTION OF CAPITAL STOCK OF TOUCH TONE . . . . . . . . . . . . . . .91
COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91
PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . .91
WARRANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92
TRANSFER AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . .93
DESCRIPTION OF CAPITAL STOCK OF ARCADA . . . . . . . . . . . . . . . . .94
COMPARISON OF RIGHTS OF HOLDERS OF TOUCH TONE COMMON STOCK AND TOUCH
TONE WASHINGTON COMMON STOCK . . . . . . . . . . . . . . . . . . . . . .95
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95
VOTING RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95
NUMBER OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . .95
REMOVAL OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . .96
CALL OF SPECIAL SHAREHOLDER MEETINGS. . . . . . . . . . . . . . . . . .96
SHAREHOLDERS' ACTION WITHOUT A MEETING. . . . . . . . . . . . . . . . .96
AMENDMENTS TO CHARTER . . . . . . . . . . . . . . . . . . . . . . . . .96
PREEMPTIVE RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . .97
LIMITATIONS ON DIRECTORS' LIABILITY . . . . . . . . . . . . . . . . . .97
INDEMNIFICATION OF DIRECTORS AND OFFICERS . . . . . . . . . . . . . . .97
DISSENTERS' RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . .97
vi
<PAGE>
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99
OTHER INFORMATION AND STOCKHOLDER PROPOSALS. . . . . . . . . . . . . . .99
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . 1
APPENDICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
A. MERGER AGREEMENT INCLUDING PLAN OF MERGER . . . . . . . . . . . . . 3
B. WASHINGTON DISSENTERS' RIGHTS STATUTE . . . . . . . . . . . . . . . 3
C. FORM OF AGREEMENT AND PLAN OF REINCORPORATION MERGER. . . . . . . . 3
D. ARTICLES OF INCORPORATION AND BYLAWS OF TOUCH TONE - WASHINGTON . . 3
vii
<PAGE>
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
JOINT PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH THE OFFERING OF SECURITIES
MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY TOUCH TONE OR ARCADA. THIS JOINT
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, NOR DOES IT CONSTITUTE THE
SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS
NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THE JOINT PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF
SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF TOUCH TONE OR ARCADA SINCE THE
DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO ITS DATE.
AVAILABLE INFORMATION
Touch Tone is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("the 1934 Act"), and in accordance therewith
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at its principal office at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: in Denver, 1801 California Street, Suite 4800,
Denver, Colorado 80202; in Chicago, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; in New York, 7 World Trade Center, Suite 1300, New
York, New York 10048; in Miami, 1401 Brickell Avenue, Suite 200, Miami, Florida
33131; and in Los Angeles, 5670 Wilshire Boulevard, 11th Floor, Los Angeles,
California 90036. Copies of such materials can be obtained at prescribed rates
by written request addressed to the Commission, Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains a Web
Site that contains reports, proxy and information statements and other
information regarding registrants, including Touch Tone, that file
electronically with the Commission at http://www.sec.gov. In addition, copies of
such documents and other information are provided to Nasdaq and can be inspected
at the Nasdaq offices maintained at the National Association of Securities
Dealers, Inc., 1735"K" Street, Washington, D.C. 20549.
Touch Tone has filed with the Commission in Washington, D.C. a Registration
Statement on Form S-4 (together with all amendments, supplements, and exhibits
thereto, referred to as the "Registration Statement") under the Securities Act
of 1933, as amended, (the "1933 Act") with respect to the Touch Tone Common
Stock and Series B Preferred Stock to be issued in the Merger. This Joint Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto. Such additional information may
be obtained from the Commission's principal office in Washington D.C. Statements
contained in this Joint Proxy Statement/Prospectus or in any document
incorporated in this Joint Proxy Statement/Prospectus by reference as to the
contents of any contract or other document referred to herein or therein are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement or
such other document filed as an exhibit to the Registration Statement or such
other document, each such statement being qualified in all respects by such
reference.
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<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS JOINT PROXY STATEMENT/PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS AND THE APPENDICES HERETO. AS USED HEREIN,
UNLESS THE CONTEXT OTHERWISE REQUIRES, "TOUCH TONE" MEANS TOUCH TONE AMERICA,
INC. AND ITS CONSOLIDATED SUBSIDIARY AND, AFTER GIVING EFFECT TO THE
REINCORPORATION MERGER, TOUCH TONE - WASHINGTON, "ARCADA" MEANS S.V.V. SALES,
INC., STELLAR COMMUNICATIONS, INC. AND LEBANCO, LTD., ALL OF WHICH COMPANIES DO
BUSINESS AS ARCADA COMMUNICATIONS AND ALL OF WHICH COMPANIES WILL BE MERGED
PRIOR TO THE MERGER, AND "MERGER SUB" MEANS TOUCH TONE/ARCADA, INC., A WHOLLY
OWNED SUBSIDIARY OF TOUCH TONE.
__________________
TOUCH TONE AND ARCADA SHAREHOLDERS ARE URGED TO READ THIS JOINT PROXY
STATEMENT/PROSPECTUS AND THE APPENDICES HERETO IN THEIR ENTIRETY. SHAREHOLDERS
OF EACH COMPANY SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH BELOW
UNDER THE HEADING "RISK FACTORS."
__________________
THE COMPANIES
TOUCH TONE AMERICA AND TOUCH TONE/ARCADA
Touch Tone currently provides long distance and Internet services, and to a
lesser extent, paging products. Touch Tone has a small long distance customer
base which is primarily located in the Southwestern United States. Due to
intense competition in the long distance industry and the high cost of its AT&T
long distance contracts, Touch Tone has focused its efforts on the development
of a national Internet "backbone." An Internet backbone consists of a
centralized high-speed computer network that allows access to the Internet and
connects smaller computer networks around the United States. With the continued
development of the Internet backbone, Touch Tone is able to offer Internet
services to Internet service providers and larger individual, dial up customer
accounts. Touch Tone was organized under the laws of the State of California in
1990. Touch Tone's corporate offices are located at 4110 N. Scottsdale Road,
Suite 170, Scottsdale, Arizona 85251 and its telephone number is (800) 535-2211.
Merger Sub was organized as a Washington corporation in 1996 for the
purpose of consummating the Merger and the other transactions contemplated by
the Merger Agreement. Merger Sub has nominal assets or business and has not
carried on any activities to date other than incident to its formation and in
connection with the Merger and the other transactions contemplated by the Merger
Agreement. Merger Sub's corporate offices are located at 4110 N. Scottsdale
Road, Suite 170, Scottsdale, Arizona 85251.
For additional information concerning Touch Tone, see "AVAILABLE
INFORMATION," BUSINESS OF TOUCH TONE," "TOUCH TONE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS" and "TOUCH TONE
MANAGEMENT."
ARCADA
Arcada was organized under the laws of the State of Washington in 1987 as
S.V.V. Sales, Inc. It is currently engaged in the provision of long-distance
voice and data telecommunication services in 17 states. Arcada offers a broad
array of services designed for the telecommunications needs of small and
mid-sized commercial customers. Arcada believes that it can provide services to
its target market at rates for long distance below those typically charged by
the major carriers. Arcada also resells cellular airtime and cellular long
distance telecommunications services. Arcada's executive offices are located at
2001 Sixth Avenue, Suite 3210, Seattle, Washington 98121-2516, telephone (206)
441-5022.
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<PAGE>
For additional information concerning Arcada, see "BUSINESS OF ARCADA,"
"ARCADA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" and "ARCADA MANAGEMENT."
DATE AND PLACE OF THE MEETINGS
TIME AND PLACE. The Touch Tone Special Meeting will be held at 10:00 a.m.,
Seattle, Washington time, on February 26, 1997, at the offices of Arcada, 2001
Sixth Avenue, Suite 3210, Seattle, Washington 98121-2516.
The Arcada Special Meeting will be held at 1:00 p.m., Seattle, Washington
time, on February 26, 1997 at the offices of Arcada, 2001 Sixth Avenue, Suite
3210, Seattle, Washington 98121-2516.
PURPOSE OF THE MEETINGS
THE TOUCH TONE SPECIAL MEETING. At the Touch Tone Special Meeting, the
Touch Tone Shareholders will be asked to consider the vote upon proposals (i) to
approve and adopt the Merger Agreement (included as Appendix A to this Joint
Proxy Statement/Prospectus incorporated herein by reference), pursuant to which,
among other things, Arcada will be merged with and into Merger Sub, with Merger
Sub as the surviving corporation and continuing as a wholly owned subsidiary of
Touch Tone, and to approve the Merger and the issuance of shares of Touch Tone
Common Stock and Touch Tone Series B Preferred Stock in the Merger, (ii) to
approve a proposal to change Touch Tone's state of incorporation from California
to Washington by the merger of Touch Tone with and into a newly formed, wholly
owned Washington subsidiary ("Touch Tone - Washington"), which merger will be
affected immediately prior to the Merger, and (iii) to transact such other
business as may properly come before the Touch Tone Special Meeting.
THE ARCADA SPECIAL MEETING. At the Arcada Special Meeting, Arcada
Shareholders will consider and vote upon a proposal to approve and adopt the
Merger Agreement and to approve the Merger. Arcada Shareholders will also
consider and vote upon any other matter that may properly come before the Arcada
Special Meeting.
VOTE REQUIRED
TOUCH TONE. The adoption and approval of the Merger Agreement and the
approval of the Merger requires the affirmative vote of the holders of a
majority of the outstanding shares of Touch Tone Common Stock entitled to vote
thereon. The adoption and approval of the Reincorporation Merger requires the
affirmative vote of the holders of a majority of the outstanding shares of the
Touch Tone Common Stock entitled to vote thereon.
Arcada. The adoption and approval of the Merger Agreement and the approval
of the Merger requires the affirmative vote of the holders of two-thirds of the
outstanding shares of Arcada Common Stock entitled to vote thereon.
See "THE SPECIAL MEETINGS - Vote Required."
SHAREHOLDERS ENTITLED TO VOTE. The Record Date for the determination of
holders of Touch Tone and Arcada Common Stock entitled to notice of and to vote
at the Touch Tone and Arcada Special Meetings is January 15, 1997. On that
date, Touch Tone had issued and outstanding 3,358,245 shares of
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<PAGE>
Touch Tone Common Stock, held by approximately 1,300 beneficial holders. As
of the Record Date, Arcada has issued and outstanding 50,000 shares of Arcada
Common Stock, held by four holders of record.
SECURITY OWNERSHIP OF MANAGEMENT
TOUCH TONE. As of the Record Date, directors and executive officers of
Touch Tone and their affiliates were beneficial owners of an aggregate of
114,516 shares, or approximately 3.4% of the outstanding shares of Touch Tone
Common Stock (excluding 300,000 shares underlying warrants to purchase Touch
Tone Common Stock at $4.00 per share held by such directors and executive
officers also outstanding and exercisable on that date and options to purchase
125,000 shares at $.01 per share, which will be granted to Michael J. Canney, a
director and the President and Chief Executive Officer of Touch Tone, upon
consummation of the Merger as part of a consulting agreement to be entered into
between Touch Tone and Mr. Canney effective upon consummation of the Merger).
The executive officers and directors of Touch Tone who are also
stockholders of Touch Tone have indicated that they intend to vote their shares
in favor of the proposals submitted to shareholders at the Touch Tone special
meetings. In addition, Touch Tone has agreed, pursuant to the merger agreement,
to use its best efforts to have each of such directors and officers, together
with its top ten (10) shareholders, to agree to vote their shares of Touch Tone
common stock in favor of the merger and the reincorporation merger.
ARCADA. As of the Record Date, directors and executive officers of Arcada
and their affiliates were beneficial owners of an aggregate of 48,000 shares, or
98% of the outstanding shares of Arcada Common Stock.
The executive officers and directors of Arcada who are also stockholders of
Arcada have indicated that they intend to vote their shares in favor of the
proposals submitted to shareholders at the Arcada Special Meeting. Because such
executive officers and directors beneficially own 98% of the Arcada Common
Stock, approval of the Merger by Arcada Shareholders is substantially certain to
occur.
Based upon the number of shares of Arcada Common Stock outstanding as of
the date hereof, there would be approximately 12.5 million shares of Touch Tone
Common Stock and 1.5 million shares of Touch Tone Series B Preferred Stock
issued in the Merger representing 78% of the outstanding Touch Tone Common Stock
(without giving effect to the conversion of the shares of Series B Preferred
Stock issued in the Merger).
THE MERGER
THE MERGER. The Merger Agreement provides for the Merger of Arcada with and
into Merger Sub, with Merger Sub as the surviving entity. As a result of the
Merger, each outstanding share of Arcada Common Stock will be converted into the
right to receive 250 shares of Touch Tone Common Stock and thirty (30) shares of
Touch Tone Series B Preferred Stock, in each case subject to adjustment under
certain circumstances. Based upon the number of shares of Arcada Common Stock
outstanding as of the record date (the "Record Date") for the determination of
holders of Touch Tone and Arcada Common Stock entitled to notice of and to vote
at the Touch Tone and Arcada Special Meeting, there would be approximately 12.5
million shares of Touch Tone Common Stock and an aggregate of 1.5 million shares
of Touch Tone Series B Preferred Stock issued in the Merger, representing
approximately 78% of the outstanding Touch Tone Common Stock (without giving
effect to the conversion of the shares of Touch Tone Series B Preferred Stock
issued in the Merger). Pursuant to the terms of the Merger Agreement, 11.5
million of the 12.5 million shares of Touch Tone Common Stock and any shares of
Touch Tone Common Stock issued upon conversion of the Touch Tone Series B
Preferred Stock issued in the Merger will be subject to resale restrictions
until November, 1998. See "THE MERGER - General."
The Touch Tone Series B Preferred Stock issued in the Merger will be
non-voting and will pay cumulative dividends of 8% per annum, payable
annually. Each share of Preferred Stock is redeemable for cash at the
election of Touch Tone or convertible into shares of Touch Tone Common Stock
at the election of Touch Tone or the holder of the Series B Preferred Stock
at any time for a period of three years from the date of issuance. On the
third anniversary of the date of issuance Touch Tone must either convert or
redeem the Series B Preferred Stock. The Series B Preferred Stock is
redeemable at $1.00 per share (subject to adjustment in certain
circumstances) or convertible into 0.40 shares of Touch Tone Common Stock.
The Series B Preferred Stock has a liquidation preference of $1.00 per share.
See "RISK FACTORS - Payment of Dividends on Preferred Stock; Potential
Conflicts of Interest" and "DESCRIPTION OF CAPITAL STOCK OF TOUCH TONE -
Preferred Stock."
The separate existence of Arcada will cease upon the effectiveness of the
Merger. The articles of incorporation and bylaws of Merger Sub will continue to
be the articles and bylaws of the surviving entity after
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<PAGE>
completion of the Merger and the Merger Sub board of directors will continue to
be the board of directors of the surviving entity after completion of the
Merger. Upon completion of the Mergers, the Touch Tone Board will be
reconstituted as described elsewhere herein. Upon consummation of the Merger,
all shares of Arcada Common Stock will automatically be canceled and will cease
to exist. Each holder of a certificate representing any shares of Arcada Common
Stock will cease to have any rights with respect thereto, except the right to
receive shares of Touch Tone Common Stock and a Promissory Note to be issued
upon surrender of such certificate, as described below, or the right of
dissenting Arcada Shareholders to receive fair value for their shares of Arcada
Common Stock, under certain circumstances. See "THE MERGER - Dissenters'
Rights."
At the effective date of the Merger (the "Effective Date"), each
outstanding share of Arcada Common Stock will be converted into the right to
receive 250 shares of Touch Tone Common Stock and thirty (30) shares of Touch
Tone Series B Preferred Stock. See "THE MERGER - General."
Based on the number of shares outstanding on the Record Date, upon
consummation of the Merger there will be approximately 16,070,000 shares of
Touch Tone Common Stock outstanding (including 250,000 shares to be issued to a
consultant) and the shares of Touch Tone Common Stock issued to stockholders of
Arcada pursuant to the Merger Agreement will comprise approximately 78% of the
total number of shares of Touch Tone Common Stock then outstanding (without
giving effect to conversion of 1.5 million shares of Touch Tone Series B
Preferred Stock issued in the Merger). See "SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN BENEFICIAL OWNERS" and "RISK FACTORS - Significant Shareholders."
No certificates for fractional shares of Touch Tone Common Stock or Touch
Tone Preferred Stock will be issued as a result of the Merger. Instead, each
Arcada Shareholder otherwise entitled to a fractional share will receive cash in
lieu of such fractional share in an amount equal to the fraction multiplied by
the closing price of Touch Tone Common Stock on the date prior to the Effective
Date.
RECOMMENDATIONS
TOUCH TONE. The Touch Tone Board believes that the terms of the Merger are
fair to and advisable and in the best interests of Touch Tone Shareholders and
has approved the Merger Agreement and the Reincorporation Merger. THE TOUCH TONE
BOARD RECOMMENDS THAT TOUCH TONE SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE
AND ADOPT THE MERGER AGREEMENT AND TO APPROVE THE REINCORPORATION MERGER. Four
out of five Touch Tone Directors approved the Merger with one director
abstaining based on a perceived conflict of interest. In considering the
recommendation of the Touch Tone Board, Touch Tone Shareholders should be aware
that certain officers and directors have certain interests in the Merger apart
from their interest as a Touch Tone Shareholder. See "THE MERGER -
Recommendations of the Board of Directors; Reasons for the Merger" and
"Interests of Certain Persons in the Merger."
ARCADA. The Arcada Board believes that the terms of the Merger are fair to
and advisable and in the best interest of the Arcada Shareholders and has
unanimously approved the Merger Agreement. THE ARCADA BOARD UNANIMOUSLY
RECOMMENDS THAT THE ARCADA SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE AND
ADOPT THE MERGER AGREEMENT. In considering the recommendation of the Arcada
Board, Arcada Shareholders should be aware that certain officers and directors
have interests in the Merger apart from their interest as a Shareholder. Because
the Arcada Board beneficially owns 98% of the Arcada Common Stock, approval of
the Merger by Arcada Shareholders is substantially certain to occur. See "THE
MERGER - Recommendations of the Board of Directors; Reasons for the Merger" and
"Interests of Certain Persons in the Merger."
RISK FACTORS
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<PAGE>
In determining whether to approve the Merger Agreement, Touch Tone and
Arcada Shareholders should consider the risks set forth under "RISK FACTORS."
The telecommunications industry is extremely competitive and evolving rapidly.
There can be no assurance that Touch Tone, Arcada or Touch Tone and Arcada as a
combined company will be able to compete and operate profitably in the future.
IN PARTICULAR, TOUCH TONE HAS EXPERIENCED SEVERE OPERATIONAL AND MANAGEMENT
DIFFICULTIES AND HAS RECENTLY FOCUSED SUBSTANTIALLY ALL OF ITS RESOURCES ON ITS
INTERNET-RELATED BUSINESS, AN UNPROVEN BUSINESS WHICH HAS REQUIRED SIGNIFICANT
CAPITAL EXPENDITURES. BECAUSE OF TOUCH TONE'S OPERATING LOSSES FROM ITS LONG
DISTANCE RESELLER BUSINESS, THE LONG DISTANCE SERVICE COMMITMENTS TO AT&T AND
OTHERS, AND ITS CAPITAL EXPENDITURES ON ITS INTERNET ACTIVITIES, TOUCH TONE WILL
REQUIRE SUBSTANTIAL ADDITIONAL FINANCING IN THE NEAR TERM IF IT DOES NOT
COMPLETE THE MERGER.
LOCK-UP
As part of the Merger Agreement, the Arcada Shareholders will be restricted
from selling shares of Touch Tone Common Stock and any shares of Touch Tone
Common Stock issued upon conversion of the Touch Tone Series B Preferred Stock
received in the Merger (the "Lock-up") except as follows: (i) an aggregate of
250,000 shares of Touch Tone Common Stock may be sold prior to May 1997, (ii) an
additional 250,000 shares may be sold between May 1997 and November 1997, and
(iii) an additional 500,000 shares may be sold between November 1997 and
November 1998. After November 1998, there will be no further restrictions on
sales of Touch Tone Common Stock pursuant to the terms of the Lock-up.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In connection with the Merger, on the date the Merger is consummated,
Michael J. Canney, a director and the President and Chief Executive Officer of
Touch Tone, will resign as President and Chief Executive Officer of Touch Tone
and will enter into a consulting agreement with Touch Tone providing for a $500
per day consulting fee for each day Mr. Canney renders such services to Touch
Tone, and the grant of options to purchase 125,000 shares of Touch Tone Common
Stock at an exercise price of $.01 per share. See "MANAGEMENT AND OPERATIONS OF
TOUCH TONE FOLLOWING THE MERGER - Employment and Consulting Agreements."
In connection with the Merger, on the date the Merger is consummated, Frank
J. Bonadio, a director and President and Chief Executive Officer of Arcada will
be named President and Chief Executive Officer of Touch Tone pursuant to an
employment agreement providing for an annual salary of $150,000 per annum and
the grant of options to purchase 100,000 shares of Touch Tone Common Stock at an
exercise price equal to the fair market value per share of Touch Tone Common
Stock on the date of grant. See "MANAGEMENT AND OPERATIONS OF TOUCH TONE
FOLLOWING THE MERGER - Employment and Consulting Agreements."
In connection with the Merger, on the date the Merger is consummated,
Robert C. Vaughan, a consultant to Touch Tone, will agree to terminate his
present consulting agreement and will enter into a new consulting agreement with
Touch Tone providing for the payment of a commission to Mr. Vaughan of $150,000
in cash and 250,000 shares of Touch Tone Common Stock in satisfaction of certain
"finders fee" provisions set forth in Mr. Vaughan's current consulting agreement
relating to the Merger. The new consulting agreement will provide that Mr.
Vaughan will serve as consultant to Touch Tone for a period of one year
following the Effective Time for an annual consulting fee of $120,000. Mr.
Vaughan will also receive commissions for introducing Touch Tone to future
merger and acquisition candidates, which commissions will be paid on a sliding
scale formula based on the dollar value of such mergers or acquisitions.
In connection with the Merger, on the date the Merger is consummated,
Touch Tone, Arcada and Robert and Keith Leppaluoto, both Arcada Shareholders
and Directors of Arcada, have agreed to exchange an aggregate of $200,000 of
presently outstanding debt owed to such Shareholders by Arcada into 200,000
shares of Touch Tone Series B Preferred
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<PAGE>
Stock, which shares of Series B Preferred Stock will be in addition to the 1.5
million shares of Series B Preferred Stock issued in the Merger.
See also "MANAGEMENT AND OPERATIONS OF TOUCH TONE FOLLOWING THE MERGER -
Management," "THE MERGER - Interests of Certain Persons in the Merger" and "THE
MERGER AGREEMENT."
In connection with the Merger, on the date the Merger is consummated, each
of Robert Leppaluoto and Keith Leppaluoto, currently Directors and Shareholders
of Arcada, will enter into consulting agreements with Touch Tone providing for
an annual consulting fee of $60,000 per annum. Robert and Keith Leppaluoto will
also be named Directors of Touch Tone at the Effective Time. See "MANAGEMENT AND
OPERATIONS OF TOUCH TONE FOLLOWING THE MERGER."
DISSENTERS' RIGHTS. Arcada Shareholders who do not vote in favor of the
Merger may be entitled to certain dissenters' rights under Washington law. Such
dissenters' rights are described under "THE MERGER - Rights of Dissenting Arcada
Shareholders." Shareholders of Touch Tone will not be entitled to appraisal
rights in connection with the Merger or the Reincorporation Merger.
FEDERAL INCOME TAX CONSEQUENCES. The Merger is intended to qualify as a
nontaxable reorganization under section 368(a) of the Internal Revenue Code of
1986, as amended and in effect on the date hereof (the "Code"). Accordingly, for
federal income tax purposes, neither Touch Tone, Arcada nor Merger Sub will
recognize any taxable gain or loss as a result of the Merger and Arcada
Shareholders will not recognize any taxable gain or loss on the conversion of
their Arcada Common Stock into Touch Tone Common Stock and Touch Tone Preferred
Stock pursuant to the Merger. Arcada shareholders will recognize taxable gain or
loss upon Touch Tone's payment of dividends on the Touch Tone Series B Preferred
Stock issued in the Merger and upon Touch Tone's redemption of such Preferred
Stock for cash in an amount equal to the difference between the amount of cash
received and the basis of the Arcada Common Stock attributable thereto. Arcada
Shareholders who perfect their dissenters' rights will, for federal income tax
purposes, recognize gain or loss on the receipt of cash in exchange for their
Arcada Common Stock in an amount equal to the difference between the amount of
cash received and the basis of the stock surrendered in exchange therefor. See
"THE MERGER -Federal Income Tax Consequences."
EACH HOLDER OF ARCADA COMMON STOCK SHOULD CONSULT HIS OWN TAX ADVISOR
REGARDING THE TAX CONSEQUENCES OF THE MERGER IN LIGHT OF SUCH HOLDER'S OWN
SITUATION, INCLUDING THE APPLICATION AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
INCOME AND OTHER TAX LAWS.
ACCOUNTING TREATMENT. The Merger will be accounted for as a "purchase" in
accordance with generally accepted accounting principles. See "THE MERGER-
Anticipated Accounting Treatment" and "UNAUDITED PRO FORMA CONDENSED FINANCIAL
INFORMATION."
THE MERGER AGREEMENT
EFFECTIVE TIME OF THE MERGER. The Merger will become effective at the time
of the filing and acceptance of the Articles of Merger in Washington or such
later date as is specified in such Articles (the "Effective Time"). See MERGER
AGREEMENT - Conditions to the Consummation of the Merger."
CONDITIONS TO THE MERGER. The respective obligations of Touch Tone, Merger
Sub and Arcada to consummate the Merger are subject to various conditions,
including, among others, (i) the approval of Touch Tone and Arcada Shareholders
of the Merger and, in the case of Touch Tone Shareholders, the Reincorporation
Merger, (ii) Touch Tone having at least $1,500,000 in working capital at the
Effective Time, (iii) Touch Tone having settled certain pending law suits and
renegotiated certain contracts, (iv) the performance by each party to the Merger
Agreement of its respective covenants and obligations set forth therein, (v) the
continued accuracy of each party's representations and warranties set forth in
the Merger Agreement, (vi) the absence of any order or other legal restraint or
prohibition preventing the consummation of the Merger and (vii) Touch Tone using
its best efforts to
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<PAGE>
induce its directors, officers and ten largest shareholders to agree in
writing to vote their shares of Touch Tone Common Stock in favor of the
Merger and the Reincorporation Merger. At November 30, 1996, Touch Tone had
working capital of $563,000 and there is a substantial risk that Touch Tone
will not have $1,500,000 in working capital at the Effective Time and,
accordingly, that Arcada will not be obligated to consummate the Merger. See
"RISK FACTORS -Non-Compliance with Closing Conditions" and "THE MERGER
AGREEMENT - Conditions to the Consummation of the Merger."
TERMINATION OF THE MERGER AGREEMENT. The Merger Agreement may be terminated
and the Merger abandoned at any time prior to the Effective Time (i) by mutual
consent of Touch Tone and Arcada, (ii) by either Touch Tone or Arcada (a) if any
court or other governmental entity shall have issued a final and nonappealable
order, decree or ruling or taken any other final and nonappealable action
permanently enjoining or otherwise prohibiting the Merger, (b) if the Merger
shall not have been consummated on or before March 1, 1997 (other than due to
the failure of the party seeking to terminate the Merger Agreement to perform
its obligations under the Merger Agreement), or (c) if, under certain
circumstances, the required stockholder approval is not obtained, and (iii) by
Touch Tone or Arcada in certain other situations, including in the event of
certain competing transactions or a withdrawal or modification by the Touch Tone
or Arcada Board of Directors of its recommendation of the Merger. See "THE
MERGER AGREEMENT - Termination."
BREAKUP FEES. To compensate Arcada for certain costs incurred in
anticipation of the Merger and to induce Arcada to forego initiating discussions
with other potential partners, Touch Tone has agreed to pay Arcada $200,000 if
Touch Tone terminates the Merger Agreement under certain circumstances. To
compensate Touch Tone for certain costs incurred in anticipation of the Merger
and to induce Touch Tone to forego initiating discussions regarding other
potential transactions, Arcada has agreed to pay Touch Tone $200,000 if Arcada
terminates the Merger Agreement under certain circumstances. See "THE MERGER
AGREEMENT - Breakup Fees."
ABSENCE OF REGULATORY FILINGS AND APPROVALS
Other than certain filings to be made and approvals obtained under certain
state securities or "Blue-Sky" laws, there are no federal or state regulatory
requirements that must be complied with or obtained in connection with the
Merger. See "THE MERGER - Governmental and Regulatory Approvals."
MANAGEMENT AND OPERATIONS AFTER THE MERGER
At the Effective Time, four of Touch Tone's current directors will resign
and Michael J. Canney, the remaining director of Touch Tone will elect four new
directors, each of whom have been or will be designated by Arcada (the "Arcada
Designees"). Arcada has informed Touch Tone that Frank Bonadio, Robert
Leppaluoto, Keith Leppaluoto and an individual to be named by Arcada prior to
the Effective Time will be the Arcada Designees. The individuals identified
above are currently directors of Arcada. The terms of all directors of Touch
Tone, including the Arcada Designees, will expire at the next annual meeting of
stockholders of Touch Tone. Following the Effective Time, Frank Bonadio,
currently the President and Chief Operating Officer of Arcada, will become
President of Touch Tone and the other officers of Arcada will become officers of
Touch Tone. See "MANAGEMENT AND OPERATIONS OF TOUCH TONE FOLLOWING THE MERGER."
The Merger will combine the two companies' current operations, focusing
substantially on Arcada's operations in the long distance switched and
unswitched telecommunications markets and the cellular air time and long
distance services and on Touch Tone's Internet access products. Arcada believes
that as a result of the Merger, more sources of financing and acquisition
opportunities will be available to it as a publicly-held company than may be
available to it as a privately-held company. Touch Tone will adopt Arcada's
fiscal year end of December 31.
COMPARATIVE RIGHTS OF SHAREHOLDERS
Arcada is a Washington corporation organized under the Washington Business
Corporations Act, RCW Chapter 23B ("WBCA"). Touch Tone is a California
corporation organized under the California Corporations Code ("CCC"). The rights
of Touch Tone Shareholders are governed by the CCC and Touch Tone's Articles of
Incorporation and Bylaws. The rights of Arcada Shareholders are governed by the
WBCA and
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<PAGE>
Arcada's Articles of Incorporation and Bylaws. Upon consummation of the Merger,
and assuming completion of the Reincorporation Merger which is a condition to
the closing of the Merger, Touch Tone and Arcada Shareholders will become
shareholders of a newly formed Washington corporation Touch Tone - Washington
and their rights will be governed by the WBCA and the Articles of Incorporation
and Bylaws of TOUCH TONE -Washington. Certain differences arise from this change
of governing law as well as the distinctions between Touch Tone's Articles of
Incorporation and Bylaws and the Articles of Incorporation and Bylaws of Touch
Tone -Washington. The Articles of Incorporation and Bylaws of Touch Tone
- -Washington are not materially different than those of Arcada and, accordingly,
the rights of Arcada shareholders will not be materially affected after the
Merger. For a summary of certain differences between the rights of holders of
Touch Tone - Washington Common Stock and holders of Arcada and Touch Tone Common
Stock and an explanation of certain possible anti-takeover effects of certain
provision in Touch Tone -Washington's Articles of Incorporation and Bylaws, See
"COMPARISON OF RIGHTS OF HOLDERS OF TOUCH TONE COMMON STOCK AND TOUCH TONE -
WASHINGTON COMMON STOCK" and "APPENDIX E - Articles and Bylaw of Touch Tone -
Washington."
RESALES OF TOUCH TONE COMMON STOCK
The shares of Touch Tone Common Stock and Touch Tone Series B Preferred
Stock to be issued to ARCADA Shareholders in connection with the Merger have
been registered under the 1933 Act. However, of the 12.5 million shares issued
in connection with the Merger, 11.5 million of such shares and any shares of
Touch Tone Common Stock issued upon conversion of the Touch Tone Series B
Preferred Stock will be subject to resale restrictions until November, 1998. See
"THE MERGER - Lock-up." Subject to the foregoing restrictions, the Touch Tone
Common Stock received by holders of Arcada upon consummation of the Merger will
be freely transferable by those shareholders of Arcada not deemed to be
"affiliates" of Arcada. "Affiliates" are generally defined as persons who
control, or controlled by, or under common control with Arcada at the time of
the special meeting (generally, executive officers, directors and certain
beneficial owners). All Arcada Shareholders would be deemed to be "affiliates"
of Arcada. In as much, such shareholders are subject to certain limitations on
transfer of Touch Tone Common Stock." See "THE MERGER - Resales of Touch Tone
Common Stock by Arcada Shareholders" for a discussion of the limitations on
transfer of Touch Tone Common Stock held by affiliates of Arcada.
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<PAGE>
MARKET PRICES
Touch Tone Common Stock and Warrants are traded on Nasdaq under the symbols
"TONE" and "TONEW," respectively. The table below sets forth, for the quarters
indicated, the reported high and low bid prices of the Touch Tone Common Stock
and Warrants. These prices reflect inter-dealer prices without retail markup,
markdown or commissions and may not necessarily represent actual transactions.
The trading volumes of Touch Tone Common Stock and Warrants have been limited
and the prices below may not be indicative of the value of the Touch Tone Common
Stock or Warrants.
COMMON STOCK WARRANTS
------------ --------
FISCAL 1996 HIGH BID LOW BID HIGH BID LOW BID
- ----------- -------- ------- -------- -------
Fourth Quarter (ended
May 31, 1996) $7.88 $5.13 $4.75 $2.00
Fiscal 1997
- -----------
First Quarter (ended
August 31, 1996) $7.00 $6.25 $4.25 $3.25
Second Quarter (ended
November 30, 1996) $7.00 $3.00 $4.00 $0.75
Third Quarter (through
January 28, 1997 $4.00 $2.13 $0.56 $1.38
Effective January 1, 1994 Arcada issued 50,000 shares of Arcada Common
Stock in exchange for $557,000 representing the net value of contributed assets,
or a per share price of $11.14. Subsequent to that time Arcada has repurchased
shares from departing employees on three occasions at $14.15 per share, pursuant
to terms of buy-sell agreements. Accordingly, this price was not necessarily
indicative of the fair market value of Arcada Common Stock and was instead
determined pursuant to the term of the respective buy-sell agreement.
The following table sets forth (i) the closing price per share of TOUCH
TONE Common Stock as reported by Nasdaq on November 15, 1996 and January 22,
1997; (ii) the price per share of Arcada Common Stock based on the book value
per share of Arcada Common Stock on September 30, 1996; and (iii) the value
of the Merger Consideration received for a share of Arcada Common Stock,
without making any adjustments to the Merger Consideration.
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<PAGE>
MARKET PRICE OF BOOK VALUE OF
--------------- -------------
VALUE PER TOUCH TONE ARCADA MERGER
- --------- ---------- ------ -------
SHARE AT: COMMON STOCK COMMON STOCK CONSIDERATION (1)
- --------- ------------ ------------ -----------------
November 15, 1996 $3.00 $8.03 $ 780.00
January 28, 1997 $3.00 $8.03 $ 780.00
- --------------------------------
(1) Calculated based on (i) 250 shares of Touch Tone Common Stock multiplied by
the market price per share, plus (ii) $30.00 representing the $1.00 per
share redemption price of the thirty (30) shares of Touch Tone Series B
Preferred Stock issued in exchange for each share of Arcada Common Stock.
No assurance can be given as to what the market price of Touch Tone Common
Stock will be at the Effective Time. On January 15, 1997, there were
approximately 700 Touch Tone Shareholders of record and four Arcada Shareholders
of record.
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<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
OF TOUCH TONE AMERICA, INC.
The following table sets forth selected consolidated historical financial
data of Touch Tone and has been derived from and should be read in conjunction
with the audited consolidated financial statements of Touch Tone for the ten
months ended May 31, 1995 and the fiscal year ended May 31,1996 and the
unaudited interim consolidated financial statements of Touch Tone for the six
months ended November 30, 1995 and November 30, 1996, including the respective
notes thereto, included herein. In the opinion of management, all adjustments,
consisting of normal recurring accruals, considered necessary for a fair
presentation have been included in the unaudited interim data. Unaudited interim
results are not necessarily indicative of results which may be expected for
future periods.
STATEMENT OF OPERATIONS DATA:
FOR THE TEN FOR THE FOR THE SIX MONTHS
MONTHS ENDED YEAR ENDED ENDED NOVEMBER 30,
MAY 31, 1995 MAY 31,1996 1995 1996
------------ ----------- ---- ----
Revenues $1,952,000 $2,238,000 $1,228,000 $963,000
Net Loss (294,000) (2,802,000) (1,016,000) (2,225,000)
Loss Per Share (.19) (1.81) (.67) (.68)
BALANCE SHEET DATA:
MAY 31, NOVEMBER 30,
1995 1996 1996
---- ---- ----
Total assets $1,388,000 $6,928,000 $3,837,000
Redeemable 750,000 750,000 --
Preferred Stock
Stockholders'
equity (586,000) 3,842,000 2,367,000
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SUMMARY COMBINED FINANCIAL DATA
OF ARCADA COMMUNICATIONS
The following table sets forth selected combined historical financial data
of Arcada and has been derived from and should be read in conjunction with the
combined financial statements of Arcada as of and for each of the years ended
December 31, 1994 and 1995 and the unaudited interim combined financial
statements of Arcada for the nine months ended September 30, 1995 and 1996,
including the notes thereto, included herein. In the opinion of Arcada
management, all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation have been included in the unaudited
interim financial statements. Unaudited interim results are not necessarily
indicative of results which may be expected for the entire fiscal year.
STATEMENT OF OPERATIONS DATA:
FOR FOR
THE YEAR ENDED THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
________________________ ________________________
1994 1995 1995 1996
___________ ___________ ___________ ___________
Revenues $9,060,000 $10,954,000 $8,292,000 $9,429,000
Net Income (loss) 154,000 (559,000) (521,000) 36,000
BALANCE SHEET DATA:
DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
__________ __________ __________
Total assets $4,127,000 $4,858,000 $4,873,000
Long term 775,000 1,115,000 981,000
debt and capital lease
obligations, net of current
portion
Notes payable to 254,000 456,000 469,000
shareholders
Shareholders' equity 1,157,000 428,000 297,000
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SUMMARY PRO FORMA CONDENSED FINANCIAL DATA
AS MORE FULLY DESCRIBED IN THE PRO FORMA CONDENSED FINANCIAL INFORMATION
APPEARING ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS, THE UNAUDITED
PRO FORMA CONDENSED BALANCE SHEET DATA GIVES EFFECT TO (I) THE MERGER OF
ARCADA INTO A WHOLLY-OWNED SUBSIDIARY OF TOUCH TONE, RESULTING FROM THE
EXCHANGE OF ARCADA COMMON STOCK FOR 12.5 MILLION SHARES OF TOUCH TONE COMMON
STOCK AND 1.5 MILLION SHARES OF TOUCH TONE SERIES B PREFERRED STOCK, AND (II)
THE EXCHANGE OF 200,000 IN NOTES PAYABLE TO CERTAIN ARCADA SHAREHOLDERS INTO
200,000 SHARES OF TOUCH TONE SERIES B PREFERRED STOCK AND (III) THE PAYMENT
OF FEES DIRECTLY ATTRIBUTABLE TO THE MERGER. THE UNAUDITED PRO FORMA
CONDENSED STATEMENT OF OPERATIONS DATA FOR THE YEAR ENDED DECEMBER 31, 1995
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 INCLUDE THE RESULTS OF
OPERATIONS OF ARCADA AND TOUCH TONE FOR THE RESPECTIVE PERIODS PRESENTED AND
GIVE EFFECT TO PRO FORMA ADJUSTMENTS AS IF THE AFOREMENTIONED TRANSACTIONS
HAD OCCURRED AT THE BEGINNING OF THE PERIOD. THESE PRO FORMA CONDENSED
FINANCIAL STATEMENTS ARE NOT NECESSARILY INDICATIVE OF FUTURE FINANCIAL
POSITIONS OR RESULTS OF OPERATIONS. THE FOLLOWING INFORMATION SHOULD BE READ
IN CONJUNCTION WITH AND IS QUALIFIED IN ITS ENTIRETY BY THE FINANCIAL
STATEMENTS OF TOUCH TONE AND ARCADA AND THE UNAUDITED PRO FORMA CONDENSED
FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. SEE "THE MERGER -ANTICIPATED ACCOUNTING TREATMENT," AND
"UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION."
PRO FORMA CONDENSED STATEMENTS OF INCOME DATA
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
______________ _________________
1995 1996
______________ _________________
Revenues. . . . . . . . . . . . . . . . . . $13,734,000 $11,231,000
Line charges. . . . . . . . . . . . . . . . (8,679,000) (7,102,000)
----------- -----------
Excess of Revenues over line charges. . . . 5,055,000 4,129,000
Other operating expenses:
Selling, general, administrative and other 5,848,000 5,691,000
Excess circuit commitments. . . . . . . . . 779,000 489,000
Depreciation and amortization. . . . . . . 545,000 670,000
Provision for Severance obligations. . . . 295,000 285,000
----------- -----------
Loss from operations. . . . . . . . . . . . (2,412,000) (3,006,000)
Other expense . . . . . . . . . . . . . . . (340,000) (395,000)
----------- -----------
Net loss. . . . . . . . . . . . . . . . . . $(2,752,000) $(3,401,000)
----------- -----------
----------- -----------
Net loss per common share . . . . . . . . . $(0.18) $(0.22)
----------- -----------
----------- -----------
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PRO FORMA CONDENSED BALANCE SHEET DATA
ASSETS SEPTEMBER 30, 1996
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . $1,331,000
Other current assets . . . . . . . . . . . . . . . 2,816,000
----------
Total current assets . . . . . . . . . . . . . . . 4,147,000
Property and Equipment, net. . . . . . . . . . . . . . 3,025,000
Other assets . . . . . . . . . . . . . . . . . . . . . 1,138,000
----------
Total assets . . . . . . . . . . . . . . . . . . . $8,310,000
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable. . . . . . . . . . . . . . . . . . . $480,000
Accounts payable and other accrued liabilities . . 3,677,000
----------
Total current liabilities. . . . . . . . . . . . . 4,157,000
----------
Long term liabilities:
Notes payable to stockholders. . . . . . . . . . . 269,000
Other long term liabilities. . . . . . . . . . . . 1,420,000
----------
Total long term liabilities. . . . . . . . . . . . 1,689,000
----------
Stockholders' equity . . . . . . . . . . . . . . . . . 2,464,000
----------
Total liabilities and stockholders' equity . . . . $8,310,000
----------
----------
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COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
Touch Tone and Arcada and combined per share data on an unaudited pro forma
basis after giving effect to the Merger on a "purchase" basis assuming that
250 shares of Touch Tone Common Stock and 30 shares of Touch Tone Series B
Preferred Stock are issued in exchange for each share of Arcada Common Stock
in the Merger. This data should be read in conjunction with the selected
historical financial information, the pro forma condensed financial
information and the separate historical financial statements of Touch Tone
and of Arcada and the notes thereto included elsewhere in this Joint Proxy
Statement/Prospectus. The unaudited pro forma condensed financial data are
not necessarily indicative of the operating results or financial position
that would have been achieved had the Merger been consummated at the
beginning of the periods presented and should not be construed as
representative of future operations.
AS OF AND FOR AS OF AND FOR
THE YEAR ENDED THE SIX MONTHS ENDED
MAY 31, 1996 NOVEMBER 30, 1996
--------------- --------------------
Historical -- Touch Tone:
Net loss per share $(1.81) $(.68)
Book value per share 1.20 .71
Cash dividends per share -- --
AS OF AND FOR AS OF AND FOR
THE YEAR ENDED THE NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ---------------------
Historical -- Arcada (1)
Net income (loss) per share $(11.89) $0.90
Book value per share 10.19 8.03
Cash dividends per share 3.57 4.18
Pro forma combined Touch Tone
and Arcada (2):
Net loss per share $(.18) $(.22)
Book value per share (.05) .14
Cash dividends per share (3) -- --
Equivalent pro forma Arcada (4):
Net income (loss) per share (.04) --
Book value per share .03 .02
Cash dividends per share .01 .01
_______________________
(1) Amounts calculated on the basis of 47,000 shares outstanding for the year
ended December 31, 1995 and 40,000 shares outstanding for the nine months
ended September 30, 1996, and of 42,000 shares and 37,000 shares as of
December 31, 1995 and September 30, 1996, respectively.
(2) Amounts calculated utilizing 16,070,800 shares on a pro-forma combined per
share basis with Touch Tone financial information recast on the basis of
Arcada's year end (without giving effect to conversion of the 1.5 million
shares of Touch Tone Series B Preferred Stock issued in the Merger).
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(3) It is assumed as a public company, the combined company would not have paid
any dividends.
(4) Amounts calculated based on 12,500,000 shares of Touch Tone Common Stock
exchanged for outstanding shares of Arcada Common Stock.
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RISK FACTORS
In addition to the other information set forth in this Joint Proxy
Statement/Prospectus, Touch Tone and Arcada Shareholders should consider the
following risk factors before voting on the proposal described herein.
WHEN USED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, THE WORDS "ANTICIPATE,"
"ESTIMATE," "EXPECT," "PROJECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS,
UNCERTAINTIES AND ASSUMPTIONS. SHOULD ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT,
ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED, EXPECTED
OR PROJECTED. SEVERAL KEY FACTORS THAT HAVE A DIRECT BEARING ON TOUCH TONE'S AND
THE COMBINED COMPANIES' ABILITY TO ATTAIN THEIR GOALS ARE DISCUSSED BELOW. TOUCH
TONE AND ARCADA WILL NOT UNDERTAKE AND SPECIFICALLY DECLINE ANY OBLIGATION TO
PUBLICLY RELEASE THE RESULT OF ANY REVISIONS WHICH MAY BE MADE TO ANY
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF
SUCH STATEMENTS OR TO REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED
EVENTS.
PAST FINANCIAL PERFORMANCE OF TOUCH TONE AND GOING CONCERN CONSIDERATIONS
Touch Tone incurred net losses of ($2,225,000) and ($2,802,000) for the
six months ended November 30, 1996, and the year ended May 31, 1996,
respectively. Touch Tone expects to incur significant additional losses. There
is no assurance that Touch Tone will be able to achieve or sustain profitability
in the future or that Touch Tone will be able to continue to finance its losses.
Touch Tone's financial statements have been prepared on the basis that Touch
Tone will continue operating as a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. Touch Tone's ability to continue as a going concern is dependent upon
several factors, including Touch Tone's raising additional capital, meeting the
terms of its service commitments and purchase commitments and achieving and
maintaining profitable operations. Touch Tone's financial statements were
audited by its independent certified public accountants, whose report includes
an explanatory paragraph stating that the financial statements have been
prepared assuming Touch Tone will continue as a going concern and that Touch
Tone has incurred losses from operations and has entered into significant sales
volume commitments that raise substantial doubt about its ability to continue as
a going concern. Further, Touch Tone is dependent on the Merger to increase
revenues and operating efficiencies. If the Merger should not be consummated
for any reason, Touch Tone will be in need of immediate financing to fund
expected operating losses and other working capital needs. In addition, Touch
Tone must in the near term renegotiate certain non-competitive carrier
commitments in order to avoid or mitigate substantial short-falls on these
commitments. There can be no assurance such financing would be available or on
what terms or whether such carrier commitments can be renegotiated. See "TOUCH
TONE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the Financial Statements included in this Joint Proxy
Statement/Prospectus.
POTENTIAL LIABILITIES TO AT&T
Touch Tone is party to an agreement with AT&T where Touch Tone committed to
purchase long distance services through July 1999 of $1.8 million annually.
Touch Tone is not meeting this commitment, and pursuant to such agreement, is
liable to pay to AT&T the committed amount, whether or not the services are used
by Touch Tone. AT&T has the right to terminate Touch Tone's long distance
service if Touch Tone fails to pay these amounts when due. Touch Tone's long
distance revenues have declined from $1,952,000 for the ten months ended May 31,
1995 to $1,951,000 for the year ended May 31, 1996 to $613,000 for the six
months ended November 30, 1996 and is expected to decline further. Revenues have
decreased because the prices at which Touch Tone can buy long distance under its
AT&T agreements are, management believes, non-competitive in the marketplace.
Under its contract Touch Tone must pay AT&T $0.17 per minute and, due to its
commission structure must resell this service at rates between $0.23 and $0.26
per minute to make a profit. Touch Tone believes their rates to be above
prevailing market rates and in certain cases, above the rates charged by AT&T in
the retail market. As a result, Touch Tone has lost agents who are able to
offer their customers more competitive rates attainable with other long distance
resellers. Unless this agreement can be renegotiated to allow Touch Tone to
offer competitive pricing, revenue will continue to decrease. See
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"TOUCH TONE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and the Financial Statements included in this Joint Proxy
Statement/Prospectus.
Additionally, beginning in June 1996 and continuing into July 1996, an
unknown party fraudulently charged over $1,000,000 in long distance charges on
Touch Tone's account. Touch Tone has been diligently investigating the matter
and has contacted the carrier, AT&T, who denies any responsibility. Touch Tone
has retained counsel to represent it in this matter and together with Arcada has
submitted a letter to AT&T stating its position. As of the date of this Joint
Proxy/Prospectus, AT&T has not formally responded to Touch Tone's letter
although discussions are ongoing between the parties. It is a condition to
Arcada's obligation to consummate the Merger that Touch Tone settle this dispute
with AT&T and renegotiate its contractual commitments to AT&T prior to the
Effective Time in a manner satisfactory to Arcada. Touch Tone believes it has
recourse against AT&T and will not be held responsible for these charges, but
the outcome of this matter cannot be predicted at this time. If Touch Tone is
unable to settle the foregoing matters with AT&T, it is probable that AT&T will
discontinue its long distance service to Touch Tone and its customers and the
parties will institute legal proceedings. If Touch Tone loses AT&T service and
to some extent, long distance customers are not transferred to WilTel, long
distance revenues will become insignificant, further harming Touch Tone's
financial condition. See "TOUCH TONE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the Financial Statements
included in this Joint Proxy Statement/Prospectus.
CHANGE OF BUSINESS FOCUS
Touch Tone has only recently entered the Internet access market. This
market has not yet generated significant revenues and Touch Tone and its
prospects in this market must be considered in light of the risks, expenses and
difficulties frequently encountered by companies attempting to develop anew
product, particularly companies in new and evolving markets. Furthermore, the
limited history of the Company's Internet access business makes projections of
future results of operations extremely difficult and uncertain, and therefore
there can be no assurance that Touch Tone will generate significant revenues
from its Internet operations.
THE MERGER
FAILURE TO SATISFY CLOSING CONDITIONS. Arcada's obligation to consummate
the Merger is contingent upon Touch Tone's satisfaction of certain closing
conditions set forth in the Merger Agreement. At November 30, 1996 Touch Tone
had working capital of $563,000 and there is a substantial risk that Touch
Tone will not comply with the closing condition that it have at least
$1,500,000 in working capital at the Effective Time as well as a risk that it
will be unable to maintain listing of the Touch Tone Common Stock and
Warrants on the Nasdaq SmallCap Market, another closing condition. Although
these conditions may be waived by Arcada in its sole discretion, there can be
no assurance that it will do so. Accordingly, even if the Touch Tone
Shareholders and the Arcada Shareholders approve the Merger Agreement, it may
not be consummated. See "THE MERGER AGREEMENT - Conditions to the
Consummation of the Merger."
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT MARKET PRICE OF STOCK;
POSSIBLE VOLATILITY OF STOCK PRICE. Upon consummation of the Merger, an
aggregate 12.5 million shares of Touch Tone Common Stock will be issued to the
Arcada Shareholders (without giving effect to conversion of the 1.5 million
shares of Touch Tone Series B Preferred Stock issued in the Merger). Although
11.5 million of the 12.5 million shares of Touch Tone Common Stock and any
shares of Touch Tone Common Stock issued upon conversion of the Touch Tone
Series B Preferred Stock are subject to resale restrictions until November, 1998
pursuant to the terms of the Merger Agreement, sales of unrestricted shares of
Touch Tone Common Stock in the public market could adversely affect the market
price of such stock. If the market price of Touch Tone Common Stock were
adversely affected by such sales, Touch Tone's access to equity capital markets
could be adversely affected, and issuances of stock by Touch Tone in connection
with future acquisitions, or otherwise, could dilute earnings per share. See
"THE MERGER -Resale of Touch Tone Common Stock."
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CONTINUED NASDAQ LISTING. Nasdaq has indicated that Touch Tone will be
required to comply with Nasdaq's initial listing requirements to remain listed
on the Nasdaq SmallCap Market after the Merger. Under the current rules
promulgated by Nasdaq for initial listing, a company must apply to Nasdaq for
listing and have at least $4,000,000 in total assets, $2,000,000 in stockholders
equity and a minimum bid price of $3.00 per share. The Company believes that it
will continue to be listed on the Nasdaq SmallCap Market after the Merger.
However, until Nasdaq approves Touch Tone's application, there can be no
assurance that Touch Tone's securities will continue to be listed on the Nasdaq
SmallCap Market after the Merger. Nasdaq's acceptance of Touch Tone's
application is a condition to the closing of the Merger Agreement. Even if this
condition were waived by Arcada and the Merger consummated, if Touch Tone's
application is rejected, trading, if any, in Touch Tone's Common Stock and
Warrants would be conducted in the over-the-counter market on an electronic
bulletin board established for securities that do not meet the Nasdaq listing
requirements or in what are commonly referred to as the "pink sheets." As a
result, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the price of, the listed securities. See "Risk of Low
Priced Stock."
SIGNIFICANT SHAREHOLDERS. At the Effective Time, the Arcada Shareholders
will own approximately 78% of the Touch Tone Common Stock then outstanding
(based on the number of shares outstanding on the Record Date and without giving
effect to conversion of the 1.5 million shares of Touch Tone Series B Preferred
Stock issued in the Merger). Pursuant to the terms of the Merger Agreement the
Arcada Shareholders are restricted in their right to sell shares of Touch Tone
Common Stock and Touch Tone Series B Preferred Stock received in the Merger and
any shares of Touch Tone Common Stock issued upon conversion of the Touch Tone
Series B Preferred Stock. As holders of 78% of the outstanding Touch
Tone Common Stock after the Merger (without giving effect to conversion of the
1.5 million shares of Touch Tone Series B Preferred Stock issued on the Merger),
the Arcada Shareholders will be able to determine voting on substantially all
matters put before the Touch Tone Shareholders. See "Restrictions on Transfer"
and "THE MERGER - Lock-up."
NO FAIRNESS OPINIONS. The Touch Tone and Arcada Boards have not retained
independent business valuation firms to opine to their respective shareholders
as to the fairness of the Merger from a financial point of view. Inasmuch, no
independent third parties have reviewed terms of the Merger for the benefit of
the Touch Tone and Arcada Shareholders. See "THE MERGER - Recommendations of the
Board of Directors; Reasons for the Merger."
DETERMINATION OF NUMBER OF SHARES TO BE RECEIVED IN THE MERGER. In
determining whether to vote to approve the Merger, the Touch Tone and Arcada
Shareholders should consider that the number of shares of Touch Tone Common
Stock and Series B Preferred Stock to be received in the Merger by the holders
of Arcada Common Stock was determined by negotiations between Touch Tone and
Arcada and were based on a number of factors. The number of shares to be
received do not necessarily reflect the relative stock values, asset values,
cash flow per share, earnings per share or other attributes of either Touch Tone
or Arcada. The Merger Agreement does not provide for any adjustment in the
number of shares to be received in the event that either the Touch Tone Common
Stock or Arcada Common Stock should increase or decrease in value. See "THE
MERGER - Recommendation of the Boards of Directors; Reasons for the Merger."
BOARD OF DIRECTORS MAY CHANGE BUSINESS POLICIES. The Touch Tone Board of
Directors may change the business objectives and policies of Touch Tone without
a vote of the stockholders. In addition, as discussed elsewhere within this
Joint Proxy Statement/Prospectus, upon the consummation of the Merger, four of
Touch Tone's current directors will resign and the remaining director will elect
four new directors, each of whom have been or will be designated by Arcada. If
Touch Tone changes its business objectives and policies, the risks and potential
rewards of an investment in Touch Tone may also change, and the marketplace may
react favorably or unfavorably to such changes, which may affect the price at
which Touch Tone's Common Stock trades in the public market. See "MANAGEMENT AND
OPERATIONS OF TOUCH TONE FOLLOWING THE MERGER - Operations and Management After
the Merger."
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EXPECTED BENEFITS OF COMBINED BUSINESS MAY NOT BE ACHIEVED. Touch Tone
anticipates that benefits will occur as a result of the Merger as described
under "THE MERGER - Recommendation of the Board of Directors; Reasons for the
Merger" and "MANAGEMENT AND OPERATIONS OF TOUCH TONE FOLLOWING THE MERGER."
When, if ever, the anticipated benefits of the Merger are ultimately achieved,
however, will depend on a number of factors, including the ability of Touch Tone
and Arcada as a combined company (the "combined companies") to achieve cost
savings at projected levels within projected time frames, to obtain adequate
financing to pursue its growth strategy and, generally, the ability of the
combined companies to capitalize on their combined asset base and strategic
position. There can be no assurance that the expected benefits of the Merger
relative to the combined business will be achieved.
FIXED NUMBER OF SHARES OFFERED TO ARCADA SHAREHOLDERS. In the Merger,
Arcada shareholders will receive an aggregate of 12,500,000 shares of Touch Tone
Common Stock and 1.5 million shares of Series B Preferred Stock. Such number of
shares will not be adjusted if the market price of Touch Tone Common Stock
decreases or increases. Arcada Shareholders should obtain current market prices
of Touch Tone Common Stock prior to voting on the Merger. See "THE MERGER -
General."
RESTRICTIONS ON TRANSFER. As part of the Merger Agreement, the Arcada
Shareholders who receive shares of Touch Tone Common Stock in the Merger will be
restricted from selling 11.5 million of the 12.5 million shares received, and
any shares of Touch Tone Common Stock issued upon conversion of the Touch Tone
Series B Preferred Stock until November, 1998. Accordingly, such Arcada
Shareholders will be unable to liquidate such shares for a substantial period
of time. The price per share of Touch Tone Common Stock at the end of the
restricted period may be significantly higher or lower than the price per
share at the Effective Time. See "THE MERGER - Lock-up."
PAYMENT OF DIVIDENDS ON PREFERRED STOCK. The 1.5 million shares of
Series B Preferred Stock to be issued to the Arcada shareholders in the
Merger provides for cumulative dividends of 8% per annum, which dividends are
to be paid quarterly out of Touch Tone funds legally available for such
purpose. Based on Touch Tone's financial position, there can be no assurance
that any dividends will be paid on the Touch Tone Series B Preferred Stock in
the foreseeable future. See "THE MERGER AGREEMENT - Post Merger Dividend
Policy" and "DESCRIPTION OF CAPITAL STOCK OF TOUCH TONE - Preferred Stock."
GENERAL
DEPENDENCE ON KEY PERSONNEL. Upon the consummation of the Merger, Frank
Bonadio, the President and Chief Operating Officer of Arcada, will become
President of Touch Tone. The success of Arcada and of the
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combined companies will be dependent on the abilities of Frank Bonadio, whose
loss could adversely affect Arcada or the combined companies. See "MANAGEMENT
AND OPERATIONS OF TOUCH TONE FOLLOWING THE MERGER."
NO DIVIDENDS. Touch Tone has not paid cash dividends on its common stock.
Touch Tone will be required, if funds are legally available for such purpose,
to pay dividends on the Touch Tone Series B Preferred Stock, until such stock
is either redeemed or converted into Touch Tone Common Stock. The boards of
directors of each of Touch Tone and Arcada do not anticipate paying cash
dividends in excess of such dividends required to be paid on the Series B
Perferred Stock in the forseeable future as they intend to retain future
earnings to finance the growth of the business. Payment of cash dividends on
the Touch Tone Common Stock in the future will depend, among other things,
upon the future earnings, requirements for capital improvements, the
operating and financial conditions and other factors deemed relevant by the
combined company's Board of Directors. See "DESCRIPTION OF CAPITAL STOCK OF
TOUCH TONE - Preferred Stock."
PRICE VOLATILITY. The market for Touch Tone Common Stock is extremely
illiquid. Consequently, whenever there are significantly more sellers than
buyers or buyers than sellers of Touch Tone Common Stock, the market price of
such stock will fluctuate significantly. The market price of the Touch Tone
Common Stock could also be subject to significant fluctuations in response to
various factors and events, including quarterly variations in operating results,
regulatory or other changes affecting the telecommunications industry generally,
announcements of business developments by Touch Tone or its competitors, the
addition of customers in connection with acquisitions, the introduction of new
services, changes in the cost of long distance service or other operating costs
and changes in general market conditions.
RISK OF LOW-PRICED STOCKS. If Touch Tone's listed securities were delisted
from Nasdaq, and no other exclusion from the definition of a "penny stock" under
applicable Securities and Exchange Commission regulations were available, such
securities would be subject to the penny stock rules. A "penny stock" is defined
as a stock that has a price of $5.00 or less. The rules relating to "penny
stocks" impose additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors (generally defined as investors with net worth in excess of $1,000,000
or annual income exceeding $200,000, or $300,000 together with a spouse). For
example, the broker dealer must deliver to its customer prior to effectuating
any transaction, a risk disclosure document which sets forth information as to
the risks associated with "penny stocks," information as to the salesperson,
information as to the bid and ask prices of the "penny stock," the importance of
the bid and ask prices to the purchaser, and investor's rights and remedies
under certain circumstances. Also, the broker dealer must disclose to the
purchaser its aggregate commission received on the transaction, current
quotations for the securities and monthly statements which provide information
as to market and price information. In addition, for transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase and must have received the purchaser's written consent to the
transaction prior to sale. Consequently, delisting from Nasdaq, if it were to
occur, could affect the ability and willingness of broker-dealers to sell Touch
Tone's securities and the ability of Touch Tone Shareholders and Warrantholders
to sell their securities in the secondary market.
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LONG DISTANCE INDUSTRY CUSTOMER ATTRITION. A level of customer attrition
is inherent in the long distance industry. Attrition (the average number of
customers from whom revenues have terminated or been terminated as a result
of non-payment or dropped to zero usage expressed as a percentage of the
total number of customers) has averaged approximately 2% per month in the
long distance industry. Although both Touch Tone and Arcada attempt to reduce
the level of customer attrition, there can be no assurance that this level
will not continue or increase and as discussed below, has substantially
increased at Touch Tone. See "TOUCH TONE MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
TOUCH TONE CUSTOMER ATTRITION. The level of Touch Tone's customer attrition
is significant due to several factors including its carrier commitments at
non-competitive rates, disputes with AT&T on fraudulent third-party charges, and
inability to get accurate billing records. The result is that Touch Tone is not
competitive with long distance companies and is unable to pay their agents, as
AT&T has suspended all payments to Touch Tone until such time as the AT&T
problems are resolved, if ever. Consequently, Touch Tone's customer base is
rapidly declining, causing as shortfall in its long distance carrier
commitments. and significantly increasing its losses from operations.
DEPENDENCE ON SERVICES OFFERED BY OTHER CARRIERS. Neither Touch Tone nor
Arcada owns any transmission facilities other than Arcada's investments in its
long distance switches, and its long distance services are dependent upon
WilTel, AT&T, Frontier and other carriers for the transmission of its customers'
calls. Accordingly, Touch Tone's and Arcada's long distance operations are
subject to their continued ability to obtain such services at bulk rates.
COMPETITION. The telecommunications industry is intensely competitive and
is significantly affected by the introduction of new services and the market
activities of major industry participants. Competition in the growing
telecommunications industry is based upon pricing, customer service, network
quality and value-added services. Touch Tone and Arcada compete with AT&T, MCI,
Sprint and other national and regional long distance carriers. Most of Touch
Tone and Arcada's competitors have greater name recognition, more extensive
transmission networks and greater engineering and marketing capabilities than
Touch Tone or Arcada and have, or have access to, substantially greater
financial and personnel resources than those of Touch Tone and Arcada. These
resources may permit certain of Touch Tone and Arcada's competitors to offer
pricing and incentives below those which can be offered by Arcada or Touch Tone.
For example, AT&T is currently selling long distance in certain of Touch Tone's
markets at rates below those which Touch Tone is able to profitably offer.
Various regulatory factors can also have an impact on Touch Tone or Arcada's
ability to compete. For example, the new Telecommunications Act has reduced the
competitive barriers facing all telecommunications companies, especially AT&T
and the regional Bell operating companies. Arcada and Touch Tone's size makes it
difficult to have an impact on such regulations. Moreover, certain of Arcada and
Touch Tone's larger competitors may have the ability to influence regulation of
the telecommunications industry in a manner unfavorable to small or more recent
market entrants such as Touch Tone and Arcada.
In addition, Touch Tone and Arcada are customers and competitors of AT&T
and other long distance suppliers. Touch Tone and Arcada are customers of AT&T
and other suppliers because they use such companies' long distance
telecommunications services. Touch Tone and Arcada are competitors of AT&T and
other suppliers in that they directly seek customers who are, or potentially may
be customers of AT&T.
The ability of Touch Tone and Arcada to compete effectively in the
telecommunications industry will depend upon their continued ability to provide
high quality, market-driven services at prices generally similar to, or less
than, those charged by its competitors. There can be no assurance that Touch
Tone or Arcada will be able to compete successfully with existing or future
companies.
DEPENDENCE ON EFFECTIVE BILLING SYSTEM. Both Touch Tone and Arcada rely on
their information and billing systems to efficiently and effectively process
bills and produce information. The combined companies will rely on Arcada's
current system which was installed in 1995. The successful operation of these
systems is of importance to the combined companies' growth and profitability and
there can be no assurance that Arcada's billing system will
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perform to expectations into the future or that Touch Tone's billing data can be
smoothly incorporated into Arcada's billing system. See "BUSINESS OF ARCADA -
Billing Systems."
RISK OF SERVICE INTERRUPTION. Arcada does not have long-term service
commitments with its long distance service providers. While short-term
arrangements with long distance service providers reduces the risk of committing
to minimums at pricing levels which may become above market, the risk that
service providers will terminate service and interrupt Arcada customer service
is increased. Arcada believes that its relations with service providers are
excellent and that significant terminations will not occur; however, if
terminations occur and Arcada cannot reroute telecommunications traffic, its
business may be adversely affected.
GOVERNMENT REGULATION. Federal and state regulations, regulatory actions
and court decisions have had, and may have in the future both positive and
negative effects on Touch Tone and Arcada and their ability to compete. Touch
Tone and Arcada are subject to regulation by the FCC and various state public
service or public utility commissions which typically impose obligations to file
tariffs containing the rates, terms and conditions of service. Neither the FCC
nor the relevant state utility commission currently regulate the company's
profit levels, but they have the authority to do so. The vast majority of states
require long distance service providers to apply for authority to provide
telecommunications services and to make filings regarding their activities. The
multiplicity of state regulations make full compliance with all such regulations
a challenge for any multi-state provider. There can be no assurance that
regulators or third parties will not raise material issues with regard to either
Touch Tone or Arcada's compliance with applicable regulations or that regulatory
activities will not have a material adverse effect on the company. See "BUSINESS
OF ARCADA - Regulation."
RISK OF LIABILITY FOR LOCAL UTILITY TAXES. Touch Tone and Arcada serve
customers in numerous localities throughout their service areas. Touch Tone
and Arcada currently collect and remit local utility and other taxes only in
jurisdictions where they have offices or hold other assets. Arcada has made
tax payments to one locality where it does not have offices or hold assets
and has agreed to pay additional amounts based on a review of its billing to
that locality while preserving the right to challenge its obligation to make
such payments. Touch Tone and Arcada have been contacted in the past by other
localities where they have customers but no other assets or operations
requesting that they collect and commit local utility taxes in such
jurisdictions. Neither Touch Tone nor Arcada believes such local utility
taxes apply to their respective operations and they have not historically
collected such taxes. There can be no assurance that such localities will
not actively seek to collect taxes from Touch Tone or Arcada in the future or
that Touch Tone or Arcada will be liable for failure to collect such taxes in
the past. In the event Touch Tone or Arcada is found liable for such back
taxes it could have a material adverse effect on Touch Tone and Arcada. See
"BUSINESS OF ARCADA -Regulation."
WORKING CAPITAL REQUIREMENTS AND LONG CASH CYCLE. Currently, customer
billings for long distance services are generated by AT&T for Touch Tone from
detailed call records which are generally prepared by the carrier and are
available on or about the fourth day of the month following the month of
customer usage. Customer invoices usually are generated within ten days
thereafter and are due by the first day of the billing month. However, Touch
Tone historically collects a large portion of receivables after the scheduled
due date, resulting in an average cash cycle of approximately 60 days. Pursuant
to the terms of the agreement with AT&T, all cash received on such accounts is
paid directly to AT&T and then remitted to Touch Tone. Furthermore, AT&T
retains an amount equal to customer invoices which are past due for 30 days
until such time as the customer pays his bill and as noted elsewhere herein AT&T
has suspended all payments to Touch Tone pending resolution of the $1,000,000
fraudulent charge. No assurances can be given that Touch Tone's temporary
liquidity shortages will not occur in the future and adversely affect
Touch Tone. See "TOUCH TONE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AN RESULTS OF OPERATIONS."
DEPENDENCE ON AGENTS. Touch Tone, and to a lesser degree, Arcada, depend on
continuing relationships with their independent marketing agents to acquire new
customer accounts. Substantially all of Touch Tone's current customer accounts
and approximately one-quarter of Arcada's accounts have been obtained through
their network of independent marketing agents. In general, Touch Tone's
agreements with its independent marketing agents provide that all customers
introduced to Touch Tone by the agents are the Company's customers. Most of
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these contracts contain restrictions on the transfer of accounts sold by the
independent marketing agent, such as limitations on the selling of a competing
long distance service to customers placed on Touch Tone's network by the
independent marketing agent, a right of first refusal to Touch Tone on sale of
residual commissions and other similar restrictions. Although Touch Tone cannot
prevent an existing agent from becoming a competitor and attempting to transfer
Touch Tone's customers to a competing service, these contractual limitations
limit an independent marketing agent's ability to do so. Touch Tone primarily
uses independent marketing agents to sell Touch Tone's services through
telemarketing and direct sales efforts.
Revenues derived from customers introduced to Touch Tone by independent
marketing agents currently constitute approximately 90% of Touch Tone's total
revenue for the year ended May 31, 1996 and the six months ended November
1996. These percentages represent the total revenues derived from both
existing and new customers introduced to Touch Tone by independent marketing
agents. The independent marketing agents receive residual commissions based
on billings. Touch Tone has lost several key independent marketing agents as
previously discussed herein, which has had a material adverse effect on Touch
Tone's ability to develop new business. Arcada utilizes marketing agents to
supplement their inside sales program. Revenues derived from such agents
constituted 14% of revenues for the nine months ended September 30, 1996. See
"TOUCH TONE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
OBSOLESCENCE DUE TO TECHNOLOGICAL CHANGE AND NEW SERVICES. The
telecommunications industry has been characterized by steady technological
change, frequent new service introductions and evolving industry standards.
Touch Tone and Arcada believe that their future success will depend on their
ability to anticipate such changes and to offer on a timely basis services that
meet these evolving industry standards. There can be no assurance that Touch
Tone or Arcada will have sufficient resources to make the investments necessary
to acquire new technology or to introduce new services that would satisfy an
expanded range of customer needs.
INTERNET
COMPETITION. The market for Internet access services is extremely
competitive. There are no substantial barriers to entry, and Touch Tone expects
that competition will intensify in the future. Touch Tone believes that its
ability to compete successfully depends upon a number of factors, including
market presence; the capacity, reliability and security of its proposed network
infrastructure; ease of access to and navigation of the Internet; the pricing
policies of its competitors and suppliers; the timing of introductions of new
products and services by Touch Tone and its competitors; Touch Tone's ability to
support existing and emerging industry standards; and industry and general
economic trends. Touch Tone's current and prospective competitors include many
large companies that have substantially greater market presence and financial,
technical, marketing and other resources than Touch Tone. Touch Tone competes or
expects to compete directly or indirectly with the following categories of
companies: (1) other national and regional commercial Internet service
providers, such as Performance Systems International ("PSI"), Bolt Beranek &
Newman, Inc. ("BBN") and UUNET Technologies ("UUNET"), (2) established on-line
services companies that currently offer or are expected to offer Internet
access, such as American Online, Inc. ("AOL"), 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.
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Although most of the established on-line services companies and
telecommunications companies currently offer only limited Internet access, many
of these services have announced plans to offer expanded Internet access. Touch
Tone expects that all of the major on-line services companies will eventually
compete fully in the Internet access market. Certain companies, including AOL,
BBN, CompuServe and PSI, have obtained or expanded their Internet access
products and services as a result of acquisitions. In addition, Touch Tone
believes that new competitors, including large computer hardware and software,
media and telecommunications companies such as the regional telephone companies,
will enter the Internet access market, resulting in even greater competition for
Touch Tone. For example, Microsoft has introduced an Internet access solution,
including front-end software and an on-line service, called "Microsoft Network,"
that is expected to be competitive with Touch Tone's services. The application
software for this on-line service has been bundled with Microsoft's Windows 95
operating system, which may give the service a significant advantage over the
on-line and Internet services from other providers, including Touch Tone. In
connection with its plans to enter the Internet access market, Microsoft
recently announced a strategic alliance with UUNET (including the purchase of a
minority investment in UUNET by Microsoft) that will give Microsoft customers
access to the Internet through UUNET's POPs. In addition, IBM's most recent
version of its OS/2 operating system software includes Internet utilities, and
IBM offers Internet access through its own private communications network. The
ability of these competitors or others to bundle services and products with
Internet connectivity services could place Touch Tone at a significant
competitive disadvantage.
Competition in Touch Tone's markets is expected to focus increasingly on
overseas traffic where Internet connectivity services are just beginning to be
introduced. For example, AOL recently announced a joint venture with Bertelmann
AG, a German entertainment company, to create an on-line computer service in
Europe. Touch Tone does not currently compete in overseas markets, and to the
extent the ability to provide connectivity services overseas becomes a
competitive advantage in the Internet connectivity industry, Touch Tone may be
at a competitive disadvantage relative to other competitors.
Increased competition could result in significant price competition, which
in turn could result in significant reductions in the average selling price of
Touch Tone's services. In addition, competition could result in increased
selling and marketing expenses and related subscriber acquisition costs which
could adversely affect Touch Tone's profitability. There can be no assurance
that Touch Tone will be able to offset the effects of any such price reductions
through an increase in the number of its subscribers, higher revenue from
enhanced services, cost reductions or otherwise. Increased competition, price or
otherwise, could result in erosion of Touch Tone's market share and adversely
affect Touch Tone's operating results. There can be no assurance that Touch Tone
will have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully.
DEPENDENCE ON WILTEL AND OTHER SUPPLIERS. Touch Tone will rely on other
companies, particularly WilTel, Inc. ("WilTel"), to provide communications
capacity via leased telecommunication lines. Pursuant to an addendum to Touch
Tone's existing agreement with WilTel, a majority of leased telecommunications
lines that Touch Tone will lease will be provided by WilTel. If WilTel is unable
or unwilling to continue providing service to Touch Tone in the future, Touch
Tone's operations could be materially adversely affected. Although leased
telecommunications lines are available from several alternative suppliers,
including AT&T, MCI and Sprint, there can be no assurance that Touch Tone could
obtain substitute services from other providers at reasonable or comparable
prices, or in a timely fashion.
In addition to the proposed use of WilTel, Touch Tone is dependent on
certain third party suppliers of hardware components. Although Touch Tone
attempts to maintain a minimum of two vendors for each required product, certain
components used by Touch Tone in providing its networking services are currently
acquired from only one source, including high performance routers manufactured
by Cisco Systems, Inc. and modems manufactured by U.S. Robotics, Inc. A failure
by a supplier to deliver quality products on a timely basis, or the inability to
develop alternative sources if and as required, could result in delays which
could materially adversely affect Touch Tone.
SOFTWARE AND SERVICE DEVELOPMENT; TECHNOLOGICAL CHANGE. The market for
Touch Tone's services is characterized by rapidly changing technology, evolving
industry standards, emerging competition and frequent new
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software and service introductions. There can be no assurance that Touch Tone
can successfully identify new service opportunities and develop and bring new
services to market in a timely manner, or that software, services or
technologies developed by others will not render Touch Tone's, services or
technologies noncompetitive or obsolete. Touch Tone is also at risk to
fundamental changes in the way Internet access services are delivered.
Currently, Internet services are accessed primarily by computers and are
delivered by telephone lines. If the Internet becomes accessible by screen-based
telephones, television or other consumer electronic devices, or customer
requirements change the way Internet access is provided, Touch Tone will have to
develop new technology or modify its existing technology to accommodate these
developments. There can be no assurance that Touch Tone will succeed in adapting
its Internet service business to alternate access devices and technology.
DEPENDENCE ON THE DEVELOPMENT OF A NETWORK INFRASTRUCTURE. The future
success of Touch Tone's business will depend upon the capacity, reliability and
security of its proposed network infrastructure. Touch Tone will attempt to
adapt its network infrastructure as the number of users and the amount of
information they wish to transfer increases, and so meet changing customer
requirements. The development and expansion of Touch Tone's proposed network
infrastructure will require substantial financial, operational and management
resources. There can be no assurance that Touch Tone will be able to develop a
network infrastructure to meet demand or its customers' changing requirements on
a timely basis, at a commercially reasonable cost, or at all, or that Touch Tone
will be able to deploy successfully any network expansion. Any failure of Touch
Tone to develop its network infrastructure on a timely basis or to adapt it to
changing customer requirements or evolving industry standards could have a
material adverse effect on Touch Tone's business, financial condition and
results of operations.
NEW AND UNCERTAIN MARKET. The market for Internet connectivity services and
related software products is in an early stage of growth. Since this market is
relatively new and because current and future competitors are likely to
introduce competing Internet connectivity and/or on-line services, it is
difficult to predict the rate at which the market will grow or at which new or
increased competition will result in market saturation. The novelty of the
market for Internet access services may also adversely affect Touch Tone's
ability to retain new customers, as customers unfamiliar with the Internet may
be more likely to discontinue Touch Tone's services after an initial trial
period than other subscribers. If demand for Internet services fails to grow, or
grows more slowly than anticipated, or becomes saturated with competitors, Touch
Tone's business, operating results and financial condition will be adversely
affected. Although Touch Tone intends to support emerging standards in the
market for Internet connectivity, there can be no assurance that industry
standards will emerge or, if they become established, that Touch Tone will be
able to conform to these new standards in a timely fashion and maintain a
competitive position in the market.
In order to achieve subscriber growth, Touch Tone must continue to replace
terminating subscribers and attract additional subscribers. However, the sales
and marketing expense and subscriber acquisition costs associated with
attracting new subscribers are substantial. Accordingly, Touch Tone's ability to
improve operating margins will depend in part on Touch Tone's ability to retain
its subscribers. Since the Internet market is new and the utility of available
services is not well understood by new and potential subscribers, Touch Tone is
unable to predict future subscriber retention rates.
POTENTIAL LIABILITY FOR CONTENT. Recent legislative proposals aimed at
limiting the use of the Internet to transmit certain contents and materials
could, if enacted, result in significant potential liability to Internet access
providers including Touch Tone. Private suits may also be a possibility for
Internet providers for messages posted by subscribers and disseminated through
access providers systems. Touch Tone does not currently have the ability to
regulate use of the Internet by its customers and has no plans at this time to
develop software for this purpose. Accordingly, although Touch Tone carries
insurance, it may not be adequate to compensate Touch Tone for any liability
that may be imposed. Any imposition of liability in excess of such coverage
could have a material adverse effect on Touch Tone.
GOVERNMENT REGULATION OF INTERNET ACCESS PROVIDERS. Most recently, Congress
passed the Telecommunications Bill which makes the transmission of indecent
material on the Internet a crime. Under the Bill, Internet access providers
will have the responsibility for the material their customers put on the
Internet. At this point, Touch Tone is unable to predict the impact or the cost
of compliance on its Internet operations. The law or
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future regulations soon to be adopted may decrease the growth of the Internet,
which could in turn decrease the demand for Touch Tone's products and increase
Touch Tone's cost of doing business or otherwise have an adverse effect on Touch
Tone's business, operating results or financial condition. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, libel and personal privacy is uncertain.
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THE TOUCH TONE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE TOUCH TONE SPECIAL MEETING
At the Touch Tone Special Meeting, Touch Tone Shareholders will consider
and vote upon a proposal to approve and adopt the Merger Agreement, the Merger
and the Reincorporation Merger. Touch Tone Shareholders entitled to vote also
will consider and vote upon any other matter that may properly come before the
Touch Tone Special Meeting.
THE TOUCH TONE BOARD HAS APPROVED THE MERGER AGREEMENT, THE MERGER, THE
REINCORPORATION MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED THEREBY, AND
RECOMMENDS A VOTE "FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT, THE
MERGER AND THE REINCORPORATION MERGER. See "The Merger - Recommendation of the
Boards of Directors; Reasons for the Merger."
Abstentions will be counted as shares present for purposes of determining
the presence of a quorum on all matters. See "-Revocability of Proxies; Quorum."
Abstentions will have the effect of votes against the approval and adoption of
the Merger Agreement, the Merger, the other transactions contemplated by the
Merger Agreement and the Reincorporation Merger.
As of the Record Date directors and executive officers of Touch Tone were
beneficial owners of an aggregate of 114,516 shares of Touch Tone Common Stock,
or approximately 3.4% of the outstanding shares of Touch Tone Common Stock
(excluding 300,000 shares underlying warrants to purchase Touch Tone Common
Stock at $4.00 per share held by such directors and executive officers also
outstanding and exercisable on that date and an option to Michael Canney Touch
Tone's President and Chief Executive Officer to purchase 125,000 shares of
common stock at $.01 per share, which will be granted as part of a consulting
agreement to be entered into upon consummation of the Merger). The directors and
executive officers of Touch Tone who are also stockholders of Touch Tone have
advised Touch Tone that they will vote their shares of Touch Tone Common Stock
in favor of the matters submitted to stockholders of Touch Tone at the Touch
Tone Special Meeting or any adjournments or postponements thereof.
VOTING OF PROXIES
A form of proxy is enclosed with this Joint Proxy Statement/Prospectus for
use by Touch Tone Shareholders.
Shares of Touch Tone Common Stock represented by all properly executed
proxies received in time for the Touch Tone Special Meeting and which have not
been revoked will be voted at such meeting in accordance with the instructions
indicated thereon. PROXIES WHICH DO NOT CONTAIN AN INSTRUCTION TO VOTE FOR OR
AGAINST OR TO ABSTAIN FROM VOTING ON A PARTICULAR MATTER DESCRIBED IN THE PROXY
WILL BE VOTED IN FAVOR OF THE MERGER AGREEMENT, THE MERGER AND THE
REINCORPORATION MERGER AND IN THE DISCRETION OF THE PROXY HOLDER AS TO ANY OTHER
MATTER THAT MAY PROPERLY COME BEFORE THE TOUCH TONE SPECIAL MEETING.
REVOCABILITY OF PROXIES; QUORUM
The grant of a proxy on the enclosed Touch Tone form of proxy does not
preclude a stockholder from voting in person. A stockholder may revoke a proxy
at any time prior to its exercise by submitting a later dated proxy with respect
to the same shares, by filing with the Secretary of Touch Tone a duly executed
revocation, or by voting in person at the meeting. Attendance at the Touch Tone
Special Meeting will not in and of itself constitute are vocation of a proxy.
Only holders of record of Touch Tone Common Stock at the close of business
on the Record Date will be entitled to receive notice of and to vote at the
Touch Tone Special Meeting. On the Record Date, Touch Tone had outstanding
3,320,800 shares of Touch Tone Common Stock. The holders of Touch Tone Common
Stock are entitled to one vote per share on each matter submitted to a vote at
the Touch Tone Special Meeting. The holders of
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a majority of the outstanding shares of Touch Tone Common Stock entitled to vote
must be present in person or by proxy at the Touch Tone Special Meeting in order
for a quorum to be present. Shares of Touch Tone Common Stock represented by
proxies which are marked "abstain" or which are not marked as to any particular
matter or matters will be counted as shares present for purposes of determining
the presence of a quorum on all matters. Proxies relating to "street name"
shares that are voted by brokers will be counted as shares present for purposes
of determining the presence of a quorum on all matters, but will not be treated
as shares having voted at the Touch Tone Special Meeting as to any proposal as
to which authority to vote is withheld by the broker.
In the event a quorum is not present in person or by proxy at the Touch
Tone Special Meeting, the Touch Tone Special Meeting is expected to be adjourned
or postponed.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of at least a majority of the shares of
Touch Tone Common Stock outstanding as of the Record Date voting in person or by
proxy is necessary to approve and adopt the Merger Agreement, the Merger and the
Reincorporation Merger.
APPRAISAL RIGHTS
Holders of Touch Tone Common Stock who vote against the Merger will not be
entitled to appraisal rights under the California Corporation Code if the Merger
is consummated.
SOLICITATION OF PROXIES
Subject to the Merger Agreement, Touch Tone will bear the cost of the
solicitation of proxies from its stockholders, and Arcada and Touch Tone will
pay the cost of printing and mailing this Joint Proxy Statement/Prospectus. In
addition to solicitation by mail, the directors, officers and employees of Touch
Tone and its subsidiaries may solicit proxies from stockholders of Touch Tone by
telephone or telegram or in person. Such directors, officers and employees will
not be additionally compensated for such solicitation but may be reimbursed for
out-of-pocket expenses in connection therewith. Arrangements also will be made
with brokerage houses and other custodians, nominees and fiduciaries for the
forwarding of solicitation material to the beneficial owners of shares held of
record by such persons, and Touch Tone will reimburse such custodians, nominees
and fiduciaries for their reasonable out-of-pocket expenses in connection
therewith.
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THE ARCADA SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE ARCADA SPECIAL MEETING
At the Arcada Special Meeting, holders of Arcada Common Stock will consider
and vote upon a proposal to approve and adopt the Merger Agreement and the
Merger. Holders of shares of Arcada Common Stock entitled to vote also will
consider and vote upon any other matter that may properly come before the Arcada
Special Meeting or any adjournments or postponements thereof.
THE BOARD OF DIRECTORS OF ARCADA HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT, THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED THEREBY, AND
RECOMMENDS A VOTE "FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND
THE MERGER. See "THE MERGER - Recommendation of the Board of Directors; Reasons
for the Merger."
Abstentions will be counted as shares present for purposes of determining
the presence of a quorum on all matters. See "- Revocability of Proxies;
Quorum." Abstentions will have the effect of votes against the approval and
adoption of the Merger Agreement, the Merger and the other transactions
contemplated by the Merger Agreement.
As of the Record Date, directors and executive officers of Arcada were
beneficial owners of an aggregate of 49,000 shares of Arcada Common Stock (98%
of the outstanding shares of Arcada Common Stock.) The directors and executive
officers of Arcada who are also stockholders of Arcada have advised Arcada that
they will vote their shares of Arcada Common Stock in favor of the matters
submitted to stockholders of Arcada at the Arcada Special Meeting or any
adjournments or postponements thereof.
VOTING OF PROXIES
A form of proxy is enclosed with this Joint Proxy Statement/Prospectus for
use by Arcada Shareholders.
Shares of Arcada Common Stock represented by all properly executed proxies
received in time for the Arcada Special Meeting and which have not been revoked
will be voted at such meeting in accordance with the instructions indicated
thereon. PROXIES WHICH DO NOT CONTAIN AN INSTRUCTION TO VOTE FOR OR AGAINST OR
TO ABSTAIN FROM VOTING ON A PARTICULAR MATTER DESCRIBED IN THE PROXY WILL BE
VOTED IN FAVOR OF THE MERGER AND IN THE DISCRETION OF THE PROXY HOLDER AS TO ANY
OTHER MATTER THAT MAY PROPERLY COME BEFORE THE ARCADA SPECIAL MEETING.
REVOCABILITY OF PROXIES; QUORUM
The grant of a proxy on the enclosed Arcada form of proxy does not preclude
a stockholder from voting in person. A stockholder may revoke a proxy at any
time prior to its exercise by submitting a later dated proxy with respect to the
same shares, by filing with the Secretary of Arcada a duly executed revocation,
or by voting in person at the meeting. Attendance at the Arcada Special Meeting
will not in and of itself constitute are vocation of a proxy.
Only holders of record of Arcada Common Stock at the close of business on
the Record Date will be entitled to receive notice of and to vote at the Arcada
Special Meeting. On the Record Date, Arcada had outstanding 50,000 shares of
Arcada Common Stock. The holders of Arcada Common Stock are entitled to one vote
per share on each matter submitted to a vote at the Arcada Special Meeting. The
holders of a majority of the outstanding shares of Arcada Common Stock entitled
to vote must be present in person or by proxy at the Arcada Special Meeting in
order for a quorum to be present. Shares of Arcada Common Stock represented by
proxies which are marked "abstain" or which are not marked as to any particular
matter or matters will be counted as shares present for purposes of determining
the presence of a quorum on all matters.
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In the event a quorum is not present in person or by proxy at the Arcada
Special Meeting, the Arcada Special Meeting is expected to be adjourned or
postponed.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of at least two-thirds (66 2/3%) of the
shares of Arcada Common Stock outstanding as of the Record Date voting in person
or by proxy is necessary to approve and adopt the Merger Agreement and the
Merger.
APPRAISAL RIGHTS
Holders of Arcada Common Stock who do not vote for the Merger will be
entitled to appraisal rights under the Washington Business Corporation Act if
the Merger is consummated. The Washington Business Corporation Act generally
entitles a stockholder to exercise appraisal rights upon a merger or
consolidation of the corporation effected pursuant to the Washington Corporation
Act if the holder complies with the requirements of Washington Business
Corporation Act. See "THE MERGER - Dissenters' Rights" and Appendix C attached
hereto.
SOLICITATION OF PROXIES
Subject to the Merger Agreement, Arcada will bear the cost of the
solicitation of proxies from its stockholders, and Arcada and Touch Tone will
pay the cost of printing and mailing this Joint Proxy Statement/Prospectus. In
addition to solicitation by mail, the directors, officers and employees of
Arcada may solicit proxies from stockholders of Arcada by telephone or telegram
or in person. Such directors, officers and employees will not be additionally
compensated for such solicitation but may be reimbursed for out-of-pocket
expenses in connection therewith.
HOLDERS OF ARCADA COMMON STOCK SHOULD NOT SEND STOCK CERTIFICATES
WITH THEIR PROXY CARDS
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THE MERGER
THE DESCRIPTION OF THE MERGER AND THE MERGER AGREEMENT CONTAINED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE MERGER AGREEMENT, A COPY OF WHICH IS INCLUDED AS APPENDIX A TO THIS JOINT
PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE.
GENERAL
Touch Tone, Merger Sub and Arcada have entered into the Merger Agreement,
which provides that, subject to the satisfaction or waiver of the conditions set
forth therein (see "THE MERGER AGREEMENT - Conditions to the Consummation of the
Merger"), Arcada will be merged with and into Merger Sub, and Merger Sub will be
the surviving corporation and a wholly owned subsidiary of Touch Tone. As soon
as practicable after the satisfaction or waiver (where permissible) of the
conditions under the Merger Agreement, the Articles of Merger will be filed with
the Secretary of State of the State of Washington, and the time of such filings
will be the Effective Time unless otherwise provided in the Articles of Merger.
Upon consummation of the Merger, all shares of Arcada Common Stock will
automatically be canceled and retired and will cease to exist. Each holder of
a certificate representing any shares of Arcada Common Stock will cease to
have any rights with respect thereto, except the right to receive shares of
Touch Tone Common Stock and Series B Preferred Stock to be issued upon the
surrender of such certificate, or the right of dissenting Arcada Shareholders
to receive fair value for their shares of Arcada Common Stock, under certain
circumstances. See "THE MERGER - Dissenters' Rights." At the Effective Time,
each outstanding share of Arcada Common Stock will be converted into the
right to receive 250 shares of Touch Tone Common Stock and 30 shares of Touch
Tone Series B Preferred Stock, in each case subject to adjustment, resulting
in the issuance of 12.5 million shares of Touch Tone Common Stock and 1.5
million shares of Series B Preferred Stock. Pursuant to the terms of the
Merger Agreement, 11.5 million of the 12.5 million shares of Touch Tone
Common Stock issued in the Merger will be subject to resale restrictions
until November, 1998. See "THE MERGER AGREEMENT -Lock-up."
The number of shares of Touch Tone Common Stock and Series B Preferred
Stock to be received upon conversion of the shares of Arcada Common Stock in the
Merger, will be subject to further adjustment if, prior to the Effective Time,
the shares of Touch Tone Common Stock are changed into a different number of
shares by reason of any recapitalization, split up, combination or exchange of
shares, or if a stock dividend on such shares is declared with a record date
within such period, then the number of shares to be issued to Arcada
Shareholders will be adjusted accordingly.
No certificates or fractional shares of Touch Tone Common Stock or Series B
Preferred Stock will be issued as a result of the Merger. Instead, each Arcada
Shareholders otherwise entitled to a fractional shares will receive the cash
value of such fractional share in an amount equal to the fraction multiplied the
closing price of Touch Tone Common Stock on the third trading day before the
Effective Time.
BACKGROUND OF THE MERGER
The Touch Tone Board has been cognizant of increasing levels of competition
in the long distance telecommunications business. The Touch Tone Board believes
that it must expand in order to receive the substantial
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competitive benefits available to larger entities. These benefits include
significant price advantages to volume purchasers provided by long distance
carriers.
In April, 1996, Touch Tone's Board retained Robert Vaughan to act as a
finder to locate parties that might be interested in a business combination with
Touch Tone. See "--Interests of Certain Persons in the Merger." During the
period from June 10, 1996 through July 31, 1996, Touch Tone identified and
performed initial due diligence on several possible candidates located in the
states of South Dakota, Texas, Utah, Washington and Hawaii. After reviewed and
for various reasons, the Touch Tone Board determined not to pursue any of such
possible transactions.
On August 1, 1996, Arcada was identified by Mr. Vaughan to Touch Tone as
possible acquisition candidate. During August, 1996, Michael Canney, President
and CEO of Touch Tone and Frank Bonadio, President and Director of Arcada met
several times and discussed possible terms of such a transaction. After
extensive negotiations and due diligence by Touch Tone and Arcada, a Letter of
Intent dated August 22, 1996 was executed by each party. Items discussed during
these negotiations included the number of shares to be issued to Arcada
shareholders in connection with the proposed transaction, new management,
compatibility of business philosophies and long term goals. Members of Arcada's
management also conducted extensive interviews of GetNet's management to
evaluate the possible integration of Arcada's long distance service with
GetNet's Internet Backbone.
After further negotiations, due diligence and meetings at each of the
company's corporate offices, a draft Merger Agreement was circulated. The
parties discussed the draft merger agreement and after further revisions, a
substantially final draft of the Merger Agreement was circulated to all
parties. The Touch Tone Board, after discussions with management and the
review of legal counsel, approved the Agreement for Merger on November 1,
1996. The Arcada Board approved the Agreement for Merger on November 1, 1996.
The original Merger Agreement contemplated the issuance of 12.5 million
shares of Touch Tone Common Stock and $1.5 million in one year, 8% unsecured
promissory notes (the "Promissory Notes").
The Merger Agreement was amended on November 19, 1996 to provide that 11.5
million of the 12.5 million shares of Touch Tone Common Stock issued in the
Merger will be subject to a two-year resale restriction and, in exchange for the
restriction, that Touch Tone will use its best efforts to induce its officers,
directors and ten (10) largest shareholders to agree to vote in favor of the
Merger and the Reincorporation Merger.
The Merger Agreement was amended on December 4, 1996 to provide that the
term of the Promissory Notes which were to be issued in the Merger would be
changed from 12 to 15 months.
The Merger Agreement was further amended on January 22, 1997 to substitute
an aggregate of 1.5 million shares of Series B Preferred stock for the
Promissory Notes initially contemplated on the Merger Agreement.
The Merger Agreement is the result of arms-length negotiations between
Touch Tone and Arcada. There is no affiliation between any of the directors and
officers of the respective entities.
RECOMMENDATION OF THE BOARDS OF DIRECTORS; REASONS FOR THE MERGER
TOUCH TONE. By the vote of the Touch Tone Board of Directors at a meeting
held on November 1, 1996, the Touch Tone Board determined the Merger to be fair
to and advisable and in the best interests of Touch Tone and its stockholders
and approved the Merger and the Merger Agreement. The Touch Tone Board's
decision to declare the Merger advisable and to approve the Merger and the
Merger Agreement at the meeting followed study of strategic alternatives.
At its meeting held on August 29, 1996, the Touch Tone Board received the
presentation of management with respect to Arcada, including reviews of, among
other things, historical information relating to the business, financial
condition and results of operations of Arcada; information provided by Arcada
management and reviewed and adjusted by Touch Tone management regarding the long
distance operations of Arcada; information regarding the management of Arcada;
and the possible effects of the Merger on Touch Tone's financial condition and
the
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possible market effects of the announcement of the proposed Merger and the
consummation thereof on the Touch Tone Common Stock.
During the course of its deliberations, the Touch Tone Board of Directors,
with the assistance of management and its advisors, considered a number of other
factors, including the following:
(i) The strategic and financial alternatives available to Touch Tone,
including remaining a separate company and pursuing its existing growth
strategy;
(ii) The exchange ratio proposed by Arcada;
(iii) The terms and conditions of the proposed Merger, including (a) the
right of Touch Tone to terminate the Merger Agreement upon the occurrence
of a material adverse change in Arcada, (b) the Touch Tone Board's ability,
subject to certain determinations regarding the Touch Tone Board's
fiduciary duties, to withdraw or modify its recommendation to Touch Tone's
stockholders and (c) the size and structure of the termination and finders
fees; and
(iv) The ability of the combined companies to generate additional long
distance revenues, reduce overhead and expand the utilization of the
Internet backbone.
In the course of its deliberations, the Touch Tone Board reviewed and
considered a number of other factors relevant to the Merger, including among
other things: (i) information concerning Touch Tone's and Arcada's respective
businesses, prospects, financial performance, financial conditions, operations
and technology; (ii) an analysis of the respective contributions to revenue,
operating profits and net profits of the combined company; and (iii) reports
from management and legal advisors as to the results of their due diligence
investigation of Arcada.
The Touch Tone Board also considered a variety of the potentially negative
factors in its deliberations of the Merger, including (i) the potential
disruption of Touch Tone's business that might result from a lack of focus
following the announcement of the Merger; (ii) possibilities that the Merger
might not be consummated and the effects of a public announcement of the Merger
on Touch Tone's business; (iii) the risk that the market price of Touch Tone
stock might be adversely affected by the announcement of the Merger; (iv) the
risk that the other benefits sought to be achieved in the Merger will not be
achieved; and (v) the risks described under "RISK FACTORS."
In view of the wide variety of factors, both positive and negative,
considered by the Touch Tone Board, the Touch Tone Board did not find it
practical, and did not quantify or otherwise assign relative weights to the
specific factors considered.
Benjamin W. Bronston, a Touch Tone Director, elected to abstain from voting
on the Merger due to his perception of a conflict of interest, Mr. Bronston is a
principal of Nowalsky & Bronston LLP, a law firm which was retained by Touch
Tone to conduct a due diligence review of Arcada's telecommunications contracts.
The Touch Tone Board elected not to obtain a fairness opinion because
Arcada met the profile criteria established by Touch Tone's management when it
initiated its search for a merger/acquisition candidate including solid
management with a history of results, and proven systems and products; a
profitable operation with aggressive marketing; and a long-term growth plan
through further acquisitions.
ARCADA. By the unanimous vote of the Arcada Board at a meeting held on
November 8, 1996, Arcada Board determined the Merger to be fair to and advisable
and in the best interests of Arcada and its shareholders and approved the Merger
and the Merger Agreement. The Arcada Board believes that the following are
reasons for Arcada shareholders to vote for approval and adoption of the Merger
Agreement and approval of the Merger:
(i) The strategic and financial alternatives available to Arcada,
including remaining a separate company and pursuing its existing growth
strategy;
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(ii) The business opportunities available by leveraging Touch Tone's
Internet "backbone" to provide Internet access services;
(iii) The exchange ratio agreed to by Touch Tone;
(iv) The proposed terms and conditions of the proposed Merger, including
(a) the right of Arcada to terminate the Merger Agreement upon (1) the
occurrence of a material adverse change in Touch Tone (2) Touch Tone's
inability to renegotiate certain of its contracts and to settle certain
pending litigation matters and (3) Touch Tone's failure to maintain a
minimum level of working capital, (b) the Arcada Board's ability, subject
to certain determinations regarding its fiduciary duties, to withdraw or
modify its recommendations to Arcada's stockholders and (c) the size and
structure of the termination and finders fees;
(v) The potential increased liquidity and access to capital markets
available to Arcada as a publicly held and traded entity; and
(vi) The potential increased ability of Arcada to pursue acquisitions
through the issuance of publicly traded securities.
In the course of its deliberations, the Arcada Board reviewed and
considered a number of other factors relevant to the Merger, including, among
other things: (i) information concerning Arcada's and Touch Tone's respective
business, prospects, financial performance, financial conditions, operations and
technology; (ii) the historical stock prices of Touch Tone common stock; (iii)
an analysis of the respective contributions to revenue, operating profits and
net profits of the combined company; (iv) the structure of the Merger which will
permit the Arcada shareholders to exchange their shares of Arcada common stock
for Touch Tone common stock on a tax-free basis; and (v) reports from management
and legal advisors as to the results of their due diligence investigation of
Touch Tone.
The Arcada Board also considered a variety of the potentially negative
factors in its deliberations of the Merger including: (i) the potential
disruption of Arcada's business that might result from a lack of focus following
announcement of the Merger; (ii) possibilities that the Merger might not be
consummated and the effects of a public announcement of the Merger on Arcada's
business; (iii) the risk that the market price of Touch Tone stock might be
adversely affected by the announcement of the Merger; (iv) the risk that the
other benefits sought to be achieved in the Merger will not be achieved; and (v)
the risks described under "Risk Factors."
In view of the wide variety of factors, both positive and negative,
considered by the Arcada Board, the Arcada Board did not find it practical, and
did not quantify or otherwise assign relative weights to the specific factors
considered.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The Merger Agreement provides that from and after the Effective Time, Touch
Tone will indemnify and hold harmless all past and present officers and
directors of Arcada to the full extent such persons may be indemnified by Arcada
pursuant to Arcada's Certificate of Incorporation and Bylaws for acts or
omissions occurring at or prior to the Effective Time and will advance
reasonable litigation expenses incurred by such officers and directors in
connection with defending any action arising out of such acts or omissions. See
"THE MERGER AGREEMENT - Indemnification."
At the Effective Time, four of the current directors of Touch Tone will
resign, and the remaining director of Touch Tone will elect the Arcada Designees
to fill the four vacancies. The terms of all directors of Touch Tone, including
the Arcada Designees, will expire at the next annual meeting of stockholders of
Touch Tone. Also, at the Effective Time, Frank Bonadio, currently the President
and Chief Operating Officer of Arcada, will enter into an employment agreement
with Touch Tone and will become President and Chief Executive Officer of Touch
Tone.
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Michael Canney, the current President and Chief Executive Officer of Touch Tone
will resign and become a consultant to Touch Tone pursuant to the terms of a
consulting agreement between Mr. Canney and Touch Tone. Also, Robert Vaughan, a
consultant and a shareholder and the former President of Touch Tone will receive
$150,000 in cash and 250,000 shares of Touch Tone Common Stock upon consummation
of the Merger.
In addition, Robert Leppaluoto and Keith Leppaluoto will enter into
consulting agreements with Touch Tone providing for consulting fees of
$60,000 per annum. Touch Tone, Arcada and Robert and Keith Leppaluoto have
also agreed to convert $200,000 of certain indebtedness of Arcada into
200,000 shares of Touch Tone Series B Preferred Stock. See "MANAGEMENT AND
OPERATIONS OF TOUCH TONE FOLLOWING THE MERGER - Employment and Consulting
Agreements."
GOVERNMENTAL AND REGULATORY APPROVALS
Certain aspects of the Merger will require notification to, and filings
with, certain securities and other authorities in certain states, including
licensing and tariff restriction in jurisdictions where Arcada currently
operates long distance service.
The obligations of Touch Tone and Arcada to consummate the Merger are
subject to the condition that there shall be no preliminary or permanent
injunction or other order by any court or governmental or regulatory authority
prohibiting the consummation of the Merger. Each party has agreed to use
reasonable efforts to defend any such challenge or order and to seek to have any
such order vacated or reversed.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon the Internal Revenue Code, existing
and proposed regulations thereunder, reports of congressional committees,
judicial decisions and current administrative rulings and practices. Any of
these authorities could be repealed, overruled or modified at any time after the
date hereof. Any such change could be retroactive and, accordingly, could modify
the tax consequences discussed herein. No ruling from the Internal Revenue
Service (the "IRS") with respect to the matters discussed herein has been
requested and there is no assurance that the IRS would agree with the
conclusions set forth in this discussion. The following discussion also is based
upon representations made by Arcada and Touch Tone and any inaccuracy in those
representations could adversely modify the tax consequences discussed herein.
This discussion is for general information only and does not address the
federal income tax consequences that may be relevant to particular stockholders
of Arcada in light of their personal circumstances or to certain types of
stockholders of Arcada (such as dealers in securities, insurance companies,
foreign individuals and entities, financial institutions and tax-exempt
entities) who may be subject to special treatment under the federal income tax
laws. This discussion also does not address any tax consequences under state,
local or foreign laws.
EXCHANGE OF ARCADA COMMON STOCK PURSUANT TO THE MERGER. The Merger is
intended to qualify as a reorganization under section 368(a) of the Code.
Accordingly, no gain or loss would be recognized by Arcada, Touch Tone or Merger
Sub as a result of the Merger. Furthermore, no gain or loss would be recognized
by Arcada Shareholders upon the conversion of their Arcada Common Stock into
shares of Touch Tone Common Stock and Touch Tone Series B Preferred Stock
pursuant to the Merger. The aggregate tax basis of the shares of Touch Tone
Common Stock and Touch Tone Series B Preferred Stock received in exchange for
shares of Arcada Common Stock pursuant to the Merger should be the same as the
aggregate tax basis for such shares of Arcada Common Stock at the time of the
Merger and the holding period for shares of Touch Tone Common Stock and Touch
Tone Series B Preferred Stock received in exchange for shares of Arcada Common
Stock pursuant to the Merger should include the holding period of such shares
provided that they were held as capital assets as of the Effective Time.
If the Merger does not qualify as a reorganization for federal income tax
purposes, no gain or loss would be recognized by Touch Tone, Merger Sub or
Arcada. However, an Arcada shareholder would recognize gain or loss upon the
conversion of Arcada Common Stock into Touch Tone Common Stock and Touch Tone
Series B Preferred Stock pursuant to the Merger in an amount equal to the
difference between the fair market value of Touch Tone
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Common Stock and Touch Tone Series B Preferred Stock received by such
stockholder pursuant to the Merger and its adjusted tax basis in the Arcada
Common Stock surrendered in exchange therefore. Such gain or loss would be
capital gain or loss if the shares of Arcada Common Stock were held as a capital
asset and would be long-term gain or loss if such shares had been held for more
than one year as of the Effective Time. Arcada Shareholders will not recognize
gain or loss upon Touch Tone's conversion of the Series B Preferred Stock into
Touch Tone Common Stock.
CONVERSION OR REDEMPTION OF SERIES B PREFERRED STOCK RECEIVED PURSUANT TO
THE MERGER. Arcada shareholders will recognize gain or loss upon Touch Tone's
redemption of the Series B Preferred Stock in an amount equal to the difference
between such stockholder's adjusted basis in the Arcada Common Stock
attributable to the Series B Preferred Stock and the redemption price paid. Such
gain or loss would be capital gain or loss if the shares of Touch Tone Series B
Preferred Stock were held as a capital asset and would be long-term gain or loss
if such shares had been held for more than one year as of the Effective Time.
Arcada Shareholders will not recognize gain or loss upon Touch Tone's conversion
of the Series B Preferred Stock into Touch Tone Common Stock. The aggregate tax
basis of the shares of Touch Tone Common Stock received in exchange for shares
of Touch Tone Common Stock should be the same as the aggregate tax basis of the
shares of Touch Tone Series Preferred Stock received pursuant to the Merger.
DISSENTERS. Stockholders of Arcada who perfect their dissenters' rights
should recognize gain or loss on the receipt of cash in exchange for their
Arcada Common Stock in an amount equal to the difference between the amount of
cash received and the basis of the stock surrendered in exchange therefore,
provided that no party related to such stockholder (including such stockholder's
spouse, children, parents and grandchildren and certain corporations,
partnerships, estates and trusts in which such stockholder owns an interest)
owns any stock in Touch Tone.
BACKUP WITHHOLDING. Backup withholding at a rate of 31% and information
reporting may apply to payments made with respect to Touch Tone Common Stock.
This withholding and information reporting generally will apply only if a holder
of a share of Touch Tone Common Stock, as the case may be, (i) fails to furnish
a social security or other taxpayer identification number ("TIN"), (ii)
furnishes an incorrect TIN, (iii) fails to report properly interest or dividends
or (iv) fails, under certain circumstances, to provide a certified statement,
signed under penalties of perjury, that the TIN provided is correct and that the
shareholder is not subject to backup withholding. Any amount withheld from a
payment to a holder under the backup withholding rules is allowable as a credit
against such holder's federal income tax liability, provided that certain
information is furnished to the IRS. Holders should consult their tax advisors
as to their qualification for exemption from backup withholding and information
reporting and the procedure for obtaining such an exemption. Holders of Touch
Tone Common Stock will be required to provide the required information to Touch
Tone on a completed Form W-9. A holder who does not provide Touch Tone with a
correct TIN also may be subject to penalties imposed by the IRS.
Touch Tone will report to Touch Tone Shareholders and the IRS the amount of
any "reportable payments" for each calendar year and the amount of tax withheld,
if any, with respect to payments on Touch Tone Common Stock.
ARCADA SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF PARTICIPATING IN THE MERGER, INCLUDING
THE APPLICABILITY OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, CHANGES IN APPLICABLE
TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION.
ANTICIPATED ACCOUNTING TREATMENT
Inasmuch as Arcada shareholders are to receive 12.5 million shares of Touch
Tone Common Stock, former Arcada shareholders will own approximately 78% of
Touch Tone stock (without giving effect to the conversion of the 1.5 million
shares of Touch Tone Series B Preferred Stock issued in the Merger), which, for
accounting purposes, results in Arcada being deemed the "acquiring" corporation
and Touch Tone the "acquiree." Accordingly, in accordance with generally
accepted accounting principles, the recorded assets and
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liabilities of Arcada will be carried forward at recorded book values. The
assets and liabilities of Touch Tone will be recorded through allocation of the
purchase price based upon estimated fair values of such assets and liabilities.
There is no goodwill recorded as a result of purchase accounting for this
reverse merger business combination and costs associated with the Merger will be
recorded as a period expense. See "UNAUDITED PRO FORMA CONDENSED FINANCIAL
INFORMATION."
DISSENTERS' RIGHTS
Arcada Shareholders have the right to dissent from the Merger and, in
certain circumstances, to receive payment for their shares in accordance with
the terms of Chapter 23B.13 of the Washington Business Corporation Act ("WBCA").
The following discussion is not a complete statement of the law pertaining to
dissenters' rights under the WBCA and is qualified in its entirety by the full
text of Chapter 23B.13 of the WBCA, which is reprinted in its entirety as
Appendix C to this Joint Proxy Statement/Prospectus.
APPENDIX C SHOULD BE REVIEWED CAREFULLY BY ANY ARCADA SHAREHOLDER WHO
WISHES TO EXERCISE DISSENTERS' RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO
SO, SINCE FAILURE TO COMPLY WITH THE PROCEDURES OF THE STATUTE WILL RESULT IN
THE LOSS OF DISSENTERS' RIGHTS.
If the shares of Arcada Common Stock of a Dissenting Holder are held in
street name, either the beneficial owner or the broker in whose name the shares
are registered may dissent from the Merger by following the following
procedures. In addition, the beneficial owner must provide the written consent
of the registered holder to such dissent with or prior to the assertion of
dissenters' right. The record shareholder may dissent with respect to all shares
held by one beneficial owner and must provide written notice to Arcada of the
name and address of each such dissenting beneficial owner.
A holder of Arcada Common Stock who wishes to dissent from the Transaction
(a "Dissenting Holder") must satisfy the following conditions, among others:
(i) WRITTEN OBJECTION. Such shareholder must file a written objection to
the Merger with Arcada at its offices at 2001 Sixth Avenue, Suite 3210,
Seattle, Washington 98121 (Attention: Frank Bonadio, President) prior to
the vote if taken at the Arcada Special Meeting; and
(ii) NO VOTE IN FAVOR. Such shareholder must not vote in favor of the
Merger.
If the Merger is approved by the holders of Arcada Common Stock, Arcada
will send written notice along with a copy of Chapter 23B.13 of the WBCA no
later than 10 days after the Effective Time to each Dissenting Holder (i)
stating where such shareholder must send his or her written payment demand, (ii)
stating where and when certificates representing Arcada Common Stock must be
deposited, (iii) containing a form for demanding payment, which requires the
Dissenting Holder to certify that he or she acquired beneficial ownership before
the first public announcement of the Merger, and (iv) setting a date by which
such written payment demand must be received. A holder of Arcada Common Stock
who does not demand payment, certify that such shareholder acquired the shares
before the first public announcement, nor deposit his or her shares within the
time provided by such notice will not be entitled to dissenters' rights.
Arcada will pay to each Dissenting Holder who complies with the procedures
described above, within 30 days after the Effective Time, the amount that Arcada
estimates to be the fair value of such Dissenting Holder's shares immediately
prior to the announcement of the Merger, plus accrued interest, excluding any
appreciation or depreciation in anticipation of the Merger. Arcada will provide,
along with such payment, Arcada's balance sheet, income statement and statement
of changes in shareholders' equity for its last fiscal year and any recent
interim financial statements, an explanation of how Arcada estimates the fair
value of the shares and how the accrued interest was calculated and certain
other information. Any Dissenting Holder who is dissatisfied with such payment
or such offer may, within 30 days of such payment or offer for payment, notify
Arcada in writing of such shareholder's estimate of fair value of his or her
shares and the amount of interest due, and demand payment thereof.
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If any Dissenting Holder's demand for payment is not settled within 60 days
after receipt by Arcada of such shareholder's payment demand described in the
last sentence, WBCA requires that Arcada commence a proceeding in King County
Superior Court to determine the fair value of the shares, naming all Dissenting
Holders whose demands remain unsettled as parties to the proceeding. The court
may appoint one or more persons as appraisers to receive evidence and recommend
the fair value of the shares.
Court costs and approval fees would be assessed against Arcada, except that
the court may assess such costs against some or all of the Dissenting Holders to
the extent that the court finds the Dissenting Holders acted arbitrarily,
vexatiously or not in good faith in demanding payment or to the extent the court
finds equitable.
Any shareholder who fails to follow these procedures will lose his or her
rights to dissent from the Merger. A negative vote, alone, will not constitute
the written objection required prior to the Special Meeting. Any shareholder
making a written demand for payment is thereafter entitled only to payment as
provided in the WBCA, and is no longer entitled to vote or otherwise exercise
any shareholder rights as to the shareholder's shares of Arcada Common Stock.
Consent of Arcada is required for the withdrawal of demand for payment.
NASDAQ LISTING
It is a condition to the parties' obligations under the Merger Agreement
that Nasdaq shall have been notified and shall have approved the listing of the
shares of Touch Tone Common Stock issuable pursuant to the Merger Agreement, and
the applicable listing fee paid. Nasdaq has indicated that Touch Tone will be
required to apply for and satisfy its initial listing requirement in order to
continue the listing of its securities on the Nasdaq SmallCap Market. There can
be no assurance that Touch Tone's application will be accepted. See "RISK
FACTORS - Continued Nasdaq Listing."
RESALE OF TOUCH TONE COMMON STOCK
The Touch Tone Common Stock and any shares of Touch Tone Common Stock
obtained upon conversion of the Touch Tone Series B Preferred Stock issued
pursuant to the Merger will be subject to a "lock-up" restricting sales of Touch
Tone Common Stock (and Touch Tone Common Stock issued upon conversion of the
Touch Tone Series B Preferred Stock) received in the Merger through November,
1998. See "THE MERGER AGREEMENT - Lock-up." In addition, shares issued to any
Arcada shareholder who may be deemed to be an "affiliate" (as defined under the
Securities Act and generally including, without limitation, directors, certain
executive officers and beneficial owners of 10% or more of a class of capital
stock) of Arcada for purposes of Rule 145 under the Securities Act will not be
transferable except in compliance with the Securities Act (including Rule 145).
This Joint Proxy Statement/Prospectus does not cover resales of Touch Tone
Common Stock received by any person who may be deemed to be an "affiliate" of
Arcada.
In general, under Rule 145, for two years following the Effective Time, an
affiliate would be entitled to sell Touch Tone Common Stock acquired in
connection with the Merger only through unsolicited "broker transactions" or
transactions directly with a "market maker," as such terms are defined in Rule
144. Additionally, the number of shares to be sold by an affiliate within any
three-month period for purposes of Rule 145, may not exceed the greater of 1% of
the outstanding shares of Touch Tone Common Stock or the average weekly trading
volume of such stock during the four calendar weeks preceding such sale. Rule
145 would remain available to affiliates, however, only if Touch Tone remained
current with its informational filings with the Commission under the Exchange
Act. Two years after the Effective Time, an affiliate would be able to sell such
Touch Tone Common Stock without such manner of sale or volume limitations,
provided that Touch Tone was current in its Exchange Act informational filings
and such affiliate was not then an affiliate of Touch Tone. Three years after
the Effective Time, an affiliate would be able to sell such Touch Tone Common
Stock without any restrictions, so long as such affiliate had not been an
affiliate of Touch Tone for at least three months prior thereto.
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THE MERGER AGREEMENT
THE FOLLOWING IS A SUMMARY OF CERTAIN PROVISIONS OF THE MERGER AGREEMENT,
WHICH APPEARS AS APPENDIX A TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS
INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING SUMMARY INCLUDES THE MATERIAL
TERMS OF SUCH AGREEMENT BUT IS NOT NECESSARILY COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT.
EFFECTIVE DATE AND TIME OF THE MERGER
The Merger will become effective at the time of the acceptance of the Plan
of Merger by the Secretary of State of the State of Washington. As used herein,
the term "Effective Date" means the day on which the Effective Time occurs. The
parties anticipate filing the Articles of Merger as soon as practicable after
the approval of the Merger by the shareholders of Touch Tone and Arcada.
However, the parties are unable to predict when or if the Effective Time will
occur.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The obligations of Touch Tone and Arcada to consummate the Merger are
subject to, among other things, the satisfaction of the following conditions:
(i) the approval of the Merger and the Merger Agreement by the requisite vote of
the shareholders of Touch Tone and Arcada; (ii) the receipt of all applicable
regulatory and governmental approvals and consents and the expiration of all
statutory and regulatory waiting periods; (iii) the absence of any order, decree
or injunction of a court or agency of competent jurisdiction that enjoins or
prohibits the consummation of the Merger; (iv) compliance with applicable
pre-merger notification provisions of Section 7A of the Clayton Act and the
absence of pending or threatened proceedings under any applicable antitrust law
of the states of California and Washington; and (v) the effectiveness of the
Registration Statement and the absence of any stop order suspending the
effectiveness thereof or any proceedings for that purpose initiated by the
Commission.
The obligation of Touch Tone to consummate the Merger is subject to the
satisfaction or waiver of certain additional conditions, including, without
limitation, the following: (i) the continued accuracy of representations and
warranties of Arcada and the performance by Arcada of its covenants and
agreements made in the Merger Agreement, except where the failure of such
representations and warranties to be accurate or the failure to perform such
covenants or agreements would not have a material adverse affect on Touch Tone;
(ii) the receipt of all regulatory and governmental consents, waivers,
clearances, approvals and authorizations required in connection with the
transactions contemplated by the Merger Agreement without the imposition of any
condition that has not normally been imposed in such transactions and would have
a material adverse effect on Arcada or Touch Tone; (iii) the receipt of an
opinion, dated the date of the closing, from Cairncross & Hempelmann, counsel to
Arcada; (iv) the absence of any material adverse change in the overall financial
condition, businesses or results of operations of Arcada; (v) evidence that
dissenters' rights have not been preserved with respect to more than five
percent of the outstanding shares of Arcada Common Stock: and (vi) the receipt
of a certificate of officers of Arcada and such other documents necessary to
evidence fulfillment of the conditions precedent to the closing of the Merger.
The obligation of Arcada to consummate the Merger is subject to the
satisfaction or waiver of certain additional conditions, including, without
limitation, the following: (i) the continued accuracy of the representations and
warranties of Touch Tone and Merger Sub and the performance by each of Touch
Tone and Merger Sub, of its covenants and agreements made in the Merger
Agreement, except where the failure of such representations and warranties to be
accurate or the failure to perform such covenants and agreements would not have
a material adverse effect on Touch Tone, (ii) the receipt of an opinion, dated
the date of closing, from John B. Wills, Esq., counsel to Touch Tone and Merger
Sub; (iii) Touch Tone having working capital of at least $1,500,000 at the
Effective Time; (iv) Touch Tone having settled certain pending litigation
matters to the satisfaction Of Arcada; (v) Touch Tone having renegotiated
certain contractual commitments to the satisfaction of Arcada; (vi) the receipt
of resignations from each of Matthew J. Barletta, Norman B. Walko, Stephen P.
Shearin and Benjamin W. Bronston as directors of Touch Tone and the appointment
of Frank Bonadio, Robert Leppaluoto, Keith Leppaluoto and an individual to be
named by Arcada prior to the Effective Time and to fill the vacancies on the
Touch Tone board of directors
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resulting from the foregoing resignations, (vii) the resignations of all of the
executive officers of Touch Tone; (viii) the absence of any material adverse
change in the overall financial condition, businesses or results of operations
of Touch Tone; and (ix) Touch Tone having used its best efforts to induce its
directors, officers and ten largest shareholders to agree in writing to vote
their shares of TTA Common Stock in favor of the Merger and the Reincorporation
Merger and (x) the receipt of a certificate of officers of Touch Tone and Merger
Sub, and other such other documents necessary to evidence fulfillment of the
conditions precedent to the closing of the Merger. See "RISK FACTORS - Failure
to Satisfy Closing Conditions."
BUSINESS OF TOUCH TONE PENDING THE MERGER
Under the Merger Agreement, until the Effective Time, Touch Tone is
generally obligated to conduct its business in the ordinary course and
consistent with past practice and prudent business practice. In addition, Touch
Tone has agreed to use its best efforts to preserve its business organizations,
keep available the present services of its employees and preserve the goodwill
of its customers and other business relationships. The Merger Agreement also
provides that, prior to the Effective Time, except as otherwise consented to by
Arcada, as permitted by the Merger Agreement or as required by law, Touch Tone
will not: (i) change any provisions of its articles of incorporation or bylaws;
(ii) change the number of shares of its authorized or issued capital stock,
except upon the exercise of certain existing stock options; (iii) issue, grant
or amend any options, warrants or other rights to purchase capital stock; (iv)
split, combine or reclassify any shares of its capital stock; (v) declare, set
aside or pay any dividends or other distributions on its capital stock; (vi)
redeem or otherwise acquire any shares of its capital stock; (vii) grant any
severance or termination pay to or enter into or amend any employment agreement
with or increase the amount of payments or fees to its employees, officers or
directors; (viii) make capital expenditures in excess of $40,000 per project or
$200,000 in the aggregate; (ix) change in any material manner its pricing
policies or any other business or customer policies; (x) guarantee the
obligations of any other person except in the ordinary course of business
consistent with past practice; (xi) acquire, sell, transfer, assign, encumber or
otherwise dispose of assets other than in the ordinary course of business; (xii)
enter into, amend or terminate certain contracts having a term of one year or
more or calling for the payment of $25,000 or more; (xiii) engage or participate
in any material transaction or incur or sustain any material obligation except
as one in the ordinary course of business consistent with past practice; (xiv)
make any contributions to any benefit plans except in amount consistent with
past practice; (xv) increase the number of Touch Tone's full-time employees
above 30; (xvi) acquire any real property; (xvii) renegotiate any debts or take
any action to change the characteristics of any short term or long term debt or
(xviii) agree to do any of the foregoing.
WAIVER AND AMENDMENT
At any time prior to the consummation of the Merger, the parties to The
Merger Agreement may (i) amend the Merger Agreement, (ii) extend the time for
the performance of any of the obligations or other acts of any other party
thereto, (iii) waive any inaccuracies in the representations and warranties of
any other party contained therein or in any document delivered pursuant thereto,
or (iv) waive compliance with any of the agreements or conditions contained
therein; provided, however, that after any approval of the Merger by the Touch
Tone and Arcada Shareholders, there may not be, without further approval of such
shareholders, any amendment or waiver of the Merger Agreement that reduces the
amount or changes the form of the Merger Consideration to be delivered to the
Touch Tone Shareholders or Arcada Shareholders, respectively.
TERMINATION
The Merger Agreement may be terminated at any time prior to The Effective
Time, whether before or after approval of the Merger by the Touch Tone and
Arcada Shareholders:
(a) by mutual written consent of all the parties to the Merger Agreement;
(b) by any party to the Merger Agreement (i) if the Effective Time has not
occurred on or prior to March 1, 1997 unless the failure of such occurrence is
due to the failure of the party seeking to terminate the Merger Agreement to
perform or observe its agreements and conditions set forth in the Merger
Agreement; or (ii) 10 days
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after written certification of the vote of the Touch Tone Shareholders is
delivered to Arcada indicating that the Touch Tone Shareholders failed to
approve the Merger at the Special Meeting (or any adjournment thereof); or (iii)
10 days after written certification of the vote of the Arcada Shareholders is
delivered to Touch Tone indicating that the Arcada Shareholders failed to
approve the Merger at the Special Meeting (or any adjournment thereof);
(c) by Arcada if (i) at the time of such termination there has been a
material adverse change in the consolidated financial condition of Touch Tone
from that set forth in Touch Tone's financial statements for the year ended May
31, 1996 and the quarter ended August 31, 1996 (except for changes resulting
from market and economic conditions that generally affect the telecommunications
industry as a whole, including changes in regulation); (ii) there has been any
material breach of any covenant of Touch Tone or Touch Tone - Washington under
the Merger Agreement and such breach has not been remedied within 45 days after
receipt by Touch Tone or Touch Tone -Washington of notice in writing from Arcada
specifying the nature of such breach and requesting that it be remedied; or
(iii) the directors of Arcada, after receiving advice of counsel, determine in
their good faith judgment, in order to discharge their fiduciary duties, to
withdraw or modify or resolve to withdraw or modify their recommendation that
Arcada Shareholders vote in favor of the Merger; or
(d) by Touch Tone if (i) at the time of such termination there has been a
material adverse change in the consolidated financial condition of Arcada from
that set forth in Arcada's financial statements for the year ended December 31,
1995 (except for changes resulting from market and economic conditions that
generally affect the telecommunications industry as a whole, including changes
in regulations); (ii) there has been any material breach of any covenant of
Arcada under the Merger Agreement and such breach has not been remedied within
45 days after receipt by Arcada of notice in writing from Touch Tone specifying
the nature of such breach and requesting that it be remedied; or (iii) the
directors of Touch Tone, after receiving advice of counsel, determine in their
good faith judgment, in order to discharge their fiduciary duties, to withdraw
or modify or resolve to withdraw or modify their recommendation that Touch Tone
Shareholders vote in favor of the Merger.
BREAK-UP FEES
As part of the Merger Agreement, Touch Tone and Arcada agreed to pay
liquidated damages to each other under certain circumstances.
To compensate Touch Tone for certain costs incurred in connection with the
Merger and to induce Touch Tone to forego initiating discussions with other
potential acquirors Arcada will pay to Touch Tone $200,000, on demand, if (i)
Arcada terminates the Merger Agreement for any reason other than the mutual
consent of the parties, expiration of the term for the occurrence of the
Effective Time for the Merger Agreement, or any material change in the financial
condition of Touch Tone; (ii) the Merger Agreement terminates because Arcada did
not use all reasonable efforts to consummate the Merger; (iii) the Arcada Board
withdraws its recommendation that Arcada Shareholders vote for approval of the
Merger; or (iv) Touch Tone terminates the Merger Agreement because of a material
breach of any covenant of Arcada and such breach is not remedied within 45 days
after receipt by Arcada of written notice from Touch Tone of such breach.
To compensate Arcada for certain costs incurred in connection with The
Merger and to induce Arcada to forego initiating discussions with other
potential acquirors Touch Tone will pay to Arcada $200,000 on demand if:
(i) Touch Tone terminates the Merger Agreement for any reason other than the
mutual consent of the parties, expiration of the term for the occurrence of the
Effective Time for the Merger Agreement or any material change in the financial
condition of Arcada; (ii) the Merger Agreement terminates because Touch Tone or
Merger Sub did not use all reasonable efforts to consummate the Merger; (iii)
the Touch Tone Board withdraws its recommendation that Touch Tone Shareholders
vote for approval of the Merger; or (iv) Arcada terminates the Merger Agreement
because of a material breach of any covenant by Touch Tone or Merger Sub that is
not remedied within 45 days after receipt by Touch Tone or Merger Sub as the
case may be, of written notice from Arcada of such breach.
The liquidated damages described above could increase the likelihood that
the Merger will be consummated on the terms set forth in the Merger Agreement.
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LOCK-UP
As part of the Merger Agreement, the Arcada Shareholders will be restricted
from selling shares of Touch Tone Common Stock received in the Merger (the
"Lock-up") except as follows: (i) an aggregate of 250,000 shares of Touch Tone
Common Stock may be sold prior to May 1997, (ii) an additional 250,000 shares
may be sold between May 1997 and November 1997 and (iii) an additional 500,000
shares may be sold between November 1997 and November 1998. After November 1998,
there will be no further restrictions under the terms of the Lock-up. See "RISK
FACTORS - Restrictions on Transfer."
The Touch Tone Series B Preferred Stock issued in the Merger will be
non-voting and will pay cumulative dividends of 8% per annum, payable
annually. Each share of Preferred Stock is redeemable for cash at the
election of Touch Tone or convertible into shares of Touch Tone Common Stock
at the election of Touch Tone or the holder of the Series B Preferred Stock
at any time for a period of three years from the date of issuance. On the
third anniversary of the date of issuance Touch Tone must either convert or
redeem the Series B Preferred Stock. The Series B Preferred Stock is
redeemable at $1.00 per share (subject to adjustment in certain
circumstances) or convertible into 0.40 shares of Touch Tone Common Stock.
The Series B Preferred Stock has a liquidation preference of $1.00 per share.
See "RISK FACTORS - Payment of Dividends on Preferred Stock; Potential
Conflicts of Interest" and "DESCRIPTION OF CAPITAL STOCK OF TOUCH TONE -
Preferred Stock."
EXCHANGE OF STOCK CERTIFICATES
Promptly after the Effective Date, an agreed upon exchange agent (the
"Exchange Agent") will mail written transmittal materials concerning the
exchange of stock certificates to each record holder of shares of Arcada Common
Stock outstanding at the Effective Date. The transmittal materials will contain
instructions with respect to the proper method of surrender of certificates that
immediately prior to the Effective Date represented shares of Arcada Common
Stock. ARCADA SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES AT THIS TIME.
Upon surrender to the Exchange Agent of Certificates formerly
representing shares of Arcada Common Stock for cancellation, together with
properly completed transmittal material, an Arcada Shareholder will be
entitled to receive the number of shares of Touch Tone Common Stock and
Series B Preferred Stock (and cash in lieu of any fractional shares of Touch
Tone Common Stock) to which such holder is entitled as merger consideration.
Arcada Shareholders will not be entitled to receive interest on any cash
payment received in the Merger.
Until surrendered, each certificate that, prior to the Effective Date,
represented Arcada Common Stock (other than shares delivered to Touch Tone after
the Effective Date pursuant to the exercise of dissenters' rights) will be
deemed for all corporate purposes to evidence ownership of the number of whole
shares of Touch Tone Common Stock into which the shares of Arcada Common Stock
formerly represented thereby were converted. All certificates so surrendered
will be canceled. However, until surrendered, no dividends payable to holders of
record of Touch Tone common Stock will be paid to any holder of such
unsurrendered certificates. Upon surrender and exchange for such outstanding
certificates, the holder thereof will be paid, without interest, the amount of
any dividend or other distributions with a record date occurring on or after the
Effective Date, theretofore paid with respect to whole shares of Touch Tone
Common Stock, but withheld with respect to such shares. After the Effective
Date, there will be no further registration or transfers on the records of
Arcada of outstanding certificates representing shares of Touch Tone Common
Stock.
If any new certificate for Touch Tone Common Stock is to be issued in a
name other than that in which the certificate surrendered in exchange therefore
is registered, the new certificate will not be issued unless the certificate
surrendered in exchange is properly endorsed and otherwise in proper form for
transfer. In addition, the person requesting such transfer must pay any transfer
or other taxes required by the issuance of a new certificate for shares
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of Touch Tone Common Stock to a person other than the registered holder of the
certificate surrendered, or must establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not payable.
Fractional shares of Touch Tone Common Stock will not be issued in the
Merger. Instead, each Arcada Shareholder who would otherwise be entitled to a
fractional share will receive cash in lieu thereof.
EXPENSES
All legal and other costs and expenses incurred in connection with the
Merger Agreement and the transactions contemplated thereby will be borne by the
party incurring such costs and expenses unless otherwise specified in the Merger
Agreement.
POST-MERGER DIVIDEND POLICY
Dividends may be paid out on the Touch Tone Common Stock as and when
declared by the Touch Tone Board out of funds legally available for the payment
of dividends. Touch Tone has not ever paid cash dividends on its Common Stock.
Arcada, as a closely held corporation, has paid dividends from time to time to
its shareholders. However, the boards of directors of each of Touch Tone and
Arcada do not anticipate paying cash dividends in excess of such dividends
required to be paid on the Series B Preferred Stock issued in connection with
the Merger in the foreseeable future after the Merger as they intend to retain
future earnings to finance the growth of the business. See "Preferred Stock."
According to Washington Law, Touch Tone dividends may be paid only if,
after giving effect to the dividend, Touch Tone will be able to pay its debts as
they become due in the ordinary course of business and Touch Tone's total assets
will not be less than the sum of its total liabilities plus the amount that
would be needed, if Touch Tone were to be dissolved at the time of the dividend,
to satisfy the preferential rights of persons whose right to payment is superior
to those receiving the dividend. There are no other limitations on the ability
of Touch Tone to pay dividends to its shareholders. The payment of future cash
dividends will depend on such factors as earnings levels, anticipated capital
requirements, the operating and financial conditions of Touch Tone and other
factors deemed relevant by the Touch Tone Board.
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BUSINESS OF TOUCH TONE
Touch Tone currently provides long distance and Internet services, and to a
limited degree, paging products. Touch Tone has a small long distance customer
base which is primarily located in the Southwestern United States. Due to
intense competition in the long distance industry and the high cost of its AT&T
long distance contracts, Touch Tone focused its efforts on the development of a
national Internet "backbone." An Internet backbone consists of a centralized
high-speed computer network that allows access to the Internet and connects
smaller computer networks around the United States. With the continued
development of the Internet backbone, Touch Tone is able to offer Internet
services to Internet Service Providers ("ISPs") and individual, dial up customer
accounts. Touch Tone was organized under the laws of the State of California in
1990.
GENERAL
In its early operations, Touch Tone concentrated solely on reselling long
distance services provided pursuant to agreements with AT&T as a long distance
provider. Long distance providers have a network of fiber optic or copper lines
connected to switching equipment, regionally or nationally, that carries long
distance traffic. Touch Tone, as a long distance reseller, buys or leases
network capacity from a long distance provider such as AT&T and then resells the
long distance service to its own customers under its own name through
independent sales agents. Profits, if any, are derived from the difference
between the cost per minute of access bought from the carrier and the cost per
minute sold to the customer.
Touch Tone's long distance revenues have declined from $1,952,000 for the
ten months ended May 31, 1995 to $1,951,000 for the year ended May 31, 1996
to $613,000 for the six months ended November 30, 1996 and is expected to
decline further. Revenues have decreased because the prices at which Touch
Tone can buy long distance under its AT&T agreements are, management
believes, non-competitive in the marketplace. Under its contract Touch Tone
must pay AT&T $0.17 per minute and, due to its commission structure must
resell this service at rates between $0.23 and $0.26 per minute to make a
profit. Touch Tone believes their rates to be above prevailing market rates
and in certain cases, above the rates charged by AT&T in the retail market.
As a result, Touch Tone has lost agents who are able to offer their customers
more competitive rates attainable with other long distance resellers. Unless
this agreement can be renegotiated to allow Touch Tone to offer competitive
pricing, revenue will continue to decrease. See "TOUCH TONE'S MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
In November 1995, Touch Tone acquired all the outstanding stock of GetNet
International, Inc. of Phoenix, Arizona ("GetNet"). GetNet is a provider of
Internet access services to individuals and businesses in Arizona and other
parts of the United States. GetNet currently offers subscribers complete
Internet access which is comprised of front-end software, integrated with high
quality access service and 24-hour customer support. GetNet's high-speed digital
telecommunications network provides subscribers with direct access to the full
range of Internet applications and resources including E-mail, file transfer,
World Wide Web sites, USENET news groups and database information (including
graphics, data and public domain software). See "Internet Services" and
"Internet Backbone" below.
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INTERNET DIVISION
GENERAL. As is more fully described below, Touch Tone has shifted its
emphasis to becoming an Internet service provider and to developing an Internet
backbone. A backbone connects to the Internet as a gateway carrying
computer-generated and stored digital information across the United States and
connects with other major backbone networks. Although monthly revenues
attributed to the Internet Division currently are approximately $65,000 per
month, of which approximately $49,000 is attributable to Touch Tone's "dial up"
base, $4,000 is attributable to web page design and maintenance and $12,000 is
attributable to the backbone. Touch Tone believes it can increase revenues from
the backbone network by providing access to the Internet to numerous ISPs and
their customers. As of October 1996, the backbone has been completed to five
cities.
INTERNET OVERVIEW AND COMPETITION. Use of the Internet has grown rapidly
since the commercialization of the Internet in the early 1990s. According to
industry sources, there were approximately 37 million Internet users in the
United States and Canada in 1995. The rapid growth in popularity of the
Internet, Touch Tone believes, is in large part due to the continuing
penetration of computers into U.S. households. Touch Tone also believes an
increasing percentage of computer owners also own modems, which are now
pre-installed in a growing number of new computers. Other industry sources note
that it is estimated in 1995, approximately 70 million people own computers
worldwide and approximately 39% of all households in the United States own
computers. Touch Tone believes that this growth is accompanied by increasing use
of the computer for communications such as facsimile transmissions and E-mail.
In addition, there has been substantial growth of the informational,
entertainment and commercial applications and resources of the Internet and the
growing awareness of such resources among individuals. Many computers connected
to the Internet are repositories of vast amounts of information, graphics and
public domain software. Through an Internet connection, users can access
commercial, educational and governmental databases, entertainment software,
photographs and videos, newspapers, magazines, library card catalogs, industry
newsletters, weather updates and other information. Traditional and emerging
Internet applications are also increasing in popularity, including E-mail, File
Transfer Protocol ("FTP"), web sites on the World Wide Web and USENET news
groups. Finally, new applications are being created by individuals, educational
institutions and companies and are made available at little or no cost through
the Internet.
The increased availability of user-friendly navigational and utility
programs provides easier access to the Internet's resources. Internet use is
also being promoted by the development of software tools that simplify access to
the Internet's applications and resources. Navigational and search tools such as
Gopher, Archie, Veronica and WAE, as well as new browsing programs and search
tools such as Mosaic, help users access information from the Internet. The
foregoing navigational and utility programs are not products of Touch Tone nor
any affiliate of Touch Tone.
The market for Internet access services is extremely competitive, and Touch
Tone expects that competition in this market will intensify in the future. Touch
Tone's current and prospective competitors include many large companies that
have substantially greater market presence and financial, technical, marketing
and other resources than Touch Tone. See "RISK FACTORS - Internet."
The potential impact of the Internet on the future of long distance with
regard to the origination and termination of long distance calls is currently
unknown as the Internet and its potential uses continues to rapidly evolve.
Issues such as bandwidth availability, which affects sound quality and the
potential regulation of the Internet, if possible, make it impossible for Touch
Tone to determine the long term potential impact. However, Touch Tone believes
quality of long distance calling on the Internet will become a reality in the
future.
INTERNET SERVICES. In November 1995, Touch Tone acquired GetNet for 400,000
shares of Touch Tone Common Stock in exchange for all of the then issued and
outstanding shares of GetNet. Touch Tone operates GetNet, its wholly-owned
subsidiary, as a separate division; however it is a part of the communications
package offered to its customers.
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Touch Tone, through GetNet, was initially a provider of Internet services
to various individuals and businesses in the United States. Touch Tone offers
subscribers complete Internet access comprised of front-end software integrated
with high quality access service and 24-hour customer support. Touch Tone's
high-speed, digital telecommunications network provides subscribers with direct
access to the full range of Internet applications and resources including
E-mail, World Wide Web sites, USENET news groups and database information
(including graphics, data and public domain software). Touch Tone's front-end
software features a point-and-click graphical user interface, providing
subscribers with an easy-to-use access to the Internet's applications and
resources.
INTERNET BACKBONE. Touch Tone has established and maintains a nationwide,
high-speed digital network, known as a "backbone," connecting main Internet NAPs
(network access points) located throughout the United States. A Cisco 7000
series router has been installed at various NAPs which allow Touch Tone a direct
connection to the Internet. Regional exchange points ("REPs") have been created
using the smaller Cisco 4700 router. This connection to these NAPs allows Touch
Tone to provide Internet access to other ISPs, government and educational
institutions as well as customers of all sizes anywhere in the world. Touch
Tone's network has been designed to provide high quality, reliable and fast
access service, and designed to support expansion in both the number of
subscribers it may handle and the increasing data traffic associated with those
subscribers. In addition, Touch Tone believes that its network will be
upgradable and will in the future, be able to support new types of data traffic,
such as sound and video.
Touch Tone's eventual goal is to become a "gateway" Internet provider by
building a fully redundant backbone network of routers, servers, end
point-to-point connections anchored at strategic NAPs located throughout the
country. This backbone network gives Touch Tone the ability to resell Internet
connections to other ISPs and large institutions requiring larger amounts of
bandwidth than can be provided by most ISPs. In October, 1996, Touch Tone
completed the initial phase of building its Internet backbone, which is
comprised of two NAPs in Santa Clara, California and Washington, D.C. In
addition, Touch Tone has installed network Points of Presence ("POPs") in three
other cities; Phoenix, Arizona; Baltimore, Maryland; and Pittsburgh,
Pennsylvania. A POP consists of routers that provide access to and egress from
the backbone.
INTERNET APPLICATIONS. Touch Tone, as a service provider, enables its
subscribers to have access to the full range of available Internet applications
which include E-mail. E-mail allows an Internet user to exchange messages with
any other user who has an E-mail address. Messages can be sent almost instantly
to designated individuals or groups on a mailing list.
The World Wide Web is a browsing and searching system comprised of
thousands of computer servers, referred to as home pages, each linked by a
special communications protocol called Hypertext. This open protocol allows
Internet users to view and access text, graphics, video and audio resident on a
home page or to connect instantaneously to related and linked information on the
same server or other home pages. Since the Internet is an open system, any
company can create a home page on the World Wide Web in order to provide users
with product or service information. Users can then solicit more information
and, in some cases, make purchases electronically. Browsing programs such as
Netscape and Mosaic have helped contribute to the rapid growth of the World Wide
Web. Touch Tone expects the World Wide Web to continue to grow rapidly as more
businesses and consumers become aware of the advantages of communications on the
Internet. Neither Netscape nor Mosaic are products of Touch Tone nor affiliates
of Touch Tone.
USENET News Groups is a network of thousands of computers attached to the
Internet that provide news groups that allow users to exchange information on a
variety of topics of shared interest. Internet users can seek or provide
information on diverse topics ranging from sports or other hobbies, to job
opportunities, to restaurant and travel suggestions.
In addition, many of the computers connected to the Internet are
repositories for vast and growing amounts of data, graphics, public domain
software and other programs that have been made available to the public. For
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
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retrieving data. In addition, customer support is available on-line by calling
Touch Tone or in several manuals dedicated to Internet users, to aid in their
attempts to utilize the functions of these products.
The Internet can also be easily used to move electronic files (including
data, programs or text) from one computer to another. This can be very useful
for parties that collaborate on data files where the parties are separated by
great distances. Unlike a transmission via a fax machine, data transferred over
the Internet remains in digital format and does not need to be re-entered by a
receiving party. It can be manipulated and then re-transmitted to other Internet
users.
INTERNET SERVICE PROVIDERS. With the growth and increasing
commercialization of the Internet, a number of companies, including Touch Tone,
have emerged to provide Internet software and access services. Access providers
vary widely in the geographic coverage, customer focus and levels of Internet
access provided to subscribers. For example, many access providers are regional
in scope, requiring subscribers outside a local or regional calling area to
incur long distance charges. Access providers may also concentrate on certain
types of subscribers such as businesses or individuals which differ
substantially in the type of service and support required.
Providers may also differ according to whether they provide direct or
non-direct access to the Internet. Direct access through Internet protocols such
as Serial Line Interface Protocol ("SLIP") or Point-to-Point Protocol ("PPP")
enable users to establish direct connections to other computers on the Internet
including Web sites or other users. A number of the major on-line service
providers, such as AOL and Prodigy, currently offer non-direct access to the
Internet which requires users to access the Internet through a host computer
controlled by the service provider. Under this type of service, users are
dependent on the service provider to determine which Internet applications are
available to them. Other regional and national Internet access providers
generally offer direct Internet access to customers which enables users to
access the full range of Internet resources.
Currently, Touch Tone provides individuals seeking direct access to the
Internet with front-end software integrated with high quality access service and
24-hour a day customer support. Touch Tone has adopted a value pricing strategy
of charging subscribers various flat monthly fees for Internet connectivity
service. Touch Tone believes that its value pricing attracts subscribers to and
encourages their use of the Internet. Through Touch Tone, users can also bypass
the complex UNIX commands normally associated with The Internet through an
easy-to-use, point-and-click, Windows-based graphical user interface.
Touch Tone's objective is to capitalize on the growing demand for Internet
services and gain market share by aggressively building its subscriber base of
small users, other ISPs and large institutions. Touch Tone believes that by
continuing to expand its subscriber base through providing high quality software
and services it can build a nationwide brand identity, increase customer loyalty
and achieve higher retention rates.
INTERNET MARKETING. Touch Tone's marketing plan is to capitalize on the
growing demand for Internet services and gain market share by building its
backbone network and customer base through direct sales by its own sales
personnel and agents responding to inbound calls and E-mail largely generated by
referrals from other Touch Tone subscribers as a result of local businesses
advertising their websites located on Touch Tone's service. Touch Tone will
continue to educate and promote Internet services through its existing base of
long distance agents and the hiring of additional direct sales personnel. Touch
Tone believes that by continuing to expand its backbone network and agreements
with third party carriers for global access to the backbone, it can build an
international identity and increase customer loyalty and achieve higher customer
retention rates.
Touch Tone is also focused on providing access services to the individual
subscriber market, which continues to be the fastest growing segment of the
Internet market. In the past, individual users have had difficulty accessing the
Internet because of the difficulty in integrating software packages and services
from different vendors. Touch Tone's strategy is to establish a high-quality,
nationwide name identity in this market by offering a complete Internet solution
comprised of easy-to-use front-end software, integrated with high quality access
service and 24-hour-a-day customer support. With the development of the
backbone, Touch Tone will be able to resell the network's bandwidths to other
ISPs and large institutions.
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Touch Tone has adopted a flat rate pricing structure which Touch Tone
believes encourages usage by eliminating subscribers' concerns about incurring
significant hourly charges, which has the potential to increase subscriber
retention rates. Touch Tone believes that its value price point will help
attract new subscribers and facilitate rapid penetration of the individual
subscriber market.
LONG DISTANCE DIVISION
LONG DISTANCE INDUSTRY OVERVIEW AND COMPETITION. See "BUSINESS OF ARCADA -
Industry Background" for a review of the long distance telecommunications
industry and the competition within that industry.
LONG DISTANCE STRATEGY. Management believes it would be able to reduce the
current burden of its carrier commitments and declining long distance sales
through acquisitions of other existing long distance companies and/or their
customer accounts. Touch Tone believes, based on information obtained from the
Telecommunications Resellers Association, that there are in excess of 1,000
small- to medium-sized long distance resellers operating throughout the United
States which are similar to Touch Tone in terms of operating revenues and
customer base. Touch Tone believes an acquisition(s) would enable it to
renegotiate its existing contracts with AT&T and WilTel due to increased total
long distance revenues and operating efficiencies without a significant increase
in overhead. Acquisitions may include both switched and switchless resellers of
long distance.
PRIMARY LONG DISTANCE PROVIDER. Touch Tone's primary provider of underlying
long distance services is AT&T for both outbound and inbound services as
discussed elsewhere herein. Touch Tone has committed to a $1.8 million annual
dollar usage for Software Defined Network ("SDN"). The SDN product was designed
by AT&T to allow large, multi-location businesses the ability to create a long
distance network by receiving one bill from AT&T for the collective usage of the
locations. AT&T also provides the customer with the ability to manage their
network by issuing their own calling card numbers and account codes, and
designating which locations would receive bills and which would not. By
combining their locations on one bill, the customer is able to receive larger
volume discounts. Under this contract, Touch Tone has committed to sell a
certain amount in AT&T long distance each month through July, 1999. Touch Tone
is not meeting the minimum usage commitments and is obligated to pay AT&T
penalties that are dependent upon the degree to which Touch Tone is short of
those commitments. If AT&T terminates the contract due to Touch Tone's failure
to pay the charges due thereunder, the contract provides that Touch Tone will be
liable for the minimum usage commitment charges to be incurred over the
remaining term of the contract. See "RISK FACTORS - Potential Liability to
AT&T."
ADDITIONAL LONG DISTANCE SUPPLIERS. Commencing in October 1996, Touch
Tone signed an agreement for a two year period with WilTel for long distance,
calling card and point-to-point services. The agreement provides for a
$50,000 monthly commitment. The agreement allows Touch Tone to act as a long
distance carrier in the completion of long distance and calling card calls at
rates substantially more competitive than its AT&T SDN contract. Touch Tone
is currently meeting this commitment through its actual long distance
billings. This commitment can also be satisfied through orders from WilTel
for certain circuits used in the Internet backbone are credited against the
WilTel long distance contract.
LONG DISTANCE RATES AND CHARGES. Touch Tone charges customers primarily on
a 18-second initial rate and 6 second intervals thereafter irrespective of the
volume of usage, the distance of the call, the time of day of the call and the
origination region of the call. The rates charged are not affected by the
particular transmission facilities selected by the network switching centers for
transmission of the call. Different rates are applied to inbound origination
telephone services than to outbound termination telephone services. The product
line includes general 1+ dialing origination and "800" service which Touch
Tone's customers use to receive and pay for calls from their respective
customers and potential customers. The rates offered by Touch Tone may be
adjusted by AT&T in the future as interexchange carriers continue to adjust
their rates.
LONG DISTANCE CUSTOMERS. Touch Tone markets its long distance services
primarily to small business customers with monthly long distance bills of less
than $10,000. Currently, the monthly long distance phone bills for Touch Tone's
customers range from under $100 to $5,000, with the monthly long distance phone
bill for an average Company customer averaging approximately $350 to $400. Sales
to customers are made by independent
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agents who directly contact potential customers and are paid on a commission
basis as long as Touch Tone receives revenues from that customer. Touch Tone
does not have contracts with its customers, vis-a-vis its agents, but receives
written or telephonic authorization from new customers in connection with their
order for services as per FCC regulations.
LONG DISTANCE MARKETING. Touch Tone historically has relied on its network
of independent marketing agents to market its long distance products.
Independent marketing agents are companies that market Touch Tone's long
distance products directly to business customers as authorized sales agents of
Touch Tone and receive a continuing commission based on the monthly usage of the
customer accounts that they have brought to Touch Tone. Touch Tone provides its
independent marketing agents with promotional materials and products and offers
training programs by Company employees. Touch Tone solicits independent
marketing agents primarily through telecommunications trade periodicals and
trade shows.
For the ten months ended May 31, 1995, one sales agent, TMO
Communications ("TMO"), accounted for approximately 42% of Touch Tone's
revenues on which it received commissions of 32%. At this level of
commissions Touch Tone does not receive any gross margin on the sales
originated by this agent. For the fiscal year ended May 31, 1996 and the six
months ended November 30, 1996, TMO accounted for approximately 36% and 41%,
respectively, of Touch Tone's long distance sales revenues.
Touch Tone currently does not engage in advertising directly to end users
of long distance services, although Touch Tone distributes a limited amount of
printed marketing materials to prospective users on a selected basis.
LOCAL ACCESS DIVISION
On February 17, 1995, Touch Tone entered into an agreement with ICG to act
as a reseller for local access in cities around the United States where ICG has
established circuits and fiber optic lines. This agreement was amended in March,
1996. Due to high marketing costs and competitive nature of the local access
market, Touch Tone has to date been unable to penetrate this market. For the
six months ended November 30, 1996 Touch Tone has revenues of approximately
$3,000 a month from local access customers. Touch Tone management intends to
evaluate this division as to its future viability.
WIRELESS DIVISION
In September 1995, Touch Tone entered into an agreement with Paging Network
of Arizona, Inc. ("PageNet") to act as a reseller of one way paging services
including tone only, digital and alphanumeric paging services. The agreement
further allows Touch Tone to offer other services offered by PageNet which
includes personal 800 numbers, mini mail, page mail, and custom greeting
features. Touch Tone has had insignificant customer sales of the PageNet product
and has undertaken only minimal marketing activities in this regard. Touch Tone
management intends to evaluate this division as to its future viability.
GOVERNMENT REGULATION
LONG DISTANCE AND LOCAL ACCESS. See "BUSINESS OF ARCADA - Regulations" for
a discussion of the various governmental regulations which impact the long
distance telecommunications business.
INTERNET SERVICES. Touch Tone's Internet services are not currently subject
to direct regulation by any government agency, other than regulations applicable
to businesses generally, and there are currently few laws or regulations
directly applicable to access to or commence on the Internet. However, due to
the increasing popularity and use of the Internet, it is possible that a number
of laws and regulations may be adopted with respect to the Internet, covering
issues such as user privacy, pricing and characteristics and quality of products
and services. For example, the Exxon Bill (which was recently approved by the
Senate) would prohibit distribution of obscene, lascivious or indecent
communications on the Internet. The adoption of any such laws or regulations may
decrease the growth of the Internet, which could in turn decrease the demand for
Touch Tone's products and increase Touch
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Tone's cost of doing business or otherwise have an adverse effect on Touch
Tone's business, operating results or financial condition. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, libel and personal privacy is uncertain. Further, due to the
encryption technology contained in Touch Tone's products, such products are
subject to U.S. export controls. There can be no assurance that such export
controls, either in their current form or as may be subsequently enacted, will
not limit Touch Tone's ability to distribute products outside of the United
States or electronically.
The recently passed telecommunications bill includes provisions that would
prohibit online services or users from transmitting indecent material without
restricting minors access. Online providers are required to make a "good faith"
effort to provide users with a means to screen out pornographic material. Touch
Tone, as a result, will be required to develop screening programs; however,
Touch Tone is optimistic that the deregulation may provide lower online prices
for its customers.
EMPLOYEES
As of December 1, 1996, Touch Tone had twenty-seven (27) full-time
employees. Two of such employees serve in sales and marketing, 12 serve in
customer service and technical support, four serve in network operations, four
serve web page design and support and five serve in administration.
LITIGATION
On August 30, 1996 a lawsuit was filed in the Superior Court of the State
of Arizona, Maricopa County by Touch Tone against Touch Tone's former President,
Jonathan Miller and his wife, Janeece Miller. The complaint details various
causes of action against Mr. Miller, in his capacity as a former Officer and
Director of Touch Tone and seeks damages in the amount of $360,835 from the
defendants. Mr. Miller filed an answer in September 1996 denying the allegations
of the complaint. Touch Tone is, and will vigorously pursue this legal action.
The case is in the discovery stage and no date has been set for trial.
Mrs. Janeece Miller filed a request with the American Arbitration
Association regarding an alleged breach of her employment agreement. She has
made a claim for $32,500 plus attorney's fees and costs as part of her severance
package. This claim was filed with the Arbitration Association on July 31, 1996
and Touch Tone has responded, consenting to the arbitration but contesting the
allegations in the complaint, asserting that Ms. Miller voluntarily resigned her
employment with Touch Tone and that the terms of the severance package do not
apply in her situation. No hearing date has yet been set and Touch Tone will
defend the claim.
In July 1996, an unknown party fraudulently charged over $1,000,000 in
long distance charges on Touch Tone's account. Touch Tone has been diligently
investigating the matter and has contacted the carrier, AT&T, who denies any
responsibility. Touch Tone has retained counsel to represent it in this claim
and has submitted a letter to AT&T stating its position that it has no
liability for the fraud. As of the date of this Joint Proxy
Statement/Prospectus, discussions are ongoing between the parties. AT&T is
also withholding payments to Touch Tone on its long distance service until
this matter is resolved. It is a condition to Arcada's obligation to
consummate the Merger that Touch Tone settle this dispute with AT&T prior to
the Effective Time in a manner satisfactory to Arcada. Touch Tone believes it
has recourse against AT&T and will not be held responsible for these charges,
but the outcome of this matter cannot be predicted at this time. See "RISK
FACTORS - Potential Liability to AT&T."
On October 10, 1996, two identical lawsuits were filed in Superior Court of
the State of Arizona, Maricopa County by two former officers and employees of
GetNet, including Stephen Shearin, a current director of Touch Tone, for
compensation due pursuant to employment agreements pending final resolution of
their respective employment agreements. The plaintiffs have requested specific
performance as it relates to past compensation, attorneys' fees and costs. The
Company will vigorously defend these suits and maintains the employment
agreements were terminated for cause.
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TOUCH TONE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR TOUCH TONE SHOULD BE READ IN CONJUNCTION WITH THE TOUCH TONE
FINANCIAL STATEMENTS AND NOTES THERETO ATTACHED HERETO.
FORWARD-LOOKING STATEMENTS MAY NOT PROVE ACCURATE. When used in this Joint
Proxy Statement/ Prospectus, the words "anticipate," "estimate," "expect,"
"project" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, expected or projected. Several key
factors that have a direct bearing on the ability of Arcada, Touch Tone and the
combined company to attain their goals are discussed in "RISK FACTORS."
RECENT DEVELOPMENTS; SIGNIFICANT DECREASE IN LONG DISTANCE REVENUES; NEED FOR
ADDITIONAL FINANCING
Through January 1, 1997, Touch Tone's long distance revenues have continued
to decline. Touch Tone's management believes the AT&T SDN contract discussed
herein is non-competitive with AT&T's own customers and other long distance
carriers. Specifically, Touch Tone pays approximately $.17 per minute wherein
its competitors, including AT&T, sell long distance at rates of $.15 and below.
As a result, Touch Tone has experienced greater than normal customer attrition
and the loss of several of its independent agents. In addition, in August 1996,
AT&T made a claim against Touch Tone for long distance charges of over
$1,000,000 fraudulently charged by an unknown third party to Touch Tone's
account. As a consequence, AT&T is holding all payments made by long distance
customers on Touch Tone's account and is applying these funds to the $1,000,000
claim. Consequently, Touch Tone has been unable to pay its independent agents,
resulting in their switching their customer bases to other long distance
resellers.
Accounts receivable and related allowances for bad debt have also increased
substantially due to Touch Tone's inability to receive accurate billing records
from AT&T and Touch Tone's lack of clerical personnel to assist in their
collection and the failure of one of Touch Tone's agents to remit certain long
distance payments it has collected.
Touch Tone is trying to renegotiate with AT&T both of these situations,
however, negotiations to date have been limited to discussions between the
parties and their respective legal counsel. If the Company is unsuccessful in
its negotiations with AT&T, in all probability the parties will litigate this
matter.
Further, Touch Tone's working capital resources have declined significantly
since its initial public offering in May, 1996. If the merger should not be
consummated for any reason, Touch Tone will be in need of immediate
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financing to fund expected operating and other working capital needs. See "RISK
FACTORS-Past Financial Performance of Touch Tone and Going Concern
Considerations."
On November 13, 1996, Touch Tone entered into the Merger Agreement
providing for the Merger of Arcada with and into a wholly-owned subsidiary of
Touch Tone in exchange for 12.5 million shares of Touch Tone Common Stock and
$1.5 million in Series B Preferred Stock. As a result of the Merger, Arcada
would acquire control of both management and the Touch Tone Board. The
completion of the Merger is subject to the satisfaction of certain closing
conditions set forth in the Merger Agreement and the approval of the
shareholders of Touch Tone and Arcada.
If the Merger is completed, Arcada will be considered the acquiring entity,
even though Touch Tone is legally the surviving company. Therefore, future
financial statements of Touch Tone will reflect the operations of Arcada for
prior years and Touch Tone operations only from the date of the Merger.
In October 1996, Touch Tone entered into an agreement to acquire certain
long-distance customers through the issuance of its common stock. The number
of shares issued will be based upon a multiple of revenues generated during
the first three months by the customer base acquired and the then average
price of Touch Tone's common stock. It is estimated that the total common
shares to be issued will range between 35,000 and 40,000 shares. This
acquisition is not expected to have a material effect on Touch Tone's net
loss.
GENERAL
In May 1996, Touch Tone completed its initial public offering of securities
from which it received net proceeds of approximately $5,763,000 from the sale of
1,725,000 shares of Common Stock (the Public Shares) and 1,725,000 Common Stock
Purchase Warrants (the "Public Warrants") (collectively, the "Public Shares and
Warrants"). As of November 30, 1996, working capital was approximately $563,000.
Touch Tone intends to use its remaining funds for future Internet development
(including the completion of the initial stage of the backbone) and to fund
current losses. These remaining funds are not sufficient to fund Touch Tone's
future development and the continued payment of existing carrier commitments and
general and administrative expenses.
Touch Tone's financial statements have been prepared on the basis that
Touch Tone will continue operating as a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. Touch Tone's ability to continue as a going concern is dependent upon
several factors, including meeting the terms of its commitments and achieving
and maintaining profitable operations. Touch Tone's financial statements were
audited by its independent certified public accountants, whose report includes
an explanatory paragraph stating that the financial statements have been
prepared assuming Touch Tone will continue as a going concern and that Touch
Tone has incurred losses from operations and has entered into significant sales
volume commitments that raise substantial doubt about its ability to continue as
a going concern.
To increase revenues to a sufficient level to meet its carrier commitments,
general and overhead expenses and future expansion, Touch Tone has been actively
seeking acquisition candidates (as set forth below) with existing customer and
revenue bases. Touch Tone will attempt to issue shares of its authorized, but
unissued, Common Stock to acquire customer bases and/or assets of acquisition
candidates and retain its existing cash for further development of its Internet
backbone and to fund current losses. There can be no assurance that Touch Tone
will be successful in this regard.
Touch Tone's net revenues were approximately $2.2 million for the year
ended May 31, 1996, $2.0 million for the ten months ended May 31, 1995 and
$963,000 for the six months ended November 30, 1996 compared to $1,228,000 for
the six months ended November 30, 1995.
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LIQUIDITY AND CAPITAL RESOURCES
Touch Tone's cash position at November 30, 1996 was $1,630,000 and net
working capital was $563,000. Included in Touch Tone's current liabilities
is $200,000 for monthly payments of $33,000 due to AT&T through May 1997 in
settlement of having failed to meet certain service commitments under prior
agreements with AT&T.
Cash used in operations for Touch Tone totaled $1,891,000 for the year
ended May 31, 1996 and $1,883,000 for the six month period ended November 30,
1996. This increase in cash outflows can be primarily attributed to a loss from
operations, increases in trade receivables and decreases in accrued payables.
Cash flows used in investing activities consisted primarily of additions to
equipment of $101,000 in the year ended May 31, 1996 and $733,000 for the six
month period ended November 30, 1996 used primarily in the construction of the
Internet backbone.
Cash flows provided by financing activities were $6,783,000 during the year
ended May 31, 1996. Cash flows used by financing activities were $1,032,000
for the six month period ended November 30, 1996. Cash flows for the year ended
May 31, 1996 were primarily attributed to the receipt of proceeds from the
issuance of Common Stock and Warrants in Touch Tone's initial public offering,
but were partially offset by costs incurred in connection with Touch Tone's
private and public stock offerings. In May 1996, Touch Tone completed its public
offering of its Common Stock and Warrants whereby it sold 1,725,000 shares of
Common Stock and Warrants and received net proceeds of approximately $5,763,000.
In November 1995, Touch Tone completed a private placement of its Common Stock
whereby it sold 350,000 shares of Common Stock. The net proceeds of
approximately $600,000 from this offering were used primarily to cover costs
associated with Touch Tone's public offerings and other working capital needs.
Cash flows used in financing activities for the six months ended November 30,
1996 were primarily associated with repayment of notes payable to stockholders,
redemption of preferred stock and payment of public offering costs.
Under Touch Tone's current arrangement with AT&T, customer billings and
collections are performed by AT&T. Accounts receivable represents the amount
Touch Tone's customers owe for actual usage. However, the amount Touch Tone will
receive from AT&T will be offset by the payable due to AT&T for the cost of
providing the service, which is reflected as an account payable in the financial
statements. The net of the receivable and payable is the gross margin Touch Tone
receives. AT&T is currently responsible for maintaining Touch Tone's account
receivable accounts and withholds payments to Touch Tone for customer accounts
over 30 days past due. Such amounts withheld from Touch Tone are offset by the
gross margin otherwise payable to Touch Tone.
CONTINGENCIES. Commencing in June through July 1996, an unknown party
fraudulently charged over $1,000,000 in long distance charges on Touch Tone's
account. Touch Tone has been diligently investigating the matter and has
contacted the carrier, AT&T, who denies any responsibility. Touch Tone has
retained counsel to represent it in this claim and has submitted a letter to
AT&T stating its position that it has no liability for the fraud. As of the date
of this Joint Proxy Statement/Prospectus, AT&T has not formally responded to
Touch Tone's letter although discussions are ongoing between the parties. AT&T
is also withholding payments to Touch Tone on its long distance service until
this matter is resolved. It is a condition to Arcada's obligation to consummate
the Merger that Touch Tone settle this dispute with AT&T prior to the Effective
Time in a manner satisfactory to Arcada. Touch Tone believes it has recourse
against AT&T and will not be held responsible for these charges, but the outcome
of this matter cannot be predicted at this time. See "RISK FACTORS - Potential
Liability to AT&T."
On October 10, 1996, two identical lawsuits were filed in Superior Court of
the State of Arizona, Maricopa County by two former officers and employees of
GetNet, including Stephen Shearin, a current director of Touch Tone, for
compensation due pursuant to employment agreements pending final resolution of
their respective employment agreements. The plaintiffs have requested specific
performance as it relates to past compensation, attorneys' fees and costs. The
Company will vigorously defend these suits and maintains the employment
agreements were terminated for cause.
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In July 1996, Touch Tone terminated two employees. In connection with
their termination, they were granted options to purchase in the aggregate
45,000 shares of common stock at $4.00 and 40,000 shares at $5.00. In
connection with this severance agreement, Touch Tone has recorded
approximately $172,000 of expense based on the difference between the option
exercise price and the price of Touch Tone's common stock on the date of the
agreement. Touch Tone had agreed to register, within ninety days, the shares
underlying the options, and failed to do so. One employee has filed suit
against Touch Tone in connection with the failure of Touch Tone to register
shares underlying the stock options. The employee is seeking damages of
approximately $44,000.
THE GETNET ACQUISITION
In November 1995, Touch Tone acquired all the outstanding stock of GetNet
International, Inc. ("GetNet") of Phoenix, Arizona in exchange for 400,000
shares of Touch Tone's Common Stock. GetNet is a provider of Internet access
services to individuals and businesses in Arizona and other parts of the United
States. Revenues from GetNet for the period from its acquisition on November 1,
1995 to May 31, 1996 were $287,000 and $350,000 for the six month period ended
November 30, 1996. "See BUSINESS OF TOUCH TONE - Internet Division."
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1996 COMPARED TO THE SIX MONTHS ENDED
NOVEMBER 30, 1995
Long distance resell revenue from operations for the six months ended
November 30, 1996 was $613,000 compared to revenues of $1,200,000 during the six
months ended November 30, 1995. The Company currently has an "SDN "contract
which extends through July 1999 with AT&T. Due to competition within the
telecommunications industry, the price the Company is required to pay AT&T has
become substantially less competitive than the current market price for
comparative service and is more than AT&T is charging for its own customer
accounts. Currently, AT&T is offering retail long distance services
to its customers at approximately $.02 per minute less than Touch Tone's
wholesale cost for the same service. Touch Tone is hopeful it will be able to
renegotiate its contract with AT&T to obtain a more favorable rate per minute
and commitment level, and replace its existing SDN contract. However, there is
no assurance that Touch Tone will be able to ultimately renegotiate its existing
contract. If Touch Tone is unable to renegotiate its contract with AT&T, Touch
Tone intends to find another long distance reseller with a substantial
telecommunications customer base and negotiate a favorable transfer of Touch
Tone's SDN long distance base and obligations to that SDN reseller or to AT&T.
At this time, no loss accrual has been recorded in the financial statements
based on management's belief that the contract will be renegotiated on favorable
terms with AT&T. It such renegotiations are unsuccessful, substantial losses
could be recorded.
The Company expects to experience most of its future growth through
acquisitions of long distance customer bases with regional switch-based carriers
as well as through the growth of its Internet services, especially its backbone
facilities and services which were in service as of November 1996.
Cost of sales for long distance service for the six months ended November
30, 1996 was $451,000, resulting in a gross margin of approximately $162,000 or
26% of net revenue. The gross margin for the six months ended November 30, 1995
was $418,000, approximately 35% of net revenue. The gross margin percentage has
decreased due to lower volume. The AT&T contract is structured on a tiered
discount, with the more volume achieved, the greater the discount.
Financial statement for the six month period ended November 30, 1996,
reflect the inclusion of the operations of GetNet which was acquired effective
November 1, 1995. GetNet's sales were $350,000 for these six months with cost of
sales of $190,000. GetNet is still a development stage
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company and has not yet begun to develop its market. All of GetNet fees are from
subscriber fees for Internet access. The Internet backbone was not operational
until October 1996. Touch Tone, however, expects the ramp-up of revenue on the
Internet backbone to take an extended period and this operation will most likely
not be profitable in the near future.
Selling expenses were $152,000 or 16% of net revenues for the six
months ended November 30, 1996, as compared to $294,000, or approximately 24%
of net revenues for the prior comparable period. A significant sales agent,
TMO Communications, Inc. ("TMO"), accounted for approximately 41% of AT&T
long distance sales revenues for the six months ended November 30, 1996 and
received commissions of approximately 32%. At this level, Touch Tone does not
receive gross margin on sales originated by this agent. GetNet's selling
expenses were $18,000 for the period ended November 30, 1996, or 2% of its
sales.
Under Touch Tone's current contract with independent sales agents for
reselling long distance services, commissions are paid as long as Touch Tone
receives revenues from the customer. Touch Tone intends to revise this
arrangement for new agents to provide for continuing commission payments only if
certain sales levels are maintained, however, no such contracts have been
entered into.
Touch Tone has two full time sales agents on staff marketing GetNet
services. These sales agents are paid a combination of salary and commissions.
General and administrative expenses increased to $1,406,000 or 146% of net
revenue for the six months ended November 30, 1996 as compared to $694,000 or
57% for the six months ended November 30, 1995. During the six months ended
November 30, 1996, Touch Tone paid increased salaries and benefits to its
employees of approximately $595,000 as compared to $447,000 in the prior
comparable period, primarily as a result of additional employees, including
GetNet employee related expenses of approximately $377,000. The remaining
$564,000 increase in general and administrative costs between the two periods is
mainly due to increased office and travel costs, increased internal costs
associated with search for potential acquisition candidates, the inclusion of
GetNet's other general and administrative expenses, which totaled $117,000, and
bad debt expense, which increased by $126,000 in the six months ended November
30, 1996, as compared to the prior comparable period. Furthermore, during the
six months ended November 30,1996, the Company has incurred approximately
$60,000 in costs associated with the Arcada merger which have been expensed.
Since May 1996, Touch Tone has reduced its number of personnel due to decreasing
revenues. In connection with the termination of two employees, Touch Tone
granted options at below the then market price of its Common Stock. Therefore,
an additional $172,000 of expense was recorded in the six months ended November
30, 1996 based on the difference of the exercise price and trading price of its
Common Stock. Total general and administrative expense, relative to fiscal 1996
is, however, expected to increase due to compensation commitments to Officers of
Touch Tone and a contract entered into with a significant consultant (who
previously was the Chairman of the Board and an Officer) of $15,000 per month
(see "Commitments").
Amortization and depreciation expense increased by approximately $161,000
for the six months ended November 30, 1996 compared to 1995 related primarily
to amortization of goodwill recorded in connection with the GetNet
acquisition in November 1995.
Touch Tone incurred $301,000 of excess circuit commitment expense
under its agreement with ICG during the six months ended November 30, 1995
and none was incurred in the six month period ended November 30, 1996, as the
contract was terminated in April 1996. During the six months ended November
30, 1996 the Touch Tone incurred $431,000 in excess circuit commitments
primarily related to the Internet backbone. These amounts are recorded as a
period expenses under operating expenses, as Touch Tone has experienced
insignificant revenues associated with either of these contracts.
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Interest expense, net of interest income in the six months ended November
30, 1996, increased from $16,000 in 1995 to $90,000 in 1996 primarily as a
result of 70,000 shares of Common Stock being issued in August 1996 to satisfy
an outstanding debt of $210,000. The difference of approximately $254,000
between the then market price of Common Stock and the related debt is being
expensed in operations over the period the note was outstanding. For the six
months ended November 30, 1996, $127,000 was expensed and the balance was
previously expensed in fiscal 1996. During the six months ended November 30,
1996, Touch Tone had interest income of approximately $57,000 from its cash
investments received from proceeds of its public offering.
Touch Tone had a net loss of $2,225,000 for the six months ended November
30, 1996. For the six months ended November 30, 1995, Touch Tone had a net loss
of $1,016,000. The increase in net loss between periods is directly attributed
to the decreasing revenues, the cost of share and option issuances at less than
market, the increase in selling, general and administrative costs in fiscal
1997, and other reasons discussed above.
FOR THE YEAR ENDED MAY 31, 1996 COMPARED TO THE TEN MONTHS ENDED MAY 31, 1995
Revenues from operations for the year ended May 31, 1996 was $2,238,000,
compared to revenues of $1,952,000 during the ten months ended May 31, 1995,
which had two fewer months than fiscal 1996 due to a change in year end in 1995.
Therefore, monthly revenues actually decreased for the year ended May 31, 1996
based on a comparable twelve month period. Touch Tone currently has an SDN
contract which extends through July 1999 with AT&T. Due to competition within
the telecommunications industry the price Touch Tone is required to pay AT&T
has, subsequent to May 31, 1996, become less competitive than the current market
price for comparative service. Touch Tone is hopeful it will be able to
renegotiate its contract with AT&T to obtain a more favorable rate per minute
and commitment level, and replace its existing SDN contract. However, there is
no assurance that Touch Tone will be able to ultimately renegotiate its existing
contract. If Touch Tone is unable to re-negotiate its contract with AT&T, Touch
Tone intends to find another long distance reseller with a substantial SDN base
and negotiate a favorable transfer of Touch Tone's SDN distance base and
obligations to that SDN reseller.
Touch Tone expects to experience most of its future growth through
acquisitions of long distance customer bases and regional switch-based carriers
as well as through the growth of its Internet services, especially its backbone
facilities and services which were placed in service effective October, 1996.
Cost of sales for the year ended May 31, 1996 was $1,406,000, resulting in
a gross margin of approximately $832,000 or 37% of net revenue. The gross margin
for the ten months ended May 31, 1995 was $642,000, approximately 33% of net
revenue. The gross margin percentage has remained relatively constant as Touch
Tone has achieved the highest margin currently allowed on its AT&T contract for
incremental sales. The AT&T contract is structured on a tiered discount with the
more volume achieved, the greater the discount. Touch Tone's current tier
structure is as follows: on the first $10,000 Touch Tone bills, a discount of
10% is generated; between $10,000 and $75,000 that Touch Tone bills, a discount
of 32% is generated; on billings above $75,000, Touch Tone generates a discount
of 35%.
Financial statements for the fiscal year ended May 31, 1996 reflect the
inclusion of seven months operations of GetNet, which was acquired effective
November 1, 1995. GetNet's sales were $287,000 for these seven months with cost
of sales of $122,000. GetNet is still a development stage company and has just
begun to develop its market.
Selling expenses increased to $620,000 or 28% of net revenues for the year
ended May 31, 1996 from $337,000, or approximately 17% of net revenues for the
prior ten month fiscal year. The increase in selling expenses as a percent of
revenue is attributed to the higher commissions earned by one of Touch Tone's
agents that contributed a significant volume of customer usage. The sales
agent, TMO, accounted for approximately 36% of revenues for the year ended May
31, 1996 and received commissions of approximately 32%. At this level, Touch
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Tone does not receive gross margin on sales originated by this agent, but as a
result, experiences greater gross margin on other Touch Tone revenues due to
volume discounts by AT&T. In addition, in April 1996, Touch Tone agreed to pay
TMO an additional $75,000 to settle past misunderstandings between Touch Tone
and TMO with respect to the amount of commissions due TMO. GetNet's selling
expenses were $17,000 for the period ended May 31, 1996, or 6%, of its sales.
General and administrative expenses increased to $1,724,000 or 77% of net
revenue for the year ended May 31, 1996, as compared to $505,000 or 26% for the
ten months ended May 31, 1995. During fiscal 1996, Touch Tone paid increased
salaries and benefits to its employees of approximately $1,074,000 compared to
$374,000 in fiscal 1995, primarily as a result of additional employees,
including GetNet employee related expense since November 1, 1995(date of
acquisition) of approximately $311,000. The remaining $519,000 increase in
general and administrative costs between the two periods is mainly due to
increased office and travel costs associated with the anticipated growth of
Touch Tone and increased internal costs associated with Touch Tone's offerings
of securities, attempted acquisitions and the inclusion of GetNet's other
general and administrative expense from November 1, 1995, which totaled
$115,000. Also included in general and administrative expense is bad debt
expense, which increased by $162,000 in fiscal 1996. Since May 1996, Touch Tone
has reduced its number of employees due to decreasing revenues. Total general
and administrative expense, relative to fiscal 1996 is, however, expected to
increase due to compensation commitments to Officers of Touch Tone and a
contract entered into with a significant consultant (who previously was the
Chairman of the Board and an Officer) of $15,000 per month. See "Commitments."
Amortization and depreciation expanses increased by approximately $127,000
related primarily to amortization of goodwill recorded in connection with the
GetNet acquisition.
Touch Tone also incurred $471,000 of expense under its agreement with ICG
during the year ended May 31, 1996; only $32,000 was incurred in the ten month
period ended May 31, 1995, as the contract was entered into in late February
1995. This amount is recorded as a period expense under operating expenses, as
Touch Tone experienced insignificant revenues associated with this contract.
Such revenues (approximately $34,000) have been offset against the expense. See
"Commitments."
Touch Tone also expensed $400,000 during the year ended May 31, 1996 based
on a settlement of a past contingent liability from the failure to meet its
prior minimum commitment for selling "800" services with AT&T. When Touch Tone
pays this liability, it will no longer have a minimum future commitment level
for "800" services. See "Commitments."
Interest expense increased from $12,000 in fiscal 1995 to $172,000 in
fiscal 1996 primarily as a result of 70,000 shares of common stock being issued
after year end to satisfy an outstanding debt of $210,000. The difference of
approximately $254,000 between the then market price of common stock and the
related debt is being expensed in operations over the period the note was
outstanding. For the year ended May 31, 1996, $127,000 was expensed and the
balance will be expensed in the first quarter of fiscal 1997.
In January 1996, Touch Tone abandoned a planned acquisition of another
reseller of telecommunication services. For the year ended May 31, 1996, the
costs associated with this planned acquisition of $118,000 have been expensed in
operations.
Touch Tone had a net loss of ($2,802,000) for the year ended May 31,1996.
For the ten months ended May 31, 1995, Touch Tone had a net loss of ($294,000).
The increase in net loss between periods is directly attributed to the expense
associated with not meeting minimum service commitment levels with its carriers,
the significant increase in selling, general and administrative costs in fiscal
1996 which included indirect costs associated with the cost of raising
additional capital, hiring of additional personnel, and other reasons discussed
above.
COMMITMENTS
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INTERNET BACKBONE CIRCUIT LEASES. Touch Tone leases certain
telecommunications circuits, primarily in connection with its Internet backbone,
under non-cancelable operating leases. Lease expense for both the ten months
ended May 31, 1995 and for the year ended May 31, 1996 was nominal as most of
these leases were entered into subsequent to May 31, 1996. As of August 1996
future minimum lease obligations under leases with lease terms in excess of one
year are as follows:
For the Years Ending
MAY 31,
- --------------------
1997 $ 647,000
1998 1,129,000
1999 1,129,000
2000 549,000
2001 43,000
Thereafter 205,000
----------
$3,702,000
----------
Included in the above amounts is a three-year commitment beginning in
January 1997 with WilTel, whereby Touch Tone is required to lease a minimum of
$70,000 per month of telecommunication circuits. Under this agreement, all costs
incurred are not only applied dollar-for-dollar against this commitment, but are
also concurrently credited one and one-half times actual usage against Touch
Tone's long distance service commitment described below.
Touch Tone is obligated to pay for actual monthly circuit lease costs
used to operate the Internet backbone, which for November 1996 approximated
$80,000, irrespective of the related usage by Touch Tone's Internet customers.
Novembers circuit lease cost consisted of circuit orders of $45,000 from
WilTel, and term commitments of $35,000 from other providers. Effective
January 1997, Touch Tone has entered into a 3 year commitment to purchase a
minimum of $70,000 per month of Internet circuits from WilTel. When combined
with the existing $35,000 of circuit commitments from other providers, the
total backbone circuit commitment equals $105,000 per month beginning in
January 1997. Revenues related to the Internet backbone have continued to be
nominal through November 1996. If Touch Tone is unsuccessful in marketing
its Internet services, these commitments will result in a substantial loss to
Touch Tone, including the possibility of impairing the capitalized costs
associated with the building of the backbone and the intangible assets
recorded in connection with the acquisition of GetNet by Touch Tone.
LONG DISTANT SERVICE COMMITMENTS. Touch Tone has a continuing commitment
with AT&T to provide long distance service of $1,800,000 annually, which as of
May 31, 1996, it had satisfactorily met. However, monthly revenues have declined
substantially due to increased competition and more competitive prices being
offered by other service providers. Touch Tone's current contract with AT&T
provides for the purchase by Touch Tone of telecommunications services at a
greater wholesale rate per minute than currently being offered by AT&T to its
retail customers. Therefore, it is expected that revenues will continue to
decrease under Touch Tone's SDN contract.
Touch Tone is hopeful it will be able to renegotiate its contract with AT&T
to obtain a more favorable rate per minute and commitment level and replace its
existing SDN contract. However, there is no assurance that Touch Tone will be
able to ultimately renegotiate its existing contract. If it is not renegotiated,
it is expected that the Parties will litigate this matter the outcome of which
litigation cannot be predicted. Should Touch Tone be unsuccessful in these
efforts, the loss incurred by Touch Tone, while cannot be estimated, would be
substantial whereby it would jeopardize Touch Tone's ability to continue
operations.
Touch Tone had an "800" service commitment, which exceeded Touch Tone's
current sales volume. Therefore in April 1996, Touch Tone negotiated a release
under this commitment, whereby it agreed to pay AT&T the $186,000 Touch Tone
initially received upon signing its contract plus $400,000 payable at $33,333
per month beginning in June 1996. If it does not meet this commitment it will be
obligated to pay its shortfall of approximately $1,027,000 less amounts
previously paid. Touch Tone is current on its obligations under this commitment.
Touch Tone has a commitment with WilTel which commenced in October 1996 to
sell $50,000 per month of long distance services. Touch Tone is currently
meeting this obligation through its actual long distance billings. This
commitment can also be satisfied through leases of telecommunication circuits
from WilTel for the Internet backbone.
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EMPLOYMENT AGREEMENTS. During the year ended May 31, 1996, Touch Tone
entered into employment agreements with various individuals. As of May 31,1996,
the base salary under these agreements aggregate approximately $480,000 in
fiscal 1997 and $225,000 in fiscal 1998. Touch Tone may terminate the agreements
for cause. If terminated for any other reason, Touch Tone will pay six months
salary and benefit allowance if termination occurs in the first year of the
agreement and nine months salary and benefit allowance if after the first year.
In April 1996, Touch Tone entered a consulting agreement with Robert
Vaughan, the former chief executive officer of Touch Tone to assist Touch Tone
in mergers and acquisitions. Under this agreement, Touch Tone will pay a base
compensation of approximately $15,000 per month, which under an amended
agreement in June 1996 has been extended through October 1997, plus additional
compensation based on the level of success of future endeavors. If the proposed
Arcada acquisition is approved, Mr. Vaughan will receive $150,000 plus 250,000
shares of common stock for his efforts on this Merger. When, and if, these
shares are issued, an expense will be recorded in the financial statements based
on the then market price of Touch Tone's common shares to be issued. This
expense, based on current trading prices, would be significant.
If the Merger is approved, Michael Canney, the current president of Touch
Tone will receive options to purchase 125,000 shares of common stock exercisable
at $.01 per share for a three-year period. The options are granted as part of a
consulting agreement to be entered into between Touch Tone and Mr. Canney upon
consummation of the Merger and in connection with settlement of obligations to
Mr. Canney under his current employment agreement. Touch Tone has further
agreed to register the shares underlying the warrant. When, and if granted, this
will result in expense being recorded in Touch Tone's financial statements for
the difference between the then-market price of Touch Tone's common shares and
the $.01 exercise price multiplied by the 125,000 shares underlying the warrant.
This expense, based on current trading prices, would be significant.
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BUSINESS OF ARCADA
INTRODUCTION
Arcada is a growing provider of long distance voice and data
telecommunication services in 17 states and in 1996 began reselling cellular
airtime and providing long distance and other services to cellular telephone
users. Arcada offers a broad array of services designed to provide discount
telecommunications services to small and medium-sized commercial customers and
residential users.
Arcada targets commercial customers with telecommunications usage of under
$2,000 per month. Arcada believes that it is able to offer rates for basic long
distance that are between 30% and 40% less than the rates commercial customers
of the size targeted by Arcada typically are charged by the major carriers. In
addition to basic "1 plus" and "800" long distance, Arcada offers its customers
a number of other telecommunication services including data transmission, debit
cards and calling cards. Arcada strives to be flexible, innovative and
responsive to the needs of its customers. Outside its target market and without
any significant advertising, Arcada has developed a base of residential
customers which for the nine months ended September 30, 1996 represented
approximately 52% of Arcada's revenues. Like Arcada's target market, the
residential market has grown primarily through referrals from other Arcada
customers.
In 1994, Arcada began providing long distance service to cellular telephone
users. Arcada entered the wireless market in 1994 by offering discount paging
services. In June, 1994, Arcada was selected to be one of the long distance
service choices for customers of AT&T/McCaw Communications, Inc., as required by
the June 15, 1994 U.S. Department of Justice consent decree signed by AT&T.
Arcada was chosen by approximately 19,000 new customers, representing
significantly less than 1% of the AT&T/McCaw customers. Arcada has leveraged its
participation in the AT&T/McCaw consent decree process to expand its sales of
cellular airtime and long distance services.
According to industry sources, the U.S. long distance reseller market was
over $9 billion in 1995, while the total U.S. long distance market was over $60
billion in 1995. The telecommunications industry is highly competitive and is
dominated by three carriers, AT&T, MCI and Sprint.
Since Arcada contracts with other long distance carriers to provide network
transmission other than its investment in its three long distance switches, it
has not needed to commit capital for its own network and transmission
facilities. As a result, Arcada can expand without the capacity, geographic
coverage or configuration limitations of a particular network. In three
metropolitan markets, Seattle, Portland and Denver, Arcada owns switches to
direct call traffic over selected transmission networks, which provides higher
margins.
INDUSTRY BACKGROUND
Today's domestic long distance telecommunications industry was principally
shaped by a 1984 court decree (the "Decree") that required the divestiture by
AT&T of its 22 Bell operating companies ("BOCs") and divided the country into
some 200 Local Access Transport Areas or "LATAs." The local exchange carriers
("LECs"), which include the seven regional Bell operating companies ("RBOCs" -
the parent companies of the BOCs) as well as independent local exchange
carriers, were given the right to provide local telephone service, local access
service to long distance carriers and intra-LATA long distance service (service
within LATAs), but the RBOCs were prohibited from providing inter-LATA service
(service between LATAs). The right to provide inter-LATA service was given to
AT&T and the other interexchange carriers ("IXCS").
As a result of the Decree, an inter-LATA long distance telephone call
begins with the LEC transmitting the call by means of its local network to a
point of connection with an interexchange carrier. The interexchange carrier,
through its switching and transmission network, transmits the call to the LEC
serving the area where the recipient of the call is located, and the receiving
LEC then completes the call over its local facilities. For each long distance
call, the originating LEC charges an access fee. The interexchange career also
charges a fee for its transmission of the
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call, a portion of which consists of a terminating fee which is passed on to the
LEC used to deliver the call. To encourage the development of competition in the
long distance market, the Decree required LECs to provide all IXCs with access
to local exchange services that is "equal in type, quality and price" to that
provided to AT&T.
These so-called "equal access" and related provisions were intended to
prevent preferential treatment of AT&T and to level the access charges that the
LECs could charge interexchange carriers, regardless of their volume of traffic.
As a result of the Decree, customers of all long distance companies were
eventually allowed to initiate their calls by utilizing simple "1 plus" dialing,
rather than having to dial longer access or identification numbers and codes.
On February 1, 1996, Congress passed the Telecommunications Act of 1996
(the "Act"). The Act is a comprehensive revision of the Communications Act of
1934, and radically changes the rules for competition and regulation in
virtually all sectors of the telecommunications industry. The Act was assigned
into law on February 8, 1996, and its provisions became effective immediately.
Prior to enactment of the Act, communications policy has been set largely
by the Federal Communications Commission ("FCC"), state public utility
commissions ("PUCs"), and the federal courts' enforcement of the 1984 antitrust
consent decree that dismantled the Bell System. While the Act's provisions cover
many areas of communications (telephone service, telecommunications equipment
manufacturing, cable, radio and television broadcasting, and Internet services),
the Act's primary importance to Arcada is its sweeping changes to local and long
distance telephone services.
The Act eliminates all state restrictions on competition in local and
long-distance telephone service. The RBOCs are freed to provide long distance
service outside their regions immediately, and inside their regions once
completing a series of steps to remove entry barriers for local telephone
competition. Further, the antitrust consent decrees are repealed, but their
requirements for "equal access" ("1+" dialing) to all long distance carriers are
maintained. Competitive safeguards, and a prohibition on "cross-subsidization"
are mandated to protect long distance carriers such as Arcada against
anticompetitive behavior by local telephone companies.
Legislative, judicial and technological factors have helped to create the
foundation for small long distance providers to emerge as legitimate
alternatives to AT&T, MCI and Sprint for long distance telecommunication
services. The FCC has required that all IXCs allow the resale of their services,
and the Decree substantially eliminated different access arrangements as
distinguishing features among long distance carriers. In recent years, national
and regional network providers have substantially upgraded the quality and
capacity of their domestic long distance networks, resulting in significant
excess transmission capacity for voice and data communications. Due to
anticipated advances in the technology involved in digital fiber optic
transmission, excess capacity is expected to continue to be an important factor
in long distance telecommunications. As a consequence, not only have small long
distance service providers received legal protection to compete with the
network-based carriers, they also represent a valuable source of traffic to
carriers with excess capacity.
The large national carriers generally focus on residential and large
commercial accounts, creating opportunities for small long distance service
providers. Industry observers estimate that over 500 small firms have emerged to
compete for these customers, many of whom are quickly able to build sizable
customer bases on the strength of their selling skills. However, sustaining a
small firm's growth generally requires abilities to manage a growing enterprise,
as well as to attract the capital necessary to finance receivables and develop a
management and systems infrastructure.
An integral component of long distance telecommunications transmission is
the switching equipment necessary to direct calls or data over the appropriate
transmission line. Facilities-based carriers maintain their own switches as part
of their networks. Smaller nonfacilities-based providers generally contract for
the use of switches in connection with their contractual arrangements for the
use of a network. As an alternative, these providers may install their own
switches in those areas where they have sufficient volume to justify the capital
expense and ongoing maintenance costs.
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COMPANY STRATEGY
Arcada's principal objective is to achieve continued growth by providing
small to medium-sized commercial users and residential customers with a variety
of innovative products, a high quality digital network, competitive pricing and
a level of service not generally provided to these customers directly from the
major long distance carriers. Key elements of Arcada's strategy include:
RETAIN AND INCREASE CUSTOMER BASE. Arcada believes that its direct sales
force is effective at acquiring its target customer while its Customer Care
Group focuses on the care and retention of customers. Arcada emphasizes customer
support and service in order to minimize attrition and to expand the volume of
business from its existing customers. Arcada intends to continue to grow its
inside sales force supplemented by strong customer support and service
operations, and to augment its direct sales efforts with outside sales
representatives. The customer service functions are important to Arcada, in that
Arcada believes that in 1995 it acquired over 70% of its new customers through
referrals from other customers.
EXPAND AND LEVERAGE CELLULAR PRODUCTS. Arcada believes that significant
growth opportunities exist in the cellular telecommunications industry. Arcada
intends to grow its cellular division and leverage its customer base to sell
additional Arcada cellular and long distance products.
EXPAND LONG DISTANCE PRODUCT LINE. Arcada packages a variety of innovative
and cost-effective telecommunications services to meet the needs of its
customers. Arcada intends to continue its efforts to acquire, develop and market
products and services that meet the expanding needs of its target customers by
utilizing different suppliers and adding switching facilities. Arcada is able to
customize its service offerings while optimizing call routing by purchasing its
network transmissions services from several vendors.
LEVERAGE BILLING SYSTEM. Arcada believes that a sophisticated and reliable
billing system is a key element for growth and success in the telecommunications
industry. In order to meet this challenge, Arcada has implemented a new billing
system, portions of which it helped to develop and are proprietary to Arcada.
Since that time, Arcada has worked closely with the billing system's developer
to enhance and refine the billing system. Arcada's goal is to establish a
reliable and integrated billing and management information system providing
sophisticated billing information tailored to the requirements of each customer,
prompt and accurate responses to customer queries and needs and support for
Arcada's operations and collection efforts.
ACQUIRE ADDITIONAL SWITCHING FACILITIES. Arcada continually evaluates
opportunities to install switches in selected markets where the volume of its
customers' traffic makes such an investment economically beneficial. In
addition, utilization of its switches allows Arcada to route customers' calls
over multiple networks to minimize costs. Arcada currently operates switches for
its call traffic in three locations.
MARKETING AND SALES
Arcada markets its services in 17 states through two distinct channels:
direct sales and independent agents. Arcada targets commercial customers with
telecommunications usage of under $2,000 per month. Arcada believes that AT&T,
MCI and Sprint historically have chosen not to concentrate their direct selling
efforts on this segment of the market and that Arcada's target customers
generally do not qualify for the major carriers' volume discounts or for the
level of support services made available to higher volume users.
In addition, Arcada has developed a significant number of residential
customers from unsolicited "walk-in" customers and referrals. Revenues from
"walk-in" customers constituted 45% of Arcada's total long distance revenues for
the nine months ended September 30, 1996.
DIRECT SALES. Arcada relies heavily on its direct sales force, Arcada's
Account Executives. Typically, businesses become customers of Arcada by
purchasing long distance service from Arcada's Account Executives. Thereafter,
Account Executives and customer service representatives follow up with existing
customers by offering them new value-added services. Arcada believes that direct
sales activities are more effective than advertising for
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securing and maintaining the business of small to medium-sized commercial
customers. Account Executives are compensated with a base salary supplemented by
a commission based on 10% of customer collections over six months. In October
1996, Arcada had nine Account Executives, together with two managerial and
administrative employees who also engage in long distance sales. Arcada intends
to expand its direct sales force in the near term. 41% of Arcada's revenues for
the nine months ended September 30, 1996 resulted from this sales channel.
INDEPENDENT AGENTS. Arcada supplements its direct sales efforts by
marketing through a network of approximately 100 independent agents, which
are typically equipment consultants and distributors of interconnect
equipment or other office equipment and supplies. Such firms generally enter
into agreements providing for commissions on business generated for Arcada.
Arcada typically grants a nonexclusive right to solicit customers and pays
commissions of 10% on amounts collected. Approximately 14% of Arcada's
revenues for the nine months ended September 30, 1996 resulted from this
sales channel.
RESIDENTIAL SALES. In each of Arcada's sales offices, one individual is
responsible for taking orders from new residential customers. Arcada is not
aggressively marketing its services to the residential market, but does
cultivate sales through direct mail and financial incentives for referrals.
CUSTOMER SERVICE
Arcada strives to provide superior customer service and believes that
personal contact with potential and existing customers is a significant factor
in customer acquisition and retention. Arcada believes that as the
telecommunications industry becomes more competitive, customer service will
become an even more important component of the sales and customer retention
effort.
New customer accounts are processed by Arcada's Customer Care department
located at Arcada's corporate offices. There, Arcada's staff is dedicated to
providing new customers with a smooth transition to its services. Arcada obtains
account information from new customers, which it processes and forwards to the
applicable LEC or interexchange carrier. In areas where Arcada operates
switches, it has on-line access to the local exchange carrier's database system
to expedite the transfer process.
Arcada believes that proactive customer service is helping Arcada retain
customers. Arcada's customer service team, in addition to responding to customer
questions, makes phone calls to new customers two to three weeks after they join
the Arcada system and after the first bill is sent. Arcada is also implementing
a system whereby each customer will be contacted several months into its
relationship with Arcada to address any problems, to attempt to "upsell"
Arcada's other products and generally try to reinforce the business relationship
and cut down on customer turnover. The Customer Care department also serves as a
"first stage" collections department in order to try to collect past due
accounts in a way that will maintain the customer relationship.
Customer questions about bills and services are directed to Arcada's
Customer Care department, which had a combined staff of six customer service
representatives as of October 1996. Arcada has expanded its Customer Care
department's hours to 8:00-8:00, Monday through Friday to better serve its
customers.
During 1995 and 1996, no one customer accounted for more than 5%
of Arcada's revenues. Arcada believes that the loss of any single customer would
not have a material adverse effect on its results of operations.
WIRELESS OPERATIONS
BACKGROUND. The cellular industry is a fast-growing segment of the
telecommunications business. Industry sources indicate that there were 25
million cellular phone users in 1995 and that number is expected to grow to 45
million by 2000.
In 1994, Arcada entered the wireless telecommunications business by
offering discount paging services.
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In 1994, AT&T acquired McCaw Communications, Inc. ("Cellular One"). As a
condition of approving that transaction, the U.S. Department of Justice ("DOJ")
required that AT&T agree in a Consent Decree that long distance service for
cellular customers of Cellular One must be offered on an "equal access" basis
nationally. To comply with the DOJ Consent Decree, AT&T/McCaw gave each Cellular
One customer an opportunity to select their long distance service provider by
marking and returning a ballot. Arcada was accepted on the ballot in every one
of the 17 states it requested. Arcada, AT&T, MCI and Sprint were the only long
distance carriers named on ballots in every one of those states. Since 1994,
Arcada was chosen to provide long distance service by 19,000 Cellular One
customers; approximately 12,000 remain customers of Arcada as of September,
1996.
In 1995, Arcada began reselling cellular airtime under a reselling
agreement with AT&T in the Portland, Oregon market. Arcada has since added the
Denver, Colorado and Seattle, Washington markets and has entered into are seller
agreement with U.S. West/Air Touch Cellular
MARKETING AND SALES. Arcada markets and sells its cellular airtime and long
distance products through its Wireless Communications division. The Wireless
Communications division has three sales professionals, along with one management
employee who also engages in sales.
Arcada is leveraging its success in being listed on the Cellular One
ballots by focusing on selling cellular airtime to new cellular long distance
customers. Additionally, Arcada believes that its current "wired" long distance
customers will be a good potential target for future cellular airtime and long
distance sales.
Arcada intends to expand its sales efforts in the future by: (i) retaining
independent agents to sell Arcada products on a commission basis; (ii)
contracting with retail stores which market cellular phones to sell Arcada
products "packaged" with cellular phones; and/or (iii) opening one or more
retail stores to sell cellular phones and services. Arcada is also currently
negotiating with Motorola to become one of the few wireless resellers classified
as a "Signature Dealer" permitting it to obtain wireless hardware at favorable
prices and participate in joint marketing efforts.
Arcada is aggressively pricing its cellular products and management
believes that its prices are up to 40% less than Arcada's major competitors. To
date, revenues from cellular airtime and long distance sales have not been a
significant portion of total revenues, 5% for the nine months ended September
30, 1996. However, Arcada expects that both in absolute dollars and on a
percentage of revenues basis, cellular revenues will increase in the future.
PRODUCTS AND SERVICES
Through contractual arrangements with facilities-based carriers, Arcada
currently offers a wide variety of long distance telecommunication services to
small and medium-sized businesses. Historically, substantially all of Arcada's
revenues have been generated by provision of alternate access long distance.
Over the past two years this has changed and presently substantially all of
Arcada's long distance revenues are derived from basic "1 plus" and "800" long
distance services. Arcada offers switched and dedicated, inbound and outbound
long distance service carried by large national or regional interexchange
carriers. Arcada believes it has been successful as a provider of these basic
services because of the volume discounts it has been able to negotiate with
underlying carriers and its ability to route its customers' traffic over the
transmission networks of more than one carrier. In markets where it has
switches, Arcada can direct a single customer's calls among different carriers'
networks to take advantage of the most favorable rates to different destinations
at different times of the day.
Arcada has also recently introduced cellular and cellular long distance
products. Arcada believes that revenue from its cellular products will grow as a
percentage of total revenues and it will become a significant factor in Arcada's
future business. At present, the "wireless" products offered by Arcada include:
- CELLULAR AIRTIME. Arcada offers cellular service as a reseller of AT&T
Wireless Services.
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- ONE NUMBER "FOLLOW ME" SERVICE. Arcada offers the ability for
customers to link their telephone, cellular phone and pager together
so that a customer needs only one telephone number for any call, at
any time, anywhere in the world.
- PAGING. Arcada currently offers digital and alphanumeric paging in
Colorado, Washington and Oregon.
- CELLULAR TELEPHONES, PAGERS, ACCESSORIES. Arcada has begun retail
sales of cellular telephones, pagers, pager watches and related
accessories to complement its wireless operations.
Arcada also offers enhanced billing reports. Arcada believes that its
value-added billing capabilities and other customer support services enable its
customers to manage their telecommunications costs more effectively.
For example, Arcada's customers can choose from many different features
available in the Arcada billing system, including summaries of calls by
authorization code, project code, area code, longest call, and most-called
number.
Arcada believes that its customers typically realize savings from 30% to
40% from the rates they would have been charged directly by the major carriers
for basic long distance service. Actual savings vary depending on the service
the customer was using prior to becoming a customer of Arcada.
BILLING SYSTEM
Arcada believes that maintaining sophisticated and reliable billing and
customer service information systems capable of integrating billing, accounts
receivable and customer support is a core capability necessary to record and
process the massive amounts of data that are generated by a telecommunications
service provider. Arcada currently processes approximately 2,000,000 call
records per month.
In order to process, organize and analyze this volume, in June, 1995 Arcada
implemented a new billing system designed to Arcada's specifications by EXL,
Inc. ("EXL"), a Canadian software manufacturer specializing in billing systems.
This system was put in place to replace Arcada's original long distance billing
and report-generating system which had become outdated due to the increase
volume of call records being generated by Arcada's customers. After an initial
phase-in period, Arcada was able to generate customer bills utilizing the new
systems. Since that time, Arcada and EXL have worked closely to increase the
system's reliability and versatility. Arcada believes the system is currently
operating within industry standards. See "RISK FACTORS - Dependence on
Effective Billing System."
While the billing system has accommodated Arcada's increased billing
volume, Arcada and EXL have been striving to enhance the system's ability to
generate sophisticated reports and to provide collections, customer and
administrative support. To this end, Arcada and EXL have developed several
additions and modifications to the billing system and anticipate continued
enhancements and refinements in the future. Arcada believes that the current
billing system is capable of accommodating increased growth and will, overtime,
provide Arcada with a competitive advantage in administrative and customer
support matters.
Arcada has a perpetual, non-exclusive license to use the billing system and
also has proprietary rights in certain customized aspects of the system,
including the software allowing Arcada to bill customers for specific "call
packages" allowing flat monthly billing for a specific number of calls of a
specified duration during a given month.
In addition to its long distance billing system, Arcada also relies on an
independent, "in-house" billing and reporting system for its cellular customers.
Arcada owns all rights in this system. Arcada and EXL are working closely to
integrate the cellular billing system into the long distance billing system and
anticipate integrating the two systems in 1997.
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BILLING AND MANAGEMENT REPORTS. Arcada is currently able to collect many
call data items for each phone call placed by a customer, including customer
name, call origination point, call destination point, billing code minutes,
date, time and rate code. From this data, Arcada can organize the customer's
monthly phone calls into a wide variety of report formats.
ACQUISITIONS
Arcada intends to supplement its growth through selective acquisitions of
providers of telecommunication services. Arcada believes that in some instances
it is faster and less expensive to buy customers than to develop them through
its internal marketing or sales efforts. Arcada believes that many firms are
willing to sell their customer bases because they have been unable to manage the
growth of their enterprise or attract the capital necessary to finance
receivables and develop a management and systems infrastructure. Arcada will
also consider acquisitions that would enable it to expand its product line.
While acquisitions can offer important growth opportunities, assimilating
new businesses gives rise to certain risks, including the risk that high
customer attrition from acquired customer bases can make the acquisition less
attractive financially. The acquisition process also places demands on senior
management and its systems during periods of rapid growth. There can be no
assurance that there will not be adverse consequences to Arcada from pursuing
acquisitions in the future.
SUPPLIERS
Historically, Arcada has entered into two- to three-year supply contracts
with its major interstate long distance and cellular air time suppliers, such as
Frontier, Sprint and AT&T. Many of the major long distance agreements are
currently in the process of being renewed. In addition to its contracts with its
major interstate long distance and cellular air time suppliers, Arcada has
entered or otherwise acquired contracts with other suppliers for intrastate long
distance, including Electric Lightwave, Inc., ICG, TCG, GTE and US West. In
order to obtain favorable pricing from its interstate long distance carriers,
Arcada has committed to purchase minimum volumes of interstate long distance
services during stated periods whether or not such volumes are used. For 1996,
these commitments total approximately $1,800,000.
Arcada utilizes "least cost routing" to minimize the cost of connecting
customers' calls. With this process, Arcada's switches are programmed to
automatically select the lowest cost long distance carrier from among Arcada's
underlying long distance carriers for each call carried through the switch. This
routing system serves to minimize Arcada's reliance on any one underlying
carrier by automatically selecting alternate service should one carrier
discontinue service.
Arcada is unable to use its "least cost routing" system in providing
inbound "800" calls. Arcada is dependent on Sprint to handle this traffic, which
constitutes approximately 10% of Arcada's total minutes billed. In the event
Sprint were to discontinue Arcada's "800" service without sufficient notice for
Arcada to make alternate arrangements, Arcada's "800" customers would
temporarily be without such service. Such a loss of service could have an
adverse effect on Arcada's business.
Arcada, like all other long distance providers, is dependent upon local
exchange carriers for call origination (carrying the call from the customer's
location to the long distance network of the interexchange carrier selected to
carry the call) and termination (carrying the call off the interexchange
carrier's network to the call's destination). FCC policy currently requires
interexchange carriers to provide resale of the use of their transmission
facilities. The FCC also requires local exchange carriers to provide all
interexchange carriers, including Arcada, with equal access to the origination
and termination of calls. If either or both of these requirements were relaxed,
Arcada could be adversely affected. See "BUSINESS OF ARCADA - Regulation."
Each month Arcada receives invoices from its underlying carriers. Due to
the multitude of billing rates and discount rates and discounts which must be
applied by carriers to the calls completed by Arcada's customers, and due to
discrepancies in information contained in suppliers' bills when compared with
Arcada's records, Arcada has
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disagreements with its carriers concerning the sums invoiced for its customers'
traffic. It has been Arcada's experience that the amounts it is invoiced
regularly do not precisely reflect actual call traffic. These disputes have
generally been resolved on terms favorable to Arcada, although there can be no
assurance that this will continue to be the case. No dispute over billing
discrepancies or failure to meet volume commitments has had a material adverse
effect on Arcada to date, but there could be no assurance that this will
continue to be the case.
ACQUISITION OF SWITCHING FACILITIES
Arcada owns switches for call traffic transmission in three locations:
Seattle, Portland and Denver. Use of a switch results in lower overall call
transmission costs. Arcada's ownership and potential future acquisition of
switching equipment can improve gross margins and provide greater control over
service to its customers. These increased margins are somewhat offset by costs
associated with operating its own switches. In areas where Arcada owns switches,
it can immediately access call records, provide customers with instant access to
different networks and implement differentiating features and billing
enhancements without the involvement of the underlying carrier. Arcada believes
that the ability to exercise direct control over a customer's calls and reduce
their cost can be an important competitive advantage.
COMPETITION
The telecommunications industry is highly competitive and affected by
regulatory and rapid technological change. Arcada's competitors range from
nationally-recognized Fortune 500 companies (AT&T, MCI) to small regional and
local resellers. Many competitors have greater resources than Arcada and
barriers to entry are low. There can be no assurance that it will remain
competitive in this environment. Arcada believes that the principal competitive
factors in its business include pricing, customer service, network quality,
value-added services and the flexibility to adapt to changing market conditions.
While Arcada believes that AT&T, MCI and Sprint historically have chosen not to
concentrate their direct sales efforts on small to medium-sized businesses,
these carriers are dominant in the industry. In addition, AT&T, MCI and Sprint
have recently introduced new service and pricing options that are attractive to
smaller commercial users, and there can be no assurance that they will not
market to these customers more aggressively. A significant number of large
regional long distance carriers and newer entrants in the industry compete
directly with Arcada by concentrating their marketing and direct sales efforts
on small and medium-sized commercial users.
Arcada believes it competes favorably in its targeted market segment,
principally due to its pricing, personalized service and enhanced billing and
reporting. Arcada also believes that its success will increasingly depend on its
ability to offer on a timely basis new services based on evolving technologies
and industry standards. There can be no assurance that new technologies or
services will be made available to Arcada on favorable terms.
Regulatory trends have had and may have in the future, significant effects
on competition in the industry. See "BUSINESS OF ARCADA - Regulation." Under
current industry conditions, both the interexchange carriers and local exchange
carriers have access to information regarding Arcada's customers for which they
provide the actual call transmission. Because these interexchange and local
exchange carriers are potential competitors of Arcada, they could use
information about Arcada's customers, such as their calling volume and patterns
of use, to their advantage in attempts to gain such customers' business,
although Arcada believes that the FCC would find such practices to be unlawful.
In addition, Arcada's future success will depend, in part, on its ability to
continue to buy transmission services from these carriers at a significant
discount below the rates these carriers otherwise make available to Arcada's
target customers.
REGULATION
The terms and conditions under which Arcada provides communications
services are subject to government regulations. Federal laws and FCC regulations
apply to interstate telecommunications, while particular state regulatory
authorities have jurisdiction over intra state telecommunications.
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FEDERAL. In early 1996, Congress passed the Telecommunications Act of 1996
(the "Act"). The Act is an extensive and broad revision of the
telecommunications rules and regulations. Under the Act, Congress set the stage
to dramatically reduce the competitive barriers facing all telecommunications
companies, especially AT&T and the RBOCs. Since 1984, judicially imposed
restrictions barred the RBOCs from providing inter-LATA Along distance. AT&T was
barred from providing local exchange services. Under the Act, after a transition
phase, and subject to each RBOC meeting criteria set forth in the Act and
established by the FCC, each RBOC will be able to provide both local and long
distance services (intra and inter-LATA long distance). Recently, certain FCC
rules dictating pricing for the resale of local service were held invalid. The
United States Supreme Court has refused to review the lower court's ruling. As a
result, many state regulatory agencies have actively intervened and are
establishing pricing and rules under which LECs must allow resale of local
service.
It is difficult to estimate the resulting impact of the Act. However,
Arcada anticipates increased competition from the RBOC's as they are allowed to
enter the inter-LATA long distance markets. Further, Arcada anticipated
additional competition from AT&T as they are able to offer broader ranges of
products and services, such as local exchange services.
Many LECs are in the process of allowing equal access to their intra-LATA
long distance services. This means that Arcada's customers may soon be able to
dial 1+ to make intra-LATA calls. Presently, in order to make intra-LATA calls,
Arcada's customers, and all other long distance company's customers, must first
dial 10xxx, (in Arcada's case, 10644), prior to dialing the called number. The
"xxx" refers to the Carrier Identification Code ("CIC"). If a customer fails to
dial the CIC prior to making intra-LATA calls, the call is carried by the LEC.
Dialing the CIC bypasses the local exchange carrier's local long distance. Even
if a customer has chosen Arcada as their long distance company, the customer
must dial the 10xxx to have the call routed through Arcada's services. Arcada
believes that many of its customers do not use the 10xxx number prior to making
intra-LATA calls, and therefore, Arcada does not receive significant long
distance revenue from its existing customers. Allowing all IXCs equal access to
the intra-LATA markets via 1+ dialing could result in significant additional
price competition in the intra-LATA markets. Since the incumbent LEC has access
to all customers in its region, and since the incumbent LEC owns and controls
virtually all of the equipment necessary to make intra-LATA calls, Arcada
anticipates that the incumbent LEC may have a significant competitive advantage
in the intra-LATA markets.
Arcada is classified by the FCC as a non-dominant carrier. Among domestic
carriers, only the LECs are classified as dominant carriers. The FCC has
recently classified AT&T as a non-dominant carrier. As a result, AT&T is capable
of competing much more effectively with Arcada because they are no longer
subject to certain pricing and regulatory restrictions. Further, by order dated
October 29, 1996, the FCC ruled under the new forbearance authority granted to
the FCC under the Act, that non-dominant carriers will no longer be required to
file tariffs for their interstate inter-LATA long distance services. After a
nine month transition period, the relationship between carriers and their
customers will be set by contract. The FCC has generally not chosen to exercise
its statutory right to regulate the charges, policies, classifications or
procedures of non-dominant carriers, although it has the power to do so.
Further, It is unclear whether the Act contains sufficient safeguards to
preventative-competitive practices. Anti-competitive practices can result from
the RBOCs access to a large group of present customers for local exchange
services. Also, interexchange carriers such as Arcada, heavily rely on the RBOCs
for access to local exchange networks. Problems arising from delays or errors
caused by the local RBOC or any other local exchange carrier's inability or
difficulty to implement or repair necessary services can severely impact
Arcada's operations.
Despite the order phasing out tariff filings, all interchange carriers will
be required to retain and make available information as to the rates and terms
of their services. Consumers may still file complaints with the FCC regarding
the interexchange companies services. In addition, when complete detariffing is
implemented, consumer will be able to take advantage of state consumer
protection laws and contract law. Previously, consumer's legal rights over
billings were often limited by the terms of the tariff. The detariffing order
will not change an interexchange carriers obligations to charge rates that are
just and reasonable and not unjustly or unreasonable discriminatory. It is
anticipated that the recent FCC detariffing decisions could provide a
competitive advantage to large interexchange carriers, such as AT&T. In light of
the recent FCC order, it is, and will remain, difficult to determine the nature
and extent of continued federal rules, regulations, and oversight.
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Arcada has been authorized to provide domestic interstate and international
telecommunications services. The FCC conditions the authority to continue to
conduct interstate and international telecommunication services upon compliance
with the FCC's rules and regulations. The FCC reserves the right to condition,
modify or revoke the authority it has granted.
Until the detariffing order is fully effective, Arcada and other domestic
and international interexchange carriers must maintain tariffs on file with the
FCC. Although the tariffs are subject to FCC review and approval, they are
presumed to be lawful and seldom contested. In reliance on the FCC's practice of
relaxed enforcement of the rules and regulations of companies of the size of
Arcada, Arcada and many, if not most, of its competitors, have not continuously
updated their tariffs with the FCC and state regulatory agencies. Until the
statute of limitations expires, Arcada could be held liable for damages for its
failure to strictly maintain its tariff filing, although Arcada believes that
such an outcome is unlikely and even if it did occur, would not have a
materially adverse effect on Arcada. In order to recover damages, a competing
telecommunications service provided would have to show that Arcada's failure to
strictly maintain its tariff caused the complaining carrier to lose customers.
The possible amount of any such liability cannot be calculated by Arcada.
STATE. The intrastate long distance telecommunications operations of Arcada
are also subject to various state laws and regulations, including certification
and registration requirements. Currently, Arcada is authorized to do business
and is properly tariffed, or has substantially completed the process of doing
so, where required to provide intrastate services to customers. Arcada monitors
the regulatory developments in the states where it presently conducts business.
Arcada intends to continue to investigate whether it should conduct business in
additional states.
Arcada is currently subject to varying levels of regulation in the 17
states in which it provides intrastate telecommunications services. The vast
majority of the states require Arcada to apply for certification to provide
telecommunications service, or at least to register or to be found exempt from
registration, prior to commencing services. The vast majority of states also
require Arcada to file and maintain detailed tariffs listing their rates for
intrastate service. Many states also impose various reporting requirements
and/or require prior approval for transfers of control, assignment of assets,
including customers passes, offering of securities, and the incurrence of
significant debt. Certification of authority to conduct business can be
terminated, modified, conditioned, or revoked by state regulatory authorities.
Fines and other penalties, including the return of all monies received for
intrastate traffic from residents of a state may be imposed for a violation. In
certain states, prior regulatory approval may be required for acquisition of
telecommunications operations. In the past, Arcada generally has not obtained
such prior approvals for its acquisitions. However, Arcada does not believe that
its prior failure to obtain regulatory approval will have a materially adverse
effect on Arcada.
Arcada currrently collects and remits local utility and other taxes only
in jurisdictions where it has offices or holds other assets. Arcada has made
tax payments to one locality where it does not have offices or hold assets
and has agreed to pay additional amounts based on a review of its billing to
that locality while preserving the right to challenge its obligation to make
such payments. Arcada has in the past been contacted by other localities
where it has customers but no other assets or operations requesting that it
collect and remit local utility taxes in such jurisdictions. Arcada does not
believe such local utility taxes apply to its operations and it has not
historicallly collected such taxes. Arcada believes that the vast majority
of switched and non-switched resellers do not collect or remit such taxes.
There can be no assurance that such localities will not actively seek to
collect taxes from Arcada in the future or that Arcada will be liable for
failure to collect such taxes in the past. In the event Arcada is found
liable for such back taxes it could have a material adverse effect on Arcada.
See "RISK FACTORS - Risk of Liability for Local Utility Taxes."
EMPLOYEES
As of January 1, 1997. Arcada employed 59 persons on a full-time basis,
with 20 in sales and marketing, 14 in customer service and provisioning, four
in administration, seven in finance and accounting, nine in technical and
five in information systems. None of Arcada's employees are members of a
labor union or are covered by a collective bargaining agreement.
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PROPERTIES
Arcada's headquarters in Seattle consists of approximately 8,850 square
feet of office space under a lease that expires on December 31,1999, and
requires minimum annual lease payments in 1996 of $187,680. Arcada also
leases 975 square feet, 640 square feet, and 1,328 square feet in Vancouver,
Washington, Portland, Oregon and Denver, Colorado, respectively, requiring
minimum annual lease payments in 1996 of $28,128, $12,000 and $36,336,
respectively. Management believes its present office facilities are adequate
for its operations for the foreseeable future and that similar additional
space can readily be obtained as needed.
CERTAIN TRANSACTIONS
In April, 1996, Arcada entered into an agreement with KBFT, Inc. ("KBFT"),
a corporation owned by Frank Bonadio, President, director and shareholder of
Arcada, and Keith Leppaluoto and Robert Leppaluoto, directors and shareholders
of Arcada. Pursuant to the Agreement, KBFT serves as a procurement agent for
Arcada. Payments to KBFT have aggregated approximately $373,000 through November
30, 1996. KBFT was sold to an unaffiliated party in December, 1996.
Commencing in 1994, Robert Leppaluoto and Keith Leppaluoto, shareholders
and directors of Arcada, loaned cash to Arcada pursuant to the terms of
unsecured, four-year promissory notes. Interest on such notes is payable at a
rate of 15% per annum. Interest expense related to these borrowings
approximated $8,000 and $74,000 during the years ended December 31, 1994 and
1995. The notes are subordinated to borrowings under Arcada's line of credit.
Pursuant to the Merger Agreement a portion of, this debt will be exchanged for
Touch Tone's issuance of an aggregate of 200,000 shares of Series B Preferred
Stock to Robert Leppaluoto and Keith Leppaluoto upon consummation of the
Merger. The shares of Touch Tone America Preferred Stock issued in exchange
for this debt are in addition to the 1.5 million shares of Touch Tone Series
A Preferred Stock issued in the Merger. See "Interests of Certain Persons in
the Merger."
In 1995 and 1996 Arcada entered into a severance agreement with two former
employee pursuant to which Arcada has agreed to make payments totaling an
aggregate of $1,260,000 in the event of a sale of Arcada or the occurrence of
certain other events, including the Merger. The two principal shareholders of
Arcada have reached an understanding with these individuals pursuant to which
the Arcada Shareholders will instruct Touch Tone to issue an aggregate of
450,000 shares of the Touch Tone Common Stock (which shares were to be issued to
such Arcada Shareholders in the Merger) directly to the former employees in full
satisfaction of Arcada's obligations to the two former employees under the
severance agreement.
LEGAL PROCEEDINGS
In November 1995 Arcada entered into an agreement with an investment
banking group, which agreement was subsequently terminated by Arcada. This
group has claimed that they are owed certain fees relating to the Merger.
Arcada believes these claims are without merit and it will vigorously defend
any litigation resulting from this matter, and if necessary, institute legal
action to preserve its right.
Arcada is involved in certain other disputes that arise in the ordinary
course of business. Arcada believes that no current dispute will have a material
adverse effect on its financial condition or results of operations.
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ARCADA MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This following should be read in conjunction with the Arcada financial
statements and notes related thereto appearing elsewhere in this Joint Proxy
Statement/Prospectus.
FORWARD-LOOKING STATEMENTS MAY NOT PROVE ACCURATE. When used in this Joint
Proxy Statement/Prospectus, the words "anticipate," "estimate," "expect,"
"project" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, expected or projected. Several key
factors that have a direct bearing on the ability of Arcada, Touch Tone and the
combined company to attain their goals are discussed in "RISK FACTORS."
GENERAL
Due to the commercial nature of its customer base, Arcada experiences
general decreases in customer usage and revenue around national holidays and
traditional vacation periods. Accordingly, Arcada anticipates revenues from
existing customers during the last two quarters of the year to be somewhat lower
than during the first two quarters. Historically, results have been affected
more significantly by the addition of new customers in connection with internal
sales growth.
A high level of customer attrition is inherent in the long distance
industry, and Arcada's revenues are also affected by such attrition. Attrition
is attributable to a variety of factors including the initiatives of existing
and new competitors as they engage in, among other things, national advertising
campaigns, telemarketing programs and the issuance of cash or other forms of
incentives. Although Arcada is aware of the significance of attrition on its
business, telecommunications providers generally find it difficult to measure
customer attrition in a consistently meaningful manner for a number of reasons
including, among others, the limitations of their data processing systems, the
wide range of revenues attributable to individual customers, the fact that
service to an individual customer may be provided by more than one underlying
carrier and the variety of reasons for changes in the volume of services
provided to an individual customer. As a consequence, Arcada has not formulated
a statistical basis for measuring or reporting its attrition.
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1994 1995 1995 1996
---- ---- ---- ----
Revenues $9,060,000 $10,954,000 $8,292,000 $9,429,000
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Excess of revenues
over line charges $4,129,000 $4,138,000 $3,144,000 $3,493,000
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Earnings (loss) before
interest and tax (1) $216,000 $(328,000) $(362,000) $181,000
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Net income (loss) $154,000 $(559,000) $(521,000) $36,000
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
(1) Includes depreciation and amortization expense of $240,000 and $470,000 for
the years ended December 31, 1994 and 1995 and $325,000 and $410,000 for
the nine months ended September 30, 1995 and 1996.
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NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
- ------REVENUES. Total revenues for the nine months ended September 30, 1996
increased 14% to $9.4 million over the corresponding prior year period due
primarily to the increase in Arcada's long distance customer base and Arcada's
expanded cellular and cellular long distance businesses.
- ------EXCESS OF REVENUES OVER LINE CHARGES. The excess of revenues over line
charges increased $349,000 or 11% during the nine months ended September 30,1996
over the comparative prior year period. The excess of revenues over line charges
expressed as a percentage declined slightly from 38% of revenues to 37% of
revenues in the nine months ended September 30, 1996 compared to the nine months
ended September 30, 1995. This resulted from increased utilization of lower
margin services by Arcada's customers and reduced pricing due to competitive
pressures on Arcada's rates.
- ------EARNINGS (LOSS) BEFORE INTEREST AND TAXES. Earnings (loss) before interest
and taxes increased from a loss of ($362,000) for the nine months ended
September 30, 1995 to income of $181,000 for the comparative 1996 period.
Approximately half of the improvement was due to a $295,000 provision for
severance obligations recorded during 1995, and the remaining increase was due
to increased excess of revenues over line charges of $349,000 offset by slight
increases of $101,000 (3%) in other operating expenses.
1995 COMPARED TO 1994
- ------REVENUES. Total revenues in 1995 increased 17% to $11.0 million from $9.1
million in 1994 due primarily to increases in Arcada's long distance customer
base. To a lesser extent, 1995 revenues increased as a result of the expansion
of Arcada's products and services, including the introduction of cellular
services in the Seattle, Denver and Portland metropolitan areas.
- ------EXCESS OF REVENUES OVER LINE CHARGES. The excess of revenues over line
charges was essentially the same in 1994 and 1995. Although Arcada experienced
increased revenues, these revenues were offset by a 38% increase in line charges
from 1994 to 1995. This increase in line charges resulted from increased volume
from lower margin services such as "1-plus" and cellular products in 1995.
- ------EARNINGS (LOSS) BEFORE INTEREST AND TAXES. Earnings (loss) before interest
and taxes decreased from income of $216,000 in 1994 to a loss of ($328,000) in
1995. Of the decline, over half was due to a $295,000 provision for severance
obligations recorded during 1995 with the remaining decline due principally to
increased depreciation and amortization related to substantial capital
expenditures undertaken in the later part of 1994 and 1995 resulting in a 96%
increase in depreciation and amortization expense from 1994 to 1995, together
with a modest increase in other operating expenses (less than 1%).
LIQUIDITY AND CAPITAL RESOURCES
Historically Arcada has experienced growth, which has required substantial
working capital to finance receivables and capital expenditures. Given Arcada's
billing and collection cycle with its customers and suppliers, Arcada generally
pays its underlying suppliers from fifteen to thirty days prior to the time it
is paid by its customers for the same services. Arcada has financed its growth
primarily through loans from shareholders, vendor financing, capital leases and
cash flow from operations.
Net cash provided by operating activities was $776,000, $308,000, $114,000
and $456,000 in 1994, 1995 and the first nine months of 1995 and 1996,
respectively. This decrease in cash provided by operating activities during 1995
as compared to 1994 results primarily from the $713,000 decrease in net income
during the period offset by a non-cash charge of $295,000 relating to severance.
The increase in net cash provided by operating activities in the first nine
months of 1996 as compared to the corresponding period in 1995 is primarily
attributable to an increase in net income during the later period.
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Net cash used in investing activities approximated $1.2 million, $661,000
and $231,000 in 1994 and 1995 and the first nine months of 1996 and consisted
primarily of capital expenditures.
Net cash provided (used) by financing activities was $403,000, $127,000 and
($239,000) in 1994, 1995 and the first nine months of 1996, respectively. The
decrease in net cash provided by financing in 1995 compared to 1994 resulted
primarily from increased payments on capital lease obligations and dividends
paid to shareholders in 1995, offset somewhat by borrowings under Arcada's line
of credit and from Arcada's shareholders. The decrease in net cash provided by
financing in the nine months ended September 30, 1996 is principally
attributable to decreased borrowings.
The Company maintains line-of-credit borrowing agreements with banks. In
August 1996, the Company entered into a $400,000 line-of-credit agreement.
Borrowing availability approximated $250,000 and $300,000 during 1994 and 1995,
respectively. Borrowings are secured by accounts receivable, certificates of
deposits, and personal guarantees of Company shareholders. Line-of-credit
agreements provide for interest, payable monthly, at prime plus 2% during 1994
and 1995 and at prime plus 1% on the 1996 line.
Commencing in 1994, certain of the Company's stockholders loaned cash to
the Company pursuant to terms of unsecured, four-year promissory notes.
Interest is payable monthly at a rate of 15% per annum. These payables are
subordinate to line-of-credit bank borrowings.
IMPACT OF INFLATION
Arcada believes that the effects of inflation have not had a significant
effect on its financial condition or results of operations and anticipates that
the level of inflation, if moderate, will not have a significant effect on
operations.
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TOUCH TONE MANAGEMENT
The following table sets forth, with respect to each person who is
currently a director or executive officer of Touch Tone, the person's age and
the person's positions and offices with Touch Tone. Individual background
information concerning each of such persons follows the table.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH TOUCH TONE TENURE AS OFFICER OR DIRECTOR
---- --- ------------------------ -----------------------------
<S> <C> <C> <C> <C>
Michael J. Canney (1) 65 Chairman of the Board of Directors, Director on January 12, 1996
President and Chief Executive Officer
from April 8, 1996
David J. Smith 43 Chief Financial Officer and From October 2, 1995 to
Secretary/Treasurer present
Matthew J. Barletta (2) 30 Director From September 12, 1995 to
present
Norman B. Walko (2) 56 Director From November 1, 1995 to
present
Stephen P. Shearin (2) 31 Director From November 29, 1995 to
present
Benjamin W. Bronston (2) 32 Director From June 7, 1996 to present
</TABLE>
- ------------------------
(1) Will resign as President, Chairman of the Board and Chief Executive Officer
but will remain a director as of the Effective Time.
(2) Will resign as a Director at the Effective Time.
The directors of Touch Tone are elected to hold office until the next
annual meeting of shareholders and until their respective successors have been
elected and qualified. Officers of Touch Tone are elected by the Board of
Directors and hold office until their successors are elected and qualified.
Touch Tone has an Audit Committee comprised of Norbert Zeelander, Norman B.
Walco and Michael J. Canney and a Compensation Committee composed of Michael J.
Canney, Norman B. Walko and Norbert Zeelander.
MICHAEL J. CANNEY. Mr. Canney has served as a Director of Touch Tone from
January 1996 to the present and in April 1996 became President and Chief
Executive Officer. From February 1966 to August of 1987 Mr. Canney was employed
by Mountain Bell, (later known as U.S. West) in Albuquerque, New Mexico and
Denver, Colorado in various management capacities. While at Mountain Bell,
Mr. Canney served in various capacities including director of marketing,
director of mechanized systems, and director of contract negotiations and
purchasing.
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DAVID J. SMITH. Mr. Smith joined Touch Tone in September 1995 as a
consultant in the accounting and finance division. In October 1995 he was
appointed Chief Financial Officer and in June 1996 Secretary/Treasurer. From
September 1994 until July 1995, Mr. Smith served as Controller/Accounting
Manager for the Phoenix, Arizona branch of Poe & Brown Insurance, a nationwide
insurance agency/brokerage based in Daytona Beach, Florida. From July 1982 until
September 1994, Mr. Smith served as Controller for Alliance Insurance Group, a
regional insurance agency/brokerage based in Phoenix, Arizona.
MATTHEW J. BARLETTA. Mr. Barletta has been a Director of Touch Tone from
September 12, 1995 to the present. From July 1993 to the present, Mr. Barletta
has been the ATM Product Marketing Engineer for Cisco Systems, Inc. of San Jose,
California. From March 1989 to July 1993 Mr. Barletta was a member of the
technical staff for AT&T Bell Laboratories in Liberty Corner, New Jersey.
NORMAN B. WALKO. Mr. Walko has been a Director of Touch Tone from November
1995 to the present. Recently he joined Next Wave Telecom as Vice President in
charge of the Southeast Region. From March 1994 to the present Mr. Walko has
been Chief Operating Officer of QuestCom Communications of Portola Valley,
California, a company formed to participate in wireless telecommunications
license auctions. From June 1992 to February 1994, he was General Manager,
Central/North Florida with McCaw Cellular Communications, Inc. of Kirkland
Washington, a company engaged in cellular telephone service. From March 1989 to
June 1992, Mr. Walko was employed by U.S. West Corporation as a general manager.
Mr. Walko received a B.S. in Computer Science from Purdue University and a
M.B.A. in Marketing from the University of Southern California.
STEPHEN P. SHEARIN. Mr. Shearin has served as a Director of Touch Tone
since November 1995. Mr. Shearin founded GetNet in 1994 and served as the
President of GetNet until August 1996 when he was terminated by Touch Tone.
From 1991 to 1994, Mr. Shearin managed Shearin Tile Co. while also founding
GetNet.
BENJAMIN W. BRONSTON. Mr. Bronston has served as a Director since June 7,
1996. Mr. Bronston has practiced telecommunications and corporate law for the
past five (5) years as a principal with Nowalsky & Bronston LLP.
Touch Tone's Bylaws provides that any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, partnership, joint venture, trust or other enterprise,
may be indemnified by the corporation against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with such action, suitor proceeding.
California corporate law permits a corporation to indemnify officers,
directors, employees and agents for actions taken in good faith and in a manner
they reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, which they had no
reasonable cause to believe was unlawful. California corporate law also provides
that a corporation may advance expenses of defense (upon receipt of a written
undertaking to reimburse the corporation if indemnification is not appropriate)
and must reimburse a successful defendant for expenses, including attorney's
fees, actually and reasonably incurred, and permit a corporation to purchase and
maintain liability insurance for its directors and officers. California
corporate law further provides that indemnification may not be made in
connection with a proceeding by or in the right of a corporation in which a
director has been adjudged by a court of competent jurisdiction to be liable to
the corporation or that the director was adjudged liable to the corporation on
the basis that the director derived an improper personal benefit.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of Touch Tone pursuant to the foregoing provisions, or otherwise, Touch
Tone has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable.
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<PAGE>
CHANGE OF MANAGEMENT
In April 1996, Mr. Vaughan, Touch Tone's former Chairman of the Board and
Chief Executive Officer, brought to the attention of Touch Tone's auditors a
previously undisclosed letter agreement signed by Mr. Miller (Touch Tone's
former President and Director), with a significant sales agent, which provided
for a retroactive increase in the sales agent's commissions to 50% from 32%.
This agreement and its potential ramifications has subsequently been thoroughly
reviewed by Touch Tone's Board of Directors and the following actions were taken
on behalf of Touch Tone.
The Board of Directors, with the concurrence and support of Messrs. Miller
and 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 was
appointed President, Chairman of the Board and Chief Executive Officer. Mr.
Miller resigned as a Director and Officer, and Mr. Vaughan also resigned as a
Director and Officer, but continues to serve as a consultant to Touch Tone in
locating and negotiating potential future mergers and acquisitions. In
connection with their resignation, their employment agreements were terminated.
Subsequently in June 1996, Mr. Vaughan entered into an eighteen month consulting
contract with Touch Tone.
Touch Tone also obtained an updated agreement with the sales agent which
substantially reaffirmed Touch Tone's prior sales commission arrangement with
the sales agent.
EMPLOYMENT AND CONSULTING AGREEMENTS. In August 1995, Touch Tone entered
into employment agreements with Robert C. Vaughan and Jonathan Miller, former
Officers and Directors of Touch Tone. The agreements provided for base salaries
per year of $120,000 and $80,000, respectively, and options to purchase 50,000
shares of Touch Tone's Common Stock the first year and 50,000 shares the second
year at $5.00 per share. In addition, Mr. 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 Messrs. Vaughan and
Miller resigned as Officers and Directors. While they no longer receive
salaries, they did retain their option rights.
Michael J. Canney, Touch Tone's President, deemed it advisable that Mr.
Vaughan continue as a consultant to Touch Tone pursuant to an amended consulting
agreement (the "Vaughan Consulting Agreement") dated June 5,1996, and is to be
paid a monthly fee of $15,000 for a period of 18 months, together with a finders
fee for successful merger and acquisitions for which he is responsible. This
Agreement will terminate as of the Effective Time and Mr. Vaughan will enter
into a revised consulting agreement with Touch Tone. See "MANAGEMENT AND
OPERATIONS OF TOUCH TONE FOLLOWING THE MERGER - Employment and Consulting
Agreements."
Mr. Michael Canney became the new President and Chief Executive Officer in
April 1996 under an employment agreement (the "Canney Employment Agreement")
which he will receive an annual salary of $120,000 plus options for 100,000
shares of Common Stock exercisable at $4.00 per share. This Agreement will
terminate as of the Effective Time and Mr. Canney will enter into a consulting
agreement with Touch Tone. See "MANAGEMENT AND OPERATIONS OF TOUCH TONE
FOLLOWING THE MERGER - Employment and Consulting Agreements." Touch Tone also
has employment agreements with certain other employees of Touch Tone.
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<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation paid or accrued by Touch
Tone for services of Michael J. Canney, Touch Tone's President and Chief
Executive Officer, for the fiscal year ended May 31, 1996, during the ten months
ended May 31, 1995 and the fiscal year ended July 31, 1994. No Officer received
cash compensation from Touch Tone in excess of $100,000 during such fiscal
years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
All
Name Other Restricted Other
and Year (1) Salary Bonus Annual Stock Options/ LTIP Compen-
Principal ($) ($) Compen- Award(s) SARs Payouts sation
Position sation ($) ($) (#) ($) ($)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael J. Canney 1996 $20,000 $ 0 $ 0 N/A (0-) N/A $3,000
President and Chief 1995 $ 0 $ 0 $ 0 --- (0-) --- $ 0
Executive Officer 1994 $ 0 $ 0 $ 0 --- (0-) --- $ 0
</TABLE>
- -----------------------
(1) Periods presented are for the years ended May 31, 1996, the ten months
ended May 31, 1995 and the year ended July 31, 1994.
COMPENSATION OF DIRECTORS
The non-employee directors of Touch Tone will receive $250 for each meeting
they attend plus expenses. Directors may also receive options as designated by
the Board of Directors.
OPTION/SAR GRANTS TABLE
OPTIONS GRANTED. The following table sets forth the options that have been
granted to Michael J. Canney, Touch Tone's President and Chief Executive
Officer, listed in the Executive Compensation Table.
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<PAGE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS
INDIVIDUAL GRANTS
---------------------------------------------------------------------------------
% of Total
Options/SARs
Granted to
Options/SARs Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/Share) Expiration Date
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael J. Canney,
President and
Chief Executive
Officer 250,000 (1) 36% $4.00 3/2001
</TABLE>
- ----------------
(1) Of the 250,000 options, 125,000 options are currently exercisable, 50,000
become exercisable in September 1996 and 75,000 become exercisable in March
1997.
In November 1995, Touch Tone granted 60,000 options exercisable at $2.00
per share for a five year period. The options were granted to Joseph Monnig, a
long distance sales agent, to provide long distance consulting and assistance
with Touch Tone's long distance agents.
In April 1995, Touch Tone granted 15,900 options exercisable at $3.00 per
share for a five year period to certain non-affiliated persons, who have
provided short term loans to Touch Tone in the past.
In March 1996, Touch Tone granted a total of 450,000 warrants to purchase
Common Stock to Messrs. Walko, Canney and Barletta, Directors (150,000 each) of
Touch Tone. The warrants are exercisable for a five (5) year period at $4.00 per
warrant. Each Director's warrants become exercisable as follows: 25,000
commencing in March 1996; 50,000 in six (6) months; and 75,000 after one (1)
year.
In March 1996, Touch Tone granted 100,000 warrants to purchase Common Stock
to Norbert Zeelander, a member of the Audit Committee. The Warrants are
exercisable for a five (5) year period at $4.00 per warrant, pursuant to the
following schedule: 25,000 in March, 1996; 25,000 in September, 1996; and 50,000
in March, 1997.
In connection with its recent public offering, Touch Tone granted the
underwriter, Barron Chase Securities, Inc., warrants to purchase 150,000 shares
of Common Stock and 150,000 Warrants at an exercise price of $4.80. The
warrants are exercisable through May 17, 2001.
Mr. Canney did not exercise any options in the last fiscal year and all
options held by Mr. Canney have exercise prices above current market prices for
Touch Tone Common Stock.
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<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS OF TOUCH TONE
TOUCH TONE
The following table sets forth certain information regarding the beneficial
ownership of Touch Tone Common Stock as of January 24, 1997 by (i) each
director of Touch Tone, each executive officer of Touch Tone, all directors and
executive officers of Touch Tone as a group, each Arcada Designee and each
person known by Touch Tone to be the beneficial owner of more than 5% of the
Touch Tone Common Stock and (ii) the beneficial ownership of Touch Tone Common
Stock as of January 24, 1997, after giving effect to the issuance of 12,500,000
shares of Touch Tone Common Stock in the Merger (without giving effect to
conversion of the 1.5 million shares of Touch Tone Series B Preferred Stock
issued in the Merger).
BENEFICIAL OWNERSHIP
OF TOUCH TONE COMMON STOCK (2)
------------------------------------------------------
NAME AFTER GIVING
AND ADDRESS OF SHARES PERCENT EFFECT
BENEFICIAL OWNER TO THE MERGER
(1)
Michael J. Canney 75,000(3) 2.1% *
Jonathan P. Miller 260,000(4) 7.2 1.6
Janeece Miller 260,000(5) 7.2 1.6
Robert C. Vaughan 210,000(6) 5.8 1.3
Stephen P. Shearin 114,516 3.2 *
Matthew J. Barletta 75,000(7) 2.1 *
Norman B. Walko 75,000(8) 2.1 *
Benjamin W. Bronston 75,000(9) 2.1 *
All Executive Officers
and Directors as a group
(five persons) 414,516 11.4 2.6
- -----------------------
* Less than one percent (1%).
(1) All of the individuals listed above have their principal place of business
at 4110 N. Scottsdale Road, Suite 170, Scottsdale, Arizona 85251.
(2) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934. Unless otherwise stated below, each such person has sole voting and
investment power with respect to all such shares. Under Rule 13d-3(d),
shares not outstanding which are subject to options, warrants, rights or
conversion privileges exercisable within 60 days are deemed outstanding for
the purpose of calculating the number and percentage owned by such person,
but are not deemed outstanding for the purpose of calculating the number
and percentage owned by each other person listed.
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<PAGE>
(3) Represents 75,000 options currently exercisable.
(4) Includes 100,000 shares owned directly by Mr. Miller and 100,000 owned
indirectly by virtue of his wife's ownership of said shares and includes
50,000 options to purchase shares of the Company's Common Stock owned by
Mr. Miller and 10,000 options currently exercisable by his wife, Janeece
Miller.
(5) Includes 100,000 shares owned by Ms. Miller and 100,000 shares owned
indirectly by virtue of her husband's ownership of said shares and 10,000
options currently exercisable and 50,000 options currently exercisable
owned by her husband, Jonathan Miller.
(6) Includes 75,000 options currently exercisable.
(7) Represents 75,000 options currently exercisable.
(8) Represents 75,000 options currently exercisable.
(9) Represents 75,000 options currently exercisable.
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<PAGE>
ARCADA MANAGEMENT
The following table sets forth, with respect to each person who is
currently a director or executive officer of Arcada, the person's age and the
person's positions and offices with Arcada. Individual background information
concerning each of such persons follow the table.
NAME AGE POSITION WITH ARCADA
---- --- --------------------
Robert W. Leppaluoto (1) 56 Chairman of the Board and Director
Frank J. Bonadio (1) 45 President, Chief Financial Officer and
Director
Keith Leppaluoto (1) 58 Director
- -------------------
- -------------------
(1) Will become a director of Touch Tone at the Effective Time.
The directors of Arcada are elected to hold office until the next annual
meeting of shareholders and until their respective successors have been elected
and qualified. Offices of Arcada are elected by the Board of Directors and hold
office until their successors are elected and qualified.
FRANK J. BONADIO. Mr. Bonadio has served as a Director of Arcada since
August, 1993 and as President since May, 1996. Mr. Bonadio served as Secretary
and Treasurer of Arcada from July, 1994 until his appointment as President. Mr.
Bonadio has also served as Chief Financial Officer of Arcada from 1991 to
present and as Vice President of Operations and Controller from 1994 to 1996.
KEITH LEPPALUOTO. Mr. Leppaluoto has served as a Director of Arcada since
May, 1996. Mr. Leppaluoto also served as a Director of Arcada from August, 1993
until January 1, 1996. Mr. Leppaluoto has also been Vice President of Leppaluoto
Offshore Marine, a private maritime charter company, since 1990. Mr.
Leppaluoto's brother is Robert Leppaluoto, Director, the Chairman and a
shareholder of Arcada.
ROBERT LEPPALUOTO. Mr. Leppaluoto has served as a Director of Arcada since
January, 1996 and its Chairman since September, 1996. Mr. Leppaluoto also served
as a Director of Arcada from August, 1993 to July, 1994. Mr. Leppaluoto has
also been President of Leppaluoto Offshore Marine, a private maritime charter
company, since 1975. Mr. Leppaluoto's brother is Keith Leppaluoto, a Director
and shareholder of Arcada.
INDEMNIFICATION OF ARCADA OFFICERS AND DIRECTORS
Arcada's Articles of Incorporation provide that Arcada shall indemnify its
officers and directors to the fullest extent required or permitted by the WBCA,
as the same may be amended and supplemented from time to time, except that it is
will not indemnify directors for (i) intentional misconduct or a knowing
violation of law; (ii) unlawful payment of dividends under RCW 23B.08.310 or
(iii) any transaction in which the director personally received a benefit to
which he or she was not legally entitled. Any repeal or modification of such
provision of the Articles of Incorporation by Arcada's stockholders shall be
prospective only and shall not adversely affect any right or protection of a
director of Arcada existing at the time of such repeal or modification.
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<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS OF ARCADA
The following table sets forth certain information regarding the
beneficial ownership of Arcada Common Stock as of the Effective Date by (i)
each director of Arcada, each executive officer of Arcada, all directors and
executive officers of Arcada as a group and each person known by Arcada to be
the beneficial owner of more than 5% of the Arcada Common Stock and (ii) the
beneficial ownership of Touch Tone Common Stock after giving effect to the
Merger for each of the persons referred to in clause (i) above (without
giving effect to (a) the conversion of the 1.5 million shares of Series B
Preferred Stock issued in the Merger or (b) the issuance by Touch Tone of an
aggregate of 450,000 shares of Touch Tone (which shares were to be issued to
Arcada Shareholders in the Merger) directly to former employees in full
satisfaction of certain of Arcada's obligations to such employees). See
"BUSINESS OF ARCADA - Certain Transactions").
BENEFICIAL OWNERSHIP
NAME BENEFICIAL OWNERSHIP OF
AND ADDRESS OF TOUCH TONE COMMON STOCK
OF BENEFICIAL OWNER(1) ARCADA COMMON STOCK AFTER GIVING EFFECT
- ------------------------ ------------------------- TO THE MERGER
--------------------------
SHARES PERCENT SHARES PERCENT
----------- ----------- --------- -----------
Keith Leppaluoto 20,000 40% 5,000,000 31%
Robert W. Leppaluoto 20,000 40% 5,000,000 31%
Frank J. Bonadio 9,000 18% 2,250,000 14%
All Directors & executive
officers of Arcada as a
group (3 persons) 49,000 98% 12,250,000 76%
- ------------------------
(1) All of the individuals listed below have their principal place of business
at 2001 Sixth Avenue, Suite 3210, Seattle, Washington 98121.
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<PAGE>
MANAGEMENT AND OPERATIONS OF TOUCH TONE FOLLOWING THE MERGER
OPERATIONS
The Merger of Touch Tone and Arcada will combine the two companies' current
operations. After the Effective Time, Touch Tone will integrate the sales
functions of the combined companies basing them primarily in Arcada's current
offices in Seattle, Washington, but maintaining a marketing and sales operation
from Touch Tone's offices in Scottsdale, Arizona. It is currently intended that
after the Effective Time, Touch Tone will market and sell Arcada's long distance
and cellular products and will adopt Arcada's customer service and other
approaches throughout their system. The combined company will also continue to
focus on the Internet access product developed by Touch Tone prior to the Merger
and will use its sales force, as supplemented by independent agents, to market
that service. After the Effective Time, Touch Tone will adopt Arcada's fiscal
year end of December 31 and the principal office of Touch Tone will be at
Arcada's offices at 2001 Sixth Avenue, Suite 3210, Seattle, Washington 98121.
After the Merger, Arcada will likely seek to pursue acquisitions and
strategic combinations in the telecommunications industry. Such transactions
could require debt or equity financing, resulting in potential dilution to
existing Touch Tone Shareholders. There can be no assurance, however, that such
transactions will be pursued, or the terms under which such transactions will be
consummated.
MANAGEMENT
BOARD OF DIRECTORS. The following table sets forth, with respect to each
person who will be a director or executive officer of Touch Tone at the
Effective Time, the persons' age and the person's positions and offices with
Touch Tone. Individuals background information concerning each of such persons
is set forth under "Touch Tone Management" or "Arcada Management "as the case
may be.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH TOUCH TONE PREVIOUS POSITION
- ---- --- ------------------------ -----------------
<S> <C> <C> <C>
Frank J. Bonadio 45 President and Chief Executive Officer, President and Director of
Director Arcada
Robert W. Leppaluoto 56 Chairman of the Board and Director Chairman of the Board
and Director of Arcada
Keith Leppaluoto 58 Director Director of Arcada
Michael J. Canney 65 Director Chairman of the Board,
President, Chief
Executive Officer and
Director of Touch Tone
</TABLE>
In addition, Arcada has the right to name one additional Director to the
Touch Tone Board, effective at the Effective Time. Arcada has not yet designated
this Director.
The directors of Touch Tone set forth above will hold office until the next
annual meeting of shareholders of Touch Tone and until their respective
successors have been elected and qualified. Officers of Touch Tone are elected
by the Board of Directors and hold office until their successors are elected and
qualified.
After giving effect to the Reincorporation Merger, Touch Tone's Charter
will provide that any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by reason of the fact
that he is or was a director, officer, employee or agent of the Touch Tone may
be indemnified by Touch Tone against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in
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<PAGE>
connection with such action, suitor proceeding. See "REINCORPORATION OF TOUCH
TONE IN THE STATE OF WASHINGTON - Indemnification."
After the Effective Time, Touch Tone will enter into indemnification
agreements with certain of its directors and executive officers effective as of
the Effective Time. These agreements provide that the directors and executive
officers will be indemnified to the fullest extent permitted by Washington law
against all expenses (including attorneys' fees), judgments, fines, penalties,
taxes and settlement amounts paid or incurred by them in any action or
proceeding, including any action by or in the right of Touch Tone or any of its
subsidiaries or affiliates, on account of their services as directors, officers,
employees, fiduciaries or agents of Touch Tone or any of its subsidiaries or
affiliates, and this service at the request of Touch Tone or any of its
subsidiaries or affiliates as directors, officers, employees, fiduciaries or
agents of another corporation, partnership, joint venture, trust, employer
benefit plan or other enterprise. In addition it is contemplated that Touch Tone
will obtain liability insurance for directors and officers covering certain
losses arising from claims or charges made against them while acting in their
capacities as directors or officers of Touch Tone.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers and controlling persons of Touch Tone
pursuant to the foregoing provisions, or otherwise, Touch Tone has been advised
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable.
MANAGEMENT. In connection with the Merger, all of the executive officers of
Touch Tone will resign, effective as of the Effective Time. Mr. Bonadio will
replace Mr. Canney as President and Chief Executive Officer of Touch Tone and
Mr. Canney will become a consultant to Touch Tone.
EMPLOYMENT AND CONSULTING AGREEMENTS
BONADIO EMPLOYMENT AGREEMENT. In connection with the Merger, Touch Tone and
Frank Bonadio, a director and the President and Chief Executive Officer of
Arcada, have entered into an Employment Agreement (the "Bonadio Employment
Agreement"). Providing that commencing on the Effective Date, until December 31,
1999, Mr. Bonadio will serve as President and Chief Executive Officer Of Touch
Tone. Mr. Bonadio will receive $150,000 per annum, together with options to
purchase an aggregate of 100,000 shares of Touch Tone Common Stock (the "Bonadio
Options"). The Bonadio Options are to be granted at the first meeting of the
Compensation Committee of the Touch Tone Board after the Effective Time and will
have an exercise price equal to the fair market value of Touch Tone Common Stock
on the date of grant. The Bonadio Options are vesting ratably on a three-year
period commencing on the first anniversary of the date of grant.
CANNEY CONSULTING AGREEMENT. In connection with the proposed Merger and in
settlement of certain obligations owed to Mr. Canney under his current
employment agreement with Touch Tone, in October, 1996, Touch Tone and Michael
Canney, a director and the President and Chief Executive Officer of Touch Tone,
entered into a Consulting Agreement (the "Canney Consulting Agreement"). The
Canney Consulting Agreement provides that, for a one-year period commencing on
the Effective Date, Canney will resign as President and Chief Executive Officer
and will become a consultant to Touch Tone. Mr. Canney will receive $500 for
each eight-hour day of consulting services performed. In addition, on the
Effective Date, the Canney Consulting Agreement provides that Mr. Canney will
receive an option to purchase up to 125,000 shares of Touch Tone Common Stock,
at an exercise price of $.01 per share, at any time during a three-year period
on the Effective Date (the "Canney Option"). The Canney Consulting Agreement
provides that Touch Tone will in certain circumstances use its best
efforts to register under the 1933 Act shares of Touch Tone Common Stock
obtained by Canney pursuant to the exercise of the Canney Option.
VAUGHAN CONSULTING AGREEMENT. Commencing on the Effective Date, Robert C.
Vaughan, a consultant to Touch Tone, will enter into a consulting agreement with
Touch Tone providing for the payment of a commission to Mr. Vaughan of $150,000
in cash and 250,000 shares of Touch Tone Common Stock in connection with the
Merger. The consulting agreement provides that Mr. Vaughan will serve as
consultant to Touch Tone for a period of one year following the Effective Time
at an annual salary of $120,000. Mr. Vaughan will also receive commissions
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<PAGE>
for introducing Touch Tone to future merger and acquisition candidates, which
commissions will be paid on the sliding scale formula based on the dollar
value of such mergers or acquisitions. The Vaughan Consulting Agreement
provdies that Touch Tone will use its best efforts to register under the 1933
Act the shares of Touch Tone Common Stock issued to Mr. Vaughn pursuant to
his consulting agreement.
ROBERT LEPPALUOTO AND KEITH LEPPALUOTO CONSULTING AGREEMENTS. Commencing on
the Effective Date, Robert Leppaluoto and Keith Leppaluoto, Arcada Shareholders
and Directors, will be named Directors of Touch Tone. In addition, each will
enter into a consulting agreement with Touch Tone providing for, among other
things, an annual consulting fee of $60,000 per annum. See "Interests of Certain
Persons in the Merger."
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<PAGE>
REINCORPORATION OF TOUCH TONE IN WASHINGTON
SUMMARY
For the reasons set forth below, the Touch Tone Board believes that the
best interests of Touch Tone and Touch Tone Shareholders will be served by
changing Touch Tone's state of incorporation from California to the State of
Washington (the "Reincorporation"). The Board of Directors has approved the
Reincorporation, which would be accomplished by merging Touch Tone with and into
its newly formed Washington subsidiary, Touch Tone - Washington, Inc.("Touch
Tone - Washington"). Upon effectiveness of the merger ("Reincorporation
Merger"), Touch Tone - Washington's name will be changed to Touch Tone America,
Inc., the name under which Touch Tone has operated since its initial
incorporation. The Touch Tone Shareholders will be asked to approve the
Reincorporation Merger at the Special Meeting.
PRINCIPAL REASONS FOR THE PROPOSED REINCORPORATION
Through the Reincorporation, Touch Tone intends to further its
identification with the state in which its principal subsidiary, Arcada, will be
located after the Merger and where over 99% of its employees will be located
after giving effect to the Merger. In addition, as a consequence of the
Washington Legislature's adoption of a comprehensive revision of the Washington
Business Corporation Act, Touch Tone believes that Washington law is clearer and
better addresses Touch Tone's concerns with respect to limitation on director
liability and indemnification of officers and directors than does California
law. The Board of Directors views these issues as extremely important to
recruiting and retaining directors and officers of the highest caliber who are
essential to the continuing successful operation of Touch Tone. Although Touch
Tone has not incurred any recent problems in recruiting or retaining directors
and officers, the cost and availability of adequate directors and officers
insurance and the uncertainties relating to indemnification have been a
recurring concern of the Board.
Another factor in the Board's recommendation to reincorporate Washington
was that Touch Tone's franchise fees will be substantially less in Washington
than in California.
TOUCH TONE'S REINCORPORATION IS A CONDITION TO ARCADA'S OBLIGATION TO
CONSUMMATE THE MERGER.
PLAN OF REINCORPORATION MERGER
THE FOLLOWING IS A SUMMARY OF CERTAIN PROVISIONS OF THE REINCORPORATION
MERGER AGREEMENT WHICH APPEARS AS APPENDIX D TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING
SUMMARY INCLUDES THE MATERIAL TERMS OF SUCH AGREEMENT BUT IS NOT NECESSARILY
COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE REINCORPORATION
MERGER AGREEMENT.
Touch Tone will be merged with and into Touch Tone - Washington (the
"Reincorporation Merger") pursuant to the terms of the proposed Agreement and
Plan of Merger (the "Reincorporation Merger Agreement"), a copy of which is
attached as Appendix D to this Joint Proxy Statement/Prospectus). Upon the
completion of the Reincorporation Merger, the owner of each outstanding share of
Touch Tone Common Stock will automatically own one share of Touch Tone
- -Washington common stock. Each outstanding certificate representing a share or
shares of Touch Tone Common Stock will continue to represent the same number of
shares in Touch Tone - Washington (i.e., a certificate representing one share of
Touch Tone Common Stock will then equal one share of Touch Tone -Washington
common stock). THUS, IT WILL NOT BE NECESSARY FOR SHAREHOLDERS OF TOUCH TONE TO
EXCHANGE THEIR EXISTING STOCK CERTIFICATES. The common stock of Touch Tone will
continue to be traded on the over-the-counter market and reported on the Nasdaq
SmallCap Market under the same TONE symbol subsequent to the Reincorporation
Merger.
The Touch Tone - Washington Articles of Incorporation and Bylaws will be
the Articles of Incorporation and Bylaws of the surviving corporation, except
that, upon the effectiveness of the merger, Touch Tone -
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<PAGE>
Washington's name will be changed to Touch Tone America, Inc. The Articles of
Incorporation and Bylaws of Touch Tone - Washington are attached hereto as
Appendix E.
EFFECT OF REINCORPORATION AND REINCORPORATION MERGER
The Reincorporation and the Reincorporation Merger will effect a change in
the legal domicile of Touch Tone and other changes of a legal nature, the most
significant of which are described in this Joint Proxy Statement/Prospectus.
However, the Reincorporation and the Reincorporation Merger will not result in
any change in the name, business, management, location of Touch Tone's assets,
liabilities, net worth or accounting practices. Moreover, as noted above, [THE
SHARES OF TOUCH TONE'S COMMON STOCK WILL CONTINUE TO BE TRADED ON THE
OVER-THE-COUNTER MARKET AND REPORTED ON THE NASDAQ SMALLCAP MARKET. THE
REINCORPORATION MERGER WILL NOT GIVE RISE TO ANY APPRAISAL OR DISSENTERS'
RIGHTS.]
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<PAGE>
DESCRIPTION OF CAPITAL STOCK OF TOUCH TONE
THE FOLLOWING STATEMENTS ARE BRIEF SUMMARIES OF CERTAIN PROVISIONS RELATING
TO TOUCH TONE'S CAPITAL STOCK AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE
TO THE PROVISIONS OF TOUCH TONE'S CERTIFICATE OF INCORPORATION, AS AMENDED (THE
"TOUCH TONE CHARTER"), AND BYLAWS (THE "TOUCH TONE BYLAWS"), WHICH ARE INCLUDED
AS EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS JOINT PROXY
STATEMENT/PROSPECTUS IS A PART.
As of December 15, 1996, the authorized capital stock of the Touch Tone
consists of 100,000,000 shares of Touch Tone Common Stock, no par value per
share, and 10,000,000 shares of Preferred Stock, no par value.
COMMON STOCK
All outstanding shares of Touch Tone Common Stock are duly authorized,
validly issued, fully paid and nonassessable. Holders of Common Stock are
entitled to receive dividends, when and if declared by the Board of Directors,
out of funds legally available therefore and to share ratably in the net assets
of the Company upon liquidation. Holders of Touch Tone Common Stock do not have
preemptive or other rights to subscribe for additional shares, nor are there any
redemption or sinking fund provisions associated with the Touch Tone Common
Stock. As of November 22, 1996, there are currently 3,320,800 shares of Touch
Tone Common Stock outstanding owned of record by approximately 700 persons
and/or entities.
Holders of Touch Tone Common Stock are entitled to one vote per share on
all matters requiring a vote of shareholders. Since the Touch Tone Common Stock
does not have cumulative voting rights in electing directors, the holders of
more than a majority of the outstanding shares of Touch Tone Common Stock voting
for the election of directors can elect all of the directors whose terms expire
that year, if they choose to do so.
The Touch Tone Common Stock was approved for listing on the Nasdaq SmallCap
Market effective May 17, 1996, and trades under the symbol "TONE." See "RISK
FACTORS - Continued Nasdaq Listing."
PREFERRED STOCK
The Touch Tone Board is empowered, without approval of the Touch Tone'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 Touch Tone
Board 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 Touch Tone
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 Touch Tone Common Stock. The
issuance of shares of Preferred Stock could have the effect of delaying or
preventing a change in control of Touch Tone. Except as set forth below, no
shares of Preferred Stock will be outstanding the Effective Time, and the Touch
Tone Board has no current plans to issue any additional shares of Preferred
Stock. The Company has agreed with the underwriter of its initial public
offering (the "Representative") not to issue any additional preferred stock for
a three year period without the Representative's written consent.
The Board of Directors has authorized the issuance of 1.5 million shares
of Series B Preferred Stock in the Merger. The Series B Preferred Stock
provides for a cumulative 8% dividend, payable annually. The Series B
Preferred Stock may be redeemed by Touch Tone for $1.00 per share or each
share may be converted at the election of Touch Tone or the holder into 0.40
shares of Touch Tone Common Stock, in either case at any time prior to the
third anniversary of the date of its issuance. If it has not been earlier
converted or redeemed, Touch Tone must either redeem or convert the Series B
Preferred Stock on the third anniversary of the date of its issuance. The
Series B Preferred Stock is non-voting.
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In addition, in connection with the Merger, the Touch Tone Board
has approved the issuance of an aggregate of 200,000 additional shares of
Series B Preferred Stock to two Arcada Shareholders in exchange for certain
debt obligations of Arcada to such individuals. See "Interests of Certain
Persons in the Merger."
WARRANTS
The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Warrant Agreement between the Company and
American Securities Transfer, Inc. (the "Warrant Agent").
OUTSTANDING. As of the Record Date, there were Warrants to purchase
1,725,000 shares of Touch Tone Common Stock outstanding.
EXERCISE PRICE AND TERMS. Each Warrant entitles the holder thereof to
purchase, at any time for three years beginning May 17, 1996, one share of
Common Stock at a price of $4.00 per share, subject to adjustment in accordance
with the anti-dilution and other provisions referred to below.
The holder of any Warrant may exercise such Warrant by surrendering the
certificate representing the Warrant to the Warrant Agent, with the subscription
form on the reverse side of such certificate properly completed and executed,
together with payment of the exercise price. The Warrants may be exercised at
any time in whole or in part at the applicable exercise price until expiration
of the Warrants on May 17, 1999. No fractional shares will be issued upon the
exercise of the Warrants.
REDEMPTION. The Warrants are subject to redemption by Touch Tone at $.25
per Warrant on 30 days' written notice if the closing bid or trading price of
Touch Tone's Common Stock, as applicable, over 30 consecutive days ending within
10 days of the notice of redemption averages at least $8.00. Touch Tone is
required to maintain an effective registration statement with respect to the
Common Stock underlying the Warrants at the time of redemption of the Warrants.
In the event Touch Tone exercises the right to redeem the Warrants, such
Warrants will be exercisable until the close of business on the date for
redemption fixed in such notice. If any Warrant called for redemption is not
exercised by such time, it will cease to be exercisable and the holder will be
entitled only to the redemption price.
The Company has authorized and reserved for issuance a sufficient number of
shares of Common Stock to accommodate the exercise of all Warrants. All shares
of Touch Tone Common Stock to be issued upon exercise of the Warrants, if
exercised in accordance with their terms, will be validly issued, fully paid and
non-assessable.
ADJUSTMENTS. The exercise price and the number of shares of Touch Tone
Common Stock purchasable upon exercise of the Warrants are subject to adjustment
upon the occurrence of certain events, including stock dividends, stock splits,
combinations or reclassification of the Touch Tone Common Stock, or sale by
Touch Tone of shares of Touch Tone's Common Stock (or other securities
convertible into or exercisable for Touch Tone
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Common Stock).Additionally, an adjustment would be made in the case of a
reclassification or exchange of Touch Tone Common Stock, consolidation or merger
of Touch Tone with or into another corporation, or sale of all or substantially
all of the assets of Touch Tone, in order to enable Warrant holders to acquire
the kind and number of shares of stock or other securities or property
receivable in such event by a holder of that number of shares of Touch Tone
Common Stock that would have been issued upon exercise of the Warrant
immediately prior to such event. No adjustments will be made until the
cumulative adjustments in the exercise price per share amount to $.05 or more.
No adjustment to the exercise price of the shares subject to the Warrants will
be made for dividends (other than stock dividends), if any, paid on the Touch
Tone Common Stock or pursuant to any employee benefit plans of the Company, or
upon exercise of the Warrants, the Representative's Warrant or any other options
or warrants outstanding as of the date of this Prospectus.
TRANSFER, EXCHANGE AND EXERCISE. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange or exercise at any
time prior to their expiration date, at which time the Warrants become wholly
void and of no value. If a market for the Warrants develops, the holder may sell
the Warrants instead of exercising them. There can be no assurance, however,
that a market for the Warrants will develop or continue. If Touch Tone is
unable to qualify for sale in particular states the Touch Tone Common Stock
underlying the Warrants, holders of the Warrants residing in such states and
desiring to exercise the Warrants will have no choice but to sell such Warrants
or allow them to expire.
WARRANT HOLDER NOT A SHAREHOLDER. The Warrants do not confer upon holders
any voting or any other rights as shareholders of Touch Tone.
The Warrants were approved for listing on the Nasdaq SmallCap Market-SM,
effective May 17, 1996 and trade under the symbol "TONEW." See "RISK FACTORS -
Continued Nasdaq Listing."
TRANSFER AGENT
The transfer agent and registrar for the Company's Common Stock and the
Warrants is American Securities Transfer, Inc., 1825 Lawrence Street, Suite 444,
Denver, Colorado 80202. Its telephone number is (303) 234-5300.
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DESCRIPTION OF CAPITAL STOCK OF ARCADA
As of the date of this Prospectus, the authorized capital stock of Arcada
consists of 50,000 shares of Common Stock, no par value per share, all of which
will be outstanding on the Effective Date.
All outstanding shares of Common Stock are duly authorized, validly issued,
fully paid and nonassessable. Holders of Arcada Common Stock are entitled to
receive dividends, when and if declared by the Arcada Board of Directors, out of
funds legally available therefore and to share ratably in the net assets of
Arcada upon liquidation. Holders of Arcada Common Stock do not have preemptive
or other rights to subscribe for additional shares, nor are there any redemption
or sinking fund provisions associated with the Arcada Common Stock.
Holders of Common Stock are entitled to one vote per share on all matters
requiring a vote of shareholders. Since the Common Stock does not have
cumulative voting rights in electing directors, the holders of more than a
majority of the outstanding shares of Arcada Common Stock voting for the
election of directors can elect all of the directors whose terms expire that
year, if they choose to do so.
There is no trading market for the Arcada Common Stock.
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COMPARISON OF RIGHTS OF HOLDERS OF TOUCH TONE COMMON STOCK
AND TOUCH TONE - WASHINGTON COMMON STOCK
THE CHARTER AND BYLAWS OF TOUCH TONE - WASHINGTON ARE SUBSTANTIALLY THE
SAME AS THOSE OF ARCADA AND, ACCORDINGLY, ASSUMING THE REINCORPORATION MERGER IS
CONSUMMATED, THE RIGHTS OF HOLDER OF ARCADA COMMON STOCK WILL NOT BE
SUBSTANTIALLY DIFFERENT AFTER THE MERGER.
GENERAL
If the Merger is consummated, and assuming the Reincorporation Merger is
consummated, holders of Touch Tone Common Stock will become shareholders of
Touch Tone - Washington, and the rights of such former Touch Tone shareholders
will thereafter be governed by the Touch Tone - Washington Charter, the Touch
Tone - Washington Bylaws and the laws of the state of Washington, including the
Washington Business Corporation Act ("WBCA"). The following summary, which does
not purport to be a complete statement of the differences between the rights of
the shareholders of Touch Tone and the shareholders of Touch Tone - Washington,
sets forth certain differences between the Touch Tone Charter and the Touch Tone
- - Washington Charter and the Touch Tone bylaws and the Touch Tone - Washington
bylaws. This summary is qualified in its entirety by reference to the full text
of each of such documents and the applicable corporate statutes.
VOTING RIGHTS
The WBCA provides that, unless otherwise provided in the charter of a
corporation or by applicable law, each shareholder is entitled to one vote for
each share of capital stock held by such shareholder.
The Touch Tone - Washington Bylaws provide that each holder of Arcada
Common Stock is entitled to one vote for each share held by such holder on each
matter upon which holders of Touch Tone - Washington Common Stock are entitled
or afforded the opportunity to vote. Except as otherwise provided in the Touch
Tone - Washington Charter, the Touch Tone - Washington Bylaws or the WBCA,
corporate action taken by vote of shareholders must be authorized by the vote of
the holders of a majority of the outstanding shares of all classes of stock
entitled to vote thereon present in person or by proxy at the meeting.
The Touch Tone Charter provides that each shareholder of Touch Tone Common
Stock is entitled to one vote for every share of such stock held by such
shareholder. Except as otherwise provided in the Touch Tone Charter, the Touch
Tone Bylaws or the CCC, whenever any corporate action is to be taken by vote of
the shareholders of Touch Tone, it must be authorized by a majority of the votes
cast at a meeting of shareholders by the holders of shares entitled to vote
thereon.
NUMBER OF DIRECTORS
The number of directors of a Washington and California corporation is fixed
by, or in the manner provided in, the charter or bylaws of such corporation. The
Touch Tone - Washington Charter and Bylaws provide that the number of directors
may be fixed from time to time by resolution of the Board of Directors of Touch
Tone - Washington adopted by a majority of the board, but in no case may the
Touch Tone - Washington Board consist of fewer than two members. The number of
directors of Touch Tone - Washington is currently fixed at five.
The Touch Tone Bylaws provide that the number of directors will be
determined by the Board of Directors of Touch Tone, but in no case may the board
consist of fewer than three unless such change is approved in the manner
provided in the Touch Tone Bylaws. The number of directors of Touch Tone is
currently fixed at five. Directors of Touch Tone are elected at each annual
meeting of shareholders or at a special meeting of the shareholders.
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REMOVAL OF DIRECTORS
Both the WBCA and the CCC allow the shareholders to remove a director, with
or without cause, at any meeting of shareholders called for such purpose,
provided that the charter or bylaws so allow. They further provide that any
director may be removed, with or without cause, by a majority of the shares then
entitled to vote at an election of directors.
The Touch Tone - Washington Bylaws provide that any director may be removed
from office, with or without, by the affirmative vote of the holders of at least
a majority of the total votes of all shares of stock entitled to vote in an
election of directors. The Touch Tone Bylaws provide that any director maybe
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at a meeting of shareholders.
CALL OF SPECIAL SHAREHOLDER MEETINGS
Under the WBCA and CCC, special meetings of shareholders may be called by
the Board of Directors or by such other person or persons authorized to do so by
the corporation's Charter or bylaws.
The Touch Tone - Washington Bylaws provide that special meetings of the
shareholders may be called by the Chairman of the Board, the President or the
Board of Directors of Touch Tone - Washington and must be called at the request
of the holders of 10% or more of the issued and outstanding stock entitled to
vote at the meeting. The Touch Tone Bylaws provide that special meetings of the
shareholders may be called by the President or by the Touch Tone Board of
Directors, and must be called by the President at the request of the holders of
10% or more of the issued and outstanding stock entitled to vote at the meeting.
SHAREHOLDERS' ACTION WITHOUT A MEETING
The WBCA provides that any action required by the WBCA to be taken at any
annual or special meeting of shareholders, or any action which may be taken at
any annual or special meeting of shareholders, may be taken without a vote, if a
consent or consents in writing, setting forth the action so taken, shall have
been signed by the holders of all shares entitled to vote on such action. The
CCC provides that, unless the articles of incorporation provide otherwise,
shareholders may take any action without a meeting by written consent signed by
all of the shareholders entitled to vote thereon.
Touch Tone - Washington's Bylaws and Touch Tone's Bylaws each provide that
any action that may be taken at an annual or special meeting may be taken
without a meeting only by written unanimous consent of the shareholders.
AMENDMENTS TO CHARTER
Under the WBCA and the CCC, a corporation generally can amend its charter
in any respect; provided that the amendment contains only provisions which would
have been required or permitted in the original Charter. The WBCA provides that
an amendment may be authorized by the adoption of such amendment by the Board of
Directors followed by a vote of at least two-thirds of the corporation's
outstanding shares entitled to vote therefor. The WBCA does allow for the
articles of incorporation to reduce (to not less than a majority) or increase
this two-thirds vote requirement, but the Touch Tone - Washington charter does
not so provide. The CCC provides that an amendment may be authorized by the
adoption of a resolution setting forth the amendment by the Board of Directors
followed by a majority vote of shares entitled to vote thereon.
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PREEMPTIVE RIGHTS
Under the WBCA, shareholders of a corporation have preemptive rights to
acquire additional, unissued, or treasury shares of the corporation, or
securities of the corporation, except to the extent limited by the articles of
incorporation. The CCC does not provide for preemptive rights.
The Touch Tone - Washington Charter and the Touch Tone Charter state that
no shareholder shall have preemptive rights.
LIMITATIONS ON DIRECTORS' LIABILITY
The WBCA and the CCC permit a corporation to include a provision in its
charter eliminating or limiting the personal liability of a director to the
corporation or its shareholders for monetary damages for breach of the
director's fiduciary duty, subject to certain limitations. The Touch Tone
- -Washington Charter and the Touch Tone Charter each include a provision which
eliminates personal liability of directors to the maximum extent permitted by
law.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The WBCA and the CCC permit a corporation to indemnify officers, directors,
employees and agents for actions taken in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, which they had not
reasonable cause to believe was unlawful. The termination of any action, suitor
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not meet the standard of conduct required by the Section. The
WBCA and CCC also provide that a corporation may advance expenses of defense
(upon receipt of a written undertaking to reimburse the corporation if
indemnification is not appropriate) and must reimburse a successful defendant
for expenses, including attorney's fees, actually and reasonably incurred, and
permit a corporation to purchase and maintain liability insurance for its
directors and officers. The WBCA and CCC further provide that indemnification
may not be made in connection with a proceeding by or in the right of a
corporation in which a director has been adjudged by a court of competent
jurisdiction to be liable to the corporation on the basis that the director
derived an improper personal benefit.
The Touch Tone Charter provides that any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, partnership, joint venture, trust or other enterprise, maybe
indemnified by the corporation against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding.
The Touch Tone - Washington Charter provides for indemnification of
officers, directors, employees and agents to the fullest extent permissible
under the WBCA.
DISSENTERS' RIGHTS
The WBCA set forth the requirements pursuant to which shareholders may
exercise their dissenters' rights. The WBCA generally entitles a shareholder to
exercise appraisal rights upon a merger or share exchange for which shareholder
approval is required unless (i) the corporation is on a national securities
exchange (not Nasdaq) or the shares are held of record by at least 2,000 holders
and (ii) the shareholders receive only the shares of the surviving corporation
listed on a national securities exchange or the shares will be held of record by
at least 2,000 holders, or cash in lieu of fractional shares. By exercising
dissenters' rights, any such shareholder would have the fair value of his or her
shares of Arcada Common Stock determined by a court and paid to him or her in
cash.
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As holders of Arcada Common Stock will receive (i) Touch Tone Common Stock,
which is listed on Nasdaq, but not on a national securities exchange; and (ii)
cash they are entitled to appraisal rights under the TBCA. see "THE MERGER -
Dissenters' Rights."
The CCC provide that dissenters' rights shall be available to shareholders
IN any merger if shareholder approval is required, certain parent/subsidiary
mergers, certain share exchanges, upon the sale, lease, exchange or other
disposition of all, or substantially all, or the corporation for which a
shareholders' vote is required, amendments to the articles of incorporation that
materially and adversely affects rights in respect of shares, such as altering
or abolishing a preferential right of the shares, creating, altering or
abolishing a right in respect of redemption of the shares.
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EXPERTS
The consolidated financial statements of Touch Tone and the financial
statements of GetNet have been audited by Hein + Associates LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein, and are included in reliance upon such
reports given upon the authority of said firm as experts in auditing and
accounting.
The combined financial statements of Arcada and affiliates have been
audited by BDO Seidman, LLP, independent certified public accountants, to the
extent and for the periods set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of said
firm as experts in auditing and accounting.
Representatives of Hein + Associates LLP and BDO Seidman, LLP are expected
to be present at the Touch Tone and Arcada Special Meetings, respectively, where
they will have the opportunity to make a statement if they desire to do so and
will be available to respond to appropriate questions.
LEGAL MATTERS
The legality of the Touch Tone Common Stock and Series B Preferred Stock
being offered hereby is being passed upon for Touch Tone by John B. Wills,
Esq.
Cairncross & Hempelmann, P.S., which has provided legal advice to
Arcada and which anticipates providing legal advice to Touch Tone after the
Merger, has agreed with Arcada to convert certain amounts owed for such
services to date into warrants to purchase Touch Tone Common Stock after the
Effective Date, subject to the approval of the Touch Tone Board of Directors
following the Merger.
OTHER INFORMATION AND STOCKHOLDER PROPOSALS
The management of Touch Tone and Arcada know of no other matters that may
properly be, or which are likely to be, brought before the Touch Tone and Arcada
Special Meetings. However, if any other matters are properly brought before such
Touch Tone and Arcada Special Meetings, the persons named in the enclosed proxy
or their substitutes will vote the proxies in accordance with the
recommendations of management.
In order to be considered for inclusion in the proxy statement for the next
annual meeting of stockholders of Touch Tone, any stockholder proposal intended
to be presented at the meeting must have been received by Touch Tone on or
before December 15, 1997.
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TOUCH TONE AMERICA, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Page No.
1. UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
a. Introduction F-3
b. Pro Forma Condensed Balance Sheet F-5
c. Pro Forma Interim Condensed Statement of Operations F-6
d. Pro Forma Fiscal Condensed Statement of Operations F-7
e. Notes to Pro Forma Financial Information F-8
2. TOUCH TONE AMERICA, INC. AND SUBSIDIARY
a. Independent Auditor's Report F-9
b. Consolidated Balance Sheets as of May 31, 1996 and
November 30, 1996 (Unaudited) F-10
c. Consolidated Statements of Operations for the Ten Months
Ended May 31, 1995, for the Year Ended May 31, 1995, and
for the Six Months Ended November 30, 1995 and 1996
(Unaudited) F-12
d. Consolidated Statement of Changes in Stockholders' Equity for
the Period from August 1, 1994 to November 30, 1996 (Unaudited) F-13
e. Consolidated Statements of Cash Flows for the Ten Months Ended
May 31, 1995, for the Year Ended May 31, 1996, and for the Six
Months Ended November 30, 1995 and 1996 (Unaudited) F-14
f. Notes to the Consolidated Financial Statements F-15
3. ARCADA COMMUNICATIONS AND AFFILIATES
a. Report of Independent Certified Public Accountants F-29
b. Combined Balance Sheets as of December 31, 1994 and 1995 and
(Unaudited) September 30, 1996 F-30
c. Combined Statements of Operations for the Years Ended December
31, 1994 and 1995 and (Unaudited) for the Nine Months Ended
September 30, 1995 and 1996 F-32
d. Combined Statement of Shareholders' Equity for the Years Ended
December 31, 1994 and 1995 and (Unaudited) for the Nine Months
Ended September 30, 1996 F-33
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e. Combined Statements of Cash Flows for the Years Ended
December 31, 1994 and 1995 and (Unaudited) for the Nine Months
Ended September 30, 1995 and 1996 F-34
f. Notes to Combined Financial Statements F-36
4. GETNET INTERNATIONAL, INC.
a. Independent Auditor's Report F-43
b. 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-44
c. Statement of Changes in Stockholders' Deficit from Inception
(August 24, 1994) to October 31, 1995 (Unaudited) F-45
d. 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-46
e. Notes to Financial Statements F-48
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TOUCH TONE AMERICA, INC. AND SUBSIDIARY
PRO FORMA CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
INTRODUCTION
The following unaudited pro forma condensed financial information has been
prepared in accordance with guidelines established by regulations promulgated by
the Securities and Exchange Commission.
The accompanying unaudited pro forma condensed balance sheet presents
the consolidated balance sheet of Touch Tone America, Inc. and Subsidiary
(Touch Tone) as of November 30, 1996 together with the combined balance sheet
of Arcada and Affiliates (Arcada) as of September 30, 1996 and gives effect
to (i) the merger of Arcada into a wholly-owned subsidiary of Touch Tone
resulting from the exchange of Arcada common stock for 12.5 million shares of
Touch Tone common stock and 1.5 million shares of Touch Tone Series B
Preferred Stock, (ii) the exchange of $200,000 of notes payable to certain
Arcada shareholders for 200,000 shares of Touch Tone Series B Preferred
Stock, and (iii) the payment of fees directly attributable to the merger.
The unaudited pro forma condensed statements of operations for the year ended
December 31, 1995 and for the nine months ended September 30, 1996 include
the results of operations of Arcada and Touch Tone for their respective
periods presented and give effect to the pro forma adjustments as if all such
transactions had occurred at the beginning of the periods presented.
Furthermore, for pro forma presentation, Touch Tone's financial statements
have been recast to conform with Arcada's year-end. The pro forma financial
information for the year ended December 31, 1995 also includes GetNet
International, Inc. (GetNet) results of operations for the period prior to its
November 1, 1995 acquisition by Touch Tone.
The following pro forma adjustments have been determined on the basis as
described below:
1. The business combination involving Touch Tone and Arcada is accounted
for utilizing the purchase method of accounting. Inasmuch as the
former Arcada shareholders will own a majority of Touch Tone common
stock after the business combination, Arcada is considered to be the
acquiring corporation for purposes of purchase accounting, and
subsequent to the merger, the successor entity to Touch Tone for
purposes of financial reporting. This business combination is also
referred to as a "Reverse Acquisition."
2. Consideration in a Reverse Acquisition is determined no differently
than in a normal acquisition (i.e., fair value of stock issued or the
fair value of assets received and liabilities assumed, whichever is
more indicative of fair value). However, in a Reverse Acquisition the
stock issued goes to the accounting acquirer, which in this instance
is Arcada. Accordingly, it is the fair market value of Touch Tone's
stock at date of acquisition (the "Fair Value of Touch Tone") that
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is valued with a write-up (or write down) of Touch Tone's net assets
depending on whether the stock is trading in excess of (less than)
book value, respectively. While Touch Tone stock is reported as
trading in the range of $2 to $3 per share, which is in excess of its
book value per share of approximately $0.71 at November 30, 1996, due
to the limited trading volume of Touch Tone stock and certain other
circumstances and conditions, the Fair Value of Touch Tone cannot be
determined utilizing shares outstanding times the recent stock price.
Accordingly cost is determined based on the fair market value of Touch
Tone's recorded net assets without recognition of any goodwill to be
recorded as a result of this business combination.
3. Touch Tone's financial statements have been recast to conform with
Arcada's December 31 fiscal year-end.
4. Pro forma condensed results of operations for the year ended December
31, 1995 include pro forma purchase accounting adjustments relating to
Touch Tone's November 1, 1995 acquisition of GetNet International,
Inc. (GetNet).
5. Consistent with the application of purchase accounting for this
business combination as described above, estimated fees and other
costs of $400,000 that are directly attributable to the merger have
been presented as a period expense (which has the same effect on
shareholders' equity as a direct charge to capital).
6. The owners of Arcada common stock have agreed in principle to fully
satisfy obligations relating to Arcada severance agreements with two
individuals which provide for the payment of $1.26 million under
certain conditions, the consummation of this merger being one of such
events, by delivery of 450,000 shares of Touch Tone common stock. The
Arcada shareholders have agreed to contribute such 450,000 shares out
of the 12.5 million shares of Touch Tone Common Stock to be received
in connection with the Merger. Inasmuch as the value attributable to
the contributed shares equals the value of the obligation, there is no
net effect on shareholders' equity as a result of these transactions.
In accordance with guidelines established by the Securities and
Exchange Commission, pro forma net loss does not include this related
expense to be recorded on consummation of the Merger.
7. In the event the Merger is consummated, pursuant to two separate
agreements with a Touch Tone officer and consultant, Touch Tone will
issue (i) options to purchase 125,000 shares of Touch Tone Common
Stock at an exercise price of $0.01 and (ii) 250,000 shares of Touch
Tone Common Stock. Utilizing a market price of $3.00 per share, the
value of such securities approximates $1.1 million and, consistent
with the application of purchase accounting for this business
combination as described above, such amount would be recorded as a
period expense (which has the same effect on shareholders' equity as a
direct charge to capital). Inasmuch as the value attributable to the
issued securities will be
recorded as an increase in common stock and additional paid in
capital, there is no net effect on shareholders' equity as a result of
these transactions. In accordance with guidelines established by the
Securities and Exchange Commission, pro forma net loss does not
include this related expense to be recorded on consummation of the
Merger.
These unaudited pro forma statements are not necessarily indicative of
future financial positions or results of operations or the actual results that
would have occurred had the merger been consummated at the beginning of the
periods presented and should be read in conjunction with the historical
financial statements included elsewhere in this Joint Proxy
Statement/Prospectus.
F-4
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
TOUCH TONE ARCADA
NOVEMBER 30, SEPTEMBER 30, PRO FORMA
1996 1996 ADJUSTMENTS PRO FORMA
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $1,630,000 $101,000 $(400,000)(A) $1,331,000
Other current assets 279,000 2,537,000 -- 2,816,000
---------- ---------- ---------- ---------
Total current assets 1,909,000 2,638,000 (400,000) 4,147,000
EQUIPMENT, net 1,065,000 1,960,000 -- 3,025,000
OTHER ASSETS 863,000 275,000 -- 1,138,000
---------- ---------- ---------- ---------
TOTAL ASSETS $3,837,000 $4,873,000 $(400,000) $8,310,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
CURRENT LIABILITIES:
Notes payable $ -- $480,000 -- $480,000
Accounts payable and
accrued liabilities 1,346,000 2,331,000 -- 3,677,000
--------- --------- ---------- ---------
Total current
liabilities: 1,346,000 2,811,000 -- 4,157,000
NOTES PAYABLE TO
STOCKHOLDERS -- 469,000 (200,000)(B) 269,000
OTHER LONG-TERM
LIABILITIES 124,000 1,296,000 -- 1,420,000
STOCKHOLDERS' (400,000)(A)
EQUITY 2,367,000 297,000 200,000 (B) 2,464,000
--------- ------- ----------- ---------
TOTAL LIABILITIES
AND
STOCKHOLDERS' $3,837,000 $4,873,000 $(400,000) $8,310,000
EQUITY ---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA FINANCIAL INFORMATION.
F-5
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
UNAUDITED CONDENSED INTERIM STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TOUCH TONE
ELEVEN MONTHS ARCADA NINE
ENDED MONTHS
NOVEMBER 30, ENDED
1996 SEPTEMBER 30, PRO FORMA
(RECASTED) 1996 ADJUSTMENTS PRO FORMA
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
REVENUES $1,802,000 $9,429,000 $ - $11,231,000
LINE CHARGES (1,166,000) (5,936,000) - (7,102,000)
------------- ------------- ------------- -----------
EXCESS OF REVENUES OVER
LINE CHARGES 636,000 3,493,000 - 4,129,000
OTHER OPERATING
EXPENSES:
Selling, general and
administrative 2,789,000 2,902,000 - 5,691,000
Excess volume commitments 489,000 - - 489,000
Depreciation and amortization 260,000 410,000 - 670,000
Provision for Severance
Obligations 285,000 - - 285,000
------------- ------------- ------------- -----------
INCOME (LOSS) FROM
OPERATIONS (3,187,000) 181,000 - (3,006,000)
OTHER EXPENSE, NET (250,000) (145,000) (395,000)
------------- ------------- ------------- -----------
NET INCOME (LOSS) $(3,437,000) $ 36,000 $(3,401,000)
------------- ------------- ------------- -----------
------------- ------------- ------------- -----------
NET LOSS PER COMMON
SHARE (C) $ (.22)
-----------
-----------
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING (D) 16,070,800
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA FINANCIAL INFORMATION.
F-6
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOUCH PRO
TONE GETNET FORMA
(RECASTED) (RECASTED) ADJUST-
(1) (2) ARCADA MENTS PRO FORMA
--------- --------- ------ ----- ---------
<S> <C> <C> <C> <C> <C>
REVENUES $2,570,000 $210,000 $10,954,000 $ - $13,734,000
LINE CHARGES (1,769,000) (94,000) (6,816,000) $ - (8,679,000)
----------- -------- ----------- --------- -----------
EXCESS OF REVENUES
OVER LINE CHARGES 801,000 116,000 4,138,000 - 5,055,000
OTHER OPERATING
EXPENSES
Selling, general and
administrative 1,715,000 292,000 3,701,000 140,000(E) 5,848,000
Excess volume
commitments 779,000 - - - 779,000
Depreciation and
amortization 54,000 21,000 470,000 - 545,000
Provision for Severance
Obligation - - 295,000 - 295,000
---------- --------- ------- --------- -------
LOSS FROM OPERATIONS (1,747,000) (197,000) (328,000) (140,000) (2,412,000)
OTHER EXPENSE, NET (109,000) - (231,000) (340,000)
--------- ------- --------- --------- ---------
NET LOSS $(1,856,000) $(197,000) $(559,000) $(140,000) $(2,752,000)
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
NET LOSS PER COMMON
SHARE (C) $ (.18)
------------
------------
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING (D) 16,070,800(E)
-----------
-----------
</TABLE>
- -------------------------
(1) Touch Tone recasted for the twelve months ended December 31, 1995.
(2) GetNet operations are recasted for the ten months ended October 31, 1995,
as it was acquired by Touch Tone effective November 1, 1995.
SEE ACCOMPANYING NOTES TO PRO FORMA CONDENSED FINANCIAL INFORMATION.
F-7
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO PRO FORMA FINANCIAL INFORMATION
A. To record estimated fees and other costs of $400,000 that are directly
attributable to the merger, which will be recognized as a period expense.
In accordance with guidelines established by the SEC, pro forma net loss
does not include these expenses.
B. To record issuance of 200,000 shares of Touch Tone Series B Preferred Stock
in exchange for certain notes payable due to certain Arcada shareholders.
C. Pro forma net loss per common share is calculated by dividing net loss less
Preferred Stock dividends at an 8% annual rate on 1.7 million shares of
Touch Tone Series B Preferred Stock by the weighted average common shares
outstanding.
D. Common shares outstanding on pro forma basis represents Touch Tone shares
outstanding as of November 30, 1996, together with the 12,500,000 shares to
be issued in the Arcada acquisition and the 250,000 shares to be issued to
a consultant to the transaction, but does not include shares potentially
issuable upon conversion of Touch Tone Series B Preferred Stock.
E. To record amortization expense associated with intangible assets
capitalized in the GetNet acquisition for the period prior to November 1,
1995 (the date it was acquired by Touch Tone).
F. The owners of Arcada common stock have agreed in principle to fully satisfy
obligations relating to Arcada severance agreements with two individuals
which provide for the payment of $1.26 million under certain conditions,
the consummation of this merger being one of such events, by delivery of
450,000 shares of Touch Tone common stock. The Arcada shareholders have
agreed to contribute such 450,000 shares out of the 12.5 million shares of
Touch Tone Common Stock to be received in connection with the merger.
Inasmuch as the value attributable to the contributed shares equals the
value of the obligation, there is no net effect on shareholders' equity as
a result of these transactions. In accordance with guidelines established
by the Securities and Exchange Commission, pro forma net loss does not
include this related expense to be recorded on consummation of the Merger.
G. In the event the Merger is consummated, pursuant to two separate agreements
with a Touch Tone officer and consultant, Touch Tone will issue (i) options
to purchase 125,000 shares of Touch Tone Common Stock at an exercise price
of $0.01 and (ii) 250,000 shares of Touch Tone Common Stock. Utilizing a
market price of $3.00 per share, the value of such securities approximates
$1.1 million and, consistent with the application of purchase accounting
for this business combination as described above, such amount would be
recorded as a period expense (which has the same effect on shareholders'
equity as a direct charge to capital). Inasmuch as the value attributable
to the issued securities
F-8
<PAGE>
will be recorded as an increase in common stock and additional paid in
capital, there is no net effect on shareholders' equity as a result of
these transactions. In accordance with guidelines established by the
Securities and Exchange Commission, pro forma net loss does not include
this related expense to be recorded on consummation of the Merger.
F-9
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Touch Tone America, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheet of Touch Tone
America, Inc. and Subsidiary as of May 31, 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for the ten months
ended May 31, 1995 and for the year ended May 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Touch
Tone America, Inc. and Subsidiary as of May 31, 1996, and the results of their
operations and their cash flows for the ten months ended May 31, 1995 and for
the year ended May 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has incurred losses from
operations and has entered into significant sales volume commitments. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
HEIN + ASSOCIATES LLP
Denver, Colorado
August 9, 1996
F-10
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31 NOVEMBER 30,
1996 1996
---------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $5,278,000 $1,630,000
Trade receivables, net allowance for doubtful accounts of 264,000 243,000
$124,000 and $182,000, respectively
Prepaid expense - 36,000
---------- ----------
Total current assets 5,542,000 1,909,000
EQUIPMENT, net of accumulated depreciation of $62,000 and 429,000 1,065,000
$159,000, respectively
OTHER:
Intangibles, net of accumulated amortization of $97,000 and 738,000 654,000
$181,000, respectively
Refundable deposits 76,000 80,000
Other 143,000 129,000
---------- ----------
TOTAL ASSETS $6,928,000 $3,837,000
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 477,000 $ 500,000
Accrued liabilities 1,170,000 679,000
Deferred revenues 76,000 103,000
Notes payable to stockholders 393,000 -
Current portion of capital lease obligations 61,000 64,000
---------- ----------
Total current liabilities 2,177,000 1,346,000
DEFERRED REVENUE 25,000 25,000
CAPITAL LEASE OBLIGATIONS, net of current portion 134,000 99,000
COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 5)
REDEEMABLE PREFERRED STOCK LIABILITY 750,000 -
COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 10,000,000 shares authorized; none - -
outstanding
Common stock, no par value, 100,000,000 shares authorized, and 7,195,000 7,945,000
3,204,300 and 3,320,800 shares issued and outstanding,
respectively
Accumulated deficit (3,353,000) (5,578,000)
---------- ----------
Total stockholders' equity 3,842,000 2,367,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,928,000 $3,837,000
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-11
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
TEN MONTHS FOR THE FOR THE SIX
ENDED YEAR ENDED MONTHS ENDED
MAY 31, MAY 31, NOVEMBER 30,
-----------------------------
1995 1996 1995 1996
---------- ----------- ------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET REVENUES:
Long distance resell $1,952,000 $ 1,951,000 $ 1,200,000 $ 613,000
Internet access - 287,000 28,000 350,000
---------- ----------- ------------ -----------
1,952,000 2,238,000 1,228,000 963,000
COST OF SALES
Long distance resell (1,310,000) (1,284,000) (782,000) (451,000)
Internet access - (122,000) (17,000) (190,000)
---------- ---------- ------------- -----------
(1,310,000) (1,406,000) (799,000) (641,000)
---------- ---------- ------------- -----------
GROSS MARGIN 642,000 832,000 429,000 322,000
OPERATING EXPENSES:
Selling 337,000 620,000 294,000 152,000
General and administrative 505,000 1,724,000 694,000 1,406,000
Amortization and depreciation 2,000 129,000 22,000 183,000
Severance agreements - - - 285,000
Excess circuit commitments 32,000 871,000 301,000 431,000
---------- ---------- ------------- -----------
876,000 3,344,000 1,311,000 2,457,000
---------- ---------- ------------- -----------
LOSS FROM OPERATIONS (234,000) (2,512,000) (882,000) (2,135,000)
OTHER EXPENSES:
Interest expense, net (12,000) (172,000) (16,000) (90,000)
Absorbed offering and acquisition costs (48,000) (118,000) (118,000) -
---------- ---------- ------------- -----------
(60,000) (290,000) (134,000) (90,000)
---------- ---------- ------------- -----------
NET LOSS $ (294,000) $(2,802,000) $ (1,016,000) $(2,225,000)
---------- ----------- ------------- -----------
---------- ----------- ------------- -----------
LOSS PER SHARE $ (.19) $ (1.81) $ (.67) $ (.68)
---------- ----------- ------------- -----------
---------- ----------- ------------- -----------
WEIGHTED AVERAGE COMMON SHARES
AND EQUIVALENTS 1,508,000 1,552,000 1,508,000 3,263,000
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-12
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ PREFERRE
NUMBER STOCK ACCUMULATED
OF SHARES AMOUNT ISSUANCE COSTS DEFICIT TOTAL
---------- ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, August 1, 1994 2,785,000 $ 2,000 $ - $ (257,000) $ (255,000)
Surrender of common stock (1,651,000) - - - -
Grants of common stock by stockholders - 16,000 - - 16,000
Common stock issued to officer/director for 160,000 40,000 - - 40,000
services
Common stock issued for cash 11,000 15,000 - - 15,000
Issuance cost of redeemable preferred stock - - (108,000) - (108,000)
Net loss - - - (294,000) (294,000)
---------- ---------- --------- ----------- ----------
BALANCE, May 31, 1995 1,305,000 73,000 (108,000) (551,000) (586,000)
Issuance of common stock in a private 350,000 600,000 - - 600,000
placement, net of offering costs
Issuance of common stock for acquisition of 400,000 800,000 - - 800,000
GetNet
Surrender of common stock (763,200) - - - -
Issuance of common stock and warrants in a 1,725,000 5,830,000 - - 5,830,000
public offering, net of offering costs
Conversion of redeemable preferred stock to 187,500 (108,000) 108,000 - -
common stock
Net loss - - - (2,802,000) (2,802,000)
---------- ---------- --------- ----------- ----------
BALANCE, May 31, 1996 3,204,300 7,195,000 - (3,353,000) 3,842,000
Additional offering costs (unaudited) - (67,000) - - (67,000)
Issuance of common stock for debt (unaudited) 70,000 464,000 - - 464,000
Issuance of common stock for settlement of 45,000 180,000 - - 180,000
past payable (unaudited)
Issuance of common stock for settlement of 1,500 - - - -
past agreement (unaudited)
Stock options issued at below market - 173,000 - - 173,000
(unaudited)
Net loss (unaudited) - - - (2,225,000) (2,225,000)
---------- ---------- --------- ----------- -----------
BALANCE, November 30, 1996 (Unaudited) 3,320,800 $7,945,000 $ - $(5,578,000) $ 2,367,000
---------- ---------- --------- ----------- -----------
---------- ---------- --------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-13
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
TEN MONTHS FOR THE FOR THE SIX
ENDED YEAR ENDED MONTHS ENDED
MAY 31, MAY 31, NOVEMBER 30,
-----------------------------
1995 1996 1995 1996
--------- ----------- ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(294,000) $(2,802,000) $(1,016,000) $(2,225,000)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization 2,000 129,000 22,000 183,000
Common stock for exchange of debt or 56,000 - - 127,000
services
Options issued at below market - - - 173,000
Bad debt expense 17,000 185,000 25,000 151,000
Absorbed acquisition costs 48,000 118,000 118,000 -
Change in assets and liabilities:
Decrease (increase) in:
Trade receivables (311,000) 128,000 171,000 (130,000)
Other assets - (214,000) (56,000) (28,000)
Increase (decrease) in:
Accounts payable 274,000 (71,000) (161,000) 23,000
Accrued liabilities 422,000 625,000 218,000 (184,000)
Deferred revenue and other (8,000) 11,000 (9,000) 27,000
--------- ----------- ----------- -----------
Net cash provided by (used in) operating 206,000 (1,891,000) (688,000) (1,883,000)
activities
CASH FLOWS FROM INVESTING ACTIVITY:
Acquisition costs incurred (95,000) (25,000) (25,000) -
Purchase of equipment - (101,000) (80,000) (733,000)
--------- ----------- ----------- -----------
Net cash used in investing activities (95,000) (126,000) (105,000) (733,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 50,000 - - -
Payment of note payable (50,000) - - -
Payment of capital lease obligations - (100,000) (13,000) (32,000)
Proceeds from notes payable to stockholders - 210,000 - -
Payment of notes payable to stockholders (24,000) - - (183,000)
Proceeds from issuance of redeemable preferred 637,000 113,000 113,000 -
stock
Repayment of preferred stock - - - (750,000)
Proceeds from issuance of common stock 15,000 7,816,000 700,000 -
Offering costs incurred (285,000) (1,256,000) (162,000) (67,000)
--------- ----------- ----------- -----------
Net cash provided by (used in) financing 343,000 6,783,000 638,000 (1,032,000)
activities --------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 454,000 4,766,000 (155,000) (3,648,000)
CASH AND CASH EQUIVALENTS, beginning of period 58,000 512,000 512,000 5,278,000
--------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 512,000 $ 5,278,000 $ 357,000 $ 1,630,000
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-14
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS - The consolidated financial statements include the
accounts of Touch Tone America, Inc. (Touch Tone) and from November 1,
1995, GetNet International, Inc. (GetNet) (collectively referred to as "the
Company"). Touch Tone acquired the outstanding common stock of GetNet
effective November 1, 1995 as more fully described in Note 3.
Touch Tone is engaged in the reselling of long distance telecommunications
products and services primarily in the western and southwestern United
States. As a reseller of long distance services, Touch Tone offers its
customers the use of routing equipment and phone lines of large carriers;
in turn, the large carriers offer Touch Tone volume discounts based on the
use of this equipment. Touch Tone was incorporated as a California
corporation in 1990. Touch Tone previously had a July 31 year-end. In
fiscal 1995, Touch Tone changed its year-end to May 31. Therefore, the
1995 financial statements only include the financial operations for the ten
months ended May 31, 1995.
GetNet is a provider of Internet and World Wide Web access services to
individuals and businesses in Arizona and other parts of the United States.
The Internet is a network of millions of computers around the world which
are able to communicate with one another, as well as access the World Wide
Web which is a system of documents on a multitude of subjects.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Touch Tone and its subsidiary, GetNet as described above.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
monetary instruments purchased with an original maturity at three months
or less to be cash equivalents.
BASIS OF ACCOUNTING - The accompanying consolidated financial statements
have been prepared on the accrual basis of accounting. Customer billings
and collections for long distance services are performed by a third party
service provider (Provider). Accounts receivable represents the amount the
Company's customers owe for actual usage. However, the amount the Company
will receive from the Provider will be offset by the payable due to the
Provider for the cost of providing the service, which is included in
accounts payable in the financial statements. The net of the receivable
and payable is the margin the Company receives. The Provider is
responsible for maintaining the Company's long distance accounts receivable
and withholds payments to the Company for past due customer amounts. Such
amounts withheld from the Company are offset by the margin otherwise paid
to the Company. Bad debt expense is included with general and
administrative expenses.
EQUIPMENT - Equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful life of the equipment,
generally five years. Repairs and maintenance are charged to expense as
incurred. Material expenditures, which increase the life of an asset, are
capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of equipment sold, or otherwise disposed of, and the
related accumulated depreciation or amortization are removed from the
accounts, and any gains or losses are reflected in current operations.
Depreciation expense charged to operations was $2,000 and $32,000 for the
ten months end May 31, 1995 and the year ended May 31, 1996, respectively.
F-15
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
INCOME TAXES - The Company accounts for income taxes under the liability
method of SFAS No. 109, whereby current and deferred tax assets and
liabilities are determined based on tax rates and laws enacted as of the
balance sheet date. Deferred tax expense or benefit represents the change
in the deferred tax asset/liability balance.
REVENUE RECOGNITION - The Company recognizes revenue during the period of
performance of the related services. Deferred revenues consist of the
following:
- Funds paid by AT&T to Touch Tone at the initiation of a contract
of $42,000, deferred initially and recognized as a reduction to
cost of sales ratably over the life of the contract as earned. A
total of $1,000 and $16,000 was recognized during the ten months
ended May 31, 1995 and the year ended May 31, 1996, respectively.
Subsequent to May 31, 1996, it has become apparent the Company
may not be able to meet its continuing commitment (see Note 5)
under which the deferred revenues were being recognized.
Therefore, recognition of such amount as revenue has been
suspended until such time as it is resolved to the ultimate
liability the Company may have to AT&T.
- Current month's advance billings by GetNet for subscriber
services and revenue received in advance for services under
contract. This amount will be recognized as revenue when earned.
INTANGIBLES - Intangibles represent the excess of the purchase price paid
over the net liabilities acquired in the GetNet acquisition of $835,000.
This amount is being amortized over five years.
IMPAIRMENT OF LONG-LIVED ASSETS - Effective June 1, 1996, the Company
adopted Financial Accounting Standards Board Statement 121 (FAS 121). In
the event that facts and circumstances indicate that the cost of assets or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted
cash flows associated with the asset would be compared to the asset's
carrying amount to determine if a write-down to market value or discounted
cash flow value is required. Adoption of FAS 121 had no effect on the
unaudited November 30, 1996 financial statements. GetNet is still in the
developmental stages and has not yet experienced significant revenues from
its "Internet Backbone" operations, however, if future revenues do not
support the cost capitalized associated with this system, the Company could
be required to impair such costs, including the related intangible costs,
under this accounting standard.
CONCENTRATION OF CREDIT RISK - Credit risk represents the accounting loss
that would be recognized at the reporting date if counterparties failed
completely to perform as contracted. Concentrations of credit risk
(whether on or off balance sheet) that arise from financial instruments
exist for groups of customers or counterparties when they have similar
economic characteristics that would cause their ability to meet contractual
obligations to be similarly effected by changes in economic or other
conditions. The Company does not have a significant exposure to any
individual customer or counterparty.
At May 31, 1996, the Company's cash balance at one financial institution
was in excess of FDIC insured limits by approximately $5,190,000.
F-16
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
USE OF ESTIMATES - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires the Company's management to make estimates and assumptions that
affect the amounts reported in these financial statements and accompanying
notes. Actual results could differ from those estimates. The Company
makes significant estimates as to the amortization period used for its
intangibles. Due to the uncertainties inherent in the life of intangibles,
and increased competition and technology changes in the telecommunications
industry, it is reasonably possible that the estimated life of intangibles
and the ultimate liability the Company could have to AT&T under its SDN
commitment (see Note 5) could materially change in the forthcoming year.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values for
financial instruments under SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS, are determined at discrete points in time based on
relevant market information. These estimates involve uncertainties and
cannot be determined with precision. The estimated fair values of the
Company's financial instruments, which includes cash trade receivables,
accounts payable, and notes payable to stockholders, approximates the
carrying value in the financial statements at May 31, 1996 and November 30,
1996.
LOSS PER SHARE - Loss per share is generally computed based on the weighted
average number of shares outstanding. However, for the periods presented,
common and common equivalent shares including the common stock underlying
the redeemable preferred stock and common stock options (using the treasury
stock method and the public offering price) have been included in the
weighted average calculation, as if they were outstanding for the entire
period through December 31, 1995.
STOCK-BASED COMPENSATION - In October 1995, the Financial Accounting
Standards Board issued a new statement titled "Accounting for Stock-Based
Compensation" (FAS 123), which the Company adopted effective June 1, 1996.
FAS 123 encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options, and other equity
instruments to employees based on fair value. Companies that do not adopt
the fair value accounting rules must disclose the impact of adopting the
new method in the notes to the financial statements. Transactions in
equity instruments with non-employees for goods or services must be
accounted for on the fair value method. The Company has elected not to
adopt the fair value accounting prescribed by FAS 123 for employees, but is
subject to the disclosure requirements prescribed by FAS 123.
UNAUDITED INFORMATION - The Company's consolidated balance sheet as of
November 30, 1996, and the consolidated statement of operations for the six
months ended November 30, 1995 and 1996 are taken from the Company's books
and records without audit. Management believes, however, that such
information includes all accruals, which are considered recurring in
nature, required for the fair presentation of the Company's financial
position and results of their operations as of and for the periods then
ended. The results of operations for the interim periods are not
necessarily indicative of results expected for the full year.
2. CONTINUED OPERATIONS:
The accompanying consolidated financial statements have been prepared
assuming that the Company
F-17
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
will continue operating as a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course
of business. The Company has incurred significant losses since inception.
Furthermore, as discussed in Note 5, the Company has entered into sales
volume commitments with service providers.
The Company has a continuing service commitment with AT&T of $1,800,000
annually, which as of May 31, 1996, the Company had satisfactorily met.
However, as discussed in Note 5, monthly revenues under this commitment
have declined, and it is likely revenues will continue to decline, and the
Company will not be able to continue to meet this commitment. As of
November 30, 1996, no loss accrual has been recorded on management's belief
that the contract will be renegotiated on favorable terms with AT&T. If
such renegotiations are unsuccessful, the parties will most likely litigate
the contract. Furthermore, AT&T has claimed the Company owes approximately
$1,000,000 for the fraudulent use of the Company's long-distance service by
an unknown party. The Company also has other significant
telecommunications commitments for its Internet backbone and the Company
has experienced only nominal revenues from its backbone. If the Company is
unsuccessful in renegotiating its contract with AT&T, does not favorably
resolve the fraudulent usage matter, or if revenues on its Internet
backbone fail to materialize, substantial losses, the amount of which
cannot currently be estimated, could be recorded.
The Company's ability to continue as a going concern is dependent upon
several factors, including meeting and/or renegotiating its carrier
commitments, and ultimately achieving and maintaining profitable
operations. The Company is also aggressively working to increase revenues
through a merger with a larger entity, and renegotiate its contract with
AT&T, which it believes will ultimately lead to profitable operations and
enable the Company to meet its continuing service commitments. The
accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
3. ACQUISITIONS
In November 1996, the Company signed an agreement to merge with Arcada
Communications Inc. (Arcada), based in Seattle, Washington, whereby the
Company would issue to shareholders of Arcada 12,500,000 shares of the
Company's common stock and 1.5 million shares of redeemable preferred
stock. The preferred shares issued in the merger will be non-voting and
will pay cummulative dividends at 8% per annum, payable annually. Each
share of preferred stock will be convertible at the option of the holder
or, redeemable or convertible by the Company, at any time for a period
of three years at which time it must be redeemed at $1.00 per share or
converted into 0.40 shares of Touch Tone common stock. As a result,
Arcada would acquire control of both management and the board of
directors of the Company. The completion of the merger is subject to
approval by shareholders of both companies and resolution of various
contingencies generally to the satisfaction of Arcada. (Also see Note 6
regarding common stock options and common stock grants to be issued in
connection with this merger, if approved.)
In November 1995, the Company acquired the outstanding common stock of
GetNet through the issuance of 400,000 shares of its common stock, which
was valued at $800,000. This acquisition was accounted for under purchase
method of accounting. The excess of the purchase price over the net
liabilities acquired of approximately $835,000 is being amortized over a
period not to exceed five years. All other assets and liabilities were
recorded at book values, which approximated fair value. Unaudited
F-18
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
pro-forma financial information is provided below:
FISCAL YEAR FISCAL YEAR SIX MONTHS
1995 1996 ENDED
------------ ------------ NOVEMBER 30,
1995
------------
Net Revenues $2,067,000 $ 2,388,000 $ 1,328,000
---------- ----------- -----------
---------- ----------- -----------
Net Loss $ (724,000) $(2,823,000) $(1,107,000)
---------- ----------- -----------
---------- ----------- -----------
Net Loss per Share $ (.24) $(1.88) $ (1.18)
---------- ----------- -----------
---------- ----------- -----------
The above pro-forma financial information assumes the acquisition occurred
at the beginning of the period presented. This information is not
necessarily indicative of the financial results which would have resulted
if the acquisition had occurred at such earlier date nor of future
financial operating results.
In August 1995, the Company entered into an acquisition agreement with
National Telcom Management, Inc. (NTM) to purchase NTM's long distance
customer base. In January 1996, the Company terminated the contract with
NTM and forfeited a $90,000 deposit previously paid. Accordingly, this
amount and other costs associated with the acquisition of approximately
$25,000 has been shown as an expense in the accompanying financial
statements.
In October 1996, the Company entered into an agreement to acquire certain
long-distance customers through the issuance of its common stock. The
number of shares issued will be based upon a multiple of revenues
generated during the first three months by the customer base acquired
and the then average price of the Company's common stock. It is
estimated that the total common shares to be issued will range between
35,000 and 40,000 shares. This acquisition is not expected to have a
material effect on the Company's net loss.
4. NOTES PAYABLE TO STOCKHOLDERS:
As of May 31, 1996, notes payable to stockholders consist of the following:
Notes payable to stockholder with a stated interest rate of $ 210,000
30% per annum, unsecured which was repaid subsequent to year-
end through the issuance of 70,000 shares of common stock.
As a result, the Company recorded interest and finance
charges totaling $254,000, based upon the value of the shares
issued, of which $127,000 is included in accrued liabilities
as of May 31, 1996 based on the period the note was
outstanding. The balance was expensed in the first quarter
of fiscal 1997.
Notes payable to stockholders with interest at 10% and 12%, 183,000
principal and -----------
F-19
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
interest was paid after year end.
Total $ 393,000
----------
----------
Interest expense to stockholders for the ten months ended May 31, 1995 and
for the year ended May 31, 1996 totaled $12,000 and $172,000, respectively.
Accrued interest of $127,000 was included in accrued liabilities at May 31,
1996.
5. COMMITMENTS AND CONTINGENCIES:
INTERNET BACKBONE CIRCUIT LEASES - The Company leases certain
telecommunication circuits, primarily in connection with its Internet
backbone, under non-cancelable operating leases. The Internet backbone was
not completed until after year-end, therefore, lease expense for both the
ten months ended May 31, 1995 and for the year ended May 31, 1996 was
nominal as most of these leases were entered into subsequent to May 31,
1996. As of August 1996, future minimum lease obligations under
leases with lease terms in excess of one year approximate the following:
For the Year Ended May 31,
--------------------------
1997 $ 647,000
1998 1,129,000
1999 1,129,000
2000 549,000
2001 43,000
Thereafter 205,000
-----------
$ 3,702,000
-----------
-----------
Included in the above amounts is a three-year commitment beginning in
January 1997 with WilTel, whereby the Company is required to lease a
minimum of $70,000 per month of telecommunication circuits. Under this
agreement, all costs incurred are not only applied dollar-for-dollar
against this commitment, but are also concurrently credited 1 1/2 times
actual usage against the Company's long distance service commitment
described below.
The Company, however, is obligated to pay for actual monthly usage of
telecommunication circuits, which for November 1996 approximated $80,000
and increases in January 1997 to approximately $105,000 per month,
irrespective of the related usage by the Company's Internet customers.
Revenues related to the Internet backbone have continued to be nominal
through November 1996. If the Company is unsuccessful in marketing its
Internet services, these commitments will result in a substantial loss to
the Company, including the possibility of impairing the capitalized costs
associated with building the backbone and the intangible cost recorded in
connection with the acquisition of GetNet by Touch Tone.
SERVICE COMMITMENTS - The Company has a continuing commitment with AT&T to
provide long distance service of $1,800,000 annually, which as of May 31,
1996, it had satisfactorily met. However,
F-20
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
monthly revenues have declined substantially due to increased competition
and more competitive rates being offered by other service providers. The
Company's current contract with AT&T provides for the purchase by the
Company of telecommunications services generally at a greater wholesale
rate per minute than currently being offered by AT&T to its retail
customers. Therefore, it is expected that revenues will continue to
decrease under the Company's SDN contract.
The Company is hopeful it will be able to renegotiate its contract with
AT&T to obtain a more favorable rate per minute and commitment level and
replace its existing SDN contract. However, there is no assurance that the
Company will be able to ultimately renegotiate its existing contract. If
it is not renegotiated, it is expected the parties will litigate this
contract, the outcome of which cannot be predicted. Should the Company be
unsuccessful in these efforts, the loss incurred by the Company, the amount
of which cannot be estimated, would be substantial, whereby it would
jeopardize the Company's ability to continue operations.
The Company has a commitment with WilTel which commenced in October 1996 to
sell $50,000 per month of long distance services. The Company is currently
meeting this obligation through its actual long distance billings. This
commitment can also be satisfied through leases of telecommunication
circuits from WilTel for the Internet backbone.
The Company has an agreement with ICG Access Services, which was revised in
March 1996. Under the old agreement, the Company was required to utilize
ICG services or pay ICG the difference between the amount utilized and the
minimum monthly commitment. During the periods ended May 31, 1996 and
May 31, 1995, the Company has recorded $462,000 and $32,000, respectively,
of expense under this initial agreement. In March 1996, the Company
renegotiated its agreement with ICG whereby it agreed to pay its then
current obligation of approximately $430,000 with $250,000 from proceeds of
the public offering and the issuance of 45,000 shares valued at $180,000.
At May 31, 1996, the Company has an accrued liability to ICG of
approximately $180,000 which represents the 45,000 shares, which were
issued in August 1996. There has been relatively insignificant revenue
associated with this expense as the Company has marketed services under the
ICG agreement on a very limited basis.
The Company was not meeting its "800" service agreement commitment with
AT&T, and consequently, in April 1996, the Company entered into a revised
agreement with AT&T, which provided for the repayment in June 1996 of
$186,000 paid by AT&T on the signing of the initial agreement and $400,000
over twelve months beginning in June 1996. If the Company does not make
the payments as required, the Company will be obligated to pay $1,027,000,
less amounts previously paid. During the year ended May 31, 1996, the
Company has recorded $400,000 of expense in connection with settlement of
this commitment. The Company is current in its payments to AT&T.
EMPLOYMENT AGREEMENTS - During the year ended May 31, 1996, the Company
entered into employment agreements with various individuals. As of May 31,
1996, the base salary under these agreements aggregate approximately
$480,000 in fiscal 1997 and $225,000 in fiscal 1998. The Company may
terminate the agreements for cause. If terminated for any other reason,
the Company will pay six months salary and benefit allowance if termination
occurs in the first year of the agreement and nine
F-21
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
months salary and benefit allowance if after the first year. In connection
with the employment agreements, certain options were granted as discussed
in Note 6.
In September 1996, two officers at GetNet (including a current director of
the Company) were terminated. These terminations are being disputed by the
former officers and action has been formally filed against the Company.
The resolution of this matter cannot be determined, but management believes
the ultimate outcome will not have a material impact on the Company's
financial position. Their prior salaries are included in aggregate amounts
discussed above.
In April 1996, two of the Company's officers resigned and terminated their
employment agreements and the Company hired a new president/chief executive
officer. Subsequently, the Company entered a consulting agreement with the
former chief executive officer of the Company to assist the Company in
mergers and acquisitions. Under this agreement, the Company will pay a
base compensation of $15,000 per month, which under an amended agreement in
June 1996 has been extended through October 1997, plus additional
compensation based on the level of success of future endeavors. If the
proposed Arcada acquisition is approved, this person will receive $150,000
plus 250,000 shares of common stock for his efforts on this merger and a
new consulting agreement will be entered into.
Also see Note 6 regarding an option to be granted to the Company's
president, if the merger with Arcada is approved.
OTHER CONTINGENCIES - Commencing in June 1996, an unknown party
fraudulently charged over $1,000,000 in long distance charges on the
Company's account. The Company is currently investigating the matter and
has contacted the carrier, AT&T, who denies any responsibility. AT&T has
made a claim to the Company indicating it owes for this fraudulent usage,
and is currently withholding funds otherwise payable to the Company for its
long-distance service. The Company believes it has recourse in the matter,
and will not be held responsible for these charges and AT&T continues to
provide service, but the outcome of this matter cannot be predicted at this
time.
The Company has filed legal action against its former president in August
1996. The former president has filed a response to the Company's claim, in
addition, the former president has made various allegations that he intends
to pursue legal action for unspecified damages against the Company,
however, none have been formally filed. If such action occurs, the Company
intends to defend itself vigorously and believes no adverse material
consequences would result. The former president has filed an answer and
the Company continues to pursue this matter. The ultimate resolution of
this matter cannot presently be determined.
OPERATING LEASES - The Company leases its office facilities and certain
equipment under non-cancelable operating leases. Rent expense for the ten
months ended May 31, 1995 and for the year ended May 31, 1996 was $26,000
and $63,000, respectively. At May 31, 1996, future lease obligations under
leases with lease terms in excess of one year are as follows:
For the Year Ended May 31,
--------------------------
1997 $ 118,000
F-22
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
1998 121,000
1999 78,000
2000 37,000
2001 37,000
Thereafter 3,000
-----------
$ 394,000
-----------
-----------
CAPITAL LEASES - The Company leases certain equipment which have been
recorded as capital leases. Obligations under these capital leases have
been recorded at the present value of future minimum lease payments,
discounted at rates ranging from approximately 20% to 23%. The capitalized
cost of $231,000 less accumulated amortization of $31,000, are included in
property and equipment at May 31, 1996. The following is a schedule of
future minimum lease payments under capital leases at May 31, 1996:
For the Year Ended May 31,
--------------------------
1997 $ 95,000
1998 80,000
1999 44,000
2000 30,000
2001 15,000
-----------
Future minimum lease payment 264,000
Less amount representing interest (69,000)
-----------
Present value of net minimum lease payments 195,000
Less current portion (61,000)
-----------
$ 134,000
-----------
-----------
6. CAPITAL STOCK:
PREFERRED STOCK - In June 1995, the Company completed a private placement
of the Company's Series A Convertible Preferred Stock. The Company
received $642,000, net of offering costs of $108,000, from issuing
150,000 shares of convertible preferred stock. The shares were redeemed
from $750,000 proceeds received in the Company's public offering plus
187,500 shares of common stock (the shares were effectively issued at the
time of the public offering in May 1996, even though the preferred stock
liability was paid in June 1996).
The Company has authorized, but unissued 10,000,000 shares of preferred
stock, which may be issued in such series and with such preferences as
determined by the Company's Board of Directors.
COMMON STOCK - In March 1995, the Company restructured its capital
accounts, whereby it revised its articles to increase the authorized shares
and changed its common stock to a "no par value." Furthermore, the Company
declared an approximate 1 for 185 reverse stock split. For financial
F-23
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
statement presentation purposes, shares outstanding and all common shares
references have been restated to reflect this split, as if it occurred at
the beginning of the period presented.
During the ten months ended May 31, 1995, a prior shareholder surrendered
1,393,000 shares of common stock when the Company repaid a then outstanding
$23,000 debt. Another shareholder also surrendered 258,000 shares of
common stock for an agreement to repay an outstanding debt plus accrued
interest totaling $41,000. The surrendered shares were canceled by the
Company.
During the ten months ended May 31, 1995 the founding shareholders
transferred 62,300 of their shares of common stock to persons who in the
past provided certain limited consulting assistance to the Company. For
financial statement presentation purposes, the value of such services has
been reflected as an expense in the financial statement with an offset to
capital, as if such shares had been issued directly by the Company.
The Company also issued 160,000 shares of common stock for services in 1995
to an officer/director. For financial statement presentation purposes,
such shares have been recorded based on the estimated value of the services
rendered (aggregating $40,000), which approximated the value of the common
stock at the time of issuance, as determined by the Company's Board of
Directors.
In 1995, the Company sold 11,000 shares of common stock to an unrelated
party based on a prior agreement to issue common stock at a price 50% of an
initial public offering price. Subsequent to November 30, 1996, an
additional 1,500 shares were issued based on a change in the public
offering price.
In November 1995, the Company completed a private placement of its common
stock whereby it sold 350,000 shares of common stock for $700,000. The
Company incurred costs associated with this offering of approximately
$100,000.
Pursuant to an understanding with the Company's Representative, in fiscal
1996, the founding shareholders surrendered an aggregate of 763,200 shares
of common stock back to the Company.
In May 1996, the Company completed a public offering of its common stock
and warrants whereby it sold 1,725,000 shares of common stock at $4 per
share and 1,725,000 warrants at $.125 per warrant. Net proceeds, after
offering costs, was approximately $5,763,000. Each warrant enables the
holder to purchase one share of common stock at the public offering price
of $4 per share through May 1999. The Company may redeem the warrants at
$.25 per warrant, under certain circumstances. The Representative to the
offering also received a warrant for the purchase of 150,000 shares of
common stock and 150,000 warrants exercisable at $4.80 per share for four
years commencing May 1997. At the closing of the public offering, the
Company engaged the Representative as a financial advisor to the Company
for a fee of $108,000 which is reflected as an other asset and will be
amortized over three years.
In June 1996, the company repaid its preferred shareholders $750,000. Also
subsequent to year-end, $67,000 in additional printing costs associated
with the offering were recorded.
F-24
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
In August 1996, the Company issued 70,000 shares of common stock for the
exchange of a note payable of $210,000. In connection with this exchange,
the Company recorded approximately $254,000 of expense (of which $127,000
was recorded as an expense in the period ended November 30, 1996 and the
balance in the prior year) based on the quoted market price at the time the
parties agreed to the exchange. The Company has agreed to register these
shares for sale under The Securities Act.
Also in August 1996, the Company issued 45,000 shares to a
telecommunications company in settlement of a past debt. Accrued expenses
at May 31, 1996 include $180,000 related to this debt. The Company has
agreed to register these shares for sale under The Securities Act.
In September 1996, the Company issued 1,500 shares of common stock in
settlement of a past agreement to issue shares of common stock based on 50%
of the initial public offering price.
If the merger with Arcada is approved, the Company's former chief executive
officer will receive 250,000 shares of common stock for his efforts in the
merger (see Note 5).
Also, see Note 3 for the common stock issued in connection with the GetNet
acquisition and Notes 4 and 5 for shares issued to settle past debts.
COMMON STOCK OPTIONS AND DIRECTOR WARRANTS - In April 1995, the Company
issued common stock options to certain persons who had previously loaned
funds to the Company. The options, which are currently exercisable,
entitle these persons to purchase an aggregate 15,900 shares of common
stock for $3.00 per share for five years. As of November 30, 1996, no
options have been exercised.
In fiscal 1996, the Company issued common stock options to an independent
significant sales agent (see Note 8). These options, which are currently
exercisable, entitle this sales agent to purchase an aggregate of
60,000 shares of common stock for $2.00 per share over five years. As of
November 30, 1996, no options have been exercised.
As part of the various employment agreements, stock options were granted to
purchase a total of 480,000 shares (including 200,000 to former officers
and directors). At May 31, 1996, no options are exercisable. Options for
210,000 shares become exercisable during fiscal 1997, with the remainder
becoming exercisable in fiscal 1998, at prices ranging from $4 to $6 per
share and generally expire one year after becoming exercisable.
During fiscal 1996, the Company issued 600,000 warrants to new directors
and 100,000 warrants to a member of the Company's compensation committee to
purchase common stock. The warrants have an exercise price of $4.00 per
share for a period of five years, with 350,000 warrants currently
exercisable, and the balance vesting in March 1997. One of the new
directors became president of the Company in April 1996. As of May 31,
1996, no options have been exercised.
In July 1996, the Company terminated two employees by mutual agreement. In
connection with their termination, their prior option agreements were
amended, whereby they were granted options to
F-25
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
purchase in the aggregate 45,000 shares of common stock at $4.00 and
40,000 shares at $5.00. In connection with this severance agreement, the
Company has recorded approximately $173,000 of expense based on the
difference between the option exercise price and the price of the Company's
common stock on the date of new option terms were agreed upon. The Company
had agreed to register, within 90 days, the shares underlying the options,
and failed to do so. One employee has filed suit against the Company in
connection with the failure of the Company to register the shares
underlying such options. The employee is seeking damages of approximately
$44,000.
If the merger with Arcada is approved, the current president of the Company
will receive an option to purchase 125,000 shares of common stock
exercisable at $.01 per share for a three-year period. The Company has
further agreed to register the shares underlying the option. When, and if
granted, this will result in expense being recorded in the Company's
financial statements for the difference between the then market price of
the Company's common stock and the $.01 exercise price multiplied by the
shares underlying the option. This expense, based on current trading
prices, would be significant.
RESERVED SHARES - Excluding the 12,750,000 shares and the option to
purchase 125,000 shares which would be issued if the Company successfully
completed the proposed merger with Arcada, the Company has approximately
3,366,000 shares reserved for possible issuance under existing option and
warrants outstanding, as previously discussed herein.
7. INCOME TAXES:
As of May 31, 1996, the Company has a net operating loss (NOL) carryforward
for tax reporting purposes of approximately $3,200,000, however, a
substantial portion may be limited due to changes in ownership of the
Company in fiscal 1995 and 1996, pursuant to Section 382 of the Internal
Revenue Code, stemming primarily from the issuances of common stock in its
public and private offerings and the acquisition of GetNet. This NOL
expires in the years 2009 through 2011.
Deferred income taxes are provided for differences between the tax and book
basis of assets and liabilities as a result of temporary differences in the
recognition of revenues or expenses for tax and financial reporting
purposes, which relates primarily to certain items not currently deductible
for tax purposes until paid.
Deferred tax assets resulting from these differences consist of the
following:
Net operating loss carryforward $ 1,248,000
Other 72,000
------------
Total 1,320,000
Less valuation allowance (1,320,000)
------------
Net deferred tax asset $ -
------------
------------
F-26
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
The valuation allowance for deferred tax assets increased from $195,000 at
May 31, 1995 to $1,320,000 at May 31, 1996, due primarily to an increase
in the Company NOL carryforwards.
8. SIGNIFICANT SALES AGENT RELATIONSHIP:
The Company has an agreement with an independent sales agent, whereby the
agent receives commissions of approximately 32% on AT&T long distance sales
it originates. At this sales level, the Company does not realize a gross
margin from the sales generated by the agent. If the Company successfully
renegotiates its contract with its provider, the Company believes it will
then realize profit on sales originated by the agent, if a greater discount
can be obtained from the provider. Payment of the commissions to the agent
is secured by the customer base generated by the sales agent. For the ten
months ended May 31, 1995 and the year ended May 31, 1996, and the six
months ended November 30, 1995 and 1996, the sales originated by the agent
have accounted for 42%, 36%, 35%, and 41%, respectively, of company AT&T
long distance sales. During these periods, the Company has recorded a
related expense to the agent of approximately $265,000, $299,000, $217,000,
and $72,000, respectively, which includes $75,000 paid in fiscal 1996 to
settle past misunderstandings between the parties.
9. SUPPLEMENTAL CASH FLOW INFORMATION:
The supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE SIX MONTHS
TEN YEAR ENDED
MONTHS ENDED November 30,
ENDED MAY 31,
MAY 31, -------------------
1995 1996 1995 1996
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
Equipment acquired through capital leases $ 24,000 $ 265,000 $ - $ -
---------- ---------- --------- --------
---------- ---------- --------- --------
Issuance of preferred stock for receivables $ 113,000 $ - $ - $ -
---------- ---------- --------- --------
---------- ---------- --------- --------
Issuance of common stock for GetNet acquisition $ - $ 800,000 $ - $ -
---------- ---------- --------- --------
---------- ---------- --------- --------
Issuance of common stock for repayment of notes $ - $ - $ - $ 464,000
and interest
---------- ---------- --------- --------
---------- ---------- --------- --------
Issuance of common stock for settlement of a $ - $ - $ - $ 180,000
liability
---------- ---------- --------- --------
---------- ---------- --------- --------
</TABLE>
F-27
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO MAY 31, 1996 IS UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE SIX MONTHS
TEN YEAR ENDED
MONTHS ENDED November 30,
ENDED MAY 31, -------------------
MAY 31,
---------- ---------- --------- --------
1995 1996 1995 1996
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
Issuance of options to former employees $ - $ - $ - $ 173,000
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>
10. SEGMENT INFORMATION:
The Company's principal operations are in the long distance resell and
Internet access industries. The following is selected information for
fiscal 1996 about the Company's industry segments. Since GetNet was
acquired in November 1995, segment information is not included for the ten
months ended May 31, 1995.
Long
Distance Internet
Year Ended May 31, 1996 Resell Access Consolidated
----------------------------- ----------- ----------- ------------
Revenue $ 1,951,000 $ 287,000 $ 2,238,000
Loss from operations (2,092,000) (420,000) (2,512,000)
Depreciation and amortization 11,000 118,000 129,000
Capital expenditures 106,000 260,000 366,000
Identifiable assets 5,832,000 1,096,000 6,928,000
F-28
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Arcada Communications and Affiliates
We have audited the accompanying combined balance sheets of Arcada
Communications and Affiliates, (the "Company") as of December 31, 1994 and 1995
and the related combined statements of operations, shareholders' equity and cash
flows for each of the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the combined financial position of Arcada Communications and
Affiliates as of December 31, 1994 and 1995, and the results of their operations
and cash flows for each of the years then ended in conformity with generally
accepted accounting principles.
BDO Seidman, LLP
November 22, 1996
F-29
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $341,000 $115,000 $101,000
Certificates of Deposit - Restricted
(Note 4) -- 200,000 312,000
Accounts receivable, net of allowance for
doubtful accounts of $160,000, $144,000
and $300,000 (Note 4) 1,302,000 1,760,000 1,864,000
Carrier security deposits 264,000 282,000 248,000
Prepaid expenses and other 2,000 105,000 113,000
--------- --------- ---------
Total Current Assets 1,909,000 2,462,000 2,638,000
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and amortization
(Note 3) 2,120,000 2,131,000 1,960,000
OTHER ASSETS 98,000 265,000 275,000
--------- --------- ---------
Total Assets $4,127,000 $4,858,000 $4,873,000
--------- --------- ---------
--------- --------- ---------
CURRENT LIABILITIES
Line of credit borrowings $ -- $260,000 $223,000
Accounts payable 1,435,000 1,795,000 1,959,000
Accrued compensation and related 117,000 141,000 104,000
Other accrued liabilities 89,000 136,000 128,000
Dividends payable -- -- 140,000
Current portion of long-term liabilities 258,000 235,000 257,000
--------- --------- ---------
Total Current Liabilities 1,899,000 2,567,000 2,811,000
--------- --------- ---------
LONG-TERM LIABILITIES
Capital lease obligations, net of current
portion (Note 5) 582,000 663,000 589,000
Long-term debt, net of current portion
(Note 6) 193,000 452,000 392,000
Notes payable to shareholders (Note 8) 254,000 456,000 469,000
Other long-term liabilities 42,000 292,000 315,000
--------- --------- ---------
Total Long-Term Liabilities 1,071,000 1,863,000 1,765,000
--------- --------- ---------
COMMITMENTS AND
CONTINGENCIES (Notes 5 and 10)
SHAREHOLDERS' EQUITY
Common stock and additional paid in
capital (Note 7) 560,000 558,000 558,000
Retained earnings (accumulated deficit) 597,000 (130,000) (261,000)
--------- --------- ---------
Total Shareholders' Equity 1,157,000 428,000 297,000
--------- --------- ---------
Total Liabilities and Shareholders'
Equity $4,127,000 $4,858,000 $4,873,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-30
<PAGE>
F-31
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1994 1995 1995 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES $9,060,000 $10,954,000 $8,292,000 $9,429,000
Line charges 4,931,000 6,816,000 5,148,000 5,936,000
--------- --------- --------- ---------
EXCESS OF REVENUES OVER LINE CHARGES 4,129,000 4,138,000 3,144,000 3,493,000
Other operating expenses:
Salaries, wages and related 2,107,000 2,094,000 1,571,000 1,584,000
General and administrative 526,000 531,000 431,000 487,000
Facilities and switch expense 490,000 409,000 364,000 321,000
Depreciation and Amortization 240,000 470,000 325,000 410,000
Sales and marketing 311,000 332,000 255,000 284,000
Provision for doubtful accounts 144,000 160,000 145,000 131,000
Provision for severance obligation
(Note 10) -- 295,000 295,000 --
Legal and other consulting 95,000 175,000 120,000 95,000
------ ------- ------- ------
EARNINGS (LOSS) BEFORE
INTEREST AND TAX 216,000 (328,000) (362,000) 181,000
Interest expense, net of interest
income 42,000 231,000 159,000 145,000
------ ------- ------- -------
EARNINGS (LOSS) BEFORE
INCOME TAX 174,000 (559,000) (521,000) 36,000
Provision for Income Tax 20,000 -- -- --
------ ---------- ---------- ---------
NET INCOME (LOSS) $154,000 ($559,000) ($521,000) $36,000
-------- ---------- ---------- -------
-------- ---------- ---------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-32
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
EARNINGS
COMMON STOCK (ACCUMULATED
SHARES AMOUNT DEFICIT) TOTAL
------ ------ -------- -----
<S> <C> <C> <C> <C>
BALANCE, January 1, 1994 52,000 $560,000 $490,000 $1,050,000
(Note 6)
Dividends -- -- (47,000) (47,000)
Net income -- -- 154,000 154,000
-------- -------- -------- --------
BALANCE, December 31, 1994 52,000 560,000 597,000 1,157,000
Redemption of common stock
(Unaudited) (Note 6) (10,000) (2,000) -- (2,000)
Dividends -- -- (168,000) (168,000)
Net loss -- -- (559,000) (559,000)
-------- -------- -------- --------
BALANCE, December 31, 1995 42,000 558,000 (130,000) 428,000
Redemption of common stock
(Unaudited) (Note 6) (5,000) -- -- --
Dividends (Unaudited) -- -- (167,000) (167,000)
Net income (Unaudited) -- -- 36,000 36,000
-------- -------- -------- --------
BALANCE, September 30, 1996
(Unaudited) 37,000 $558,000 ($261,000) $297,000
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-33
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30
------------ ------------------
1994 1995 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited)
NET INCOME (LOSS) $ 154,000 $ (559,000) $ (521,000) $ 36,000
Adjustments to reconcile net
income (loss) to cash flows
from operating activities
Depreciation and amortization 240,000 476,000 330,000 430,000
Decrease in accounts
receivable (233,000) (459,000) (689,000) (104,000)
Increase in accounts payable 670,000 687,000 810,000 185,000
Increase in deposits and prepaid expenses (37,000) (88,000) (68,000) (34,000)
Provision for severance
obligation - 295,000 295,000 -
Payments of severance
obligation - (43,000) (14,000) (32,000)
Increase in deferred income tax
liabilities 12,000 26,000 26,000 -
Other (30,000) (27,000) (55,000) (25,000)
----------- ----------- ----------- -----------
Net Cash Provided by Operating
Activities 776,000 308,000 114,000 456,000
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment (1,146,000) (262,000) (216,000) (80,000)
Investment in other assets (20,000) (199,000) (199,000) (51,000)
Purchase of Certificates of
Deposit - Restricted - (200,000) (200,000) (100,000)
----------- ----------- ----------- -----------
Net Cash Used by Investing
Activities (1,166,000) (661,000) (615,000) (231,000)
----------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Line-of-credit borrowings - 460,000 450,000 223,000
Repayment of line-of-credit
borrowings - (200,000) (200,000) (260,000)
Proceeds from Notes Payable
to Shareholders 258,000 436,000 421,000 160,000
Repayments of Notes Payable to
Shareholders (4,000) (234,000) (210,000) (146,000)
Proceeds from long-term debt 253,000 - - -
Repayment of long-term debt
and capital lease obligations (57,000) (165,000) (91,000) (189,000)
Redemption of common stock - (2,000) (2,000) -
Dividends paid (47,000) (168,000) (168,000) (27,000)
F-34
<PAGE>
----------- ----------- ----------- -----------
Net Cash Provided (Used)
by Financing Activities 403,000 127,000 200,000 (239,000)
----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash
and Cash Equivalents 13,000 (226,000) (301,000) (14,000)
CASH AND CASH
EQUIVALENTS 328,000 341,000 341,000 115,000
----------- ----------- ----------- -----------
End of period $ 341,000 $ 115,000 $ 40,000 $ 101,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Accounts payable exchanged for
Note Payable - 326,000 326,000 -
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-35
<PAGE>
ARCADA COMMUNICATIONS AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF BUSINESS
OPERATIONS Arcada Communications and Affiliates (together, "Arcada" or the
"Company") provides long-distance telecommunication services. The Company
currently serves over 20,000 customers in 17 states, with an emphasis in
the Pacific Northwest. The Company's corporate offices are located in
Seattle, Washington with marketing offices in Vancouver, Washington and
Denver, Colorado. Arcada also provides cellular air time and other cellular
telecommunication products and services.
PLANNED MERGER - In November 1996, the Company entered into an Agreement
and Plan of Merger, as amended (the "Merger Agreement"), to merge with
Touch Tone America, Inc. ("Touch Tone"), public company based in Phoenix,
Arizona, which provides Internet services, local dedicated access and other
telecommunications products. The proposed merger provides for, among other
things, Touch Tone to issue to Arcada shareholders 12.5 million shares of
Touch Tone common stock and 1.5 shares million of Touch Tone Series B
Preferred Stock. As a result, Arcada would acquire shareholder control as
well as control of both management and the board of directors of Touch
Tone. Consummation of the merger is subject to approval of the Merger
Agreement by the shareholders of both companies. The business combination
would be considered a purchase of Touch Tone by Arcada for financial
reporting purposes and would be accounted for utilizing purchase
accounting. Inasmuch as Arcada stockholders will own the majority of Touch
Tone capital stock after the merger, Arcada is considered to be the
acquiring corporation for purposes of purchase accounting and will be the
predecessor entity for purposes of future financial reporting by Touch
Tone.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION - The combined financial statements include
S.V.V. Sales, Inc., d/b/a Arcada Communications ("SVV"), LeBanco, Ltd.
("LeBanco"), and Stellar Telecommunications Services, Inc. ("Stellar"),
which are affiliated through common ownership. Stellar and LeBanco own
certain equipment and switches utilized in the Company's operations, which
are leased to Arcada. All significant intercompany balances and
transactions have been eliminated in combination in a manner similar to
consolidation.
USE OF ESTIMATES - The financial statements are prepared in conformity with
generally accepted accounting principles which requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statement and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from the
estimates.
REVENUE RECOGNITION - Revenues are recognized as services are provided and
billed monthly in arrears.
INTERIM FINANCIAL STATEMENTS - The interim financial data as of and for the
nine months ended September 30, 1995 and 1996 is unaudited; however, in the
opinion of Company management, the interim data includes all adjustments,
consisting only of normal recurring adjustments necessary for a fair
statement of results for the interim periods. The 1996 interim period
results of operations are not necessarily indicative of results for the
entire year.
F-36
<PAGE>
CASH AND CASH EQUIVALENTS - The Company considers cash on hand, cash in
banks, certificates of deposits, time deposits and other short-term
securities with maturities of three months or less as cash and cash
equivalents. Cash and cash equivalents are comprised primarily of funds on
deposit with banks and are recorded at market value.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is computed on the straight-line method over estimated useful
lives ranging from three to ten years. Leasehold improvements are amortized
over the lesser of lease term or useful life of property. Maintenance and
repairs are expensed while major improvements are capitalized.
DEFERRED CUSTOMER ACQUISITION COSTS AND OTHER INTANGIBLE ASSETS - The
Company is one of five long-distance carriers that customers with AT&T
Wireless Services ("AT&T Wireless") may select for long distance in the 17
states in which Arcada does business. The Company pays a one-time equal
access charge to AT&T Wireless for each customer subscribing to the
Company's services. Intangible assets are included in other assets, consist
primarily of deferred customer acquisition costs and are amortized on the
straight-line method over estimated productive lives ranging from two to
four years. Intangible assets approximate $21,000 and $211,000 at December
31, 1994 and 1995, and accumulated amortization approximated $1,000 and
$53,000 at December 31, 1994 and 1995.
INCOME TAXES - SVV and LeBanco, with consents of their shareholders, have
elected under the Internal Revenue Code to be taxed as S corporations, and
as a result in lieu of these companies paying corporate income tax, the
shareholders are taxed on their proportionate share of taxable income.
Stellar is a C corporation and accordingly, income taxes are provided for
the tax effect of Stellar operating results reported in the financial
statements. The provision consists of tax currently due or refundable plus
deferred taxes related to differences in financial statement and tax bases
of assets and liabilities. Deferred tax assets and liabilities represent
estimated future tax return consequences of such differences, which will
either be taxable or deductible when the assets and liabilities are
recovered or settled.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of current
assets and liabilities are considered to be reasonable estimates of fair
value due to the short maturity of these items. The carrying amounts of
long-term debt are considered to be reasonable estimates of fair value
because they bear interest at relatively recently established market rates.
It is not practicable to estimate the fair value of notes payable to
shareholders as the related party nature of these financial instruments
allow for possible modification to their terms and maturities.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject the Company to concentrations of credit risk include primarily cash
deposits and accounts receivable. The Company places its deposits and short
term investments with high credit quality financial institutions; at times
deposits exceed federally-insured limits. Accounts receivable consist of
many small account balances due from individuals and companies dispersed
across the United States, with a concentration in the Pacific Northwest.
Collateral is generally not required.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS - Recently issued accounting
standards having relevant applicability to the Company consist primarily of
Statement of Financial Accounting Standards No. ("SFAS 121"), which
establishes accounting standards for, among other things, the impairment of
long-lived assets and certain identifiable intangibles. SFAS No. 121 is
effective for fiscal years beginning after December 15, 1995, and is not
expected to have a significant effect, if any, on the Company's financial
condition or results of operations.
F-37
<PAGE>
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1994 1995 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Unaudited)
Equipment and switches $1,222 $1,477 $1,557
Equipment under capital lease 853 1,008 1,085
Vehicles 353 353 353
Leasehold improvements 70 77 78
- -------------------------------------------------------------------------------
2,498 2,915 3,073
Accumulated depreciation and amortization (378) (784) (1,113)
- -------------------------------------------------------------------------------
Property, and equipment, net $2,120 $2,131 $1,960
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Accumulated amortization of equipment under capital leases approximated
$103,000 and $216,000 at December 31, 1994 and 1995.
NOTE 4: LINE-OF-CREDIT
Property and equipment are pledged as security for borrowings as described
in Note 6. The Company maintains line-of-credit borrowing agreements with
banks. In August 1996, the Company entered into a $400,000 line-of-credit
agreement. Borrowing availability approximated $250,000 and $300,000 during
1994 and 1995, respectively. Borrowings are secured by accounts receivable,
certificates of deposits, and personal guarantees of Company shareholders.
Line-of-credit agreements provide for interest, payable monthly, at prime
plus 2% during 1994 and 1995 (10.25% at December 31, 1995) and at prime
plus 1% on the 1996 line
The Company has pledged and assigned as security for line of credit
borrowing certificates of deposit which are reported as Restricted in the
accompanying balance sheet as such amounts are legally restricted as to
withdrawal.
NOTE 5: LEASES
The Company has various lease agreements for certain equipment and
switches, office premises and office equipment. Most leases contain renewal
options and some contain purchase options. Rent expense for operating
leases approximated $342,000 and $317,000 during the years ended
December 31, 1994 and 1995.
F-38
<PAGE>
Minimum annual future obligations for leases in effect at December 31, 1995 are
as follows (in thousands):
Years Ending December 31, Capital Leases Operating Leases
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1996 $281 $286
1997 292 88
1998 292 64
1999 209 24
2000 70 11
- -------------------------------------------------------------------------------
Total minimum lease payments 1,144 $473
------
------
Amount representing interest and
other charges (318)
- -------------------------------------------------------------------------------
Present value of minimum lease
payments 826
Less current portion 163
- -------------------------------------------------------------------------------
Capital lease obligations, net of
current portion $663
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NOTE 6: LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
---- ---- ----
(UNAUDITED)
Note payable to vendor, due in 2002 in $5
monthly installments, including annual
interest at approximately 14%, secured by
switching equipment. $ -- $321 $307
Notes payable to vendor, due in 2002 in 4%
monthly installments, including annual
interest at approximately 5%, secured by
vehicles 223 177 143
Other secured notes payable bearing interest
at approximately 8% to 10% 28 26 19
---- ---- ----
251 524 469
---- ---- ----
---- ---- ----
Less amounts due within one year 58 72 77
---- ---- ----
Long-term debt, net of current portion $193 $452 $392
---- ---- ----
---- ---- ----
F-39
<PAGE>
Long-term debt annual principal payment
obligations are as follows (in thousands):
Years Ending December 31,
-------------------------
1996 $72
1997 115
1998 157
1999 112
2000 68
------
$524
------
------
Interest paid in cash, including interest attributable to capital lease
obligations and interest paid on notes payable to shareholders, approximated
$91,000 and $279,000 during the years ended December 31, 1994 and 1995.
NOTE 7: COMMON STOCK
SVV commenced operations in 1992 as a result of the contribution and
assignment by the Company's then sole stockholder, an individual who
subsequently transferred stock ownership to his two sons (the "Majority
Shareholders"), of certain assets comprised primarily of accounts
receivable, and assumption of various operating liabilities and other
accrued liabilities. The Company recorded assets assigned and liabilities
assumed at their historical net book value of approximately $557,000, such
net amount being recorded as common stock and additional paid in capital.
Inasmuch as most assets and liabilities were current and subsequently
recovered and extinguished in the ordinary course of business, net book
value approximated fair value. Stellar and LeBanco were capitalized with
cash of approximately $1,000 and $2,000 and are also owned by SVV
stockholders. Common stock information for each of the companies in the
combined financial statements are summarized below:
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
COMPANY PAR VALUE AUTHORIZED ISSUED 1994 1994 1995
------- --------- ---------- ------ ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
SVV No Par 50,000 50,000 50,000 50,000 40,000
Stellar No Par 1,000 980 980 980 700
LeBanco $1 1,000 1,000 1,000 1,000 900
</TABLE>
During 1994, the Majority Shareholders sold 42% of SVV common stock (21,000
shares) to five individuals, all of whom were Company employees, in exchange for
promissory notes secured by such shares. The shares sold are subject to terms of
a buy-sell agreement which among other things, provides the Company an option to
purchase shares from a selling shareholder under certain circumstances including
termination of employment. During 1995, pursuant to terms of the buy-sell
agreement the Company acquired 5,000 shares from each of two shareholders for a
combined total purchase price of approximately $2,000. In addition, during
1995 the Company also acquired for nominal consideration 280 shares of Stellar
and 100 shares of LeBanco common stock pursuant to terms of buy-sell agreements.
Shares of common stock acquired by the Company have been canceled.
Effective in June 1996, pursuant to terms of buy-sell agreements, the Company
acquired for nominal consideration as provided for in such agreements 5,000
shares of SVV common stock, 140 shares of Stellar common stock and 100 shares of
LeBanco common stock.
F-40
<PAGE>
NOTE 8: RELATED PARTY TRANSACTIONS
Commencing in 1994, certain of the Company's shareholders, including and
primarily the Majority Shareholders, loaned cash to the Company pursuant to
terms of unsecured, four-year promissory notes. Interest is payable
monthly at rates of 30% during 1994, and 15% thereafter. Interest expense
related to these borrowings approximated $8,000 and $74,000 during the
years ended December 31, 1994 and 1995. Related party payables are
subordinate to line-of-credit bank borrowings.
NOTE 9: FEDERAL INCOME TAXES
The provision for income tax relates solely to Stellar as described in Note
1. The 1994 income tax provision approximates that which would result from
applying federal statutory tax rates to pre-tax income, adjusted for the
effect of graduated tax rates. As a result of pre-tax losses, there is no
tax provision for 1995 or 1996. The Company has recorded deferred income
tax liabilities of approximately $20,000 and $40,000 at December 31, 1994
and 1995. Deferred tax liabilities relate to depreciation and are included
in other long-term liabilities.
Cash paid for income taxes approximated $15,000 during the year ended
December 31, 1994.
NOTE 10: COMMITMENTS AND CONTINGENCIES
The Company does not own any transmission facilities, other than its
investments in its long distance switches, thus its long distance services
are dependent upon other carriers for the transmission of its customers'
calls. The Company procures such services at bulk rates pursuant to short-
term agreements from several suppliers, including three major suppliers.
The Company serves customers in numerous localities. The Company currently
collects and remits local utility taxes only in jurisdictions where it has
offices or holds other assets. The Company has been contacted in the past
by other localities where it has customers, but no other assets or
operations, requesting that the Company collect and remit local utility
taxes in such jurisdictions. The Company does not believe such local
utility taxes apply to its operations, has not historically collected such
taxes, and does not intend to do so in the future. However, there can be
no assurance that localities will not actively seek to collect such taxes
from the Company for past or future services.
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. Company management currently believes
that resolving these matters, some of which have already been settled, will
not have a material adverse impact on the Company's financial position or
results of operation.
During 1995, the Company entered into a severance agreement with a former
employee pursuant to which the Company committed to make payments totaling
$400,000 over a seven year period, subject to acceleration under certain
circumstances, including a change in control. Accordingly, during 1995 the
Company has recorded a liability and compensation expense of approximately
$295,000 at the discounted net present value of the payments. The severance
obligation, net of the current portion, is included in other long-term
liabilities.
In addition, during 1995, the Company entered into a severance agreement
with another employee. Pursuant to terms of the agreement, among other
things, the Company is contingently committed to make payments totaling
$560,000 in the event of a sale of the Company, or certain other future
events. Inasmuch
F-41
<PAGE>
as the event which would require a commitment on behalf of the Company to
make these payments has not occurred, no expense or obligation has been
recorded.
During the nine months ended September 30, 1996, the Company entered into a
severance agreement with an employee. Pursuant to terms of the agreement,
among other things, the Company is contingently committed to make payments
totaling $700,000 in the event of a sale of the Company, or certain other
future events. Inasmuch as the event which would require a commitment on
behalf of the Company to make these payments has not occurred, no expense
or obligation has been recorded.
As described in Note 1, the Company has entered into a Merger Agreement
which provides for, among other things, the Company to merge with Touch
Tone. Consummation of the merger is subject to, among other things
including certain conditions of merger, approval by the shareholders of
both companies. In the event the merger is consummated, the Company would
be obligated to make severance payments totaling $1,260,000 pursuant to
terms of two severance agreements and would record such obligation as
expense.
F-42
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
GetNet International, Inc.
Phoenix, Arizona
We have audited the balance sheet (not separately included herein) of
GetNet International, Inc. (A Development Stage Company) as of July 31, 1995 and
the related accompanying statements of operations and changes in stockholders'
deficit, and cash flows from inception (August 24, 1994) to July 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion of these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GetNet International, Inc.
(A Development Stage Company) as of July 31, 1995 and the results of its
operations and its cash flows from inception (August 24, 1994) to July 31, 1995
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred substantial losses from
operations and has a working capital deficit as of July 31, 1995. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans with regard to these matters are described in Note
2. The financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
HEIN + ASSOCIATES LLP
Denver, Colorado
August 31, 1995
F-43
<PAGE>
GETNET INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FROM INCEPTION CUMULATIVE FROM
FROM INCEPTION (AUGUST 24, INCEPTION (AUGUST
(AUGUST 24, 1994) FOR THE THREE 1994) TO 24, 1994) TO
TO MONTHS ENDED OCTOBER 31, OCTOBER 31, 1995
JULY 31, 1995 OCTOBER 31, 1995 1994 (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-44
<PAGE>
GETNET INTERNATIONAL, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGE IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
DEFICT
ACCUMULATED
COMMON STOCK DURING THE
------------ DEVELOPMENT
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/director 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-45
<PAGE>
GETNET INTERNATIONAL, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE
FOR THE THREE FROM INCEPTION FROM INCEPTION
FROM INCEPTION MONTHS ENDED (AUGUST 24, 1994) (AUGUST 24, 1994)
(AUGUST 24, OCTOBER 31, TO OCTOBER 31, TO OCTOBER 31,
1994) TO 1995 1994 1995
JULY 31, 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 expenses (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 in capital leases (3,000) (2,000) - (5,000)
Advances from Touch Tone - 36,000 - 36,000
---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities 184,000 34,000 47,000 218,000
---------- ---------- ---------- ----------
NET INCREASE IN CASH 2,000 2,000 8,000 4,000
CASH, beginning of period - 2,000 - -
---------- ---------- ---------- ----------
CASH, end of period $ 2,000 $4,000 $ 8,000 $ 4,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
F-46
<PAGE>
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-47
<PAGE>
GETNET INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO JULY 31, 1995 IS UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS- GetNet International, Inc. (GetNet) is a provider of
Internet and World Wide Web access services to individuals and businesses in
Arizona and other parts of the United States. The Internet is a network of
millions of computers around the world which are able to communicate with one
another, as well as access the World Wide Web which is a system of documents on
a multitude of subjects. As GetNet has not yet experienced significant revenues
from its planned operations, it is considered to be in the developmental stage.
INCOME TAXES - GetNet accounts for income taxes under the liability method
of SFAS No. 109, whereby current and deferred tax assets and liabilities are
determined based on tax rates and laws enacted as of the balance sheet date.
Deferred tax expense or benefit represents the change in the deferred tax
asset/liability balance.
REVENUE RECOGNITION - GetNet recognizes revenue during the period of
performance of the related services. Deferred revenues represent current
month's advance billings for subscriber services and revenue received in advance
for services under contract. This amount will be recognized as revenue when
earned.
UNAUDITED INFORMATION - The statement of operations and cash flows for the
period from inception (August 24, 1994) to October 31, 1994 and the three-month
period ended October 31, 1995 were taken from GetNet's books and records without
audit. However, in the opinion of management, such information includes all
adjustments (consisting only of normal accruals), which are necessary to
properly reflect the results of operations of GetNet for the period from
inception (August 24, 1994) to October 31, 1994 and the three-month period ended
October 31, 1995. Certain information and footnote disclosure normally included
in financial statements prepared in accordance with generally accepted
accounting principles for the interim periods have been condensed or omitted.
The results of operations for the three months ended October 31, 1995 are not
necessarily indicative of the results to be expected for the full year.
2. CONTINUED OPERATIONS:
The accompanying financial statements have been prepared assuming that
GetNet will continue operation as a going concern, which contemplates the
realization of assets, including liquidation of liabilities in the normal course
of business. GetNet is a developmental stage company and has incurred a
substantial loss and has a working capital deficit of $121,000 as of October 31,
1995. GetNet's ability to continue as a going concern is dependent upon
obtaining long-term debt and/or equity financing to meet its obligations, as
well as, achieving and maintaining profitable operations. The accompanying
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
Effective November 1, 1995, GetNet merged with Touch Tone America, Inc.,
(Touch Tone) in a stock exchange. Touch Tone completed a public offering in May
1996 of its common stock, which should 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.
F-48
<PAGE>
At July 31, 1995, deferred tax assets resulting from these differences
consist of the following:
Net operating loss carryforward $ 110,000
Less valuation allowance (110,000)
----------
Net deferred tax asset $ -
----------
----------
As of July 31, 1995, GetNet has an income tax loss carryforward of
approximately $280,000 which will expire in 2010.
4. COMMITMENTS:
OFFICE LEASE - GetNet leases office space under a noncancellable operating
lease which expires in March 1996. Total rental expense was $8,000 for the
period from inception (August 24, 1994) to July 31, 1995. The total minimum
rental commitments at July 31, 1995 total approximately $10,000 for the 1996
fiscal year and expires in March 1996.
CAPITAL LEASE OBLIGATIONS - GetNet leases certain computer equipment under
agreements classified as capital leases. Equipment under these leases has a
cost of $12,000 and accumulated depreciation of $2,000 and $3,000 as of July 31,
1995 and October 31, 1995, respectively. Minimum lease payments continue
through December 1997. The following is a schedule of future minimum lease
payments under capital leases at July 31, 1995.
Future minimum lease payments $ 12,000
Less amount representing interest (2,000)
----------
Present value of net minimum lease payments 10,000
Less current portion (5,000)
----------
$ 5,000
----------
----------
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
F-49
<PAGE>
services provided prior to July 31, 1995. For financial statement presentation
purposes, the value of such services aggregating approximately $21,000, have
been reflected as an expense in the period ended July 31, 1995.
F-50
<PAGE>
APPENDICES:
A. Merger Agreement Including Plan of Merger, together
with Amendments Thereto
B. Washington Dissenters' Rights Statute (RCW 23B.13)
C. Form of Agreement and Plan of Reincorporation Merger
D. Articles of Incorporation and Bylaws of Touch Tone -
Washington
<PAGE>
APPENDIX A
AGREEMENT FOR MERGER
DATED AS OF NOVEMBER 13, 1996
BY AND AMONG
TOUCH TONE AMERICA, INC.,
TOUCH TONE/ARCADA, INC.
AND
S.V.V. SALES, INC. d/b/a
ARCADA COMMUNICATIONS, INC.
<PAGE>
TABLE OF CONTENTS
AGREEMENT FOR MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. EFFECTIVE TIME; CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . 3
3. REPRESENTATIONS AND WARRANTIES OF NEWCO. . . . . . . . . . . . . . . . . 3
3.1 Corporate Organization. . . . . . . . . . . . . . . . . . . . . . . . 3
3.2 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.3 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.4 Consents and Approvals. . . . . . . . . . . . . . . . . . . . . . . . 4
3.5 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4. REPRESENTATIONS AND WARRANTIES OF TTA. . . . . . . . . . . . . . . . . . 4
4.1 Organization, Power, Good Standing, Etc.. . . . . . . . . . . . . . . 5
4.2 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.3 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.4 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.5 No Violation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.6 Consents and Approvals. . . . . . . . . . . . . . . . . . . . . . . . 8
4.7 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . 8
4.8 Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.9 Absence of Certain Changes or Events. . . . . . . . . . . . . . . . . 8
4.10 Litigation, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.11 Taxes and Tax Returns. . . . . . . . . . . . . . . . . . . . . . . . 9
4.12 Employees; Employee Benefit Plans. . . . . . . . . . . . . . . . . .10
4.13 TTA Information. . . . . . . . . . . . . . . . . . . . . . . . . . .12
4.14 Compliance With Applicable Law . . . . . . . . . . . . . . . . . . .12
4.15 Contracts and Agreements . . . . . . . . . . . . . . . . . . . . . .13
4.16 Affiliate Transactions . . . . . . . . . . . . . . . . . . . . . . .13
4.17 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
4.18 Title to Property. . . . . . . . . . . . . . . . . . . . . . . . . .14
4.19 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
4.20 Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . .16
4.21 Sufficient Resources . . . . . . . . . . . . . . . . . . . . . . . .16
4.22 SEC Filings. . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
4.23 Bank Accounts, Etc.. . . . . . . . . . . . . . . . . . . . . . . . .16
5. REPRESENTATIONS OF ARCADA. . . . . . . . . . . . . . . . . . . . . . . .17
5.1 Organization, Power, Good Standing, Etc.. . . . . . . . . . . . . . .17
5.2 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . .18
5.3 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
5.4 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
5.5 No Violation. . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
5.6 Consents and Approvals. . . . . . . . . . . . . . . . . . . . . . . .19
5.7 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . .19
5.8 Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
5.9 Absence of Certain Changes or Events. . . . . . . . . . . . . . . . .20
5.10 Litigation, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . .20
5.11 Taxes and Tax Returns. . . . . . . . . . . . . . . . . . . . . . . .20
5.12 Employees; Employee Benefit Plans. . . . . . . . . . . . . . . . . .21
i
<PAGE>
5.13 Arcada Information . . . . . . . . . . . . . . . . . . . . . . . . .24
5.14 Compliance With Applicable Law . . . . . . . . . . . . . . . . . . .24
5.15 Contracts and Agreements . . . . . . . . . . . . . . . . . . . . . .24
5.16 Affiliate Transactions . . . . . . . . . . . . . . . . . . . . . . .24
5.17 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
5.18 Title to Property. . . . . . . . . . . . . . . . . . . . . . . . . .25
5.19 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
5.20 Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . .27
5.21 Bank Accounts, Etc.. . . . . . . . . . . . . . . . . . . . . . . . .27
6. COVENANTS OF THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . .27
6.1 Redemption of Redeemable Warrants . . . . . . . . . . . . . . . . . .27
6.2 Reincorporation in Washington State . . . . . . . . . . . . . . . . .27
6.3 Conduct of the Business of TTA. . . . . . . . . . . . . . . . . . . .28
6.4 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . .29
6.5 Current Information . . . . . . . . . . . . . . . . . . . . . . . . .30
6.6 Access to Properties and Records Confidentiality. . . . . . . . . . .30
6.7 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
6.8 Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . .31
6.9 Approval of TTA Stockholders. . . . . . . . . . . . . . . . . . . . .32
6.10 Approval of Arcada Stockholders. . . . . . . . . . . . . . . . . . .32
6.11 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . .33
6.12 Public Announcements . . . . . . . . . . . . . . . . . . . . . . . .33
6.13 Assignment of Contract Rights. . . . . . . . . . . . . . . . . . . .33
6.14 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
6.15 Indemnification of Arcada Directors and Officers . . . . . . . . . .33
6.16 Current Public Information . . . . . . . . . . . . . . . . . . . . .34
6.17 Resolution of Certain Matters. . . . . . . . . . . . . . . . . . . .34
6.18 Purchase Accounting. . . . . . . . . . . . . . . . . . . . . . . . .34
7. CLOSING CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .35
7.1 Conditions to Each Party's Obligations Under This Agreement . . . . .35
7.2 Conditions to the Obligations of TTA Under This Agreement . . . . . .35
7.3 Conditions to the Obligations of Arcada Under This Agreement. . . . .36
8. TERMINATION, AMENDMENT AND WAIVER. . . . . . . . . . . . . . . . . . . .37
8.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
8.2 Break-up Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
8.3 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . .39
8.4 Amendment, Extension and Waiver . . . . . . . . . . . . . . . . . . .40
9. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
9.1 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
9.2 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
9.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
9.4 Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . .41
9.5 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . .41
9.6 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
9.7 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
9.8 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
ii
<PAGE>
AGREEMENT FOR MERGER
This Agreement for Merger ("Agreement") is made and entered into as of
November 13, 1996 by and among Touch Tone America, Inc., a California
corporation ("TTA"), Touch Tone/Arcada, Inc., a Washington corporation and
wholly-owned subsidiary of TTA ("Newco"), and S.V.V. Sales, Inc., a Washington
corporation d/b/a Arcada Communications, Inc. ("Arcada").
Newco is a wholly owned subsidiary of TTA. The parties desire that TTA and
Newco enter into a transaction with Arcada which will result in a merger (the
"Merger") of Arcada with and into Newco, which shall be the surviving
institution.
The shareholders of Arcada are also all of the shareholders of each of
Stellar Telecommunications Services, Inc., a Washington corporation ("Stellar")
and LeBanco, Ltd., an Oregon corporation ("LeBanco"). Prior to the consummation
of the transactions contemplated hereby, each of Stellar and LeBanco shall be
merged into Arcada. For all purposes of this Agreement references to Arcada
shall be deemed references to all three entities.
Therefore, in consideration of the mutual covenants, representations,
warranties and agreements herein contained, the parties hereto agree as follows:
1. MERGER. Subject to the terms and conditions of this Agreement, the
Merger is to be accomplished in the manner described herein.
(a) MERGER OF ARCADA AND NEWCO. At the Effective Time (as defined in
Section 2), Arcada shall be merged with and into Newco, with Newco being the
surviving institution, in accordance with the Plan of Merger by and among TTA,
Newco and Arcada substantially in the form attached hereto as Exhibit A (the
"Plan of Merger"). The Plan of Merger provides for the terms of the Merger and
the manner of carrying it into effect. The terms and conditions of the Plan of
Merger are incorporated herein and made a part hereof.
(b) CONVERSION OF ARCADA COMMON STOCK. Subject to the provisions
below and in the Plan of Merger, at the Effective Time, all of the outstanding
shares of common stock, no par value per share, of Arcada ("Arcada Common
Stock") shall be converted into the right to receive shares of common stock, no
par value per share, of TTA ("TTA Common Stock"), as described below and in the
Plan of Merger.
(i) Subject to the provisions below and the provisions of the
Plan of Merger, each outstanding share of Arcada Common Stock will at the
Effective Time be converted into the right to receive 250 newly issued shares of
TTA Common Stock and a one-year, eight percent (8%) promissory note of TTA in
the original principal amount of $30.00, (collectively, the Merger
Consideration), subject to the conditions set forth in this Agreement and in the
Plan of Merger. No fractional shares of TTA Common Stock shall be issued. In
lieu of any fractional shares, any holder of Arcada Common Stock who would
otherwise be entitled to a fractional share of TTA Common Stock will, upon
surrender of his certificate or certificates
<PAGE>
representing Arcada Common Stock outstanding immediately prior to the Effective
Time, be paid the cash value of such fractional share interest, which shall be
equal to the product of the fraction multiplied by the Average Price (as
hereinafter defined). For the purposes of determining any such fractional share
interests, all shares of Arcada Common Stock owned by an Arcada stockholder
shall be combined so as to calculate the maximum number of whole shares of TTA
Common Stock issuable to such Arcada stockholder.
(ii) If between the date of this Agreement and the third Nasdaq
Stock Market trading day prior to the Effective Time, the shares of TTA Common
Stock shall be changed into a different number of shares by reason of any
recapitalization, split-up, combination or exchange of shares, or if a stock
dividend thereon shall be declared with a record date within such period, the
number of shares of TTA Common Stock issued in exchange for each share of Arcada
Common Stock specified in Section l(b)(i) shall be adjusted accordingly.
(c) STOCKHOLDERS' MEETINGS. (i) TTA shall, as soon as practicable,
hold a meeting of its stockholders (the "TTA Stockholders' Meeting") to submit
for stockholder approval (the "TTA Stockholder Approval") (a) this Agreement,
(b) the Plan of Merger and (c) the reincorporation of TTA in the State of
Washington and (ii) Arcada shall, as soon as practicable, hold a meeting of its
stockholders (the "Arcada Stockholders' Meeting") to submit for stockholder
approval (the "Arcada Stockholder Approval") (a) this Agreement and (b) the Plan
of Merger.
(d) PROXY STATEMENT/PROSPECTUS.
(i) The parties hereto will cooperate in the preparation of an
appropriate proxy statement/prospectus satisfying all applicable requirements of
federal and state law (such proxy statement/prospectus in the form mailed to TTA
and Arcada stockholders, together with any and all amendments or supplements
thereto, being herein referred to as the "Proxy Statement/Prospectus").
(ii) Arcada will furnish such information concerning itself as
is necessary in order to cause the Proxy Statement/Prospectus, insofar as it
relates to Arcada, to comply with Section l(e)(i). Arcada agrees promptly to
advise TTA if at any time prior to the TTA and Arcada Stockholders' Meetings any
information provided by Arcada for inclusion in the Proxy Statement/Prospectus
becomes incorrect or incomplete in any material respect and to provide the
information needed to correct such inaccuracy or omission. Arcada will continue
to furnish TTA with such supplemental information as may be necessary in order
to cause such Proxy Statement/Prospectus, insofar as it relates to Arcada, to
comply with Section l(e)(i) after the mailing thereof to TTA and Arcada
stockholders.
(iii) TTA will furnish such information concerning itself as is
necessary in order to cause the Proxy Statement/Prospectus, insofar as it
relates to TTA, to comply with Section l(e)(i). TTA agrees promptly to advise
Arcada if at any time prior to the TTA and Arcada Stockholders' Meetings any
information provided by TTA for inclusion in the Proxy Statement/Prospectus
becomes incorrect or incomplete in any material respect and to provide the
information needed to correct such inaccuracy or omission. TTA will continue to
furnish Arcada
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with such supplemental information as may be necessary in order to cause such
Proxy Statement/Prospectus, insofar as it relates to TTA, to comply with Section
l(e)(i) after the mailing thereof to TTA and Arcada stockholders.
(iv) TTA will prepare and file with the SEC a registration
statement on Form S-4 (together with amendments thereto, the "Registration
Statement") containing the Proxy Statement/Prospectus in connection with the
registration under the 1933 Act, and the rules and regulations promulgated
thereunder (the "1933 Act") of the TTA Common Stock to be issued in connection
with the Merger, will use all reasonable efforts to have or cause the
Registration Statement to become effective as promptly as practicable, will use
all reasonable efforts to have or cause such TTA Common Stock to be listed on
the Nasdaq SmallCap Market-SM, and will take any other action required to be
taken under any applicable federal or state securities laws in connection with
the issuance of TTA Common Stock in the Merger. TTA will advise Arcada promptly
when the Proxy Statement/Prospectus has been approved for use in all necessary
states. The parties shall cooperate with each other in taking any other
appropriate actions that may be necessary to cause the TTA Common Stock to be
issued in connection with the Merger to be registered under the 1933 Act.
2. EFFECTIVE TIME; CLOSING. As used herein, the term Effective Time'
shall mean the date and time when the Merger becomes effective. As used herein,
the term Effective Date' shall mean the day on which the Effective Time occurs.
The parties intend that the Effective Time shall occur as soon as reasonably
practicable following the satisfaction of the conditions set out in Section 7.
l(a) and (b) below. A closing (the "Closing") shall take place prior to the
Effective Time at the offices of Cairncross & Hempelmann, 701 Fifth Avenue, 70th
Floor, Seattle, Washington, or at such other place as the parties hereto may
mutually agree upon for the Closing to take place.
3. REPRESENTATIONS AND WARRANTIES OF NEWCO. Each of TTA and Newco,
jointly and severally, hereby represent and warrant to Arcada as follows:
3.1 CORPORATE ORGANIZATION. Newco is a corporation duly organized,
validly existing and in good standing under the laws of the state of Washington.
Newco has all the requisite power and authority to own, lease and operate all of
its properties and assets and to carry on its business as currently conducted.
Newco is duly licensed or qualified to do business and is in good standing in
each jurisdiction in which the nature of the business conducted by it makes such
licensing or qualification necessary and where the failure to be so qualified
would, individually or in the aggregate, have a Material Adverse Effect (as
defined below) on TTA.
3.2 AUTHORITY. Newco has requisite corporate power and authority to
execute and deliver this Agreement and the Plan of Merger and, subject to
applicable regulatory approvals, to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement and the Plan
of Merger and the consummation of the transactions contemplated hereby and
thereby have been duly and validly approved by the Board of Directors of Newco.
This Agreement has been duly and validly executed and delivered by Newco.
Assuming the due authorization, execution and delivery hereof by the other
parties hereto, this
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Agreement constitutes the valid and binding obligation of Newco, enforceable
against it in accordance with its respective terms.
3.3 NO VIOLATIONS. Neither the execution and delivery of this
Agreement or the Plan of Merger nor the consummation by Newco of the
transactions contemplated hereby and thereby, nor compliance by Newco with any
of the terms or provisions hereof or thereof, will (i) violate any provision of
the Articles or bylaws of TTA, (ii) assuming the consents and approvals referred
to in Section 7.1 hereof are duly obtained, violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to Newco or any of its respective properties or assets, or (iii)
violate, conflict with, result in a breach of any provisions of, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of, accelerate the
performance required by, or result in the creation of any lien, security
interest, charge or other encumbrance upon any of the properties or assets of
Newco under any of the terms, conditions or provisions of any note, bond,
mortgage indenture, deed of trust, license, lease, agreement or other instrument
or obligation to which Newco is a party, or by which it or any of its properties
or assets may be bound or affected, except with respect to (iii) above, for such
violations, conflicts, breaches, defaults, termination's, accelerations and
encumbrances which would not in the aggregate (a) have a Material Adverse Effect
on TTA or (b) otherwise prevent or delay the consummation of the transactions
contemplated hereby.
3.4 CONSENTS AND APPROVALS. Except for consents and approvals of or
filings, deliveries or registrations with the SEC or other applicable
governmental authorities, no consents or approvals of or filings or
registrations with any third party or public body or authority, except for
consents, approvals, filings or registrations where the failure to obtain such
consents or approvals or to make such filings or registrations would not prevent
or delay the Merger and would not in the aggregate have a Material Adverse
Effect on TTA, are necessary in connection with the execution and delivery by
Newco of this Agreement and the consummation of the transactions contemplated
hereby.
3.5 CAPITALIZATION. The authorized capital stock of Newco as of the
date hereof consists of 100,000 shares of common stock, no par value per share,
of which 50,000 shares are duly issued and outstanding, fully paid and
nonassessable. All such shares of common stock are owned by TTA. There are
outstanding no options, convertible securities, warrants or other rights to
purchase or acquire capital stock of Newco and there is no commitment of TTA or
Newco to issue any of the same.
4. REPRESENTATIONS AND WARRANTIES OF TTA. The TTA Disclosure Schedules'
shall mean all of the disclosure schedules required by this Agreement, dated as
of the date hereof, which have been delivered to Arcada. TTA hereby represents
and warrants to Arcada as follows:
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4.1 ORGANIZATION, POWER, GOOD STANDING, ETC.
(a) TTA is a corporation duly organized, validly existing and in good
standing under the laws of the State of California. TTA has all the requisite
corporate power and authority to own, lease and operate all of its properties
and assets and to carry on its business as currently conducted. TTA is duly
licensed or qualified to do business and is in good standing in each
jurisdiction in which the nature of the business conducted by it makes such
licensing or qualification necessary and where the failure to be so qualified
would, individually or in the aggregate, have a Material Adverse Effect on TTA.
TTA owns all of the outstanding capital stock of Newco. TTA has heretofore
delivered or made available to Arcada true and correct copies of its Articles of
Incorporation (the "Articles") and its bylaws as in effect on the date hereof.
As used in this Agreement, the term Material Adverse Effect' with respect to a
party shall mean any change or effect that is reasonably likely to be materially
adverse to the business, operations, properties, condition (financial or
otherwise), assets or liabilities of such party and such party's subsidiaries
taken as a whole.
(b) Except for Newco and GetNet International, Inc. ("GetNet"), there
is no firm, corporation, partnership, joint venture or similar organization
which is consolidated with TTA for financial reporting purposes or any
corporation a majority of the outstanding capital stock of which is owned by
TTA. All of the issued and outstanding capital stock of GetNet is owned by TTA.
GetNet is a corporation duly organized, validly existing and in good standing
under the laws of the State of Arizona GetNet has all requisite corporate power
and authority to carry on its business as currently conducted. GetNet is duly
licensed or qualified to do business and is in good standing in each
jurisdiction in which the nature of the business conducted by it makes such
licensing or qualification necessary and where the failure to be so qualified
would have a Material Adverse Effect on TTA. Disclosure Schedule 4.l(b)
correctly sets forth a list of each firm, corporation, partnership, joint
venture or similar organization in which TTA has a direct or indirect
controlling, or 10 percent or greater, equity interest.
(c) The minute books of TTA and its subsidiaries contain materially
complete and accurate records of all meetings held and other corporate action
taken, since its date of organization, by such entities stockholders and Board
of Directors.
(d) Except for Newco and GetNet or as set forth on Disclosure
Schedule 4.1(d), TTA does not own (beneficially or otherwise) any capital stock
or other equity interest in any corporation or other entity.
(e) TTA has previously delivered or made available for inspection by,
Arcada, true and complete copies of all agreements to which it or any of its
subsidiaries is a party or by which it or any of its subsidiaries or any of
their respective assets may be bound, (i) which relate to any ownership interest
by TTA or any of its subsidiaries of an equity interest in any partnership,
joint venture, or similar enterprise or (ii) pursuant to which TTA or any of its
subsidiaries may be required to transfer funds in respect of an equity interest
to, make an investment in, or guarantee or assume any debt, dividend or other
obligation of, any person or entity, partnership, joint venture or similar
enterprise.
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4.2 CAPITALIZATION.
(a) The authorized capital stock of TTA consists of (a) 100,000,000
shares of common stock, of which 3,318,300 shares are issued and outstanding,
and of which (i) 1,725,000 shares are reserved for issuance pursuant to
redeemable common stock purchase warrants issued by TTA in May 1996 pursuant to
a Warrant Agreement dated May 31, 1996 between TTA and American Securities
Transfer, Inc. (the "Warrant Agreement"), (ii) 1,668,400 shares are reserved for
issuance pursuant to warrants, rights and options heretofore granted by TTA, and
(iii) 200,000 shares are reserved for issuance by the board of directors and/or
management of TTA and (b) 10,000,000 shares of preferred stock of which
9,850,000 shares are unclassified and 150,000 shares are designated as Series A
Convertible Preferred Stock. No shares of preferred stock are outstanding.
(b) Except as disclosed on Disclosure Schedule 4.2(b), TTA has not in
the past two years repurchased or retired any shares of its capital stock.
(c) All of the issued and outstanding shares of TTA Common Stock have
been duly authorized, validly issued, and are fully paid and non-assessable,
with no personal liability attaching to the ownership thereof.
(d) Disclosure Schedule 4.2 sets forth a list of all individuals who
hold stock options, the number of shares for which options have been granted to
such individuals and the exercise price for each option. Except as set forth in
Disclosure Schedule 4.2, TTA is not bound by any outstanding subscriptions,
options, warrants, calls, commitments or agreements of any character calling for
the transfer, purchase, or issuance of any shares of its capital stock or any
securities representing the right to purchase or otherwise receive any shares of
its capital stock or any securities convertible into or representing the right
to purchase or subscribe for any such shares, and there are no agreements or
understandings to which TTA is a party with respect to voting any such shares.
(e) Except as set forth in Section 4.2(a) above, there are no
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the transfer, purchase, or issuance of any shares
of its capital stock or any securities representing the right to purchase or
otherwise receive any shares of its capital stock or any securities convertible
into or representing the right to purchase or subscribe for any such shares, and
there are no agreements or understandings to which TTA is a party with respect
to voting any such shares.
(f) The authorized capital stock of GetNet as of the date hereof
consists of 10,000,000 shares of common stock, no par value per share, of which
5,566,400 shares are duly issued and outstanding, fully paid and nonassessable.
All such shares of common stock are owned by TTA. There are outstanding no
options, convertible securities, warrants or other rights to purchase or acquire
capital stock of GetNet and there is no commitment of TTA or GetNet to issue any
of the same.
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(g) The common stock of TTA to be issued in the Merger will have been
duly authorized and, when issued in accordance with the Plan of Merger, (i) will
be validly authorized and issued and fully paid and nonassessable and no
stockholder of TTA will have any preemptive rights thereto and (ii) will be
registered under the Securities Act of 1933 ,as amended, and the rules and
regulations promulgated thereunder (the "1933 Act") and listed for trading on a
national securities exchange of the Nasdaq Stock Market.
4.3 REPORTS.
(a) TTA has previously delivered or made available to Arcada an
accurate and complete copy of each (a) report delivered by TTA to its
stockholders since its inception and (b) other communications (other than
general advertising materials) mailed by TTA to its stockholders since its
inception and no such report or communication, as of its date, contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
4.4 AUTHORITY. TTA has requisite corporate power and authority to
execute and deliver this Agreement and the Plan of Merger and, subject to the
TTA Stockholder Approval and applicable regulatory approvals, to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Plan of Merger and the consummation of the transactions
contemplated hereby and thereby have been duly and validly approved by the Board
of Directors of TTA. This Agreement has been duly and validly executed and
delivered by TTA. Assuming the due authorization, execution and delivery hereof
by the other parties hereto, this Agreement constitutes the valid and binding
obligation of TTA, enforceable against it in accordance with its respective
terms.
4.5 NO VIOLATION. Neither the execution and delivery of this
Agreement or the Plan of Merger nor the consummation by TTA of the transactions
contemplated hereby and thereby, nor compliance by TTA with any of the terms or
provisions hereof or thereof, including, without limitation, TTA's
reincorporation in the state of Washington will (i) assuming TTA Stockholder
Approval, violate any provision of the Articles or bylaws of TTA, (ii) assuming
the consents and approvals referred to in Section 7.1 hereof are duly obtained,
violate any statute, code, ordinance, rule, regulation, judgment, order, writ,
decree or injunction applicable to TTA or any of its subsidiaries or any of
their respective properties or assets, or (iii) except as set forth on
Disclosure Schedule 4.5, violate, conflict with, result in a breach of any
provisions of, constitute a default (or an event which, with notice or lapse of
time, or both, would constitute a default) under, result in the termination of,
accelerate the performance required by, or result in the creation of any lien,
security interest, charge or other encumbrance upon any of the properties or
assets of TTA or any of its subsidiaries under any of the terms, conditions or
provisions of any note, bond, mortgage indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which TTA or any of its
subsidiaries is a party, or by which it or any of TTA's or its subsidiaries'
respective properties or assets may be bound or affected, except with respect to
(iii) above, for such violations, conflicts, breaches, defaults, termination's,
accelerations and encumbrances which would not in the aggregate have a Material
Adverse Effect on TTA.
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4.6 CONSENTS AND APPROVALS. Except for (i) consents and approvals of
or filings, deliveries or registrations with the SEC or other applicable
governmental authorities, (ii) the approval of the stockholders of TTA and (iii)
the consents, approvals, filings or registrations set forth on Disclosure
Schedule 4.7, no consents or approvals of or filings or registrations with any
third party or public body or authority, except for consents, approvals, filings
or registrations where the failure to obtain such consents or approvals or to
make such filings or registrations would not prevent or delay the Merger and
would not in the aggregate have a Material Adverse Effect on TTA, are necessary
in connection with the execution and delivery by TTA of this Agreement and the
consummation of the transactions contemplated hereby.
4.7 FINANCIAL STATEMENTS.
(a) TTA has previously delivered or made available to Arcada copies
of (i) the audited consolidated financial statements and unaudited interim
financial statements of TTA and any subsidiary of TTA included in TTA's annual
report on Form 10-KSB for TTA's fiscal year ended May 31, 1996 (the "May 1996
Financial Statements") and TTA's quarterly report on Form 10-QSB for TTA's
quarter ended August 30, 1996 (the "August 1996 Financial Statements") The TTA
Financial Statements referred to herein (including the related notes) have been
prepared in accordance with generally accepted accounting principals ("GAAP")
consistently followed throughout the periods covered thereby, and fairly and
accurately present the consolidated financial position of TTA as of the
respective dates set forth therein and the results of operations for the periods
included therein, except that interim unaudited financial statements are subject
to normal year-end adjustments.
(b) Each of the TTA Financial Statements referred to in Section
4.8(a) (including the related notes) has been prepared in accordance with GAAP
consistently applied during the periods involved (except as indicated in the
notes thereto). The books and records of TTA have been, and are being,
maintained in accordance with applicable legal and accounting requirements and
reflect only actual transactions.
4.8 BROKERAGE. Except for commissions owed by TTA to Robert C.
Vaughn, there are no claims for investment banking fees, brokerage commissions,
finder's fees or similar compensation arising out of or due to any act of TTA in
connection with the transactions contemplated by this Agreement.
4.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. As of the date hereof,
except as disclosed in Disclosure Schedule 4.9, there has not been any material
adverse change in the business, operations, properties, assets or financial
condition of TTA or any of its subsidiaries from that described in the TTA May
1996 Financial Statements or the TTA August 1996 Financial Statements, and, to
the best of TTA's knowledge, no fact or condition existed as of the date hereof
that TTA had reason to believe would cause such a material adverse change after
the date hereof.
4.10 LITIGATION, ETC. As of the date hereof, except as disclosed on
Disclosure Schedule 4.10, there were no actions, suits, claims, inquiries,
proceedings or, to the knowledge of TTA, investigations before any court,
commission, bureau, regulatory, administrative or
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governmental agency, arbitrator, body or authority pending or, to the knowledge
of TTA, threatened against TTA or any of its subsidiaries which would reasonably
be expected to result in any liabilities, including defense costs, in excess of
$5,000 in the aggregate. Except as disclosed on Disclosure Schedule 4.10,
neither TTA nor any of its subsidiaries is subject to any order, judgment or
decree and neither TTA nor any of its subsidiaries is in default with respect to
any such order, judgment or decree.
4.11 TAXES AND TAX RETURNS.
(a) The amounts set up as provisions for taxes on the TTA May 1996
Financial Statements are sufficient for all material accrued and unpaid federal,
state, county and local taxes, interest and penalties of TTA and each of its
subsidiaries, whether or not disputed, for the period ended May 31, 1996 and for
all fiscal periods prior thereto. Neither TTA nor any of its subsidiaries has
entered into any agreements or understandings with the Internal Revenue Service
or other applicable taxing authorities to extend or waive any statute of
limitations or time for assessment. Complete and correct copies of the income
tax returns of TTA and its subsidiaries for the three fiscal years ending May
31, 1996, as filed with the Internal Revenue Service and all state, county and
local taxing authorities, together with all related correspondence and notices,
have previously been or will be delivered and made available to Arcada when
filed in November 1996.
(b) Except as set forth on Schedule 4.11(b), TTA and each of its
subsidiaries has timely and correctly filed all federal, state, county and local
tax and other returns and reports (collectively, "Returns") required by
applicable law to be filed (including, without limitation, estimated tax
returns, income tax returns, excise tax returns, sales tax returns, use tax
returns, property tax returns, franchise tax returns, information returns and
withholding, employment and payroll tax returns), except to the extent that the
failure to timely or correctly file such Returns does not result in aggregate
penalties or assessments of more than $25,000, and has paid all taxes, levies,
license and registration fees, charges or withholdings of any nature whatsoever
shown by such Returns to be owed, or which are otherwise due and payable
(hereinafter called "Taxes"), and to the extent any material liabilities for
Taxes have not been fully discharged, full and complete reserves have been
established on the TTA May 1996 Financial Statements. Neither TTA nor any of
its subsidiaries is in default in the payment of any Taxes due or payable or any
assessments received in respect thereof except for Taxes which are being
contested in good faith. No additional assessments of Taxes are known to TTA to
be proposed, pending or threatened, other than Taxes for periods for which
returns are not yet filed.
(c) Neither TTA nor any of its subsidiaries has filed a consent to
the application of Section 341(f) of the Internal Revenue Code of 1986, as
amended.
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4.12 EMPLOYEES; EMPLOYEE BENEFIT PLANS.
(a) Except as set forth on Disclosure Schedule 4.12(a), as of the
date hereof, neither TTA nor any of its subsidiaries is a party to or bound by
any contract, arrangement or understanding (whether written or oral) with
respect to the employment or compensation of any officers, employees or
consultants and except as provided herein, and under those Benefit Plans (as
defined below) set forth on Disclosure Schedule 4.12(a), consummation of the
transactions contemplated by this Agreement will not (either alone or upon the
occurrence of any additional acts or events) result in any payment (whether of
severance pay or otherwise) becoming due from TTA or any of its subsidiaries to
any officer or employee thereof. TTA has previously delivered or made available
to Arcada true and complete copies of all employment, consulting and deferred
compensation agreements that are in writing, to which TTA or any of its
subsidiaries is a party.
(b) Except as set forth on Disclosure Schedule 4.12(b), as of the
date hereof, no officer or employee of TTA or any of its subsidiaries is
receiving aggregate remuneration bonus, salary and commissions) at a rate which,
if annualized, would exceed $40,000 in 1996.
(c) Except as disclosed on Disclosure Schedule 4.12(c), as of the
date hereof, there are not, and have not been at any time in the past three
years, any actions, suits, claims or proceedings before any court (which have
been served on TTA or any of its subsidiaries), commission, bureau, regulatory,
administrative or governmental agency, arbitrator, body or authority pending or,
to the best of TTA's knowledge, threatened by any employees, former employees or
other persons relating to the employment practices or activities of TTA or its
subsidiaries (except for threatened actions which have subsequently been
resolved). Neither TTA nor any of its subsidiaries is a party to any collective
bargaining agreement, and no union organization efforts are pending or, to the
best of TTA's knowledge, threatened nor have any occurred during the last three
years.
(d) TTA has made available to Arcada true and complete copies of all
personnel codes, practices, procedures, policies, manuals, affirmative action
programs and similar materials.
(e) With respect to all employee benefit plans, TTA represents and
warrants as follows:
(i) All employee benefit plans, as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
any other pension, bonus, deferred compensation, stock bonus, stock purchase,
post-retirement medical, hospitalization, health and other employee benefit
plan, program or arrangement, whether formal or informal, under which TTA or any
of its subsidiaries has any obligation or liability, or under which any employee
or former employee has any rights to benefits or any cafeteria plans,' as
described in Section 125 of the Internal Revenue Code of 1986, as amended (the
"Code") (together, the "Benefit Plans") are set forth on Disclosure Schedule
4.12(e)(i). Except as set forth on Disclosure Schedule 4.12(e)(i), none of the
Benefit Plans is subject to Title IV of ERISA, is a multiemployer plan,' as
such term is defined in Section 3(37) and 4001(a)(3) of
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ERISA and Section 414(f) of the Code, or is subject to the funding requirements
of Section 412 of the Code or Title I, Subtitle B, Part 3 of ERISA.
(ii) In all material respects, except as discussed on Disclosure
Schedule 4.12(e)(ii), the terms of the Benefit Plans are, and the Benefit Plans
have been administered, in accordance with the requirements of ERISA, the Code,
applicable law and the respective plan documents. Except as disclosed on
Disclosure Schedule 4.12(e)(ii), none of the Benefit Plans is under audit or is
the subject of an investigation by the Internal Revenue Service, the U.S.
Department of Labor or any other federal or state governmental agency. Except
as disclosed on Disclosure Schedule 4.12(e)(ii), all material reports and
information required to be filed with, or provided to, the United States
Department of Labor, Internal Revenue Service, the Pension Benefit Guaranty
Corporation (the "PBGC") and plan participants and beneficiaries with respect to
each Benefit Plan have been timely filed or provided. With respect to each
Benefit Plan for which an annual report has been filed, no material change has
occurred with respect to the matters covered by the most recent annual report
since the date thereof.
(iii) TTA is not aware of any facts regarding any Benefit Plan
which is an employee pension benefit plan' as defined in Section 3(2) of ERISA
(collectively, the "Employee Pension Benefit Plans") that would present a
significant risk that any Employee Pension Benefit Plan would not be determined
by the appropriate District Director of the Internal Revenue Service to be
'qualified' within the meaning of Section 401(a) of the Code, or with respect to
which any trust maintained pursuant thereto is not exempt from federal income
taxation pursuant to Section 501 of the Code, or with respect to which a
favorable determination letter could not be issued by the Internal Revenue
Service with respect to each such Employee Pension Benefit Plan.
(iv) Prior to the Closing, TTA shall deliver or make available
to Arcada complete and correct copies (if any) of (w) the most recent Internal
Revenue Service determination letter relating to each Employee Pension Benefit
Plan intended to be tax qualified under Section 401(a) and 501(a) of the Code,
(x) the most recent annual report (Form 5500 Series) and accompanying schedules
of each Benefit Plan, filed with the Internal Revenue Service or an explanation
of why such annual report is not required, (y) the most current summary plan
description for each Benefit Plan, and (z) the most recent audited financial
+statements of each Benefit Plan.
(v) With respect to each Benefit Plan, all contributions,
premiums or other payments due or required to be made to such plans as of the
Effective Time have been or will be made or accrued prior to the Effective Time.
(vi) To the best of TTA's knowledge, there are not now, nor have
there been, any prohibited transactions', as such term is defined in Section
4975 of the Code or Section 406 of ERISA, involving TTA or any of its
subsidiaries, or any officer, director or employee of TTA or any of its
subsidiaries, with respect to the Benefit Plans that could subject TTA or any
other party-in-interest to the penalty or tax imposed under Section 502(i) of
ERISA and Section 4975 of the Code.
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(vii) As of the date hereof, no claim, lawsuit, arbitration or
other action has been instituted, asserted (and no such lawsuit has been served
on TTA or any of its subsidiaries) or, to the best of TTA's knowledge,
threatened by or on behalf of such Benefit Plan or by any employee alleging a
breach or breaches of fiduciary duty or violations of other applicable state or
federal law with respect to such Benefit Plans, which could result in liability
on the part of TTA or any of its subsidiaries or a Benefit Plan under ERISA or
any other law, nor is there any known basis for successful prosecution of such a
claim, and Arcada will be notified promptly in writing of any such threatened or
pending claim arising between the date hereof and the Closing.
(viii) Except as may be required by the Consolidated Omnibus
Budget and Reconciliation Act of 1985, as amended ("COBRA"), no Benefit Plan
which is an employee welfare benefit plan (within the meaning of Section 3(1) of
ERISA) provides for continuing benefits or coverage for any participant or
beneficiary of a participant after such participant's termination of employment
nor does TTA or any of its subsidiaries have any current or projected liability
under any such plans.
(ix) Neither TTA nor any of its subsidiaries has maintained or
contributed to, and does not currently maintain or contribute to, any severance
pay plan. All payments (other than regular wages and vacation pay) made to
employees of TTA or any of its subsidiaries coincident with or in connection
with termination of employment since January 1, 1994 are disclosed on Disclosure
Schedule 4.12(e)(ix).
(x) No individual will accrue or receive any additional
benefits, service, or accelerated rights to payment or vesting of benefits under
any Benefit Plan, or otherwise obtain rights to any parachute payment,' as
defined in Section 280G(b)(2) of the Code, as a result of the transactions
contemplated by this Agreement.
(xi) TTA and each of its subsidiaries has complied in all
material respects with all of the requirements of COBRA.
4.13 TTA INFORMATION. The information relating to TTA and each of its
subsidiaries to be contained in the Proxy Statement/Prospectus contemplated by
Section l(e) hereof will not, at the time it is filed with the applicable
governmental authorities, as of the date thereof, or at the date actions of TTA
stockholders are taken with respect to the transactions contemplated therein,
contain any untrue statement of a material fact or omit to state a material fact
necessary to make such statements, in light of the circumstances under which
such statements were made, not misleading.
4.14 COMPLIANCE WITH APPLICABLE LAW.
(a) Except as set forth on Disclosure Schedule 4.14(a), TTA and each
of its subsidiaries holds all licenses, certificates, franchises, permits and
other governmental authorizations ("Permits") necessary for the lawful conduct
of its respective businesses and such Permits are in full force and effect, and
TTA and each of its subsidiaries is in all respects
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complying therewith, except where the failure to possess or comply with such
Permits would not have a Material Adverse Effect on TTA.
(b) Except as set forth on Disclosure Schedule 4.14(b), TTA and each
of its subsidiaries is and for the past three years has been in compliance with
all foreign, federal, state and local laws, statutes, ordinances, rules,
regulations and orders applicable to the operation, conduct or ownership of its
business or properties except for any noncompliance which is not reasonably
likely to have in the aggregate a Material Adverse Effect on TTA.
4.15 CONTRACTS AND AGREEMENTS.
As of the date hereof, except as disclosed in Disclosure Schedule
4.15, (i) neither TTA nor any of its subsidiaries is a party to or bound by any
commitment, contract, agreement or other instrument which involves or could
involve aggregate future payments by TTA or any of its subsidiaries of more than
$25,000, (ii) neither TTA nor any of its subsidiaries is a party to nor was it
bound by any commitment, contract, agreement or other instrument which is
material to the business, operations, properties, assets or financial condition
of TTA and (iii) no commitment, contract, agreement or other instrument other
than TTA's and its subsidiaries' respective charter documents, to which TTA or
any of its subsidiaries is a party or by which TTA or any of its subsidiaries is
bound, limits the freedom of TTA or any of its subsidiaries to compete in any
line of business or with any person.
4.16 AFFILIATE TRANSACTIONS.
(a) Except as disclosed in Disclosure Schedule 4.16, and except as
specifically contemplated by this Agreement, since May 31, 1996, neither TTA nor
any of its subsidiaries has engaged in, or is not currently obligated to engage
in (whether in writing or orally), any transaction with any Affiliated Person
(as defined below) involving aggregate payments by or to TTA or any of its
subsidiaries of $30,000 or more during any consecutive 12 month period.
(b) For purposes of this Section 4.16, Affiliated Person' means:
(i) a director, executive officer or Controlling Person (as
defined below) of TTA or any of its subsidiaries
(ii) a spouse of a director, executive officer or Controlling
Person of TTA or any of its subsidiaries;
(iii) a member of the immediate family of a director,
executive officer, or Controlling Person of TTA or any of its subsidiaries who
has the same home as such person;
(iv) any corporation or organization (other than TTA or any of
its subsidiaries) of which a director, executive officer or Controlling Person
of TTA or any of its subsidiaries (w) is a chief executive officer, chief
financial officer, or a person performing similar functions; (x) is a general
partner; (y) is a limited partner who, directly or indirectly, either alone or
with his spouse and the members of his immediate family who are also Affiliated
Persons, owns an interest of five percent or more in the partnership (based on
the value of his contribution) or who, directly or indirectly through other
directors, executive officers and Controlling Persons of TTA or any of its
subsidiaries and their spouses and their immediate family members who are also
Affiliated Persons,
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owns an interest in 25 percent or more of the partnership; or (z) directly or
indirectly either alone or with his spouse and the members of his immediate
family who are also Affiliated Persons, owns or controls ten percent or more of
any class of equity securities, or owns or controls, with other directors,
executive officers, and Controlling Persons of TTA or any of its subsidiaries
and their spouses and their immediate family members who are also Affiliated
Persons, 25 percent or more of any class of equity securities;
(v) any trust or estate in which a director, executive officer,
or Controlling Person of TTA or any of its subsidiaries or the spouse of such
person has a substantial beneficial interest or as to which such person or his
spouse serves as trustee or in a similar fiduciary capacity.
(c) For purposes of this Section 4.16 Controlling Person' means any
person or entity which, either directly or indirectly, or acting in concert with
one or more other persons or entities owns, controls or holds with power to
vote, or holds proxies representing ten percent or more of the outstanding TTA
Common Stock or of any subsidiary of TTA.
(d) For purposes of this Section 4.16, the term director' means any
director, trustee, or other person performing similar functions with respect to
any organization whether incorporated or unincorporated.
(e) For purposes of this Section 4.16, the term executive officer'
means the president, any executive vice president, any senior vice president,
the secretary, the treasurer, the comptroller, and any other person performing
similar functions with respect to any organization whether incorporated or
unincorporated.
4.17 DISCLOSURE. To the knowledge of TTA, no representation or
warranty of TTA contained in this Agreement, and no statement contained in the
Disclosure Schedules delivered by TTA hereunder, contains any untrue statement
of a material fact or omits to state a material fact necessary in order to make
a statement herein or therein, in light of the circumstances under which it was
made, not misleading.
4.18 TITLE TO PROPERTY.
(a) REAL PROPERTY. Disclosure Schedule 4.18(a) contains a true and
correct description of all interests in real property (other than real property
security interests received in the ordinary course of business), whether owned,
leased or otherwise claimed, including a list of all leases of real property, in
which TTA or any of its subsidiaries has or claims an interest as of the date
hereof and any guarantees of any such leases by TTA or any of its subsidiaries.
True and complete copies of such leases have previously been delivered or made
available to Arcada, together with all amendments, modifications, agreements or
other writings related thereto. Except as disclosed on Disclosure Schedule
4.18(a), each such lease is legal, valid and binding as
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between TTA or its subsidiaries and the other party or parties thereto, and the
occupant is a tenant or possessor in good standing thereunder, free of any
default or breach whatsoever and quietly enjoys the premises provided for
therein. Except as disclosed on Disclosure Schedule 4.18(a), TTA and each of
its subsidiaries has good, valid and marketable title to all real property owned
by it on the date hereof, free and clear of all mortgages, liens, pledges,
charges or encumbrances of any nature whatsoever, except liens for current taxes
not yet due and payable, and such encumbrances and imperfections of title, if
any, as do not materially detract from the value of the properties and do not
materially interfere with the present or proposed use of such properties or
otherwise materially impair such operations. All real property and fixtures
material to the business, operations or financial condition of TTA or any of its
subsidiaries are in substantially good condition and repair.
(b) ENVIRONMENTAL MATTERS. Except as set forth on Disclosure
Schedule 4.18(b), to the knowledge of TTA, the real property owned or leased by
TTA or any of its subsidiaries on the date hereof does not contain any
underground storage tanks, asbestos, ureaformaldehyde, uncontained
polychlorinated biphenyls, or, except for materials which are ordinarily used in
office buildings and office equipment such as janitorial supplies and do not
give rise to financial liability therefor under the hereafter defined
Environmental Laws, releases of hazardous substances as such terms may be
defined by all applicable federal, state or local environmental protection laws
and regulations ("Environmental Laws"). As of the date hereof (i) no part of
any such real property has been listed, or to the knowledge of TTA, proposed for
listing on the National Priorities List pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") or on a
registry or inventory of inactive hazardous waste sites maintained by any state,
and, (ii) except as set forth on Disclosure Schedule 4.18(b), no notices have
been received alleging that TTA or any of its subsidiaries was a potentially
responsible person under CERCLA or any similar statute, rule or regulation. TTA
knows of no violation of law, regulation, ordinance (including, without
limitation, laws, regulations and ordinances with respect to hazardous waste,
zoning, environmental, city planning or other similar matters) relating to its
or any of its subsidiaries' respective properties, which violations could have
in the aggregate a Materially Adverse Effect on TTA.
(c) PERSONAL PROPERTY. Disclosure Schedule 4.18(c) contains a true
and correct list of (i) each item of machinery, equipment, or furniture,
including without limitation computers and vehicles, of TTA and each of its
subsidiaries, included on the TTA May 1996 Financial Statements at a carrying
value of, or, if acquired after May 31, 1996, for a purchase price of, more than
$50,000, (ii) each lease or other agreement under which any such item of
personal property is leased, rented, held or operated where the current fair
market value of such item is more than $25,000 and (iii) all trademarks, trade
names or service marks currently used, owned, or registered for use by TTA or
any of its subsidiaries. Except as disclosed on Schedule 4,18(c), TTA and each
of its subsidiaries has good, valid and marketable title to all personal
property owned by it, free and clear of all liens, pledges, charges or
encumbrances of any nature whatsoever.
4.19 INSURANCE. Disclosure Schedule 4.19 contains a true and complete
list and a brief description (including name of insurer, agent, coverage and
expiration date) of all insurance policies in force on the date hereof with
respect to the business and assets of TTA and
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each of its subsidiaries. TTA and each of its subsidiaries is in compliance
with all of the material provisions of its insurance policies and are not in
default under any of the terms thereof. Each such policy is outstanding and in
full force and effect and, except as set forth on Disclosure Schedule 4.19, TTA
or one of its subsidiaries is the sole beneficiary of such policies. Al
premiums and other payments due under any such policy have been paid. TTA has
previously delivered to, or made available for inspection by, Arcada, each
insurance policy to which TTA or any of its subsidiaries is a party.
4.20 POWERS OF ATTORNEY. Neither TTA nor any of its subsidiaries has
any powers of attorney outstanding other than those in the ordinary course of
business with respect to routine matters.
4.21 SUFFICIENT RESOURCES. TTA has and will have available at the
Effective Time sufficient authorized but unissued shares of TTA Common Stock, to
enable it lawfully to satisfy its payment obligations pursuant to this
Agreement. TTA has and will have sufficient management and financial resources
to obtain the required regulatory approvals for the Merger. On the date of this
Agreement, there is no pending or, to the knowledge of TTA, threatened legal or
governmental proceeding, against TTA or any subsidiary or affiliate of TTA which
would affect TTA's or Newco's ability to obtain any of the required regulatory
approvals or satisfy any of the other conditions required to be satisfied in
order to consummate the transactions contemplated by this Agreement. TTA will
promptly notify Arcada if any of the representations contained in this Section
4.21 cease to be true and correct.
4.22 SEC FILINGS. (a) TTA has delivered to Arcada its annual report
on Form 10-KSB for TTA's fiscal year ended May 31, 1996 and TTA's quarterly
report of 10-QSB for TTA's first quarter ended August 31, 1996, and all of
Purchaser's other reports, statements ,schedules and registration statements
filed with the Securities and Exchange Commission (the "SEC") since its
inception, (b) as of its filing date, each such report or statement filed
pursuant to the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder (the "1934 Act"), complied as to form in all
material respects with the 1934 Act and did not contain any untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading and (c) each such registration statement, as amended
or supplemented, if applicable, filed pursuant to the 1933 Act as of the date
such statement or amendment became effective complied as to form in all material
respects with the 1933 Act and did not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
4.23 BANK ACCOUNTS, ETC. Set forth on SCHEDULE 4.23 hereto is a true
and complete list of all bank accounts, safe deposit boxes and lock boxes of TTA
and each of its subsidiaries, including, with respect to each such account and
lock box: (a) identification of all authorized signatories, (b) identification
of the business purpose of such account or lock box, including identification of
any accounts or lock boxes representing escrow funds or otherwise subject to
restriction; and (c) identification of the amount on deposit as of September 30,
1996.
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5. REPRESENTATIONS OF ARCADA: The 'Arcada Disclosure Schedules' shall
mean all of the disclosure schedules required by this Agreement, dated as of the
date hereof, which have been delivered to Arcada. Arcada hereby represents and
warrants to each of TTA and Newco as follows:
5.1 ORGANIZATION, POWER, GOOD STANDING, ETC.
(a) Arcada is a corporation duly organized, validly existing and in
good standing under the laws of the State of Washington. Arcada has all the
requisite corporate power and authority to own, lease and operate all of its
properties and assets and to carry on its business as currently conducted.
Arcada is duly licensed or qualified to do business and is in good standing in
each jurisdiction in which the nature of the business conducted by it makes such
licensing or qualification necessary and where the failure to be so qualified
would, individually or in the aggregate, have a Material Adverse Effect on
Arcada. Arcada has heretofore delivered or made available to Arcada true and
correct copies of its Articles of Incorporation (the "Articles") and its bylaws
as in effect on the date hereof.
(b) There is no firm, corporation, partnership, joint venture or
similar organization which is consolidated with Arcada for financial reporting
purposes or any corporation a majority of the outstanding capital stock of which
is owned by Arcada. Disclosure Schedule 5.l(b) correctly sets forth a list of
each firm, corporation, partnership, joint venture or similar organization in
which Arcada has a direct or indirect controlling, or 10 percent or greater,
equity interest.
(c) The minute books of Arcada and its subsidiaries contain
materially complete and accurate records of all meetings held and other
corporate action taken, since its date of organization, by its stockholders and
Board of Directors.
(d) Except as set forth on Disclosure Schedule 5.1(d), Arcada does
not own (beneficially or otherwise) any capital stock or other equity interest
in any corporation or other entity.
(e) Arcada has previously delivered or made available for inspection
by, TTA, true and complete copies of all agreements to which it is a party or by
which its assets may be bound, (i) which relate to any ownership interest by
Arcada of an equity interest in any partnership, joint venture, or similar
enterprise or (ii) pursuant to which Arcada may be required to transfer funds in
respect of an equity interest to, make an investment in, or guarantee or assume
any debt, dividend or other obligation of, any person or entity, partnership,
joint venture or similar enterprise.
5.2 CAPITALIZATION.
(a) The authorized capital stock of Arcada consists of 50,000 shares
of common stock, all of which shares shall be issued and outstanding as of the
Effective Date.
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(b) Except as set forth on Schedule 5.2(b), Arcada has not in the
past two years repurchased or retired any shares of its capital stock.
(c) All of the issued and outstanding shares of Arcada Common Stock
have been duly authorized, validly issued, and are fully paid and
non-assessable, with no personal liability attaching to the ownership thereof.
(d) Arcada is not bound by any outstanding subscriptions, options,
warrants, calls, commitments or agreements of any character calling for the
transfer, purchase, or issuance of any shares of its capital stock or any
securities representing the right to purchase or otherwise receive any shares of
its capital stock or any securities convertible into or representing the right
to purchase or subscribe for any such shares, and there are no agreements or
understandings to which Arcada is a party with respect to voting any such
shares.
(e) There are no outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the transfer, purchase,
or issuance of any shares of its capital stock or any securities representing
the right to purchase or otherwise receive any shares of its capital stock or
any securities convertible into or representing the right to purchase or
subscribe for any such shares, and there are no agreements or understandings to
which Arcada is a party with respect to voting any such shares.
5.3 REPORTS.
(a) Arcada has previously delivered or made available to TTA an
accurate and complete copy of each (a) report delivered by Arcada to its
stockholders since January, 1993, and (b) other communications (other than
general advertising materials) mailed by Arcada to its stockholders since
January, 1993 and no such report or communication, as of its date, contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
5.4 AUTHORITY. Arcada has requisite corporate power and authority to
execute and deliver this Agreement and the Plan of Merger and, subject to the
Arcada Stockholder Approval and applicable regulatory approvals, to consummate
the transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Plan of Merger and the consummation of the transactions
contemplated hereby and thereby have been duly and validly approved by the Board
of Directors of Arcada. This Agreement has been duly and validly executed and
delivered by Arcada. Assuming the due authorization, execution and delivery
hereof by the other parties hereto, this Agreement constitutes the valid and
binding obligation of Arcada, enforceable against it in accordance with its
respective terms.
5.5 NO VIOLATION. Neither the execution and delivery of this
Agreement or the Plan of Merger nor the consummation by Arcada of the
transactions contemplated hereby and thereby, nor compliance by Arcada with any
of the terms or provisions hereof or thereof, will (i) assuming Arcada
Stockholder Approval, violate any provision of the Articles or bylaws of Arcada,
(ii) assuming the consents and approvals referred to in Section 7.1 hereof are
duly
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obtained, violate any statute, code, ordinance, rule, regulation, judgment,
order, writ, decree or injunction applicable to Arcada or any of its properties
or assets, or (iii) except as set forth on Disclosure Schedule 5.5, violate,
conflict with, result in a breach of any provisions of, constitute a default (or
an event which, with notice or lapse of time, or both, would constitute a
default) under, result in the termination of, accelerate the performance
required by, or result in the creation of any lien, security interest, charge or
other encumbrance upon any of the properties or assets of Arcada under any of
the terms, conditions or provisions of any note, bond, mortgage indenture, deed
of trust, license, lease, agreement or other instrument or obligation to which
Arcada is a party, or by which its properties or assets may be bound or
affected, except with respect to (iii) above, for such violations, conflicts,
breaches, defaults, termination's, accelerations and encumbrances which would
not in the aggregate have a Material Adverse Effect on Arcada.
5.6 CONSENTS AND APPROVALS. Except for (i) consents and approvals of
or filings, deliveries or registrations with the SEC or other applicable
governmental authorities, (ii) the approval of the stockholders of Arcada and
(iii) the consents, approvals, filings or registrations set forth on Disclosure
Schedule 5.6, no consents or approvals of or filings or registrations with any
third party or public body or authority, except for consents, approvals, filings
or registrations where the failure to obtain such consents or approvals or to
make such filings or registrations would not prevent or delay the Merger and
would not in the aggregate have a Material Adverse Effect on Arcada, are
necessary in connection with the execution and delivery by Arcada of this
Agreement and the consummation of the transactions contemplated hereby.
5.7 FINANCIAL STATEMENTS.
(a) Arcada has previously delivered or made available to TTA copies
of (i) the reviewed combined financial statements and unaudited interim
financial statements of Arcada and any subsidiary of Arcada for fiscal year
ended December 31, 1995 (the "December 1995 Financial Statements") and Arcada's
quarterly financial statements for the six months ended June 30, 1996 (the "June
1996 Financial Statements") The Arcada Financial Statements referred to herein
(including the related notes) have been prepared in accordance with GAAP
consistently followed throughout the periods covered thereby, and fairly and
accurately present the consolidated financial position of Arcada as of the
respective dates set forth therein and the results of operations for the periods
included therein, except that interim unaudited financial statements are subject
to normal year-end adjustments.
(b) Each of the Arcada Financial Statements referred to in Section
5.8(a) (including the related notes) has been prepared in accordance with GAAP
consistently applied during the periods involved (except as indicated in the
notes thereto). The books and records of Arcada have been, and are being,
maintained in accordance with applicable legal and accounting requirements and
reflect only actual transactions.
5.8 BROKERAGE. There are no claims for investment banking fees,
brokerage commissions, finder's fees or similar compensation arising out of or
due to any act of Arcada in connection with the transactions contemplated by
this Agreement.
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5.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. As of the date hereof,
except as disclosed in Disclosure Schedule 5.9, there has not been any material
adverse change in the business, operations, properties, assets or financial
condition of Arcada or any of its subsidiaries from that described in the Arcada
December 1995 Financial Statements or the Arcada June 1996 Financial Statements,
and, to the best of Arcada's knowledge, no fact or condition existed as of the
date hereof that Arcada had reason to believe would cause such a material
adverse change after the date hereof.
5.10 LITIGATION, ETC. As of the date hereof, except as disclosed on
Disclosure Schedule 5.10, there were no actions, suits, claims, inquiries,
proceedings or, to the knowledge of Arcada, investigations before any court,
commission, bureau, regulatory, administrative or governmental agency,
arbitrator, body or authority pending or, to the knowledge of Arcada, threatened
against Arcada which would reasonably be expected to result in any liabilities,
including defense costs, in excess of $5,000 in the aggregate. Except as
disclosed on Disclosure Schedule 5.10, Arcada is not subject to any order,
judgment or decree and Arcada is not in default with respect to any such order,
judgment or decree.
5.11 TAXES AND TAX RETURNS.
(a) The amounts set up as provisions for taxes on the Arcada December
1995 Financial Statements are sufficient for all material accrued and unpaid
federal, state, county and local taxes, interest and penalties of Arcada and
each of its subsidiaries, whether or not disputed, for the period ended December
31, 1995 and for all fiscal periods prior thereto. Arcada has not entered into
any agreements or understandings with the Internal Revenue Service or other
applicable taxing authorities to extend or waive any statute of limitations or
time for assessment. Complete and correct copies of the income tax returns of
Arcada for the three fiscal years ending December 31, 1995, as filed with the
Internal Revenue Service and all state, county and local taxing authorities,
together with all related correspondence and notices, have previously been
delivered or made available to Arcada.
(b) Arcada has timely and correctly filed all federal, state, county
and local tax and other returns and reports (collectively, "Returns") required
by applicable law to be filed (including, without limitation, estimated tax
returns, income tax returns, excise tax returns, sales tax returns, use tax
returns, property tax returns, franchise tax returns, information returns and
withholding, employment and payroll tax returns), except to the extent that the
failure to timely or correctly file such Returns does not result in aggregate
penalties or assessments of more than $25,000, and has paid all taxes, levies,
license and registration fees, charges or withholdings of any nature whatsoever
shown by such Returns to be owed, or which are otherwise due and payable
(hereinafter called "Taxes"), and to the extent any material liabilities for
Taxes have not been fully discharged, full and complete reserves have been
established on the Arcada December 1995 Financial Statements. Arcada is not in
default in the payment of any Taxes due or payable or any assessments received
in respect thereof except for Taxes which are being contested in good faith. No
additional assessments of Taxes are known to Arcada to be proposed, pending or
threatened, other than Taxes for periods for which returns are not yet filed.
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(c) Arcada has not filed a consent to the application of Section
341(f) of the Internal Revenue Code of 1986, as amended.
5.12 EMPLOYEES; EMPLOYEE BENEFIT PLANS.
(a) Except as set forth on Disclosure Schedule 5.12(a), as of the
date hereof, Arcada is not a party to or bound by any contract, arrangement or
understanding (whether written or oral) with respect to the employment or
compensation of any officers, employees or consultants and except as provided
herein, and under those Benefit Plans (as defined below) set forth on Disclosure
Schedule 5.12(a), consummation of the transactions contemplated by this
Agreement will not (either alone or upon the occurrence of any additional acts
or events) result in any payment (whether of severance pay or otherwise)
becoming due from Arcada to any officer or employee thereof. Arcada has
previously delivered or made available to Arcada true and complete copies of all
employment, consulting and deferred compensation agreements that are in writing,
to which Arcada is a party.
(b) Except as set forth on Disclosure Schedule 5.12(b), as of the
date hereof, no officer or employee of Arcada is receiving aggregate
remuneration bonus, salary and commissions) at a rate which, if annualized,
would exceed $40,000 in 1996.
(c) Except as disclosed on Disclosure Schedule 5.12(c), as of the
date hereof, there are not, and have not been at any time in the past three
years, any actions, suits, claims or proceedings before any court (which have
been served on Arcada), commission, bureau, regulatory, administrative or
governmental agency, arbitrator, body or authority pending or, to the best of
Arcada's knowledge, threatened by any employees, former employees or other
persons relating to the employment practices or activities of Arcada (except for
threatened actions which have subsequently been resolved). Arcada is not a
party to any collective bargaining agreement, and no union organization efforts
are pending or, to the best of Arcada's knowledge, threatened nor have any
occurred during the last three years.
(d) Arcada has made available to TTA true and complete copies of all
personnel codes, practices, procedures, policies, manuals, affirmative action
programs and similar materials.
(e) With respect to all employee benefit plans, Arcada represents and
warrants as follows:
(i) All employee benefit plans, as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
any other pension, bonus, deferred compensation, stock bonus, stock purchase,
post-retirement medical, hospitalization, health and other employee benefit
plan, program or arrangement, whether formal or informal, under which Arcada has
any obligation or liability, or under which any employee or former employee has
any rights to benefits or any 'cafeteria plans,' as described in Section 125 of
the Internal Revenue Code of 1986, as amended (the "Code") (together, the
"Benefit Plans") are set forth on Disclosure Schedule 5.12(e)(i). Except as set
forth on Disclosure Schedule 5.13(e)(i), none of the Benefit Plans is subject to
Title IV of ERISA, is a 'multiemployer plan,'
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as such term is defined in Section 3(37) and 4001(a)(3) of ERISA and Section
414(f) of the Code, or is subject to the funding requirements of Section 412 of
the Code or Title I, Subtitle B, Part 3 of ERISA.
(ii) In all material respects, except as discussed on Disclosure
Schedule 5.12(e)(ii), the terms of the Benefit Plans are, and the Benefit Plans
have been administered, in accordance with the requirements of ERISA, the Code,
applicable law and the respective plan documents. Except as disclosed on
Disclosure Schedule 5.12(e)(ii), none of the Benefit Plans is under audit or is
the subject of an investigation by the Internal Revenue Service, the U.S.
Department of Labor or any other federal or state governmental agency. Except
as disclosed on Disclosure Schedule 5.12(e)(ii), all material reports and
information required to be filed with, or provided to, the United States
Department of Labor, Internal Revenue Service, the Pension Benefit Guaranty
Corporation (the "PBGC") and plan participants and beneficiaries with respect to
each Benefit Plan have been timely filed or provided. With respect to each
Benefit Plan for which an annual report has been filed, no material change has
occurred with respect to the matters covered by the most recent annual report
since the date thereof.
(iii) Arcada is not aware of any facts regarding any Benefit Plan
which is an 'employee pension benefit plan' as defined in Section 3(2) of ERISA
(collectively, the "Employee Pension Benefit Plans") that would present a
significant risk that any Employee Pension Benefit Plan would not be determined
by the appropriate District Director of the Internal Revenue Service to be
'qualified' within the meaning of Section 401(a) of the Code, or with respect to
which any trust maintained pursuant thereto is not exempt from federal income
taxation pursuant to Section 501 of the Code, or with respect to which a
favorable determination letter could not be issued by the Internal Revenue
Service with respect to each such Employee Pension Benefit Plan.
(iv) Prior to the Closing, Arcada shall deliver or make available
to TTA complete and correct copies (if any) of (w) the most recent Internal
Revenue Service determination letter relating to each Employee Pension Benefit
Plan intended to be tax qualified under Section 401(a) and 501(a) of the Code,
(x) the most recent annual report (Form 5500 Series) and accompanying schedules
of each Benefit Plan, filed with the Internal Revenue Service or an explanation
of why such annual report is not required, (y) the most current summary plan
description for each Benefit Plan, and (z) the most recent audited financial
statements of each Benefit Plan.
(v) With respect to each Benefit Plan, all contributions,
premiums or other payments due or required to be made to such plans as of the
Effective Time have been or will be made or accrued prior to the Effective Time.
(vi) To the best of Arcada's knowledge, there are not now, nor
have there been, any 'prohibited transactions', as such term is defined in
Section 4975 of the Code or Section 406 of ERISA, involving Arcada or any of its
subsidiaries, or any officer, director or employee of Arcada or any of its
subsidiaries, with respect to the Benefit Plans that could subject Arcada or any
other party-in-interest to the penalty or tax imposed under Section 502(i) of
ERISA and Section 4975 of the Code.
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(vii) As of the date hereof, no claim, lawsuit, arbitration or
other action has been instituted, asserted (and no such lawsuit has been served
on Arcada) or, to the best of Arcada's knowledge, threatened by or on behalf of
such Benefit Plan or by any employee alleging a breach or breaches of fiduciary
duty or violations of other applicable state or federal law with respect to such
Benefit Plans, which could result in liability on the part of Arcada or any of
its subsidiaries or a Benefit Plan under ERISA or any other law, nor is there
any known basis for successful prosecution of such a claim, and TTA will be
notified promptly in writing of any such threatened or pending claim arising
between the date hereof and the Closing.
(viii) Except as may be required by the Consolidated Omnibus
Budget and Reconciliation Act of 1985, as amended ("COBRA"), no Benefit Plan
which is an employee welfare benefit plan (within the meaning of Section 3(1) of
ERISA) provides for continuing benefits or coverage for any participant or
beneficiary of a participant after such participant's termination of employment
nor does Arcada have any current or projected liability under any such plans.
(ix) Arcada has not maintained or contributed to, and does not
currently maintain or contribute to, any severance pay plan. All payments
(other than regular wages and vacation pay) made to employees of Arcada
coincident with or in connection with termination of employment since January 1,
1994 are disclosed on Disclosure Schedule 5.12(e)(ix).
(x) No individual will accrue or receive any additional
benefits, service, or accelerated rights to payment or vesting of benefits under
any Benefit Plan, or otherwise obtain rights to any parachute payment,' as
defined in Section 280G(b)(2) of the Code, as a result of the transactions
contemplated by this Agreement.
(xi) Arcada has complied in all material respects with all of
the requirements of COBRA.
5.13 ARCADA INFORMATION. The information relating to Arcada to be
contained in the Proxy Statement/Prospectus contemplated by Section l(e) hereof
will not, at the time it is filed with the applicable governmental authorities,
as of the date thereof, or at the date actions of Arcada stockholders are taken
with respect to the transactions contemplated therein, contain any untrue
statement of a material fact or omit to state a material fact necessary to make
such statements, in light of the circumstances under which such statements were
made, not misleading.
5.14 COMPLIANCE WITH APPLICABLE LAW.
(a) Except as set forth on Disclosure Schedule 5.14(a), Arcada holds
all licenses, certificates, franchises, permits and other governmental
authorizations ("Permits") necessary for the lawful conduct of its businesses
and such Permits are in full force and effect, and Arcada is in all respects
complying therewith, except where the failure to possess or comply with such
Permits would not have a Material Adverse Effect on Arcada.
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(b) Except as set forth on Disclosure Schedule 5.14(b), Arcada is and
for the past three years has been in compliance with all foreign, federal, state
and local laws, statutes, ordinances, rules, regulations and orders applicable
to the operation, conduct or ownership of its business or properties except for
any noncompliance which is not reasonably likely to have in the aggregate a
Material Adverse Effect on Arcada.
5.15 CONTRACTS AND AGREEMENTS.
As of the date hereof, except as disclosed in Disclosure Schedule
5.15, (i) Arcada is not a party to or bound by any commitment, contract,
agreement or other instrument which involves or could involve aggregate future
payments by Arcada of more than $25,000, (ii) Arcada is not a party to nor was
it bound by any commitment, contract, agreement or other instrument which is
material to the business, operations, properties, assets or financial condition
of Arcada and (iii) no commitment, contract, agreement or other instrument other
than Arcada's charter documents, to which Arcada is a party or by which Arcada
is bound, limits the freedom of Arcada to compete in any line of business or
with any person.
5.16 AFFILIATE TRANSACTIONS.
(a) Except as disclosed in Disclosure Schedule 5.16, and except as
specifically contemplated by this Agreement, since May 31, 1996, Arcada has not
engaged in, or is not currently obligated to engage in (whether in writing or
orally), any transaction with any Affiliated Person (as defined below) involving
aggregate payments by or to Arcada of $30,000 or more during any consecutive 12
month period.
(b) For purposes of this Section 5.16, 'Affiliated Person' means:
(i) a director, executive officer or Controlling Person (as
defined below) of Arcada;
(ii) a spouse of a director, executive officer or Controlling
Person of Arcada;
(iii)a member of the immediate family of a director, executive
officer, or Controlling Person of Arcada who has the same home as such person;
(iv) any corporation or organization (other than Arcada) of which
a director, executive officer or Controlling Person of Arcada (w) is a chief
executive officer, chief financial officer, or a person performing similar
functions; (x) is a general partner; (y) is a limited partner who, directly or
indirectly, either alone or with his spouse and the members of his immediate
family who are also Affiliated Persons, owns or controls ten percent
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or more of any class of equity securities, or owns or controls, with other
directors, executive officers, and Controlling Persons of Arcada and their
spouses and their immediate family members who are also Affiliated Persons, 25
percent or more of any class of equity securities;
(v) any trust or estate in which a director, executive officer,
or Controlling Person of Arcada or the spouse of such person has a substantial
beneficial interest or as to which such person or his spouse serves as trustee
or in a similar fiduciary capacity.
(c) For purposes of this Section 5.16 'Controlling Person' means any
person or entity which, either directly or indirectly, or acting in concert with
one or more other persons or entities owns, controls or holds with power to
vote, or holds proxies representing ten percent or more of the outstanding
Arcada Common Stock.
(d) For purposes of this Section 5.16, the term 'director' means any
director, trustee, or other person performing similar functions with respect to
any organization whether incorporated or unincorporated.
(e) For purposes of this Section 5.16, the term 'executive officer'
means the president, any executive vice president, any senior vice president,
the secretary, the treasurer, the comptroller, and any other person performing
similar functions with respect to any organization whether incorporated or
unincorporated.
5.17 DISCLOSURE. To the knowledge of Arcada, no representation or
warranty of Arcada contained in this Agreement, and no statement contained in
the Disclosure Schedules delivered by Arcada hereunder, contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make a statement herein or therein, in light of the circumstances under
which it was made, not misleading.
5.18 TITLE TO PROPERTY.
(a) REAL PROPERTY. Disclosure Schedule 5.18(a) contains a true and
correct description of all interests in real property (other than real
property security interests received in the ordinary course of business),
whether owned, leased or otherwise claimed, including a list of all leases of
real property, in which Arcada has or claims an interest as of the date
hereof and any guarantees of any such leases by Arcada. True and complete
copies of such leases have previously been delivered or made available to
TTA, together with all amendments, modifications, agreements or other
writings related thereto. Except as disclosed on Disclosure Schedule
5.18(a), each such lease is legal, valid and binding as between Arcada and
the other party or parties thereto, and the occupant is a tenant or possessor
in good standing thereunder, free of any default or breach whatsoever and
quietly enjoys the premises provided for therein. Except as disclosed on
Disclosure Schedule 5.18(a), Arcada has good, valid and marketable title to
all real property owned by it on the date hereof, free and clear of all
mortgages, liens, pledges, charges or encumbrances of any nature whatsoever,
except liens for current taxes not yet due and payable, and such encumbrances
and imperfections of title, if any, as do not materially detract from the
value of the properties and do not materially interfere with the present or
proposed use of such properties or otherwise materially impair such
operations. All real property and fixtures
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material to the business, operations or financial condition of Arcada are in
substantially good condition and repair.
(b) ENVIRONMENTAL MATTERS. Except as set forth on Disclosure
Schedule 5.18(b), to the knowledge of Arcada, the real property owned or leased
by Arcada on the date hereof does not contain any underground storage tanks,
asbestos, ureaformaldehyde, uncontained polychlorinated biphenyls, or, except
for materials which are ordinarily used in office buildings and office equipment
such as janitorial supplies and do not give rise to financial liability therefor
under the hereafter defined Environmental Laws, releases of hazardous substances
as such terms may be defined by all applicable federal, state or local
environmental protection laws and regulations ("Environmental Laws"). As of the
date hereof (i) no part of any such real property has been listed, or to the
knowledge of Arcada, proposed for listing on the National Priorities List
pursuant to the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA") or on a registry or inventory of inactive hazardous waste sites
maintained by any state, and, (ii) except as set forth on Disclosure Schedule
5.18(b), no notices have been received alleging that Arcada or any of its
subsidiaries was a potentially responsible person under CERCLA or any similar
statute, rule or regulation. Arcada knows of no violation of law, regulation,
ordinance (including, without limitation, laws, regulations and ordinances with
respect to hazardous waste, zoning, environmental, city planning or other
similar matters) relating to its properties, which violations could have in the
aggregate a Materially Adverse Effect on Arcada.
(c) PERSONAL PROPERTY. Disclosure Schedule 5.18(c) contains a true
and correct list of (i) each item of machinery, equipment, or furniture,
including without limitation computers and vehicles, of Arcada, included on the
Arcada December 1995 Financial Statements at a carrying value of, or, if
acquired after December 31, 1995, for a purchase price of, more than $50,000,
(ii) each lease or other agreement under which any such item of personal
property is leased, rented, held or operated where the current fair market value
of such item is more than $25,000 and (iii) all trademarks, trade names or
service marks currently used, owned, or registered for use by Arcada. Except as
disclosed on Schedule 5,18(c), Arcada has good, valid and marketable title to
all personal property owned by it, free and clear of all liens, pledges, charges
or encumbrances of any nature whatsoever.
5.19 INSURANCE. Disclosure Schedule 5.19 contains a true and complete
list and a brief description (including name of insurer, agent, coverage and
expiration date) of all insurance policies in force on the date hereof with
respect to the business and assets of Arcada. Arcada and each of its
subsidiaries is in compliance with all of the material provisions of its
insurance policies and are not in default under any of the terms thereof. Each
such policy is outstanding and in full force and effect and, except as set forth
on Disclosure Schedule 5.19, Arcada or one of its subsidiaries is the sole
beneficiary of such policies. All premiums and other payments due under any
such policy have been paid or arrangements for payment are being made. Arcada
has previously delivered to, or made available for inspection by, Arcada, each
insurance policy to which Arcada or any of its subsidiaries is a party (other
than insurance policies under which Arcada is named as a loss payee or
additional insured as a result of its position as a secured lender).
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5.20 POWERS OF ATTORNEY. Arcada does not have any powers of attorney
outstanding other than those in the ordinary course of business with respect to
routine matters.
5.21 BANK ACCOUNTS, ETC. Set forth on Schedule 5.21 hereto is a true
and complete list of all bank accounts, safe deposit boxes and lock boxes of
Arcada and each of its subsidiaries, including, with respect to each such
account and lock box: (a) identification of all authorized signatories, (b)
identification of the business purpose of such account or lock box, including
identification of any accounts or lock boxes representing escrow funds or
otherwise subject to restriction; and (c) identification of the amount on
deposit as of September 30, 1996.
6. COVENANTS OF THE PARTIES.
6.1 REDEMPTION OF REDEEMABLE WARRANTS. From and including the date
of this Agreement through the Effective Time, if the closing price or trading
price of the TTA Common Stock, as applicable, over thirty (30) consecutive
trading days averages at least $8.00 per share (as more particularly described
in the Warrant Agreement), TTA shall, within ten (10) days of such event,
exercise its redemption right and call all outstanding Redeemable Warrants on
the terms and in the manner set forth in the Warrant Agreement.
6.2 REINCORPORATION IN WASHINGTON STATE. Immediately prior to the
Effective Time, TTA shall cause its state of incorporation to be changed from
California to Washington and to take any and all appropriate action that may be
necessary or desirable to maintain in full force and effect TTA's qualification
as a foreign corporation in all states where it is so qualified.
6.3 CONDUCT OF THE BUSINESS OF TTA. During the period from the date
of this Agreement to the Effective Time, TTA will conduct the business of TTA
and will engage in transactions only in the ordinary course and consistent with
past practice and with prudent business practice, except with the written
consent of Arcada (which will not be unreasonably withheld, delayed or
conditioned). During such period, TTA will use its best efforts to (x) preserve
the business organizations of TTA intact, (y) keep available to it and to Arcada
the present services of the employees of TTA, and (z) preserve for itself and
for Arcada the goodwill of the customers of TTA and others with whom business
relationships exist. In addition, without limiting the generality of the
foregoing, TTA agrees that from the date hereof to the Effective Time, except as
otherwise consented to or approved by Arcada in writing (which consent or
approval shall not be unreasonably withheld, delayed or conditioned) or as
permitted or required by this Agreement or as required by law (in which case TTA
shall notify Arcada in writing), TTA will not:
(a) change any provisions of its Articles or bylaws or any similar
governing documents of TTA
(b) change the number of shares of its authorized or issued capital
stock (other than issuance of stock as a result of the exercise of options
issued as of the date hereof and described on Disclosure Schedule 4.2) or issue,
grant or amend any option, warrant, call, commitment, subscription, right to
purchase or agreement of any character relating to the authorized or issued
capital stock of TTA, or any securities convertible into shares of such stock,
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or split, combine or reclassify any shares of its capital stock, or declare, set
aside or pay any dividend, or other distributions (whether in cash, stock or
property or any combination thereof) in respect of the capital stock of TTA, or
redeem or otherwise acquire any shares of such capital stock;
(c) except as permitted pursuant to Section 6.13 hereof, grant any
severance or termination pay to or enter into or amend any employment agreement
with, or increase the amount of payments or fees to, any of its employees,
officers or directors other than salary increases to employees (other than those
executing Employment Agreements) consistent with past increases;
(d) make any capital expenditures in excess of (i) $40,000 per
project or related series of projects or (ii) $200,000 in the aggregate, other
than pursuant to binding commitments existing on the date hereof and
expenditures necessary to maintain existing assets in good repair;
(e) change in any material manner its pricing policies or any other
material business or customer policies;
(f) guarantee the obligations of any other persons except in the
ordinary course of business consistent with past practice;
(g) acquire assets other than those necessary in the conduct of its
business in the ordinary course;
(h) sell, transfer, assign, encumber or otherwise dispose of assets
other than has been customary in its ordinary course of business;
(i) enter into or amend or terminate any long-term (one-year or more)
contracts (including real property leases) except for contracts which are in the
ordinary course of business consistent with past practice
(j) enter into or amend any contract that calls for the payment by
TTA of $25,000 or more after the date of this Agreement (a "Material Contract")
that cannot be terminated on not more than 30 days' notice without cause and
without payment or loss of any material amount as a penalty, bonus, premium or
other compensation for termination;
(k) engage or participate in any material transaction or incur or
sustain any material obligation except for transactions otherwise permitted
under this Section 6.1 which are in the ordinary course of business consistent
with past practices and which are of similar kinds and involve similar amounts;
(l) make any contributions to any Benefit Plans except in such
amounts and at such times as consistent with past practice;
(m) increase the number of full time equivalent employees of TTA
above 30;
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(n) except after having followed reasonable procedures with respect
to the investigation of potential environmental problems, which procedures have
been approved in writing by Arcada (which approval shall not be unreasonably
withheld, delayed or conditioned), acquire any real property;
(o) renegotiate any debts or take any action to change the
characterization of any short term or long term debt; or
(o) agree to do any of the foregoing.
6.4 NO SOLICITATION. Neither TTA nor any of its directors, officers,
representatives, agents or other persons controlled by any of them, shall,
directly or indirectly encourage or solicit, or (except to the extent that the
directors of TTA in their good faith judgment after receipt of advice of counsel
determine that such response is reasonably required in order to discharge their
fiduciary duties) hold discussions or negotiations with, or provide any
information to, any person, entity or group other than Arcada concerning any
merger, sale of substantial assets not in the ordinary course of business, sale
of shares of capital stock or similar transactions involving TTA. TTA will
promptly communicate to Arcada the terms of any proposal that it may receive in
respect of any such transaction. Notwithstanding the foregoing two sentences,
if the board of directors of TTA receives an unsolicited offer or inquiry with
respect to such a transaction, the board may respond to such offer if the board
determines in its good faith judgment (after receiving advice of counsel) that
such response is reasonably required in order to discharge its fiduciary duties.
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6.5 CURRENT INFORMATION.
(a) No later than ten days after the date of this Agreement, TTA and
Arcada shall each designate an individual acceptable to the other party (a
"Designated Representative" and, together, the "Designated Representatives") to
be the primary point of contact between the parties. During the period from the
date of their designation to the Closing, the Designated Representatives or
their representatives shall confer on a regular basis so that Arcada is kept
advised as to the general status of the ongoing operations of TTA. Without
limiting the foregoing, TTA agrees to confer with the Arcada Designated
Representative regarding any proposed significant changes to TTA's management
policies and objectives. TTA agrees to provide access to members of Arcada's
acquisition team and to work with them in order to plan, prepare for and
facilitate the coordination of the parties' (i) accounting, billing and other
data processing systems, (ii) billing structure, (iii) sales and marketing
systems and structures with each other as well as other matters arising from the
Merger. TTA will promptly notify the Arcada Designated Representative or his or
her representatives of any material change in the normal course of business or
in the operation of the properties of TTA or of any governmental complaints,
investigations or hearings (or communications indicating that the same may be
contemplated) or the institution or the threat of any litigation involving TTA,
and have kept and will keep the Arcada Designated Representative or his or her
representatives fully informed of such events and the progress of any already
existing litigation. Without limiting the foregoing, TTA shall immediately
notify the Arcada Designated Representative if it appears that there has
occurred any change in its financial or other condition or any other event that
will or may affect TTA's ability to complete the Merger or have a Material
Adverse Effect on TTA.
6.6 ACCESS TO PROPERTIES AND RECORDS CONFIDENTIALITY.
(a) TTA shall permit Arcada reasonable access to its properties, and
shall disclose and make available to Arcada all books, papers and records
relating to the assets, stock, ownership, properties, obligations, operations
and liabilities of TTA, including but not limited to, all books of account
(including the general ledger), tax records, minute books of directors and
stockholders meetings, organizational documents, bylaws, material contracts and
agreements, filings with any regulatory authority, accountants work papers,
litigation files, plans affecting employees, and any other business activities
or prospects in which Arcada may have a reasonable interest, including, without
limitation, all loan files in each case during normal business hours and upon
reasonable notice. TTA shall not be required to provide access to or disclose
information where such access or disclosure would jeopardize the attorney-client
privilege of TTA or would contravene any law, rule, regulation, order, judgment,
decree or binding agreement entered into prior to the date hereof. The parties
will use all reasonable efforts to make appropriate substitute disclosure
arrangements under circumstances in which the restrictions of the preceding
sentence apply.
(b) All information furnished by TTA to Arcada or the representatives
or affiliates of either pursuant to, or in any negotiation in connection with,
this Agreement shall be treated as the sole property of TTA until consummation
of the Merger and, if the Merger shall not occur, Arcada and their affiliates,
agents and advisers shall upon written request return to TTA, all documents or
other materials containing, reflecting, referring to such information, and
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shall keep confidential all such information and shall not disclose or use such
information for competitive purposes. The obligation to keep such information
confidential shall not apply to (i) any information which (w) Arcada can
establish by convincing evidence was already in its possession (subject to no
obligations of confidentiality) prior to the disclosure thereof by TTA; (x) was
then generally known to the public; (y) becomes known to the public other than
as a result of actions by Arcada or by the directors, officers or employees or
agents of either; or (z) was disclosed to Arcada, or to the directors, officers
or employees of either, solely by a third party not bound by any obligation of
confidentiality; or (ii) disclosure in accordance with the federal securities
laws, or pursuant to an order of a court or agency of competent jurisdiction.
(c) All information furnished by Arcada to TTA or the representatives
or affiliates of TTA pursuant to, or in any negotiation in connection with, this
Agreement shall be treated as the sole property of Arcada until consummation of
the Merger and, if the Merger shall not occur, TTA and its affiliates, agents
and advisors shall upon written request return to Arcada, all documents or other
materials containing, reflecting, referring to such information, and shall keep
confidential all such information and shall not disclose or use such information
for competitive purposes. The obligation to keep such information confidential
shall not apply to (i) any information which (w) TTA can establish by convincing
evidence was already in its possession (subject to no obligations or
confidentiality) prior to the disclosure thereof by TTA; (x) was then generally
known to the public; (y) becomes known to the public other than as a result of
actions by TTA or by the directors, officers or employees or agents of TTA; or
(z) was disclosed to TTA, or to the directors, officers or employees of TTA,
solely by a third party not bound by any obligation of confidentiality; or (ii)
disclosure in accordance with the federal securities laws, federal banking laws,
or pursuant to an order of a court or agency of competent jurisdiction.
6.7 REPORTS.
(a) As soon as reasonably available, but in no event more than 45
days after the end of each fiscal quarter ending after the date hereof (other
than the last quarter of any fiscal year), TTA will deliver to Arcada its
quarterly report on Form 10-QSB, as filed under the 1934 Act. As soon as
reasonably available, but in no event more than 120 days after the end of each
fiscal year ending after the date of this Agreement, TTA will deliver to Arcada
its annual report on Form 10-KSB as filed under the 1934 Act.
6.8 REGULATORY MATTERS.
(a) The parties hereto will cooperate with each other and use all
reasonable efforts to prepare all necessary documentation, to effect all
necessary filings and to obtain all necessary permits, consents, approvals and
authorizations of all third parties and governmental bodies necessary to
consummate the transactions contemplated by this Agreement including, without
limitation, those that may be required from the SEC, other regulatory
authorities, or the holders of TTA Common Stock. Arcada and TTA shall each have
the right to review reasonably in advance all information relating to Arcada or
TTA, as the case may be, and any of their respective subsidiaries, together with
any other information reasonably requested, which appears
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in any filing made with or written material submitted to any governmental body
in connection with the transactions contemplated by this Agreement.
(b) Arcada and TTA shall furnish each other with all reasonable
information concerning themselves, their subsidiaries, directors, officers and
stockholders and such other matters as may be necessary or advisable in
connection with the Proxy Statement/Prospectus, or any other statement or
application made by or on behalf of Arcada or TTA, or any of their respective
subsidiaries to any governmental body in connection with the Merger and the
other transactions, applications or filings contemplated by this Agreement.
(c) Arcada and TTA will promptly furnish each other with copies of
written communications received by Arcada or TTA or any of their respective
subsidiaries from, or delivered by any of the foregoing to, any governmental
body in respect of the transactions contemplated hereby.
6.9 APPROVAL OF TTA STOCKHOLDERS. TTA will (a) take all steps
necessary duly to call, give notice of, convene and hold a meeting of its
stockholders as soon as practicable for the purpose of voting on this Agreement
and the transactions contemplated hereby and with the consent of Arcada (which
consent shall not be unreasonably withheld, delayed or conditioned), for such
other purposes as may be necessary or desirable, (b) include in the Proxy
Statement/Prospectus the recommendation of TTA's Board of Directors that the
stockholders approve this Agreement and the other transactions contemplated
hereby, including, without limitation, the reincorporation of TTA in the State
of Washington, and such other matters as may be submitted to its stockholders in
connection with this Agreement, (c) cooperate and consult with Arcada with
respect to each of the foregoing matters, and (d) use all reasonable efforts to
obtain, as promptly as practicable, the necessary approvals by TTA stockholders
of this Agreement and the transactions contemplated hereby, including, without
limitation, the reincorporation of TTA in the State of Washington, except, in
each case, where the directors of TTA determine in their good faith judgment
(after receiving advice of counsel) that they are required to do otherwise in
order to discharge their fiduciary duties.
6.10 APPROVAL OF ARCADA STOCKHOLDERS. Arcada will (a) take all steps
necessary duly to call, give notice of, convene and hold a meeting of its
stockholders as soon as practicable for the purpose of voting on this Agreement
and the transactions contemplated hereby and with the consent of TTA (which
consent shall not be unreasonably withheld, delayed or conditioned), for such
other purposes as may be necessary or desirable, (b) include in the Proxy
Statement/Prospectus the recommendation of Arcada's Board of Directors that the
stockholders approve this Agreement and the other transactions contemplated
hereby, and such other matters as may be submitted to its stockholders in
connection with this Agreement, (c) cooperate and consult with TTA with respect
to each of the foregoing matters, and (d) use all reasonable efforts to obtain,
as promptly as practicable, the necessary approvals by Arcada stockholders of
this Agreement and the transactions contemplated hereby, except, in each case,
where the directors of TTA determine in their good faith judgment (after
receiving advice of counsel) that they are required to do otherwise in order to
discharge their fiduciary duties.
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6.11 FURTHER ASSURANCES. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
6.12 PUBLIC ANNOUNCEMENTS. Neither party will issue or distribute any
information to its shareholders or employees, any news releases or any other
public information disclosures with respect to this Agreement or any of the
transactions contemplated hereby without the consent of the other party, except
as may be otherwise required by law.
6.13 ASSIGNMENT OF CONTRACT RIGHTS. Arcada shall use its reasonable
efforts to obtain any consents, waivers or revisions necessary to allow TTA to
accede to all of the rights of Arcada under any existing real property leases
and all material personal property leases, licenses and other contracts, which
TTA wishes to have continue in effect after the Effective Time, without
incurring substantial costs in connection therewith. TTA will offer its
reasonable cooperation with Arcada in obtaining such consents, waivers and
revisions, it being understood that the obligation to obtain such consents,
waivers and revisions shall nevertheless be the obligation of Arcada.
6.14 EMPLOYEES. TTA and Frank Bonadio shall have entered into a
mutually satisfactory employment agreement to be effective upon the Closing of
the Merger.
6.15 INDEMNIFICATION OF ARCADA DIRECTORS AND OFFICERS.
(a) TTA will use all reasonable efforts, in cooperation with Arcada,
to arrange for insurance coverage for prior acts for all current and former
directors and officers of Arcada, provided that such coverage must be available
from normal carriers at a reasonable cost in light of the cost of similar
policies under similar circumstances. TTA shall not cancel such prior acts
coverage for three years after the Effective Date.
(b) From and after the Effective Time, TTA will, to the extent
permitted by then applicable law, indemnify current and former directors,
officers and employees of Arcada (each an "Indemnified Party ") as though they
had been directors, officers and/or employees of TTA, for acts or omissions
occurring prior to, and including, the Effective Time.
Any Indemnified Party wishing to claim indemnification under this provision
shall, upon learning of any claim, action, suit, proceeding or investigation
(hereinafter a "Claim"), promptly notify TTA thereof. TTA shall have the right
to assume the defense of any such Claim and upon so doing shall not thereafter
be liable to such Indemnified Party for any expenses, of other counsel or
otherwise, subsequently incurred by such Indemnified Party in connection with
such Claim. If TTA elects not to assume such defense, or counsel for the
Indemnified Party advises that there are issues which raise conflicts of
interest between TTA and the Indemnified Party, the Indemnified Party may retain
counsel satisfactory to such Indemnified Party and TTA will pay all reasonable
fees and expenses of such counsel incurred in defending the Claim; provided,
however, that (i) in the event that more than one Indemnified Party is involved
in the same
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Claim, TTA shall not be obligated to pay for more than one firm of counsel for
all Indemnified Parties in any one jurisdiction (unless counsel for the
Indemnified Parties advises that there are issues which raise conflicts of
interest between the Indemnified Parties), (ii) the Indemnified Parties will
cooperate in the defense of the Claim, and (iii) TTA shall not be liable for any
settlement effected without its prior written consent. If, upon the conclusion
of the proceedings in any Claim, it is determined by TTA that the Indemnified
Party was not entitled to such indemnification, such party shall be required to
reimburse TTA for all cost expended in defending such Indemnified Party.
(c) This Section 6.14 is intended to be for the benefit of, and shall
be enforceable by, the Indemnified Parties, their heirs and personal
representatives and shall be binding on TTA and its successors and assigns.
6.16 CURRENT PUBLIC INFORMATION. TTA shall continue to satisfy the
current public information requirements of Rules 144 and 145 of the SEC with
respect to the TTA Common Stock, and to provide affiliates of Arcada with such
information as they may reasonably require and to otherwise cooperate with them
to facilitate sales of TTA Common Stock in compliance with Rules 144 and 145 of
the SEC.
6.17 RESOLUTION OF CERTAIN MATTERS. On or prior to the Closing, TTA
shall have:
(a) reached a final, binding settlement satisfactory to Arcada and
obtained unconditional releases from all adverse parties in connection with the
litigation matter set forth as item 8 to Disclosure Schedule 4.10 hereto;
(b) renegotiated, amended, canceled or otherwise modified to the
satisfaction of Arcada the agreements set forth as Service Commitments 1, 2, and
3 to Disclosure Schedule 4.15 hereto; and
(c) Achieved and furnished evidence, satisfactory to Arcada of
revenue of at least $100,000 per month attributable to TTA's internet "backbone"
operations.
6.18 PURCHASE ACCOUNTING. TTA and Arcada shall cooperate and assist
in the preparation of any and all materials reasonably required by Arcada or TTA
in connection with establishing appropriate values for assets and liabilities of
Touch Tone or Arcada for purchase accounting purposes.
7. CLOSING CONDITIONS.
7.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS UNDER THIS AGREEMENT. The
respective obligations of each party under this Agreement to consummate the
Merger shall be subject to the fulfillment at or prior to the Effective Time of
the following conditions:
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(a) This Agreement and the transactions contemplated hereby,
including, without limitation, the reincorporation of TTA in the State of
Washington, shall have been approved by the requisite vote of the stockholders
of TTA and Arcada.
(b) All necessary regulatory or governmental approvals and consents
required to consummate the transactions contemplated hereby shall have been
obtained and shall remain in full force and effect and all statutory or
regulatory waiting periods in respect thereof shall have expired.
(c) No party hereto shall be subject to any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits the consummation of the Merger.
(d) ANTITRUST LAW. Any applicable pre-merger notification provisions
of Section 7A of the Clayton Act shall have been complied with by the parties
hereto, and no other statutory or regulatory requirements with respect to the
Clayton Act shall be applicable. There shall be no pending or threatened
proceedings under any applicable antitrust law of the State of Washington or
California.
(e) SECURITIES LAWS. The shares of TTA Common Stock to be issued to
the stockholders of Arcada in exchange for their shares shall have been
qualified or registered for offering and sale under the federal securities law
and the state securities or Blue Sky laws of each jurisdiction in which
stockholders of Arcada reside, and no order suspending the sale of such shares
of TTA Common Stock in any such jurisdiction shall have been issued prior to the
Effective Time and no proceedings for that purpose shall have been instituted or
shall be contemplated; provided, that TTA shall not have been obligated to
execute or file any general consent to service of process or to qualify as a
foreign corporation in any jurisdiction in which it is not qualified. As soon
as reasonably practicable, Arcada shall advise TTA of each jurisdiction in which
stockholders of Arcada reside.
7.2 CONDITIONS TO THE OBLIGATIONS OF TTA UNDER THIS AGREEMENT. The
obligations of TTA under this Agreement shall be further subject to the
satisfaction, at or prior to the Closing, of all of the following conditions,
any one or more of which may be waived by TTA:
(a) (i) Each of the obligations or covenants of Arcada required to
be performed by it on or prior to the Closing pursuant to the terms of this
Agreement shall have been duly performed and complied with in all material
respects.
(ii) Each of the representations and warranties of Arcada
contained in this Agreement shall be true and correct in all material respects
as of the date of this Agreement and as of the Effective Time as though made at
and as of the Effective Time except as to any representation or warranty which
specifically relates to an earlier date, which shall be true and correct as of
such earlier date, except in the case of such representations and warranties,
where the failure to be true would not have a Material Adverse Effect on Arcada.
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(b) Any consents, waivers, clearances, approvals and authorizations
of regulatory or governmental bodies that are necessary in connection with the
consummation of the transactions contemplated hereby shall have been obtained,
and none of such consents, waivers, clearances, approvals or authorizations
shall contain any term or condition that is a term or condition that has not
heretofore been normally imposed in such transactions and which would have a
Material Adverse Effect on Arcada or TTA.
(c) TTA shall have received an opinion, dated the Effective Date,
from Cairncross & Hempelmann, counsel to Arcada, reasonably satisfactory to TTA
with respect to the matters set forth herein.
(d) Since the date of this Agreement there shall have been no
Material Adverse Effect with respect to Arcada (except for changes resulting
from market and economic conditions which generally affect the
telecommunications industry as a whole including, without limitation, changes in
law or regulation or interpretations thereof); provided, however, that the
following expenses and adjustments shall be excluded in determining whether a
material adverse change has occurred: (i) fees and expenses relating to the
consummation of the transactions contemplated hereby, (ii) charges for severance
and other payments to officers and employees made or expected to be made in
connection with the transactions contemplated hereby, and (iii) costs and
expenses related to any transactions of the type set forth in Section 6.1
undertaken by Arcada with the prior written consent of TTA.
(e) Dissenters' rights shall not have been preserved by stockholders
of Arcada with respect to more than five percent of the outstanding shares of
Arcada Common Stock and each affiliate of Arcada shall have delivered to Arcada
stock certificates evidencing all shares of Arcada Common Stock owned by such
affiliate as provided in Section l(f) hereof and delivered to TTA assurance that
such affiliate has voted for the Merger, together with any other assurances
requested by TTA, that such affiliates will not have dissenters' rights.
(g) Arcada shall have furnished TTA with such certificates of its
officers and such other documents to evidence fulfillment of the conditions set
forth in this Section 7.2 as TTA may reasonably request.
7.3 CONDITIONS TO THE OBLIGATIONS OF ARCADA UNDER THIS AGREEMENT.
The obligations of Arcada under this Agreement shall be further subject to the
satisfaction, at or prior to the Closing, of all of the following conditions,
any one or more of which may be waived by Arcada:
(a) Each of the obligations or covenants of TTA and Newco required to
be performed by them at or prior to the Closing pursuant to the terms of this
Agreement shall have been duly performed and complied with in all material
respects.
(b) Each of the representations and warranties of TTA and Newco
contained in this Agreement shall be true and correct in all material respects
as of the date of this Agreement and as of the Effective Time as though made at
and as of the Effective Time except as to any representation or warranty which
specifically relates to an earlier date, which shall be
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true and correct as of such earlier date, except in the case of such
representations and warranties, where the failure to be true would not have a
Material Adverse Effect on TTA.
(c) The amount of TTA's unrestricted working capital (as determined
in accordance with GAAP) at the Closing shall be at least $1,500,000.
(d) Arcada shall have received an opinion, dated the date of the
Closing, from John B. Wills, Esq., counsel to TTA and Newco, reasonably
satisfactory to Arcada with respect to the matters set forth herein.
(e) Each of Matthew J. Barletta, Norman B. Walco, Stephen P. Shearin
and Benjamin W. Bronston shall have resigned as Directors of TTA effective as of
the Closing Time.
(f) Michael J. Canney, as the sole remaining Director of TTA, shall
have appointed Robert W. Leppaluoto, Keith Leppaluoto, Frank J. Bonadio and an
individual to be designated by Arcada on or prior to the Closing to fill the
vacancies on TTA's Board of Directors created by the resignations called for by
Section 7.3(d) above;
(g) All of the officers of TTA shall have resigned, effective as of
the Effective Time;
(h) Since the date of this Agreement, there shall have been no
Material Adverse Effect with respect to TTA (except for changes resulting from
market and economic conditions which generally affect the telecommunications
industry as a whole including, without limitation, changes in law or regulation
or changes in interpretations thereof).
(i) TTA shall have furnished Arcada with such certificates of its
officers or others and such other documents to evidence fulfillment of the
conditions set forth in this Section 7.3 as Arcada may reasonably request.
(j) TTA shall have instructed its transfer agent with respect to the
issuance of TTA Common Stock to the Arcada stockholders at least two days prior
to Closing.
8. TERMINATION, AMENDMENT AND WAIVER.
8.1 TERMINATION. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval of the Merger by the TTA
stockholders:
(a) by mutual written consent of all the parties hereto;
(b) by any party hereto (i) if the Effective Time shall not have
occurred on or prior to March 1, 1997 unless the failure of such occurrence
shall be due to the failure of the party seeking to terminate this Agreement to
perform or observe its agreements and conditions set forth herein to be
performed or observed by such party at or before the Effective Time; (ii) 10
days after written certification of the vote of TTA's stockholders is delivered
to Arcada indicating that such stockholders failed to adopt the resolution to
approve this Agreement and the
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transactions contemplated hereby at the stockholders' meeting (or any
adjournment thereof) contemplated by Section l(d) hereof; or (iii) 10 days after
written certification of the vote of Arcada' shareholders is delivered to TTA
indicating that such stockholders failed to adopt the resolution to approve this
Agreement and the transactions contemplated hereby at the stockholders' meeting
(or any adjournment thereof) contemplated by Section 1(d) hereof ;
(c) by Arcada (i) if at the time of such termination there shall have
been a material adverse change in the consolidated financial condition of TTA
from that set forth in TTA's May 1996 Financial Statements and August 1996
Financial Statements (except for changes resulting from market and economic
conditions which generally affect the telecommunications industry as a whole,
including changes in regulation), it being understood that any of the matters
set forth in TTA's Disclosure Schedules as of the date of this Agreement or any
of the matters described in clauses (i), (ii) or (iii) of Section 7.2(d) are not
deemed to be a material adverse change for purposes of this paragraph (c); or
(ii) if there shall have been any material breach of any covenant of TTA
hereunder and such breach shall not have been remedied within 45 days after
receipt by TTA of notice in writing from Arcada specifying the nature of such
breach and requesting that it be remedied.
(d) by TTA (i) if at the time of such termination there shall have
been a material adverse change in the consolidated financial condition of Arcada
from that set forth in the December 1995 Financial Statements (except for
changes resulting from market and economic conditions which generally affect the
telecommunications industry as a whole), it being understood that any of the
matters set forth in Arcada's Disclosure Schedules as of the date of this
Agreement are not deemed to be a material adverse change for purposes of this
paragraph (d); or (ii) if there shall have been any material breach of any
covenant of Arcada hereunder and such breach shall have not been remedied within
45 days after receipt by Arcada of notice in writing from TTA specifying the
nature of such breach and requesting that it be remedied or (iii) if the
directors of TTA, after receiving advice of counsel, determine in their good
faith judgment that they are required to do so in order to discharge their
fiduciary duties, shall withdraw or modify or resolve to withdraw or modify its
recommendation that stockholders vote in favor of the transactions contemplated
hereby.
8.2 BREAK-UP FEE.
(a) The parties hereby acknowledge that, in negotiating and executing
this Agreement and in taking the steps necessary or appropriate to effect the
transactions contemplated hereby, Arcada has incurred and will incur direct and
indirect monetary and other costs (including without limitation attorneys' fees
and costs, costs of Arcada management and employee time and potential damage to
Arcada's business and franchises as a result of the announcement of the pending
Merger), will forego discussion with other potential merger candidates and will
forego various business activities which it would have otherwise undertaken if
it remained an independent institution. To compensate Arcada for such costs and
to induce it to forego initiating discussion with other potential merger
candidates, (i) if this Agreement terminates because TTA (or Newco) does not use
all reasonable efforts to consummate the transactions contemplated by this
Agreement in accordance with the terms of this Agreement (unless a condition set
forth in Section 7.3 is not satisfied and such nonsatisfaction has not been
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the result of the failure of TTA (or Newco) to use all reasonable efforts to
consummate this Agreement in accordance with the terms of this Agreement), (ii)
if TTA terminates this Agreement for any reason other than the grounds for
termination set out in Section 8.1(a), 8.1(b) or 8.1(d) or (iii) if Arcada
terminates this Agreement pursuant to Section 8.1(c)(ii), then TTA shall pay to
Arcada on demand (and in no event more than three days after such demand) in
immediately available funds, Two Hundred Thousand Dollars ($200,000.00).
(b) The parties hereby acknowledge that, in negotiating and executing
this Agreement and in taking the steps necessary or appropriate to effect the
transactions contemplated hereby, TTA has incurred and will incur direct and
indirect monetary and other costs (including without limitation attorneys' fees
and costs, costs of TTA management and employee time and potential damage to
TTA's business and franchises as a result of the announcement of the pending
Merger), will forego discussion with other potential merger candidates and will
forego various business activities which it would have otherwise undertaken if
it remained an independent institution. To compensate TTA for such costs and to
induce it to forego initiating discussion with other potential merger
candidates, (i) if this Agreement terminates because Arcada does not use all
reasonable efforts to consummate the transactions contemplated by this Agreement
in accordance with the terms of this Agreement (unless a condition set forth in
Section 7.2 is not satisfied and such nonsatisfaction has not been the result of
the failure of Arcada to use all reasonable efforts to consummate this Agreement
in accordance with the terms of this Agreement), (ii) if Arcada terminates this
Agreement for any reason other than the grounds for termination set out in
Section 8.1(a), 8.1(b) or 8.1(d) or (iii) if TTA terminates this Agreement
pursuant to Section 8.1(c)(ii), then Arcada shall pay to TTA on demand (and in
no event more than three days after such demand) in immediately available funds,
Two Hundred Thousand Dollars ($200,000.00).
(c) Notwithstanding the foregoing, the parties hereto hereby
acknowledge and agree that non-compliance with the provisions of Section 6.17(a)
or Section 7.3(c) above is not the basis for any party hereto to be entitled to
the break-up fee set forth in this Section 8.3.
8.3 EFFECT OF TERMINATION. In the event of termination of this
Agreement by any party, this Agreement shall forthwith become void (other than
Section 6.4(b) hereof, which shall remain in full force and effect) and, except
as and to the extent provided in Section 8.2, there shall be no further
liability on the part of any party or its officers or directors except for the
liability of TTA under Section 6.6(b).
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8.4 AMENDMENT, EXTENSION AND WAIVER. Subject to applicable law, at
any time prior to the consummation of the Merger, whether before or after
approval thereof by the stockholders of TTA, the parties may (a) amend this
Agreement (including the Plan of Merger incorporated herein), (b) extend the
time for the performance of any of the obligations or other acts of any other
party hereto, (c) waive any inaccuracies in the representations and warranties
of any other party contained herein or in any document delivered pursuant
hereto, or (d) waive compliance with any of the agreements or conditions
contained herein; provided, however, that after any approval of the Merger by
the TTA and Arcada stockholders, there may not be, without further approval of
such stockholders, any amendment or waiver of this Agreement (or the Plan of
Merger) that reduces the amount or changes the form of consideration to be
delivered to the TTA stockholders or Arcada stockholders, respectively. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto. Any agreement on the part of a party hereto to
any extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party, but such waiver or failure to insist on
strict compliance with such obligation, covenant, agreement or condition shall
not operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
9. MISCELLANEOUS.
9.1 EXPENSES. All legal and other costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
borne by the party incurring such costs and expenses unless otherwise specified
in this Agreement.
9.2 SURVIVAL. Except for the covenants of Sections 6.13, 6.14, 6.15,
6.16 and 6.17, the respective representations and warranties, covenants and
agreements set forth in this Agreement and all Disclosure Schedules shall not
survive the Effective Time.
9.3 NOTICES. All notices, requests, claims, demands or other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly received if so given) by delivery, by registered or
certified mail (return receipt requested) or by cable, telecopier, or telex to
the respective parties as follows:
(a) If to TTA, to:
Touch Tone America, Inc.
4110 North Scottsdale Road
Scottsdale, Arizona 85251
Attn: Michael Canney
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With a copy to:
John Wills, Esq.
410 - 17th Street , Suite 1940
Denver, Colorado 80202
(b) If to Arcada, to:
Arcada Communications, Inc.
2001 Sixth Avenue, Suite 3210
Seattle, Washington 98121-2516
Attn: Frank Bonadio
With a copy to:
Cairncross & Hempelmann
701 Fifth Avenue, 70th Floor
Seattle, Washington 98104
Attn: David M. Otto
or such other address as shall be furnished in writing by any party to the
others in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
9.4 PARTIES IN INTEREST. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns; provided, however, that neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any party hereto
without the prior written consent of the other parties. Nothing in this
Agreement is intended to confer, expressly or by implication, upon any other
person any rights or remedies under or by reason of this Agreement (except for
Sections 1, 6.13, 6.14, 6.15, 6.16 and 6.17, which are intended to benefit third
party beneficiaries).
9.5 ENTIRE AGREEMENT. This Agreement, including the documents and
other writings referred to herein or delivered pursuant hereto, contains the
final expression of the parties with respect to its subject matter. There are
no restrictions, agreements, promises, warranties, covenants or undertakings
between the parties other than those expressly set forth herein or therein.
This Agreement supersedes all prior agreements and understandings between the
parties, both written and oral, with respect to its subject matter.
9.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
9.7 GOVERNING LAW. This Agreement, in all respects, including all
matters of construction, validity and performance, is governed by the internal
laws of the state of Washington as applicable to contracts executed and
delivered in Washington by citizens of such state to be performed wholly within
such state without giving effect to the principles of conflicts of laws thereof.
This Agreement is being delivered in Seattle, Washington.
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[This Space Intentionally Blank]
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9.8 HEADINGS. The Section headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
TOUCH TONE AMERICA, INC.
By: /s/ Michael J. Canney
------------------------------------
Its: President
S.V.V. SALES, INC.
By: /s/ Frank Bonadio
------------------------------------
Its: President
TOUCH TONE/ARCADA, INC.
By: /s/ Michael J. Canney
------------------------------------
Its: President
43
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FIRST AMENDMENT TO AGREEMENT FOR MERGER
This First Amendment dated as of November 19, 1996 to that certain
Agreement for Merger dated November 13, 1996 (the "Merger Agreement"), is by and
among Touch Tone America, a California corporation ("TTA"), Touch Tone/Arcada,
Inc., a Washington corporation and wholly-owned subsidiary of TTA ("Newco"), and
S.V.V. Sales, Inc., a Washington corporation d/b/a Arcada Communications, Inc.
("Arcada"). Capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed to them in the Merger Agreement.
TTA, Newco and Arcada hereby desire to amend certain portions of the Merger
Agreement.
In consideration of the above and the mutual covenants, terms and
conditions set forth below, TTA, Newco and Arcada hereby agree as follows:
1. AMENDMENTS TO MERGER AGREEMENT
A. Section 1(b) of the Merger Agreement is hereby amended by adding
a new Section 1(b)(iii) at the end thereof as follows:
"(iii) Notwithstanding the foregoing, TTA shall, at the
written request of Arcada (the "Adjustment Notice"), reduce the number of
shares of TTA Common Stock to be received in the Merger for each share of
Arcada Common Stock by (a) the number of shares as specified in the
Adjustment Notice ("Adjustment Shares") divided by (b) 50,000. At the
Effective Time, TTA shall issue the Adjustment Shares to the individuals
and in the amounts as specified in the Adjustment Notice; provided however,
that in no event shall the aggregate Merger Consideration exceed the Merger
Consideration as it exists without giving effect to this Section 1(b)(iii);
and provided further that TTA shall be under no obligation to cause any
shares issued pursuant to such Adjustment Notice to be registered under the
1933 Act or to otherwise to comply with the provisions of Section 1(d)(iv)
hereof with respect to such shares."
B. Section 6 of the Merger Agreement is hereby amended by adding a
new Section 6.19 at the end thereof as follows:
"6.19 LOCKUP. Arcada shall cause each of its Shareholders who
receive TTA Common Stock in the Merger to covenant and agree that they
shall not sell any such shares of TTA Common Stock, except in according
with the following limits:
RESTRICTION PERIOD TTA COMMON STOCK NOT SUBJECT TO LOCKUP
------------------ --------------------------------------
Commencing on November 19, 1996
(the "Lock-up Date") Until the six-month
anniversary of the Lock-up Date Up to an aggregate of 250,000 shares
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Commencing on the six-month anniversary
of the Lock-up Date until the one year Up to an aggregate of 500,000 shares
anniversary of the Lock-up Date (including sales in prior periods)
Commencing on the one year anniversary
of the Lock-up Date until the two year Up to an aggregate of 1,000,000 shares
anniversary of the Lock-up (including sales in prior periods)
On and after the two year anniversary of
the Lock-up Date All shares of TTA Common Stock
It is understood and agreed that the number of shares of TTA Common Stock
exempt from the "lock-up" pursuant to the foregoing schedule shall be
cumulative such that any shares not sold in one period may be sold in any
subsequent period without reducing the aggregate number of shares of TTA
Common Stock which may be sold in such period(s)."
C. Section 6 of the Merger Agreement is hereby amended by adding a
new Section 6.20 at the end thereof as follows:
"6.20 ASSURANCE LETTERS. TTA shall have used its best efforts to
cause each of the directors, executive officers and each of the ten (10)
largest beneficial owners of TTA Common Stock on the date hereof to execute
a letter substantially in the form of Exhibit B hereto providing for, among
other things, the agreement of each such person to vote in favor of the
Merger Agreement."
D. The Merger Agreement is hereby amended by adding a new Exhibit B
at the end thereof in the form attached hereto as Annex 1.
2. MISCELLANEOUS
A. RATIFICATION. The parties hereto hereby ratify and approve the
Merger Agreement, as amended hereby, and the parties hereto acknowledge that all
of the terms and provisions of the Merger Agreement as amended hereby, are and
remain in full force and effect.
B. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
C. GOVERNING LAW. This Amendment, in all respects, including all
matters of construction, validity and performance, is governed by the internal
laws of the state of Washington as applicable to contracts executed and
delivered in Washington by citizens of such state to be performed wholly within
such state without giving effect to the principles of conflicts of laws thereof.
This agreement is being delivered in Seattle, Washington.
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The parties hereto have executed this First Amendment as of the date first
set forth above.
TOUCH TONE AMERICA, INC.
By: /s/ Michael J. Canney
------------------------------------
Its: President
S.V.V. SALES, INC.
By: /s/ Frank Bonadio
------------------------------------
Its: President
TOUCH TONE/ARCADA, INC.
By: /s/ Michael J. Canney
------------------------------------
Its: President
3
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SECOND AMENDMENT TO AGREEMENT FOR MERGER
This Second Amendment dated as of December 4, 1996 to that certain
Agreement for Merger dated November 13, 1996, as previously amended by that
certain First Amendment to Merger Agreement dated as of November 19, 1996 (the
"Merger Agreement"), is by and among Touch Tone America, a California
corporation ("TTA"), Touch Tone/Arcada, Inc., a Washington corporation and
wholly-owned subsidiary of TTA ("Newco"), and S.V.V. Sales, Inc., a Washington
corporation d/b/a Arcada Communications, Inc. ("Arcada"). Capitalized terms
used herein and not otherwise defined herein shall have the meanings ascribed to
them in the Merger Agreement.
TTA, Newco and Arcada hereby desire to amend certain portions of the Merger
Agreement.
In consideration of the above and the mutual covenants, terms and
conditions set forth below, TTA, Newco and Arcada hereby agree as follows:
1. AMENDMENT TO MERGER AGREEMENT
A. Section 1(b)(i) of the Merger Agreement is hereby amended by
deleting reference in the first sentence thereof to a "one year, eight percent
(8%) promissory note of TTA" and substituting therefor a reference to a "fifteen
(15) month, eight percent (8%) promissory note of TTA".
2. MISCELLANEOUS
A. RATIFICATION. The parties hereto hereby ratify and approve the
Merger Agreement, as amended hereby, and the parties hereto acknowledge that all
of the terms and provisions of the Merger Agreement as amended hereby, are and
remain in full force and effect.
B. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
C. GOVERNING LAW. This Amendment, in all respects, including all
matters of construction, validity and performance, is governed by the internal
laws of the state of Washington as applicable to contracts executed and
delivered in Washington by citizens of such state to be performed wholly within
such state without giving effect to the principles of conflicts of laws thereof.
This agreement is being delivered in Seattle, Washington.
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The parties hereto have executed this Second Amendment as of the date first
set forth above.
TOUCH TONE AMERICA, INC.
By: /S/ Michael J. Canney
-------------------------------
Its: President
S.V.V. SALES, INC.
By: /S/ Frank Bonadio
-------------------------------
Its: President
TOUCH TONE/ARCADA, INC.
By: /S/ Michael J. Canney
-------------------------------
Its: President
2
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THIRD AMENDMENT TO AGREEMENT FOR MERGER
This Third Amendment dated as of January 22, 1997 to that certain Agreement
for Merger dated November 13, 1996, as previously amended by that certain First
Amendment to Merger Agreement dated as of November 19, 1996 and that certain
Second Amendment to Merger Agreement dated as of December 4, 1996 (the "Merger
Agreement"), is by and among Touch Tone America, a California corporation
("TTA"), Touch Tone/Arcada, Inc., a Washington corporation and wholly-owned
subsidiary of TTA ("Newco"), S.V.V. Sales, Inc., a Washington corporation d/b/a
Arcada Communications, Inc. ("Arcada"), Robert Leppaluoto and Keith Leppaluoto.
Capitalized terms used herein and not otherwise defined herein shall have the
meanings ascribed to them in the Merger Agreement.
TTA, Newco and Arcada hereby desire to amend certain portions of the Merger
Agreement.
In consideration of the above and the mutual covenants, terms and
conditions set forth below, TTA, Newco and Arcada and, solely with respect to
Sections 1(B) and 2(B) and (C) hereof, Robert Leppaluoto and Keith Leppaluoto,
hereby agree as follows:
1. AMENDMENT TO MERGER AGREEMENT
A. Section 1(b) of the Merger Agreement is hereby amended by
deleting such Section 1(b) in its entirety and replacing it with the following:
"(b) CONVERSION OF ARCADA COMMON STOCK. Subject to the provisions below
and in the Plan of Merger, at the Effective Time, all of the outstanding shares
of common stock, no par value of Arcada ("Arcada Common Stock") shall be
converted into the right to receive shares of common stock, no par value per
share, of TTA ("TTA Common Stock") and shares of Series B Preferred Stock, no
par value per share, of TTA, the terms of which are attached hereto as Exhibit B
("TTA Preferred Stock").
(i) Subject to the provisions below and the provisions of the Plan of
Merger, each outstanding shares of Arcada Common Stock will at the Effective
Time be converted into the right to receive 250 newly issued shares of TTA
Common Stock and thirty (30) shares of TTA Preferred Stock (collectively, the
"Merger Consideration"), subject to the conditions set forth in this Agreement
and in the Plan of Merger. No fractional shares of TTA Common Stock or TTA
Preferred Stock will be issued. In lieu of any fractional shares, any holder of
Arcada Common Stock who would otherwise be entitled to a fractional share of TTA
Common Stock or TTA Preferred Stock will, upon surrender of his certificate or
certificates representing the Arcada Common Stock outstanding immediately prior
to the Effective Time, be paid the cash value of such fractional share interest,
which shall be equal to the product of the fraction multiplied by the Average
Price (as hereinafter defined). For the purposes of determining any such
fractional share interests, all shares of Arcada Common Stock owned by an Arcada
stockholder shall be combined so as to calculate the maximum number of whole
shares of TTA Common Stock and TTA Preferred Stock issuable to such Arcada
stockholder.
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(ii) If between the date of this Agreement and the third Nasdaq Stock
Market trading day prior to the Effective Time, the shares of TTA Common Stock
or Preferred Stock shall be changed into a different number of shares by reason
of any recapitalization, split-up, combination or exchange of shares, or if a
stock dividend thereon shall be declared with a record date within such period,
the number of shares of TTA Common Stock or Preferred Stock, as the case may be,
issued in exchange for each share of Arcada Common Stock specified in Section
1(b)(i) shall be adjusted accordingly."
B. Section 4.2(g) of the Merger Agreement is hereby amended by
deleting such Section 4.2(g) in its entirety and replacing it with the
following:
"(g) The TTA Common Stock and TTA Preferred Stock to be issued in the
Merger will have been duly authorized and, when issued in accordance with the
Plan of Merger, (i) will be validly authorized and issued and fully paid and
nonassessable and no stockholder of TTA will have any preemptive rights thereto
and (ii) will be registered under the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder (the "1933 Act"). The TTA
Common Stock to be issued in the Merger will be listed for trading on a national
securities exchange of the Nasdaq Stock Market."
C. Section 6 of the Merger Agreement is hereby amended by adding a
new Section 6.19 at the end thereof as follows:
"6.19. Each of Robert Leppaluoto and Keith Leppaluoto covenant and
agree, effective as of the Effective Time to exchange an aggregate of $200,000
of presently outstanding debt owed them by Arcada into an aggregate of 200,000
shares of TTA Preferred Stock (the "Exchange Shares") and TTA Covenants and
agrees to issue, at the Effective Time, the Conversion Shares, which Conversion
Shares, when issued, shall be fully paid and nonassessable."
D. The Merger Agreement is hereby amended by deleting Exhibit A
thereto and replacing it with the form of Exhibit A attached hereto as Exhibit
1.
E. The Merger Agreement is hereby amended by adding a new Exhibit B
thereto at the end thereof in the form of Exhibit 2 hereto.
2. MISCELLANEOUS
A. RATIFICATION. The parties hereto hereby ratify and approve the
Merger Agreement, as amended hereby, and the parties hereto acknowledge that all
of the terms and provisions of the Merger Agreement as amended hereby, are and
remain in full force and effect.
B. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
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<PAGE>
C. GOVERNING LAW. This Amendment, in all respects, including all
matters of construction, validity and performance, is governed by the internal
laws of the state of Washington as applicable to contracts executed and
delivered in Washington by citizens of such state to be performed wholly within
such state without giving effect to the principles of conflicts of laws thereof.
This agreement is being delivered in Seattle, Washington.
(This Space Intentionally Left Blank)
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<PAGE>
The parties hereto have executed this Third Amendment as of the date first
set forth above.
TOUCH TONE AMERICA, INC.
By: /s/ Michael Canney
-------------------------------
Its: President
S.V.V. SALES, INC.
By: /s/ Frank Bonadio
-------------------------------
Its: President
TOUCH TONE/ARCADA, INC.
By: /s/ Michael Canney
-------------------------------
Its: President
Solely with respect to Sections 1(B)
and 2(B) and (C) hereof:
/s/ Robert Leppaluoto
- ----------------------------------
Robert Leppaluoto
/s/ Keith Leppaluoto
- -----------------------------------
Keith Leppaluoto
4
<PAGE>
APPENDIX B
CHAPTER 23B.13
DISSENTERS' RIGHTS
Sec.
23B.13.010. Definitions.
23B.13.020. Right to Dissent.
23B.13.030. Dissent by nominees and beneficial owners.
23B.13.200. Notice of dissenters' rights.
23B.13.210. Notice of intent to demand payment.
23B.13.220. Dissenters' notice.
23B.13.230. Duty to demand payment.
23B.13.240. Share restrictions.
23B.13.250. Payment.
23B.13.260. Failure to take action.
23B.13.270. After-acquired shares.
23B.13.280. Procedure if shareholder dissatisfied with payment or offer.
23B.13.300. Court action.
23B.13.310. Court costs and counsel fees.
Section 23B.13.010. DEFINITIONS.
As used in this chapter:
(1) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under RCW 23B.13.020 and who exercises that right when and in
the manner required by RCW 23B.13.200 through 23B.13.280.
(3) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder. [1989 c 165 Section 140.]
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<PAGE>
Section 23B.13.020. RIGHT TO DISSENT.
(1) A shareholder is entitled to dissent from, and obtain payment of the
fair value of the shareholder's shares in the event of, any of the following
corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party
(i) if shareholder approval is required for the merger by RCW 23B.11.030,
23B.11.080, or the articles of incorporation and the shareholder is entitled to
vote on the merger, or (ii) if the corporation is a subsidiary that is merged
with its parent under RCW 23B.11.040;
(b) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale will be distributed to the shareholders within one
year after the date of sale;
(d) An amendment of the articles of incorporation that materially reduces
the number of shares owned by the shareholder to a fraction of a share if the
fractional share so created is to be acquired for cash under RCW 23B.06.040; or
(e) Any corporate action taken pursuant to a shareholder vote to the extent
the articles of incorporation, bylaws, or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to dissent and
obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action fails to comply with
the procedural requirements imposed by this title, RCW 25.10.900 through
25.10.955, the articles of incorporation, or the bylaws, or is fraudulent with
respect to the shareholder or the corporation.
(3) The right of a dissenting shareholder to obtain payment of the fair value
of the shareholder's shares shall terminate upon the occurrence of any one of
the following events:
(a) The proposed corporate action is abandoned or rescinded;
(b) A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
(c) The shareholder's demand for payment is withdrawn with the written
consent of the corporation. [1991 c 269 Section 37; 1989 c 165 Section 141.]
Section 23B.13.030. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(1) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in the shareholder's name only if the shareholder
dissents with respect to all shares beneficially owned by any one person and
notifies the corporation in writing of the name and address of each person on
whose behalf the shareholder asserts dissenters' rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to which the
dissenter dissents and the dissenter's other shares were registered in the names
of different shareholders.
(2) A beneficial shareholder may assert dissenters' fights as to shares
held on the beneficial shareholder's behalf only if:
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(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares of which
such shareholder is the beneficial shareholder or over which such shareholder
has power to direct the vote. [1989 c 165 Section 142.]
Section 23B.13.200. NOTICE OF DISSENTERS' RIGHTS.
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this chapter and be accompanied by a copy of this chapter.
(2) If corporate action creating dissenters' rights under RCW 23B.13.020 is
taken without a vote of shareholders, the corporation, within ten days after
[the] effective date of such corporate action, shall notify in writing all
shareholders entitled to assert dissenters' rights that the action was taken and
send them the dissenters' notice described in RCW 23B.13.220. [1989 c 165
Section 143.]
Section 23B.13.220. DISSENTERS' NOTICE.
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of RCW 23B.13.210.
(2) The dissenters' notice must be sent within ten days after the effective
date of the corporate action, and must:
(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not the person acquired beneficial ownership of the shares
before that date;
(d) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after the date
the notice in subsection (1) of this section is delivered; and
(e) Be accompanied by a copy of this chapter. [1989 c 165 Section 145.]
Section 23B.13.230. DUTY TO DEMAND PAYMENT.
(1) A shareholder sent a dissenters' notice described in RCW 23B.13.220
must demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to RCW 23B.13.220(2)(c), and deposit the
shareholder's certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits the shareholder's
share certificates under subsection (1) of this section retains all other rights
of a shareholder until the proposed corporate action is effected.
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<PAGE>
(3) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter. [1989 c 165 Section 146.]
Section 23B.13.240. SHARE RESTRICTIONS.
(1) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is effected or the restriction is released under RCW 23B.13.260.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until the
effective date of the proposed corporate action. [1989 c 165 Section 147.]
Section 23B.13.250. PAYMENT.
(1) Except as provided in RCW 23B.13.270, within thirty days of the later
of the effective date of the proposed corporate action, or the date the payment
demand is received, the corporation shall pay each dissenter who complied with
RCW 23B. 13.230 the amount the corporation estimates to be the fair value of the
shareholder's shares, plus accrued interest.
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year ending
not more than sixteen months before the date of payment, an income statement for
that year, a statement of changes in shareholders' equity for that year, and the
latest available interim financial statements, if any;
(b) An explanation of how the corporation estimated the fair value of the
shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under RCW
23B.13.280; and
(e) A copy of this chapter. [1989 c 165 Section 148.]
Section 23B.13.260. FAILURE TO TAKE ACTION.
(1) If the corporation does not effect the proposed action within sixty
days after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release any transfer
restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it must
send a new dissenters' notice under RCW 23B.13.220 and repeat the payment demand
procedure. [1989 c 165 Section 149.]
Section 23B.13.270. AFTER-ACQUIRED SHARES.
(1) A corporation may elect to withhold payment required by RCW 23B.13.250
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of the dissenter's demand. The corporation shall send with its
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offer an explanation of how it estimated the fair value of the shares, an
explanation of how the interest was calculated, and statement of the dissenter's
right to demand payment under RCW 23B.13.280. [1989 c 165 Section 150.]
Section 23B.13.280. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR
OFFER.
(1) A dissenter may notify the corporation in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate, less any payment under RCW
23B.13.250, or reject the corporation's offer under RCW 23B.13.270 and demand
payment of the dissenter's estimate of the fair value of the dissenter's shares
and interest due, if:
(a) The dissenter believes that the amount paid under RCW 23B.13.250 or
offered under RCW 23B.l3.270 calculated; is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under RCW 23B.13.250 within sixty
days after the date set for demanding payment; or
(c) The corporation does not effect the proposed action and does not return
the deposited certificates or release the transfer restrictions imposed on
uncertificated shares within sixty days after the date set for demanding
payment.
(2) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (1) of this section within thirty days after the
corporation made or offered payment for the dissenter's shares. [1989 c 165
Section 151.]
Section 23B.13.300. COURT ACTION.
(1) If a demand for payment under RCW 23B.13.280 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the sixty-day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
(2) The corporation shall commence the proceeding in the superior court of
the county where a corporation's principal office, or, if none in this state,
its registered office, is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled, parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provisions of this chapter. If the court determines that such
shareholder has not complied with the provisions of this chapter, the
shareholder shall be dismissed as a party.
(5) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more
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persons as appraisers to receive evidence and recommend decision on the question
of fair value. The appraisers have the powers described in the order appointing
them, or in any amendment to it. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
(6) Each dissenter made a party to the proceeding is entitled to judgment
(a) for the amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the corporation,
or (b) for the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under RCW 23B.13.270. [1989 c 165 Section 152.]
Section 23B.13.310. COURT COSTS AND COUNSEL FEES.
(1) The court in a proceeding commenced under RCW 23B.13.300 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall assess the costs
against the corporation, except that the court may assess the costs against all
or some of the dissenters, in amounts the court finds equitable, to the extent
the court finds the dissenters acted arbitrarily, vexatiously, or not in good
faith in demanding payment under RCW 23B.13.280.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the requirements
of RCW 23B. 13.200 through 23B. 13.280; or
(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by chapter 23B.13 RCW.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited. [1989 c 165 Section 153.]
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APPENDIX C
PLAN AND AGREEMENT OF MERGER BETWEEN
TOUCH TONE - WASHINGTON, INC.
AND
TOUCH TONE AMERICA, INC.
The Plan and Agreement of Merger (this "Agreement") is entered into this
____ day of January 1997, by and between Touch Tone - Washington, Inc., a
Washington corporation (the "Surviving Corporation"), and Touch Tone America,
Inc., a California corporation ("TTA"). The Surviving Corporation and TTA are
sometimes referred to jointly as the "Constituent Corporations."
RECITALS
A. Each of the Constituent Corporations are corporations organized and
existing under the laws of the respective states as indicated in the first
paragraph of this Agreement.
B. The shareholders and directors of each of the Constituent Corporations
have deemed it advisable for the mutual benefit of the Constituent corporations
and their respective shareholders that TTA be merged into the Surviving
Corporation pursuant to the provisions of the Washington Business Corporation
Act, Title 23B of the Revised Code of Washington and the California General
Corporation Law (the "Merger").
NOW, THEREFORE, in accordance with the laws of the states of Washington and
California, the Constituent Corporations agree that, subject to the following
terms and conditions, (i) TTA shall be merged into the Surviving Corporation,
(ii) the Surviving Corporation shall continue to be governed by the laws of the
state of Washington, and (iii) the terms of the Merger, and the mode of carrying
them into effect, shall be as follows:
ARTICLE I
ARTICLES OF SURVIVING CORPORATION
The Articles of Incorporation of the Surviving Corporation in effect
immediately prior to the Effective Time of the Merger shall constitute the
"Articles" of the Surviving Corporation within the meaning of Section
23B.01.400(1) of the Washington Business Corporation Act and Section 200 of the
California General Corporation law, except that Article I of the Articles of
Incorporation of the Surviving Corporation is hereby amended in its entirety to
read as follows:
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ARTICLE 1
NAME
The name of the corporation is Touch Tone America, Inc.
ARTICLE II
CONVERSION OF SHARES
2.1 TTA SHARES. At the Effective Time of the Merger each outstanding
share of the common stock of TTA shall automatically convert to one share of
Touch Tone - Washington, Inc. It will not be necessary for shareholders of TTA
to exchange their existing stock certificates for stock certificates of the
Surviving Corporation.
2.2 SURVIVING CORPORATION SHARES. At the Effective Time of the Merger
each outstanding share of the common stock of the Surviving Corporation shall be
automatically canceled and returned to the status of authorized but unissued
shares.
ARTICLE III
BYLAWS
The Bylaws of the Surviving Corporation shall be the governing Bylaws.
ARTICLE IV
DIRECTORS AND OFFICERS
The directors and officers of TTA shall be the directors and officers of
the Surviving Corporation.
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ARTICLE V
EFFECT OF THE MERGER
The effect of the Merger shall be as provided by the applicable provisions
of the laws of Washington and California. Without limiting the generality of
the foregoing, and subject thereto, at the Effective time of the Merger: the
separate existence of TTA shall cease; the Surviving Corporation shall possess
all assets and property of every description, and every interest therein,
wherever located, and the rights, privileges, immunities, powers, franchises,
and authority, of a public as well as a private nature, of all of the
Constituent Corporations; all obligations belonging to or due any of the
Constituent Corporations shall be vested in and become the obligations of, the
Surviving Corporation without further act or deed; title to any real estate or
any interest therein vested in any of the Constituent Corporations shall be
vested in and become the obligations of the Surviving Corporation without
further act or deed; title to any real estate or any interest therein shall not
revert or in any way be impaired by reason of the Merger; all rights of
creditors and all liens upon any property of any of the Constituent Corporations
shall be preserved unimpaired; and the Surviving Corporation shall be liable for
all the obligations of the Constituent Corporations and any claim existing, or
action or proceeding pending, by or against any of the Constituent Corporations
may be prosecuted to judgment with right of appeal, as if the Merger had not
taken place.
If at any time after the Effective Time of the Merger the Surviving
Corporation shall consider it to be advisable that any further conveyances,
agreements, documents, instruments, and assurances of law or any other things
are necessary or desirable to vest, perfect, confirm, or record in the Surviving
Corporation the title to any property, rights, privileges, powers, and
franchises of the Constituent Corporations or otherwise to carry out the
provisions of this Agreement, the proper directors and officers of the
Constituent Corporations last in office shall execute and deliver, upon the
Surviving Corporations' request, any and all proper conveyances, agreements,
documents, instruments, and assurances of law, and do all things necessary or
proper to vest, perfect, or confirm title to such property, rights, privileges,
powers, and title to such property, rights, privileges, powers, and franchises
in the Surviving Corporation, and otherwise to carry out the provisions of this
Agreement.
ARTICLE VI
EFFECTIVE TIME OF THE MERGER
As used in this Agreement, the "Effective Time of the Merger" shall mean
the time at which executed counterparts of this Agreement or conformed copies
thereof, together with duly executed Certificates of Articles of Merger have
been duly filed by the Constituent Corporations in the office of the Washington
Secretary of State pursuant to Section 23B.11.050 of the Washington Business
Corporation Act and the Office of the California Secretary of State pursuant to
Section 1108 of the California General Corporation Law or at such time
thereafter as is provided in such Certificate or Articles of Merger.
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ARTICLE VII
TERMINATION
This Agreement may be terminated and the Merger abandoned by mutual consent
of the directors of the Constituent Corporations at any time prior to the
Effective Time of the Merger.
ARTICLE VIII
NO THIRD PARTY BENEFICIARIES
Except as otherwise specifically provided herein, nothing expressed or
implied in this Agreement is intended, or shall be construed, to confer upon or
give any person, firm, or corporation, other than the Constituent Corporations
and their respective shareholders, any rights or remedies under or by reason of
this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Plan and Agreement
of Merger to be executed as of the date first above written.
TOUCH TONE - WASHINGTON, INC.
A Washington Corporation
By
---------------------------------
Michael J. Canney, PRESIDENT
ATTEST:
- --------------------------------
David Smith, SECRETARY
TOUCH TONE AMERICA, INC.
A California Corporation
-----------------------------------
Michael J. Canney, PRESIDENT
ATTEST:
- --------------------------------
David Smith, SECRETARY
4
<PAGE>
APPENDIX D
ARTICLES OF INCORPORATION
OF
TOUCH TONE - WASHINGTON, INC.
The above-named Corporation existing under the Washington Business Corporation
Act, adopts the following Restated Articles of Incorporation:
ARTICLE 1. NAME
The name of the Corporation is TOUCH TONE - WASHINGTON, INC.
ARTICLE 2. DURATION
The period of the Corporation's duration shall be perpetual.
ARTICLE 3. PURPOSES AND POWERS
The purpose for which the Corporation is organized is to engage in any business,
trade or activity which may be conducted lawfully by a corporation organized
under the Washington Business Corporation Act.
The Corporation shall have the authority to engage in any and all such
activities as are incidental or conducive to the attainment of the purposes of
the Corporation, and to exercise any and all powers authorized or permitted
under any laws that now or hereafter may be applicable or available to the
Corporation.
ARTICLE 4. AUTHORIZED CAPITAL
The total number of shares which the corporation is authorized to issue is one
hundred and ten million (110,000,000), consisting of one hundred million
(100,000,000) shares of common stock and ten million (10,000,000) shares of
preferred stock.
The preferred stock may be issued from time to time in one or more series in any
manner permitted by law and the provisions of these
Page 1 - ARTICLES OF INCORPORATION
<PAGE>
Articles of Incorporation of the corporation, as determined from time to time by
the board of directors and stated in the resolution or resolutions providing for
the issuance thereof, prior to the issuance of any shares thereof. The board of
directors shall have the authority to fix and determine and to amend, subject to
the provisions hereof, the rights and preferences of the shares of any series
that is wholly unissued or to be established. Unless otherwise specifically
provided in the resolution establishing any series, the board of directors shall
further have the authority, after the issuance of shares of a series whose
number it has designated, to amend the resolutions establishing such series to
decrease the number of shares of that series, but not below the number of shares
of such series then outstanding.
The holders of shares of the common stock shall be entitled to receive
dividends out of funds of the Corporation legally available by the Board of
Directors. The holders of shares of Common Stock, on the basis of one vote per
share, shall have the right to vote for the election of members of the Board of
Directors of the Corporation and the right to vote on all other matters and
shall not have cumulative voting rights. The holders of the shares of the
Common Stock shall be entitled to receive distributions legally payable to
shareholders on the liquidation of the Corporation and shall have no preemptive
rights.
ARTICLE 5. BYLAWS
The Board of Directors shall have the power to adopt, amend or repeal the Bylaws
of the Corporation and to adopt new Bylaws, subject to the power of the
shareholders to amend or repeal such Bylaws. The shareholders shall also have
the power to adopt, amend or repeal the Bylaws of the Corporation and to adopt
new Bylaws.
ARTICLE 6. REGISTERED OFFICE AND AGENT
The name of the registered agent of the Corporation and the address of its
registered office are as follows:
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<PAGE>
Cairncross & Hempelmann
701 Fifth Avenue
70th Floor, Columbia Tower
Seattle, Washington 98104
ARTICLE 7. DIRECTORS
7.1 NUMBER. The number of Directors of the Corporation shall be determined in
the manner provided in the Bylaws, and may be increased or decreased from
time to time in the manner provided therein.
7.2 VACANCIES. Any vacancy occurring on the Board of Directors may be filled
by the affirmative vote of a majority of the remaining Directors, though
less than a quorum of the Board of Directors, or by a sole remaining
Director. Any directorship to be filled by reason of an increase in the
number of Directors of the Corporation may be filled by the affirmative
vote of a majority of the number of Directors fixed by the Bylaws prior to
such increase. Any such directorship not so filled by the Directors shall
be filled by election at the next annual meeting of shareholders or at a
special meeting of shareholders called for that purpose.
ARTICLE 8. LIMITATION OF DIRECTOR LIABILITY
To the full extent that the Washington Business Corporation Act, as it exists on
the date hereof or hereafter may be amended, permits the limitation or
elimination of the liability of Directors, a Director of the Corporation shall
not be liable to the Corporation or its shareholders for any monetary damages
for conduct as a Director. Any amendment to or repeal of this Article 8 or to
the Washington Business Corporation Act shall not adversely affect any right or
protection of a Director of the Corporation for or with respect to any acts or
omissions of such Director occurring prior to such amendment or repeal.
Page 3 - ARTICLES OF INCORPORATION
<PAGE>
ARTICLE 9. INDEMNIFICATION
The Corporation shall provide any indemnification required by the Washington
Business Corporation Act and may indemnify directors, officers, agents and
employees as follows:
9.1 The Corporation shall indemnify its officers and directors to the full
extent required and may indemnify its officers and directors to the full
extent permitted by the Washington Business Corporation Act now or
hereafter in force, whether they are serving the Corporation or, at its
request, any other entity, as an officer, director, or in any other
capacity; provided no such indemnity shall indemnify any director from or
on account of any (a) acts or omissions of the director finally adjudged to
be intentional misconduct or a knowing violation of law; (b) conduct of the
director finally adjudged to be in violation of RCW 23B.08.310, or (c) any
transaction with respect to which it was finally adjudged that such
director personally received a benefit in money, property or services to
which the director was not legally entitled.
9.2 The Board of Directors may take such action as is necessary or appropriate
to carry out these indemnification provisions and is expressly empowered to
adopt, approve and amend from time to time such Bylaws, resolutions or
contracts implementing these provisions, including but not limited to
implementing the manner in which determinations as to any indemnity or
advancement of expenses shall be made, or such further indemnification
agreements as may be permitted by law.
9.3 The Corporation shall indemnify other employees and agents to the extent
that shall be authorized by the Board of Directors or the Bylaws of the
Corporation and that may be permitted by law, whether the employees and
agents are serving the Corporation or, at its request, any other entity.
9.4 The foregoing rights of indemnification shall not be exclusive of any other
rights to which those seeking indemnification may be entitled under any
statute, provision of the Articles of Incorporation, the Bylaws of the
Corporation or other agreements and contracts.
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<PAGE>
9.5 No amendment or appeal of this Article shall apply to or have any effect on
any right to indemnification provided hereunder with respect to acts or
omissions occurring prior to such amendment or repeal.
ARTICLE 10. AMENDMENTS TO ARTICLES OF INCORPORATION
The Corporation reserves the right to amend or repeal any of the provisions
contained in these Articles of Incorporation, in any manner now or hereafter
permitted by law, and the rights of the shareholders of the Corporation are
granted subject to this reservation.
ARTICLE 11. NOTICES
The address where the State of Washington Office of Secretary of State may mail
notices to the Corporation is:
c/o Cairncross & Hempelmann
701 Fifth Avenue
70th Floor, Columbia Center
Seattle, Washington 98104
ARTICLE 12. EFFECTIVE DATE
These Articles are adopted as of _________, 1996.
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<PAGE>
ARTICLE 13. SHAREHOLDER APPROVAL
These Amendments were duly approved by the shareholders in accordance with RCW
23B.10.030 and 23B.10.040
Dated this ___ day of _________, 1996.
TOUCH TONE - WASHINGTON, INC.
By:
-----------------------------
Its
By:
-----------------------------
Its
Page 6 - ARTICLES OF INCORPORATION
<PAGE>
CONSENT TO APPOINTMENT AS REGISTERED AGENT
Cairncross & Hempelmann, P.S. hereby consents to serve as Registered Agent,
in the State of Washington, for Touch Tone - Washington, Inc. It understands
that, as agent for the Corporation, it will be my responsibility to receive
service of process in the name of the Corporation; to forward all mail to the
Corporation; and to immediately notify the office of the Secretary of State in
the event of its resignation, or of any changes in the registered office address
of the Corporation for which it is agent.
DATED: ________, 1996
CAIRNCROSS & HEMPELMANN, P.S.
By:
--------------------------
Print Name
-------------------
Its:
-------------------------
70th Floor, Columbia Center
701 Fifth Avenue
Seattle, Washington 98104
Page 7 - ARTICLES OF INCORPORATION
<PAGE>
BYLAWS
OF
TOUCH TONE - WASHINGTON, INC.
<PAGE>
TOUCH TONE - WASHINGTON, INC.
SECTION 1. OFFICES
The principal office of the Corporation shall be located at the principal place
of business or such other place as the Board of Directors (the "Board") may
designate. The Corporation may have such other offices, either within or
without the State of Washington, as the Board may designate or as the business
of the Corporation may require from time to time.
SECTION 2. SHAREHOLDERS
2.1 ANNUAL MEETING. The annual meeting of the shareholders shall be held on
the day chosen by the Board of Directors each year at the principal office
of the Corporation or such other place as fixed by the Board, for the
purpose of electing Directors and transacting such other business as may
properly come before the meeting. If the day fixed for the annual meeting
is a legal holiday, the meeting shall be held on the next succeeding
business day. If the annual meeting is not held at the designated time,
the President or the Board may call the annual meeting at a time fixed by
them not more than sixty (60) days after such designated time by proper
notice designating the meeting as the annual meeting. If the annual
meeting is not held at the designated time or during the sixty (60) day
period thereafter, the annual meeting may be called by the holders of not
less than one-tenth (1/10th) of all the outstanding shares of the
Corporation entitled to vote at the meeting. In such event, notice shall
be given not more than fifteen (15) days after the expiration of such sixty
(60) day period. Any such notice shall fix the time of the meeting at the
earliest date permissible under the applicable notice requirements.
2.2 SPECIAL MEETINGS. The Chairman of the Board, the President, or the Board
may call special meetings of the shareholders for any purpose, and the
holders of not less than one-tenth (1/10th) of all the outstanding shares
of the Corporation entitled to vote on any issue proposed to be considered
at the proposed special meeting, may call a special meeting of the
shareholders, if they sign, date and deliver to the Corporation's Secretary
a demand for a special meeting describing the purpose(s) for which it is to
be held.
Page 1 -BYLAWS
<PAGE>
2.3 PLACE OF MEETING. All meetings shall be held at the principal office of
the Corporation or at such other place within or without the State of
Washington designated by the Board, by any persons entitled to call a
meeting hereunder or by a waiver of notice signed by all of the
shareholders entitled to vote at the meeting.
2.4 MEETING NOTICE REQUIREMENTS.
2.4.1NOTICE OF MEETING. The Chairman of the Board, the President, the
Secretary, the Board, or shareholders calling an annual or
special meeting of shareholders, as provided for herein, shall
cause to be delivered to each shareholder entitled to notice of
or to vote at the meeting, either personally or by mail, not less
than ten (10) nor more than sixty (60) days before the meeting,
written notice stating the place, day and hour of the meeting,
and in the case of a special meeting, the purpose(s) for which
the meeting is called. At any time, upon properly executed
written demand of the holders of not less than one-tenth (1/10th)
of all of the outstanding shares of the Corporation entitled to
vote on any issue proposed to be considered at the proposed
meeting, it shall be the duty of the Secretary to give notice of
such special meeting of shareholders to be held on such date and
at such place and hour as shall be fixed in accordance with these
Bylaws, not less than ten (10) nor more than sixty (60) days
after receipt of said request, and if the Secretary shall neglect
or refuse to issue such notice, the person(s) making the request
may do so and may so fix the date for such meeting. If such
notice is mailed, it shall be deemed delivered when deposited in
the U.S. mail properly addressed to the shareholder at his or her
address as it appears on the stock transfer books of the
Corporation, with postage prepaid. If the notice is telegraphed,
it shall be deemed delivered when the content of the telegram is
delivered to the telegraph company.
2.4.2NOTICE OF ADJOURNMENT OF MEETING. A majority of the shares
represented at the meeting, even if less
Page 2 -BYLAWS
<PAGE>
than a quorum, may adjourn the meeting from time to time. At a
reconvened meeting at which a quorum is present, any business may
be transacted which might have been transacted at the meeting as
originally noticed. If a meeting is adjourned to a different
date, time or place, notice need not be given of the new date,
time or place if a new date, time or place is announced at the
meeting before adjournment; however, if a new record date for the
adjourned meeting is or must be fixed in accordance with the
corporate laws of the State of Washington, notice of the
adjourned meeting must be given to persons who are shareholders
as of the new record date.
2.5 WAIVER OF NOTICE.
2.5.1Whenever any notice is required to be given to any shareholder under
the provisions of these Bylaws, the Articles of Incorporation of
the Corporation or the Washington Business Corporation Act, a
waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before or after the time stated
therein, and delivered to the Corporation for inclusion in the
minutes of the Corporation, shall be deemed equivalent to the
giving of such notice.
2.5.2The attendance of a shareholder at a meeting waives objection to lack
of, or defective notice of such meeting or consideration of a
particular matter at the meeting, unless a shareholder at the
beginning of the meeting or the consideration of such matter
objects to holding the meeting, transacting business at the
meeting or considering the matter when presented at the meeting.
2.6 FIXING OF RECORD DATE FOR DETERMINING OF SHAREHOLDERS. For purposes of
determining shareholders entitled to notice of, or to vote at any meeting
of shareholders or at any adjournment thereof, or shareholders entitled to
demand a special meeting, or shareholders entitled to receive payment of
any dividend, or in order to make a determination of shareholders of the
Corporation for any other purpose, the Board may fix in advance a date as
the record date for any
Page 3 -BYLAWS
<PAGE>
such determination. Such record date shall be not more than seventy (70)
days, and in case of a meeting of shareholders, not less than ten (10)
days, prior to the date on which the particular action requiring such
determination is to be taken. If no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a
meeting, or to demand a special meeting or to receive payment of a
dividend, the date on which the notice of meeting is mailed or on which the
resolution of the Board declaring such dividend is adopted, as applicable,
shall be the record date for such determination. Such determination shall
apply to any adjournment of the meeting.
2.7 SHAREHOLDERS' LIST.
2.7.1THE LIST. Beginning two (2) business days after notice of a meeting
of shareholders has been given, a complete alphabetical list of
the shareholders entitled to vote at such meeting, or at any
adjournment thereof, shall be compiled, arranged by voting group,
and within each voting group by class or series, with the address
of and number of shares held by each shareholder. This record
shall be kept on file at the Corporation's principal office or at
a place identified in the meeting notice in the city where the
meeting will be held, and on written demand shall be subject to
inspection by any shareholder at any time during normal business
hours. Such record shall also be kept open at such meeting for
inspection by any shareholder.
2.7.2COPYING. A shareholder may, on written demand, copy the shareholders'
list at such shareholder's expense during regular business hours,
provided that:
a. Such shareholder's demand is made in good faith and for a
proper purpose;
b. Such shareholder has described with reasonable particularity
his/her/its purpose in the written demand; and
Page 4 -BYLAWS
<PAGE>
c. The shareholders' list is directly connected with such
shareholder's purpose.
2.8 QUORUM. A majority of the votes entitled to be cast on a matter at a
meeting by a voting group, represented in person or by proxy, shall
constitute a quorum of that voting group for action on that matter at a
meeting of the shareholders. If the presiding officer at a meeting of the
shareholders determines that a quorum is not present, he shall not call the
meeting to order. If a quorum is present or represented at a reconvened
meeting following an adjournment, any business may be transacted that might
have been transacted at the meeting as originally called. The shareholders
present at a duly convened meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave
less than a quorum.
2.9 MANNER OF ACTING.
2.9.1GENERALLY. If a quorum exists, action on a matter, other than the
election of directors, by a voting group is approved if the votes
cast within the voting group favoring the action exceed the votes
cast opposing the action, unless the affirmative vote of a
greater number is required by these Bylaws, the Articles of
Incorporation or the Washington Business Corporation Act.
2.9.2SINGLE VOTING GROUP. If a matter is to be voted upon by a single
group, action on that matter is taken when voted upon by that
voting group; if a matter is to be voted on by two (2) or more
voting groups, action on that matter is taken only when voted
upon by each of those voting groups counted separately. Action
may be taken by one (1) voting group on a matter even though no
action is taken by another voting group entitled to vote on such
matter.
2.10 PROXIES. A shareholder may vote by proxy executed in writing by the
shareholder or by his or her attorney-in-fact. Such proxy shall be filed
with the Secretary of the Corporation before or at the time of the meeting.
A proxy shall become invalid eleven (11) months after the date of its
execution, unless otherwise expressly provided in the proxy. A proxy
Page 5 -BYLAWS
<PAGE>
with respect to a specified meeting shall entitle the holder thereof to
vote at any adjournment of such meeting but shall not be valid after the
final adjournment thereof.
2.11 VOTING OF SHARES. Each outstanding share entitled to vote shall be
entitled to one vote upon each matter submitted to a vote at a meeting of
shareholders.
2.12 VOTING FOR DIRECTORS.
2.12.1 NON-CUMULATIVE VOTING. Unless the Articles of Incorporation
permit cumulative voting, each shareholder entitled to vote at an
election of Directors may vote, in person or by proxy, the number
of shares owned by such shareholder for each position on the
Board of Directors that is to be filled by election, and for
which such shareholder has a right to vote. The candidate
receiving the plurality of the votes cast for that position on
the Board of Directors shall be deemed elected to that position;
provided, however, that no candidate may be elected to serve in
more than one position on the Board of Directors at the same
time.
2.12.2 CUMULATIVE VOTING. If cumulative voting is authorized by the
Articles of Incorporation, each shareholder entitled to vote
shall be entitled to cast cumulative votes in a total equal to
the number of shares held by such shareholder multiplied by the
number of Directors to be elected. Such cumulative votes may all
be cast for one Director candidate, or distributed among any
number of such candidates. In the case of cumulative voting,
voting shall be for the Board of Directors as a whole, and the
candidates receiving the highest number of votes shall be deemed
elected to the positions to be filled by election.
2.13 ACTION BY SHAREHOLDERS WITHOUT A MEETING. Any action which could be taken
at a meeting of the shareholders may be taken without a meeting if a
written consent setting forth the action so taken is signed by all
shareholders entitled to vote with respect to the subject matter thereof.
The action
Page 6 -BYLAWS
<PAGE>
shall be effective on the date on which the last signature is placed on the
consent, or at such earlier or later time as is set forth therein. Such
written consent, which shall have the same force and effect as a unanimous
vote of the shareholders, shall be inserted in the minute book as if it
were the minutes of a meeting of the shareholders.
2.14 VOTING OF SHARES BY CERTAIN HOLDERS.
2.14.1 SHARES HELD BY ANOTHER CORPORATION. Shares in the name of
another corporation may be voted by such officer, agent or proxy
as the bylaws of such other corporation may prescribe, or, in the
absence of such provision, as the Board of Directors of such
corporation may determine; provided, however, that such shares
are not entitled to vote if the Corporation owns, directly or
indirectly, a majority of the shares entitled to vote for
Directors of such other corporation.
2.14.2 SHARES HELD BY PERSONAL REPRESENTATIVE, GUARDIAN, CONSERVATOR OR
TRUSTEE. Shares held by a personal representative,
administrator, executor, guardian or conservator may be voted by
the holder, either in person or by proxy, without a transfer of
such shares into the holder's name. Shares standing in the name
of a trustee may be voted by that trustee either in person or by
proxy, but no trustee shall be entitled to vote shares without a
transfer of such shares into the trustee's name.
2.14.3 SHARES HELD BY RECEIVER OR TRUSTEE IN BANKRUPTCY. Shares in the
name of a receiver or trustee in bankruptcy may be voted by such
receiver or trustee in bankruptcy, and shares held by or under
the control of a receiver or trustee in bankruptcy may be voted
by such receiver or trustee in bankruptcy without the transfer
thereof into the name of such receiver or trustee if authority to
do so is contained in an appropriate order of the court by which
such receiver or trustee in bankruptcy was appointed.
2.14.4 PLEDGED SHARES. A shareholder whose shares are pledged shall be
entitled to vote such shares
Page 7 -BYLAWS
<PAGE>
until the shares have been transferred into the name of the
pledgee, and thereafter the pledgee shall be entitled to vote the
shares so transferred.
2.14.5 TREASURY SHARES; FIDUCIARY STOCK. Treasury shares shall not be
voted or counted for determining whether a quorum exists at any
meeting or counted in determining the total number of outstanding
shares at any given time; shares of its own stock held by the
Corporation in a fiduciary capacity may be voted by the
Corporation.
2.15 CONFERENCE TELEPHONE. Meetings of the shareholders may be conducted by
means of a conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear one
another at the same time, and participation by such means shall constitute
presence in person at such meeting.
SECTION 3. BOARD OF DIRECTORS
3.1 GENERAL POWERS. The business affairs of the Corporation shall be managed
by the Board, except as may be otherwise provided in these Bylaws, the
Articles of Incorporation, or the Washington Business Corporation Act.
3.2 NUMBER AND TENURE. The Board shall consist of five (5) Directors. The
number of Directors may be changed from time to time by amendment to these
Bylaws, but no decrease in the number of Directors shall have the effect of
shortening the term of any incumbent Director. Unless a Director dies,
resigns, or is removed from office, he or she shall hold office until the
next annual meeting of shareholders or until his or her successor is
elected and qualified, whichever is later. Directors need not be
shareholders of the Corporation or residents of the State of Washington.
Page 8 -BYLAWS
<PAGE>
3.3 ANNUAL AND REGULAR MEETINGS. An annual Board meeting shall be held without
notice immediately after and at the same place as the annual meeting of
shareholders. By resolution, the Board, or any committee thereof, may
specify the time and place, either within or without the State of
Washington, for holding regular meetings thereof without other notice than
such resolution.
3.4 SPECIAL MEETINGS. Special meetings of the Board or of any committee
designated by the Board may be called by or at the request of the Chairman
of the Board, the President, the Secretary or any two (2) Directors and, in
the case of any special meeting of any committee designated by the Board,
by the Chairman thereof. The person(s) authorized to call special meetings
may fix any place either within or without the State of Washington as the
place for holding any special Board or committee meeting called by such
person(s).
3.5 MEETINGS BY TELEPHONE. Members of the Board or of any committee designated
by the Board may participate in a meeting of such Board or committee by
means of a conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each
other. Participation by such means shall constitute presence in person at
a meeting.
3.6 NOTICE OF SPECIAL MEETINGS. Notice of a special Board or committee
meeting, stating the place, day and hour of the meeting, shall be given to
a Director in writing, in person or orally by telephone. Neither the
business to be transacted at, nor the purpose of, any special meeting need
be specified in the notice of such meeting.
3.6.1PERSONAL DELIVERY. If delivery is by personal service, the notice
shall be effective if delivered at the Director's address at
least two (2) days before the meeting.
3.6.2DELIVERY BY MAIL. If notice is delivered by mail, the notice shall be
deemed effective if deposited in the U.S. mail at least five (5)
days before the meeting, properly addressed to a Director at his
or her address shown on the records of the Corporation, with
postage prepaid.
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<PAGE>
3.6.3DELIVERY BY ELECTRONIC MEANS. If notice is delivered by any
electronic means including, but not limited to, telegraph or
facsimile, the notice shall be deemed effective if the content
thereof is delivered to the telegraph company for delivery to
a Director at his or her address shown on the records of the
Corporation, or transmitted by facsimile machine to a
facsimile number for the Director shown on the records of the
Corporation, at least three (3) days before the meeting.
3.6.4ORAL NOTICE. If notice is delivered orally, by telephone or in
person, the notice shall be effective if personally given to a
Director at least two (2) days before the meeting.
3.7 WAIVER OF NOTICE.
3.7.1WRITTEN WAIVER. Whenever any notice is required to be given to any
Director under the provisions of these Bylaws, the Articles of
Incorporation or the Washington Business Corporation Act, a
waiver thereof in writing, specifying the meeting for which
notice is waived, signed by the person or persons entitled to
such notice and whether before or after the time stated therein,
shall be deemed equivalent to the giving of such notice. Neither
the business to be transacted at, nor the purpose of, any regular
or special meeting of the Board or any committee appointed by the
Board need be specified in the waiver of notice of such meeting.
3.7.2WAIVER BY ATTENDANCE. The attendance of a Director at a Board or
committee meeting shall constitute a waiver of notice of such
meeting, unless a Director, at the beginning of the meeting, or
promptly upon such Director's arrival, objects to holding the
meeting or transacting any business and does not thereafter vote
for or assent to action taken at the meeting.
3.8 QUORUM. A majority of the number of Directors fixed by, or in the manner
provided by, these Bylaws shall constitute a quorum for the transaction of
business at any Board meeting.
Page 10 -BYLAWS
<PAGE>
If the Chairman of the Board determines that less than a quorum is present
he shall not call the meeting to order.
3.9 MANNER OF ACTING AND ADJOURNMENT. The act of the majority of the Directors
present at a Board meeting at which there is a quorum shall be the act
of the Board, unless the vote of a greater number is required by these
Bylaws, the Articles of Incorporation or the Washington Business
Corporation Act. Any meeting of the Board may be adjourned and continued
at a later time, including a meeting at which a quorum is not present.
Notwithstanding Section 3.6, notice of the adjourned meeting or of the
business to be transacted there, other than by announcement at the
meeting of which the adjournment is taken, shall not be necessary. At
any adjourned meeting at which a quorum is present, any business may be
transacted which could have been transacted at the meeting as originally
called.
3.10 PRESUMPTION OF ASSENT. A Director of the Corporation present at a Board or
committee meeting at which action on any corporate matter is taken shall be
deemed to have assented to the action taken unless such Director objects at
the beginning of the meeting, or promptly upon such Director's arrival, to
holding the meeting or transacting business at the meeting, and his or her
dissent is entered in the minutes of the meeting, or unless such Director
delivers a written notice of dissent or abstention to such action with the
presiding officer of the meeting before the adjournment thereof, or
forwards such notice by registered mail to the Secretary of the Corporation
immediately after the adjournment of the meeting. A Director who voted in
favor of such action may not thereafter dissent or abstain.
3.11 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING. Any action which could be
taken at a meeting of the Board or of any committee appointed by the Board
may be taken without a meeting if a written consent setting forth the
action so taken is signed by each of the Directors or by each committee
member. The action shall be effective on the date on which the last
signature is placed on the consent, or at such other time as is set forth
therein. Such written consent, which shall have the same effect as a
unanimous vote of the Directors or of such committee, shall be inserted in
the minute book as if it were the minutes of the Board or committee
meeting.
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<PAGE>
3.12 RESIGNATION. Any Director may resign at any time by delivering written
notice thereof to the Chairman of the Board, the Board, or to the
registered office of the Corporation. Such resignation shall take effect
at the time specified therein, or if the time is not specified therein,
upon delivery thereof and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Once delivered, a notice of resignation is irrevocable unless revocation is
permitted by the Board.
3.13 REMOVAL. At a meeting of shareholders called expressly for that purpose,
one (1) or more members of the Board (including the entire Board) may be
removed, with or without cause, unless the Articles of Incorporation permit
removal for cause only, by a vote of the holders of a majority of the
shares then entitled to vote on the election of Director(s). A Director
may be removed only if the number of votes cast to remove the Director
exceeds the number of votes cast to not remove the Director. If a Director
is elected by a voting group of shareholders, only the shareholders of that
voting group may participate in the vote to remove such Director.
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3.14 VACANCIES. Any vacancy occurring on the Board, including a vacancy
resulting from an increase in the number of Directors, may be filled by the
shareholders, by the Board or by the affirmative vote of a majority of the
remaining Directors though less than a quorum of the Board, or by a sole
remaining Director. A Director elected to fill a vacancy shall be elected
for the unexpired term of his or her predecessor in office. Any
directorship to be filled by reason of an increase in the number of
Directors may be filled by the affirmative vote of a majority of the number
of Directors fixed by the Bylaws prior to such increase for a term of
office continuing only until the next election of Directors by the
shareholders. Any directorship not so filled by the Directors shall be
filled by election at the next annual meeting of shareholders or at a
special meeting of shareholders called for that purpose. If the vacant
directorship is filled by the shareholders and was held by a Director
elected by a voting group of shareholders, then only the holders of shares
of that voting group are entitled to vote to fill such vacancy. A vacancy
that will occur at a specific later date by reason of a resignation
effective at such later date, or otherwise, may be filled before the
vacancy occurs, but the new Director may not take office until the vacancy
occurs.
3.15 EXECUTIVE AND OTHER COMMITTEES.
3.15.1 CREATION OF COMMITTEES. The Board, by resolution adopted in the
manner provided by these Bylaws by a majority of the number of
Directors in office when such action is taken, may appoint
standing or temporary committees, including an Executive
Committee, from its own number and consisting of no fewer than
two (2) Directors, and invest such committee(s) with such powers
as it may see fit, subject to such conditions as may be
prescribed by the Board, these Bylaws, the Articles of
Incorporation or the Washington Business Corporation Act.
3.15.2 AUTHORITY OF COMMITTEES. Each committee shall have and may
exercise all of the authority of the Board to the extent provided
in the resolution of the Board designating the committee and any
subsequent resolutions pertaining thereto and
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adopted in like manner, except that no such committee shall have
the authority to: (a) authorize distributions; (b) approve or
propose to shareholders actions required by the Washington
Business Corporation Act to be approved by shareholders; (c) fill
vacancies on the Board or on any committee thereof; (d) adopt,
amend or repeal these Bylaws; (e) amend the Articles of
Incorporation; (f) approve a plan of merger not requiring
shareholder approval; (g) authorize or approve reacquisition of
shares, except according to a formula or method prescribed by the
Board; or (h) authorize or approve the issuance or sale or
contract for the sale of shares, or determine the designation of
relative rights, preferences and limitations of a class or series
of shares of the Corporation, except that the Board may authorize
a committee or a senior executive officer of the Corporation to
do so within limits specifically prescribed by the Board.
3.15.3 QUORUM AND MANNER OF ACTING. A majority of the number of
Directors composing any committee of the Board, as established
and fixed by resolution of the Board, shall constitute a quorum
for the transaction of business at any meeting of such committee.
If the presiding officer determines that less than a quorum is
present, (s)he shall not call the meeting to order. Except as
may be otherwise provided in the Washington Business Corporation
Act, the Articles of Incorporation, or these Bylaws, the act of a
majority of the members of a committee present shall be the act
of the committee.
3.15.4 MINUTES OF MEETINGS. All committees so appointed shall keep
regular minutes of their meetings and shall cause them to be
recorded in books kept for that purpose.
3.15.5 RESIGNATION. Any member of any committee may resign at any time
by delivering written notice thereof to the Board, the Chairman
of the Board or the Corporation. Such resignation shall take
effect at the time specified therein, or if the
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time is not specified, upon delivery thereof and the acceptance
of such resignation shall not be necessary to make it effective.
Once delivered, a notice of resignation is irrevocable unless
revocation is permitted by the Board.
3.15.6 REMOVAL. The Board may remove from office any member of any
committee elected or appointed by it, but only by the affirmative
vote of not less than a majority of the number of Directors fixed
by or in the manner provided by these Bylaws.
3.16 COMPENSATION. By Board resolution, Directors and committee members may be
paid their expenses, if any, of attendance at each Board or committee
meeting, or a fixed sum for attendance at each Board or committee meeting,
or a stated salary as Director or a committee member, or a combination of
the foregoing. No such payment shall preclude any Director or committee
member from serving the Corporation in any other capacity and receiving
compensation therefor.
3.17 TRANSACTIONS WITH DIRECTORS.
3.17.1 Any contract or other transaction or determination between the
Corporation and one or more of its Directors, or between the
Corporation and another party in which one or more of its
Directors are interested, shall be valid notwithstanding the
relationship or interest or the presence or participation of such
Director(s) in a meeting of the Board or of a committee thereof
which acts upon or in reference to such contract, transaction, or
determination, if: (a) the material facts and the Directors'
interest(s) were disclosed or known to the Board or the committee
and the Board or committee authorized, approved, or ratified the
transactions; (b) the material facts and the Directors or
Directors' interest(s) were disclosed or known to the
shareholders entitled to vote and they authorized, approved or
ratified the transaction; or (c) the transaction was fair to the
Corporation.
3.17.2 Common or interested Directors may be counted in determining the
presence of a quorum at a meeting
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of the Board or committee which authorizes or ratifies such
contract, transaction or determination. A transaction with a
Director may not be authorized, approved or ratified by a single
Director unless such Director is the sole Director and the sole
shareholder of the Corporation and otherwise complies with the
requirements of Section 3.17 herein and applicable law. The
interested Director(s) shall not be disqualified from voting as
shareholders for ratification or approval of such contract,
transaction or determination.
3.17.3 None of the provisions of this Section shall invalidate any
contract, transaction or determination which would otherwise be
valid under applicable law.
SECTION 4. OFFICERS
4.1 NUMBER. The officers of the Corporation shall be a President and a
Secretary, each of whom shall be appointed by the Board; and one or more
Vice Presidents, a Treasurer and such other officers and assistant
officers, including a Chairman of the Board, may be appointed by the Board;
such officers and assistant officers to hold office for such period, have
such authority and perform such duties as are provided in these Bylaws or
as may be provided by resolution of the Board. Any officer may be assigned
by the Board any additional title that the Board deems appropriate. The
Board may delegate to any officer or agent the power to appoint any such
subordinate officers or agents and to prescribe their respective terms of
office, authority and duties and to remove any subordinate officers or
agents so appointed. Any two (2) or more offices may be held by the same
person.
4.2 APPOINTMENT AND TERM OF OFFICE. The officers of the Corporation shall be
appointed annually by the Board at the meeting held following the annual
meeting of the shareholders. If the appointment of officers is not made at
such meeting, such appointment shall be made as soon thereafter as a Board
meeting may conveniently be held. Unless an officer dies, resigns or is
removed from office, he or she shall hold office until the next annual
meeting of the Board or until his or her successor is appointed and
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qualified. The appointment of an officer does not itself create contract
rights.
4.3 RESIGNATION. Any officer may resign at any time by delivering written
notice to the Corporation. Such resignation shall take effect at the time
specified therein, or if the time is not specified, upon delivery thereof
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective. Once delivered, a notice of
resignation is irrevocable unless revocation is permitted by the Board.
4.4 REMOVAL. Any officer or agent appointed by the Board may be removed by the
Board at any time, with or without cause, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed.
Appointment of an officer or agent shall not of itself create contract
rights.
4.5 VACANCIES. A vacancy in any office because of death, resignation, removal,
disqualification, creation of a new office or any other cause may be filled
by the Board for the unexpired portion of the term, or for a new term
established by the Board.
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4.6 CHAIRMAN OF THE BOARD. If elected, the Chairman of the Board shall perform
such duties as shall be assigned to him by the Board from time to time and
shall preside over meetings of the Board and of shareholders unless another
officer is appointed or designated by the Board as Chairman of such
meeting.
4.7 PRESIDENT. The President shall be the chief executive officer of the
Corporation unless some other officer is so designated by the Board, shall
preside over meetings of the Board and shareholders in the absence of a
Chairman of the Board and, subject to the Board's control, shall supervise
and control all of the assets, business and affairs of the Corporation.
The President may sign certificates for shares of the Corporation, deeds,
mortgages, bonds, contracts and other instruments, except when the signing
and execution thereof have been expressly delegated by the Board or by
these Bylaws to some other officer or agent of the Corporation, or are
required by law to be otherwise signed or executed by some other officer or
in some other manner. In general, the President shall perform all duties
incident to the office of President and such other duties as are prescribed
by the Board from time to time.
4.8 VICE PRESIDENT. In the event of the death of the President or his or her
inability to act, the Vice President (or if there is more than one (1) Vice
President, the Vice President who was designated by the Board as the
successor to the President, or if no Vice President is so designated, the
Vice President first elected to such office) shall perform the duties of
the President, except as may be limited by resolution of the Board, with
all the powers of and subject to all the restrictions upon the President.
Any Vice President may sign, with the Secretary or Assistant Secretary,
certificates for shares of the Corporation. Vice Presidents shall have, to
the extent authorized by the President or the Board, the same powers as the
President to sign deeds, mortgages, bonds, contracts and other instruments.
Vice Presidents shall perform such other duties as from time to time may be
assigned to them by the President or the Board.
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4.9 SECRETARY. The Secretary shall: (a) keep the minutes of meetings of the
shareholders and of the Board in one (1) or more books designated for that
purpose; (b) ensure that all notices are duly given in accordance with the
provisions of these Bylaws or as required by law; (c) be custodian of the
corporate records and seal of the Corporation; (d) keep registers of the
post office address of each shareholder and Director; (e) sign, with the
President or a Vice President, certificates for shares of the Corporation;
(f) have general charge of the stock transfer books of the Corporation; (g)
sign, with the President or other officer authorized by the President or
the Board, deeds, mortgages, bonds, contracts and other instruments; and
(h) perform all duties generally incident to the office of Secretary and
such other duties as from time to time may be assigned to him or her by the
President or by the Board. In the absence of the Secretary, an Assistant
Secretary may perform the duties of the Secretary.
4.10 TREASURER. If required by the Board, the Treasurer shall give a bond for
the faithful discharge of his or her duties in such amount and with such
surety or sureties as the Board shall determine. The Treasurer shall have
charge and custody of and be responsible for all funds and securities of
the Corporation; receive and give receipts for moneys paid to the
Corporation from any source whatsoever, and deposit all such moneys in the
name of the Corporation in banks, trust companies or other depositories
selected in accordance with these Bylaws; and in general perform all of the
duties incident to the office of Treasurer and such other duties as from
time to time may be assigned to him or her by the President or by the
Board. In the absence of the Treasurer, an Assistant Treasurer may perform
the duties of the Treasurer.
4.11 SALARIES. The salaries of the officers shall be fixed from time to time by
the Board or by any person or persons to whom the Board shall have
delegated such authority. No officer shall be prevented from receiving
such salary by reason of the fact that he or she is also a Director of the
Corporation.
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SECTION 5. CONTRACTS, LOANS, CHECKS, AND DEPOSITS
5.1 CONTRACTS. The Board may authorize any officer or officers, or agent or
agents, to enter into any contract or execute and deliver any instrument in
the name of and on behalf of the Corporation. Such authority may be
general or confined to specific instances.
5.2 LOANS TO THE CORPORATION. No loans shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued in its name
unless authorized by a resolution of the Board. Such authority may be
general or confined to specific instances.
5.3 LOANS TO DIRECTORS. The Corporation shall not lend money to or guarantee
the obligation of a Director unless: (a) the particular loan or guarantee
is approved by a majority of the votes represented by the outstanding
voting shares of all classes, voting as a single voting group, excluding
the votes of the shares owned by or voted under the control of the
benefitted Director; or (b) the Board determines that the loan or guarantee
benefits the Corporation and either approves the specific loan or guarantee
or a general plan authorizing loans to and guarantees for Directors.
5.4 CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for the payment
of money, notes or other evidences of indebtedness issued in the name of
the Corporation shall be signed by such officer or officers, or agent or
agents, of the Corporation and in such manner as is from time to time
determined by resolution of the Board.
5.5 DEPOSITS. All funds of the Corporation not otherwise employed shall be
deposited from time to time to the credit of the Corporation in such banks,
trust companies or other depositories as the Board may select.
SECTION 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 ISSUANCE OF SHARES. No shares of the Corporation shall be issued unless
authorized by the Board, and such authorization shall specify the maximum
number of shares to be issued and the consideration to be received for each
share.
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6.2 CERTIFICATES FOR SHARES. Certificates representing shares of the
Corporation shall be in such form as shall be determined by the Board.
Such certificates shall be signed by the Chairman or Vice Chairman of the
Board, or the President or a Vice President, and by the Secretary or an
Assistant Secretary. Any or all of the signatures on a certificate may be
a facsimile if the certificate is manually signed on behalf of a transfer
agent or a registrar other than the Corporation itself or an employee of
the Corporation. All certificates shall include on their face written
notice of any restrictions which may be imposed on the transferability of
such shares. All certificates shall be consecutively numbered or otherwise
identified.
6.3 STOCK RECORDS. The stock transfer books shall be kept at the registered
office or principal place of business of the Corporation or at the office
of the Corporation's transfer agent or registrar. The name and address of
each person to whom a certificate for shares is issued, together with the
class and number of shares represented by each such certificate and the
date of issue thereof, shall be entered on the stock transfer books of the
Corporation. The person in whose name shares stand on the books of the
Corporation shall be deemed by the Corporation to be the owner thereof for
all purposes.
6.4 RESTRICTION ON TRANSFER. Except to the extent that the Corporation has
obtained an opinion of counsel acceptable to the Corporation that transfer
restrictions are not required under applicable securities laws, or has
otherwise satisfied itself that such transfer restrictions are not
required, all certificates representing shares of the Corporation shall
bear the following legend on the face of the certificate or on the reverse
of the certificate if a reference to the legend is contained on the face,
which reads substantially as follows:
The securities evidenced by this certificate have not been registered
under the Securities Act of 1933, as amended, (the "Act") or any
applicable state securities law, and no interest therein may be sold,
distributed, assigned, offered, pledged, or otherwise transferred
unless (a) there is an effective registration statement under the Act
and applicable state securities laws covering any such
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transaction involving said securities or (b) this Corporation receives
an opinion of legal counsel for the holder of these securities
(concurred in by legal counsel for this Corporation) stating that such
transaction is exempt from registration or this Corporation otherwise
satisfies itself that such transaction is exempt from registration.
6.5 TRANSFER OF SHARES. Transfer of shares of the Corporation shall be made
only on the stock transfer books of the Corporation pursuant to
authorization or document of transfer made by the holder of record thereof,
or by his or her legal representative who shall furnish proper evidence of
authority to transfer, or by his or her attorney-in-fact authorized by
power of attorney duly executed and filed with the Secretary of the
Corporation. All certificates surrendered to the Corporation for transfer
shall be cancelled and no new certificate shall be issued until the former
certificates for like number of shares shall have been surrendered and
cancelled.
6.6 LOST OR DESTROYED CERTIFICATES. In the case of a lost, destroyed or
mutilated certificate, a new certificate may be issued therefor upon such
terms and indemnity to the Corporation as the Board shall prescribe.
6.7 TRANSFER AGENT AND REGISTRAR. The Board may from time to time appoint one
(1) or more Transfer Agents and one (1) or more Registrars for the shares
of the Corporation, with such powers and duties as the Board shall
determine by resolution.
6.8 OFFICER CEASING TO ACT. If any officer who has signed or whose facsimile
signature has been placed upon a stock certificate shall have ceased to be
such officer before such certificate is issued, the certificate may be
issued by the Corporation with the same effect as if the signer were such
officer at the date of its issuance.
6.9 FRACTIONAL SHARES. The Corporation shall not issue certificates for
fractional shares.
6.10 VOTING RECORD. The officer or agent having charge of the stock transfer
books for shares of the Corporation shall at least ten (10) days before
each meeting of shareholders compile a complete record of the shareholders
entitled to
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vote at such meeting or any adjournment thereof, arranged in alphabetical
order, with the address of and the number of shares held by each. Such
record shall be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any shareholder during the whole
time of the meeting for the purposes thereof.
SECTION 7. BOOKS AND RECORDS
7.1 MAINTAINING CORPORATE RECORDS. The Corporation shall keep correct and
complete books and records of account, stock transfer books, minutes of the
proceedings of its shareholders and Board and such other records as may be
necessary or advisable.
7.2 INSPECTION OF CORPORATE RECORDS. A shareholder is entitled to inspect and
copy during regular business hours those corporate books and records
described in RCW 23B. subject to the requirements therein.
7.3 FINANCIAL STATEMENTS. Not later than four (4) months following the close
of its fiscal year, and in any event prior to the annual meeting of
shareholders, the Corporation shall prepare a balance sheet and income
statement as of the close of the fiscal year. Upon written request, the
Corporation shall mail to any shareholder a copy of the most recent balance
sheet and income statement. If the annual financial statements are
reported upon by a public accountant, the accountant's report must
accompany them. If not, the statements must be accompanied by the
statement required in RCW 23B.16.200, which is to be signed by the
President or a person responsible for the Corporation's accounting records.
SECTION 8. FISCAL YEAR
The fiscal year of the Corporation shall be the calendar year, provided that if
a different fiscal year is at any time selected for purposes of federal income
taxes, the fiscal year shall be the year so selected.
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SECTION 9. SEAL
The Corporation may use a seal. If it does so, the seal of the Corporation
shall consist of the name of the Corporation, the year of its incorporation and
the state of its incorporation.
SECTION 10. INDEMNIFICATION
10.1 DEFINITIONS. As used in this Section 10:
10.1.1 "Act" means the Washington Business Corporation Act, as now or
hereafter amended.
10.1.2 "Another Enterprise" means a corporation (other than the
Corporation), partnership, joint venture, trust, association,
committee, employee benefit plan, or other group or entity.
10.1.3 "Corporation" means S.V.V. SALES, INC., and any domestic or
foreign predecessor entity which, in merger or other
transactions, ceased to exist.
10.1.4 "Director" means each individual who is or was a director of the
Corporation or an individual who, while a director of the
Corporation, is or was serving, at the request of the
Corporation, as a director, officer, partner, trustee, employee
or agent of Another Enterprise.
10.1.5 "Expenses" include counsel fees.
10.1.6 "Indemnitee" means each person who was, is, or is threatened to
be made a party to or is involved (including, without limitation,
as a witness) in any proceeding because the person is or was a
director, officer, employee or agent of the Corporation and who
possesses indemnification rights pursuant to the Articles of
Incorporation of the Corporation, these Bylaws, or other action
by the Corporation. The term shall also include, for officers,
employees or agents, service at the Corporation's request as a
director, officer, partner, trustee, employee or agent of Another
Enterprise.
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10.1.7 "Loss" means the obligation to pay a judgment, settlement,
penalty, fine, including an excise tax assessed with respect to
an employee benefit plan, or reasonable Expenses incurred with
respect to a Proceeding.
10.1.8 "Party" includes an individual who was, is, or is threatened to
be named a defendant or respondent in a Proceeding.
10.1.9 "Proceeding" means any threatened, pending or completed action,
suit, or proceeding, whether civil, criminal, administrative, or
investigative and whether formal or informal Proceeding shall
include derivative shareholders' actions.
10.2 RIGHT TO INDEMNIFICATION. The Corporation may indemnify and hold each
director and officer harmless against any and all Loss except for Losses
arising out of: (a) the Indemnitee's acts or omissions finally adjudged to
be intentional misconduct or a knowing violation of law, (b) the
Indemnitee's approval of certain distributions or loans by such Indemnitee
which are finally adjudged to be in violation of RCW 23B.08.310, or (c) any
transaction in which it is finally adjudged that the Indemnitee personally
received a benefit in money, property, or services to which the Indemnitee
was not legally entitled. Except as provided in Section 10.5, the
Corporation shall not indemnify an Indemnitee in connection with a
Proceeding (or part thereof) initiated by the Indemnitee unless such
Proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. If, after the effective date of this Article, the Act is
amended to authorize further indemnification of directors and officers,
then directors and officers of this Corporation may be indemnified to the
fullest extent permitted by the Act, as so amended.
10.3 CONTRIBUTION. If the indemnification provided in Section 10.2 is not
available to be paid to Indemnitee for any reason other than those set
forth in subparagraphs (a), (b), and (c) of Section 10.2 (for example,
because indemnification is held to be against public policy even though
otherwise permitted under Section 10.2, then in respect of any Proceeding
in which the Corporation is jointly liable with Indemnitee (or would be if
joined in such
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Proceeding), the Corporation may contribute to the amount of Loss paid or
payable by Indemnitee in such proportion as is appropriate to reflect
(a) the relative benefits received by the Corporation and the Indemnitee
from the transaction from which such Proceeding arose, and (b) the relative
fault of the Corporation and the Indemnitee in connection with the events
which resulted in such Loss, as well as any other relevant equitable
consideration. The relative fault of the Corporation and the Indemnitee
shall be determined by a court of appropriate jurisdiction (which may be
the same court in which the Proceeding took place) with reference to, among
other things, the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent the circumstances
resulting in such Loss. The Corporation agrees that it would not be just
and equitable if contribution pursuant to this Section 10.3 was determined
by pro rata allocation or any other method of allocation which does not
take account of the foregoing equitable considerations.
10.4 NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by Indemnitee of
notice of commencement of any Proceeding against Indemnitee, Indemnitee
must, if a claim in respect thereof is to be made against the Corporation
under this Article, notify the Corporation of the commencement thereof.
With respect to any such Proceeding as to which Indemnitee has notified the
Corporation:
10.4.1 The Corporation will be entitled to participate therein at its
own expense;
10.4.2 Except as otherwise provided below, to the extent that it may
wish to do so, the Corporation, jointly with any other
indemnifying party similarly notified, will be entitled to assume
the defense thereof, with counsel satisfactory to Indemnitee.
After notice from the Corporation to Indemnitee of its election
to assume the defense thereof, the Corporation will not be liable
to Indemnitee under this Article for any legal or other Expenses
subsequently incurred by Indemnitee in connection with the
defense thereof, other than reasonable costs of investigation or
as otherwise provided below. Indemnitee shall have the right to
employ its counsel in such Proceeding, but the fees and Expenses
of such counsel incurred after
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notice from the Corporation of its assumption of the defense
thereof shall be at the expense of Indemnitee unless (1) the
employment of counsel by Indemnitee has been authorized by the
Corporation, (2) Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Corporation and
Indemnitee in the conduct of the defense of such Proceeding, or
(3) the Corporation shall not in fact have employed counsel to
assume the defense of such Proceeding, in any of which events,
the fees and Expenses of counsel shall be at the expense of the
Corporation. The Corporation shall not be entitled to assume the
defense of any proceeding brought by or on behalf of the
Corporation or as to which Indemnitee shall have made the
conclusion provided in (2) of this subparagraph; and
10.4.3 The Corporation shall not be liable to indemnify Indemnitee under
this Article for any amounts paid in settlement of any Proceeding
effected without its written consent. The Corporation shall not
settle any Proceeding in any manner which would impose any
penalty or limitation on Indemnitee without Indemnitee's written
consent. Neither the Corporation nor Indemnitee will
unreasonably withhold its consent to a proposed settlement.
10.5 CERTAIN PROCEDURES RELATING TO INDEMNIFICATION. For the purpose of
pursuing rights to indemnification under this Article, the Indemnitee shall
(a) submit to the Board a sworn statement of request of indemnification
("Indemnification Statement") stating that he is entitled to
indemnification hereunder; and (b) present to the Corporation reasonable
evidence of all amounts for which indemnification is requested. Submission
of an Indemnification Statement to the Board shall create a presumption
that the Indemnitee is entitled to indemnification hereunder, and the
Corporation shall, within sixty (60) calendar days after submission of the
Indemnification Statement, make the payments requested in the
Indemnification Statement to or for the benefit of the Indemnitee, unless
(i) within such sixty (60) calendar day period it shall be resolved by a
majority vote of the Directors who were not and are not parties to the
threatened Proceeding (Disinterested Director) that the Indemnitee is
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not entitled to the indemnification under this Article; PROVIDED, HOWEVER,
that in no event shall the number of Directors voting be less than two (2);
(ii) such vote shall be based upon clear and convincing evidence
(sufficient to rebut the foregoing presumption); and (iii) the Indemnitee
shall receive within such sixty (60) day period notice in writing of such
vote, which notice shall disclose with particularity the evidence upon
which the vote is based.
If there are not at least two (2) Disinterested Directors, then the Board
of Directors shall send notice to all shareholders indicating that the
Indemnitee will be entitled to receive payment unless shareholders owning
at least fifty percent (50%) of the outstanding shares object to the
payment and such objection complies with Sections 10.5(a)(ii) and (iii).
The notice shall also contain a copy of the Indemnification Statement. If
the necessary number of shareholders do not object, then the payment shall
be made.
The provisions of this Section are intended to be procedural only and shall
not affect the right of the Indemnitee to indemnification under this
Article so long as the Indemnitee follows the prescribed procedure, and any
determination that the Indemnitee is not entitled to indemnification and
any failure to make the payments requested in the Indemnification Statement
shall be subject to judicial review by any court of competent jurisdiction.
The right to indemnification conferred in this Article shall include the
right to be paid by the Corporation all Expenses incurred in defending a
Proceeding in advance of its final disposition; PROVIDED, HOWEVER, that the
payment of such Expenses in advance of the final disposition of any
Proceeding shall be made upon delivery to the Corporation of an
undertaking, by or on behalf of such Indemnitee, to repay all amounts so
advanced in the event and only to the extent it shall ultimately be
determined that such director or officer is not entitled to be indemnified
by the Corporation under the Act, Articles of Incorporation, this Article,
or otherwise, for such Expenses.
10.6 RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under this Article is not
paid in full by the Corporation within sixty (60) days after a written
claim has been received by the Corporation, except in the case of a claim
for expenses
Page 28 -BYLAWS
<PAGE>
incurred in defending a Proceeding in advance of its final disposition, in
which case the applicable period shall be twenty (20) days, the Indemnitee
may at any time thereafter bring suit against the Corporation to recover
the unpaid amount of the claim and, to the extent successful in whole or in
part, the Indemnitee shall be entitled to be also paid the expense of
prosecuting such claim. Neither the failure of the Corporation (including
its Board of Directors, its shareholders, or independent legal counsel) to
have made a determination prior to the commencement of such Proceeding that
indemnification of or reimbursement or advancement of Expenses to the
Indemnitee is proper in the circumstances, nor an actual determination by
the Corporation (including its Board of Directors, its shareholders, or
independent legal counsel) that the Indemnitee is not entitled to
indemnification or to the reimbursement or advancement of Expenses, shall
be a defense to the Proceeding or create a presumption that the Indemnitee
is not so entitled.
10.7 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The
Corporation may, by action of its Board of Directors from time to time,
provide indemnification and pay Expenses in advance of the final
disposition of a Proceeding against employees and agents of the
Corporation, with the same scope and effect as the provisions of this
Article with respect to the indemnification and of advancement of Expenses
of its Directors and officers of the Corporation, or pursuant to rights
granted pursuant to, or provided by, the Act or otherwise.
10.8 CONTRACT RIGHT. Rights of indemnification under this Article shall
continue as to an Indemnitee who has ceased to be a director or officer, as
long as Indemnitee shall be subject to any possible Proceeding, by reason
of the fact that Indemnitee was a director or officer of the Corporation or
serving in any other capacity referred to herein, and shall inure to the
benefit of his or her heirs, executors, and administrators. The right to
indemnification conferred in this Article shall be a contract right upon
which each director or officer shall be presumed to have relied in
determining to serve or to continue to serve as such. Any amendment to or
repeal of this Article shall not adversely affect any right or protection
of a director or officer of the Corporation for or with respect to any acts
or omissions
Page 29 -BYLAWS
<PAGE>
of such director or officer occurring prior to such amendment or repeal.
10.9 SEVERABILITY. If any provision of this Article or any application thereof
shall be invalid, unenforceable or contrary to applicable law, the
remainder of this Article, or the application of such provisions to persons
or circumstances other than those as to which it is held invalid,
unenforceable or contrary to applicable law, shall not be affected thereby
and shall continue in full force and effect.
SECTION 11. AMENDMENTS
These Bylaws may be altered, amended, or repealed and new Bylaws may be adopted
by the Board at any regular or special meeting of the Board. The shareholders
may also make, alter, amend and repeal the Bylaws of the Corporation at any
annual meeting or at a special meeting called for that purpose. All Bylaws made
by the Board may be amended, repealed, altered or modified by the shareholders
at any regular or special meeting called for that purpose.
Page 30 -BYLAWS
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with California General Corporation Law, Registrant has
included a provision in its Articles of Incorporation to limit the personal
liability of its directors to the fullest extent possible under California law.
The provision serves to eliminate such directors' liability to Registrant or its
stockholders for monetary damages, except for (i) any breach of the director's
duty of loyalty to Registrant or its stockholders, (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) unlawful payment of dividends or unlawful stock purchases or
redemptions, or (iv) any transaction from which a director derived an improper
personal benefit.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers, or persons
controlling the Company pursuant to the foregoing provisions, Registrant has
been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in The Securities Act
of 1933, as amended, and is therefore unenforceable.
ITEM 21. EXHIBITS
1.2 Form of Representative's Warrant Agreement Option or Warrant
Agreement.*
3.1 Certificate of Incorporation of Registrant dated July 31, 1990 and
Amendments thereto.*
3.2 Bylaws.*
4.0 Warrant Agreement between the Registrant and American Securities Stock
Transfer, Inc.*
4.1 Form of Certificate of Determination of Series B Preferred Stock.
5.0 Opinion of John B. Wills, Esq.
10.1 Agreement for Merger dated November 13, 1996 by and among the
Registrant, S.V.V. Sales, Inc. d/b/a Arcada Communications ("Arcada")
and Touch Tone/Arcada, Inc.*
10.2 First Amendment to Agreement for Merger dated November 19, 1996 by and
among the Registrant, Arcada and Touch Tone/Arcada, Inc.*
10.3 Second Amendment to Agreement for Merger dated December 4, 1996 by and
among the Registrant, Arcada and Touch Tone/ Arcada, Inc.*
10.4 Third Amendment for Merger dated January 17, 1996 by and among the
Registrant, Arcada, Touch/Arcada, Touch Tone/Arcade, Inc., Robert
Leppaluoto and Keith Leppaluoto (the "Third Amendment").
10.5 Form of Plan of Merger by and among the Registrant, Arcada and Touch
Tone/Arcada, Inc., as amended by the Third Amendment
10.6 Acquisition Agreement and addendum thereto between the Registrant and
National Telcom Management, Inc.*
10.6 Form of Financial Advisory Agreement between the Registrant and Barron
Chase Securities, Inc.*
10.7 Form of Merger and Acquisition Agreement between the Registrant and
Barron Chase Securities, Inc.*
10.8 Agreement between AT&T and the Registrant.*
10.9 Telecommunications Services Agreement between WilTel and the
Registrant.*
II-1
<PAGE>
10.10 Sales and Distribution Agreement between Paging Network of Arizona and
the Registrant.*
10.11 Employment Agreement with David J. Smith and the Registrant.*
10.12 Agreement between TMO Communications and the Registrant.*
10.13 National Reseller Agreement between the Registrant and ICG Access
Services, Inc.*
10.14 Release and Settlement Agreement between AT&T and Touch Tone America,
Inc.*
10.15 Release and Settlement Agreement between ICG Access Services, Inc. and
Registrant.*
10.16 Agreement with TMO and the Registrant dated April 18, 1996.*
10.17 Employment Agreement between Frank J. Bonadio and the Registrant
10.18 Consulting Agreement between Michael J. Canney and the Registrant.*
10.19 Form of Consulting Agreement between Robert Vaughan and the
Registrant.
11.0 Statement Concerning Computation of Per Share Earnings.*
24.1 Consent of Hein + Associates LLP.
24.2 Consent of BDO Seidman, LLP.
24.3 Consent of John B. Wills, Esq.
_______________________________
* Previously filed.
**
(b) Financial statement schedules have been omitted because they are not
required or the information is included in the financial statements and
notes thereto.
II-2
<PAGE>
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1993;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement;
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in the
registration statement or any material change to such information
in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(c) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (a) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be field as part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference in the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class marl or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
(f) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the even that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Scottsdale,
State of Arizona on January 28, 1997.
Date: January 28, 1997 TOUCH TONE AMERICA, INC.
By /s/ Michael J. Canney
---------------------------
Michael J. Canney, Chairman
of the Board, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael J. Canney and David J. Smith, or
either of them, his or her attorneys-in-fact, with the power of substitution,
for him or her in any and all capacities, to sign any amendments to this
Registration Statement, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorneys-in-fact, or their
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C>
/s/ Michael J. Canney Chairman of the Board, President January 28, 1997
_____________________ and Chief Executive Officer
Michael J. Canney
/s/ David J. Smith Secretary and Chief Financial Officer
__________________ (Principal Financial and Accounting
David J. Smith Officer) January 28, 1997
II-5
<PAGE>
Director January ___, 1997
____________________
Matthew J. Barletta
* Director January 28, 1997
____________________
Stephen P. Shearin
/s/ Norman B. Walko Director January 28, 1997
____________________
Norman B. Walko
Director January ___, 1997
____________________
Benjamin W. Bronston
* By: /S/ MICHAEL J. CANNEY
---------------------
Michael J. Canney
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
PROXY
TOUCH TONE AMERICA, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Michael J. Canney as proxy, with full power
of substitution, with authority to represent and vote, as designated below, all
shares of common stock of Touch Tone America, Inc. held of record by the
undersigned on January __, 1997 at the Special Meeting of Shareholders to be
held at the corporate offices of S.V.V. Sales, Inc. d/b/a Arcada Communications
located at 2001 Sixth Avenue, Suite 3210, Seattle, Washington on January __,
1997, at 10:00 a.m., local time, or at any adjournment or postponement thereof,
upon the matters set forth below, all in accordance with and as more fully
described in the Notice of Special Meeting and Joint Proxy Statement and
Prospectus dated January __, 1997.
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1 AND 2.
The Board of Directors recommends a vote "FOR" the following proposals:
Please mark boxes / / or /x/ in blue or black ink.
1. Proposal to approve and adopt the Agreement and Plan of Merger
dated as of November 13, 1996, among S.V.V. Sales, Inc. d/b/a Arcada
Communications ("Arcad"), Touch Tone/Arcada, Inc. ("Merger Sub") and Touch
Tone America, Inc. ("Touch Tone"), as amended November 19, 1996 and as
further amended on December 4, 1996 (the "Merger Agreement"), and to approve
the merger (the "Merger") of Arcada with and into Merger Sub pursuant to the
Merger Agreement. As a result of the Merger, Arcada shareholders will
receive 250 shares of Touch Tone Common Stock, subject to certain resale
restrictions and adjustment under certain circumstances, and a 15 month 8%
unsecured promissory note in the principal amount of $30.00 for each share
of their Arcada Common Stock, and Merger Sub, as survivor in the Merger,
will remain a wholly owned subsidiary of Touch Tone.
/ / FOR / / AGAINST / / ABSTAIN
2. To approve a proposal to change Touch Tone's state of
incorporation from California to Washington by a merger with and into a
newly formed, wholly owned Washington subsidiary, which merger will be
effected immediately prior to the Merger.
/ / FOR / / AGAINST / / ABSTAIN
Date: , 1996
--------------------
Signed:
------------------------------
------------------------------
(Please sign exactly as your name appears on the proxy.
When shares are held jointly, each party should sign.
When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such.
If a corporation, please sign in full corporate name,
by president or other authorized officer. If a
partnership, please sign in partnership name by
authorized person.)
Please Mark, Sign, Date and Return the Proxy Promptly Using the Enclosed
Envelope.
<PAGE>
PROXY
S.V.V. SALES, INC.
D/B/A/ ARCADA COMMUNICATIONS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Frank Bonadio as proxy, with full power of
substitution, with authority to represent and vote, as designated below, all
shares of common stock of S.V.V. Sales, Inc. d/b/a Arcada Communications held of
record by the undersigned on January __, 1997 at the Special Meeting of
Shareholders to be held at the corporate offices of S.V.V. Sales, Inc. d/b/a
Arcada Communications located at 2001 Sixth Avenue, Suite 3210, Seattle,
Washington on January __, 1997, at 1 p.m., local time, or at any adjournment or
postponement thereof, upon the matters set forth below, all in accordance with
and as more fully described in the Notice of Special Meeting and Joint Proxy
Statement and Prospectus dated January __, 1997.
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1.
The Board of Directors recommends a vote "FOR" the following proposal:
Please mark boxes / / or /x/ in blue or black ink.
1. Proposal to approve and adopt the Agreement and Plan of Merger
dated as of November 13, 1996, among S.V.V. Sales, Inc. d/b/a/ Arcada
Communications ("Arcada"), Touch Tone/Arcada, Inc. ("Merger Sub") and Touch
Tone America, Inc. ("Touch Tone"), as amended November 19, 1996 and as
further amended December 4, 1996 (the "Merger Agreement"), and to approve
the merger (the "Merger") of Arcada with and into Merger Sub pursuant to
the Merger Agreement. As a result of the Merger, Arcada shareholders will
receive 250 shares of Touch Tone Common Stock, subject to certain resale
restrictions and adjustment under certain circumstances, and a 15 month
8% unsecured promissory note in the principal amount of $30.00 for each
share of their Arcada Common Stock, and Merger Sub, as survivor in the
Merger, will remain a wholly owned subsidiary of Touch Tone.
/ / FOR / / AGAINST / / ABSTAIN
Date: , 1996
--------------------
Signed:
------------------------------
------------------------------
(Please sign exactly as your name appears on the proxy.
When shares are held jointly, each party should sign.
When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such.
If a corporation, please sign in full corporate name,
by president or other authorized officer. If a
partnership, please sign in partnership name by
authorized person.)
Please Mark, Sign, Date and Return the Proxy Promptly Using the Enclosed
Envelope.
<PAGE>
CERTIFICATE OF DETERMINATION
OF TOUCH TONE AMERICA, INC.
Michael J. Canney and David Smith certify that:
1. They are the President and Secretary, respectively, of Touch Tone
America, Inc., a California corporation.
2. The number of shares of preferred stock of the corporation is
10,000,000, 150,000 shares of which have been issued and redeemed and no
shares of which are currently outstanding. These shares were Series A
Preferred.
3. The board of directors duly adopted the following resolution:
RESOLVED, that the Series B Preferred Stock is established to replace
two debts, $1,500,000 note to Arcada and $200,000 note owed by an Arcada
subsidiary and shall have the following characteristics:
(1) The Series B Preferred Stock is entitled to receive, out of funds
legally available therefor, cumulative dividends at the annual rate of 8%
payable on an annual basis on each anniversary of its issuance, or sooner at
the discretion of the Company when and as declared by the board of directors.
Such dividends shall accrue from the date of issuance whether or not earned
so that no dividends or other distributions shall be made with respect to the
Common Stock until cumulative dividends on the Preferred Stock for all past
dividend periods and for the then current annual dividend period shall have
been declared and paid or set apart. After cumulative dividends on the
Preferred Stock for all past dividend periods and for the then current annual
dividend period shall have been declared and paid or set apart, if the board
of directors shall elect to declare additional dividends out of funds legally
available therefor, such additional dividends shall be declared solely on the
Common Stock.
(2) The Series B Preferred Stock is subject to redemption, out of funds
legally available therefor, in whole, or from time to time in part, at the
option of the board of directors of the Company. The redemption shall
occur automatically three years from the date of issuance if the Company does
not redeem the shares earlier or the shareholder does not convert them under
the provisions of Article (4). If only a part of the Series B Preferred Stock
is to be redeemed, the redemption shall be carried out prorata. The
redemption prices shall be $1.00 per share plus cumulative dividends as
provided in subdivision (1) of the Article accrued and unpaid to the date
fixed for redemption (herein called the "redemption price").
(a) The Company shall mail a notice of redemption to each holder of
record of shares to be redeemed addressed to the holder at the address of
such holder appearing on
1
<PAGE>
the books of the corporation or given by the holder to the corporation for
the purpose of notice, or if no such address appears or is given at the
place where the principal executive office of the corporation is located,
no earlier than 60 nor later than 20 days before the date fixed for
redemption. The notice of redemption shall include (i) the class of shares
or the part of a class of shares to be redeemed, (ii) the date fixed for
the redemption, (iii) the redemption price, (iv) the place at which the
shareholders may obtain payment of the redemption price upon surrender of
their share certificates and (v) the last date prior to the date of
redemption that the right of conversion may be exercised. If funds are
available on the date fixed for the redemption, then whether or not the
share certificates are surrendered for payment of the redemption price, the
shares shall no longer be outstanding and the holders thereof shall cease
to be shareholders of the Company with respect to the shares redeemed on
and after the date fixed for redemption and shall be entitled only to
receive the redemption price without interest upon surrender of the share
certificate. If less than all the shares represented by one share
certificate are to be redeemed, the Company shall issue a new share
certificate for the shares not redeemed.
(3) The Series B Preferred Stock shall be convertible into Common Stock
at any time at the option of the respective holders or the Company during the
three years after issuance of Series B Preferred Stock. If the Series B
Preferred Stock is not converted it will be redeemed by the Company
automatically three years from issuance. For the purpose of any such
conversion, each share of Series B Preferred Stock shall be treated as
equivalent to its liquidation preference not including accrued and unpaid
dividends. The number of shares of Common Stock issuable with respect to any
share of Series B Preferred Stock upon conversion shall be determined by
dividing the aggregate dollar equivalent of all shares of Series B Preferred
Stock at any one time surrendered for conversion by any one holder thereof by
the conversion price in effect at the date of conversions. The conversion price
per share shall be established as the price of the shares at the close of
business January 27, 1996 according to the final price as quoted by NASDAQ
(the "Conversion Price"). The conversion price shall not be adjustable except
as provided in Article 5 or 6 hereof. In electing the conversion, accrued
unpaid dividends on the Series B Preferred Stock shall be disregarded. Upon
conversion, no fractional shares shall be issued and the Company shall in
lieu thereof pay in cash the fair value of the fraction. The corporation
shall reserve and keep reserved out of its authorized but unissued shares of
Common Stock sufficient shares to effect the conversion of all shares of
Series B Preferred Stock outstanding from time to time.
(4) A holder of Series B Preferred Stock desiring to convert shall
deliver the share certificate to the corporation's Transfer Agent if it has
one, otherwise to the corporation at its principal executive office,
accompanied by a written request to convert, specifying the number of shares
to be converted. The endorsement of the share certificate and the request to
convert shall be in form satisfactory to the Transfer Agent or the
corporation, as the case may be. Upon the date of such delivery the
conversion is deemed to have occurred and the persons entitled to receive
share certificates for Common Stock shall be regarded for all corporate
purposes from and after such date as the holder of the number of shares of
Common Stock to which they are entitled upon the conversion.
(5) Upon the happening of an Extraordinary Common Stock Event (as
defined below) after the date of the initial issuance of any shares of Series
B Preferred Stock, the Conversion Price shall, simultaneously with the
happening of such Extraordinary Common Stock Event, be adjusted by
multiplying the then effective Conversion Price by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding
immediately prior to such Extraordinary Common Stock Event and the
denominator of which shall be the number of shares of Common Stock
outstanding immediately after such Extraordinary Common Stock Event, and the
product so obtained shall thereafter be the Conversion Price. The Conversion
Price, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive Extraordinary Common Stock Event or Events.
For purposes hereof "Extraordinary Common Stock Event" shall mean (i)
the issuance of additional shares of Common Stock as a dividend or other
distribution on outstanding Common Stock of the Company, (ii) a subdivision
of outstanding shares of Common Stock into a greater number of shares of
Common Stock, or (iii) a combination of outstanding shares of Common Stock
into a smaller number of shares of Common Stock.
(6) If the Common Stock issuable upon the Conversion of the Series B
Preferred Stock shall be changed into the same or different number of shares
of any class or classes of stock of this corporation, whether by capital
reorganization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend provided for in Paragraph (5) above),
then and in each such event the holder of each share of Series B Preferred
Stock shall have the right thereafter to convert such share into the kind and
amount of shares of stock and other securities and property receivable upon
such reorganization, reclassification or other change by holders of the
number of shares of Common Stock into which such share of Series B Preferred
Stock might have been converted immediately prior to such reorganization,
reclassification or change, all subject to further adjustment as provided
herein.
2
<PAGE>
Exhibit 5.0
January 29, 1997
Michael J. Canney, President
Touch Tone America, Inc.
4110 North Scottsdale Road, Suite 170
Scottsdale, AZ 85251
Re: SEC Registration Statement on Form S-4 (SEC File No. 333-17403)
Dear Gentlemen:
I am counsel for Touch Tone America, Inc., a California corporation (the
"Company") in connection with its proposed business combination with Arcada
Communications, Inc. and the resulting share issuance under the Securities
Act of 1933, as amended, of 12,500,000 shares of the Company's Common Stock
and 1,500,000 shares of the Company's Series B Preferred Stock through a
Registration Statement on Form S-4 as to which this opinion is a part,
previously filed with the Securities and Exchange Commission (the
"Commission").
In connection with rendering my opinion as set forth below, I have
reviewed and examined originals or copies identified to my satisfaction of
the following:
(1) Certificate and Amended Certificate of Incorporation of the Company
as filed with the Secretary of State of the State of California.
(2) Minute Book containing the written deliberations and resolutions of
the Board of Directors and Shareholders of the Company.
<PAGE>
Michael J. Canney, President
January 29, 1997
Page 2
(3) The Registration Statement and the Preliminary prospectus contained
within the Registration Statement.
(4) The other exhibits to the Registration Statement filed with the
Commission.
I have examined such other documents and records, instruments and
certificates of public officials, officers and representatives of the
Company, and have made such other investigations as I have deemed necessary
or appropriate under the circumstances.
Based upon the foregoing and in reliance thereon, it is my opinion that
the 12,500,000 shares of the Company's Common Stock and 1,500,000 shares of
the Company's Series B Preferred Stock, have been duly and validly
authorized, legally issued, and are fully paid and non-assessable.
I hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the use of my name under the caption "Legal
Matters" in the Prospectus constituting a part thereof.
Very truly yours,
/s/ John B. Wills
--------------------
<PAGE>
THIRD AMENDMENT TO AGREEMENT FOR MERGER
This Third Amendment dated as of January 22, 1997 to that certain Agreement
for Merger dated November 13, 1996, as previously amended by that certain First
Amendment to Merger Agreement dated as of November 19, 1996 and that certain
Second Amendment to Merger Agreement dated as of December 4, 1996 (the "Merger
Agreement"), is by and among Touch Tone America, a California corporation
("TTA"), Touch Tone/Arcada, Inc., a Washington corporation and wholly-owned
subsidiary of TTA ("Newco"), S.V.V. Sales, Inc., a Washington corporation d/b/a
Arcada Communications, Inc. ("Arcada"), Robert Leppaluoto and Keith Leppaluoto.
Capitalized terms used herein and not otherwise defined herein shall have the
meanings ascribed to them in the Merger Agreement.
TTA, Newco and Arcada hereby desire to amend certain portions of the Merger
Agreement.
In consideration of the above and the mutual covenants, terms and
conditions set forth below, TTA, Newco and Arcada and, solely with respect to
Sections 1(B) and 2(B) and (C) hereof, Robert Leppaluoto and Keith Leppaluoto,
hereby agree as follows:
1. AMENDMENT TO MERGER AGREEMENT
A. Section 1(b) of the Merger Agreement is hereby amended by
deleting such Section 1(b) in its entirety and replacing it with the following:
"(b) CONVERSION OF ARCADA COMMON STOCK. Subject to the provisions below
and in the Plan of Merger, at the Effective Time, all of the outstanding shares
of common stock, no par value of Arcada ("Arcada Common Stock") shall be
converted into the right to receive shares of common stock, no par value per
share, of TTA ("TTA Common Stock") and shares of Series B Preferred Stock, no
par value per share, of TTA, the terms of which are attached hereto as Exhibit B
("TTA Preferred Stock").
(i) Subject to the provisions below and the provisions of the Plan of
Merger, each outstanding shares of Arcada Common Stock will at the Effective
Time be converted into the right to receive 250 newly issued shares of TTA
Common Stock and thirty (30) shares of TTA Preferred Stock (collectively, the
"Merger Consideration"), subject to the conditions set forth in this Agreement
and in the Plan of Merger. No fractional shares of TTA Common Stock or TTA
Preferred Stock will be issued. In lieu of any fractional shares, any holder of
Arcada Common Stock who would otherwise be entitled to a fractional share of TTA
Common Stock or TTA Preferred Stock will, upon surrender of his certificate or
certificates representing the Arcada Common Stock outstanding immediately prior
to the Effective Time, be paid the cash value of such fractional share interest,
which shall be equal to the product of the fraction multiplied by the Average
Price (as hereinafter defined). For the purposes of determining any such
fractional share interests, all shares of Arcada Common Stock owned by an Arcada
stockholder shall be combined so as to calculate the maximum number of whole
shares of TTA Common Stock and TTA Preferred Stock issuable to such Arcada
stockholder.
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(ii) If between the date of this Agreement and the third Nasdaq Stock
Market trading day prior to the Effective Time, the shares of TTA Common Stock
or Preferred Stock shall be changed into a different number of shares by reason
of any recapitalization, split-up, combination or exchange of shares, or if a
stock dividend thereon shall be declared with a record date within such period,
the number of shares of TTA Common Stock or Preferred Stock, as the case may be,
issued in exchange for each share of Arcada Common Stock specified in Section
1(b)(i) shall be adjusted accordingly."
B. Section 4.2(g) of the Merger Agreement is hereby amended by
deleting such Section 4.2(g) in its entirety and replacing it with the
following:
"(g) The TTA Common Stock and TTA Preferred Stock to be issued in the
Merger will have been duly authorized and, when issued in accordance with the
Plan of Merger, (i) will be validly authorized and issued and fully paid and
nonassessable and no stockholder of TTA will have any preemptive rights thereto
and (ii) will be registered under the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder (the "1933 Act"). The TTA
Common Stock to be issued in the Merger will be listed for trading on a national
securities exchange of the Nasdaq Stock Market."
C. Section 6 of the Merger Agreement is hereby amended by adding a
new Section 6.19 at the end thereof as follows:
"6.19. Each of Robert Leppaluoto and Keith Leppaluoto covenant and
agree, effective as of the Effective Time to exchange an aggregate of $200,000
of presently outstanding debt owed them by Arcada into an aggregate of 200,000
shares of TTA Preferred Stock (the "Exchange Shares") and TTA Covenants and
agrees to issue, at the Effective Time, the Conversion Shares, which Conversion
Shares, when issued, shall be fully paid and nonassessable."
D. The Merger Agreement is hereby amended by deleting Exhibit A
thereto and replacing it with the form of Exhibit A attached hereto as Exhibit
1.
E. The Merger Agreement is hereby amended by adding a new Exhibit B
thereto at the end thereof in the form of Exhibit 2 hereto.
2. MISCELLANEOUS
A. RATIFICATION. The parties hereto hereby ratify and approve the
Merger Agreement, as amended hereby, and the parties hereto acknowledge that all
of the terms and provisions of the Merger Agreement as amended hereby, are and
remain in full force and effect.
B. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
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C. GOVERNING LAW. This Amendment, in all respects, including all
matters of construction, validity and performance, is governed by the internal
laws of the state of Washington as applicable to contracts executed and
delivered in Washington by citizens of such state to be performed wholly within
such state without giving effect to the principles of conflicts of laws thereof.
This agreement is being delivered in Seattle, Washington.
(This Space Intentionally Left Blank)
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The parties hereto have executed this Third Amendment as of the date first
set forth above.
TOUCH TONE AMERICA, INC.
By: /s/ Michael Canney
-------------------------------
Its: President
S.V.V. SALES, INC.
By: /s/ Frank Bonadio
-------------------------------
Its: President
TOUCH TONE/ARCADA, INC.
By: /s/ Michael Canney
-------------------------------
Its: President
Solely with respect to Sections 1(B)
and 2(B) and (C) hereof:
/s/ Robert Leppaluoto
- ----------------------------------
Robert Leppaluoto
/s/ Keith Leppaluoto
- -----------------------------------
Keith Leppaluoto
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<PAGE>
FORM OF PLAN OF MERGER
This Plan of Merger is made by and among Touch Tone America, Inc., a
California corporation ("TTA"), Touch Tone/Arcada, Inc., a Washington
corporation and wholly-owned subsidiary of TTA ("Newco"), and Arcada
Communications, Inc., a Washington corporation ("Arcada"), in connection with
the transactions described in an Agreement for Merger dated as of November __,
1996 (the "Merger Agreement") by and among TTA, Newco and Arcada. Capitalized
terms used but not otherwise defined herein shall have the meaning given them in
the Merger Agreement. This Plan of Merger, including related documents, is
intended to constitute a "plan of reorganization" as that term is used in
Section 354 of the Code. Further, this Merger is intended to constitute a
"reorganization" as defined in Section 368 of the Code by reason of Section
368(a)(2)(D) of the Code.
The boards of directors of Arcada, TTA and Newco have approved this Plan of
Merger (the "Plan of Merger") under which Arcada shall be merged with and into
Newco. The Plan of Merger has been approved by the shareholders of Arcada and
TTA and the shareholders of Newco.
Arcada, TTA and Newco hereby agree as follows:
1. MERGER. At and on the Effective Time of the Merger, Arcada shall be
merged with and into Newco in accordance with the terms hereof. Newco shall be
the surviving corporation.
2. EFFECTIVE TIME. The Merger shall not be effective unless and until
accepted by the Secretary of State of the State of Washington. The effective
time ("Effective Time") of this Merger shall be the time and date of the
occurrence of the endorsement of articles of incorporation by the Secretary of
State of the State of Washington.
3. NAME. The name of the surviving corporation shall be "Arcada
Communications, Inc."
4. DIRECTORS AND PRINCIPAL OFFICERS. The directors and the principal
officers of Newco immediately prior to the Effective Time shall continue to
serve as directors and principal officers of the surviving corporation after the
Effective Time. Newco, as the resulting corporation, shall have one director.
There shall be one class of directors and each such director shall have a one-
year term. The name, residential address and term of each director are set
forth on Schedule A attached hereto and incorporated herein by this reference.
5. OFFICES. The location of the office of the surviving corporation
shall be 4110 N. Scottsdale Road, Suite 170, Scottsdale, Arizona.
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6. TERMS AND CONDITIONS OF MERGER. At the Effective Time of the Merger:
(a) CONVERSION OF ARCADA COMMON STOCK. Subject to the provisions
below, at the Effective Time, each of the outstanding shares of common stock, no
par value per share, of Arcada ("Arcada Common Stock") shall be converted into
the right to receive 250 shares of common stock, no par value per share, of TTA
("TTA Common Stock") and thirty (30) shares of Series A Preferred Stock, no par
value per share, of TTA ("TTA Preferred Stock"). Each shareholder of record of
Arcada Common Stock immediately prior to the Effective Time shall be entitled to
receive (subject to the conditions set forth below) (i) the number of shares of
TTA Common Stock determined by multiplying 250 times the number of shares of
Arcada Common Stock owned by such shareholder, provided that cash will be paid
in lieu of fractional shares as provided in Section 6(c) below and (ii) the
number of shares of TTA Preferred Stock determined by multiplying 30 times the
number of shares of Arcada Common Stock owned by such shareholder provided that
cash will be paid in lieu of fractional shares as provided in Section 6(c)
below. [IF NECESSARY, INSERT APPROPRIATE LANGUAGE TO ACCOUNT FOR ANY
ADJUSTMENTS IN MERGER CONSIDERATION PURSUANT TO SECTION l(b)(ii) AND (iii) OF
THE MERGER AGREEMENT].
(b) NEWCO COMMON STOCK. Each share of Newco Common Stock issued
and outstanding immediately prior to the Effective Time shall at the Effective
Time remain outstanding and unchanged and shall continue to be owned by TTA. No
new shares of Newco capital stock shall be issued or otherwise transferred in
the Merger.
Upon the Effective Time, TTA shall remain the owner of all the issued and
outstanding shares of the surviving corporation.
(c) NO FRACTIONAL SHARES. Notwithstanding any term or provision
hereof, no fractional shares of TTA Common Stock or TTA Preferred Stock, and no
certificates or scrip therefor, or other evidence of ownership thereof, shall be
issued in exchange for any shares of Arcada Common Stock; no dividend or
distribution with respect to TTA Common Stock or TTA Preferred Stock shall be
payable on or with respect to any fractional share interests; and no such
fractional share interest shall entitle the owner thereof to vote or to any
other rights of a stockholder of TTA. In lieu of such fractional share
interests, any holder of Arcada Common Stock who would otherwise be entitled to
a fractional share of TTA Common Stock or TTA Preferred Stock will, upon
surrender of his certificate or certificates representing Arcada Common Stock
outstanding immediately prior to the Effective Time, be paid the cash value of
such fractional share interest, which shall be equal to the product of the
fraction multiplied by [INSERT "AVERAGE PRICE"]. For the purposes of determining
any such fractional share interests, all shares of Arcada Common Stock owned by
an Arcada stockholder shall be combined so as to calculate the maximum number of
whole shares of TTA Common Stock and TTA Preferred Stock issuable to such Arcada
stockholder.
7. METHOD OF EFFECTUATION EXCHANGE OF CERTIFICATES. As soon as
practicable after the Effective Time, TTA shall mail to each person who was, at
the Effective Time, a holder of record of Arcada Common Stock a letter of
transmittal (which shall specify that delivery of certificates
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which, immediately prior to the Effective Time, represented outstanding shares
of Arcada Common Stock (the "Certificates") shall be effected, and risk of loss
and title to the Certificates shall pass, only upon receipt of the Certificates
by TTA and instructions for effecting the surrender of the Certificates. Upon
surrender to TTA of the Certificates, together with such letter of transmittal,
duly completed and validly executed in accordance with the instructions thereto,
and such other documents as may be reasonably requested, TTA shall promptly
deliver to the person entitled thereto certificates representing the number of
shares of TTA Common Stock and TTA Preferred Stock (and cash in lieu of any
fractional shares of TTA Common Stock or TTA Preferred Stock) such holder is
entitled to receive pursuant to this Plan of Merger. All Certificates so
surrendered shall be canceled. Until so surrendered and exchanged, each
Certificate shall, after the Effective Time, be deemed to evidence only the
right to receive the number of shares of TTA Common Stock and TTA Preferred
Stock (and cash in lieu of any fractional shares of TTA Common Stock or TTA
Preferred Stock) to which such holder is entitled pursuant to Section 6 hereof.
No dividends or other distributions declared with respect to shares of TTA
Common Stock or TTA Preferred Stock and payable to the holders of record thereof
after the Effective Time shall be paid to the holder of any unsurrendered
Certificate until the holder thereof surrenders such Certificate. Subject to
the effect of any applicable escheat laws and unclaimed property laws, after the
subsequent surrender and exchange of a Certificate, the record holder thereof
shall be entitled to receive any such dividends or other distributions, without
any interest thereon, which theretofore had become payable with respect to the
TTA Common Stock or TTA Preferred Stock for which such Certificate was
exchangeable.
If delivery of shares of TTA Common Stock and TTA Preferred Stock (and
any cash in lieu of fractional shares) is to be made to a person other than
the person in whose name a surrendered Certificate is registered, it shall be
a condition of such delivery that the Certificate so surrendered be properly
endorsed (or accompanied by an appropriate instrument of transfer) and
otherwise be in proper form for transfer and that the person requesting such
delivery shall have paid any transfer and other taxes required by reason of
such delivery to a person other than the registered holder of the surrendered
Certificate or shall have established to the satisfaction of TTA that such
tax has been paid or is not payable.
At the Effective Time, the stock transfer books of Arcada shall be closed
and there shall be no further registration of transfers of shares of Arcada
Common Stock thereafter on the records of Arcada. From and after the Effective
Time, the holders of Certificates shall cease to have any rights with respect to
the shares of Arcada Common Stock represented thereby immediately prior to the
Effective Time except as provided herein.
No interest shall be paid or accrue on or in respect of any portion of the
TTA Common Stock or TTA Preferred Stock, or the cash in lieu of fractional
shares, to be delivered in exchange for the surrendered Certificates.
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<PAGE>
Notwithstanding anything to the contrary herein, TTA shall not be liable to
a holder of Arcada Common Stock for any amount properly paid to a public
official pursuant to any applicable unclaimed property, escheat or similar laws.
Notwithstanding the foregoing, shares of Arcada Common Stock which are
issued and outstanding immediately prior to the Effective Time and which are
held by holders who have not voted their shares in favor of the Merger and have
complied with the provisions of Chapter 23B.13 of the Washington Business
Corporate Act (the "WBCA") relating to dissenting shareholders, shall not be
converted into the right to receive shares of TTA Common Stock or TTA Preferred
Stock as provided herein, unless and until such holder shall have effectively
withdrawn or lost the right to payment under Chapter 23B.13 or any other
applicable provision of the WBCA, in which case each such share shall thereupon
be deemed to have been converted at the Effective Time into the right to receive
shares of TTA Common Stock as provided herein, without any interest thereon.
8. CHARTER AND BYLAWS. At and after the Effective Time, the charter
(the "Charter") and articles of incorporation and the bylaws of Newco as in
effect immediately prior to the Effective Time shall continue to be the charter
and articles of incorporation and the bylaws of the surviving corporation until
amended in accordance with law.
9. RIGHTS AND DUTIES OF THE SURVIVING CORPORATION. At the Effective
Time, Arcada shall be merged with and into Newco, which shall be the surviving
corporation and which shall continue to be a Washington corporation. The
business of the surviving corporation shall be that of a corporation organized
under the laws of the State of Washington and as provided for in the Articles of
Incorporation of Newco as now existing. All assets, rights, privileges, powers,
franchises and property (real, personal and mixed, tangible and intangible,
causes in action, rights and credits) of Arcada shall be automatically vested in
Newco as the surviving corporation by virtue of the Merger without any deed or
other document of transfer. The surviving corporation, without any order or
action on the part of any court or otherwise and without any documents of
assumption or assignment, shall hold and enjoy all of the properties, franchises
and interests, including appointments, powers, designations, nominations and all
other rights and interests as agent or other fiduciary in the same manner and to
the same extent as such rights, franchises and interests and powers were held or
enjoyed by Newco and Arcada, respectively. The surviving corporation shall be
responsible for all the liabilities of every kind and description of both Newco
and Arcada immediately prior to the Effective Time, including liabilities for
all debts, savings accounts, deposits, obligations and contracts of Newco and
Arcada, respectively, matured or unmatured, whether accrued, absolute,
contingent or otherwise and whether or not reflected or reserved against on
balance sheets, books or accounts or records of either Newco or Arcada. All
rights of creditors and other obligees and all liens on property of either Newco
or Arcada shall be preserved and shall not be released or impaired.
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10. EXECUTION. This Plan of Merger may be executed in any number of
counterparts each of which shall be deemed an original and all of such
counterparts shall constitute one and the same instrument.
Dated as of _____________, 1996.
TOUCH TONE AMERICA, INC.
By: ______________________________
Its: ______________________________
TOUCH TONE/ARCADA, INC.
By: ______________________________
Its: ______________________________
ARCADA COMMUNICATIONS, INC.
By: ______________________________
Its: ______________________________
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<PAGE>
TOUCH TONE AMERICA, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as of
January 16, 1997 by and between Touch Tone America, Inc. ("Employer" or "TTA"),
and Frank J. Bonadio ("Employee").
Employer is party to a transaction pursuant to which it will be the
survivor of a merger with SVV Sales, Inc. d/b/a Arcada Communications (the
"Merger").
Pursuant to the terms of the Merger, Employee will be named President and
Chief Executive Officer of TTA.
The parties wish to enter into this Agreement to memorialize the terms upon
which the Employee will provide services to TTA.
For good and valuable consideration, the receipt and sufficiency of which
we hereby acknowledge, the parties agree as follows:
1. TERM OF AGREEMENT. Employer and Employee agree that the Employee will
be employed by TTA commencing on the effective date of the Merger (the
"Effective Time") until December 31, 1999, unless employment is sooner
terminated as provided herein. This Agreement shall be automatically renewed
for succeeding terms of one (1) year, unless at least ninety (90) days prior to
the expiration of any term, either party gives written notice to the other of
that party's intention not to renew this Agreement.
2. POSITION AND DUTIES
2.1 Employer and Employee agree that Employee will be employed as the
President and Chief Executive Office of TTA and that, in this capacity,
Employee's responsibilities will include providing overall leadership and
management of TTA, subject to the approval and oversight of the Board of
Directors.
2.2 It is further agreed and understood that, as the President and
Chief Executive Officer of Employer, the hours which Employee is required to
work will vary considerably and will sometimes be more than forty (40) hours per
week. It is understood and agreed that such work in excess of forty (40) hours
per week is a regular and normal part of Employee's responsibilities for which
he is compensated, and does not in any way constitute overtime for which
Employee is entitled to receive additional compensation.
2.3 Employee agrees to devote his full-time efforts to his duties
with Employer and further agrees that Employee will not directly or indirectly
engage or participate in
<PAGE>
any activities while employed with Employer that would conflict with the best
interests of Employer.
2.4 Employee's obligation to devote his full-time attention and
energy to the business of Employer shall not be construed as preventing Employee
from investing his assets so long as any such investment will not require any
services on the part of Employee in the operation of the affairs of the
company(ies) or business(es) in which such investment(s) is (are) made.
3. EMPLOYER'S COVENANTS
3.1 Employer agrees to furnish Employee with such equipment,
employees and services as are necessary to perform Employee's obligations under
this Agreement. Employer shall also pay for Employee's membership dues in
professional organizations, the reasonable costs of any seminar attendance or
continuing education requirements of Employee's profession and Employee's
subscriptions to a reasonable number of professional journals.
3.2 Employer agrees to reimburse Employee for all reasonable business
expenses incurred by Employee while on Employer's business. Employee shall
maintain such records as will be necessary to enable Employer to properly deduct
such items as business expenses when computing Employer's federal income tax.
4. COMPENSATION
4.1 For all services rendered by Employee under this Agreement
(exclusive of directors' fees, if any), Employer shall pay Employee a base
salary of One Hundred and Fifty Thousand Dollars ($150,000) per year. Employee
shall be paid this salary on a bi-weekly basis, minus all lawful and agreed upon
payroll deductions.
4.2 The base salary set forth in Section 4.1 above shall be reviewed
annually by the Employer and may be increased by such amount as the Employer
shall, in its sole discretion, determine; provided, however, that such base
salary shall, at a minimum, be increased annually on each anniversary of the
Effective Time by an amount equal to the proportionate increase in the Consumer
Price Index (as hereinafter defined) during the twelve (12) calendar months
immediately preceding the month in which such anniversary date occurs. For
purposes hereof, "Consumer Price Index" shall mean the U.S. City Average for All
Urban Consumers (1982-84=100) issued monthly by the Bureau of Labor Statistics
of the United States Department of Labor, or any successor index thereto
appropriately adjusted.
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5. BONUS AND OPTIONS
5.1 DISCRETIONARY BONUSES. It is understood that Employer's earnings
depend largely upon the performance and productivity of Employee. Therefore,
Employer shall periodically, but not less frequently than annually, review
Employee's services rendered and, in the sole discretion of the Board of
Directors of TTA, may award bonuses in an amount which will recognize Employee's
contributions to profits during that period.
5.2 OPTIONS. As of the date of the first meeting of the Compensation
Committee of the Board of Directors of TTA after the Effective Time, TTA shall
grant to the Employee options (the "Options") to purchase an aggregate of
100,000 shares of common stock of TTA ("Common Stock") (as such number shall be
appropriately adjusted to take into account stock splits, stock dividends and
similar events in respect of the Common Stock), under and subject to the terms
of any stock option plan then in effect (the "Option Plan"), at an exercise
price equal to the closing bid and asked price of the Common Stock, as quoted on
the Nasdaq SmallCap market on the date of grant. The Options shall be ten (10)
year options and shall become exercisable and vest as to 33-1/3 of such shares
on each of the first, second and third anniversaries of the date of grant
thereof. It is understood and agreed by the Employee and the Employer that the
Options shall otherwise be in all respects subject to the terms and conditions
of the Option Plan, if any, and the certificate representing such options, which
terms and conditions shall include acceleration of exercisability and vesting of
the Options upon the occurrence of certain change of control events.
6. FRINGE BENEFITS
6.1 Employer and Employee agree that, during the term of this
Agreement, Employee shall be entitled to participate in all fringe benefits and
incentive compensation plans as may be authorized and adopted from time to time
by the Employer and for which Employee is eligible, including, for example, any
pension plan, profit sharing plan, disability plan, medical plan, group life
insurance plan, or other employee benefit plans.
6.2 SICK LEAVE. Employee shall be entitled to a reasonable number of
paid sick leave days during each calendar year of employment. In determining
what is a reasonable number of days, the Employer shall take into consideration
previous periods of disability, the number of days of sick leave taken in the
current year and preceding years, and other factors it deems pertinent.
Employer shall be the sole party to determine the reasonableness of Employee's
number of sick leave days.
6.3 AUTOMOBILE EXPENSE. Employee shall be provided an automobile by
Employer or, if Employee so chooses, Employer shall provide the Employee with an
automobile allowance of $900 per month. Employer shall reimburse Employee for,
or pay on behalf of the Employee, at Employer's election, all insurance, fuel,
repair and maintenance expenses relating to such automobile incurred by Employee
during the term hereof (including any extensions
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thereof) and shall, in connection therewith, provide to Employee one or more
gasoline charge cards for use by Employee during the term hereof (and any
extensions thereof).
6.4 INSURANCE. In the event this Agreement is terminated, Employer,
upon the request of Employee, shall assign to Employee any insurance policy
owned by Employer under which Employee is the insured and which is assignable by
the policy terms; provided, however, that if any such policy has a cash
surrender value, Employee shall pay the then cash surrender value of such policy
to Employer in exchange for its assignment to Employee under this section. Any
conversion rights which Employee may have under the terms of any such insurance
policy shall survive any termination of this Agreement.
6.5 VACATION. Employee shall be entitled to four (4) weeks' paid
vacation per calendar year.
7. CONFIDENTIAL INFORMATION. It is understood and agreed that as a
result of Employee's employment with TTA, Employee will be acquiring and making
use of confidential information about Employer's business as well as financial
information about TTA. Employee agrees that he will respect the confidences of
Employer and will not at any time during or within three (3) years following the
period of his employment with TTA, directly or indirectly divulge or disclose
for any purpose whatsoever or use for his own benefit, any confidential
information that has been obtained by or disclosed to Employee as a result of
his employment with TTA. Employee may also have signed or be asked to sign an
additional agreement regarding confidential information, including trade secrets
and inventions. In the event that the provisions of this agreement conflict
with the provisions of that additional agreement, Employee understands that he
must adhere to the more restrictive agreement.
8. COVENANT NOT TO COMPETE. In view of the unique value to TTA of
Employee's services and because of the confidential information to be obtained
by or disclosed to Employee as described above, Employee agrees as follows:
8.1 That during his employment with TTA, and for a period of six (6)
months after termination of such employment by Employee, Employee will not
directly or indirectly, as principal, owner, employee, or agent, engage within
the United States in any business that is competitive with business of TTA, or
that business described in the prospectus contained in any registration
statement filed by TTA under the Securities Act of 1933 at any time during the
initial year of this Agreement.
8.2 That during his employment with TTA, and for a period of six (6)
months after termination of such employment by Employee, he will not directly or
indirectly solicit for employment or employ any employee of TTA.
8.3 That during his employment with TTA, and for a period of six (6)
months after termination of such employment by Employee, he will not, directly
or indirectly, solicit business from any customers of TTA.
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8.4 That if Employee violates any of the provisions of this Section 8
or section 7, Employer and Employee both realizing the difficulty in
establishing the amount of actual damages incurred by TTA as the result of such
a breach, TTA shall be entitled to liquidated damages in an amount equal to
Employee's then current yearly salary if still employed by TTA, or if no longer
employed by Employer, the amount of Employee's yearly salary at the time of his
termination, plus any bonus paid during the previous twelve (12) months, plus
interest at the rate of twelve percent (12%) per annum from the date of the
breach of any of these subsections or section 7 until payment is received by
TTA. It is understood and agreed that this remedy is in addition to, and not a
limitation on, any injunctive relief or other rights or remedies to which
Employer is or may be entitled to under law.
9. TERMINATION. This Agreement shall be terminated upon the occurrence
of any one of the following events:
9.1 Death of Employee.
9.2 If Employee shall have been incapacitated from illness, accident
or other disability and unable to perform his normal duties hereunder for a
cumulative period of six (6) months in any period of twelve (12) consecutive
months, upon Employer or Employee giving the other party not less than thirty
(30) days' written notice. In the event of such termination, Employee shall be
entitled to: (a) all benefits due Employee under any accident, sickness,
disability, health or hospitalization plan or insurance policy of Employer then
in effect; and (b) compensation under this agreement for a period of one (1)
year following the effective date of Employee's termination. The payments in
respect to this subsection shall be made in twelve (12) installments.
9.3 Expiration of this Agreement or expiration of any renewal or
extension thereof.
9.4 Immediately by Employer for cause. For purposes of this
subsection, "cause" includes, but is not necessarily limited to, the following:
(a) breach by Employee of any material provision of this Agreement; (b) material
violation by Employee of any statutory or common law duty of loyalty to
Employer; or (c) personal or professional conduct of Employee, which, in the
reasonable and good faith judgment of the Board of Directors of Employer injures
or tends to injure the reputation of Employer or otherwise adversely affects the
interests of Employer. Such conduct may include, but is not limited to,
dishonesty, chronic absenteeism, alcoholism, drug addiction, and conviction of a
felony or misdemeanor involving moral turpitude.
9.5 Upon the cessation of business by Employer.
9.6 Upon the retirement of Employee.
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10. EFFECT OF TERMINATION. Upon termination of Employee's employment with
TTA, Employer agrees to pay Employee all salary, fringe benefits, bonuses or
other remuneration which are due and owing to Employee as of the date of
termination, less legal deductions or offsets Employee may owe to Employer for
such items as salary advances or loans. Employee agrees that his signature on
this Agreement constitutes his authorization for all such deductions, upon
termination of Employee's employment with TTA. Upon the termination of
Employee's employment with TTA, Employee agrees to return to TTA all of
Employer's property of any kind which may be in Employee's possession. In the
event of termination of this Agreement, the noncompetition and confidentiality
provisions provided in sections 7 and 8 above, shall continue in full force and
effect according to their terms.
11. CONSTRUCTION OF AGREEMENT
11.1 ESSENTIAL TERMS AND MODIFICATION OF AGREEMENT. It is understood
and agreed that the terms and conditions described in this Agreement constitute
the essential terms and conditions of the employment arrangement between
Employer and Employee, all of which have been voluntarily agreed upon. Employer
and Employee agree that there are no other essential terms or conditions of the
employment relationship that are not described within this Agreement, and that
any change in the essential terms and conditions of this Agreement will be
written down in a supplemental agreement which shall be signed by both Employer
and Employee before it is effective.
11.2 SEVERABILITY. The invalidity of all or any part of any section
of this Agreement shall not render invalid the remainder of this Agreement or
the remainder of such section. In the event a court of competent jurisdiction
should decline to enforce any provision of any section of this Agreement, such
section shall be reformed to the extent necessary in the judgment of such court
to make such provision of such section enforceable to the maximum extent which
the court shall find enforceable.
11.3 NOTICES. Any notice hereunder shall be sufficient if in writing
and delivered to the party or sent by certified mail, return receipt requested
and addressed as follows:
a. If to Employer:
Touch Tone America, Inc.
4110 N. Scottsdale Road, Suite 170
Scottsdale, AZ 85251
b. If to Employee:
Frank Bonadio
__________________________
__________________________
6
<PAGE>
Either party may change the address herein specified by giving to the other,
written notice of such change.
11.4 GOVERNING LAW. This Agreement is made and shall be construed
and performed under the laws of the State of Washington.
11.5. VENUE AND ATTORNEYS' FEES. A breach of any of the terms of this
Agreement shall entitle the aggrieved party to sue for breach of the Agreement.
In such case, venue shall be in King County, Washington. In the event it is
necessary for either party to institute suit in connection with this Agreement
or its breach, the prevailing party in said suit or proceeding shall be entitled
to reimbursement for its reasonable costs and attorney's fees incurred.
11.6 WAIVER OF AGREEMENT. The waiver by Employer of a breach of any
provision of this Agreement by Employee shall not operate or be construed as a
waiver by Employer of any subsequent breach by Employee.
11.7 CAPTIONS. The captions and headings of the sections of this
Agreement are for convenience and reference only and are not to be used to
interpret or define the provisions hereof.
11.8 ASSIGNMENT AND SUCCESSORS. The rights and obligations of
Employer under this Agreement shall inure to the benefit of and be binding upon
the successors and assigns of Employer. The rights and obligations of Employee
hereunder are nonassignable. Employer may assign its rights and obligations to
any entity in which Employer, or a company affiliated to Employer, has a
majority ownership interest.
7
<PAGE>
Executed on the date first written above and commencing at the Effective
Time.
EMPLOYEE: TOUCH TONE AMERICA, INC.:
/s/ Frank Bonadio /s/ Michael Canney
- ------------------------------ ------------------------------
By Michael Canney
Its President
8
<PAGE>
FORM OF
TOUCH TONE AMERICA, INC.
VAUGHAN CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("Agreement") is made and entered into as of
January __, 1997 by and between TOUCH TONE AMERICA, INC. (the "Corporation"),
and ROBERT VAUGHAN ("Consultant").
Consultant has been employed as a consultant to the Corporation pursuant to
a Consulting Agreement dated April 22, 1996 (the "Original Consulting
Agreement").
The Corporation is party to a transaction pursuant to which it will be the
survivor of a merger with SVV Sales, Inc. d/b/a Arcada Communications, Inc. (the
"Merger").
In connection with the Merger, Consultant and the Corporation desire to
terminate the Original Consulting Agreement, and enter into this agreement
pursuant to which the Corporation will retain Consultant as, and Consultant will
serve as a consultant to, the Corporation pursuant to the terms and conditions
hereof.
The parties hereto agree:
1. TERM. The Corporation hereby retains Consultant, and Consultant
hereby agrees to be retained by the Corporation, for the consideration and upon
the terms and conditions herein set forth, to consult, counsel and advise with
the Corporation as set forth herein for a term commencing upon the consummation
of the Merger (the "Commencement Date") and continuing for one (1) year (the
"Term"). The Term may be extended for one (1) additional year by mutual
agreement of the parties.
2. DUTIES. Consultant agrees to render counsel and advice to the
President of the Corporation from time to time, as reasonably requested by and
at the sole discretion of the President of the Corporation, for the profit,
benefit and advantage of the Corporation in connection with locating unrelated
entities that the Corporation may acquire or be interested in acquiring and
developing and implementing finance plans for acquisitions and/or business
expansion purposes, in all cases subject to the approval and oversight of the
Board of Directors and the President of the Corporation. The services of
Consultant hereunder shall be rendered at such times and places as shall be
mutually convenient to the Corporation and the Consultant. Nothing in this
Agreement shall prevent Consultant from performing services for persons or
entities other than the Corporation, provided that performance of such services
shall not be contrary to any of the provisions of Sections 10 through 12 and
shall not interfere with the Consultant's performance of his duties hereunder
unless Consultant has obtained the prior written consent of the Corporation.
It is expressly understood and agreed that Consultant's discharge of his
duties as expressly set forth herein requires an extensive time commitment and
that Consultant is not
<PAGE>
required and agrees that he shall not engage in and shall have no authority with
respect to any matters not expressly set forth herein including, without
limitation, investor or public relations, management, personnel or
administrative matters, security dealer or broker relations or day to day
operations of the Corporation without the prior approval of the President of the
Corporation.
3. TITLE. Consultant shall have the title of "Special Advisor-Mergers
and Acquisitions".
4. COMPENSATION. Consultant shall be paid a consulting fee of One
Hundred and Twenty Thousand Dollars ($120,000) per year. Consultant shall be
paid this consulting fee on a monthly basis.
5. USE OF FACILITIES AND SERVICES. The Corporation shall provide
Consultant with access to the Corporation's staff, equipment and services as are
reasonably necessary to perform Consultant's duties under this Agreement.
6. AUTHORITY. Consultant shall not, and covenants and agrees that he
will not, enter into any agreement or commitment purporting to bind the
Corporation nor hold himself out as authorized to do so without the prior
express written approval of the President of the Corporation. Consultant
covenants and agrees to indemnify and hold harmless the Corporation from and
against any and all damages incurred by the Corporation resulting from
Consultant's breach of this or any other covenant or agreement contained herein
and the Corporation covenants and agrees to indemnify and hold harmless
Consultant from and against any and all damages incurred by Consultant resulting
from the Corporation's breach of any covenant or agreement contained herein.
7. FINDERS FEE.
(a) The Corporation agrees to pay Consultant a commission (a "Finders
Fee") in accordance with the provisions of this Section 7 for every merger or
acquisition candidate (a "Candidate") which Consultant finds, makes contact
with, introduces to the Corporation and with which the Corporation, or any of
its subsidiaries or affiliates, subsequently consummate a transaction involving
a merger with or acquisition of all or a portion of such candidate (an
"Acquisition").
(b) The Corporation shall not be obligated to pay any such Finders
Fee to Consultant unless (i) The Corporation shall not have previously
identified, contacted or otherwise obtained an introduction to such Candidate
without the assistance of Consultant, and (ii) Consultant notifies the President
of The Corporation in writing of the identity of such Candidate and the
Corporation, within ten days of receipt of such notice, does not dispute
Consultant's claim to such Candidate. Any dispute between the Corporation and
Consultant shall be resolved by mutual agreement between Consultant and the
Corporation.
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<PAGE>
(c) Provided Consultant has satisfied and complied with the
provisions of Section 7(b) above, The Corporation shall pay to Consultant, at
the closing of an Acquisition a Finder's Fee based on the following:
5% of first one million,
4% of second one million,
3% of third one million,
2% of fourth one million, and
1% of all over four million of the total value of the
Acquisition.
For purposes hereof "total value" of the Acquisition shall be deemed
to mean the total dollar price, whether in cash, stock or combination thereof
paid, or in the case of a reverse merger or other similar transaction received
by the Corporation in connection with the acquisition or merger of the
Corporation of or with a Candidate.
The Finders Fee is due and payable at the closing of each Acquisition
and shall be paid in stock, cash, warrants or notes as mutually agreed by the
Corporation and Consultant prior to the closing of each such Acquisition.
8. COMMISSION IN CONNECTION WITH MERGER. Notwithstanding anything to the
contrary contained herein, The Corporation agrees to pay to Consultant, and
Consultant agrees to accept from The Corporation the following Commission in
connection with the Merger (the "Merger Commission"):
(a) The sum of $150,000 in cash; and
(b) the greater of (i) 250,000 shares of the Corporation's common
stock or (ii) a number of shares of the Corporation's common stock equal to the
result obtained by dividing:
(1) 5% of the first one million,
4% of the second one million,
3% of the third one million,
2% of the fourth one million, and
1% of all over four million of the total value of the shares
issued by the Corporation in the Merger, by
(2) the Average Price Per Share (as defined below).
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<PAGE>
Solely for purposes of the Section 8 "total value" shall be deemed to
mean 12,500,000 multiplied by the Average Price Per Share. Solely for purposes
of this Section 8, Average Price Per Share shall be deemed to mean the average
of the closing bid and asked price for the Corporation's common stock, as
reported on the Nasdaq SmallCap Market for the five business days preceding the
day before the effective date of the Merger.
The Merger Commission shall be paid by the Corporation on the
Effective Date; provided, however, that the Corporation shall not be obligated
to pay the Merger Commission and the Consultant shall not be entitled to receive
the Merger Commission unless and until Consultant shall have delivered to the
Corporation a release executed by James Meadows releasing the Corporation from
any and all obligations to pay commissions or other fees to Mr. Meadows in
connection with the Merger or otherwise.
Consultant and the Corporation agree that the Merger Commission is the
only consideration to be paid to Consultant in connection with the Merger and
Consultant hereby waives any claim to any other fee, commission or other
consideration in connection with the Merger including, without limitation, under
the Original Consulting Agreement.
In the event that, at any time or from time to time after the effective
date of the Merger, the Corporation proposes to register any securities (the
"Registration Stock"), including shares of stock, under the Securities Act of
1933 and the rules and regulations promulgated thereunder (the "1933 Act") other
than pursuant to a registration statement on Forms S-4 or S-8, or any successor
to such Forms, for the purpose of the sale or other transfer of the Registration
Stock by the Corporation or by any present or future holder of securities of the
Corporation, Consultant shall have the right to request that the Corporation
effect the registration under the 1933 Act, of any or all of the shares (the
"Requested Registration Shares") of the Corporation's common stock issued to
Consultant pursuant to this Section 8 (the "TTA Shares") which are then
beneficially owned by Consultant. In such event, the Corporation shall use its
best efforts to cause the Requested Registration Shares to be registered under
the 1933 Act; provided, however, that the Corporation shall not be obligated to
file and cause to become effective more than one registration statement for the
Consultant in which Requested Registration Shares are sold pursuant to this
Section 8. Consultant covenants and agrees to cooperate and to furnish the
Corporation with such information as it deems necessary to assist in the
preparation of such registration.
In the event that the Corporation shall not have caused the TTA shares to
be registered on or prior to the sixth month of the Effective Date of the
Merger, the Corporation shall, at the written request of Consultant, undertake
to cause the TTA Shares to be registered under the 1933 Act so as to permit a
public offering and sale by Consultant of the TTA Shares.
9. EXPENSES. Consultant shall obtain prior approval for any business
expense, including travel expenses, in excess of $250. which consent shall not
be unreasonably withheld. Provided Consultant has obtained prior approval or
such expenses are below $250, the Corporation shall reimburse Consultant for
such expenses reasonably incurred by Consultant and directly relating to the
provision by Consultant of his services pursuant to this Agreement.
-4-
<PAGE>
Consultant shall maintain such records as will be necessary to enable The
Corporation to properly deduct such items as business expenses when computing
The Corporation's federal income tax.
10. TERMINATION OF EMPLOYMENT. With reasonable cause, either party may
terminate this Agreement effective immediately after giving written notice of
termination for cause or, without cause, either party may terminate this
Agreement after giving thirty (30) days prior written notice to the other of
intent to terminate without cause. The parties shall deal with each other in
good faith during the thirty (30) day period after notice of intent to terminate
without cause has been given.
For purposes hereof, reasonable cause shall include:
(i) A material violation of this Agreement.
(ii) Any act exposing the other party to liability to others for
personal injury or property damage.
(iii) The commission by the Consultant of a willful or negligent act,
or any act or omission taken in bad faith, which, in the good faith opinion of
the Corporation, causes material harm to the Corporation, its affiliated
entities, its customers or its employees.
(iv) The Contractor's intentional and persistent failure to obey
instructions from the Board of Directors or President of the Corporation.
(v) The commission or perpetration by the Consultant of any
criminal act, any act of moral turpitude, fraudulent or intentional
misrepresentation or any fraud.
In the event of Corporation's termination of this Agreement for reasonable
cause or Consultant's termination of this Agreement without cause, the
Corporation shall pay to the Consultant (i) promptly after such termination, the
consulting fee provided for in Section 4 accrued to the date of such termination
and not theretofore paid to the Consultant and (ii) when and if payable pursuant
to Section 7(c) of this Agreement, any Finders Fee payable to Consultant for any
Candidate which Consultant identified in writing and introduced to the
Corporation prior to the termination of this Agreement.
In the event of Consultant's termination of this Agreement for reasonable
cause or the Corporation's termination of this Agreement without cause, the
Corporation shall (i) continue to pay to the Consultant, in the same periodic
installments as the Consultant's consulting fee was paid, the consulting fee
provided for in Section 4, until the then scheduled expiration of the term
hereof and (ii) when and if payable pursuant to Section 7(c) of this Agreement,
pay to Consultant any Finders Fee payable to Consultant for any Candidate which
Consultant furnished to the Corporation prior to the termination of this
Agreement. After termination hereof, whether for reasonable cause or otherwise,
neither the Corporation not Consultant shall have any further
-5-
<PAGE>
rights or obligations under this Agreement, except as provided in this Section
10(b) and in Sections 6, 11, 12, 13, 14 and 16 hereof.
11. NONCOMPETITION. During the term of this Agreement and for a period of
at least thirty (30) days thereafter, Consultant shall not at any time, directly
or indirectly, in any capacity whatsoever, own, manage, operate, join in,
control, participate in, invest in, work for, or otherwise be connected with, in
any manner, whether as an officer, director, consultant, partner, investor,
consultant, agent or otherwise, any business entity or person which is engaged,
or proposes to engage, in activities that are directly competitive with the then
current or proposed activities of the Corporation. The parties hereto
acknowledge that this noncompetition covenant is made to induce the Corporation
to retain Consultant and is required for the purpose of preserving for the
Corporation the goodwill of its current and future business. The parties hereto
further acknowledge and agree that, without limiting the foregoing, for a period
of one (1) year after the termination of this Agreement , Consultant will not
contact or solicit (on behalf of Consultant or any third party) any Candidate
which Consultant furnished to the Corporation prior to the termination of this
Agreement.
12. COVENANT NOT TO DISCLOSE. Consultant shall not at any time, without
the express prior written consent of the Corporation, disclose or otherwise make
known or available to any person, firm, corporation or other entity other than
the Corporation, or use for his own account, any Confidential Information of the
Corporation, whether made available to Consultant in the course of the provision
of his services to the Corporation, or in negotiations leading up to the
provision of such services, or otherwise, that relates to the Corporation, the
existing business of the Corporation, or the reasonably foreseeable business of
the Corporation. Without limiting the foregoing, consultant covenants and
agrees that he will not purchase or sell the Corporation's securities while in
possession of any material Confidential Information.
13. CONFIDENTIAL INFORMATION. As used in this Agreement, "Confidential
Information" means any non-public information obtained by Consultant from The
Corporation, whether during or prior to the Term, including but not limited to
financial projections and performance information, billing information, customer
lists, business plans, marketing plans, and other proprietary business
information of the Corporation; any and all subject matter claimed in or
disclosed by any patent application prepared or filed by or on behalf of by the
Corporation, in any jurisdiction, and any amendments or supplements thereto; and
any and all "know how," methods, information, procedures or processes related to
any invention, invention report, trade secret, or proprietary information of the
Corporation.
Confidential Information includes any of the foregoing information whether
or not such information was developed, devised or otherwise created in whole or
in part by the efforts of Consultant. Confidential Information may be written,
oral, electronically stored, contained in magnetic media, simulated, or
manifested physically, or in or by other forms, but shall be protected as
Confidential Information regardless of form. Confidential Information shall not
include matters of public knowledge, unless such matters become public knowledge
as a result of any disclosure by Consultant or by any other party who is bound
by obligations of confidence to the Corporation, or unless the combination of
such matters would amount to Confidential
-6-
<PAGE>
Information. In any dispute over whether information or matter is Confidential
Information for purposes of enforcement of this Agreement, it shall be the
burden of Consultant to show both that such contested information or matter is
not Confidential Information within the meaning of this Section 8, and that it
does not constitute a trade secret under the laws of the State of Washington.
14. RETURN OF CONFIDENTIAL INFORMATION. Immediately upon termination of
this Agreement, howsoever arising, or at any time upon the written request of
the Corporation or upon the oral request of any of Consultant's supervisors,
Consultant shall immediately return to the Corporation all Confidential
Information in any written or other manifestation or form, and shall further
surrender and deliver to the Corporation all records, materials, equipment,
drawings, documents and data of any nature pertaining to the Corporation, the
retention of Consultant's services, or the performance of any of Consultant's
duties as a consultant of the Corporation.
15. ADDITIONAL INSURED. During the term hereof, to the extent no
additional premiums are required, the Corporation covenants and agrees to use
its best efforts to have Consultant named as an "additional insured" on any
errors and omissions insurance policy obtained by the Corporation for its
officers and directors.
16. SPECIFIC PERFORMANCE. Consultant acknowledges and agrees that: (a)
but for the agreement of Consultant to comply with the covenants of this
Agreement, the Corporation would not contemplate retaining or continuing to
retain Consultant; (b) the Corporation will not have no adequate remedy at law
if Consultant violates the terms of this Agreement or fails to perform any other
obligation hereunder; and (c) the Corporation shall have the right, in addition
to any other rights it may have, to obtain in any court of competent
jurisdiction, temporary, preliminary and permanent injunctive relief to restrain
any breach, threatened breach, or otherwise to specifically enforce any, of such
covenants or any other obligations of Consultant, if Consultant fails to perform
any of his obligations under this Agreement.
17. SEVERABILITY. The invalidity of all or any part of any section of
this Agreement shall not render invalid the remainder of this Agreement or the
remainder of such section. Consultant acknowledges and stipulates that the
covenants set forth in Sections 6 through 9 above are fair and reasonably
necessary for the protection of the Corporation's protectable interests. In the
event a court of competent jurisdiction should decline to enforce any provision
of Sections 6 through 9, such section(s) shall be reformed to the extent
necessary in the judgment of such court to make such section(s) enforceable to
the maximum extent which the court shall find enforceable.
18. NOTICES. Any notices given under this Agreement shall be in writing,
personally delivered, or sent by certified mail, postage prepaid, or sent via
telefacsimile, receipt confirmed, to the following addresses and telephone
numbers, which a party may change from time to time by prior written notice to
the other party:
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<PAGE>
Corporation: Touch Tone America, Inc.
4110 N. Scottsdale Road, Suite 170
Scottsdale, Arizona 85251
Attention: President
-8-
<PAGE>
With a copy to: Cairncross & Hempelmann, P.S.
701 Fifth Avenue, Suite 7000
Seattle, Washington 98104-7016
Attention: David M. Otto
Consultant: Robert Vaughan
______________________________
______________________________
19. INDEPENDENT CONTRACTOR. Consultant shall during the Term be deemed to
be an independent contractor.
20. MISCELLANEOUS. This Agreement shall be binding upon and inure to the
benefit of the parties' respective successors and assigns. The waiver of any
breach of any provision of this Agreement or failure to enforce any provision
hereof shall not operate or be construed as a waiver of any subsequent breach.
In the event of any dispute between the parties that arises out of this
Agreement, the substantially prevailing party shall be entitled to reimbursement
for its attorneys' and experts' costs, fees and expenses. The provisions of
this Agreement shall not be construed as limiting any rights or remedies that
either party may otherwise have under applicable law, and shall be in addition
to all other rights and remedies of such party, including any which may arise
out of any other written agreement involving the parties.
21. GOVERNING LAW; VENUE. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Washington
without regard to conflicts of laws principles. The obligations set forth in
this Agreement are intended to supplement and not to supersede the protections
afforded the Corporation under the Uniform Trade Secrets Act, or similar law or
laws as may be in effect from time to time within the State of Washington. The
exclusive jurisdiction and venue of any lawsuit between the parties arising
under this Agreement or out of the transactions contemplated hereby shall be the
Superior Court of Washington for King County, or the United States District
Court for the Western District of Washington at Seattle, and each of the parties
hereby submits itself to the exclusive jurisdiction and venue of such court for
the purposes of such lawsuit.
22. PRIOR AGREEMENTS. This Agreement amends, restates and supersedes all
prior oral and written agreements between the parties. Without limiting the
foregoing, the parties hereto agree that, commencing on the Commencement Date,
this agreement restates and supersedes the Original Consulting Agreement and
that the Original Consulting Agreement shall be terminated and of no further
force and effect commencing on such date.
* * *
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<PAGE>
DATED as of the day and year first written above.
TOUCH TONE AMERICA, INC.
By _____________________
Its_____________________
________________________
ROBERT VAUGHAN
-10-
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in the Joint Proxy Statement/Prospectus of Touch
Tone America, Inc. filed in this S-4 Registration Statement of our reports
dated August 9, 1996 and August 31, 1995, accompanying the financial
statements of Touch Tone America, Inc. and GetNet International, Inc.,
respectively, contained in such Registration Statement, and to the use of our
name and the statements with respect to us, as appearing under the heading
"Experts" in the Joint Proxy Statement/Prospectus.
/s/ Hein + Associates LLP
HEIN + ASSOCIATES LLP
Denver, Colorado
January 27, 1997
<PAGE>
EXHIBIT 24.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Arcada Communications and Affiliates
We hereby consent to the use in the Touch Tone America, Inc. Joint Proxy
Statement/Prospectus constituting a part of this Registration Statement on form
S-4 of our report dated November 22, 1996, relating to the financial statements
of Arcada Communications and Affiliates, which is contained in that Joint Proxy
Statement/Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Joint Proxy Statement/Prospectus.
/s/ BDO Seidman, LLP
- ------------------------------
BDO Seidman, LLP
Seattle, Washington
January 27, 1997
<PAGE>
CONSENT OF ATTORNEYS
Reference is made to the Registration Statement on Form S-4 (SEC File No.
333-17403) of Touch Tone America, Inc.
I hereby consent to the use of my opinion concerning the legality of the
securities being registered dated January 22, 1997 filed as an exhibit to the
Registration Statement, and to being named in the Registration Statement as
having advised Touch Tone America, Inc. as to the legality of its securities
proposed to be sold.
JOHN B. WILLS
Attorney at Law
By: /s/ JOHN B. WILLS
______________________________________
John B. Wills
Denver, Colorado
January 22, 1997
