<PAGE> 1
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 November 30, 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 Number)
incorporation or organization
1771 E. Flamingo Road, Building B,
Suite 200, Las Vegas, NV 89119
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (702) 792-2500
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 December 31, 1997, 42,166,225 shares of common stock, no par value were
outstanding.
Page 1 of 18 pages.
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TOUCH TONE AMERICA, INC. AND SUBSIDIARY
INDEX TO FORM 10-QSB
<TABLE>
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PAGE NO.
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PART I
FINANCIAL INFORMATION
a. Condensed Consolidated Balance Sheets as of May 31, 1997 and November 30,
1997 (Unaudited)............................................................ 2
b. Condensed Consolidated Statements of Operations for the Three and Six Months
Ended November 30, 1996 and 1997 (Unaudited)................................ 3
c. Condensed Consolidated Statements of Cash Flows for the Six Months Ended
November 30, 1996 and 1997 (Unaudited)...................................... 4
d. Notes to Condensed Consolidated Financial Statements........................ 5
MANAGEMENT'S DISCUSSION AND ANALYSIS................................................. 8
PART II
a. Other Information........................................................... 11
b. Signatures.................................................................. 17
</TABLE>
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TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1997 1997
----------- -----------
* (Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 160,000 $ 13,000
Trade receivables, net of allowance for doubtful accounts of
$156,000 and $147,000, respectively 14,000 97,000
Prepaid expense 80,000 24,000
----------- -----------
Total current assets 394,000 134,000
EQUIPMENT, net of accumulated depreciation of $275,000 and
$380,000, respectively 962,000 861,000
OTHER:
Intangibles, net of accumulated amortization of $264,000 and
$835,453, respectively 571,000 --
Refundable deposits 80,000 78,000
----------- -----------
TOTAL ASSETS $ 2,007,000 $ 1,073,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 686,000 $ 1,191,000
Accrued liabilities 816,000 765,000
Deferred revenues 65,000 34,000
Current portion of capital lease obligations 68,000 59,000
----------- -----------
Total current liabilities 1,635,000 2,049,000
CAPITAL LEASE OBLIGATIONS, net of current portion 65,000 46,000
DUE TO ORIX GLOBAL COMMUNICATIONS, INC -- 84,000
COMMITMENTS AND CONTINGENCIES (Notes 4 and 6) -- --
----------- -----------
Total liabilities 1,700,000 2,179,000
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, no par value, 10,000,000 shares authorized; none
outstanding -- --
Common stock, no par value, 100,000,000 shares authorized,
3,368,245 and 4,568,245 shares issued and outstanding,
respectively 8,017,000 8,437,000
Accumulated deficit (7,710,000) (9,543,000)
----------- -----------
Total stockholders' equity (deficit) 307,000 (1,106,000)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 2,007,000 $ 1,073,000
=========== ===========
</TABLE>
* Condensed from audited financial statements.
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
---------------------------- ----------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUES:
Long distance resell $ 273,000 $ 17,000 $ 613,000 $ 194,000
Internet access 174,000 268,000 350,000 533,000
----------- ----------- ----------- -----------
447,000 285,000 963,000 727,000
COST OF SALES:
Long distance resell (222,000) (67,000) (451,000) (215,000)
Internet access (115,000) (339,000) (190,000) (800,000)
----------- ----------- ----------- -----------
337,000) (406,000) (641,000) (1,015,000)
----------- ----------- ----------- -----------
GROSS MARGIN 110,000 (121,000) 322,000 (288,000)
OPERATING EXPENSES:
Selling 94,000 14,000 152,000 45,000
General and administrative 684,000 434,000 1,406,000 854,000
Amortization, depreciation and asset
impairment 93,000 580,000 183,000 673,000
Severance agreements 55,000 -- 285,000 --
Excess circuit commitments 365,000 -- 431,000 --
----------- ----------- ----------- -----------
1,291,000 1,028,000 2,457,000 1,572,000
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,181,000) (1,149,000) (2,135,000) (1,860,000)
OTHER EXPENSE -
Interest income (expense), net 16,000 29,000 (90,000) 27,000
----------- ----------- ----------- -----------
NET LOSS $(1,165,000) $(1,120,000) $(2,225,000) $ 1,833,000)
=========== =========== =========== ===========
LOSS PER SHARE $ (.35) $ (.25) $ (.68) $ (.44)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
AND EQUIVALENTS 3,321,000 4,568,000 3,263,000 4,168,000
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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TOUCH TONE AMERICA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
NOVEMBER 30,
----------------------------
1996 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,225,000) $(1,833,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, amortization and asset impairment 183,000 672,000
Common stock for exchange of debt at below market 127,000 --
Options issued at below market 173,000 --
Bad debt expense (recovery) 151,000 (9,000)
Change in assets and liabilities:
Decrease (increase) in:
Trade receivables (130,000) 66,000
Other assets (28,000) 58,000
Increase (decrease) in:
Accounts payable 23,000 505,000
Accrued liabilities (184,000) (51,000)
Deferred revenue and other 27,000 (31,000)
----------- -----------
Net cash used in operating activities (1,883,000) (623,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITY -
Purchase of equipment (733,000) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (32,000) (28,000)
Payment of notes payable to stockholders (183,000) --
Repayment of preferred stock (750,000) --
Proceeds from issuance of common stock -- 420,000
Proceeds from ORIX Global Communications, Inc. -- 84,000
Offering costs incurred (67,000) --
----------- -----------
Net cash provided by (used in) financing activities (1,032,000) 476,000
----------- -----------
NET DECREASE IN CASH (3,648,000) (147,000)
CASH, beginning of period 5,278,000 160,000
----------- -----------
CASH, end of period $ 1,630,000 $ 13,000
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
The consolidated financial statements include the accounts of Touch Tone
America, Inc. (Touch Tone) and from November 1, 1995, GetNet International,
Inc. (GetNet) (collectively referred to as "the Company"). Touch Tone
acquired the outstanding common stock of GetNet effective November 1, 1995.
Touch Tone is engaged in the reselling of long distance telecommunications
products and services primarily in the western and southwestern United
States. As a reseller of long distance services, Touch Tone offers its
customers the use of routing equipment and phone lines of large carriers;
in turn, the large carriers offer Touch Tone volume discounts based on the
use of this equipment.
GetNet is a provider of Internet and World Wide Web access services to
individuals and businesses in Arizona and other parts of the United States.
The Internet is a network of millions of computers around the world which
are able to communicate with one another, as well as access the World Wide
Web which is a system of documents on a multitude of subjects.
2. DISCLOSURE SUMMARY:
Pursuant to rules and regulations of the Securities and Exchange
Commission, the Company has elected to omit substantially all the
disclosures normally included in financial statements prepared under
generally accepted accounting principles. Readers of these financial
statements should refer to the Company's Form 10-KSB filed for the year
ended May 31, 1997, for additional disclosures as well as other filings
with the Securities and Exchange Commission.
3. UNAUDITED INFORMATION:
The Company's balance sheet as of November 30, 1997, and the statements of
operations for the three and six months ended November 30, 1996 and 1997
are taken from the Company's books and records without audit. Management
believes, however, that such information includes all accruals, which are
considered recurring in nature, required for the fair presentation of the
Company's financial position and results of their operations as of and for
the periods then ended. The results of operations for the interim periods
presented are not necessarily indicative of results expected for the full
year.
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Actual results could differ from those estimates. The Company makes
significant estimates as to the amortization period used for its
intangibles and estimated losses for contingencies. Due to the
uncertainties inherent in the life of intangibles, and increased
competition and technology changes in the telecommunications industry, it
is reasonably possible that the estimated life of intangibles could
materially change in the forthcoming year.
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TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. CONTINUED OPERATIONS:
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue operating as a going concern, which
contemplates the realization of assets and liquidation of liabilities in
the normal course of business. The Company has incurred significant losses
since inception and as of November 30, 1997 has a working capital deficit
of $1,915,000.
Furthermore, the Company has significant telecommunications commitments for
its Internet backbone from which it has not experienced adequate revenues
to generate a gross margin. If an increase in revenues on its Internet
backbone fail to materialize, additional losses, the amount of which cannot
currently be estimated, could be recorded. In addition, the Company has
significant liabilities to, among others, its Internet circuit provider,
AT&T, and the IRS for payroll taxes, which if not paid could jeopardize the
Company's ability to continue its operations.
The Company's ability to continue as a going concern is dependent upon
several factors, including, but not limited to, the Company's raising
additional capital, making payment on its current obligations,
carrier commitments and the IRS for payroll taxes, meeting the terms
of its continuing service commitments and achieving and maintaining
profitable operations. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
The Company is aggressively working to increase revenues through a merger,
which it believes will ultimately lead to profitable operations and enable
the Company to meet its continuing service commitments. Subsequent to May
31, 1997, the Company also has reached a settlement with AT&T, raised
additional capital, and entered into a merger agreement with another
entity. The Company is continuing its efforts to raise additional capital,
which will be required, among other things, to satisfy current obligations,
including AT&T and fund operations.
5. PROPOSED ACQUISITION:
In August 1997, the Company entered into an agreement and plan of
reorganization whereby the Company will acquire all the issued and
outstanding shares of ORIX Global Communications, Inc. (ORIX), based in Las
Vegas, Nevada. Such agreement was subsequently amended in November 1997 and
December 1997. The revised amended agreement states that the Company will
issue to ORIX 33,732,980 shares of the Company's Common Stock, which such
number of shares will afford ORIX an 80% equity position in all issued and
outstanding shares of common stock on a fully diluted basis. The merger was
finalized December 31, 1997. Immediately after the acquisition there were
approximately 42,166,225 shares of the Company's Common Stock issued and
outstanding.
6. CONTINGENCIES:
On September 19, 1997, the Company entered into a settlement agreement with
AT&T in connection with certain disagreements surrounding fraudulent use of
the Company's long-distance service and the Company's failure to meet
certain minimum commitments during fiscal 1997. AT&T was the Company's
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TOUCH TONE AMERICA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
primary provider for long distance service. Under the settlement, the
Company is obligated to make certain payments to AT&T which payments were
made on January 6, 1998. As part of the settlement the Company will forego
receiving certain amounts previously withheld by AT&T. Pursuant to the
settlement, the Company also transferred to AT&T its long-distance service
for which AT&T was the provider and the Company has no future service
commitments with AT&T. Revenues from this service totaled approximately
$480,000 and $118,000 for the six months ended November 30, 1996 and 1997.
7. SIGNIFICANT SALES AGENT RELATIONSHIP:
The Company has an agreement with an independent sales agent, whereby the
agent receives maximum commissions of 32% on AT&T long distance sales it
originates. At current sales levels, the Company does not realize a profit
from the sales generated by the agent. For the six months ended November
30, 1996 and 1997, the sales originated by the agent have accounted for 41%
and 40%, respectively, of the Company's AT&T long distance sales. As the
AT&T long distance customer base was transferred to AT&T with the
settlement discussed above, the Company expects to discontinue its
relationship with this sales agent.
8. SUBSEQUENT EVENTS:
On December 19, 1997, the Company's wholly owned subsidiary, GetNet
International, Inc. filed for Chapter 11 Bankruptcy Code protection. As a
result, the remaining balance of goodwill arising from the original
purchase, amounting to $487,000 as of November 30, 1997, was written off.
In December 1997, the Company entered into an agreement to exchange an
identical aggregate amount of Touch Tone Series B Preferred Stock for up to
$3,046,000 principal amount of convertible debentures and up to $7,918,000
stated value of convertible preferred stock of a publicly traded company.
In December 1997, the Listing Qualifications Panel of the NASDAQ delisted
Touch Tone's securities from inclusion on the NASDAQ Small/Cap Market. The
securities will now be listed on NASDAQ's OTC Bulletin Board.
In January 1998, the Company sold $2,500,000 in debentures. These
debentures will pay cumulative dividends at a rate of 8% and are
convertible into common shares.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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 ATTACHED HERETO.
FORWARD-LOOKING STATEMENTS MAY NOT PROVE ACCURATE
When used in this Form 10-QSB, the words "anticipate," "estimate," "expect,"
"project," and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks, uncertainties and
assumptions including the possibility that the Company's Internet backbone will
fail to generate projected revenues. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected.
GENERAL
In September 1997, the Company entered into a settlement agreement with AT&T in
connection with certain disagreements surrounding fraudulent use of the
Company's long distance service and the Company's failure to meet certain
minimum commitments during fiscal 1997. Pursuant to the settlement, the Company
transferred to AT&T its long distance service for which AT&T was the provider.
Revenues totaled approximately $480,000 and $118,000 for the six months ended
November 30, 1996 and 1997 and the Company has no future service commitments
with AT&T. Under the settlement, the Company is obligated to make payments to
AT&T which were made on January 6, 1998.
Furthermore, the Company has significant telecommunications commitments for its
Internet backbone from which it has not experienced adequate revenues to
generate a gross margin. Due to cash flow problems, the backbone providers have
ceased doing business with the Company. If an increase in revenues on its
Internet backbone fail to materialize, additional losses, the amount of which
cannot currently be estimated, could be recorded. In addition, the Company has
significant liabilities to, among others, its Internet provider, and the
IRS for payroll taxes, which if not paid could jeopardize the Company's ability
to continue its operations.
The Company's financial statements have been prepared assuming that the Company
will continue operating as a going concern, which contemplates the realization
of assets and liquidation of liabilities in the normal course of business. The
Company's ability to continue as a going concern is dependent upon several
factors, including, but not limited to, the Company's raising additional
capital, making payment on its current obligations, carrier commitments and the
IRS for payroll taxes, meeting the terms of its continuing service commitments
and achieving and maintaining profitable operations. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties. The Company was aggressively
working to increase revenues through an acquisition, which it believes will
ultimately lead to profitable operations and enable the Company to meet its
continuing service commitments. Such merger was completed on December 31, 1997.
During the period, the Company also reached a settlement with AT&T and raised
additional capital. The Company is continuing its efforts to raise additional
capital, which will be required, among other things, to satisfy current
obligations and fund operations. As a result of continuing operating losses and
negative working capital, the Company's independent auditors included a
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"going concern" paragraph with respect to the audited financial statements as
of, and for the year ended, May 31, 1997.
ACQUISITION
On August 11, 1997, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") whereby the Company will acquire all of the
issued and outstanding shares of ORIX Global Communications, Inc. (ORIX) of Las
Vegas, Nevada. ORIX is a licensed reseller of international telecommunications
services, with operations in North America, Latin America and various Asian
countries. The agreement was amended in November 1997 and revised in December
1997. The final revised amended agreement calls for the Company to issue to the
ORIX shareholders 33,732,980 shares of the Company's Common Stock, which such
number of shares will afford ORIX an 80% equity position of all issued and
outstanding shares of common stock on a fully diluted basis. As a result of the
Agreement, ORIX would acquire control of both management and the Company's
Board. The acquisition was completed on December 31, 1997 subject to final
approval of the shareholders of the Company. Immediately after the acquisition
there were approximately 42,166,225 shares of the Company's Common Stock issued
and outstanding.
ORIX is considered the acquiring entity, even though the Company is legally the
surviving company. Therefore, future financial statements of the Company will
reflect the operations of ORIX for prior years and the Company's operations only
from the date the merger is completed.
RESULTS OF OPERATIONS - FOR THE SIX AND THREE MONTH PERIODS ENDED NOVEMBER 30,
1997 COMPARED TO THE SIX AND THREE MONTH PERIODS ENDED NOVEMBER 30, 1996
Long distance resell revenue for the six and three month periods ended November
30, 1997 was $194,000 and $17,000, respectively, compared to revenues of
$613,000 and $273,000, respectively, during the six and three month periods
ended November 30, 1996. As the Company transferred its AT&T customer base to
AT&T as part of its settlement, future revenues for long distance telephone
service is expected to continue to decrease. AT&T long distance revenue was
$118,000 and $-0-, respectively, for the six and three month periods ended
November 30, 1997. Internet access revenue for the six and three month periods
ended November 30, 1997 was $533,000 and $268,000, respectively, compared to
$350,000 and $174,000, respectively for the six and three month periods ended
November 30, 1996.
Cost of sales for long distance service for the six and three month periods
ended November 30, 1997 was $215,000 and $67,000, respectively, resulting in a
negative gross margin of approximately ($21,000) and ($50,000), respectively or
(11%) and (294%), respectively, of net revenue. The gross margin for the six and
three month periods ended November 30, 1996 was $162,000 and $51,000,
respectively, or 26% and 19%, respectively, of net revenue. The gross margin
percentage has decreased due to lower volume. Cost of sales for Internet access
for the six and three month periods ended November 30, 1997 was $800,000 and
$339,000, respectively, resulting in a negative gross margin of ($267,000) and
($71,000), respectively. This negative gross margin is a result of fixed costs
for the Internet backbone that exceed revenues currently generated from the
service.
Selling expenses were $45,000 and $14,000, respectively, or 23% and 82%,
respectively, of net revenues for the six and three month periods ended November
30, 1997 down from $152,000 and $94,000, respectively, or 16% and 21%,
respectively, of net revenues for the prior comparable period. The decrease in
selling expense is due to lower commissions paid on lower long distance sales.
General and administrative expenses decreased to $854,000 and $434,000,
respectively, or 117% and 152%, respectively, of net revenue for the six and
three month periods ended November 30, 1997 compared to $1,406,000 and $684,000,
respectively, or 146% and 153%, respectively, for the six and three month
periods ended November 30, 1996. This decrease is, due primarily to lower
payroll costs of $277,000 and $140,000,
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<PAGE> 11
respectively, for the six and three month periods ended November 30, 1997 as
compared to $616,000 and $242,000, respectively, for the six and three month
periods ended November 30, 1996, as well as, lower travel and legal costs.
Interest income (expense), in the six and three-month periods ended November 30,
1997, went from an (expense) income of ($90,000) and $16,000, respectively, in
1996 to income of $27,000 and $29,000, respectively, 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.
The Company had net losses of $1,833,000 and $1,120,000, respectively, for the
six and three month periods ended November 30, 1997. For the six and three month
periods ended November 30, 1996, the Company had net losses of $2,225,000 and
$165,000, respectively. The decrease in net loss between periods is directly
attributed to the decreasing general and administrative and severance costs, and
other reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position at November 30, 1997 was $13,000 and net working
capital deficiency was $1,915,000. During the six months ended November 30,
1997, the Company received approximately $420,000 from the issuance of 1,200,000
shares of the Company's common stock in a private placement. However, the
Company's cash position has decreased since May 31, 1997 due primarily to the
Company's significant operating losses and fixed commitments.
Cash used in operations for the Company totaled $623,000 during the six months
ended November 30, 1997 as compared to $1,883,000 for the six months ended
November 30, 1996. This decrease in cash outflows can be primarily attributed to
the decreased loss from operations and improved cash flows from receivables and
payables.
Cash flows used in investing activities were $-0- during the six months ended
November 30, 1997 as compared to $733,000 during the six months ended November
30, 1996. During the six months ended November 30, 1997, the Company's investing
activities consisted primarily of costs in constructing GetNet's Internet
backbone.
Cash flows provided by financing activities were $476,000 during the six months
ended November 30, 1997 as compared to $1,032,000 used by financing activities
for the six months ended November 30, 1996. During the six months ended November
30, 1997, cash in flows represent proceeds from the issuance of common stock in
a private placement and proceeds from advances from ORIX. During the six months
ended November 30, 1996, cash out flows can be primarily attributed to payments
made to preferred stockholders for the redemption of their preferred stock and
repayments of notes payable to stockholders.
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TOUCH TONE AMERICA, INC.
PART II
ITEM NO. 1 Legal Proceedings
The Company is a party to the following legal proceedings:
On August 30, 1996, a lawsuit was filed in the Superior Court
of the State of Arizona, Maricopa County by the Company against
the Company's former President, 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 the Company and seeks damages in the amount of
$360,835 from the defendants. Mr. Miller filed an answer in
September 1996 denying the allegations of the complaint. The
Company dismissed this action in 1997 to facilitate the ORIX
business combination.
Mrs. Janeece Miller filed a request with the American
Arbitration association regarding an alleged breach of her
employment agreement. She has made a claim for $32,500 plus
attorney's fees and costs as part of her severance package.
This claim was filed with the Arbitration Association on July
31, 1996 and the Company has responded, consenting to the
arbitration but contesting the allegations in the complaint,
asserting that Mrs. Miller voluntarily resigned her employment
with the Company and that the terms of the severance package do
not apply in her situation. The action was dismissed in 1997
with each party paying its own costs and expenses.
In July 1996, an unknown party fraudulently charged over
$1,000,000 in calling card long distance charges on the
Company's account. The Company has been diligently
investigating the matter and has contacted the carrier, AT&T,
who denies any responsibility. The Company retained counsel to
represent it in this claim and has submitted a letter to AT&T
stating its position that it has no liability for the fraud. In
September 1997, the Company entered into a settlement agreement
with AT&T which settled this dispute, as well as other issues
between the parties.
On October 10, 1996, two identical lawsuits were filed in
Superior Court of the State of Arizona, Maricopa County by two
former officers and employees of GetNet for compensation due
pursuant to employment agreements. The plaintiffs 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, which as of the date
of this report, has been paid off.
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 alleged Breach of
Contract and Breach of Covenant of Good Faith and Fair Dealing
and has
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<PAGE> 13
requested damages in the amount of $33,750. The Company did not
prevail on the merits of this case and was required to pay Mr.
McMahon approximately $38,000.
On March 7, 1997, the Company received notification that S.V.V.
Sales, Inc. dba Arcada Communications had terminated its merger
agreement with the Company. Subsequently, Arcada brought legal
action seeking a "break up" fee of $200,000 pursuant to the
Merger Agreement. In conjunction with this claim, Arcada
withheld payment to the Company of approximately $150,000 of
monies billed and supposedly collected from the Company's
customers under a "Billing and Collection Agreement" entered
into between Arcada and the Company prior to the termination of
the Merger Agreement. The Company settled this lawsuit in 1997
by allowing Arcada to retain monies collected under the Billing
and Collection Agreement.
In June 1997, Michael J. Canney, the Company's former President
and Chief Executive Office, filed a lawsuit in Maricopa County,
Arizona for monies owing pursuant to his two year employment
agreement with the Company. This action is set for arbitration,
however the Company has been advised by its attorneys that it
may not prevail in this action and may be liable for damages of
from $70,000 to $130,000.
A discussion of this litigation and other matters under
"Commitments and Contingencies" appears at Footnote 7 of the
financial statements.
ITEM NO. 2 Changes in Securities
None
ITEM NO. 3 Defaults Upon Senior Securities
None
ITEM NO. 4 Submission of Matter to a Vote of Securities Holders
None
ITEM NO. 5 Other Information
On December 31, 1997, Touch Tone America, Inc. (the
"Registrant") acquired all the issued and outstanding shares of
ORIX Global Communications, Inc., a Nevada corporation ("ORIX")
in accordance with the terms of an Agreement and Plan of
Reorganization among the Registrant, ORIX and the stockholders
of ORIX (the "Acquisition"). The acquisition was consummated by
the issuance of 33,732,980 shares of the Registrants's Common
Stock to the stockholders of ORIX. Immediately after the
acquisition there were approximately 42,166,225 shares of the
Registrant's Common Stock issued and outstanding.
ORIX operates as a reseller of communication network equipment
and circuits, and provides voice, data, video and wireless
services in the U.S. and international markets.
-12-
<PAGE> 14
All of ORIX's outstanding common stock had been held of record
and beneficially by seven shareholders. The Registrant has been
advised that none of the former ORIX stockholders is acting as
a group with respect to the ORIX common stock, nor do any of
the former ORIX stockholders share any dispositive or voting
powers with respect to their shares of ORIX.
In connection with the transaction, Messrs. Kerry L. Rogers,
Robert A. Michel, W. Bruce Voss, and Eckley M. Keach were
nominated to the Registrant's Board of Directors. They join
Messrs. Larry Cornwell, Bruce Walko, and Dr. Edward D. Wirth.
The new Board of Directors has elected the following officers:
President and Chief Executive Officer - Kerry L. Rogers,
Executive Vice-President, Secretary and Chief Financial Officer
- Robert A. Michel, and Vice-President - W. Bruce Voss. Bruce
Walko, and Dr. Edward D. Wirth agreed to resign as Directors of
the Registrant following stockholder ratification of the
Acquisition.
The Acquisition remains subject to the ratification by a
majority of the shareholders of the Registrant, excluding the
former stockholders of ORIX. Should the stockholders of the
Registrant not ratify the acquisition, the ORIX stockholders
have the right under the Agreement and Plan of Reorganization
to cause the Registrant to undo the Acquisition and to make the
parties whole and in the same position they were in prior to
the closing of the Acquisition.
The basis upon which shares of ORIX's Common Stock were
exchanged for the shares of Common Stock of the Registrant was
established through arm's length negotiations between the
Registrant and ORIX. There was no relationship between ORIX or
its stockholders, on the one hand, and the Registrant, on the
other hand, prior to entering into the Acquisition Agreement,
except for the consulting agreement entered into in August 1997
with Kerry Rogers, the President of ORIX, to serve as a
consultant to the Board of Directors of the Registrant on a
month to month basis until shareholder approval of the
Acquisition.
The Registrant has begun to relocate its principal executive
offices to ORIX's corporate office at 1771 E. Flamingo Blvd.,
Bldg. B, Suite 200, Las Vegas, NV. The Registrant's phone is
702.792.2500.
OTHER EVENTS
(i) On December 16, 1997, the Registrant announced that the
NASDAQ notified the Registrant that as a result of its
failure to satisfy the listing requirements for
continued listing on the NASDAQ Small/Cap Market the
Registrant's Common Stock was delisted. This
determination was made by the Listing Qualification
Panel following a verbal hearing before the Panel on
December 4, 1997 in connection with the Registrant's
request for the continued inclusion on the NASDAQ
Small/Cap Market notwithstanding its failure to meet the
total assets and capital surplus requirements that are
set forth in the NASD Marketplace Rules. Based on the
contemplated acqusition of ORIX and an envisaged private
placement, the Panel was of the opinion that the
proposed transactions would result in a change of
control, financial structure and business, and that the
NASD Marketplace Rules for initial inclusion
requirements are applicable.
(ii)On December 19, 1997, GetNet International, Inc., the
Registrant's wholly owned subsidiary, filed a Voluntary
Petition for Chapter 11 Reorganization with the United
-13-
<PAGE> 15
States Bankruptcy Court, District of Arizona - Phoenix
Division. Management of GetNet International, Inc.,
believes that the reorganization will give it the
ability to refashion its relationship with its primary
carrier, protect its customers and execute its business
plan.
On December 31, 1997, the Registrant entered into a Securities
Purchase Agreement with Infinity Investors Limited, a Nevis
West Indies corporation ("Infinity"), pursuant to which the
Registrant agreed to issue and sell to Infinity $2,500,000
principal amount of 8% Convertible Exchangeable Debentures due
December 31, 1999. (the "Debentures").
Effective on the first business day following the ratification
by a majority of the Registrant's shareholders of the
acquisition of all the issued and outstanding shares of ORIX
("Shareholder Ratification"), the outstanding principal balance
(together with accrued and unpaid interest) of the Debentures
shall be automatically exchanged for an equal stated amount of
the Registrant's Series B Preferred Shares. The Registrant
agreed to use its best lawful efforts to obtain such
shareholder ratification as soon as practicable following the
closing and in all events by June 30, 1998. In the event
Shareholder Ratification is not obtained by then, Infinity may
require the Registrant and ORIX, jointly and severally, to
repay the Debentures. This obligation is secured by a pledge to
Infinity (x) by the Registrant and each ORIX shareholder of all
outstanding capital stock of ORIX pursuant to a certain Stock
Pledge Agreement, and (y) by ORIX of all of its assets pursuant
to a certain Asset Pledge Agreement. Infinity agreed to refrain
from exercising these remedies for a period of thirty (30) days
following such event during which period ORIX shall in good
faith seek to repay the Debenture. Moreover, the Registrant
further agreed to submit to the Registrant's shareholders the
reincorporation of the Registrant from the State of California
to the State of Delaware.
The proceeds of the private placement, after satisfaction of
the settlement agreement with AT&T in the amount of $150,000
and payment of the expenses of the transaction, were advanced
by the Registrant to ORIX (the "ORIX advance"). The funds will
be used to expand the Mexican network and the LatinGate, and
for general working and growth capital requirements. An amount
of $420,000 was retained by the escrow agent until consummation
of the acquisition of all the issued and outstanding shares of
UCI Teleport, Inc., a Florida corporation, which holds the
rights to acquire an earth satellite station in Florida. ORIX
agreed to reimburse the ORIX Advance no later that December 31,
1999, except in the event Shareholder Ratification is not
obtained.
The Series B Preferred Shares consists of 10,000 which were
advanced by the Registrant to ORIX and the stated value shall
be $1,000 per share. The Series B Preferred Stock shall rank
prior to the Registrant's common stock, and to any class or
series of capital stock of the Registrant. The Series B
Preferred Shares shall pay a cumulative dividend of 8% per
year. The holders of Series B Preferred Shares are entitled to
liquidation preference upon liquidation, dissolution or winding
up of the Registrant in an amount equal to $1,000 per share
plus all accrued and unpaid dividends. In certain events,
including the change of control of the Registrant, the
Registrant may be required to redeem the Series B Preferred
Stock. The Registrant agreed to file with the Secretary of
State of California the Series B Preferred Shares Certificate
of Designation as soon as practicable after the Closing.
The Series B Preferred Stock may be converted into shares of
the Registrant's common stock. The "Conversion Price" shall be
$1.46. During each of the calendar months of March
-14-
<PAGE> 16
through July, 1998 the Conversion Price shall be reset at the
lower of $1.46 and the then applicable Reset Price. The Reset
Price shall be the daily-weighted average sales price on the
principal securities exchange for the immediately preceding
calendar month. In no event shall a holder of the Convertible
Debenture be entitled to convert any portion of the Debenture
and the Option Debentures in excess of that number of shares
upon conversion of which the sum of the number of shares of
Common Stock beneficially owned would result in beneficial
ownership by a holder of more that 4.9% of the outstanding
shares of Common Stock.
On December 31, 1997, the Registrant entered into an Option
Agreement with Infinity pursuant to which the Registrant agreed
to grant to Infinity an option to assign and convey to the
Registrant debentures, preferred shares and/or commons shares
of United Petroleum Corporation, a Delaware corporation (the
"UPC Securities") with an Exchange amount not to exceed, in the
aggregate for all such assignments, $11,000,000 (the "Maximum
Exchange Amount"). The Option may be exercised at any time
prior to the second anniversary date of the Option Agreement.
Upon exercise of the Option, the escrow agent will issue to
Infinity either 8% convertible exchangeable debentures due
December 31, 1999 (if the Shareholder Ratification has not
occurred) (the "Option Debentures") or Series C Preferred
Shares (if the Shareholder Ratification has occurred).
The Registrant agreed to file with the Secretary of State of
California the Series C Preferred Shares Certificate of
Designation and deposited in escrow pursuant to the terms of
the Escrow Agreement the Option Debenture in the aggregate
principal balance of the Maximum Exchange Amount.
Effective on the first business day following the ratification
by a majority of the Registrants's shareholders of the
Acqusition of all the issued and outstanding shares of ORIX,
the outstanding principal balance (together with accrued and
unpaid interest) of the Option Debentures shall be
automatically exchanged for an equal stated amount of the
Registrant's Series C Preferred Shares.
The Series C Preferred Shares consists of 10,000 shares of
Preferred Stock and the stated value shall be $1,000 per share.
The Series C Preferred Stock shall rank prior to the
Registrant's common stock, and to any class or series of
capital stock of the Registrant except the Series B Preferred
Stock. The Series C Preferred Shares shall pay a cumulative
dividend of 8% per year. The holders of Series C Preferred
Shares are entitled to liquidation preference upon liquidation,
dissolution or winding up of the Registrant in an amount equal
to $1,000 per share plus all accrued and unpaid dividends.
In certain events, including the change of control of the
Registrant, the Registrant may be required to redeem the Series
C Preferred Stock.
The Series C Preferred Stock may be converted into shares of
the Registrant's common stock. The "Conversion Price" shall be
$2.92. On the first day of each of the calendar months of March
through July, 1998 (each such date being a "Reset Date") the
Conversion Price shall be reset at the lower of $2.92 and two
(2) times the then applicable Reset Price. The Reset Price
shall be the daily-weighted average sales price on the
principal securities exchange for the immediately preceding
calendar month.
-15-
<PAGE> 17
The Debenture, the Option Debentures, the Warrant have been,
and the Series B and C Preferred Shares issued in exchange
therefor shall be, issued by the Registrant in a private
placement pursuant to Regulation S promulgated under the
Securities Act of 1933, as amended ("Regulation S"). The
Registrant relied on a number of facts and representations made
by Infinity in the Securities Purchase Agreement and the Option
Agreement to make the exemption available. The private
placement constitutes an offshore transaction, and did not
involve any directed selling efforts in the U.S. as such terms
are defined under Regulation S.
The Registrant entered into a Registration Rights Agreement
dated as of December 31, 1997 affording Infinity the right to
cause the Registrant to prepare and file a registration
statement to effect the registration under the Securities Act
of all, but not less than all, of the number of shares of
Common Stock issued upon conversion of the Debentures, the
Series B or C Preferred Shares, and the Common Shares issued
upon exercise of the Warrants, in the event Regulation S is
amended or modified either (x) to increase to more than 40 the
number of days contained in the Restricted Period or (y) so
that the Conversion Shares or Warrant Shares would be deemed
"restricted securities" pursuant to the Securities Act.
As long as Infinity owns, in the aggregate, not less than 25%
of the Debenture (or an equivalent amount of Common Stock
issued upon conversion of the Debentures or the Option
Debentures), a representative of Infinity will have all the
rights of a director (exclusive of payment of director fees)
but will not attend meetings of the Board of Directors and will
not be entitled to vote on matters submitted for the Board's
approval.
The Registrant agreed to take all actions necessary such that
the Registrant's Common Stock will be eligible for quotation on
the OTC Market unless it becomes listed on a national exchange,
and that at least ten members of the NASD continue to be
registered as market makers with respect to the Registrant's
shares of Common Stock.
On December 31, 1997, a Put and Call Agreement was executed
among the Registrant and Infinity pursuant to which the
Registrant has the right to require that Infinity repurchase on
December 31, 1999 all (but not less than all) of the UPC
Securities then owned by the Registrant as a purchase price
equal to the product of thirty percent (30%) multiplied by the
aggregate Exchange Amount of all UPC Securities being
repurchased on the Put Date. Under the Put and Call Agreement
Infinity shall have the right, but not the obligation, for a
period of thirty (30) days from December 31, 1999, to purchase
from the Registrant any or all of the UPC Securities then owned
by the Registrant at a call price of one hundred and ten
percent (110%) of the aggregate Exchange Amount of the UPC
Securities then owned by the Registrant. Such "Exchange Amount"
means (i) with respect to debentures, the outstanding principal
balance thereof, together with accrued and unpaid interest,
(ii) with respect to preferred shares, the aggregate stated
value thereof, together with accrued and unpaid dividends, and
(iii) with respect to common shares, such amount will be
determined on the basis on the average closing bid price.
ITEM NO. 6 Exhibits and Reports on Form 8-K
On November 21, 1997, the Registrant filed a Report on Form
8-K under Item 2, "Acquisition or Disposition of Assets" and
Item 5, "Other Events".
27 Financial Data Schedule
-16-
<PAGE> 18
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/ KERRY L. ROGERS
- ---------------------------------------
Kerry L. Rogers, President and CEO
/s/ ROBERT A. MICHEL
- ---------------------------------------
Robert A. Michel, CFO
Date: January 13, 1998
-17-
<PAGE> 19
INDEX TO EXHIBIT
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 13
<SECURITIES> 0
<RECEIVABLES> 97
<ALLOWANCES> 147
<INVENTORY> 0
<CURRENT-ASSETS> 134
<PP&E> 861
<DEPRECIATION> 380
<TOTAL-ASSETS> 1,073
<CURRENT-LIABILITIES> 2,049
<BONDS> 0
0
0
<COMMON> 8,437
<OTHER-SE> (9,543)
<TOTAL-LIABILITY-AND-EQUITY> 1,073
<SALES> 727
<TOTAL-REVENUES> 727
<CGS> 1,013
<TOTAL-COSTS> 2,587
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (27)
<INCOME-PRETAX> (1,833)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,833)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,833)
<EPS-PRIMARY> (.44)
<EPS-DILUTED> (.44)
</TABLE>
