SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 August 9, 1996, there
were 5,512,801 shares of common stock outstanding.
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Part I. Financial Information
Item 1. Consolidated Financial Statements
Page
Consolidated Balance Sheets - June 30, 1996 (unaudited)
and December 31, 1995........................................... 3
Consolidated Statements of Operations - Six and three
months ended June 30, 1996 and 1995 (unaudited)................. 4
Consolidated Statements of Cash Flows - Six months ended
June 30, 1996 and 1995 (unaudited).............................. 5
Notes to Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 9
Part II Other Information
Item 1-6 Other Information............................................... 12
Signatures...................................................... 13
2
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GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,484,055 $ 928,516
Accounts receivable, less allowance for doubtful
accounts of $284,000 and $165,000 in 1996 and 1995 3,168,669 3,508,250
Inventory 231,105 268,874
Deferred costs 1,189,398 1,235,972
Convertible notes receivable 325,000 325,000
Note receivable -- 237,000
Prepaid royalties and patent license fees 278,479 292,911
Prepaid expenses and other current assets 245,546 155,008
---------- ---------
Total current assets 6,922,252 6,951,531
---------- ---------
Goodwill, net 18,544,397 --
Fixed assets, net 1,990,530 428,381
Deferred financing fees, net 65,399 --
Other assets 250,839 102,052
---------- ---------
Total assets $27,773,417 $7,481,964
========== =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 3,372,214 1,819,813
Accrued liabilities 1,011,027 491,488
Deferred revenue 5,578,248 3,513,909
Sales and excise tax liability 1,090,058 --
Amounts payable to related party 977,315 --
Capital lease obligation, current 50,935 --
---------- ---------
Total current liabilities 12,079,797 5,825,210
---------- ---------
Amounts payable to related party, long-term 477,315 --
Capital lease obligation, long-term 65,511 --
Convertible notes payable 2,800,000 --
---------- ---------
Total liabilities $15,422,623 $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 5,512,801 and
3,141,678 shares, respectively 55,128 31,417
Additional paid-in capital 21,380,919 7,308,784
Deferred compensation (366,498) (197,165)
Accumulated deficit (8,610,139) (5,486,282)
Common stock subscription receivable (100,000) --
Cumulative foreign currency translation adjustment (8,616) --
---------- ---------
Total stockholders' equity 12,350,794 1,656,754
---------- ---------
Total liabilities and stockholders equity $27,773,417 $7,481,964
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 4,459,356 $ 1,265,346 $ 3,131,646 $ 780,697
Cost of sales 3,387,048 1,256,684 2,373,492 692,923
--------- --------- --------- ---------
Gross profit 1,072,308 8,662 758,154 87,774
--------- --------- --------- ---------
Selling and marketing expenses 1,292,376 515,363 757,645 253,180
General and administrative expenses 2,863,035 950,246 1,892,086 547,108
--------- --------- --------- ---------
Operating expenses 4,155,411 1,465,609 2,649,731 800,288
--------- --------- --------- ---------
Operating loss (3,083,103) (1,456,947) (1,891,577) (712,514)
Investment income 41,154 113,044 21,573 55,665
Interest expense (87,508) -- (70,282) --
Other 5,600 (3,770) 4,200 (3,770)
--------- --------- --------- ---------
Loss before income taxes (3,123,857) (1,347,673) (1,936,086) (660,619)
Income tax expense -- -- -- --
--------- --------- --------- ---------
Net loss $(3,123,857) $(1,347,673) $(1,936,086) $ (660,619)
Net loss per share $ (.69) $ (.43) $ (.37) $ (.21)
========= ========= ========= =========
Weighted average shares of common
stock and common stock equivalents 4,506,228 3,141,678 5,247,966 3,141,678
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,123,857) $(1,347,673)
Adjustments to reconcile net loss to net cash provided by or used in
operating activities:
Depreciation and amortization 556,876 15,868
Deferred compensation 230,667 33,833
Amortization of deferred financing costs 6,795 --
Changes in operating assets and liabilities, net of effects of acquisition:
(Increase) decrease in accounts receivable 1,296,015 (684,012)
(Increase) decrease in inventory 134,769 (77,335)
(Increase) decrease in deferred costs 46,574 (316,935)
(Increase) decrease in prepaid royalties and patent license fees 14,432 (61,225)
(Increase) decrease in prepaid expenses and other current assets 64,757 (73,475)
Increase in other assets (18,183) (5,823)
Increase (decrease) in accounts payable (715,393) 124,770
Increase (decrease) in accrued liabilities (14,192) 227,481
Increase in sales and excise taxes payable 363,427 --
Increase (decrease) in deferred revenue 66,193 852,829
---------- ----------
Net cash used in operating activities (1,091,120) (1,311,697)
---------- ----------
Cash flows from investing activities:
Purchases of fixed assets (222,214) (188,673)
Convertible notes receivable -- (325,000)
Cash acquired in excess of cash payment for acquisition 54,190 --
---------- ----------
Net cash used in investing activities (168,024) (513,673)
---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants 2,656,358 --
Payment of notes payable to related party (550,000) --
Increase in notes receivable from Global Link prior to merger (250,655) --
Payments on capital lease obligations (32,404) --
---------- ----------
Net cash provided by financing activities 1,823,299 --
---------- ----------
Effects of exchange rate changes on cash (8,616) --
---------- ----------
Net increase (decrease) in cash 555,539 (1,825,370)
Cash and cash equivalents at beginning of period 928,516 5,135,260
---------- ----------
Cash and cash equivalents at end of period $ 1,484,055 $ 3,309,890
========== ==========
Supplemental disclosures:
Interest paid during the period $ -- $ --
========== ==========
Income taxes paid during the period $ -- $ --
========== ==========
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 $ --
========== ==========
Capital lease obligations incurred to acquire fixed assets $ 148,850 $ --
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996
(1) Business and Basis of 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 six and three months ended
June 30, 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 six and three months
ended June 30, 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.
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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.
Six Months Ended June 30,
------------------------------
1996 1995
---- ----
Net sales $ 5,959,000 $ 5,286,000
Net loss (3,806,000) (2,710,000)
Net loss per share $ (.75) $ (.55)
Pro forma adjustments include recording amortization expense on
goodwill (using the straight-line method over 15 years), the
elimination of amortization of the predecessor's good will 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
$166,665 to date.
(6) Amounts Payable to Related Parties
Simultaneously with the execution of the merger agreement, Global
Link executed an agreement with Peoples Telephone Company, Inc.
(Peoples) pursuant to which Peoples agreed to accept $1,050,000
($550,000 of which was paid on the date of the merger with the balance
of $500,000 payable on June 28, 1996) to settle certain obligations
and indebtedness to Peoples. As of the date of this report, the payment
of the $500,000 to Peoples by the Company is outstanding. The Company
is in the process of negotiating with Peoples to modify the terms of
the original agreement between the parties, including a modification of
the payment schedule with respect to the $500,000 payment. The Company
believes that the agreement with Peoples will be modified on terms
satisfactory to the Company, although there can be no assurance that
this will be the case.
(7) Tax Obligations and Compliance
At June 30, 1996, the Company is delinquent in remitting certain
amounts previously collected for sales, use and excise taxes to various
taxing jurisdictions. Further, the Company has not filed certain sales
and use, excise, income or franchise tax returns in certain
jurisdictions in which it does business. Management is in the process
of reviewing the Company's tax collection, remittance and compliance
policies and procedures and has recorded a reserve for estimated tax
7
<PAGE>
obligations and related compliance issues. Depending on the ultimate
resolution of these matters, it is reasonably possible that the
amount of this reserve could require adjustment in the near term.
(8) Liquidity
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. 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 will be sufficient to satisfy the Company's
contemplated cash requirements for the next 12 months, 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
or curtail its proposed expansion and possibly its operations.
(9) Convertible Notes Receivable
In March and May 1995, the Company advanced $200,000 and $125,000,
respectively, to Fone America, Inc. (Fone) evidenced by convertible
promissory notes bearing interest at 10% per annum. The principal and
accrued interest thereon was due and payable on June 23, 1995 and
July 14, 1995, respectively. Accrued interest at June 30, 1996
amounted to approximately $57,000. The Company has the option of
converting any part of the principal into shares of Fone America's
common stock on the basis of two shares for each $1.00 of principal.
Fone has also agreed that, at the Company's option, Fone will repay
the notes by allowing the Company to utilize services which Fone will
provide. Such services consist of access to Fone's switching platforms,
the utilization of Fone's network personnel and the sale and service of
phone card vending machines. Management anticipates that the Company
will utilize approximately $100,000 of these services from Fone in the
fourth quarter of 1996 and the remaining balance of the principal
and interest owed under the notes during the first of half of 1997.
Based upon a review of Fone's financial statements, discussions with
Fone and knowledge of the industry, management of the Company believes
that Fone will continue to have the wherewithal to provide such
services to the Company during such period.
8
<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. To date,
the Company's expenses have exceeded revenues, resulting in losses of $3,123,857
and $1,347,673, respectively, for the six months ended June 30, 1996 and June
30, 1995.
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 generally 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.
Six months ended June 30, 1996 Compared to Six months ended June 30, 1995
Net sales for the six months ended June 30, 1996 were $4,459,356 compared to
$1,265,346 for the six months ended June 30, 1995, an increase of $3,194,010 or
252.4%. Approximately $3,073,000 or 242.9% of the increase is attributable to
the acquisition of Global Link (see note 3). Revenues from the sale of cards
featuring licensed graphics decreased by approximately $370,000 or 29.2%
primarily as a result of a decrease in revenue recognized upon the expiration of
certain cards and a decrease of licensed product offerings in 1996. Revenues
from the sale of promotional cards decreased by approximately $77,000 or 6.1%.
Sales of cards to other carriers increased by approximately $642,000 or 50.7% of
which approximately $457,000 or 36.1% represented revenue recognized upon the
expiration of certain cards. Furthermore, revenue derived from the Company's
standard cards decreased by approximately $78,000 or 6.2%. The remaining
increase in revenues of approximately $4,000 or .3% was due to an increase in
the sale of non-card products and services. Gross margins increased to 24.1% of
net sales for the six months ended June 30, 1996, compared to .7% of net sales
for the comparable period in the prior year. The increase in the gross margin is
partially a result of
9
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the acquisition of Global Link whose margins for the period approximated 31.8%.
The remaining net increase in the gross margin is a result of a decrease in
transmission costs as a percentage of sales resulting primarily from the
recognition of revenue upon the expiration of certain cards which had no
associated transmission costs offset by, an increase in sales of cards with
lower margins and an increase in production costs as a percentage of sales
primarily due to the write off of printing and production costs related to
unsold expired prepaid phone cards.
Selling and marketing expenses were $1,292,376 for the six months ended June 30,
1996, compared to $515,363 for the six months ended June 30, 1995, an increase
of $777,013 or 150.8%. Approximately $592,000 or 115.0 % of this increase is
attributable to the Global Link acquisition. The remaining increase consists of
approximately $200,000 or 38.8% of increased salaries due to the hiring of
additional marketing and sales personnel, an increase of approximately $40,000
or 7.8% in travel expenses related to the additional personnel, and an increase
of approximately $7,000 or 1.4% in other selling and marketing expenses, offset
by a decrease of approximately $62,000 or 12.0% in costs in the advertisement
and promotion of the Company's products, including attendance at trade shows.
General and administrative expenses increased to $2,863,035 for the six months
ended June 30, 1996 compared to $950,246 for the six months ended June 30,1995,
an increase of $1,912,789 or 201.3%. Approximately $1,646,000 or 173.2% of the
increase is attributable to the Global Link acquisition. The remaining increase
is due to approximately $163,000 or 17.2%, of additional amortization of
deferred compensation costs with respect to warrants issued to outside
consultants, an increase of approximately $54,000 or 5.7% in costs resulting
from the relocation of the Company's headquarters to a larger facility and the
rent expense related to new sales offices and an net increase in other general
and administrative costs aggregated approximately $50,000 or 5.3%.
Investment and interest income amounted to $41,154 for the six months ended June
30,1996 as compared to $113,044 for the six months ended June 30,1995. The
decrease of $71,890 is a result of lower balances of cash and cash equivalents
on hand offset by an increase as a result of convertible notes receivable
acquired in March and May 1995.
Interest expense for six months ended June 30,1996 increased to $87,508 from $0
for the six months ended June 30,1995, as a result of interest on the $2,800,000
convertible notes payable and amounts due to Peoples Telephone Company, Inc.
(Peoples) acquired from Global Link and interest expense on capital lease
obligations recorded in 1996.
For the foregoing reasons, the Company incurred a net loss of $3,123,857 for the
six months ended June 30,1996 compared to a net loss of $1,347,673 for the six
months ended June 30,1995.
Liquidity and Capital Resources
At June 30, 1996 the Company had cash and cash equivalents of $ 1,484,055 and a
working capital deficit of $5,157,545 compared to 928,516 and $1,126,321,
10
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respectively, at December 31, 1995. This decrease in working capital was
primarily a result of the assumption by the Company of certain obligations and
other debt of Global Link in connection with the merger. Refer to Note 9 for a
discussion on the collection of convertible notes receivable.
Net cash used in operating activities for the six months ended June 30, 1996 of
$1,091,120 was primarily due to the Company's net loss and decrease in accounts
payable and accrued liabilities, including taxes, offset by non-cash items,
including depreciation and amortization, and a decrease in accounts receivable.
Accounts receivable are generated pursuant to sales of prepaid phone cards
primarily to distributors, dealers and corporations. 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 six months ended June 30, 1996 consisted of
$222,214 of capital expenditures, net of $54,190 in cash acquired in excess of
cash payments for the Global Link acquisition. Net cash provided by financing
activities consisted of $2,656,358 of net proceeds from the issuance of common
stock and warrants pursuant to a private placement completed in May 1996, a
payment to Peoples of $550,000 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. 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 will be sufficient to satisfy the Company's contemplated cash
requirements for the next 12 months, 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 or curtail its proposed expansion and possibly its
operations.
11
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits
None.
B. Current Reports on Form 8-K
Current Report on Form 8-K for event dated March 1, 1996 and amendment
thereto.
12
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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.
Dated: September 27, 1996 GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
By: /s/ Maria Bruzzese
--------------------------------------
Maria Bruzzese, Chief Financial Officer
13
