SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. ^ 2
TO
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) March 1, 1996
-------------
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
-------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 1-13478 13-3698386
- ---------------------------- ------------- --------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
40 Elmont Road, Elmont, New York 11003 10169
- ---------------------------------------- ---------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (516) 326-1940
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Page 1 of ^ 20 Pages
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Global Link Teleco Corporation:
We have audited the accompanying balance sheet of Global Link Teleco Corporation
as of December 31, 1995, and the related statements of operations, shareholders'
equity (deficit) and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As further discussed in note 12, the Company was acquired by Global
Telecommunication Solutions, Inc. on February 29, 1996.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Global Link Teleco Corporation
as of December 31, 1995 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
May 8, 1996
2
<PAGE>
REPORT OF INDEPENDENT ^ ACCOUNTANTS
To the Board of Directors and Shareholders
of Global Link Teleco Corporation:
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of Global Link Teleco Corp. at
December 31, 1994, and the results of its operations and its cash flows for the
period from inception (March 28, 1994) through December 31, 1994 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above. We have not
audited the financial statements of Global Link Teleco Corp. for any period
subsequent to December 31, 1994.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
December 12, 1995, except as to the merger described in Note 12, which is as of
February 29, 1996 ^
3
<PAGE>
GLOBAL LINK TELECO CORPORATION
Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 213,482 2,029,332
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$120,147 at December 31, 1995 1,137,562 --
Related party -- 153,140
Inventory 97,000 --
Other current assets 38,675 22,771
----------- ---------
Total current assets 1,486,719 2,205,243
Fixed assets, net 1,352,177 357,638
Goodwill, net 7,654,789 2,070,783
Other assets 212,566 296,380
---------- ---------
Total assets $10,706,251 4,930,044
========== =========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Current portion of notes payable to related party
(notes 6 and 12) 422,000 234,000
Trade accounts payable 2,203,336 62,079
Amounts payable to related parties 477,338 733,486
Accrued interest to related party 617,226 104,917
Deferred revenue 1,822,424 --
Estimated sales and excise tax related obligations
(note 9) 620,000 --
Other current liabilities 589,706 246,960
--------- ---------
Total current liabilities 6,752,030 1,381,442
Notes payable to related party 6,078,000 1,266,000
Senior convertible promissory notes payable 2,800,000 2,800,000
--------- ---------
Total liabilities 15,630,030 5,447,442
---------- ---------
Commitments and contingencies (notes 9, 11 and 13)
Shareholders' equity (deficit):
Series A convertible cumulative preferred stock,
$.0001 par value, 50,000 shares authorized,
none issued -- --
Common stock, $.0001 par value, authorized 9,950,000
shares; 2,369,784 and 2,030,195 shares issued and
2,108,705 and 2,030,195 shares outstanding at
December 31, 1995 and 1994 211 203
Additional paid-in capital 287,751 130,739
Accumulated deficit (5,111,741) (548,340)
Common stock subscription receivable (100,000) (100,000)
---------- ---------
Total shareholders' equity (deficit) (4,923,779) (517,398)
---------- ---------
Total liabilities and shareholders' equity (deficit) $10,706,251 4,930,044
========== =========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
GLOBAL LINK TELECO CORPORATION
Statements of Operations
For the year ended December 31, 1995 and
the period from inception (March 28, 1994) to December 31, 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net revenues $8,429,863 $2,503,658
Cost of revenues 5,870,963 1,442,104
--------- ---------
Gross profit 2,558,900 1,061,554
Sales and marketing expenses 1,836,351 433,441
General and administrative expenses 3,893,620 840,356
Depreciation and amortization 757,590 193,380
--------- ---------
Operating loss (3,928,661) (405,623)
Other income (expense):
Rental income 19,600 7,821
Interest income 29,540 31,464
Interest expense (683,880) (182,002)
--------- ---------
Net loss $(4,563,401) $ (548,340)
========= =========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
GLOBAL LINK TELECO CORPORATION
Statements of Cash Flows
For the year ended December 31, 1995 and
the period from inception (March 28, 1994) to December 31, 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,563,401) (548,340)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 757,590 193,380
Changes in operating assets and liabilities, net of
effects of 1995 acquisition (note 3):
Accounts receivable (984,422) (153,140)
Inventory (72,000) --
Other current assets (15,904) (22,771)
Other assets 83,814 (38,539)
Deferred revenue 1,822,424 --
Trade accounts payable and other current liabilities 2,484,003 413,955
Estimated sales and excise tax obligations 620,000 --
--------- --------
Net cash provided by (used in) operating activities 132,104 (155,455)
--------- --------
Cash flows from investing activities:
Purchase of property and equipment (954,115) (248,179)
Acquisition of business (1,000,000) (1,000,000)
--------- ---------
Net cash used in investing activities (1,954,115) (1,248,179)
--------- ---------
Cash flows from financing activities:
Net proceeds from senior convertible promissory notes
payable -- 2,698,079
Principal payment on notes payable to related party (250,000) --
Proceeds from issuance of common stock -- 1,401
Amounts payable to related party 256,161 733,486
--------- ---------
Net cash provided by financing activities 6,161 3,432,966
--------- ---------
Increase (decrease) in cash and cash equivalents (1,815,850) 2,209,332
Cash and cash equivalents at beginning of period 2,029,332 --
--------- ---------
Cash and cash equivalents at end of period $ 213,482 2,029,332
========== =========
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 66,000 62,930
========== =========
</TABLE>
Refer to notes 3, 6, 7 and 8 for supplemental disclosures concerning certain
noncash investing and financing activities.
See accompanying notes to financial statements.
6
<PAGE>
GLOBAL LINK TELECO CORPORATION
Statement of Shareholders' Equity (Deficit)
For the Year ended December 31, 1995 and the period from inception
(March 28, 1994) to December 31, 1994
<TABLE>
<CAPTION>
Common Stock Treasury Stock Additional Shareholders'
------------------- ----------------- aid-in Accumulated Subscriptions equity
Shares Amount Shares Amount capital deficit receivable (deficit)
------ ------ ------ ------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at inception
(March 28, 1994) -- $ -- -- -- $ -- -- -- --
Sale of common stock 2,006,195 201 -- -- 101,200 -- (100,000) 1,401
Common stock transfer by
shareholders in connection
with acquisition -- -- -- -- 25,941 -- -- 25,941
Stock compensation 24,000 2 -- -- 3,598 -- -- 3,600
Net loss -- -- -- -- -- (548,340) -- (548,340)
--------- ---- ------- ----- ------- ------- -------- -------
Balances at
December 31, 1994 2,030,195 203 -- -- 130,739 (548,340) (100,000) (517,398)
Shares issued in connection
with 1995 acquisition 339,589 8 -- -- 157,012 -- -- 157,020
Shares reacquired from
PTC (note 7) -- -- 261,079 -- -- -- -- --
Net loss -- -- -- -- -- (4,563,401) -- (4,563,401)
---------- ---- ------- ---- ------- --------- -------- ---------
Balances at
December 31, 1995 2,369,784 $211 261,079 -- $287,751 (5,111,741) (100,000) (4,923,779)
========= === ======= ====== ======= ========= ======= =========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
GLOBAL LINK TELECO CORPORATION
Notes to Financial Statements
Years ended December 31, 1995 and 1994
(1) Nature of Operations
Global Link Teleco Corporation (Global Link or the Company) was
incorporated on March 28, 1994 as Phone Zone Teleco Corporation and
subsequently changed its name to Global Link Teleco Corporation on June
20, 1994. The Company is engaged in designing, developing and marketing
prepaid phone cards. The Company sells the prepaid phone cards through
retail telephone calling centers located in the New York Metropolitan
Area and Miami Beach as well as through arrangements with various
companies and individuals that market the Global Link phone cards
through distribution channels or via direct marketing to the public.
The Global Link phone cards provide inter-exchange and international
telecommunications alternatives to conventional phone service. The
Company also provides fax and photocopy service, wire transfers, money
orders, mail box rentals, and utility payment services at the retail
calling centers.
(2) Summary of Significant Accounting Policies
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company defines cash
and cash equivalents as those highly liquid investments purchased with
an original maturity date of three months or less. Included in cash and
cash equivalents at December 31, 1994 are certificates of deposit of
$1,434,000 which bear interest at approximately 6% and mature within 30
days.
Revenue Recognition
1995
The Company records revenue from prepaid phone cards sold at its retail
calling centers when the calling time is utilized by the customer.
Revenue from ancillary services is recorded when the services are
provided.
With respect to cards sold wholesale through third party agents at a
discount, the Company records deferred revenue at the time of the sale
and recognizes revenue as the ultimate customer utilizes calling time.
Agent discounts are recorded as a reduction of gross revenue.
1994
Revenue is recognized when prepaid phone cards are sold by the Company.
In addition to sales through its retail calling centers, the Company
earns commissions from Peoples Telephone Company, Inc. on sales made by
its distribution network. These commissions approximated $100,000
during the period from inception through December 31, 1994.
Inventory
Inventory consists of phone card materials and is stated at the lower
of cost or market, with cost determined using the average cost method.
Property and Equipment
Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective
assets. Expenditures for maintenance and repairs are charged to
operations as incurred.
8
<PAGE>
The estimated useful lives used in computing depreciation of property
and equipment are as follows:
Furniture and fixtures 7 years
Machinery and equipment 7 to 10 years
Computers and office equipment 5 years
Vehicles 5 years
Leasehold improvements are amortized over the lives of the respective
leases or the useful life of the improvements, whichever is shorter.
Goodwill
Goodwill represents the unamortized excess of the cost over the fair
values of the net assets acquired (see note 3 for a description of
acquisitions). Amortization expense of $434,339 and $100,000 for the
year ended December 31, 1995 and the period from inception to December
31, 1994 is computed by using the straight-line method over periods
ranging from 15 to 20 years. The Company periodically reviews goodwill
to assess recoverability and any impairment would be charged to
operations in the period in which such impairment becomes evident.
Other Intangibles
Other intangibles included in other assets included a license fee and
technical service agreement which were being amortized over 25 years
and one year, respectively. Amortization expense was $18,750 and
$60,000 for the year ended December 31, 1995 and from inception to
December 31, 1994, respectively. During 1995 in connection with the
1995 purchase agreement discussed in note 3, the license fee was
reclassified to goodwill. The technical service agreement was fully
amortized in 1995.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Recognition is subject to a valuation allowance
if it is more likely than not that some or all of a deferred tax asset
will not be realized.
Deferred Financing Fees
Deferred financing fees are amortized, using the interest method, and
are included in other assets. Amortization of these costs is classified
as interest expense and totaled $19,801 and $6,529 for the year ended
December 31, 1995 and from inception to December 31, 1994,
respectively.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
and accounts payable approximates fair value due to the short maturity
of these instruments.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the recorded amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
Concentration of Risk
Currently the Company utilizes two principal suppliers of long distance
telephone service. While the Company believes that there are alternate
suppliers, there is no guarantee that the Company will be able to
secure the same rates as currently contracted in the event the
relationship with one or both suppliers is terminated. Recorded
9
<PAGE>
amounts due to these suppliers totaled $1,699,475 at December 31, 1995.
(See also note 11 - Carrier Billing Dispute).
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of, (SFAS 121) was issued in March 1995. SFAS 121 requires
that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company has not yet evaluated how SFAS 121
will impact its financial statements.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) was issued in October 1995. SFAS
123 gives companies the option to adopt the fair value method for
expense recognition of employee stock options and stock based awards or
to continue to account for such items using the intrinsic value method
as outlined under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, (APB 25) with pro forma
disclosures of net income and net income per share as if the fair value
method had been applied. The Company intends to continue to apply APB
25 for future stock options and stock based awards, and, accordingly,
does not anticipate that the adoption of SFAS 123 will have a material
impact on its results of operations or financial position.
The Company plans to adopt both SFAS 121 and 123 effective January 1,
1996.
Reclassifications
The December 31, 1994 financial statements have been reclassified to
conform with the current year's presentation.
(3) Acquisitions
1994 Purchase Agreement
Pursuant to an Asset Purchase and License Agreement dated March 31,
1994 between the Company and Peoples Telephone Company, Inc. (PTC), the
Company purchased two retail calling centers and an exclusive license
to open and operate retail calling stores in the United States which
sell the Global Link prepaid calling cards for $2.5 million plus
167,361 shares of common stock equivalent to 10% of the issued and
outstanding common stock of the Company on a fully diluted basis. Such
shares were obtained from existing stockholders and were valued upon
issuance to PTC at $.15 per share for a total of approximately $26,000.
Including acquisition costs, the purchase price of approximately
$2,550,000 was allocated to the fair value of assets acquired which
included fixed assets ($150,000), the license fee ($100,000) and other
assets ($120,000), with the remainder allocated to goodwill, which is
being amortized over twenty years.
As further described in note 12, PTC and the Company entered into an
agreement in February of 1996 which significantly reduced Global Link's
obligations to PTC.
1995 Purchase Agreement
Pursuant to an asset purchase agreement dated February 15, 1995 between
the Company and PTC, the Company purchased certain assets of PTC's
remaining prepaid phone card division for $6,250,000 plus common stock
equal to 9.99% of the issued and outstanding capital stock (see also
note 7 - Treasury Stock). The purchase price consisted of $1,000,000 in
cash, an 8-1/2% promissory note for $5,250,000 and 78,510 shares of
common stock valued at $2 per share. The promissory note is payable in
full in three years with interest payable quarterly.
The purchase price of $6,407,020 was allocated to the fair value of
assets acquired which included inventory ($25,000), fixed assets
($433,606), with the remainder allocated to goodwill, which is being
amortized over 15 years.
10
<PAGE>
The Company also obtained a noncompete agreement from PTC for the
period covered by the term of the promissory note and for a period of
three years following the date of scheduled full payment of such note.
In addition, the Company agreed to prepay $250,000 of a promissory note
related to the 1994 purchase agreement with PTC (see note 6).
PTC also agreed to allow the Company to utilize and come under its
existing Federal Communications Commission (FCC) and state licenses for
such time as may be reasonably necessary.
As further described in note 12, PTC and the Company entered into an
agreement in February of 1996 which significantly reduced Global Link's
obligations to PTC.
(4) Related Party Transactions
The Company had an agreement to purchase telecommunications services
exclusively from PTC from April 1, 1994 to February 15, 1995, the date
of the 1995 purchase agreement. PTC paid the transmission costs of all
calls and provided 24-hour customer service. The Company paid to PTC an
amount ranging from 55 - 60 percent of the price charged to its
customers. In addition to providing inter-exchange and international
service to the Company, PTC was responsible for the installation and
maintenance of the telephone lines in all of the Company's telephone
calling centers. The Company recorded $305,485 and $733,486 of expense
related to this agreement for the year ended December 31, 1995 and from
inception to December 31, 1994, respectively.
Amounts payable to related parties also include $237,000 at December
31, 1995, due to Global Telecommunication Solutions, Inc. (GTS). This
amount was provided as a bridge financing on a noninterest-bearing
basis pending closure of the transaction described in note 12.
(5) Property and Equipment
Property and equipment consist of the following:
1995 1994
---- ----
Furniture and fixtures $ 274,992 79,344
Machinery and equipment 12,700 --
Computers and office equipment 712,478 62,026
Vehicles 26,057 26,057
Leasehold improvements 543,153 231,722
-------- -------
1,569,380 399,149
Less accumulated depreciation 217,203 41,511
--------- -------
$1,352,177 357,638
========= =======
(6) Debt
Notes Payable to Related Party
In connection with the 1994 purchase agreement with PTC described in
note 3, the Company issued (a) a five-year promissory note in the
amount of $1,900,000 with principal and interest (at 8%) payable
semi-annually through December 31, 1998, (b) a noninterest-bearing note
payable of $500,000 due in 90 days, and (c) a promissory note in the
amount of $100,000 with principal and interest (at 8%) payable
semi-annually through December 31, 1998 in consideration for the
exclusive license granted. The Company made principal payments of
$400,000, $500,000, and $100,000, respectively, on these notes during
1994. The Company elected to pay the $100,000 note in full during 1994
as permitted by the provisions of the note. During 1995 the Company
made a $250,000 principal payment on the $1,900,000 note.
In connection with the 1995 purchase agreement with PTC described in
note 3, the Company issued a three year promissory note in the amount
of $5,250,000 with interest (at 8.5%) payable annually through 1998.
No principal payments have been made on this note.
11
<PAGE>
At December 31, 1995, the notes are secured by substantially all of the
assets of the Company. In the event of default on the notes issued in
relation to the 1994 PTC acquisition, as described in the asset
purchase and license agreement, PTC has the right to assume possession
of all calling centers and the Company would be subject to early
termination fees.
In February of 1996, the PTC notes were adjusted; see note 12.
Senior Convertible Promissory Notes Payable
Through private placement offerings in June of 1994, the Company issued
a total of $2.8 million of 6% secured promissory notes (Securities).
Each Security matures in full on the fifth anniversary of issuance, is
convertible at $2.00 per share into shares of common stock, subject to
certain anti-dilution provisions, or, under certain circumstances, is
convertible into cumulative redeemable preferred stock of the Company,
and may be redeemed after the second year at varying prices. Interest
is payable semi-annually on May 31 and November 30. The agreement
contains certain covenants including restrictions on dividend payments.
The agreement also provides that the stockholders have certain
registration rights with respect to shares of common stock issued or
issuable to them.
At December 31, 1995, the Securities are secured by the assets of the
Company in accordance with the provisions of the Security Agreement,
subject to the security interest of PTC. Additionally, in the event of
a change in control of the Company, the holders of the Securities are
entitled to redemption of the Securities up to 110% of the original
principal amount depending upon the date of redemption (see note 12).
At December 31, 1995, the Company was in default on the November 30,
1995 interest payment amounting to $85,095 which was waived by the
noteholders in 1996 (see note 12). In March of 1996, the Company paid
$550,000 of the principal payments due in 1996.
Based on the revised PTC agreement discussed in note 12, the Company is
required to pay $1,050,000 in principal payments on long-term debt in
1996 and $2,800,000 in 1999, unless the Securities are converted (see
note 12).
(7) Shareholders' Equity
Recent Transactions
In connection with the 1995 purchase agreement with PTC described in
note 3, the Company issued 78,510 shares of common stock (net) valued
at $2 per share.
Stock Split
On June 20, 1994, the Company effected a 8,783 for 1 stock split. The
Company also restated its Certificate of Incorporation to change its
authorized capitalization from 10,000,000 shares of common stock (par
value $.01 per common share) to 9,950,000 (par value $.0001 per common
share) shares of common stock and 50,000 (par value $.0001 per
preferred share) shares of preferred stock. These changes have been
reflected in the financial statements.
Preferred Stock
In 1994, the Company authorized 50,000 shares of preferred stock and
designated it the Series A convertible cumulative preferred stock
(Series A preferred stock). The holders of the Series A preferred stock
are entitled to cumulative dividends at 6% and have a liquidation
preference equal to $1,000 per share plus unpaid cumulative dividends.
None of these shares were issued or outstanding at either December 31,
1995 or 1994.
Common Stock Subscriptions Receivable
In connection with the purchase of 353,391 shares of common stock by an
officer of the Company, the Company received a $58,602 three-year
promissory note with interest payable on the outstanding principal
12
<PAGE>
amount at the annual rate of 5%. Additionally, in consideration for the
purchase of 249,612 shares of common stock by this officer, the Company
received $41,398 in the form of a three-year promissory note with
interest payable on the outstanding principal amount at the rate of 5%.
The officer's right to purchase this stock vests over a four-year
period. No payments have been made on this subscription receivable as
of December 31, 1995.
Treasury Stock
At December 31, 1995, the Company holds 261,079 shares of treasury
stock at a zero cost basis. Such shares were issued to PTC in
connection with the 1995 purchase agreement but returned to the Company
in May of 1995 based on PTC's desire to limit their equity ownership in
the Company to less than 20%.
Stock Options and Stock Compensation
During 1995, the Company granted options to two employees to purchase
45,000 shares of the Company's common stock at $2 per share. Options to
purchase 14,999 shares vested in 1995; the remaining options vest
ratably in 1996 and 1997.
Pursuant to employment agreements with two key employees, the Company
granted options in 1994 to purchase 100,000 shares of the Company's
common stock at $.50 per share for 50,000 shares and at $2 per share
for 50,000 shares. Management believes the fair market value of the
shares at the date these options were granted was $.15 per share.
Options to purchase 80,000 of the 100,000 shares vested in 1994; the
remaining options vest on January 1, 1996. At December 31, 1995, none
of these options have been exercised.
The Company also issued 24,000 shares of common stock in 1994 to
certain employees. Management believes the fair market value of such
stock was $.15 per share and, accordingly, compensation expense was
recorded in connection with this transaction.
(8) Warrants
During 1995, each holder of the senior promissory notes payable
described in note 6 was granted 250 common stock purchase warrants for
the purchase of shares of the Company's common stock at an exercise
price of $6.00 per share, exercisable for a period of five years from
February 15, 1995 for each $25,000 of original principal amounts of
notes held. A total of 28,000 warrants were issued. Each warrant is
callable at the Company's option at par value on or after the date the
common stock market price is $7.25 or more per share and contains
anti-dilution provision. The options were granted as an inducement for
the noteholders to sign the necessary consent and waivers related to
the 1995 PTC purchase agreement. No value was assigned to these
warrants since the exercise price significantly exceeded the estimated
fair value of the Company's common stock as of the date of issuance.
(9) Tax Obligations and Compliance
At December 31, 1995, 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 sales
and use, excise, income or franchise tax returns in any of the
jurisdictions in which it does business since the inception of its
operations. 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 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 and the amount of such adjustment could be
material.
13
<PAGE>
(10) Income Taxes
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1995 and 1994 are as follows:
1995 1994
---- ----
Deferred tax assets:
Deferred revenue $ 619,624 --
Sales/excise tax obligations 210,800 --
Bed debt reserve 40,850 --
Tax loss carryforwards 845,306 190,000
--------- -------
Total gross deferred tax asset 1,716,580 190,000
Less valuation allowance (1,674,078) (170,000)
--------- -------
Net deferred tax asset 42,502 20,000
--------- -------
Deferred tax liabilities:
Depreciable assets, including
goodwill (42,502) (20,000)
--------- ------
Total deferred tax liabilities (42,502) (20,000)
--------- ------
Net deferred taxes $ -- --
========= ======
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax asset will be realized. The ultimate realization of
the deferred tax asset is dependent upon the generation of future
taxable income during the periods in which temporary differences or net
operating loss carryforwards become deductible. Management considers
scheduled reversals of deferred tax liabilities, projected future
taxable income, and tax planning strategies which can be implemented by
the Company in making this assessment. Based upon the Company's
operating loss and scheduled reversal of deferred tax liabilities, the
Company has established a valuation allowance. The valuation allowance
for deferred tax assets as of December 31, 1994 was $170,000. The net
change in the valuation allowance for the year ended December 31, 1995
was an increase of $1,504,078. The Company's tax operating loss
carryforward of approximately $4,985,000 expires in the year 2010. If
certain substantial changes in the Company's ownership should occur,
there would be an annual limitation on the amount of carryforwards
which can be utilized and some or all of the carryforwards could expire
unutilized (see note 12).
(11) Commitments and Contingencies
The Company's future minimum annual rental commitments at December 31,
1995 under operating leases for various calling center locations are as
follows:
Year Amount
---- -------
1996 $531,701
1997 476,245
1998 409,352
1999 324,380
2000 and thereafter $301,690
-------
The Company has the right to terminate certain of the leases given
sufficient advance written notice. Rent expense for the year ended
December 31, 1995 and from inception to December 31, 1994 amounted to
approximately $504,949 and $218,000, respectively.
In addition, the Company leases space from an officer of the Company.
The lease, which is for a five year period beginning January 1, 1995,
provides for escalating rental payments throughout the term of the
lease.
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<PAGE>
The total future commitment under this lease is $217,230. The Company
also has the option to extend the lease for five years. In addition to
the rental, the Company pays for improvements and maintenance relating
to the leased property. The rent paid to this officer for the year
ended December 31, 1995 and from inception to December 31, 1994
amounted to $48,000 and $32,000, respectively.
As of December 31, 1995, the Company has committed to acquire 350
Verifones Tranz 330 terminals and PT 900 printers totaling $143,500, of
which $70,926 was paid in the first quarter of 1996.
Employment Agreements
The Company has entered into employment agreements with certain key
employees. The agreements provide for annual salaries, scheduled salary
increases, bonus compensation, life insurance coverage, options to
purchase shares of the Company's common stock, and severance benefits.
The agreements are for a two-year period and expire from April 1, 1996
to December 1, 1996, with each agreement containing an automatic
two-year extension provision, unless either the Company or the employee
provides the other party with prior written notice.
In connection with the GTS Merger described in note 12, revised
agreements were executed between two key executives and GTS. The
agreements have a term of three years from the merger date. Salary
commitments for the executives total $870,000 over the term of these
agreements.
Carrier Billing Dispute
As of December 31, 1995, a significant provider of telecommunication
services has billed the Company approximately $540,000 which is in
dispute. The Company has not recorded this amount as a liability in the
accompanying financial statements since management believes it was
inappropriately invoiced by the carrier and further believes that the
Company is not obligated to make these payments. The parties are
presently in discussions regarding this dispute.
Litigation
In August 1995, the Company was served with a claim in the amount of
approximately $330,000 for collection of invoices for alleged service
rendered to PTC. In November 1995, PTC and the Company received a
letter alleging breach of a Partnership Marketing Agreement dated
October 22, 1993 between plaintiffs and PTC. This letter includes
allegations against the Company and its president for intentional and
negligent business torts, with respect to, among other things, the net
assets associated with the sale of PTC's prepaid calling card division
to the Company. This letter requests certain information and an
accounting regarding business and revenues alleged to be covered by
such partnership agreement, and threatens possible litigation, but does
not quantify any alleged damages.
In connection with the agreement discussed in note 12, PTC has
indemnified the Company with respect to these claims.
The Company is also involved in various other legal actions incidental
to the conduct of its business. Management is contesting these cases
vigorously and believes it has meritorious defenses in each matter.
Management does not believe the ultimate outcome of these various legal
actions will have a material effect on the Company's financial
condition, results of operations or working capital requirements.
(12) Subsequent Event - Merger
On February 29, 1996, the Company and GTS executed an agreement and
plan of merger (Merger Agreement) pursuant to which the Company became
a wholly-owned subsidiary of GTS.
In connection with the merger, GTS issued to the holders of the
Company's common stock approximately 1.7 million common shares based on
an exchange ratio of .64763 shares for each share of the Company's
outstanding common stock. Additionally, the outstanding options and
warrants of the Company automatically converted into the right to
purchase GTS common stock at the rate of .75811 shares of GTS common
15
<PAGE>
stock for each share of the Company's common stock (with an exercise
price of 1.32 times the original exercise price).
GTS guaranteed the payment of principal and interest on, and the costs
of collection of, the Company's senior convertible promissory notes
payable in the aggregate principal amount of $2,800,000. The holders of
the Securities agreed in the Amended and Restated Securities Purchase
Agreement that the Securities are convertible into an aggregate of
906,682 shares of GTS common stock. Additionally, in accordance with
the Consent and Waiver executed by the holders of the Securities, the
holders agreed to waive their right of redemption upon the merger of
the Company with another entity and also agreed to waive interest
payments for November 1995, May 1996, and November 1996 in exchange for
62,679 shares of GTS. The Company may require the conversion of the
promissory notes into GTS common stock or may prepay the promissory
notes if certain criteria are met.
In connection with the merger, the Company executed an agreement
(Peoples Agreement) with PTC, pursuant to which PTC has agreed to
accept $1,050,000 and 52,805 shares of GTS common stock in full
satisfaction of any and all amounts owed by the Company to PTC as of
the date of the Merger Agreement, except for $954,630 owed by Global
Link to PTC. PTC has agreed that the payment of the $954,630 can be
made in four equal quarterly installments commencing one year after the
closing date of the Merger Agreement.
PTC was also issued an additional 481,858 shares of Global Link's
common stock as follows: (1) 131,595 shares in consideration for PTC's
indemnification of the Company in connection with certain litigation
described in note 11, and (2) 350,263 shares related to antidilution
provisions of the March 1994 and February 1995 purchase agreements
between PTC and the Company.
The Company also agreed to lease space from PTC for some of its
switching equipment and its customer service network at a monthly rate
of $2,500. This agreement is cancelable upon six months written notice.
In addition, the Company agreed to pay monthly recurring expenses of
approximately $11,743 for circuit and usage costs.
(13) Liquidity
As indicated in the accompanying financial statements, the Company
incurred a net loss of $4.6 million in 1995 and is in a negative
working capital position of approximately $5.3 million at December 31,
1995. Management of GTS and the Company plan to reduce operating costs
and integrate the activities of the two entities where practical. In
addition, GTS plans to raise additional capital for the combined
business via a private placement transaction. GTS has stated its
intention to provide necessary capital to enable the Company to
continue to operate its business during 1996. Although there can be no
assurance that management will be successful in implementing its plans,
the Company believes that it will be able to generate sufficient cash
from its operations, and financial support from GTS, to enable it to
satisfy its obligations in the normal course of business during 1996.
16
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
Pro Forma Combined Balance Sheet
December 31, 1995
(Unaudited)
The following unaudited pro forma combined balance sheet gives effect to the
acquisition by Global Telecommunication Solutions, Inc., of Global Link Teleco
Corporation in a transaction accounted for as a purchase, as if the transaction
occurred on December 31, 1995. This pro forma combined financial statement
should be read in conjunction with the notes to the pro forma combined financial
statements and the historical financial statements of both companies.
<TABLE>
<CAPTION>
Global Tele- Pro ^ Forma Pro Forma
communication Global ^ Link Adjustments Adjustments
Assets Solutions, Inc. Teleco Corp. ^ debit ^ credit Pro Forma
<S> <C> <C> <C> <C> <C>
Current assets:
Cash $ 928,516 213,482 - (550,000)(c) ^ 591,998
Accounts receivable, net of
allowance for doubtful
accounts 3,508,250 1,137,562 - - 4,645,812
Inventory 268,874 97,000 - - 365,874
Deferred costs 1,235,972 - - - 1,235,972
Convertible notes receivable 325,000 - - - 325,000
Notes receivable 237,000 - - (237,000)(d) -
Prepaid royalties and patent fees 292,911 - - - 292,911
Prepaids and other current assets 155,008 38,675 - ^(82,000)(c) 111,683
--------- --------- ---------- -------- ---------
Total current assets 6,951,531 1,486,719 - ^(869,000) ^ 7,569,250
Furniture, fixtures and equipment, net 428,381 1,352,177 - ^- 1,780,558
Other assets 102,052 212,566 - - 314,618
Goodwill - 7,654,789 16,013,266(c) ^(5,052,934)(c) 18,615,121
--------- --------- ---------- --------- ----------
Total assets $7,481,964 10,706,251 ^16,013,266 (5,921,934) 28,279,547
========= ========== =========== ========= ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 1,819,813 2,203,336 - - ^ 4,023,149
Accrued expenses 491,488 589,706 - 368,000 ^(c) 1,449,194
Deferred revenues 3,513,909 1,822,424 - - 5,336,333
Current portion of note payable
to related party - 422,000 (550,000)(c) 628,000 (c) ^ 500,000
Amounts payable to related party - 1,094,564 (237,000)(d) 97,066 (c) 954,630
Taxes payable - 620,000 - - 620,000
--------- --------- -------------- --------- ----------
Total current liabilities 5,825,210 6,752,030 ^(787,000) 1,093,066 ^12,883,306
Long-term liabilities:
Note payable to related party - 6,078,000 (6,078,000)(c) - -
Senior convertible promissory notes
payable - 2,800,000 - - 2,800,000
--------- --------- ------------- --------- ----------
Total liabilities 5,825,210 15,630,030 ^(6,865,000) 1,093,066 ^15,683,306
Stockholders' equity (deficit):
^ Preferred stock
^ Common stock 31,417 211 (259)(c) 35(b) 49,128
13(a)
17,711(c) ^
Additional paid-in capital 7,308,784 287,751 (2,238,113)(c) 11,021,776(c) 18,330,560
1,417,720(b)
532,642(a) ^
Deferred compensation (197,165) (197,165)
Accumulated deficit (5,486,282) (5,111,741) (532,655)(a) 7,062,151(c) (5,486,282)
(1,417,755)(b)
Common stock subscription - (100,000) - - (100,000)
receivable --------- --------- ---------- ---------- ---------
Total stockholders' equity ^1,656,754 ^(4,923,779) ^(4,188,782) ^20,052,048 12,596,241
(deficit) --------- --------- ---------- ---------- ----------
Total liabilities and
stockholders' equity
(deficit) $7,481,964 10,706,251 ^(11,053,782) ^21,145,114 ^28,279,547
========= ========== ========== ========== ==========
</TABLE>
See accompanying notes to pro forma combined financial statements.
17
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
Pro Forma Statement of Operations
Year ended December 31, 1995
The following pro forma combined statement of operations (unaudited) combines on
a purchase basis of accounting, the statements of operations of Global
Telecommunication Solutions, Inc. and Global Link Teleco Corp. for the year
ended December 31, 1995. The pro forma statement of operations gives effect to
the acquisition of Global Link as if it occurred at the beginning of the year.
The pro forma combined statement of operations is not necessarily indicative of
future operating results and should not be used as a forecast of future
operations. This pro forma combined financial statement should be read in
conjunction with the notes to the pro forma combined financial statements and
the historical financial statements of both companies.
<TABLE>
<CAPTION>
Global Tele-
communication Global Link Pro Forma
Solutions, Inc. Teleco Corp. Adjustments Pro Forma
--------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Net sales $ 3,144,350 8,429,863 - 11,574,213
Cost of sales (2,892,580) (5,870,963) - (8,763,543)
--------- --------- ---------- ---------
Gross profits 251,770 2,558,900 - 2,810,670
--------- --------- ---------- ---------
Operating expenses:
Selling and marketing 1,406,160 1,836,351 - 3,242,511
General and administrative 2,008,057 4,651,210 ^ 760,700(e) ^ 7,419,967
--------- --------- -------- ----------
Total operating expenses 3,414,217 6,487,561 ^ 760,700 10,662,478
--------- --------- -------- ----------
Operating loss (3,162,447) (3,928,661) ^(760,700) (7,851,808)
Other income (expense):
Interest income 192,482 29,540 - 222,022
Interest expense - (683,880) ^ 472,309(f) ^(211,571)
Other 342 19,600 - 19,942
--------- -------- --------- --------
Loss before income taxes (2,969,623) (4,563,401) ^(288,391) (7,821,415)
Provision for income taxes (500) - - (500)
--------- --------- ---------- ---------
Net loss for period $(2,970,123) (4,563,401) ^(288,391) (7,821,915)
========= ========= ======== =========
Net loss per share ^(.95) (1.59)
========= =========
Weighted average common shares ^ 3,141,678 4,912,801(g)
outstanding ========= =========
</TABLE>
See accompanying notes to pro forma combined financial statements.
18
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
Notes to Financial Statements
December 31, 1995
(unaudited)
(1) Basis of Presentation
The acquisition of Global Link Teleco Corp. (Global Link) is accounted
for as a purchase and, in accordance with generally accepted accounting
principles, the purchase price is allocated to the assets and
liabilities of Global Link based on their fair values at the date of
acquisition.
(2) Pro Forma Adjustments and Assumptions
The pro forma combined financial statements of Global Telecommunication
Solutions, Inc. (GTS) and Global Link give effect to the following pro
forma adjustments and assumptions:
(a) ^ Record the issuance of ^ 131,595 shares of Global Link
common stock ^ to Peoples in exchange for ^ the Peoples
indemnification.
(b) Record the issuance of ^ 350,263 shares of Global Link common
stock to Peoples ^ in connection with antidilution provisions
related to the purchase of assets from Peoples.
(c) This adjustment records the acquisition of Global Link and the
related agreement with Peoples Telephone Company to reduce the
purchase price paid ^ to Peoples ^ whereby Peoples accepted
$1,050,000 ($550,000 of which was paid on the merger date^)
and 52,805 shares of GTS common stock ^ in full satisfaction
of any and all amounts ^ owed by Global Link to Peoples ^,
except for $954,630 ^. As a result of the agreement with
Peoples, Global Link reduced its liabilities and the goodwill
associated with the purchase from Peoples by approximately
$5,053,000. No gain or loss was recognized by Global Link
with respect to this adjustment.
^ Additionally, this adjustment reflects the issuance of
1,718,318 shares of GTS common stock in addition to the 52,805
shares issued to Peoples and the elimination of Global Link's
equity. The total cost of the acquisition, including^
estimated acquisition costs ^ of $450,000, was approximately
$11,500,000 and resulted in goodwill of $18,615,121.
^(d) To eliminate intercompany account balances.
^(e) To record the amortization of goodwill on a straight-line
basis over 15 years and to eliminate amortization of the
predecessor's goodwill.
^(f) To eliminate interest expense on amounts due to Peoples which
were adjusted (see (c) above).
^(g) Represents the weighted average common shares outstanding
during 1995, plus 1,771,123 issued in connection with the
merger.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Amendment to be signed on its behalf
by the undersigned hereunto duly authorized.
Dated: ^September 5, 1996 GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
----------------------------------------
(Registrant)
/s/ Maria Bruzzese
----------------------------------------
Maria Bruzzese
Chief Financial Officer
20
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