U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-^ KSB/A
(Mark One)
----- ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE | X | SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] ----- For the fiscal year ended December 31, 1995
OR
-----
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
----- THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 1-13478
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-^ 3698386
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
40 Elmont Road
Elmont New York 11003
(516) 326-1940
(Address, including zip code, and telephone number, including area code,
of registrant's executive offices)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class: Name of Each Exchange on Which Registered
Common Stock Boston Stock Exchange
Common Stock Boston Stock Exchange
Purchase Warrants
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
The issuer's revenues for its most recent fiscal year were $3,144,350.
State the aggregate market value of the voting stock held by nonaffiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: As of April 9, 1996, the aggregate market value of such stock was
$14,041,563.25.
State the number of shares outstanding of each of the issuer's class of
common equity, as of the latest practicable date: As of April 9, 1996, the
number of shares of Common Stock outstanding was 4,912,801.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
Global Telecommunication Solutions, Inc. and its subsidiaries
("Company" or "GTS") ^ design, develop and ^ market prepaid phone cards
featuring licensed, promotional and standard graphics. The Company markets its
prepaid phone cards as a convenient alternative to credit calling cards and
conventional coin or collect long distance calls. The Company also provides card
user access to long distance service through its switching facilities and long
distance network arrangements. The Company's phone cards are designed to promote
a high level of consumer awareness and appeal by combining creative graphic
designs and widely-recognized concepts, characters and/or images with long
distance service features and ancillary advertising and promotional benefits,
such as broadcast messaging, voice mail, foreign language instruction,
customized information and advertising, celebrity and character voices and
customized greetings.
Acquisition of Global Link
On February 29, 1996, the Company acquired Global Link Teleco
Corporation ("Global Link"). Global Link markets and sells prepaid phone cards
through its retail phone centers and wholesale distribution network. See
"Certain Relationships and Related Transactions -- ^ The Global Link
Acquisition." The Company anticipates that the acquisition of Global Link will
significantly increase its customer base and revenues and, through economies of
scale, improve operating margins.
Global Link markets its prepaid phone cards through various
wholesale distributors and retailers, including supermarkets, convenience
stores, travel agents and tour wholesalers, to consumers seeking economical and
convenient long distance services and to international travelers for use in the
United States and abroad. Global Link also markets its prepaid phone cards to
corporations seeking phone cards for promotional use, internal use or sale to
the corporations' customers.
Global Link's retail phone centers also market and sell the
Global Link(TM) phone card to provide public telecommunications services to
urban residents who may not otherwise have a medium to place international and
domestic long distance calls. Many lower income urban households with telephones
do not have access to interexchange telecommunications services, often due to
poor credit or unavailability. The Global Link phone card enables the Company's
customers to place telephone calls from any touch-tone telephone or the
Company's retail phone centers.
Global Link's retail phone centers are brightly lit,
attractive environments located in urban shopping areas having a high volume of
pedestrian traffic. Each retail phone center has a street level store front
offering high and easy accessibility. These retail phone centers provide two
primary functions: (i) to sell Global Link's phone cards and (ii) to enable the
customers to place telephone calls and pay for those calls with the phone card.
Other services, including money transfers, mailbox rentals, photocopying, may
also be provided at some of Global Link's retail phone centers. Such other
services, however, do not and are not expected to constitute a material part of
the retail phone centers' business. Global Link currently operates 12 retail
phone centers in Brooklyn and Queens, New York and South Miami Beach, Florida.
Corporate Background
GTS and Global Link were incorporated under the laws of the
State of Delaware in December 1992 and March 1994, respectively. The Company's
principal executive offices are located at 40 Elmont Road, Elmont, New York
11003 and its telephone number is (516) 326-1940. Global Link's offices are
located at 5697 Rising Sun Avenue, Philadelphia, Pennsylvania 19120 and its
telephone number is (215) 342-7700.
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Market Overview
The markets for prepaid phone cards have grown in recent
years. Advances in long distance telephone services, coupled with the
convenience and features of prepaid phone cards, have resulted in demand for and
increasing use of phone cards for various business and personal reasons. The
number of prepaid phone cards sold as collectors' items in worldwide markets has
also increased and prepaid phone cards have become increasingly popular with
large corporations for internal use and in connection with marketing,
advertising and promotional activities. Although the markets for prepaid phone
cards in Europe and Japan have matured, markets in the United States are
emerging and are largely undeveloped. According to industry sources, domestic
prepaid phone card sales were approximately $75 million in 1993 and grew to
approximately $200 million in 1994 and $500 million in 1995.
Two types of prepaid phone card technologies currently are ^
used in the United States. Most domestic prepaid phone cards, including the
Company's cards, utilize a remote memory technology, which permits users to
place domestic and international calls from any touch-tone phone by calling a
toll-free 800 number and entering a PIN number printed on the back of the card.
By contrast, "smart" card technology utilizes computer chips, magnetic strips or
optical readers incorporated into the cards which must be swiped or inserted
through a specially-designed device incorporated into the telephone. Smart card
technology requires the replacement of standard telephones with telephones that
have mechanisms capable of reading such cards. Smart card technology is
currently in widespread commercial use in Europe and Japan and has been
introduced in the United States on a limited basis ^ by companies such as NYNEX
Corporation ("NYNEX"), a leading regional telephone company. In order for smart
card technology to become a viable option for a calling card company in any
particular area, all or substantially all of the public pay telephones in that
area must have the technology to accept and read the smart cards. Accordingly,
NYNEX might be able to utilize smart card technology ^ as a viable economic
alternative to remote memory technology in areas, such as New York City, in
which NYNEX owns and operates a significant number of its own public pay
telephones (and thus, controls the technology), but currently the Company could
not. However, smart card technology may be a viable alternative in a "closed"
environment in which the Company would have access to each of the consumers
which would utilize the public telephone system in such environment and in which
there was only one public pay telephone provider. Examples of closed
environments include colleges, universities and entertainment facilities.
Notwithstanding the foregoing, the Company may choose not to implement smart
card technology at all if the Company determines that its prepaid calling cards
are not being primarily utilized from public pay telephones. Moreover, in the
event the Company chooses to implement smart card technology, it may not replace
its remote memory technology entirely because many of the Company's customers
utilize its prepaid phone cards from telephones other than public pay
telephones. Unlike smart cards, the Company's prepaid phone cards may be
utilized from any touch-tone telephone.
Strategy
The Company is pursuing a growth strategy to capitalize on its
early entrance into the emerging and expanding markets for prepaid phone cards
in the United States and Canada, and on the marketability of the licensed
concepts featured on many of the Company's cards. Significant components of the
Company's strategy include: (i) increasing demand for phone cards by expanding
retail distribution to enhance market penetration and utilizing popular
concepts, images and graphics licensed to the Company on its prepaid phone cards
to heighten consumer interest; (ii) encouraging corporations to use the
Company's phone cards for internal use and in connection with their marketing,
advertising and promotional activities; (iii) expanding the Company's
international network of distributors to market the Company's phone cards
overseas; (iv) creating and marketing interactive applications which can be
accessed by using the Company's phone cards; (v) pursuing the acquisition of
companies that fit within the Company's business strategy and which can, through
economies of scale, improve the Company's operating margins; and (vi)
maintaining the Company's retail phone center operations. The Company also
intends to continue development of multi-functional debit card applications for
entities such as colleges, sporting arenas and theme parks which can be used by
consumers to make small item purchases offered at and sold by such entities, as
well as for placing long distance telephone calls. The Company seeks to develop
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the components of its strategy both internally and, where appropriate, through
joint venture arrangements.
Retail Distribution Network and Licenses. The Company seeks to
increase the demand for, and direct retail sales of, its phone cards by
marketing them through high traffic retail cash businesses, such as convenience
stores, supermarkets, discount stores, truck stops, mass merchandisers, drug
stores, and by placing prepaid phone card vending machines in targeted
locations. The Company also seeks to establish marketing arrangements with
strategic partners which possess widespread distribution channels and access to
substantial numbers of consumers that are likely to utilize the Company's
prepaid phone cards, such as newsstand distributors, food brokers and vending
machine companies. The Company believes that this approach will permit the
Company to obtain a direct point-of-sale marketing position in selected
locations which are likely to attract target consumers.
The Company has assembled a significant library of licenses to
use sports and comic book concepts, celebrities, characters and other images on
its cards, including concepts licensed from the Marvel Entertainment Group, Inc.
("Marvel") and NHL Enterprises Canada Inc. ("NHL Canada"), among others. The
Company believes that the current popularity and consumer recognition of its
licensed concepts and graphics help create awareness and demand for the
Company's phone cards, as well as providing a competitive marketing advantage
over companies which do not have significant libraries of licensed graphics.
Corporate Customers. The Company seeks to market its phone
cards to corporations for promotional use, internal use or sale to the
corporations' customers. Corporations can purchase custom-designed prepaid phone
cards featuring their logos or products and customized advertisements and
promotional messages for use in connection with promotions and premium
give-aways. The Company has produced numerous promotional cards for corporate
customers such as Taco Bell Corp. ("Taco Bell"), Lufthansa German Airlines (USA)
("Lufthansa") and R.J. Reynolds Tobacco Company ("RJR"), among others.
Corporations can also provide their employees with phone cards to limit phone
usage and avoid operator-service charges. Corporations can also sell phone cards
provided by the Company to their customers through their own distribution
channels.
International Distribution. The Company seeks to increase the
distribution of its prepaid phone cards to business and vacation travelers who
visit the United States each year and in markets abroad. The Company currently
markets its phone cards to international travelers through a network of
distributors, including: (i) travel agencies and tour wholesalers located in
certain foreign countries, including the United Kingdom, Germany, Brazil,
Argentina, Australia, France, Italy, the Netherlands, Canada, Ecuador, Korea,
Sweden, New Zealand, Columbia, Saudi Arabia, Peru, and the Philippines; (ii) car
rental agencies in the United States and abroad; and (iii) international
airlines which feature regularly scheduled flights from abroad to destinations
within the United States.
Foreign Visitors to the United States. The Company sells its
cards to foreign visitors travelling to the United States. According to the
United States Travel and Tourism Administration ("USTA"), the number of
international travelers to the United States increased from approximately
39,500,000 in 1990 to an estimated 46,000,000 in 1995. Because of the prevalence
of phone cards overseas, many international travelers are already familiar with
and comfortable using prepaid phone cards. Moreover, while in the United States,
international travelers can generally place local, long distance and
international calls only through their hotels, which generally add a twenty to
fifty percent surcharge to operator assisted rates, or public pay telephones,
which generally do not allow the caller to place international telephone calls
and are unable to accept foreign credit cards. Accordingly, the Company believes
that prepaid phone cards can serve as a convenient, economical method for
international travelers in the United States to place long distance and
international calls.
European Sales. The Company intends to sell prepaid phone
cards in European markets for use in such markets. In December 1995, the Company
entered into an agreement ("Viatel Agreement") with YYC Communications, Inc., a
wholly-owned subsidiary of Viatel, Inc. ("Viatel"). Viatel is a worldwide
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provider of international long distance services, providing its services to more
than 10,000 businesses worldwide, with a focus on customers in Western European
countries where the telecommunications industry is currently being deregulated.
The Viatel Agreement allows the Company to utilize Viatel's transmission
facilities to provide users of the Company's phone cards with intra-European
transmission services. The Viatel Agreement also allows the Company to market
its phone cards across Europe utilizing Viatel's established distribution
network and sales force, together with the Company's own marketing operations.
Canadian Sales. The Company recently formed Global
Telecommunication Solutions (Canada), Inc., a wholly-owned, Canadian subsidiary
of the Company, to pursue opportunities in the Canadian phone card marketplace.
Unlike the European marketplace, the Canadian phone card market, like the United
States phone card market several years ago, is young and emerging. In building
its Canadian operations, the Company intends to follow the same strategy that it
utilizes in connection with the growth of its operations in the United States.
The Company intends to utilize the insight gained by its management team as a
result of the Company's early entrance in the United States phone card market to
gain access to the Canadian market.
The Company has entered into an agreement (the "MTS
Agreement") with The Manitoba Telephone System ("MTS"), a Canadian local
exchange company located in the city of Winnipeg in the province of Manitoba,
pursuant to which the Company may utilize MTS' prepaid calling card platform.
Additionally, MTS has agreed to promote the Company as the sole provider of MTS
prepaid phone cards and enhanced and interactive services. The Company also has
an arrangement with Bell Canada, a local exchange company serving the provinces
of Ontario and Quebec, pursuant to which the Company acts as a preferred agent
of Bell Canada and can utilize Bell Canada's logos on the Company's phone cards.
Additionally, the Company recently commenced offering its prepaid phone cards at
approximately 270 Stop 'n Shop convenience stores operated by Mohawk Oil Co.,
Ltd. throughout Western Canada. In order to enhance Canadian consumer interest,
the Company is offering phone cards which feature officially licensed National
Hockey League images at the Stop n' Shop locations. The Company also has
produced numerous promotional cards in Canada for, among others, Seagrams of
Canada, Kellogg Canada, Inc., and Manitoba Blue Cross.
Interactive Phone Cards. The Company seeks to continue to
create and market interactive applications which can be accessed by using the
Company's phone cards. The Company's in-house creative and design personnel,
proven experience in designing and implementing interactive applications, and
in-house digital recording facilities, provide the Company with the ability to
create enhanced products and customized promotional and corporate programs. The
Company recently created the first-ever "fan club by phone" with its Candice
Cameron "Buzz" phone cards and signed an agreement to produce an interactive
card with Jonathan Taylor Thomas, star of television and movies. The Company
also has recently produced a "Kids-in-Touch Safety Phone Card" which permits a
child to place a five-minute telephone call anywhere in the United States to a
selected, pre-programmed telephone number such as a mother or father's office
number or a neighbor's number.
Acquisition of Companies. The Company also seeks to expand its
operations through the acquisition of prepaid phone card companies and companies
in telecommunications businesses which the Company believes are compatible with
its businesses. In determining whether to make an acquisition, the Company will
consider the potential of each acquisition candidate to maximize revenues and
future growth. On February 29, 1996, the Company acquired Global Link. See
"Certain Relationships and Related Transactions -- ^ The Global Link
Acquisition."
Retail Phone Centers. The Company currently operates 12 retail
phone centers. The Company believes that its retail phone centers help create
awareness and demand for the Global Link phone card. To increase retail phone
center sales, the Company plans to conduct various network-wide promotions.
These promotions will offer consumers discounted rates for calls to countries to
which the Company typically carries a high volume of calling traffic, calls
placed during specified times, such as on holidays, and certain other types of
calls. The Company has not yet determined whether it will seek to expand the
number of retail phone centers which it operates.
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Prepaid Phone Cards
Prepaid phone cards have the physical characteristics of a
traditional credit card and can be produced with high quality multi-color
graphic designs or images. Prepaid phone cards permit users to place local, long
distance and international calls from any touch-tone telephone, eliminating the
need for credit cards, coins and collect calls. Phone card users easily access
telephone service by dialing a toll-free 800 number and entering a PIN number
printed on the back of the card. A computer voice informs the caller of the
value remaining on the card and the cost of the call is automatically deducted
from the prepaid account. The user is also notified when there is one minute of
calling time remaining on the card. The Company's phone cards provide users with
limited licenses to access the Company's switching facility enabling users to
place long distance calls prior to the expiration dates printed on the cards,
the collateral materials or one year from the date of last use. Unlike credit
calling cards which provide virtually unlimited credit and impose surcharges on
long distance services, the Company's phone cards are paid for in advance, and
are issued in specific denominations of $5.00 generally up to $100.00. Customers
utilizing a prepaid phone card are not charged the per-call surcharge and
service fees which may be applicable to long distance coin calls, credit card
calls and other operator assisted calls offered by other telecommunication
providers.
The Company markets phone cards for use by persons seeking
economical and convenient long distance services; phone cards featuring licensed
graphics; and phone cards for promotional use, internal use or sale to consumers
by large corporations or for fund raising. The Company's phone cards can be
designed to combine creative graphic designs and widely-recognized concepts,
characters and/or images with long distance service features and ancillary
advertising and promotional benefits, such as broadcast messaging, voice mail,
foreign language instruction, customized information and advertising, celebrity
and character voices and customized greetings.
The Global Link and GTS Cards and Other Standard Cards. The
Company sells standard cards, including its Global Link and GTS phone cards,
through its retail phone centers and through its wholesale distribution network.
The Company's standard cards typically consist of a Global Link or GTS logo or
name and other generic images. The Company does not incur any licensing costs in
connection with producing and marketing its standard cards. Accordingly, the
Company is able to charge per-minute calling rates which are lower than those
charged for the Company's cards featuring licensed or promotional graphics and,
in certain instances, lower than conventional long distance access.
Management believes that the Global Link phone card has become
widely established as a leading prepaid phone card in the United States. The
Global Link phone card provides consumers with economical long distance service
which is less expensive than coin calls from public pay telephones, collect
calls, and, in many instances, major carriers' credit calling cards. A typical
long distance call (approximately three minutes in length between the hours of
8:00 a.m. and 5:00 p.m.) made with the Company's Global Link phone card can cost
the consumer as little as $0.75, which represents a discount of 50% or more from
the price of an identical call placed using the AT&T Calling Card, MCI Calling
Card, Sprint Calling Card or 1-800-Collect.
The Global Link and GTS phone cards are rechargeable, which
permits a customer to purchase one phone card and add additional calling time to
that phone card as needed. This allows the customer to continue to use the same
PIN number for an indefinite period of time. The Company's customers can
recharge their phone cards at any of the Company's retail phone centers, at any
of the Company's corporate customers which serve as agent recharge stations,
and, in certain instances, by dialing a toll-free 800 number and furnishing
major credit card information. The Company's management believes that the
rechargeability of the Global Link and GTS phone cards provides the Company with
a competitive advantage over many of its competitors whose cards do not provide
users with recharge capabilities.
The Global Link phone card can be activated and recharged at
the retail level through the Company's ActiPhone(TM) system. The ActiPhone
system is a software-based program developed by the Company to serve as an
interface between the Company's employees, agents and customers and the
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Company's switching facilities, allowing telephone access to the switching
facility through easy to follow prompts while minimizing the Company's exposure
to fraud. The ActiPhone system converts the information input by the employee,
agent or customer into a computer language which the switching facilities can
understand. The ActiPhone system also gathers information and provides the
Company's management with timely reports on activations, recharges, volume and
revenue.
Sales of standard cards accounted for approximately 10.4% of
the Company's revenues for the fiscal year ended December 31, 1995. Sales of the
Global Link phone card, however, did not account for any of the Company's
standard card sales during 1995, as the Company did not acquire Global Link
until February 29, 1996.
Licensed Graphic Cards. The Company sells phone cards bearing
widely-recognized names, images, likenesses, characters, logos and emblems
licensed from third parties, consisting primarily of comic book characters and
sports celebrities. The Company believes that its licensed graphics are
attractive to consumers seeking uniquely designed and visually appealing prepaid
phone cards. Many prepaid phone cards, depending on their scarcity,
attractiveness of design and collector demand, have experienced increased prices
in the secondary market. The Company creates limited editions of certain of its
licensed graphic cards, which the Company believes enhance the value and
collectibility of such cards in the secondary market.
The Company has entered into license arrangements, most of
which are nonexclusive, permitting it to market prepaid phone cards bearing the
widely-recognized names, images, likenesses, characters, logos and emblems of
licensors including Marvel, The Childrens' Television Workshop (Sesame Street),
NHL Canada, the Naismith Memorial Basketball Hall of Fame, Inc. and Winterland
Concessions Co. (licensor of Led Zeppelin and Jimmy Hendrix imagery). The
Company's licenses typically provide the Company with the right to market
licensed products in the United States and, in some instances, worldwide. The
Company's licenses generally require the Company to make advance royalty
payments, pay royalties as a percentage of net sales, pay guaranteed minimum
royalty payments and obtain licensor approval of all licensed products and
promotions and advertisements for such products and, in certain circumstances,
the manufacturer of such products. The amount of unpaid guaranteed minimum
royalties under these arrangements as of December 31, 1995 was $176,500. In
addition, these licenses generally permit the Company to market its finished
inventory of licensed products for two to six months after termination of the
respective license. The Company is also typically required to satisfy minimum
sales or royalty requirements to renew the licenses.
Sales of phone cards featuring licensed graphics accounted for
approximately 37.3% of the Company's revenues for the fiscal year ended December
31, 1995, with sales of phone cards featuring imagery licensed from Marvel
accounting for 19% of the Company's revenues during such year.
Promotional Cards. The Company sells custom designed phone
cards to corporate customers for promotional use. Corporate customers typically
purchase custom designed cards featuring their logos and/or products and
customized advertisements and promotional messages for use in connection with
promotions and premium giveaways. The Company has designed such cards for Taco
Bell, Lufthansa and RJR, Dewar's of Schiffelin and Somerset Liquors, Bank of
Tokyo, Success Magazine, the Intrepid Sea Air Space Museum, Rollerblade, Inc.,
the New York, Greater Boston and Washington, D.C. Convention and Visitors
Bureaus, Broadcasting and Cable Magazine and Fortune Magazine, the Company also
has recently received a purchase order from a leading manufacturer of food
products to produce over $1 million in prepaid phone cards for a promotional
event to be conducted by such retailer. The Company also has recently produced
promotional cards for Yoo-Hoo Chocolate Drink and Microsoft Corporation. For the
fiscal year ended December 31, 1995, approximately 25.2% of the Company's
revenues were derived from sales of promotional cards to a limited number of
customers, all of which sales are non-recurring in nature.
Other Cards. The Company also produces cards for sale by
various companies as their own prepaid phone cards to their own customers,
including the Southern New England Telephone Company ("SNET"). During the year
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ended December 31, 1995, sales of such prepaid phone cards to SNET accounted for
approximately 18.3% of the Company's revenues.
Trademarks
The name "Global Link" and the design of the Global Link
prepaid phone card are registered trademarks. The Company also has filed
trademark applications for (i) the name "Peoples Telecard," a prepaid phone card
which the Company intends to market in the near future; (ii) the name "Global
Calling Card," a prepaid phone card currently marketed by the Company; (iii) the
phrase "Connecting People Around the Globe," which is a slogan utilized by
Global Link in marketing phone cards; and (iv) the name "Actiphone."
Applications have also been filed to register the name "Global Link" and the
design of the Global Link phone card in the certain foreign countries. There can
be no assurances that the Company will receive registration for any applied for
trademarks or that any registered trademark will provide the Company with any
significant marketing or industry recognition, protection, advantage or benefit.
Long Distance Services and Features
The Company provides card user access to long distance
telephone services through its long distance network arrangements and its
switching facilities.
Domestic Long Distance Services. The Company has agreements
with WorldCom, Inc. ("WorldCom") and MCI Communications Corporation ("MCI") to
direct domestic long distance calls over these carriers' networks. Additionally,
Global Link has entered into an agreement with Sprint Communications Co. L.P.
("Sprint") to direct long distance calls over Sprint's network. The Company also
has arrangements with Sprint and IDB WorldCom Services, Inc. ("IDB WorldCom") to
direct international long distance calls (and domestic calls in the case of IDB
WorldCom) over these carriers' networks. MTS also provides the Company with
telecommunications services in Canada under the terms of the MTS Agreement.
Additionally, Global Link has an arrangement with Trescom International, Inc.
("Trescom") to direct international long distance calls over Trescom's network.
Pursuant to these arrangement, the Company leases long distance lines owned by
the long distance carriers and is billed monthly for calls directed by the
Company's switching facility. As a volume purchaser of long distance services,
these agreements provide the Company with the ability to purchase long distance
services at rates which are less expensive than those charged to individuals.
The per-minute rates charged by the Company to consumers varies and is
determined based on the type of card, the features provided by the card and the
Company's costs in producing the card, including royalty fees. The Company
anticipates that, as the volume of long distance minutes generated by consumers
utilizing the Company's cards increases, it will be able to negotiate more
favorable rates.
The Company's agreements with WorldCom and MCI will expire
during 1996, but can be renewed at the option of the Company. Global Link's
agreement with Sprint for domestic services is for a term of five years and can
be renewed at the option of Global Link thereafter. Under the terms of these
agreements, the Company is typically obligated to satisfy certain minimum
monthly or annual service usage through the carrier. In the event that the
Company fails to satisfy such requirements, the Company is required to pay
underutilization charges (equal to the difference between the actual calling
volume and the applicable minimum requirement) and, in addition, if the Company
terminates an interconnect agreement, it would be required to pay an early
termination charge equal to the underutilization charge for the year, plus a
penalty based upon required minimum requirements. The Company has satisfied its
minimum requirements for 1995 and anticipates that it will satisfy such
requirements for 1996. The arrangements with each of Sprint (for international
service), IDB WorldCom and Trescom are open-ended arrangements and do not
provide for minimum volume requirements.
Switching Facilities. The Company's computerized digital
switching equipment routes incoming calls and debits cards as long distance
service is accessed. The capacity of the Company's switching equipment is
limited, but can be upgraded to provide additional capacity as needed. In
addition to providing consumer access to domestic and international long
distance service, the Company, through its switching facilities can provide
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enhanced telephonic features and services, including (i) customized voice
greetings (which the Company believes is an attractive feature to advertisers),
(ii) customized information services (which can provide access to informational
services, such as regional weather reports and monthly news letters), (iii)
voice mail boxes, (iv) broadcast messaging, (v) foreign language instruction and
(vi) information collection services (by which the Company, through its
switching equipment, monitors and collates card usage data to provide marketing
and demographic information to corporate customers). Generally, callers
accessing enhanced telephonic features are charged for such access at a rate
printed on the card or the card's packaging and disclosed by computerized voice
prompts at the time such features are being accessed. In connection with certain
promotional and licensed graphic cards, however, enhanced telephonic features,
such as customized information services, may be provided to callers at no
additional charge. The Company seeks to design and develop additional enhanced
telephonic features in order to increase the marketability of its cards and
satisfy individual customer requirements. To date, these services have been
provided on a limited basis.
Domestic Switching Facilities. Domestic and international long
distance telephone calls originating within the United States are routed through
one of the Company's switching facilities or routed through the switching
equipment of one of the Company's vendors. The Company's switching facilities
are located in Elmont, New York, Atlanta, Georgia, Miami, Florida and Jersey
City, New Jersey. In addition to its own switching facilities, the Company
utilizes the switching facilities of outside vendors including West Interactive
Corp., InComm, a subsidiary of U.S South Communications, Inc., and Interactive
Media Works Inc. Each of these vendors provides switching facilities and network
services to the Company and the Company pays monthly fees based on minutes of
calling time generated and/or quantity of PIN numbers programmed for use with
phone cards.
The Company has an arrangement with EarthCall Communications
Corp. (formerly Interactive Services Inc.) to administer, maintain and manage
the daily operations of the Company's switching equipment located in Atlanta,
Georgia for which the Company pays a monthly fee based on the number of the
Company's phone cards which are activated during the month. The Company's
switching facilities located in Elmont, New York are located within the
Company's principal executive offices and are maintained by the Company's
employees and by the manufacturer of the equipment. Global Link's switching
facilities located in Miami, Florida are located at the offices of Peoples
Telephone Company, Inc. ("Peoples") and are maintained by the Company's
employees, with the assistance of Peoples representatives in the event of an
emergency. Global Link's switching facilities located in Jersey City, New Jersey
are located at NTT Data Communications Systems Corporation, an affiliate of NTT
America, Inc. ("NTT"), a Global Link customer, and are maintained by Global
Link's employees, with the assistance of NTT representatives in the event of an
emergency.
Canadian Switching Facilities. All calls originating within
Canada are routed through MTS' switching facilities located in Winnipeg,
Manitoba. The switching facilities are located at MTS' offices and are
maintained by MTS personnel.
International Switching Facilities. The Company has recently
installed switching facilities at Viatel's telecommunications operations center
located in Omaha, Nebraska and intends to install switching facilities at
Viatel's telecommunications operations center located in London, England. The
Company's switching facilities located at Viatel's operations centers will be
utilized to route telephone calls originating within Europe and terminating
within Europe and/or the United States.
Sales and Marketing
To date, the Company has marketed its phone cards (i) directly
to the end user through its retail phone centers, (ii) to retail establishments
such as convenience stores, supermarkets, discount stores, mass merchandisers,
check cashers, travel offices and airlines, (iii) through distributors which
distribute the Company's phone cards directly to retail establishments or the
end user, (iv) through marketing arrangements with companies having established
distribution channels and (v) as promotional items to corporations and other
entities. The Company intends to expand its in-house sales and marketing
department, which will continue to market the Company's phone cards directly to
retail establishments, and to continue to identify strategic partners which
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already have distribution channels or networks in place to establish marketing
arrangements whereby those distributors will sell the Company's phone cards
through their own distribution networks. The Company regularly participates in
trade shows, direct marketing and print advertising, and develops promotional
kits to market its promotional and custom designed cards to large corporations.
Design and Manufacturing
The Company's phone cards are designed internally by the
Company utilizing its in-house design capabilities. The Company currently
engages an in-house staff of five creative personnel who are responsible for
designing the Company's phone cards. The Company's staff creates original
designs for promotional and custom designed cards and develops the layouts for
cards featuring licensed graphics. Additionally, the Company's principal offices
house a digital recording studio, which allows the Company to internally record
voice messages and other audio presentation and to design interactive and other
applications for its cards.
Upon completion of the design of a phone card, the Company
produces paper production samples of such card, converts it into a film
production sample and delivers it to a manufacturer, which prints the card on
plastic sheets and cuts the sheets into phone cards. The Company utilizes
several manufacturers for the production of its phone cards and believes that
there are adequate sources of supply and manufacturing capacity to address the
Company's requirements.
Government Regulation
Long distance telecommunication services are subject to
regulation by the FCC and by state regulatory authorities. Among other things,
these regulatory authorities impose regulations governing the rates, terms and
conditions for interstate and intrastate telecommunication services. The federal
law governing regulation of interstate telecommunications is undergoing
substantial change as a result of the ^ Telecommunications Act of 1996 (the " ^
Telecommunications Act") which was passed by Congress on February 1, 1996 and
signed into law by President Clinton on February 8, 1996. The ^
Telecommunications Act, among other things, preempts the rights of states to
prohibit competition in the telecommunications industry, will require the local
exchange carriers to make available their services on an unbundled basis and to
provide interconnection to their local exchange networks to competitors, and
allows the local exchange carriers, including the ^ Regional Bell Operating
Companies to provide long distance services and engage in the manufacturing of
telecommunications equipment. As a result of the ^ Telecommunications Act, the
Federal Communication Commission ("FCC") must undertake many proceedings to
further define the rules affecting competition in the telecommunications
industry and the companies that participate in such industry. While the Company
believes that the ^ Telecommunications Act ^ will foster open competition in the
telecommunications industry and potentially create new opportunities for the
Company to participate in various segments of the industry, the near and
long-term affects of the ^ Telecommunications Act ^ and the rules to be
promulgated thereunder on the Company and its operations cannot be anticipated.
The ^ Telecommunications Act ^ governs all "common carriers,"
including AT&T, MCI and Sprint, as well as entities, such as the Company, which
resell the transmission services provided through the facilities of other common
carriers. In general, common carriers are required to charge reasonable rates
and are prohibited from engaging in unreasonable practices in the provision of
their services. Common carriers are also prohibited from engaging in
unreasonable discrimination in their rates, charges and practices.
Each common carrier is required to file tariffs with the FCC.
A tariff is a list of services offered, the terms under which the services are
offered, and the rates, or range of rates, charged for services. Upon filing a
tariff, the service provider is required to provide the services at the rates
and under the terms and conditions specified in the tariff. Failure to file a
tariff could result in fines and penalties. The Company has filed all required
tariffs with the FCC.
In addition to federal regulation, resellers of long distance
services may be subject to regulation by the various state regulatory
authorities. The scope of such regulation varies from state to state, with
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certain states requiring the filing and regulatory approval of various
certifications and state tariffs. The Company is currently evaluating the
regulations governing the provision of long distance service in numerous states
and is in the process of obtaining operating authority in those states where a
substantial portion of its services are provided or are expected to be provided.
As the Company expands the geographic scope of its long distance operations, it
intends to obtain operating authority as may be required to provide intrastate
long distance service.
The Company believes that it is in substantial compliance with
all material laws, rules and regulations governing its operations and has
obtained or is in the process of obtaining all licenses, tariffs and approvals
necessary for the conduct of its business. In the future, legislation enacted by
Congress, court decisions relating to the telecommunications industry, or
regulatory actions taken by the FCC or the states in which the Company operates
could adversely impact the Company's business. Changes in existing laws and
regulations, particularly currently proposed relaxation of existing regulations
resulting in significantly increased price competition, may have a significant
impact on the Company's activities and on the Company's operating results.
Adoption of new statutes and regulations and the Company's expansion into new
geographic markets could require the Company to alter methods of operations, at
costs which could be substantial, or otherwise limit the types of services
offered by the Company. There can be no assurance that the Company will be able
to comply with additional applicable laws, regulations and licensing
requirements.
Competition
The Company faces intense competition in the marketing and
sale of its products and services. The Company's prepaid phone cards and long
distance services compete for consumer recognition with other prepaid phone
cards, credit calling cards and long distance telephone services which have
achieved significant international, national and regional consumer loyalty. Many
of these products and services are marketed by companies which are
well-established, have reputations for success in the development and sale of
products and services and have significantly greater financial, marketing,
distribution, personnel and other resources than the Company, thereby permitting
such companies to implement extensive advertising and promotional campaigns,
both generally and in response to efforts by additional competitors to enter
into new markets and introduce new products and services. Certain of these
competitors dominate the telecommunications industry and have the financial
resources to enable them to withstand substantial price competition, which is
expected to increase significantly. In addition, because the prepaid phone card
segment of the industry has no substantial barriers to entry, competition from
competitors in the Company's target markets is expected to continue to increase
significantly. Many of the large telephone companies, as well as retailers and
companies engaged in the marketing of collectibles, have already entered or have
announced their intention to enter into the prepaid phone card segment of the
industry.
The Company believes that it competes on the basis of value
and service offered by it and its products. The Company believes that the
rechargeability of many of its phone cards and its significant library of
licenses provide it with advantages over many of its competitors. There can be
no assurance, however, that the Company will be able to compete successfully in
its markets. The Company's success will depend on the Company's ability to
provide economical, reliable telecommunications services, to anticipate and
respond to rapid changes in consumer preferences, and to introduce new products
that appeal to the marketplace.
Employees
As of the date of this report, the Company has 72 full-time
employees and 70 part-time employees. The Company considers its relations with
its employees to be satisfactory. None of the employees are represented by labor
unions.
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ITEM 2. PROPERTY
In July 1995, the Company entered into sublease for 9,400
square feet of space located at 40 Elmont Road, Elmont, New York, which houses
the Company's present principal executive offices, switching facility and
digital recording studio. The term of the sublease is for five years and
provides for an annual rental of $145,700.
In August 1995, the Company entered into a lease for
approximately 1,930 square feet for its sales offices located at 60 East 42nd
Street, New York, New York. The term of the lease is for 62 months and provides
for an annual rental of $45,248.
In January 1995, Global Link entered into a lease for
approximately 7,500 square feet of space located at 5697 Rising Sun Avenue,
Philadelphia, Pennsylvania, which houses Global Link's offices, computer systems
and its packaging facilities. The lease is for a term of five years and provides
for an annual rental of $50,400 during 1996, $52,900 during 1997, $ 55,566
during 1998, and $58,344 during 1999. Global Link is renting this space from
Jiljac Realty, the partners of which are Gary J. Wasserson, the Company's Chief
Executive Officer, and his wife Ellen G. Wasserson.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
The Company's Common Stock and Warrants are quoted on the
Nasdaq Small Cap Market ("Nasdaq") under the symbols GTST and GTSTW,
respectively, and listed on the Boston Stock Exchange under the symbols GTL and
GTLW, respectively. The following table sets forth the ranges of high and low
sale prices for the Common Stock and Warrants for the periods indicated, as
reported by Nasdaq, which is the principal trading market for the Company's
securities. The quotes represent inter-dealer prices without adjustment or
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Common Stock Warrants
<S> <C> <C> <C> <C>
Year Ended December 31, 1994: High Low High Low
Fourth Quarter (from December 14, 1994) $ 5-3/4 $ 3-3/32 $ 2 $ 1-3/16
Year Ended December 31, 1995:
First Quarter $ 6-1/2 $ 3-7/8 $ 2-7/8 $ 1
Second Quarter $ 6-1/8 $ 4-1/2 $ 3 1/16 $ 1-5/8
Third Quarter $ 7 $ 5-3/4 $ 3-1/8 $ 1-7/8
Fourth Quarter $ 6-7/8 $ 4-3/8 $ 2-7/8 $ 1-1/8
Year Ending December 31, 1996:
First Quarter $ 7-1/8 $ 5-1/8 $ 3-1/8 $ 1-7/8
Second Quarter
(through April 9, 1996) $ 5-7/8 $ 5 $ 1-15/16 $ 1-11/16
</TABLE>
On April 9, 1996, the last sale prices for the Common Stock
and Warrants were $5-3/4 and $1-15/16, respectively, as reported by Nasdaq.
As of April 9, 1996, there were 4,912,801 shares of Common
Stock and 2,941,678 Warrants outstanding, held of record by 111 and 13 holders,
respectively. The Company believes that there are in excess of 500 beneficial
holders of each of its publicly-traded securities.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The Company generates revenues from sales of prepaid phone
cards. To date, the Company's expenses have exceeded revenues, resulting in
losses of $2,970,121 and $1,946,526 for the years ended December 31, 1995 and
December 31, 1994, respectively. These losses are primarily attributable to
start-up costs, 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
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long distance carriers fees (which long distance billing costs are not 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 card's expiration (generally 12 to 18 months
after issuance) at such date. The Company believes that collectors of prepaid
phone cards bearing licensed graphics may not use a substantial portion of
calling time available on such cards.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The following discussion relates solely to the operations and
financial results of GTS and excludes the operations and results of Global Link,
which was acquired by the Company in February 1996.
Net sales for the year ended December 31, 1995 were $3,144,350
compared to $1,377,900 for the year ended December 31, 1994, an increase of
$1,766,450 or 128.2%. ^ Revenues from the sale of cards featuring licensed
graphics increased ^ by approximately $528,000, primarily as a result of
approximately $644,000 recognized in 1995 upon the expiration of certain ^ cards
and an increase in usage of cards issued in 1994 and 1995, offset by a decrease
of approximately $602,000 of premium card revenue recognized in 1994. Revenues
from the sale of promotional cards increased by approximately $653,000, of which
approximately $118,000 represented revenue recognized upon the expiration of
certain cards. Sales of cards to other carriers increased by approximately
$422,000, of which approximately $187,000 represented revenue recognized upon
the expiration of certain cards. Furthermore, revenue derived from the Company's
standard cards increased by approximately $86,000, of which approximately
$69,000 represented revenue recognized upon the expiration of certain cards. The
remaining increase in revenues of approximately $77,000 was due to an increase
in the sale of non-card products and services. Gross profit margins decreased to
8.0% of net sales for the year ended December 31, 1995, compared to 33.5% of net
sales for the prior year. The net decrease in gross margin is a result of ^ an
increase in transmission costs as a percentage of sales resulting from a
decrease in premium revenue recognized upon the sale of cards featuring ^
licensed graphics ^(which generate higher ^ margins), an increase in sales of
cards with lower margins, an increase in international calls which in certain
instances produced negative margins and an increase in credit card chargebacks,
^ offset by the recognition of revenue upon the expiration of certain ^ cards
which had no associated transmission costs. In addition, production costs as a
percentage of sales increased in 1995 primarily due to the write-off of printing
and production costs related to unsold ^ expired prepaid phone cards^ . These
factors were offset by ^(i) a decrease in royalties as a percentage of sales as
a result of a decrease in the amount of sales of licensed products on which
royalties were due and (ii) a reduction of fees, as a percentage of sales, paid
to third party providers of switching facilities due to the installation of
switching equipment in Elmont, New York.
Selling and marketing expenses were $1,406,160 for the year
ended December 31, 1995, compared to $1,096,071 for the year ended December 31,
1994, an increase of $310,089, or 28.3%. ^ Approximately $568,000, or 51.8%, of
this increase is ^ a result of hiring additional marketing and sales personnel
^, approximately $80,000, or 7.3%, of the ^ increase is attributable to
additional costs incurred in connection with attendance at trade shows ^ and
approximately $79,000, or 7.2%, of the increase was due to the write- off of
uncollectible accounts receivable. These increases were offset by a reduction in
production expenses for sample cards and selling materials of approximately
$237,000, or 21.6%, a decrease in selling commissions paid to distributors and
independent sales agents of approximately $169,000, or 15.4%, and a decrease in
other selling and marketing expenses of $11,000 or 1.0%.
General and administrative expenses increased to $2,008,057
for the year ended December 31, 1995, compared to $1,196,764 for the year ended
December 31, 1994, an increase of $811,293, or 67.8%. This increase is primarily
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due to salaries for additional personnel hired to support the Company's growth,
along with an increase in general office expenses, benefits and travel and
entertainment expenses attributable to the increased personnel, which account
for approximately $295,000, or 24.6% of the increase. Furthermore, the Company
incurred additional expenses with respect to the utilization of outside
consultants and temporary personnel of approximately $250,000, or 20.9%, an
increase in costs resulting from the relocation of the Company's headquarters to
a larger facility of approximately $55,000, or 4.6%, an increase in taxes of
$59,000, or 4.9%, an increase in professional fees of approximately $116,000, or
9.7%, and an increase in other general and administrative costs of approximately
$36,000, or 3.0%.
Investment and interest income amounted to $192,482 for the
year ended December 31, 1995 as compared to $6,531 for the prior year. The
increase of $185,951 resulted from earnings on higher balances of cash and cash
equivalents on hand, as well as interest on certain convertible notes receivable
outstanding in 1995.
Interest expense for the year ended December 31, 1995
decreased to $0 from $121,401 for the year ended December 31, 1994, as a result
of the conversion in September 1994 of notes payable to certain holders of
equity securities.
For the foregoing reasons, the Company incurred a net loss of
$2,970,121 for the year ended December 31, 1995, compared to a net loss of
$1,946,526 for the year ended December 31, 1994.
Liquidity and Capital Resources
At December 31, 1995, the Company had cash of $928,516 and
working capital of $1,126,321, compared to $5,135,260 and $4,374,693,
respectively, at December 31, 1994. Net cash used in operating activities for
the fiscal year ended December 31, 1995 of $3,321,233 was primarily to fund the
loss from operations. Cash used in investing activities for 1995 consisted of
$323,511 of capital expenditures, convertible notes receivable of $325,000 from
Fone America, Inc. and notes receivable of $237,000 from Global Link. See Note 5
to the Company's consolidated financial statements. At December 31, 1995, the
Company's current assets (including accounts receivable, deferred costs and
inventory) was $6,951,531 compared to $8,044,827 at December 31, 1994. Increases
in accounts receivable, deferred costs and inventory resulting from the
Company's increased sales volume in 1995 were more than offset by corresponding
increases in accounts payable and deferred revenues. 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 prepaid phone cards.
The Company does not have any material commitments for capital
expenditures, except certain obligations incurred in connection with its
acquisition of Global Link. Specifically, in connection with such acquisition,
the Company has guaranteed the payment of an aggregate of $2,800,000 of
debentures ("Debentures") previously issued by Global Link and outstanding at
the time of the acquisition, the payment of $954,630 of accounts receivable (the
"Peoples Accounts Receivable") owed by Global Link to Peoples at the time of the
acquisition (and payable in four equal quarterly installments beginning in
January 1997), and a $500,000 cash payment by Global Link to Peoples due and
payable on or prior to June 28, 1996. See "Certain Relationships and Related
Transactions -- ^ The Global Link Acquisition."
As of December 31, 1995, the amounts of unpaid guaranteed
minimum royalties under the Company's license arrangements amounted to $176,500.
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 during 1996 as
a result of the increase in revenues and improvement in margins anticipated to
result from the integration of the operations of Global Link with those of the
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Company, and that cash flows from operations will become sufficient to meet the
Company's capital requirements as they occur, although there can be no assurance
that this will be the case. To bolster its current cash position, the Company
has undertaken a private placement of Common Stock and Warrants. The private
placement is being conducted on a $2,000,000 minimum, $3,000,000 maximum basis.
At the consummation of the private placement, should it occur, none of the
Common Stock or Warrants sold therein will have been registered under the
Securities Act of 1933, as amended (the "Act"), and may not be sold in the
United States absent registration under the Act or an applicable exemption
therefrom. There can be no assurance that the private placement will be
consummated. If the Company is unable to generate cash flow from operations
sufficient to meet its working capital requirements and the private placement is
not consummated, the Company would be required to obtain financing from other
sources, or if adequate financing cannot be obtained, to curtail its expansion
and possibly its operations.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121"), effective for fiscal years
beginning after December 15, 1995. The Company will adopt SFAS 121 in the first
quarter of 1996. Based on current facts and circumstances, the Company believes
that SFAS 121 will not adversely affect the Company.
In December 1995, the Financial Accounting Standards Board
issued Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), effective for years beginning after December 15, 1995. Under SFAS 123,
the Company may elect either a "fair value" based method or the current
"intrinsic value" based method of accounting for its stock-based compensation
arrangements, If the Company were to elect the "intrinsic value" based method,
the Company would be required to disclose in the footnotes to the financial
statements net income and earnings per share computed under the "fair value"
base method. The Company will elect the "intrinsic value" based method.
Accordingly, the adoption of SFAS 123 will not impact the Company's results of
operations or financial condition.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in item 13(a)(1) and (2) are included
in this Report beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current directors and executive officers of the Company and Global
Link are as follows:
Name Age Position
Shelly Finkel 51 Chairman of the Board
Gary J. Wasserson 40 Chief Executive Officer and Director
John P. McCabe 43 President and Director
Paul Silverstein 34 Vice President and Director
Joseph F. Clark 46 Executive Vice President
David S. Tobin 31 General Counsel and Secretary
Maria Bruzzese 32 Chief Financial Officer
Cory Eisner 40 Vice President
Michael Kresky 42 Vice President - Finance
Alan W. Kaufman 57 Director
Jack N. Tobin 54 Director
Donald L. Ptalis 53 Director
Shelly Finkel has been the Chairman of the Board since April
1993 and was the Chief Executive Officer of the Company from April 1993 through
March 1995. Mr. Finkel has been active in the promotional field since June 1965
and has been the President of Shelly Finkel Management, Inc., a New York-based
personal management firm, since 1980. In December 1993, Mr. Finkel promoted the
Howard Stern New Year's Eve telecast, which had the largest entertainment
pay-per-view audience in history. Since late 1980, Mr. Finkel has been involved
in boxing management and has managed several world champions including Evander
Holyfield and Pernell Whitaker. In 1973, Mr. Finkel, together with a stockholder
of the Company, promoted the Watkins Glen concert which attracted approximately
600,000 people.
Gary J. Wasserson has been the Chief Executive Officer and a
director of the Company since March 1996 and has been the President, Chief
Executive Officer and Chairman of the Board of Directors of Global Link since
its inception in March 1994. From June 1992 to February 1993, Mr. Wasserson was
the interim President, consultant and a director of Robin Enterprises Inc., a
company organized to rehabilitate, develop, manage and lease residential and
commercial properties located in Moscow, Russia. From 1984 to December 1993, Mr.
Wasserson was the principal stockholder, Chairman and Chief Executive Officer of
Sterling Supply Corporation ("Sterling"), a cleaning supply and equipment
distribution company serving the laundry and textile industries. In 1992,
Sterling filed a voluntary petition in bankruptcy under Chapter 11 of the
Federal Bankruptcy Code.
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John P. McCabe has been the President of the Company since the
Merger in February 1996 and a director of the Company since October 1995. From
October 1995 through February 1996, Mr. McCabe was the Chief Executive Officer
of the Company and from March 1995 to October 1995, he was the President of the
Company. From June 1987 to March 1995, Mr. McCabe was employed by National
Westminster Bank in various capacities, including Senior Vice President of its
credit card division (January 1994 through March 1995), Senior Vice President of
its business strategies division (July 1991 through December 1993), and Senior
Vice President of its processing and custody services division (June 1987
through June 1991). From 1985 to 1987, Mr. McCabe was Vice President of Chemical
Bank's information products division.
Paul Silverstein has been a director of the Company since its
inception in December 1992 and a Vice President of the Company since March 1996.
Mr. Silverstein was the President of the Company from its inception through
March 1995 and from October 1995 through February 1996. From March 1995 through
October 1995, Mr. Silverstein was the Chief Executive Officer of the Company.
From 1987 to May 1992, Mr. Silverstein was a software consultant for Interactive
Business Solutions Inc., specializing in financial software applications for
advertising agencies. From 1983 to 1987, Mr. Silverstein was a national account
representative for Wang Laboratories, Inc. a computer manufacturing corporation.
Joseph F. Clark has been Executive Vice President of the
Company since August 1995, was the Vice President of the Company from its
inception in December 1992 through July 1995 and Secretary and was a director of
the Company from its inception through February 1996. From January 1989 to
September 1992, Mr. Clark was President and owner of Clark-Wertheimer &
Associates, a marketing and management firm. Mr. Clark's background includes
experience in modems, multiplexers, and audiotext- and videotext-related
products and services.
David S. Tobin has been the General Counsel and Secretary of
the Company since March 1996 and General Counsel of Global Link since February
1995. From April 1992 to February 1995, Mr. Tobin was the Assistant General
Counsel of Peoples, where he was responsible for acquisitions, general corporate
matters and federal securities law compliance. From 1990 to April 1992, Mr.
Tobin was an associate of the law firm of Ruden, Barnett, McClosky, Smith,
Schuster and Russell, P.A. David Tobin is the son of Jack Tobin, a director of
the Company.
Maria Bruzzese has been the Chief Financial Officer and
Treasurer of the Company since October 1994. From April 1994 to October 1994,
Ms. Bruzzese was Chief Financial Officer of CompLink, Ltd., a developer of
computer software products primarily for the electronic messaging sector of the
office automation market. From 1986 to March 1994, Ms. Bruzzese was employed by
KPMG Peat Marwick LLP, an international, full service accounting firm, where she
specialized in the information and communications industry and most recently
served as a senior manager. Ms. Bruzzese is a certified public accountant and a
member of the American Institute of Certified Public Accountants and the New
York State Society of Certified Public Accountants.
Cory Eisner has been a Vice President of the Company since
October 1994. From 1977 to October 1994, Mr. Eisner was employed by Phone
Programs, Inc., a telepromotions agency, most recently as Executive Vice
President of Sales. From 1975 to 1977, Mr. Eisner was the director of the sports
department for Long Island Weekly, a local area news show owned and broadcasted
by Cablevision Systems Corporation.
Michael Kresky has been the Vice President - Finance of the
Company since March 1996 and was the Chief Financial Officer of Global Link from
August 1994 until February 1996. From 1983 to August 1994, Mr. Kresky was the
Controller of RCM Technologies, Inc., a publicly traded personnel services
company. Mr. Kresky is a certified public accountant and a member of the
American Institute of Certified Public Accountants and the New Jersey Society of
Certified Public Accountants.
Alan W. Kaufman has been a director of the Company since
November 1994. Since April 1986, Mr. Kaufman has held various positions,
including Vice President of Marketing and Vice President of Sales and Marketing,
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and is currently the Executive Vice President of Sales of Cheyenne Software,
Inc. Mr. Kaufman is currently Chairman of the New York Software Alliance, a
statewide alliance of three regional software trade associations.
Jack N. Tobin has been a director of the Company since March
1996. Since March 1989, Mr. Tobin has been the President of Jack Tobin &
Associates, Inc., a marketing, public relations and lobbying firm which he
founded. Since November 1982, Mr. Tobin has been a member of the State of
Florida House of Representatives. As a member of the House of Representatives,
Mr. Tobin has served as the Chairman of the Health and Rehabilitative Services,
Science Industry and Technologies and Business and Professional Regulation
committees. Since November 1989, Mr. Tobin has chaired the full committee or
subcommittee which regulates telecommunications companies operating within the
state. From October 1981 to January 1989, Mr. Tobin was the Senior Vice
President of Marketing and Public Relations for Commonwealth Savings & Loan
Association. Jack Tobin is the father of David Tobin, the General Counsel and
Secretary of the Company.
Donald L. Ptalis has been a director of the Company since
March 1996. Since January 1995, Mr. Ptalis has been the President of Masque
Sound & Recording Corp., a sound equipment rental company. From June 1993 to
December 1995, Mr. Ptalis managed his personal investments. From 1987 to June
1993, Mr. Ptalis was the President and Chief Executive Officer of Desks Inc., an
office furniture supply company. From 1984 to 1987, he was the Vice President
and General Manager of Lubin Business Interiors, Inc., an office furniture
supply company.
The Board of Directors of the Company is divided into three
classes, each of which generally serves for a term of three years, generally
with only one class of directors being elected in each year. The term of the
first class of directors, presently consisting of Shelly Finkel and Gary
Wasserson, will expire at the annual meeting of stockholders to be held in 1997;
the term of the second class of directors, presently consisting of Paul
Silverstein, Alan W. Kaufman and Don Ptalis, will expire at the annual meeting
of stockholders to be held in 1996; and the term of the third class of
directors, presently consisting of John McCabe and Jack Tobin will also expire
at the annual meeting of stockholders to be held in 1996. In each case, each
director will hold office until the next annual meeting of stockholders at which
his class of directors is to be elected or until his successor is duly qualified
and appointed. Executive officers serve at the discretion of the Board.
The Company has established a Compensation Committee and an
Audit Committee of the Board of Directors. The Compensation Committee,
consisting of Shelly Finkel, Alan Kaufman and Jack Tobin, was established to
review the salaries and other compensation of the Company's executive officers.
The Audit Committee, consisting of Gary Wasserson, Alan Kaufman and Don Ptalis,
was established to review the scope of the Company's annual audit and other
services provided by the Company's independent auditors.
Indemnification and Exculpation Provisions
The Company's Certificate of Incorporation provides for
indemnification of officers and directors to the fullest extent permitted by
Delaware law. In addition, under the Company's Certificate of Incorporation, no
director shall be liable personally to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director; provided that the
Certificate of Incorporation does not eliminate the liability of a director for
(i) any breach of the director's duty of loyalty to the Company or its
stockholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) acts or omissions in
respect of certain unlawful dividend payments or stock redemptions or
repurchases; or (iv) any transaction from which such director derives improper
personal benefit.
Compliance with Section 16 of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires the Company's directors and officers and persons who
beneficially own more than ten percent of the Company's Common Stock to file
with the Securities and Exchange Commission ("SEC"), Nasdaq and the Boston Stock
Exchange initial reports of ownership and reports of changes in ownership of
Page 19
<PAGE>
Common Stock in the Company. Officers, directors and greater-than-ten percent
shareholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) reports they filed. To the Company's knowledge, based
solely on review of the copies of such reports furnished to the Company and
written representation that no other reports were required, during the fiscal
year ended December 31, 1995, such persons complied with all Section 16(a)
filing requirements.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows the compensation earned by Shelly
Finkel, Chairman of the Board, John McCabe, President, and Paul Silverstein,
Vice President, for 1995, 1994 and 1993.
SUMMARY COMPENSATION TABLE(1)
- -------------------------------------------------------------------------------
Annual
Compensation Long Term Compensation
---------------------------------------
Restricted
Name and principal position Fiscal Stock Options
Year Salary($) Awards($) (#Shares)
- -------------------------------------------------------------------------------
Shelly Finkel(2) 1995 51,042 ---- 10,000(3)
Chairman of the Board 1994 23,542 ---- 30,000(4)
1993 20,000 ---- ----
- -------------------------------------------------------------------------------
John McCabe(5) 1995 121,154 ---- 100,000(6)
President 1994 ---- ---- ----
1993 ---- ---- ----
- -------------------------------------------------------------------------------
Paul Silverstein(7) 1995 125,000 ---- 10,000(3)
Vice President 1994 232,500 ---- 30,000(4)
1993 70,000 ---- ----
- -------------------------------------------------------------------------------
- -----------------------------------
(1) No other person received aggregate compensation equal to or exceeding
$100,000 during 1995, 1994 or 1993. None of Messrs. Finkel, McCabe or
Silverstein received noncash compensation benefits having a value
exceeding 10% of his cash compensation during 1995, 1994 or 1993.
(2) Mr. Finkel served as the Chief Executive Officer of the Company from
April 1994 through March 1995 at which time, Paul Silverstein was
appointed as Chief Executive Officer of the Company (in which position
Mr. Silverstein served until October 1995), with Mr.Finkel remaining
Chairman of the Board. The compensation received by Mr. Finkel during
1994 set forth above represents $21,459 received by him from the
Company through December 13, 1994 and $2,083 received from December
14, 1994 through December 31, 1994 under his employment agreement
which became effective simultaneously with the effectiveness of the
Company's initial public offering ("IPO") on December 14, 1994. See
"Employment Agreements."
(3) Represents currently exercisable options to purchase 10,000 shares of
Common Stock for $5.875 per share granted pursuant to the terms of the
Company's 1994 Performance Equity Plan which provide for stock option
grants for 10,000 shares to be made to each director of the Company on
March 31st of each year. See "1994 Performance Equity Plan."
(4) Represents currently exercisable options to purchase 30,000 shares of
Common Stock for $3.33 per share through October 2004. See "Other
Options and Warrants."
(5) Mr. McCabe served as the Chief Executive Officer of the Company from
October 1995 through February 1996 (at which time Mr. Wasserson became
Chief Executive Officer of the Company) and as President of the Company
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<PAGE>
from March 1995 to October 1995 (and resumed in such office beginning
in February 1996 upon consummation of the Global Link Acquisition).
See "Certain Relationships and Related Transactions -- ^ The Global
Link Acquisition."
(6) Represents currently exercisable options to purchase 33,334 shares of
Common Stock and options to purchase 66,666 shares of Common Stock
which become exercisable commencing March 1997. The per-share purchase
price pursuant to all such options is $5.00. See "Employment
Agreements."
(7) Mr. Silverstein served as President of the Company from its inception
through March 1995, at which time he became Chief Executive Officer of
the Company, in which capacity he served through October 1995. The
compensation received by Silverstein during 1994 set forth above
represents $227,292 received by him from the Company through December
13, 1994 and $5,208 received from December 14, 1994 through December
31, 1994 under his employment agreement, which became effective
simultaneously with the effectiveness of the IPO. See "Employment
Agreements."
AGGREGATE YEAR-END OPTION VALUES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of unexercised options Value of unexercised in-the-money
at fiscal year-end (#) options at fiscal year-end ($)(1)
--------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shelly Finkel 40,000 0 86,350 0
Chairman of the Board
- ----------------------------------------------------------------------------------------------
John McCabe ---- 100,000 ---- 112,500
President
- ----------------------------------------------------------------------------------------------
Paul Silverstein 40,000 0 86,350 0
Vice President
- ----------------------------------------------------------------------------------------------
</TABLE>
- -----------------------------------
(1) Represents the difference between the aggregate market value at
December 31, 1995 of the Common Stock underlying the options (based on
a last sale price of $6.125 on that date) and the options' aggregate
exercise price.
Page 21
<PAGE>
OPTIONS/SHARES GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------
% of Total
Options/Shares Market
Granted to Exercise Price on
Options/Shares Employees in Price Date of Expiration
Name Granted (#) Fiscal Year ($/Share) Grant ($) Date
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shelly Finkel 10,000(1) 5.1% 5.875 5.875 2005
Chairman of the Board
- ---------------------------------------------------------------------------------------------------------------
John McCabe 100,000(2) 51.0% 5.00 5.00 2003
President
- ---------------------------------------------------------------------------------------------------------------
Paul Silverstein 10,000(1) 5.1% 5.00 5.875 2005
Vice President
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------------------------
(1) Represents immediately exercisable options to purchase 10,000 shares
of Common Stock granted pursuant to the terms of the Company's 1994
Performance Equity Plan which provides for stock option grants for
10,000 shares to be made to each director of the Company on March 31st
of each year. See "1994 Performance Equity Plan."
(2) Represents options granted pursuant to the terms of Mr. McCabe's
employment agreement. See "Employment Agreements."
Employment Agreements
The Company has entered into an employment agreement with each
of Shelly Finkel, its Chairman of the Board, Gary Wasserson, its Chief Executive
Officer, Paul Silverstein, a Vice President and director and former President of
the Company. John McCabe, its President, David Tobin, its General Counsel and
Secretary, and Maria Bruzzese, its Chief Financial Officer. Each of Messrs.
Finkel's and Silverstein's and Ms. Bruzzese's employment agreement provides for
an initial three-year term, commencing on December 14, 1994. Each of Messrs.
Wasserson's and Tobin's employment agreement provides for an initial three-year
term, commencing on March 1, 1996. Mr. McCabe's employment agreement provides
for an initial three-year term commencing March 1, 1995. Mr. Finkel's employment
agreement requires him to devote at least 50% of his business time to the
management and operations of the Company and provides for a base annual salary
of $50,000 during the first year and $75,000 during the second and third years.
Messrs. Silverstein's, McCabe's, Wasserson's and Tobin's and Ms. Bruzzese's
employment agreements require each such person to ^ work for the Company on a
full-time basis and provide for base annual salaries of $125,000, $150,000,
$150,000, $140,000 and $85,000, respectively, during the term of the agreements.
Each of Mr. Wasserson's and Tobin's employment agreements provide that if such
person's employment is terminated without cause, such person shall receive
salary due through the later of February 28, 1999 and one year from the date of
termination. All of these officers also may be granted annual bonuses at the
discretion of the Board of Directors. Each of the agreements contains a
provision prohibiting the employee from competing with the Company during the
term of employment and for a period of two years thereafter.
Consultants
In February 1995, the Company entered into consulting
agreements with each of Barry Rubenstein, a principal stockholder of the
Company, and Eli Oxenhorn. Each of Messrs. Rubenstein and Oxenhorn has held
senior executive positions with numerous publicly-held companies and has
knowledge and expertise in negotiating and consummating mergers and acquisitions
and establishing commercial relationships, which abilities the Company believes
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<PAGE>
will be valuable in the pursuit of its strategy of rapid growth. Pursuant to the
terms of each consulting agreement, Messrs. Rubenstein and Oxenhorn shall render
consulting services for a maximum of eight hours per month for a two-year period
through February 1997, with a principal focus on potential mergers, acquisitions
and other business combinations and business development activities. Each of
Messrs. Rubenstein and Oxenhorn agreed to certain noncompetition provisions and
agreed to refer to the Company any opportunity presented to him to acquire or
enter into a business relationship with an entity engaged in activities similar
to or synergistic with those of the Company, without the receipt of any finder's
fee. The Company granted to each of Messrs. Rubenstein and Oxenhorn, in
consideration for the specified consulting services, options to purchase 100,000
shares of Common Stock at $4.75 per share (the fair market value of the Common
Stock on the date of grant), which options became exercisable in February 1996
and remain exercisable until February 2001.
1994 Performance Equity Plan
In October 1994, the Board of Directors of the Company
adopted, and the stockholders approved, the 1994 Performance Equity Plan (the
"1994 Plan"). The 1994 Plan now authorizes the granting of awards of up to
1,500,000 shares of Common Stock to the Company's key employees, officers,
directors and consultants. Awards consist of stock options (both nonqualified
options and options intended to qualify as Incentive stock options under Section
422 of the Internal Revenue Code of 1986, as amended), restricted stock awards,
deferred stock awards, stock appreciation rights and other stock-based awards,
as described in the 1994 Plan.
On March 31st of each calendar year during the term of the
1994 Plan, assuming there are enough shares then available for grant under the
1994 Plan, each person who is then a director of the Company is awarded stock
options to purchase 10,000 shares of the Company's Common Stock at the fair
market value thereof (as determined in accordance with the 1994 Plan), all of
which options are immediately exercisable as of the date of grant and have a
term of ten years. These are the only awards which may be granted to a director
of the Company under the 1994 Plan. The 1994 Plan is administered by the Board
of Directors which determines the persons (other than directors) to whom awards
will be granted, the number of awards to be granted and the specific terms of
each grant, including the vesting thereof, subject to the provisions of the 1994
Plan.
In connection with qualified stock options, the exercise price
of each option may not be less than 100% of the fair market value of the Common
Stock on the date of grant (or 110% of the fair market value in the case of a
grantee holding more than 10% of the outstanding stock of the Company). The
aggregate fair market value of shares for which qualified stock options are
exercisable for the first time by such employee during any calendar year may not
exceed $100,000. Nonqualified stock options granted under the 1994 Plan may be
granted at a price determined by the Board of Directors, not to be less than the
fair market value of the Common Stock on the date of grant. Generally, options
granted to employees are exercisable as to 50% of the shares covered thereby on
the first anniversary of the date of grant and 25% of the shares covered thereby
on each of the second and third anniversaries of the date of such grant.
The 1994 Plan also contains certain change in control
provisions which could cause options and other awards to become immediately
exercisable and restrictions and deferral limitations applicable to other awards
to lapse in the event any person, as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
including a group as defined in Section 13(d), but excluding certain
stockholders of the Company, acquires beneficial ownership of more than 25% of
the Company's outstanding shares of Common Stock.
As of the date of this Prospectus, options to purchase a total
of 514,000 shares of Common Stock are outstanding under the 1994 Plan. Options
outstanding under the 1994 Plan include options to purchase 25,000 and 35,000
shares granted to Maria Bruzzese and Cory Eisner, respectively, at exercise
prices ranging from $5.00 to $5.75 per share. In addition, pursuant to the terms
of the 1994 Plan, the Company granted to each director of the Company, on March
31, 1995, immediately exercisable options to purchase 10,000 shares for $5.875
per share, and on March 31, 1996, immediately exercisable options to purchase
10,000 shares for $5.25
Page 23
<PAGE>
per share. Pursuant to the 1994 Plan, additional options to purchase 10,000
shares of Common Stock will be granted to each director on March 31, 1997. In
February 1995, in connection with their respective consulting agreements with
the Company, Barry Rubenstein and Eli Oxenhorn, each stockholders of the
Company, each were granted options under the 1994 Plan to purchase 100,000
shares of Common Stock at an exercise price of $4.75 per share. These options
vested in February 1996 and remain exercisable until February 2001. The exercise
price of all of the foregoing options is equal to the fair market value of the
Common Stock on the date of grant. The Company anticipates granting options
under the 1994 Plan to purchase a significant number of shares in the near
future.
Other Options and Warrants
In October 1994, the Board of Directors granted ten-year
options to Shelly Finkel, Paul Silverstein and James Koplik, a stockholder of
the Company, to purchase 30,000, 30,000 and 15,000 shares, respectively. All
of these options are currently exercisable at a price of $3.33 per share.
In December 1994, in connection with serving as underwriter of
the Company's IPO, the Company issued and sold to the Placement Agent and its
designees, for nominal consideration, five-year warrants to purchase up to
150,000 shares of Common Stock at a purchase price of $8.05 per share and/or up
to 150,000 Public Warrants at a purchase price of $.161 per Public Warrant,
which are exercisable at a price of $4.00 per share.
In March 1995, in connection with his employment with the
Company, John McCabe, the Company's President, was granted options to purchase
100,000 shares of Common Stock at an exercise price of $5.00 per share (the fair
market value of the Common Stock on the date of grant). These options vest in
three equal annual installments commencing in March 1996 and will remain
exercisable for a period of five years from the date of vesting.
In April 1995, in connection with consulting services rendered
to the Company, Eleanor Feffer and Jon Silverman were granted options to
purchase 5,000 and 2,500 shares of Common Stock, respectively. These options are
currently exercisable at a price of $5.50 per share.
In April 1995, the Company issued five-year warrants to a
designee of the Placement Agent to purchase 50,000 shares of Common Stock at an
exercise price of $5.00 per share in consideration of the Placement Agent
granting the Company the right of first refusal to pursue any prospective
acquisition target in the phone card industry that the Placement Agent
identifies prior to February 1998. In October 1995, the Company issued five-year
warrants to another designee of the Placement Agent to purchase 50,000 shares of
Common Stock at an exercise price of $5.00 per share. In January 1996, the
Company issued five-year warrants to the Placement Agent to purchase 200,000
shares at an exercise price of $5.125 per share in consideration of consulting
services provided and to be provided to the Company.
In January 1996, the Company entered into a consulting
agreement with Payne Financial Group ("Payne"), pursuant to which the Company
agreed to grant Payne options to purchase 100,000 shares of Common Stock at an
exercise price of $5.50 per share. These options would become exercisable in
January 1997 and remain exercisable until January 1999; provided, however, that
if the Company terminates the agreement without cause, the options would become
immediately exercisable and if the Company terminates the agreement with cause,
the options would terminate immediately.
In February 1996, in connection with their employment with the
Company, Messrs. Gary Wasserson and David Tobin, the Company's Chief Executive
Officer and General Counsel, respectively, were granted options to purchase
125,000 and 50,000 shares, respectively, at an exercise price of $6.125 per
share. These options vest in three equal annual installments commencing in
February 1997 and will remain exercisable for a period of five years from the
date of vesting.
Page 24
<PAGE>
In connection with the acquisition of Global Link, options and
warrants to purchase 145,000 Global Link Shares were converted into options and
warrants to purchase 109,926 shares of Common Stock.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL AND MANAGEMENT
The following table sets forth, as of April 9, 1996, the
number of shares of the Company's outstanding Common Stock beneficially owned by
(i) each director of the Company; (ii) each person who is known by the Company
to beneficially own 5% or more of the outstanding Common Stock; and (iii) all of
the Company's directors and executive officers as a group. The address for each
of Mr. Finkel, Silverstein and McCabe is 40 Elmont Road, Elmont, New York 11003
and for Mr. Wasserson is 5697 Rising Sun Avenue, Philadelphia, Pennsylvania
19120. The addresses for other holders are as indicated below.
<TABLE>
Amount and Nature of Percent of
Name and Address of Beneficial Owner Beneficial Ownership(1) Outstanding Shares
<S> <C> <C>
Shelly Finkel................................ 887,736(2)(3) 17.6%
Gary J. Wasserson............................ 400,523(3)(4) 8.1%
Paul Silverstein............................. 582,500(3)(5) 11.7%
John P. McCabe............................... 43,334(3)(6) *
Alan W. Kaufman.............................. 20,000(3)(7) *
Cheyenne Software, Inc.
3 Expressway Plaza
Roslyn Heights, New York 11577
Jack N. Tobin............................... 10,000(3) *
7759 Highlands Circle
Margate, Florida 33063
Donald L. Ptalis............................. 27,294(3)(8) *
16 Ross Avenue
Emerson, New Jersey 07630
Norton Herrick............................... 343,000(9) 6.7%
7709 Wood Duck Drive
Boca Raton, Florida 33434
Eli Oxenhorn................................. 290,340(10) 5.7%
56 The Intervale
Roslyn Estates, New York 11576
Barry Rubenstein............................ 337,338(11) 6.7%
39 Woodland Road
Roslyn, New York 11576
Peoples Telephone Company, Inc. 636,866 13.0%
2300 N.W. 89th Place
Miami, Florida 33172
All executive officers and directors as a
group (12 persons)............................ 2,177,769(12) 41.2%
</TABLE>
- ------------------------------------
* Less than 1%.
Page 25
<PAGE>
(1) A person is deemed to be the beneficial owner of voting
securities that can be acquired by such person within 60 days
from the date of this report upon the exercise of options,
warrants or convertible securities. Each beneficial owner's
percentage ownership is determined by assuming that convertible
securities, options or warrants that are held by such person (but
not those held by any other person) and which are exercisable
within 60 days of the date of this report have been exercised.
Unless otherwise noted, the Company believes that all persons
named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned by them.
The information in the above table gives effect to the issuance
of 1,718,318 shares of Common Stock to the holders of Global Link
Shares and 52,805 shares of Common Stock to Peoples.
(2) Includes 40,000 shares issuable upon exercise of currently
exercisable options and an aggregate of 92,618 shares of Common
Stock issuable upon exercise of publicly traded warrants
("Warrants"). See "1994 Performance Equity Plan," "Other Options
and Warrants," and "Certain Relationships and Related
Transactions."
(3) Includes 10,000 shares of Common Stock upon exercise of
immediately exercisable options granted to each director of the
Company on March 31, 1996 under the 1994 Plan. See "1994
Performance Equity Plan."
(4) Includes 390,523 shares of Common Stock, all of which are owned
jointly by Mr. Wasserson and his spouse. See "Certain
Relationships and Related Transactions -- The Global Link
Acquisition." Does not include 125,000 shares underlying options
which become exercisable commencing in February 1997. See
"Employment Agreements."
(5) Includes 40,000 shares issuable upon exercise of currently
exercisable options. See "Other Options and Warrants."
(6) Represents 33,334 shares issuable upon exercise of currently
exercisable options. Does not include 66,666 shares underlying
options which become exercisable commencing March 1997. See
"Employment Agreements."
(7) Includes 10,000 shares of Common Stock issuable upon exercise of
currently exercisable options. See "1994 Performance Equity
Plan."
(8) Includes 16,192 shares of Common Stock issuable upon conversion
of $50,000 principal amount of Debentures and 379 shares of
Common Stock issuable upon exercise of warrants issued in
connection with such Debentures. See "Certain Relationships and
Related Transactions -- The Global Link Acquisition."
(9) Includes 243,000 shares of Common Stock issuable upon exercise of
Warrants.
(10) Includes 1,000 shares of Common Stock and 1,000 shares issuable
upon exercise of Public Warrants owned by Mr. Oxenhorn's son, of
which he disclaims beneficial ownership, 54,170 shares of Common
Stock issuable upon exercise of Public Warrants and 100,000
shares issuable upon exercise of currently exercisable options.
See "Consulting Agreements."
(11) Includes 15,000 shares of Common Stock owned by The Marilyn and
Barry Rubenstein Family Foundation, a tax exempt organization of
which Mr. Rubenstein is a trustee, and 20,000 shares of Common
Stock owned by Marilyn Rubenstein, Mr. Rubenstein's spouse. Mr.
Rubenstein disclaims beneficial ownership over all of such
shares. Also includes 45,000 shares of Common stock owned by
Woodland Partners, a New York general partnership of which Mr.
Rubenstein is a partner. 4,500 of such shares represent Marilyn
Rubenstein's equity interest in such partnership and Mr.
Rubenstein disclaims beneficial ownership over such shares. Also
includes 9,000 shares of Common Stock owned by the Woodland
Venture Fund, a New York limited partnership, of which Mr.
Rubenstein is a general partner. 5,637 of such shares represent
Page 26
<PAGE>
represent Mr. Rubenstein's equity interest in such partnership
and he disclaims beneficial ownership over the remaining
3,363 shares. Also includes 54,169 shares of Common Stock
issuable upon exercise of Warrants and 100,000 shares
issuable upon exercise of currently exercisable options. See
"Consulting Agreements."
(12) Includes those shares of Common Stock deemed to be included
in Messrs. Finkel, Wasserson, McCabe, Silverstein, Kaufman,
Tobin and Ptalis' respective beneficial ownership as
described in notes 2, 3, 4, 5, 6, 7 and 8 above. Also
includes 12,500 shares of Common Stock issuable upon
exercise of currently exercisable options held by each of
Maria Bruzzese, Chief Financial Officer of the Company, and
Cory Eisner, Vice President of the Company. Also includes
1,000 shares of Common Stock and 1,000 shares issuable upon
exercise of Public Warrants beneficially owned by each of
Ms. Bruzzese and Mr. Eisner. Also includes (i) 32,382 shares
of Common Stock issuable upon exercise of currently
exercisable options granted to David Tobin, General Counsel
and Secretary of the Company, and (ii) 135,000 shares of
Common Stock and 10,000 shares issuable upon exercise of
currently exercisable options granted to Joseph Clark,
Executive Vice President of the Company. Does not include
those shares which, as described in notes 4 and 6 above, are
not included in Messrs. Wasserson's and McCabe's ownership.
Also does not include (i) 12,500 shares underlying options
granted to each of Ms. Bruzzese and Mr. Eisner, 6,250 of
which vest in each of October 1996 and 1997, (ii) 10,000
shares underlying options granted to Mr. Eisner, 5,000 of
which vest in October 1996 and 2,500 of which vest in each
of October 1997 and 1998 and (iii) 50,000 shares underlying
options granted to David Tobin, 33-1/3% of which vest in
each of February 1997, 1998 and 1999. See "Employment
Agreements."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
General
In April 1993, the Company issued to Messrs. Shelly Finkel,
Chairman of the Board, Paul Silverstein, then the Chief Executive Officer of the
Company, Joseph Clark, then Vice President of the Company, and James Koplik, a
stockholder of the Company, 652,500, 532,500, 210,000 and 105,000 shares of
Common Stock, respectively, in consideration of capital contributions and
services rendered aggregating $100,000.
The Company's operations have been funded, in large part, by
an aggregate of $674,379 of loans to the Company (the "Loans") made by Shelly
Finkel and Shelly Finkel Management, Inc. ("SFM"), a company owned by Messrs.
Finkel and Koplik. The Loans were made at various times between April 1993 and
June 1994 and were payable on a demand basis, bearing interest at 8% per annum.
In July 1994, the Company consummated a private placement
("Bridge Financing"), pursuant to which it issued $1,000,000 principal amount of
Bridge Notes and warrants to purchase 1,000,000 shares of Common Stock. From the
proceeds of the Bridge Financing, the Company repaid $75,000 principal amount of
the Loans owed to Mr. Finkel and SFM, together with $5,000 interest due and
owing on such principal amount, reducing the principal amount of the Loans from
$694,723 (the maximum amount which was outstanding at any time^, including
$20,344 of interest added to principal through such date), then owing on such
date, to $619,723, the repayment of which (together with interest) was extended
to the later of July 1995 or one year from the date of the consummation of this
offering. Mr. Finkel and SFM agreed to subordinate the repayment of the Loans to
the repayment of the Bridge Notes.
In September 1994, Mr. Finkel and SFM converted all of the
principal amount of the Loans and all interest due and owing thereon (the
Loans and interest due and owing thereon collectively referred to herein as the
"Debt Amount") into shares of Common Stock and Conversion Warrants at the rate
of one share of Common Stock and one Conversion Warrant for each $3.00 of Debt
Amount converted. Mr. Finkel and SFM converted $136,359 and $513,675 of Debt
Page 27
<PAGE>
Amount, respectively, into 45,453 shares of Common Stock and 45,453 Conversion
Warrants and 171,225 shares of Common Stock and 171,225 Conversion Warrants,
respectively.
In September 1994, SFM sold 54,169 shares of Common Stock and
54,169 Conversion Warrants for an aggregate purchase price of $162,507 ($3.00
per share and warrant) to Barry Rubenstein and 54,170 shares of Common Stock and
54,170 Conversion Warrants for an aggregate purchase price of $162,510 ($3.00
per share and warrant) to Eli Oxenhorn. Messrs. Rubenstein and Oxenhorn also
participated in the Bridge Financing purchasing $200,000 and $225,000 of Notes
and 200,000 Bridge Warrants and 225,000 Bridge Warrants, respectively. Mr.
Rubenstein's spouse also participated in the Bridge Financing, purchasing
$50,000 of Notes and 50,000 Warrants. The remaining 62,886 shares of Common
stock and 62,886 Conversion Warrants owned by SFM were sold in September 1994 to
Messrs. Finkel and Koplik, the two stockholders of SFM. In October 1994, Mr.
Joseph Clark, a director of the Company, contributed 75,000 shares of Common
Stock to the Company.
In February 1995, the Company entered into consulting
agreements with each of Barry Rubenstein, and Eli Oxenhorn. As the entire
consideration for consulting services to be provided thereunder, the Company
granted to each of Messrs. Rubenstein and Oxenhorn options to purchase 100,000
shares of Common Stock for $4.75 per share.
The principal offices of Global Link are leased from JilJac
Realty Company, a general partnership owned by Gary Wasserson and his spouse.
The terms of the lease are described under the caption "Properties," above.
The Company believes that each of the foregoing transactions
were on terms no less favorable to the Company as those which could have been
obtained from unaffiliated third parties. All future transactions and loans
between the Company and its officers, directors and principal stockholders or
their affiliates will be on terms no less favorable than could be obtained from
unaffiliated third parties and will be approved by a majority of the then
disinterested directors of the Company.
The Global Link Acquisition
On January 18, 1996, the Company, Link Acquisition Corp., a
wholly-owned subsidiary of the Company ("Merger Sub"), and Global Link executed
an Agreement And Plan Of Merger (the "Merger Agreement"), pursuant to which
Merger Sub was merged (the "Merger") with and into Global Link and Global Link
became a wholly-owned subsidiary of the Company. The Merger was consummated on
February 29, 1996 (the "Merger Date"). The purchase price paid for Global Link
was approximately $11,500,000.
In connection with the Merger, the Company agreed to issue to
the holders of Global Link's common stock (the "Global Link Shares"), upon
surrender of such shares, an aggregate of 1,718,318 shares of the Company's
Common Stock, based upon an exchange ratio of .64763 shares of Common Stock for
each outstanding Global Link Share. Outstanding options and warrants to purchase
an aggregate of 145,000 Global Link Shares, as a result of the Merger
automatically converted into the right to purchase an aggregate of 109,926
shares of Common Stock at the rate of .75811 shares of Common Stock for each
Global Link Share (with an exercise price of 1.32 times the exercise price per
Global Link share).
In addition, in connection with the Merger, the holders of
$2,800,000 aggregate principal amount of Global Link's Debentures executed an
Amended and Restated Securities Purchase Agreement (the "Securities Purchase
Agreement"), pursuant to which such holders consented to the Merger and waived
certain rights. The Debentures are due and payable on June 23, 1999 and are
secured by a first lien on all assets of Global Link. The Debentures bear
interest at 6% per annum, payable on May 30th and November 30th of each year;
provided, however, that the 6% per annum interest due on May 30, 1996 and
November 30, 1996 was prepaid by Global Link with Global Link shares prior to
the Merger. The Debentures are immediately due and payable, at the option of the
holders, upon a change in control of Global Link, which is defined as a merger,
consolidation or sale of substantially all of the assets of Global Link, as a
result of the existing Global Link directors no longer
Page 28
<PAGE>
comprising a majority of the members of the board of directors of the surviving
entity. The Company has guaranteed the payment of principal and interest owed
under the Debentures. The principal amount of the Debentures is convertible at
the option of the holders at any time into shares of Common Stock (the
"Conversion Shares") at a conversion price of approximately $3.088 per share.
The Company may require the conversion of the Debentures if (i) the Company has
received aggregate gross proceeds of not less than $5,000,000 from certain
private placements or public offerings of its securities; (ii) the Conversion
Shares are the subject of an effective registration statement under the
Securities and Exchange Act of 1933, as amended (the "Act") or are eligible for
sale under an exemption therefrom; (iii) the Common Stock is traded on a
national securities exchange or quoted on Nasdaq; (iv) the price of the Common
Stock is at least $3.50; and (v) the lock-up agreements of the holders of the
Debentures (as described in the penultimate paragraph of this section) are
terminated. Global Link may prepay the Debentures if the Conversion Shares are
registered under the Act or an exemption therefrom is available, the Common
Stock is listed on a national securities exchange or quoted on Nasdaq and the
lock-up agreements of the holders of the Debentures are terminated.
Simultaneously with the execution of the Merger Agreement,
Global Link executed an agreement (the "Peoples Agreement") with Peoples
Telephone Company, Inc. ("Peoples"), pursuant to which, on the Merger Date,
Peoples accepted (i) $1,050,000 ($550,000 of which was paid on the Merger Date
with the balance of $500,000 plus accrued interest at the rate of 8% per annum
payable on June 28, 1996 (the "Second Peoples Payment")) and (ii) 52,805 shares
of Common Stock (the "Peoples Shares") in full satisfaction of any and all
monies owed by Global Link to Peoples other than $954,630 of the Peoples
Accounts Receivable owed by Global Link to Peoples, the payment of which Peoples
agreed could be made in four equal quarterly installments commencing in January
1997. The payment to Peoples of the Second Peoples Payment and the Peoples
Accounts Receivable were guaranteed by the Company.
On the Merger Date, the Company entered into an employment
agreement ("Employment Agreement") with each of Gary J. Wasserson and David S.
Tobin, the Chief Executive Officer and General Counsel, respectively, of Global
Link who were appointed the Chief Executive Officer and General Counsel,
respectively, of the Company. Each Employment Agreement is for a three-year term
through February 1999. Mr. Wasserson and Mr. Tobin receive annual base salaries
of $150,000 and $140,000, respectively, subject to annual increases and bonuses
at the discretion of the Board of Directors. Additionally, Messrs. Wasserson and
Tobin were granted options to purchase 125,000 and 50,000 shares of Common
Stock, respectively, at an exercise price of $6.125 per share. Such options vest
in three equal annual installments commencing in February 1997 and remain
exercisable for a period of five years from the date of vesting.
Simultaneously with the execution of the Merger Agreement, the
Company on the one hand, Shelly Finkel, James Koplik, Paul Silverstein and
Joseph Clark (collectively, the "GTS Major Stockholders"), who hold an aggregate
of 1,533,339 shares of Common Stock, and on the other hand Gary J. Wasserson,
Jody Frank, Bernard Frank, Edward Marx, Joel D. Hornstein and members of their
respective immediate families (collectively, the "Global Link Major
Stockholders"), who hold an aggregate of 1,090,075 shares of Common Stock,
entered into a voting agreement (the "Directors Voting Agreement"), pursuant to
which the Company agreed to nominate and use its best efforts to have elected to
its Board of Directors and the Board of Directors of Global Link three designees
("Global Link Designees") selected by the Global Link Major Stockholders and
four designees ("GTS Designees") selected by the GTS Major Stockholders. Each of
the GTS Major Stockholders agreed to vote all of his shares of Common Stock for
the election of each of the three Global Link Designees and each of the Global
Link Major Stockholders agreed to vote all of his shares of Common Stock for the
GTS Designees. On the Merger Date, the Board of Directors of the Company and
Global Link were each increased to seven directors, with Shelly Finkel, Paul
Silverstein, Alan Kaufman, John McCabe, Gary Wasserson, Jack Tobin and Don
Ptalis serving as directors of each board. The term of the Directors Voting
Agreement expires on February 28, 1999.
Pursuant to the Merger Agreement, the Company agreed to
register the shares of Common Stock issued in the Merger, as well as the
Conversion Shares and the Peoples Shares, by means of a registration statement
which the Company is required to use its best efforts to file by June 30, 1996
and have declared effective by September 30, 1996. Notwithstanding the
foregoing, each stockholder to be included on such registration statement
executed a lock-up agreement prohibiting his sale of such shares for a period of
one year
Page 29
<PAGE>
after the Merger Date and limiting sales to 25% of his holdings in each
three-month period during the second year after the Merger Date. There are
certain exceptions to these lock-up agreements which will allow the holders of
the Debentures to sell that aggregate number of Conversion Shares equal to the
aggregate amount of shares of Common Stock sold by the GTS Major Stockholders
during the one-year period immediately following the Merger Date in excess of
160,000 shares of Common Stock.
Between November 1995 and February 1996, the Company had
loaned an aggregate of $487,000 to Global Link, which had been guaranteed by
certain holders of Global Link shares, which guaranty was secured by a pledge of
such shares. As a result of the Merger, the debt owed by Global Link to the
Company was consolidated and the guaranty and pledge were terminated.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following financial statements of the Company, the notes thereto,
and the related report thereon of independent public accountants are filed under
Item 7 of this Report.
Page
Report of Independent Auditors...................................... F-2
Consolidated Balance Sheets at December 31, 1995 and 1994........... F-3
Consolidated Statements of Operations for the years ended
^ December 31, 1995 and 1994........................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ^ ended December 31, 1995 and 1994.................... F-5
Consolidated Statements of Cash Flow for the years ended
^ December 31, 1995 and 1994........................................ F-6
Notes to Consolidated Financial Statements.......................... F-8
(3) Exhibits
See (c) below.
(b) Reports on Form 8-K
Current Report on Form 8-K, filed with the Securities and Exchange
Commission on March 15, 1996.
(c) Exhibits
The following exhibits noted with an asterisk (*), are hereby
incorporated by reference from the Company's Registration Statement on Form SB-2
(No. 33-85998) declared effective by the Securities and Exchange Commission on
December 14, 1994 and amended on August 8, 1995, by double asterisk (**), are
hereby incorporated by reference from the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1994, and triple asterisk (***), are hereby
incorporated by reference from the Company's Current Report on Form 8-K, filed
with the Securities and Exchange Commission on March 15, 1996.
Page 30
<PAGE>
Exhibit No. Exhibit Description
1.1* Underwriting Agreement between the Company and Whale
Securities Co., L.P., the underwriter of the
Company's initial public offering in December 1994.
3.1* Certificate of Incorporation
3.2* Amendment to Certificate of Incorporation
3.3* By-Laws
3.4*** Certificate of Merger of Merger Sub into Global Link
4.1* Form of Common Stock Certificate
4.2* Form of Warrant Certificate
4.3* Warrant Agreement
4.4* Underwriter's Warrant
4.5* Stock Option Agreement between the Company and
Shelly Finkel
4.6* Stock Option Agreement between the Company and
Paul Silverstein
4.7* Stock Option Agreement between the Company and
James Koplik (originally exhibit no. 4.10 to the
Company's Registration Statement on Form SB-2
(No. 33-85998))
4.8** Stock Option Agreement between the Company and
John McCabe
10.1* Sublease for 342 Madison Avenue, New York, New York
10.2* Sublease for additional space at 342 Madison Avenue,
New York, New York
10.3* Employment Agreement between the Company and
Shelly Finkel
10.4* Employment Agreement between the Company and
Paul Silverstein
10.5* Employment Agreement between the Company and
Maria Bruzzese
10.6* 1994 Performance Equity Plan
10.7* Service Agreement between the Company and
MCI Telecommunications Corporation (originally
exhibit no. 10.17 to the Company's Registration
Statement on Form SB-2 (No. 33-85998))
10.8* Service Agreement between the Company and Sprint
Corporation (originally exhibit no. 10.18 to the
Company's Registration Statement on Form SB-2
(No. 33-85998))
10.9* Service Agreement between Independent Properties
Sales Corporation ("IPSC") and Metromedia
Communications Corporation ("Metromedia," which was
later acquired by WorldCom) (originally exhibit
no. 10.19 to the Company's Registration Statement
on Form SB-2 (No. 33-85998))
Page 31
<PAGE>
10.10* Consent between IPSC and Metromedia allowing the
assignment to the Company of IPSC's right to
receive services from Metromedia.
10.11** Employment Agreement between the Company and
John McCabe
10.12** Consulting Agreement between the Company and
Barry Rubenstein
10.13** Consulting Agreement between the Company and
Eli Oxenhorn
10.14*** Merger Agreement by and among the Company, Merger Sub
and Global Link
10.15*** Directors Voting Agreement
10.16*** Peoples Agreement, together with the Company's
Guaranty of Peoples Second Payment
10.17*** Ancillary Agreement between Global Link and Peoples
regarding payment of the Peoples Accounts Receivable,
together with Holding Corp's Guaranty of such payment
10.18*** Amended and Restated Securities Purchase Agreement
10.19*** The Company's Guaranty of Debentures
10.20*** Employment Agreement between the Company and
Gary Wasserson
10.21*** Employment Agreement between the Company and
David Tobin
10.22*** Stock Option Agreement between the Company and
Gary Wasserson
10.23*** Stock Option Agreement between the Company and
David Tobin
10.24* Sublease for space at 40 Elmont Road, Elmont, New
York (originally exhibit no. 10.14 to Post-Effective
Amendment No. 1 to the Company's Registration
Statement on Form SB-2 (No. 33-85998))
23.1 Consent of KPMG Peat Marwick LLP (previously filed)
Page 32
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: ^ September 5, 1996 GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
By: /s/ Shelly Finkel
--------------------------------------
Shelly Finkel, Chairman of
the Board of Directors
In accordance with Section 13 or 15(d) of the Exchange Act,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Shelly Finkel Chairman of the Board ^ of September 5, 1996
- ------------------- Directors
Shelly Finkel
/s/ Gary Wasserson Chief Executive Officer ^ September 5, 1996
- ------------------- and Director
Gary Wasserson ^
/s/ Alan Kaufman ^ Director September 5, 1996
- -------------------
Alan Kaufman
/s/ Jack Tobin ^ Director September 5, 1996
- -------------------
Jack Tobin
/s/ John McCabe President and ^ director September 5, 1996
- -------------------
John McCabe
^
/s/ Donald Ptalis ^ Director September 5, 1996
- -------------------
Donald Ptalis
/s/ Maria Bruzzese Chief Financial Officer ^(and September 5, 1996
- ------------------- principal ^ accounting ^ officer)
Maria Bruzzese
Page 33
<PAGE>
EXHIBITS FILED HEREWITH
None
Page 34
<PAGE>
INDEX TO FINANCIAL STATEMENTS ^
Report of Independent Auditors................................... F-2
Consolidated Balance Sheets at December 31, 1995 and 1994........ F-3
Consolidated Statements of Operations for the years ended
December 31, 1995 and 1994..................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1995 and 1994................. F-5
Consolidated Statements of Cash Flow for the years ended
December 31, 1995 and 1994..................................... F-6
Notes to Consolidated Financial Statements....................... F-8
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Global Telecommunication Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Global
Telecommunication Solutions, Inc. and subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Global
Telecommunication Solutions, Inc. and subsidiaries as of December 31, 1995 and
1994, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
March 29, 1996
F-2
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Assets
Current assets:
Cash $ 928,516 $5,135,260
Accounts receivable, less allowance for
doubtful accounts of $165,000 and $60,000 in
1995 and 1994, respectively 3,508,250 1,899,917
Inventory 268,874 202,531
Deferred costs 1,235,972 595,430
Convertible notes receivable 325,000 --
Note receivable 237,000 --
Prepaid royalties and patent license fees 292,911 129,345
Prepaid expenses and other current assets 155,008 82,344
--------- ---------
Total current assets 6,951,531 8,044,827
--------- ---------
Fixed Assets:
Telephone switches 112,630 50,270
Office equipment and furniture 381,564 120,413
--------- ---------
494,194 170,683
Less accumulated depreciation (65,813) (24,954)
--------- ---------
428,381 145,729
--------- ---------
Other assets 102,052 18,618
--------- ---------
Total assets $ 7,481,964 8,209,174
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 1,819,813 613,387
Accrued liabilities 491,488 459,644
Deferred revenue 3,513,909 2,597,103
--------- ---------
Total current liabilities 5,825,210 3,670,134
--------- ---------
Commitments and contingencies (note 8)
Stockholders' equity:
Preferred stock, $.01 par value, authorized -- --
1,000,00 shares; none issued
Common stock, $.01 par value, authorized
15,000,000 shares; issued and outstanding
3,141,678 shares 31,417 31,417
Additional paid-in capital 7,308,784 7,023,784
Deferred compensation (197,165) --
Accumulated deficit (5,486,282) (2,516,161)
--------- ---------
Total stockholders' equity 1,656,754 4,539,040
--------- ---------
Total liabilities and stockholders' equity $7,481,964 8,209,174
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1995 and 1994
1995 1994
---- ----
Net Sales $3,144,350 1,377,900
Cost of sales 2,892,580 916,221
--------- ---------
Gross profit 251,770 461,679
--------- ---------
Selling and marketing expenses 1,406,160 1,096,071
General and administrative expenses 2,008,057 1,196,764
--------- ---------
Operating expenses 3,414,217 2,292,835
--------- ---------
Operating loss (3,162,447) (1,831,156)
Interest income 192,482 6,531
Interest expense -- (121,401)
Other 344 --
--------- ---------
Loss before income taxes (2,969,621) (1,946,026)
Income tax expense 500 500
--------- ---------
Net loss $(2,970,121) (1,946,526)
========== =========
Net loss per share $ (.95) (.99)
========== =========
Weighted average shares of common stock
and common stock equivalents 3,141,678 1,964,356
========== =========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Total
Additional stockholders'
paid-in Deferred Accumulated equity
Common stock capital compensation deficit (deficit)
Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 500 $ 100,000 -- -- (569,635) (469,635)
3,000-for-one common stock split
and change from no par to $.01
per share par value 1,499,500 (85,000) 85,000 -- -- --
Conversion of stockholders notes
payable to common stock and
warrants 216,678 2,167 647,867 -- -- 650,034
Issuance of common stock
warrants (note 4) -- -- 50,000 -- -- 50,000
Common stock contributed to the
Company and retired (75,000) (750) 750 -- -- --
Sale of common stock 1,500,000 15,000 6,240,017 -- -- 6,255,017
Sale of warrant to underwriter -- -- 150 -- -- 150
Net loss for 1994 -- -- -- -- (1,946,526) (1,946,526)
--------- ------- --------- ------- --------- ---------
Balance at December 31, 1994 3,141,678 31,417 7,023,784 -- (2,516,161) 4,539,040
Deferred compensation arising
from grant of stock options and
warrants -- -- 285,000 (285,000) -- --
Amortization of deferred
compensation -- -- -- 87,835 -- 87,835
Net loss for 1995 -- -- -- -- (2,970,121) (2,970,121)
--------- -------- -------- ------- --------- ---------
Balance at December 31, 1995 3,141,678 $ 31,417 7,308,784 (197,165) (5,486,282) 1,656,754
========= ======== ========= ======= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,970,121) (1,946,526)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 40,859 19,119
Provision for uncollectible accounts receivable 144,000 21,000
Amortization of deferred compensation 87,835 --
Write-off of unamortized discount on promissory notes -- 29,167
Interest expense on loans payable to stockholders -- 25,312
added to principal balance
Amortization of unearned discount -- 20,833
Changes in operating assets and liabilities:
Increase in accounts receivable (1,752,333) (1,824,474)
Increase in inventory (66,343) (177,439)
Increase in deferred costs (640,542) (514,079)
Increase in prepaid royalties and patent license fees (163,566) (64,996)
Increase in prepaid expenses and other current assets (72,664) (68,537)
Increase in other assets (83,434) (6,697)
Decrease in advances to officers -- 65,972
Increase in accounts payable 1,206,426 555,346
Increase in accrued liabilities 31,844 346,895
Decrease in payroll taxes payable -- (63,079)
Increase in deferred revenue 916,806 2,283,861
---------- ----------
Net cash used in operating activities (3,321,233) (1,298,322)
---------- ----------
Cash flows from investing activities:
Purchase of fixed assets (323,511) (109,108)
Convertible notes receivable (325,000) --
Note receivable (237,000) --
---------- ----------
Net cash used in investing activities (885,511) (109,108)
---------- ----------
Cash flows from financing activities:
Net proceeds from initial public offering -- 6,255,017
Proceeds from issuance of promissory notes and
warrants -- 1,000,000
Proceeds from sale of warrant to underwriter -- 150
Repayment of promissory notes -- (1,000,000)
Repayment of notes payable to stockholders -- (75,000)
Proceeds from notes payable to stockholders -- 357,583
---------- ----------
Net cash provided by financing activities -- 6,537,750
---------- ----------
Net (decrease) increase in cash $ (4,206,744) 5,130,320
Cash at beginning of year 5,135,260 4,940
----------- ----------
Cash at end of year $ 928,516 5,135,260
========== =========
</TABLE>
F-6
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995 and 1994
1995 1994
---- ----
Supplemental disclosures:
Interest paid during the period $ -- 96,089
======= =======
Income taxes paid during the period $ 500 729
======= =======
Noncash financing activities -
Conversion of notes payable to stockholders
to common stock and warrants $ -- 650,034
======= =======
Deferred compensation arising from grant of
stock options and warrants $ 285,000 --
======= =======
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
(1) 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. The Company has entered into marketing
arrangements with various companies that have established distribution
channels pursuant to which these entities will promote and market certain
of the Company's prepaid phone cards.
The majority of the Company's customers are distributors, dealers of
phone cards, individuals desirous of licensed graphic prepaid phone cards
as collectibles and corporations and other entities desirous of
customized prepaid phone cards for promotional use. Accounts receivable
arise in the normal course of the Company's business of selling prepaid
phone cards primarily to such customers.
(2) Summary of Significant Accounting Policies
(a) Revenue and Cost Recognition
Substantially all the prepaid phone cards sold by the Company are
non-refundable and have expiration dates ranging from twelve to
eighteen months. The Company records deferred revenue related to
the sale of calling time when cards are sold and recognizes
revenue as the ultimate customer utilizes calling time. Revenue
related to the premium received for cards featuring licensed
graphics, if any, is recognized at the time the card is sold.
Deferred revenue relating to unused calling time remaining at each
card's expiration is recognized as revenue at the expiration date.
The Company's primary costs of its prepaid phone cards include the
cost of design and manufacturing of the cards, royalties incurred
under license agreements, long distance carrier fees for handling
the traffic generated by use of the prepaid phone cards and switch
administration fees. Costs are expensed as incurred, except the
cost of design and manufacturing of the card and switch activation
fees, which are deferred and expensed when the related revenue is
recognized.
(b) Inventory
Inventory consists of phone cards and is stated at the lower of
cost or market, with cost determined using the average cost
method.
(c) Prepaid Royalties
The Company has licensing agreements which allow the Company to
use images owned by the licensors (logos, names, designs, etc.) on
the Company's prepaid phone cards in exchange for royalty payments
calculated as a percentage of the net sales of such cards. The
agreements usually require a nonrefundable partial payment of the
royalties in advance and provide for minimum guaranteed royalty
payments. The prepaid royalties are expensed as the related cards
are sold. If minimum royalties are less then anticipated revenues
under any license, the excess royalty is expensed immediately. The
agreements also generally provide for nonexclusive rights to the
licensor's images, are for one to five-year terms and expire at
varying dates through 2000.
F-8
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1995, the amount of unpaid guaranteed minimum
royalties under licensing arrangements amounted to $176,500. Of
that amount, $67,000 is due during 1996, $84,500 in 1997 and
$25,000 in 1998. Certain of the licensing agreements were assigned
to the Company from a related affiliate.
(d) Fixed Assets
Fixed assets are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the
respective assets, five years for telephone switches and seven
years for office equipment and furniture.
(e) Income Taxes
Income taxes are accounted for under the asset and liability
method. 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. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
(f) Loss Per Share
Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin Topic 4:D, stock issued and stock options and warrants
granted during the twelve-month period preceding the date of the
Company's initial public offering ("IPO") have been included in
the calculation of weighted average shares of common stock
outstanding for the nine months ended September 30, 1994, which
was the interim period included in the IPO prospectus, even though
the impact of such incremental shares was antidilutive.
Common stock equivalents were not included in the calculation of
weighted average common shares outstanding for the year ended
December 31, 1995 and three months ended December 31, 1994 since
their effect would be to decrease net loss per share.
References to the number of shares and all per share data have
been restated for all periods to reflect the 3,000 to one stock
split in June 1994 (see note 9).
(g) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare
these consolidated financial statements in conformity with
generally accepted accounting principles. Actual results could
differ from those estimates.
(h) Fair Value of Financial Instruments
The carrying amounts of financial instruments approximate fair
value because of the short maturity of those instruments.
F-9
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(i) Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiaries have
been translated at rates of exchange at the end of the period.
Revenues, costs and expenses have been translated at average
exchange rates in effect during each reporting period. Gains and
losses resulting from foreign currency translations are included
in income while translation adjustments resulting from translation
of financial statements are reported separately as a component of
stockholders' equity.
(3) Initial Public Offering
On December 14, 1994, pursuant to its initial public offering the Company
sold 1,500,000 shares of common stock at $5.00 per share and 1,725,000
redeemable warrants at $.10 per warrant and received net proceeds of
$6,255,017, after deducting expenses relating to the offering amounting
to $1,417,483.
Each warrant entitles the holder to purchase one share of common stock at
a price of $4.00, subject to adjustment in certain circumstances, at any
time commencing June 14, 1995 through December 14, 1999. The warrants are
redeemable by the Company at any time after becoming exercisable, upon
notice of not less than 30 days, at a price of $.10 per warrant, provided
that the closing bid quotation of the common stock on all 20 trading days
ending on the third day prior to the day on which the Company gives
notice has been at least 187.5% of the then effective exercise price of
the warrants.
In addition, the Company sold to the underwriter for an aggregate of
$150, warrants to purchase up to 150,000 shares of common stock at a
purchase price of $8.05 per share and/or 150,000 warrants at a purchase
price of $.161 per warrant. Such warrants being exercisable at $4 per
warrant through December 14, 1999.
(4) Private Placement
In July 1994, the Company through a private placement offering sold 20
units, each consisting of $50,000 principal amount of 10% unsecured
promissory notes and warrants to purchase 50,000 shares of common stock.
A portion of the proceeds from the offering was used to repay principal
on notes payable to stockholder and related interest totaling $80,000. In
December 1994, the principal and accrued interest on the notes
aggregating $1,040,548 was paid from the proceeds of the Company's
initial public offering. The terms of the warrants, including redemption
terms, are identical to those issued pursuant to the Company's initial
public offering (see note 3). The Company had estimated the value of the
warrants to be $50,000 at the time of issue and, accordingly, had
reflected this amount as a component of equity and recorded an
unamortized discount on the promissory notes, which was expensed in 1994
when the notes were repaid.
(5) Convertible Notes Receivable and Note Receivable
In March and May 1995, the Company advanced $200,000 and $125,000,
respectively, to Fone America, Inc. 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. 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.
In November 1995, the Company advanced $237,000 to Global Link Teleco
Corporation (Global Link) evidenced by a promissory note and guaranteed
by certain stockholders of Global Link. As a result of the consummation
of the merger on February 29, 1996 (note 12), the guaranty was
terminated.
(6) Notes Payable to Stockholders
F-10
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Notes payable to stockholders were due on demand and bore interest at 8%
per annum. Interest expense related to these notes for the year ended
December 31, 1994 was $25,312. On September 9, 1994 all of the then
outstanding notes payable to stockholders and the accrued interest,
related to the notes as of that date, were converted into shares of
common stock and warrants at the rate of one share of common stock and
one conversion warrant for each $3.00 of debt. As a result of this
transaction, $650,034 of notes payable to stockholders and related
accrued interest were converted into 216,678 shares of common stock and
216,678 warrants that entitle the holder to purchase one share of common
stock for $4.00. The terms of the warrants, including redemption terms,
are identical to those issued pursuant to the Company's initial public
offering (see note 3).
(7) Income Taxes
Income tax expense consists of the following for the years ended December
31, 1995 and 1994:
1995 1994
---- ----
Current:
Federal $ -- --
State 500 500
---- ---
500 500
Deferred income tax -- --
---- ---
$ 500 500
==== ===
The actual income tax expense differs from the "expected" tax benefits
for 1995 and 1994, computed by applying the U.S. Federal corporate tax
rate of 34 percent to loss before income taxes, as follows:
1995 1994
---- ----
Computed "expected" tax benefit $(1,009,671) (661,649)
Increase (reduction) in income taxes
resulting from:
State income taxes, net of Federal benefit 330 330
Increase in valuation allowance 990,689 652,504
Other 19,152 9,315
---------- --------
$ 500 500
========== ========
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1995 and 1994 is as follows:
1995 1994
---- ----
Deferred tax assets:
Benefit of net operating loss carryforward $ 1,756,952 159,864
Allowance for uncollectible
accounts receivable 56,100 7,140
Deferred revenue, net of related
deferred costs 21,278 680,569
Deferred compensation 28,164 --
Less: valuation allowance (1,836,279) (845,590)
--------- -------
Net deferred tax asset 26,214 1,983
Deferred tax liabilities:
Depreciation on fixed assets (16,113) (1,983)
Other (10,101) --
--------- -------
Net deferred income taxes $ -- --
========= =======
F-11
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 historical operating
losses and scheduled reversal of deferred tax liabilities, the Company
has established a valuation allowance of approximately $1,836,000 at
December 31, 1995. The Company's tax operating loss carryforwards of
approximately $5,167,000 expire in the years 2008 through 2010.
The availability of the net operating loss carryforwards to offset income
in future years may be restricted if the Company undergoes an ownership
change, which may have occurred or which may occur as a result of sales
of Company stock and other events.
(8) Commitments
(a) Leases
The Company leases certain office space and equipment under
operating leases which expire through 2000. Minimum future rental
payments under such leases as of December 31, 1995 are as follows:
Year ending December 31 Amount
1996 $ 214,700
1997 204,200
1998 189,400
1999 190,100
2000 190,100
-------
$ 988,500
(b) Employment Agreements
The Company has entered into employment agreements with six
officers of the Company which provide for aggregate base
salaries of $650,000 a year. The agreements which expire on
varying dates, also provide for annual bonuses, as determined
by the Board of Directors, and covenants not-to-compete during
the employment term and for two years thereafter.
(c) Interconnect Arrangements
The Company's arrangements with long distance service
providers obligate the Company to generate certain minimum
monthly or annual usage through each network and, if not
attained, the Company is subject to underutilization charges.
No such charges were incurred through December 31, 1995.
The Company is obligated to provide access to long distance
telephone services through its switches for issued cards. The
costs related to the potential utilization of the minutes sold
have not been accrued in the accompanying financial
statements, but are expensed as incurred.
F-12
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Common Stock
In July 1994, the Company declared a 3,000-for-one common stock split.
In addition, the Company restated its Certificate of Incorporation to
increase 1,000 shares of common stock without par value to 15,000,000
authorized shares with a par value of $.01 per share. These changes
resulted in a decrease in common stock and a corresponding increase in
additional paid-in capital of $85,000. All per share data and
references to number of shares have been restated to reflect these
changes.
In December 1994, an officer of the Company contributed 75,000 shares
of common stock to the Company which was subsequently retired.
(10) Stock Options
The Company has reserved 1,500,000 shares of unissued common stock
under its 1994 incentive and nonqualified stock option plan ("1994
Plan"). The 1994 Plan authorizes the granting of stock options,
restricted stock awards, deferred stock awards and stock appreciation
rights to key employees, officers, directors and consultants. All
qualified stock options which will be granted by the Company, with the
exception of those options granted to persons holding more than ten
percent of the voting common stock in the Company on the date of grant,
expire ten years after grant and are issued at exercise prices which
are not less than the fair market value of the common stock on the date
of grant. Qualified options granted to persons holding more than ten
percent of the voting common stock of the Company on the date of grant
expire five years after grant and are issued at exercise prices which
are not less than 110 percent of the fair market value of the stock on
the date of grant. Nonqualified stock options granted under the 1994
Plan may be granted at any price determined by the Board of Directors,
however, the price may not be less than the fair market value of the
common stock on the date of grant. Stock options vest over a period
determined by the Board of Directors. The 1994 Plan contains certain
change in control provisions, which include those that could cause
options to become immediately exercisable.
A summary of activity under the 1994 Plan is as follows:
Number Option price
of Shares per share
--------- ------------
Options granted in 1994 202,000 $5.00
-------
Outstanding at December 31, 1994 202,000 $5.00
Granted 306,000 $4.75-6.00
Canceled (64,000) $5.00
-------
Outstanding at December 31, 1995 444,000 $4.75-6.00
=======
At December 31, 1995, 109,000 options were exercisable and options to
purchase 1,056,000 shares were available for future grant.
In October 1994, the Board of Directors granted to certain officers
and/or directors immediately exercisable ten-year options to purchase
75,000 shares of common stock at an exercise price of $3.33 per share.
In March 1995, the Company granted non-qualified options to purchase
100,000 shares of common stock at an exercise price of $5.00 per share
to an officer of the Company. The options
F-13
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
will vest 33 1/3% per annum commencing March 20, 1996 and will remain
exercisable for a period of five years from the date of vesting.
In April 1995, the Board of Directors granted to certain consultants
nonqualified stock options to purchase an aggregate of 7,500 shares of
common stock at an exercise price of $5.50 per share. Such options are
immediately exercisable and expire five years from date of grant.
(11) Deferred Compensation
(a) Consulting Agreement
In February 1995, the Company entered into consulting
agreements with two of the Company's stockholders, pursuant to
which the stockholders will provide consulting services to the
Company for a two-year period ending February 1997. As
consideration for these services, the Company issued options
to purchase 100,000 shares of common stock at $4.75 per share
to each stockholder. These options became exercisable in
February 1996 and remain exercisable for a period of five
years from the date of vesting. The estimated fair market
value of these options of $168,000 was recorded as deferred
compensation and the Company has recorded compensation expense
of $73,500 to date.
(b) Warrants
In April and October 1995, the Company issued five-year
warrants to Whale Securities Co., L.P. (Whale) to purchase an
aggregate of 100,000 shares of common stock at $5.00 per share
in consideration for providing the Company the right of first
refusal to pursue any prospective acquisition target in the
phone card industry that Whale identifies through February
1998. The estimated fair market value of these warrants of
$117,000 was recorded as deferred compensation and the Company
has recorded an expense of $14,335 to date.
(12) Subsequent Events
(a) Acquisition
On February 29, 1996, the Company through a wholly owned
subsidiary acquired all the issued and outstanding common
stock of Global Link, which designs, develops and markets
prepaid phone/debit cards, through retail telephone calling
centers as well as through distribution arrangements pursuant
to an Agreement and Plan of Merger dated January 18, 1996. The
acquisition will be accounted for as a purchase. Accordingly,
the acquired assets and liabilities will be recorded at their
estimated fair values at the date of acquisition and the
operating results of Global Link will be 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.
F-14
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The acquisition resulted in goodwill of $18,379,000, based on
a preliminary allocation of purchase price, calculated as
follows:
Fair market value of common stock issued $11,040,000
Fair value of liabilities assumed 11,085,000
Fair value of assets acquired (4,196,000)
Acquisition related costs 450,000
----------
Goodwill $18,379,000
==========
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
years.
Year Ended
December 31,
1995 1994
---- ----
Net sales $11,711,000 3,882,000
Net loss (7,251,000) (3,781,000)
Net loss per share (1.48) (1.02)
========== ---------
Pro forma adjustments include recording amortization expense
on goodwill 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 years, or of results which may occur in the future.
(b) Private Placement Memorandum
In March 1996, the Company circulated a private placement
memorandum regarding a proposed sale of 600,000 shares of the
Company's common stock and 1,200,000 warrants for a maximum
amount of $3,000,000.
F-15
<PAGE>
