UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q SB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1997
-----------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
--- ---
Commission File No. 0-24058
TOUCH TONE AMERICA, INC.
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 33-0424087
------------------------------ -------------------------------
State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization Number)
4110 N. Scottsdale Road, Suite 170, Scottsdale, Arizona 85251
----------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (800) 535-2211
--------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. [X]Yes [ ]No
At April 11, 1997, 3,368,245 shares of common stock, no par value were
outstanding.
Page 1 of 20 pages.
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
INDEX TO FORM 10-QSB
February 28, 1997
PAGE NO.
--------
PART I
- ------
CONSOLIDATED FINANCIAL STATEMENTS
a. Balance Sheets as of May 31, 1996 and
February 28, 1997 (Unaudited) F-2
b. Statements of Operations for the Three and
Nine Months Ended February 28, 1996 and 1997 (Unaudited) F-3
c. Statements of Cash Flows for the Nine Months
Ended February 28, 1996 and 1997 (Unaudited) F-4
d. Notes to the Consolidated Financial Statements F-5
MANAGEMENT'S DISCUSSION AND ANALYSIS F-11
PART II
- -------
a. OTHER INFORMATION
b. SIGNATURES
F-1
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MAY 31, FEBRUARY 28,
1996 1997
---------- -----------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $5,278,000 $ 999,000
Trade receivables, net allowance
for doubtful accounts of $124,000
and $236,000, respectively 264,000 165,000
Prepaid expense - 15,000
---------- ----------
Total current assets 5,542,000 1,179,000
EQUIPMENT, net of accumulated
depreciation of $62,000 and
$212,000, respectively 429,000 1,019,000
OTHER:
Intangibles, net of accumulated
amortization of $97,000 and
$222,000, respectively 738,000 613,000
Refundable deposits 76,000 80,000
Other 143,000 108,000
---------- ----------
TOTAL ASSETS $6,928,000 $2,999,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 477,000 $ 694,000
Accrued liabilities 1,170,000 894,000
Deferred revenues 76,000 71,000
Notes payable to stockholders 393,000 -
Current portion of capital
lease obligations 61,000 64,000
---------- ----------
Total current liabilities 2,177,000 1,723,000
DEFERRED REVENUE 25,000 25,000
CAPITAL LEASE OBLIGATIONS, net of
current portion 134,000 84,000
COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 7)
REDEEMABLE PREFERRED STOCK LIABILITY 750,000 -
COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY:
Preferred stock, no par value,
10,000,000 shares authorized;
none outstanding - -
Common stock, no par value, 100,000,000
shares authorized, and 3,204,300
and 3,368,245 shares issued and
outstanding, respectively 7,195,000 7,970,000
Accumulated deficit (3,353,000) (6,803,000)
---------- ----------
Total stockholders' equity 3,842,000 1,167,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $6,928,000 $2,999,000
========== ==========
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
---------------------- ----------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET REVENUES:
Long distance resell $ 414,000 $ 288,000 $1,615,000 $ 900,000
Internet access 154,000 232,000 148,000 582,000
---------- ---------- ---------- ----------
568,000 520,000 1,763,000 1,482,000
COST OF SALES:
Long distance resell (314,000) (184,000) (1,094,000) (635,000)
Internet access (86,000) (95,000) (104,000) (285,000)
---------- ---------- ---------- ----------
(400,000) (279,000) (1,198,000) (920,000)
---------- ---------- ---------- ----------
GROSS MARGIN 168,000 241,000 565,000 562,000
OPERATING EXPENSES:
Selling 196,000 62,000 459,000 214,000
General and administrative 411,000 722,000 1,039,000 2,128,000
Amortization and
depreciation 62,000 93,000 79,000 275,000
Severance agreements - 183,000 1,000 468,000
Excess volume commitments 544,000 414,000 785,000 845,000
---------- ---------- ---------- ----------
1,213,000 1,474,000 2,363,000 3,930,000
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (1,045,000) (1,233,000) (1,798,000) (3,368,000)
OTHER EXPENSE:
Interest expense (income),
net 16,000 (7,000) 29,000 82,000
Absorbed offering and
acquisition costs 3,000 - 118,000 -
---------- ---------- ---------- ----------
19,000 (7,000) 147,000 82,000
---------- ---------- ---------- ----------
NET LOSS $(1,064,000) $(1,226,000) $(1,945,000) $(3,450,000)
========== ========== ========== ==========
LOSS PER SHARE $ (0.40) $ (0.38) $ (1.03) $ (1.08)
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES AND EQUIVALENTS 2,639,000 3,208,000 1,885,000 3,205,000
========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE
MONTHS ENDED
FEBRUARY 28,
--------------------------
1996 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,945,000) $(3,450,000)
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation and amortization 79,000 275,000
Common stock for exchange of debt
at below market - 127,000
Options issued at below market - 207,000
Bad debt expense 44,000 200,000
Absorbed acquisition costs 115,000 -
Change in assets and liabilities:
Decrease (increase) in:
Trade receivables 46,000 (72,000)
Other assets (64,000) 16,000
Increase (decrease) in:
Accounts payable (55,000) 217,000
Accrued liabilities 863,000 56,000
Deferred revenue and other 20,000 (68,000)
---------- ----------
Net cash used in operating
activities (897,000) (2,492,000)
CASH FLOWS FROM INVESTING ACTIVITY:
Purchase of equipment (94,000) (740,000)
Acquisition costs incurred (25,000) -
---------- ----------
Net cash used in investing
activities (119,000) (740,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (19,000) (47,000)
Payment of notes payable to
stockholders (2,000) (183,000)
Repayment of preferred stock - (750,000)
Proceeds from issuance of redeemable
preferred stock 113,000 -
Proceeds from issuance of common stock 700,000 -
Offering costs incurred (285,000) (67,000)
---------- ----------
Net cash provided by (used in)
financing activities 507,000 (1,047,000)
---------- ----------
NET DECREASE IN CASH (509,000) (4,279,000)
CASH, beginning of period 512,000 5,278,000
---------- ----------
CASH, end of period $ 3,000 $ 999,000
========== ==========
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
--------------------
The consolidated financial statements include the accounts of Touch
Tone America, Inc. (Touch Tone) and from November 1, 1995, GetNet
International, Inc. (GetNet) (collectively referred to as "the
Company"). Touch Tone acquired the outstanding common stock of GetNet
effective November 1, 1995.
Touch Tone is engaged in the reselling of long distance
telecommunications products and services primarily in the western and
southwestern United States. As a reseller of long distance services,
Touch Tone offers its customers the use of routing equipment and phone
lines of large carriers; in turn, the large carriers offer Touch Tone
volume discounts based on the use of this equipment.
GetNet is a provider of Internet and World Wide Web access services to
individuals and businesses in Arizona and other parts of the United
States. The Internet is a network of millions of computers around the
world which are able to communicate with one another, as well as
access the World Wide Web which is a system of documents on a
multitude of subjects.
2. DISCLOSURE SUMMARY:
------------------
Pursuant to rules and regulations of the Securities and Exchange
Commission, the Company has elected to omit substantially all the
disclosures normally included in financial statements prepared under
generally accepted accounting principles. Readers of these financial
statements should refer to the Company's Form 10-KSB filed for the
year ended May 31, 1996, for additional disclosures as well as other
filings with the Securities and Exchange Commission.
3. UNAUDITED INFORMATION:
---------------------
The Company's balance sheet as of February 28, 1997, and the statement
of operations for the three and nine months ended February 28, 1996
and 1997 are taken from the Company's books and records without audit.
Management believes, however, that such information includes all
accruals, which are considered recurring in nature, required for the
fair presentation of the Company's financial position and results of
their operations as of and for the periods then ended. The results of
operations for the interim periods presented are not necessarily
indicative of results expected for the full year.
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Actual results could differ from those estimates. The Company makes
significant estimates as to the amortization period used for its
intangibles and estimated losses for contingencies. Due to the
uncertainties inherent in the life of intangibles, and increased
competition and technology changes in the telecommunications industry,
it is reasonably possible that the estimated life of intangibles and
the ultimate liability the
F-5
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company could have to AT&T under its SDN commitment and fraudulent
usage (see Note 7) as well as other commitments and contingencies
could materially change in the forthcoming year.
4. ADOPTION OF NEW ACCOUNTING POLICIES:
-----------------------------------
IMPAIRMENT OF LONG-LIVED ASSETS - Effective June 1, 1996, the Company
adopted Financial Accounting Standards Board Statement 121 (FAS 121).
In the event that facts and circumstances indicate that the cost of
assets or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset
would be compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow value is required.
Adoption of FAS 121 had no effect on the unaudited February 28, 1997
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 related intangible costs,
under this accounting standard.
STOCK-BASED COMPENSATION - Effective June 1, 1996, the Company adopted
Financial Accounting Standards Board Statement 123 "Accounting for
Stock-Based Compensation" (FAS 123). FAS 123 encourages, but does not
require, companies to recognize compensation expense for grants of
stock, stock options, and other equity instruments to employees based
on fair value. Companies that do not adopt the fair value accounting
rules must disclose the impact of adopting the new method in the notes
to the financial statements. Transactions in equity instruments with
non-employees for goods or services must be accounted for on the fair
value method. The Company has elected not to adopt the fair value
accounting prescribed by FAS 123 for employees, but is subject to the
disclosure requirements prescribed by FAS 123.
5. CONTINUED OPERATIONS:
--------------------
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue operating as a going concern,
which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has
incurred significant losses since inception and as of February 28,
1997 has a working capital deficiency of approximately $500,000.
Furthermore, as discussed in Note 7, the Company has entered into
sales volume commitments with service providers and is involved in
several other significant contingent matters.
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 7, monthly revenues
under this commitment have declined, and it is unlikely revenues will
increase, whereby the Company will be able to continue to meet this
commitment. As of February 28, 1997, no significant 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
F-6
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. During the fourth quarter, the Company
stopped making payments under its "800" service agreement settlement
with AT&T and is attempting to renegotiate the repayment terms under
this agreement. If unsuccessful, the Company's obligation to AT&T
could increase substantially. Subsequent to February 28, 1997, an
entity has brought legal action against the Company alleging
significant damages after the entity terminated a proposed merger
between the companies (see Notes 6 and 7). If the Company is
unsuccessful in, among other things; renegotiating its contract and
settlement agreement with AT&T; does not favorably resolve the
fraudulent usage matter and other contingent matters; and/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 future
carrier commitments, resolving contingent matters, and ultimately
achieving and maintaining profitable operations. The Company is also
aggressively working to increase revenues, seek a merger with a larger
entity, and renegotiate its contract with AT&T, which it believes will
ultimately lead to profitable operations and enable the Company to
meet its continuing service commitments. The accompanying
consolidated financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
6. ACQUISITIONS:
------------
In November 1996, the Company signed an agreement to merge with Arcada
Communications Inc. (Arcada), based in Seattle, Washington. On March
7, 1997, Arcada notified the Company it was terminating the merger and
on March 14, 1997, Arcada brought legal action against the Company
alleging significant damages (see Note 7).
In November 1995, the Company acquired the outstanding common stock of
GetNet through the issuance of 400,000 shares of its common stock,
which was valued at $800,000. This acquisition was accounted for
under purchase method of accounting. The excess of the purchase price
over the net liabilities acquired of approximately $835,000 is being
amortized over a period not to exceed five years. All other assets
and liabilities were recorded at book values, which approximated fair
value. Unaudited pro-forma financial information is provided below:
NINE MONTHS
ENDED
FEBRUARY 28,
1996
-----------
Net Revenues $ 1,896,000
===========
Net Loss $(2,171,000)
===========
Net Loss Per Share $ (1.15)
===========
F-7
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The above pro-forma financial information assumes the GetNet
acquisition occurred at the beginning of the period presented. This
information is not necessarily indicative of the financial results
which would have resulted if the acquisition had occurred at such
earlier date nor of future financial operating results.
In October 1996, the Company entered into an agreement to acquire
certain long-distance customers through the issuance of its common
stock, and in October 1996 issued 37,445 shares of common stock based
upon a multiple of future revenues generated by the customer base
acquired for this acquisition. This acquisition did not have a
material effect on the Company's net loss.
7. COMMITMENTS AND CONTINGENCIES:
-----------------------------
The Company has a continuing commitment with AT&T to provide long
distance service of $1,800,000 annually, which as of May 31, 1996, it
had satisfactorily met. However, monthly revenues have declined
substantially due to increased competition and more competitive rates
being offered by other service providers. The Company's current
contract with AT&T provides for the purchase by the Company of
telecommunications services generally at a greater wholesale rate per
minute than currently being offered by AT&T to its retail customers.
Therefore, it is expected that revenues will continue to decrease
under the Company's SDN contract.
The Company is having continued discussions with AT&T and 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 is also obligated to pay for actual monthly usage of
Internet backbone circuits, irrespective of the related usage by the
Company's Internet customers. For February 1997, the approximate
circuit cost for the backbone was $105,000 and related monthly revenue
was $15,000. This usage consisted of circuit orders of $70,000 from
WilTel, and term commitments of $35,000 from other providers. 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.
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 leases of
telecommunication circuits from WilTel for the Internet backbone.
Commencing in June 1996, an unknown party fraudulently charged over
$1,000,000 in long distance calling card charges on the Company's
account. The Company is currently investigating the matter and
F-8
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
has contacted the carrier, AT&T, who denies any responsibility. AT&T
has made a formal claim to the Company indicating it owes for this
fraudulent usage, is currently withholding funds otherwise payable to
the Company for its long-distance service, and has indicated it will
discontinue providing service to Touch Tone unless the payment is
received. 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 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. During the
fourth quarter, the Company stopped making payments under its "800"
service agreement settlement and is attempting to renegotiate the
repayment terms under this agreement. However, if unsuccessful the
Company's obligation to AT&T could increase as described above.
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 and, 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 president has filed an answer and the Company continues
to prosecute this matter. The ultimate resolution of this matter
cannot presently be determined.
In March 1997, a former employee filed a lawsuit against the Company
alleging Breach of Contract, Breach of Covenant of Good Faith and Fair
Dealing, and has requested damages in the amount of approximately
$34,000. The Company will file an answer to the complaint. The
Company may not prevail on the merits of this case.
On March 7, 1997, the Company received notification that Arcada (see
Note 6) terminated its merger agreement with the Company.
Subsequently, Arcada brought legal action seeking a "break up" fee of
$200,000 pursuant the Merger Agreement. In conjunction with this
claim, Arcada is withholding payment to the Company of approximately
$150,000 of monies billed and supposedly collected from the Company's
customers under a "Billing and Collection Agreement" entered into
between Arcada and the Company. The Company is vigorously defending
itself against Arcada's legal action and is actively seeking return of
the $150,000 in customer collections. The Company believes that it
will prevail in this matter. The ultimate resolution of this matter
cannot presently be determined.
F-9
<PAGE>
TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. CAPITAL TRANSACTIONS:
--------------------
In June 1996, the Company repaid its preferred shareholders $750,000.
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 February
28, 1997 and the balance in the prior year) based on the quoted market
at the time the parties agreed to the exchange. The Company has
agreed to register these shares for sale under The Securities Act.
Also in August 1996, the Company issued 45,000 shares to a
telecommunications company in settlement of a past debt. Accrued
expenses at May 31, 1996 include $180,000 related to this debt. 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
an 50% of the public offering price.
In October 1996, the Company issued 37,445 shares to acquire a long
distance customer base. The Company has agreed to register these
shares for sale under the Securities Act.
In February 1997, the Company issued 10,000 shares in settlement of a
trade debt. The Company has agreed to register these shares for sale
under the Securities Act.
In July 1996, the Company terminated two employees. In connection
with their termination, they were granted options to purchase in the
aggregate 45,000 shares of common stock at $4.00 and 40,000 shares at
$5.00. In connection with this severance agreement, the Company has
recorded approximately $172,000 of expense based on the difference
between the option exercise price and the price of the Company's
common stock on the date of the agreement. The Company has agreed to
register, on a timely basis, the shares underlying the options. Due
to the lack of the Company to register these shares to date, both
employees have brought legal action against the Company (see Note 7),
one of which has been settled.
9. SIGNIFICANT SALES AGENT RELATIONSHIP:
------------------------------------
The Company has an agreement with an independent sales agent, whereby
the agent receives maximum commissions of 32% on AT&T long distance
sales it originates. At current sales levels, the Company does not
realize a direct profit from the sales generated by the agent. If the
Company successfully renegotiates its contract with its provider, the
Company believes it will then directly 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 nine months
ended February 28, 1996 and 1997, the sales originated by the agent
have accounted for 35% and 42%, respectively, of company AT&T long
distance sales. During these periods, the Company has recorded a
related expense to the agent of approximately $292,000 and $114,000,
respectively.
F-10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FEBRUARY 28, 1997
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR TOUCH TONE SHOULD BE READ IN CONJUNCTION WITH
THE TOUCH TONE FINANCIAL STATEMENTS AND NOTES HERETO ATTACHED
HERETO.
FORWARD-LOOKING STATEMENTS MAY NOT PROVE ACCURATE
When used in this Form 10-QSB, the words "anticipate," "estimate,"
"expect," "project," and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks,
uncertainties and assumptions including the possibility that the Company's
Internet backbone will fail to generate projected revenues or the Company
will be unable to successfully renegotiate certain of its commitments.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially
from those anticipated, estimated or projected.
RECENT DEVELOPMENTS; SIGNIFICANT DECREASE IN LONG DISTANCE REVENUES;
NEED FOR ADDITIONAL FINANCING
Through February 1997, the Company's long distance revenues have continued
to decline. The Company's management believes the AT&T SDN contract
discussed herein is non-competitive with AT&T's own retail operation and
other long distance carriers. Specifically, the Company pays approximately
$.17 per minute wholesale wherein its competitors, including AT&T, sell
long distance at retail rates of $.15 and below. As a result, the Company
has experienced greater than normal customer attrition and the loss of
several of its independent agents resulting in their switching their
customer bases to other long distance resellers. In addition, in August
1996, AT&T made a claim against the Company for long distance charges of
over $1,000,000 fraudulently charged by an unknown third party to the
Company's account. As a consequence, AT&T is holding all payments made by
long distance customers on the Company's account and is applying these
funds to the $1,000,0000 claim. Consequently, the Company 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 the Company's inability to receive accurate billing
records from AT&T, the Company's lack of clerical personnel to assist in
their collection, and the failure of one of the Company's agents to remit
certain long distance payments it has collected.
The Company 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.
The Company is obligated to pay for actual monthly usage of Internet
backbone circuits, irrespective of the related usage by the Company's
Internet customers. Total circuit costs for February 1997 was $105,000,
while monthly revenue was $15,000. If the Company is unsuccessful in
marketing its Internet services, these commitments will result in a
substantial loss to the Company, including the possibility of impairing the
capitalized costs associated with building the backbone and the intangible
cost recorded in connection with the acquisition of GetNet by Touch Tone.
F-11
<PAGE>
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 leases of telecommunication circuits from
WilTel for the Internet backbone.
Further, the Company's working capital resources have declined
significantly since its initial public offering in May 1996 due to
continuing financial losses.
In November 1996, the Company entered into a Merger Agreement providing for
the Merger of Arcada Communication, Inc. (Arcada) and the Company. In
March 1997, Arcada terminated the merger and has subsequently commenced
legal action.
In October 1996, the Company entered into an agreement to acquire certain
long-distance customers through the issuance of its common stock. In
October 1996, the Company issued 37,445 shares of common stock based upon
a multiple of future revenues generated by the customer base acquired.
This acquisition did not have a material effect on the Company's net loss.
GENERAL
In May 1996, the Company 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 and 1,725,000 common
stock purchase warrants. As of February 28, 1997, working capital was
approximately $(544,000). The Company intends to use its remaining funds
for future Internet development and to fund current losses. These
remaining funds are not sufficient to fund the Company's future development
and the continued payment of existing carrier commitments and general and
administrative expenses.
The Company's financial statements have been prepared on the basis that the
Company will continue operating as a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course
of business. The Company's ability to continue as a going concern is
dependent upon several factors, including meeting the terms of its
commitments, resolving contingencies, and achieving and maintaining
profitable operations. The Company's May 31, 1996 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 the Company will continue as a going concern
and that the Company 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, the Company has been
actively seeking acquisition candidates with existing customer and revenue
bases. The Company 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 the Company will be successful in this regard.
The Company's net revenues were approximately $1,482,000 for the nine
months ended February 28, 1997 and $1,763,000 for the nine months ended
February 28, 1996.
F-12
<PAGE>
CHANGE IN GETNET'S MANAGEMENT
In September 1996, the Company terminated two officers of GetNet, who were
also two of the three original founding shareholders of GetNet. The
Company is unable at this time to predict the ultimate effect of these
terminations.
RESULTS OF OPERATIONS - FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28,
1997 COMPARED TO THE THREE AND NINE MONTHS ENDED FEBRUARY 29, 1996
Long distance resell revenue for the three and nine months ended February
28, 1997 was $288,000 and $900,000 compared to revenues of $414,000 and
$1,615,000 during the three and nine months ended February 28, 1996. The
Company currently has an "SDN" contract which extends through July 1999
with AT&T. Due to competition within the telecommunications industry, the
price the Company is required to pay AT&T has become less competitive than
the current market price for comparative service. Currently, AT&T is
offering retail long distance services to its retail customers at
approximately $.02 per minute less than the Company's wholesale cost for
the same service. The Company is hopeful it will be able to renegotiate
its contract with AT&T to obtain a more favorable rate per minute and
commitment level, and replace its existing SDN contract. However, there is
no assurance that the Company will be able to ultimately renegotiate its
existing contract. The Company intends to find another long distance
reseller with a substantial telecommunications customer base and negotiate
a favorable transfer of the Company's SDN long distance base and
obligations to that SDN reseller. At this time, no significant 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.
If such renegotiations are unsuccessful, substantial losses could be
recorded, which would impair the Company's ability to continue operations.
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.
Cost of sales for long distance service for the three and nine months ended
February 28, 1997 was $184,000 and $635,000, resulting in a gross margin of
approximately $104,000 and $265,000 or 36% and 29% of net revenue. The
gross margin for the three and nine months ended February 28, 1996 was
$100,000 and $521,000 or 24% and 32% of net revenue. The gross margin
percentage has decreased due to lower volume. The AT&T contract is
structured on a tiered discount with the more volume achieved, the greater
the discount.
Financial statements ended February 28, 1997, reflect the inclusion of the
operation of GetNet which was acquired effective November 1, 1995.
GetNet's sales were $232,000 and $582,000 for three and nine months with
cost of sales of $95,000 and $285,000. GetNet is still a development stage
company and has not had significant resources to aggressively market its
services. The majority of GetNet's revenues are from subscriber fees for
Internet access. The Internet backbone was not operational until October
1996. The Company 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 $62,000 and $214,000 or 12% and 14% of net revenues
for the three and nine months ended February 28, 1997 from $196,000 and
$459,000 or 35% and 26% of net revenues for the prior comparable periods.
A significant sales agent, TMO Communications, Inc. (TMO), accounted for
approximately 42% of AT&T long distance revenues for the nine months ended
February 28, 1997 and receives commissions of approximately 32%. At this
level, the Company does not receive gross margin on sales originated by
this agent. Management believes the selling expenses attributed to Company
agent commissions will decrease as a percentage of net revenues if a new
contract with AT&T is negotiated;
F-13
<PAGE>
however, selling expenses in general will increase because of marketing
efforts and variety of services offered. GetNet's selling expenses were
$20,000 for the nine months ended February 28, 1997 or 3% of its sales.
Under the Company's current contract with independent sales agents for
reselling long distance services, commissions are paid as long as the
Company receives revenues from the customer. The Company intends to revise
this arrangement for new agents to provide for continuing commission
payments only if certain sales levels are maintained, however, no such
contracts have been entered into.
For marketing GetNet services, the Company has two full time sales agents
on staff. These persons are paid a combination of salary and commissions.
General and administrative expenses increased to $722,000 and $2,128,000 or
139% and 144% of net revenue for the three and nine months ended February
28, 1997 compared to $411,000 and $1,039,000 or 72% and 59% for the three
and nine months ended February 28, 1996. During the nine months ended
February 28, 1997, the Company paid increased salaries and benefits to its
employees of approximately $816,000 compared to $595,000 in the prior
comparable nine-month period primarily as a result of additional employees,
including GetNet employee related expenses of approximately $548,000. The
remaining $868,000 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 $216,000, and bad debt expense, which increased by $209,000 in the
nine months ended February 28, 1997, as compared to the prior comparable
period. Furthermore, during the nine months ended February 28, 1997, the
Company has incurred approximately $167,000 in costs associated with the
failed Arcada merger which have been expensed. Since May 1996, the Company
has reduced its number of personnel due to decreasing revenues. In
connection with the termination of two employees, the Company granted
options at below the then market price of its common stock. Therefore, an
additional $172,000 of expense was recorded in the nine months ended
February 28, 1997 based on the difference of the exercise price and traded
price of its common stock. An additional $296,000 was recorded in
settlement of litigation, severance, and other contingencies related to
terminated employees. Total general and administrative expense, relative
to fiscal 1996 is, however, expected to increase due to compensation
commitments to Officers of the Company and a contract entered into with a
significant consultant (who previously was the Chairman of the Board and an
Officer) of $15,000 per month.
Amortization and depreciation expense increased by approximately $196,000
related primarily to amortization of goodwill recorded in connection with
the GetNet acquisition in November 1995 for the nine months ended February
28, 1997 compared to 1996.
The Company incurred $301,000 of excess circuit commitment expense under
its agreement with ICG during the nine months ended February 28, 1996 and
none was incurred in the nine-month period ended February 28, 1997, as the
contract was terminated in April 1996. During the nine months ended
February 28, 1997, the Company incurred $845,000 in excess volume
commitments primarily related to Internet backbone circuit leases. These
amounts are recorded as period expenses under operating expenses, as the
Company experienced insignificant revenues associated with either of these
contracts.
Interest expense, net of interest income in the nine-month period ended
February 28, 1997, increased from $29,000 in 1996 to $82,000 in 1997
primarily as a result of 70,000 shares of common stock being issued in
August 1996 to satisfy an outstanding debt of $210,000. The difference of
approximately $254,000 between the then market price of common stock and
the related debt was expensed in operations over the period the note was
outstanding. For the nine months ended February 28, 1997, $127,000 was
expensed and the balance was previously expensed in fiscal 1996. During
the nine months ended February 28, 1997, the Company had
F-14
<PAGE>
interest income of approximately $72,000 from its cash investments received
from proceeds of its public offering.
The Company had a net loss of $3,450,000 for the nine months ended February
28, 1997. For the nine months ended February 28, 1996, the Company had a
net loss of $1,945,000. 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, contingencies, the increase in
selling, general and administrative costs in fiscal 1997, and other reasons
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at February 28, 1997 was $999,000 and net
working capital deficiency was $(544,000). The Company's cash position
reflects the receipt of the proceeds Company's public offering of its
common stock completed in May 1996. Included in the Company's current
liabilities is $100,000 for monthly payments of $33,000 due to AT&T in
settlement of having failed to meet certain service commitments under prior
agreements with AT&T.
Cash used in operations for the Company totaled $2,492,000 during the nine
months ended February 28, 1997 as compared to $897,000 for the nine months
ended February 28, 1996. This increase in cash outflows can be primarily
attributed to a loss from operations, partially offset by the current
period non-cash expenses resulting from an increase in the bad debt
allowance and the non-cash cost of common share and option issuances
related to the exchange of a note payable for common stock and severance
agreements. The Company also paid certain payables from proceeds of the
public offering resulting in a decrease in accounts payable and accrued
expense.
Cash flows used in investing activities consisted primarily of additions to
equipment of $740,000 in the nine months ended February 28, 1997, primarily
for constructing GetNet's Internet Backbone. The initial phase of
constructing this backbone is substantially complete and the Company does
not intend to incur substantial additional capital costs.
Cash flows used in financing activities were $1,047,000 during the nine
months ended February 28, 1997 as compared to $507,000 provided by
financing activities for the nine months ended February 28, 1996. During
the nine months ended February 28, 1997, cash outflows can be primarily
attributed to payments made to preferred stock holders for the redemption
of their preferred stock and repayments of notes payable to stockholders.
During the nine months ended February 28, 1996, cash inflows represent
proceeds from issuance of redeemable preferred stock which were partially
offset by stock offering costs incurred.
Under the Company's current arrangement with AT&T, customer billings and
collections are performed by AT&T. Accounts receivable represent the
amount the Company's customers owe for actual usage. However, the amount
the Company will receive from AT&T will be offset by the payable due to
AT&T for the cost of providing the service, which is reflected as an
account payable in the financial statements. The net of the receivable and
payable is the gross margin the Company receives. AT&T is currently
responsible for maintaining the Company's account receivable accounts and
withholds payment to the Company for customer accounts over 30 days past
due. Such amounts withheld from the Company are offset by the gross margin
otherwise payable to the Company.
F-15
<PAGE>
CONTINGENCIES
Commencing in June through July 1996, an unknown party fraudulently charged
over $1,000,000 in calling card long distance charges on the Company's
account. The Company has been diligently investigating the matter and has
contacted the carrier, AT&T, who denies any responsibility. The Company
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 Report, AT&T has not formally responded to the
Company's letter although discussions are ongoing between the parties.
AT&T is also withholding payments to the Company on its long distance serve
until this matter is resolved. The outcome of this matter cannot be
predicted at this time.
In July 1996, the Company terminated two employees. In connection with
their termination, they were granted options to purchase in the aggregate
45,000 shares of common stock at $4.00 and 40,000 shares at $5.00. In
connection with this severance agreement, the Company has recorded
approximately $172,000 of expense based on the difference between the
option exercise price and the price of the Company's common stock on the
date of the agreement. 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 stock options. In March 1997, the Company settled the
lawsuit by paying the former employee $30,000 and executing a promissory
note for approximately $17,000. The other former employee filed suit in
March 1997, also for breach of contract and has requested damages of
$33,750. The Company will file an answer to the complaint. The Company
may not prevail on the merits of this case.
The Company has a continuing commitment with AT&T to provide long distance
service of $1,800,000 annually, which as of May 31, 1996, it had
satisfactorily met. However, monthly revenues have declined substantially
due to increased competition and more competitive rates being offered by
other service providers. The Company's current contract with AT&T provides
for the purchase by the Company of telecommunications services generally at
a greater wholesale rate per minute than currently being offered by AT&T to
its retail customers. Therefore, it is expected that revenues will
continue to decrease under the Company's SDN contract.
The Company is having continued discussions with AT&T and 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 is also obligated to pay for actual monthly usage of Internet
backbone circuits, irrespective of the related usage by the Company's
Internet customers. For February 1997, the approximate circuit cost for
the backbone was $105,000 and related monthly revenue was $15,000. This
usage consisted of circuit orders of $70,000 from WilTel, and term
commitments of $35,000 from other providers. 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.
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 leases of telecommunication circuits from
WilTel for the Internet backbone.
F-16
<PAGE>
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. During the fourth quarter, the Company stopped making
payments under its "800" service agreement settlement and is attempting to
renegotiate the repayment terms under this agreement. However, if
unsuccessful the Company's obligation to AT&T could increase as described
above.
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
and, 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 president has filed an answer and the
Company continues to prosecute this matter. The ultimate resolution of
this matter cannot presently be determined.
A former employee 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 the former
employee voluntarily resigned her employment with Touch Tone and that the
terms of the severance package do not apply in her situation. The hearing
has been completed but no ruling has been issued to date.
On March 7, 1997, the Company received notification that Arcada (see Note
6) terminated its merger agreement with the Company. Subsequently, Arcada
brought legal action seeking a "break up" fee of $200,000 pursuant the
Merger Agreement. In conjunction with this claim, Arcada is withholding
payment to the Company of approximately $150,000 of monies billed and
supposedly collected from the Company's customers under a "Billing and
Collection Agreement" entered into between Arcada and the Company. The
Company is vigorously defending itself against Arcada's legal action and is
actively seeking return of the $150,000 in customer collections. The
Company believes that it will prevail in this matter. The ultimate
resolution of this matter cannot presently be determined.
F-17
<PAGE>
TOUCH TONE AMERICA, INC.
PART II
ITEM NO. 1 Legal Proceedings
-----------------
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, Johnathan 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 Mrs. Miller voluntarily resigned
her employment with Touch Tone and that the terms of the
severance package do not apply in her situation. The
hearing has been completed but no ruling has been issued to
date.
In July 1996, an unknown party fraudulently charged over
$1,000,000 in calling card 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 Report, 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. Touch Tone believes it has
recourse against AT&T and will not be held responsible for
these charges, but the outcome of this mater cannot be
predicted at this time.
On October 10, 1996, two identical lawsuits were filed in
Superior Court of the State of Arizona, Maricopa County by
two former officers and employees of GetNet for compensation
due pursuant to employment agreements. The plaintiffs have
requested specific performance as it relates to past
compensation, attorneys' fees and costs. The Company
settled both lawsuits in March 1997 by paying each plaintiff
a sum of $65,000.
Rebecca F. Kelley, a former employee, has filed a lawsuit
against the Company in Superior Court, Maricopa County,
Arizona, case No. CV96-22519 on December 13, 1996. She has
alleged Breach of Contract and Breach of the Covenant of
Good Faith and Fair Dealing and has requested damages in the
amount of $43,735. The Company settled the lawsuit in March
1997 by paying the plaintiff the sum of $30,000 cash and
executing a promissory note for approximately $17,000.
John McMahon, a former employee, has filed a lawsuit against
the Company in Superior Court, Maricopa County, Arizona,
case No. CV97-05535 on March 26, 1997. He has
F-18
alleged Breach of Contract and Breach of Covenant of Good
Faith and Fair Dealing and has requested damages in the
amount of $33,750. The Company will file an answer to the
complaint. The Company may not prevail on the merits of
this case.
On March 7, 1997, the Company received notification that
S.V.V. Sales, Inc. dba Arcada Communications has terminated
its merger agreement with the Company. Subsequently, Arcada
has brought legal action seeking a "break up" fee of $200,000
pursuant to the Merger Agreement. In conjunction with this
claim, Arcada is withholding payment to the Company of
approximately $150,000 of monies billed and supposedly
collected from the Company's customers under a "Billing and
Collection Agreement" entered into between Arcada and the
Company prior to the termination of the Merger Agreement.
Additional amounts may still be collected by Arcada under
this prior arrangement. The Company is vigorously defending
itself against Arcada's legal action and is actively seeking
the return of all amounts collected by Arcada. The Company
believes that it will prevail in this matter. The ultimate
resolution of this matter cannot presently be determined.
A discussion of this litigation and other matters under
"Commitments and Contingencies" appears at Footnote 7 of the
financial statements.
ITEM NO. 2 Changes in Securities
---------------------
None
ITEM NO. 3 Defaults Upon Senior Securities
-------------------------------
None
ITEM NO. 4 Submission of Matter to a Vote of Securities Holders
----------------------------------------------------
On February 27, 1997, a Shareholders' Meeting was held in
Seattle, Washington in which the proposed merger with Arcada
Communications was approved by a majority of the
shareholders. On March 7, 1997, the Merger Agreement was
terminated by Arcada.
ITEM NO. 5 Other Information
-----------------
During the quarter ended February 28, 1997, Benjamin W.
Bronston, Director, resigned from the Board of Directors to
pursue other business interests. Subsequent to the quarter
end, Stephen Shearin, Director, resigned from the Board of
Directors pursuant to his settlement agreement referenced
above in Item No. 1; Matthew Barletta, Director, resigned
from the Board of Directors to pursue other business
interests.
ITEM NO. 6 Exhibits and Reports on Form 8-K
--------------------------------
On September 2, 1996, the Registrant filed a Form 8-K
reporting under Item No. 2 relating to the proposed business
combination with Arcada, Inc. of Seattle, Washington.
F-19
<PAGE>
On March 12, 1997, the Registrant filed a Form 8-K reporting
under Item No. 5 relating to the termination of the Merger
Agreement with S.V.V. Sales, Inc., dba Arcada Communications
of Seattle, Washington.
F-20
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned thereunto duly authorized.
TOUCH TONE AMERICA, INC.
/s/ DAVID J. SMITH
- -------------------------------
David J. Smith, Principal
Financial and Accounting Officer
Date: April 18, 1997
F-21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TOUCH TONE AMERICA, INC. AND SUBSIDIARY, FEBRUARY 28, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 999,000
<SECURITIES> 0
<RECEIVABLES> 401,000
<ALLOWANCES> 236,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,179,000
<PP&E> 1,231,000
<DEPRECIATION> 212,000
<TOTAL-ASSETS> 2,999,000
<CURRENT-LIABILITIES> 1,723,000
<BONDS> 0
0
0
<COMMON> 7,970,000
<OTHER-SE> (6,803,000)
<TOTAL-LIABILITY-AND-EQUITY> 2,999,000
<SALES> 1,482,000
<TOTAL-REVENUES> 1,482,000
<CGS> 920,000
<TOTAL-COSTS> 920,000
<OTHER-EXPENSES> 3,930,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,000
<INCOME-PRETAX> (3,450,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,450,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,450,000)
<EPS-PRIMARY> (1.08)
<EPS-DILUTED> (1.08)
</TABLE>
