SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1996
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 1-13478
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3698386
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
40 Elmont Road, Elmont, New York 11003
(Address of principal executive offices)
(516) 326-1940
(Issuer's telephone number)
(Former name, former address and former
fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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. Yes X No
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of May 17, 1996, there
were 5,512,801 shares of common stock outstanding.
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 1996
and December 31, 1995.................................... 3
Consolidated Statements of Operations -
Three months ended March 31,
1996 and 1995......................................... 4
Consolidated Statements of Cash Flows -
Three months ended March 31,
1996 and 1995......................................... 5
Notes to Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and
Results of Operations.................... ..... 8-9
Part II Other Information
Item 1-6 Other Information..................... 10
Signatures..................................... 11
2
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
Consolidated Balance Sheets
<TABLE>
Assets March 31, December 31,
1996 1995
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 899,508 $ 928,516
Accounts receivable, less allowance for doubtful
accounts of $285,000 and $165,000 in 1996 and 1995 2,580,781 3,508,250
Inventory 390,670 268,874
Deferred costs 1,282,545 1,235,972
Convertible note receivable 325,000 325,000
Note receivable -- 237,000
Prepaid royalties and patent license fees 286,985 292,911
Prepaid expenses and other current assets 298,207 155,008
Total current assets 6,063,696 6,951,531
Goodwill, net 18,860,494 --
Fixed assets, net 1,776,678 428,381
Deferred financing fees, net 70,495 --
Other assets 232,665 102,052
Total assets $ 27,004,028 $7,481,964
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 3,767,842 1,819,813
Accrued liabilities 1,160,034 491,488
Deferred revenue 5,437,367 3,513,909
Sales and excise tax liability 879,674 --
Amounts payable to related party 738,659 --
Total current liabilities 11,983,576 5,825,210
Amounts payable to related party, long-term 715,971 --
Convertible notes payable 2,800,000 --
Total liabilities 15,499,547 5,825,210
Stockholders' equity:
Preferred stock, $.01 par value, authorized 1,000,000
shares; none issued -- --
Common stock, $.01 par value, authorized 15,000,000
shares; issued and outstanding 4,912,801 and
3,141,678 shares, respectively 49,128 31,417
Additional paid-in capital 18,730,561 7,308,784
Deferred compensation (498,498) (197,165)
Accumulated deficit (6,674,053) (5,486,282)
Common stock subscription receivable (100,000) --
Cumulative foreign currency translation adjustment (2,657) --
Total stockholders' equity 11,504,481 1,656,754
Total liabilities and stockholders equity $ 27,004,028 $ 7,481,964
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
Three months ended
March 31,
1996 1995
<S> <C> <C>
Net sales $ 1,327,710 $ 484,649
Cost of sales 1,013,556 563,761
Gross profit (loss) 314,154 (79,112)
Selling and marketing expenses 534,731 262,183
General and administrative expenses 970,949 403,138
Operating expenses 1,505,680 665,321
Operating loss (1,191,526) (744,433)
Investment income 19,581 57,379
Interest expense (17,226) --
Other 1,400 --
Loss before income taxes (1,187,771) (687,054)
Income tax expense -- --
Net loss $ (1,187,771) $ (687,054)
Net loss per share $ (.32) $ (.22)
Weighted average shares of common stock and common
stock equivalents 3,764,490 3,141,678
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
Three months ended
March 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,187,771) $ (687,054)
Adjustments to reconcile net loss to net cash provided by or used in
operating activities:
Depreciation and amortization 141,418 7,017
Deferred compensation 98,667 --
Amortization of deferred financing costs 1,699 --
Changes in operating assets and liabilities, net of effects of acquisition:
(Increase) decrease in accounts receivable 1,883,903 (288,761)
Increase in inventory (24,796) (61,772)
Increase in deferred costs (46,573) (95,148)
(Increase) decrease in prepaid royalties and patent license
fees 5,926 (58,157)
(Increase) decrease in prepaid expenses and other current
assets 12,096 (72,482)
Increase in other assets (9) --
Decrease in accounts payable (319,765) (99,552)
Increase in accrued liabilities 134,813 71,364
Increase in sales and excise taxes payable 153,045 --
Increase (decrease) in deferred revenue (74,688) 393,054
Net cash provided by (used in) operating activities 777,965 (891,491)
Cash flows from investing activities:
Purchases of fixed assets (57,851) (18,697)
Convertible note receivable -- (200,000)
Cash acquired in excess of cash payment for acquisition 54,190 --
Net cash used in investing activities (3,661) (218,697)
Cash flows from financing activities:
Payment of notes payable to related party (550,000) --
Increase in notes receivable from Global Link prior to merger (250,655) --
Net cash used in financing activities (800,655) --
Effects of exchange rate changes on cash (2,657) --
Net decrease in cash (29,008) (1,110,188)
Cash and cash equivalents at beginning of period 928,516 5,135,260
Cash and cash equivalents at end of period $ 899,508 $ 4,025,072
Supplemental disclosures:
Interest paid during the period $ -- $ --
Income taxes paid during the period $ -- $ 500
Non-cash investing and financing activities:
Issuance of common stock in connection with acquisition $ 11,039,488 $ --
Deferred compensation arising from grant of warrants $ 400,000 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
Notes to Consolidated Financial Statements
March 31, 1996
(1) Business and Basis Presentation
Business
Global Telecommunication Solutions, Inc. (the "Company") was
incorporated on December 23, 1992 and is engaged in the designing,
developing and marketing of prepaid phone/debit cards featuring
licensed, promotional and standard graphics. The Company also provides
card users access to long distance service through its switching
facilities and long distance network arrangements.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31,
1996 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1996.
(2) Loss Per Share
Weighted average shares of common stock for the three months ended
March 31, 1996 and 1995 does not include common stock equivalents as
their effect would be anti-dilutive.
(3) Acquisition
On February 29, 1996, pursuant to an Agreement and Plan of Merger dated
January 18, 1996, the Company, through a wholly-owned subsidiary,
acquired all the issued and outstanding common stock of Global Link
Teleco Corp. ("Global Link"), which designs, develops and markets
prepaid phone/debit cards through retail telephone calling centers as
well as through distribution arrangements. The acquisition was
accounted for as a purchase. Accordingly, the acquired assets and
liabilities were recorded at their estimated fair values at the date of
acquisition and the operating results of Global Link were included in
the accompanying consolidated statement of operations from the
acquisition date.
In connection with the merger, the Company issued 1,718,318 shares of
common stock in exchange for all of the issued and outstanding common
stock of Global Link. In addition, the Company issued 52,805 shares of
common stock to a creditor of Global Link. The total cost of the
acquisition was approximately $11,500,000 including direct transaction
costs of approximately $450,000. In addition, Global Link has
$2,800,000 aggregate principal amount of 6% Debentures outstanding,
which principal amounts are due and payable on June 23, 1999 for which
the Company has guaranteed the payment.
6
<PAGE>
The acquisition resulted in goodwill of $18,965,860, based on an
allocation of purchase price, calculated as follows:
Fair market value of common stock issued $11,039,488
Fair value of liabilities assumed 10,718,587
Fair value of assets acquired (3,242,215)
Acquisition related costs 450,000
Goodwill $18,965,860
The following unaudited combined pro forma information reflects the
results of operations assuming the acquisition of Global Link had been
made at the beginning of the respective periods.
Three Months Ended
March 31,
1996 1995
Net sales $ 2,691,000 $ 2,120,000
Net loss (1,997,000) (1,228,000)
Net loss per share $ (.41) $ (.25)
Pro forma adjustments include recording amortization expense on
goodwill (using the straight-line method over 15 years) and the
elimination of interest expense on debt of Global Link repaid in
connection with the acquisition.
The pro forma results of operations are not necessarily indicative of
the actual results of operations that would have occurred had the
purchase been made at the beginning of the respective periods, or of
results which may occur in the future.
(4) Private Placement
In May 1996, the Company sold through a private placement 600,000
shares of the Company's common stock and 1,200,000 warrants for
$3,000,000. Each warrant entitles the holder to purchase one share of
common stock. In connection with this private placement, the Company
issued a warrant to Whale Securities Co., L.P., the placement agent
("Whale"), to purchase, through May 10, 2001, up to 60,000 shares of
common stock and 120,000 warrants for $5.00 per each share of common
stock and two warrants.
(5) Warrants
In January 1996, the Company issued five-year warrants to Whale and/or
its designees to purchase an aggregate of 200,000 shares of common
stock at $5.125 per share in consideration for consulting services. The
estimated fair market value of these warrants of $400,000 was recorded
as deferred compensation and the Company has recorded an expense of
$66,666 to date.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company generates revenues from the sales of prepaid phone cards
through retail telephone calling centers and through distribution channels or
via direct marketing to the public. To date, the Company's expenses have
exceeded revenues, resulting in net losses of $1,187,771 and $687,054,
respectively, for the three months ended March 31, 1996 and 1995. Losses
incurred since inception have been primarily attributable to start-up costs
incurred in connection with the development and promotion of the Company's
products, the development of in-house creative capabilities and the hiring of
additional personnel to support the Company's operations.
The Company's primary cost of sales are incurred in connection with the
design and manufacture of its prepaid phone cards, royalties in connection with
the various license agreements, switch administration fees and long distance
carriers fees (which long distance costs are not billed or incurred until such
time as long distance service is accessed).
The Company records deferred revenue at the time it sells its prepaid
phone cards and recognizes revenue at the time the consumer accesses long
distance service. In connection with sales of cards featuring licensed graphics,
the Company generally charges a premium per minute charge for long distance
services. The premium, if any, is recognized at the time of sale, while the
remaining revenue is deferred and recognized when long distance service is
accessed. The Company recognizes as revenue deferred revenue relating to unused
calling time remaining upon each cards expiration (generally 12 to 18 months
after issuance) at such date. The Company believes that the collectors of
prepaid phone cards bearing licensed graphics may not use a substantial portion
of calling time available on such cards.
Three Months Ended March 31, 1996 Compared to
Three Months Ended March 31, 1995
Net sales for three months ended March 31, 1996 were $1,327,710
compared to $484,649 for the three months ended March 31, 1995, an increase of
$843,061 or 174.0%. Approximately $732,850 (151.0%) of the increase is
attributable to the acquisition of Global Link (see note 3). The remaining
increase is primarily due to the recognition of revenue upon the expiration of
certain cards. Gross margins increased to 23.7% of net sales for the three
months ended March 31, 1996 compared to negative 16.3% of net sales for the
comparable period in the prior year. The net increase in the gross margin is
partially a result of the acquisition of Global Link whose margins for the
period approximated 39.5%, the recognition of revenue upon the expiration of
certain cards which produced higher margins and a decrease in credit card
chargebacks offset by a decrease in margins as a result of the write-off of
printing and production costs related to unsold expired prepaid phone cards.
Selling and marketing expenses were $534,731 for three months ended
March 31, 1996 compared to $262,183 for the three months ended March 31, 1995,
an increase of $272,548 or 104.0%. Approximately 125,344 or 47.8% of this
increase is attributable to the Global Link acquisition. The remaining increase
of $136,839 or 56.2% is primarily a result of hiring additional marketing and
sales personnel and an increase in commissions incurred pursuant to certain
arrangements with unaffiliated third parties for the marketing and advertisement
of the Company's prepaid phone cards.
General and administrative expenses increased to $970,949 for the three
months ended March 31, 1996 from $403,138 for the three months ended March 31,
1995, an increase of $567,811 or 140.8%. Approximately $389,936 or 96.7% of the
increase is attributable to the Global Link acquisition. The remaining increase
of $177,875 or 44.1% is due primarily to the expenses relating to warrants and
options
8
<PAGE>
issued to outside consultants, an increase in costs resulting from the
relocation of the Company's headquarters to a larger facility and an increase in
general office expenses attributable to an increase in personnel.
Investment and interest income amounted to $19,581 for the three months
ended March 31, 1996 as compared to $57,379 for the three months ended March 31,
1995. The decrease of $37,798 is a result of lower balances of cash and cash
equivalents on hand offset by an increase in interest on an additional
convertible note receivable.
Interest expense for three months ended March 31, 1996 increased to
$17,226 from $0 for the three months ended March 31, 1995, as a result of
interest on the $2,800,000 convertible notes payable acquired from Global Link.
For the foregoing reasons, the Company incurred a net loss of
$1,187,771 for three months ended March 31, 1996 compared to a net loss of
$687,054 for the three months ended March 31, 1995.
Liquidity and Capital Resources
At March 31, 1996 the Company had cash and cash equivalents of $899,508
and a working capital deficit of $(5,919,880), compared to cash and cash
equivalents of $928,516 and working capital of $1,126,321 at December 31, 1995.
This working capital deficit is primarily a result of the assumption by the
Company of certain obligations and other debt of Global Link in connection with
the merger, including approximately $2,000,000 of Global Link's deferred
revenues and $2,000,000 in payments due to Peoples Telephone Company, Inc.
("Peoples").
Net cash provided by operating activities for the three months ended
March 31, 1996 of $777,965 was primarily due to a large increase in collections
of outstanding accounts receivable. Accounts receivable are generated pursuant
to sales of prepaid phone cards primarily to distributors, dealers and
corporations, which are obligated to make payments for the cards 30 days from
the date of delivery. Deferred revenue represents sales of prepaid phone cards
for which revenue has not yet been recognized, but will typically be recognized
in future periods as customers access long distance services or at the
expiration dates of the phone cards. Net cash used in investing activities for
the three months ended March 31, 1996 consisted of $57,851 of capital
expenditures, net of $54,190 in cash acquired in excess of cash payments for the
Global Link acquisition. Net cash used in financing activities consisted of
payment to Peoples and an increase in notes receivable of $250,655 from Global
Link prior to the merger. The Company does not have any material commitments for
capital expenditures.
The Company has substantial capital requirements resulting from the
funding of losses from operations, the need to finance continued growth and
certain payment obligations incurred in connection with the acquisition of
Global Link. The Company anticipates that cash flows will improve as a result of
the increase in revenues and improvement in margins are anticipated to result
from the integration of the operations of Global Link with those of the Company.
In addition, in April 1996, the Company completed a $3,000,000 private placement
offering of thirty units, with each unit consisting of 20,000 shares of the
Company's common stock and 40,000 warrants. Each warrant entitles the holder to
purchase one share of the Company's common stock. Net proceeds of the offering
amounted to approximately $2,600,000. The Company anticipates, based on its
current plans and assumptions relating to its operations, that its cash
balances, together with projected cash flows from operations and the proceeds
from the private placement, will be sufficient to satisfy the Company's
contemplated cash requirements during 1996, although there can be no assurance
that this will be the case. In the event that the Company's plans change, its
assumptions change or prove to be inaccurate or cash flows otherwise prove to be
insufficient to fund operations, the Company would be required to seek
additional financing, curtail its proposed expansion and possibly its
operations.
9
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits
27 Financial Data Schedule
B. Current Reports on Form 8-K
Current Report on Form 8-K for event dated March 1, 1996 and amendment
thereto.
10
<PAGE>
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Global Telecommunication Solutions, Inc.
Registrant
By: /s/Maria Bruzzese
William J. Rouhana, Jr.
Chief Financial Officer Dated: May 17, 1996
By: /s/Maria Bruzzese
Chief Financial Officer (and principal
accounting officer) Dated: May 17, 1996
11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 899,508
<SECURITIES> 0
<RECEIVABLES> 3,190,781
<ALLOWANCES> 285,000
<INVENTORY> 390,670
<CURRENT-ASSETS> 6,063,696
<PP&E> 2,137,741
<DEPRECIATION> 361,063
<TOTAL-ASSETS> 27,004,028
<CURRENT-LIABILITIES> 11,983,576
<BONDS> 0
<COMMON> 49,128
0
0
<OTHER-SE> 11,504,481
<TOTAL-LIABILITY-AND-EQUITY> 27,004,028
<SALES> 1,327,710
<TOTAL-REVENUES> 1,327,710
<CGS> 0
<TOTAL-COSTS> 1,013,556
<OTHER-EXPENSES> 1,505,680
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,226
<INCOME-PRETAX> (1,187,771)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,187,771)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> 0
<FN>
Notes and accounts receivable -- trade includes $325,000 convertible notes
receivable
</FN>
</TABLE>
