SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
--------------------------------
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___________ to __________________
Commission file number 1-13478
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 13-3698386
-------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5697 Rising Sun Avenue, Philadelphia, Pennsylvania 19120
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(Address of principal executive offices)
(215) 342-7700
---------------------------
(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of November 13, 1997,
there were 5,074,850 shares of common stock outstanding.
Page 1 of 16 Pages
Exhibit Index -- Page 15
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Page
-------
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30,1997
(unaudited) and December 31, 1996 ............................. 3
Consolidated Statements of Operations - Three and
nine months ended September 30, 1997 and 1996 (unaudited)...... 4
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1997 and 1996 (unaudited).................. 5
Notes to Consolidated Financial Statements .................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 10
Part II. Other Information
Item 2. Changes in Securities ......................................... 13
Item 6. Exhibits and Reports on Form 8-K .............................. 13
Signatures .................................................... 14
2
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ................................................................ $ 9,891,333 $ 1,352,322
Accounts receivable, net of reserve for doubtful accounts of $481,902 3,414,130 2,450,119
and $399,000
Inventories ......................................................... 358,120 202,129
Deferred costs ...................................................... 807,803 1,127,887
Prepaid expenses .................................................... 277,490 260,272
------------ ------------
Total current assets ........................................... 14,748,876 5,392,729
GOODWILL, NET ........................................................... 17,060,596 18,008,599
FIXED ASSETS, NET ....................................................... 2,118,535 1,948,917
INTANGIBLE AND OTHER ASSETS, NET ........................................ 688,638 469,120
------------ ------------
$ 34,616,645 $ 25,819,365
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................... $ 2,811,221 $ 3,238,666
Accrued expenses .................................................... 893,626 542,965
Deferred revenues ................................................... 2,919,557 4,431,309
Estimated sales and excise tax liability ............................ 2,638,528 1,684,478
Amounts payable to affiliate ........................................ -- 1,073,921
Capital lease obligation, current ................................... 115,446 51,775
------------ ------------
Total current liabilities ..................................... 9,378,378 11,023,114
CONVERTIBLE NOTES PAYABLE ............................................... 2,612,250 2,800,000
NOTES PAYABLE, NET ...................................................... 2,144,226 1,565,960
CAPITAL LEASE OBLIGATION, LONG-TERM ..................................... -- 42,002
------------ ------------
Total liabilities ............................................ 14,134,854 15,431,076
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock -- $.01 par value, authorized 1,000,000 shares;
none issued ....................................................... -- --
Common Stock, $.01 par value, authorized 35,000,000 shares;
issued 5,074,850 and 1,837,601 shares ............................. 50,749 18,376
Additional paid in capital .......................................... 39,382,333 22,990,766
Accumulated deficit ................................................. (18,712,103) (12,406,504)
Deferred compensation ............................................... (120,441) (102,498)
Cumulative foreign currency translation adjustment .................. (18,747) (11,851)
Common stock note receivable ........................................ (100,000) (100,000)
------------ ------------
Total stockholders' equity ..................................... 20,481,791 10,388,289
------------ ------------
$34,616,645 $25,819,365
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES ................................................... $ 5,412,586 $ 3,816,531 $ 14,017,001 $ 8,412,887
COST OF SALES ............................................... 4,701,152 2,586,076 11,480,760 5,973,124
------------ ------------ ------------ ------------
GROSS PROFIT ................................................ 711,434 1,230,455 2,536,241 2,439,763
------------ ------------ ------------ ------------
SELLING AND MARKETING ....................................... 762,663 724,185 2,174,270 2,016,561
GENERAL AND ADMINISTRATIVE .................................. 1,391,582 1,452,955 4,439,639 3,753,514
DEPRECIATION AND ............................................ 428 1,3 ,304
------------ ------------ ------------
AMORTIZATION .............................................. 493,741 408, 67,717 965
------------ ------------ ------------ ------------
NET LOSS FROM OPERATIONS .................................... (1,936,552) (1,355,113) (5,445,385) (4,295,616)
------------ ------------ ------------ ------------
INTEREST INCOME ............................................. (123,983) (18,817) (138,503) (59,971)
INTEREST EXPENSE ............................................ 346,214 100,639 998,717 188,147
------------ ------------ ------------ ------------
NET LOSS BEFORE INCOME TAXES ................................ (2,158,783) (1,436,935) (6,305,599) (4,423,792)
INCOME TAXES ................................................ -- -- -- --
------------ ------------ ------------ ------------
NET LOSS .................................................... $ (2,158,783) $ (1,436,935) $ (6,305,599) $ (4,423,792)
============ ============ ============ ============
NET LOSS PER SHARE .......................................... $ (0.47) $ (0.78) $ (2.20) $ (2.74)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES ..................................... 4,604,832 1,837,600 2,860,616 1,614,734
OUTSTANDING ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------------------
OPERATING ACTIVITIES: 1997 1996
---------------- ---------------
<S> <C> <C>
Net loss ................................................................. $ (6,305,599) $ (4,423,792)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................ 1,246,559 965,304
Amortization of deferred financing costs ............................. 124,311 11,891
Deferred compensation ................................................ 133,705 362,667
Amortization of unearned discount .................................... 578,266 --
Issuance of stock in lieu of compensation ............................ 50,000 --
Loss on disposal of fixed assets ..................................... 73,902 --
Changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable .................................................. (964,011) 342,913
Inventories .......................................................... (155,991) 65,268
Deferred costs ....................................................... 320,084 172,338
Prepaids ............................................................. (17,218) 180,980
Other assets ......................................................... (277,469) (53,170)
Accounts payable ..................................................... (427,445) (411,026)
Accrued expenses ..................................................... 350,681 (180,174)
Deferred revenues .................................................... (1,511,752) 520,333
Sales and excise taxes payable ....................................... 954,050 413,578
------------ ------------
Net cash used by operating activities ............................. (5,827,947) (2,032,890)
------------ ------------
INVESTING ACTIVITIES:
Purchases of fixed assets ............................................ (477,659) (252,919)
Cash acquired in excess of cash payments for acquisition ............. -- 54,190
------------ ------------
Net cash used in investing activities ............................. (477,659) (198,729)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............................... 13,526,586 2,651,274
Payment of notes payable to affiliate ................................ (1,073,921) (650,000)
Increase in notes receivable from Global Link prior to merger ........ -- (250,655)
Proceeds from exercise of options .................................... 8,228 --
Payments on capital lease obligations ................................ (39,336) (43,490)
Proceeds from exercise of warrants ................................... 2,500,000 --
Increase on deferred financing fees .................................. (70,044) --
------------ ------------
Net cash provided by financing activities ......................... 14,851,513 1,707,129
------------ ------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH ................................... (6,896) (7,953)
------------ ------------
Net increase in cash .............................................. 8,539,011 (532,443)
CASH, BEGINNING OF PERIOD .................................................. 1,352,322 928,516
------------ ------------
CASH, END OF PERIOD ........................................................ $ 9,891,333 $ 396,073
============ ============
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ................................................ $ 105,165 $ 24,225
============ ============
Issuance of common stock in connection with acquisition .............. $ -- $ 11,039,488
============ ============
Deferred compensation relating to options and warrants ............... $ 151,648 $ 400,000
============ ============
Conversion of convertible notes payable into common stock ............ $ 187,750 $ 148,850
============ ============
Capital leases ....................................................... $ 61,005 $ --
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
(1) Business and Basis of Presentation
Business
Global Telecommunication Solutions, Inc. (the "Company") was
incorporated on December 23, 1992 and is engaged in the marketing and
distribution of prepaid phone cards. The Company's phone cards provide
consumers access to long distance service through its switching
facilities and long distance network arrangements.
Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September
30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
(2) Loss Per Share
Weighted average shares of common stock for the nine months ended
September 30, 1997 and 1996 does not include common stock equivalents
as their effect would be anti-dilutive.
(3) Reclassifications
Certain reclassifications have been made to the 1996 consolidated
financial statements to conform to the 1997 presentation.
(4) Acquisition
On February 29, 1996, pursuant to an Agreement and Plan of Merger dated
January 18, 1996, the Company, through a wholly-owned subsidiary,
acquired all the issued and outstanding common stock of Global Link
Teleco Corporation ("Global Link"). The acquisition was accounted for
as a purchase. Accordingly, the acquired assets and liabilities were
recorded at their estimated fair values at the date of acquisition and
the operating results of Global Link were included in the accompanying
consolidated statement of operations from the acquisition date.
In connection with the merger, the Company issued 572,773 shares of
common stock in exchange for all of the issued and outstanding common
stock of Global Link. In addition, the Company issued 17,602 shares of
common stock to Peoples Telephone Company, Inc. ("Peoples"), a creditor
of Global Link and a principal stockholder of the Company. The total
cost of the acquisition was approximately $11,400,000 including direct
transaction costs of approximately $344,000.
6
<PAGE>
The acquisition resulted in goodwill of $19,069,000, based on an allocation
of purchase price, calculated as follows:
Fair market value of common stock issued $11,040,000
Fair value of liabilities assumed 10,811,000
Fair value of assets acquired (3,126,000)
Acquisition related costs 344,000
-----------
Goodwill $19,069,000
The following unaudited combined pro forma information reflects the results
of operations assuming the acquisition of Global Link had been made on January
1, 1996.
Nine Months Ended
September 30, 1996
------------------
Net sales $9,776,000
Net loss (5,243,000)
Net loss per share $(1.00)
Pro forma adjustments include recording amortization expense of 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 period, or of results which may occur in the
future.
(5) Reverse Stock Split
In February 1997, the Board of Directors of the Company approved an
amendment to its Amended and Restated Certificate of Incorporation to
effect a one-for-three reverse stock split, which was effected on March
24, 1997. All per share data and references to number of shares have
been retroactively restated in these financial statements to give
effect to the reverse stock split.
(6) Proceeds from Offering
The Company's Certificate of Incorporation authorizes 35,000,000 shares
of common stock, of which 5,074,850 and 1,837,601 shares were
outstanding at September 30, 1997 and December 31, 1996, respectively.
In July 1997, the Company sold in a public offering 2,875,000 shares of
its common stock which generated net proceeds of approximately $13.5
million. The proceeds are to be used (i) to expand sales and marketing
activities, (ii) to expand the Company's network of switching
platforms, (iii) to repay $955,000 of debt owed to Peoples and (iv) for
working capital and general corporate purposes.
(7) New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard No. 128, Earnings per
Share (SFAS 128). This Statement introduces new methods for calculating
earnings per share. The adoption of this Statement will not affect
results from operations, financial condition, or long-term liquidity,
but will require the Company to restate earnings per share reported in
prior periods. Compliance with this Statement, which will be effective
for periods ending after December 15, 1997, is not expected to have a
material effect on the Company's earnings per share amounts.
In June 1997, the FASB issued SFAS 130, Reporting Comprehensive Income.
This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the
same prominence as other financial statements. The Company plans to
adopt this Statement on January 1, 1998, as required. The Company does
not have any items of comprehensive income, other than that presented
on its consolidated statements of income that would require disclosure
and presentation of accumulated balances in the equity section for
the balance sheet.
7
<PAGE>
In June 1997, the FASB issued SFAS 131, Disclosures About Segments of
and Related Information. This Statement established standards for
reporting information about operating segments in annual financial
statements and requires selected information about operating segments
in interim financial reports issued to shareholders. It also
establishes standards for related disclosure about products and
services, geographic areas and major customers. The Company plans to
adopt this statement on January 1, 1998, as required. The adoption of
this Statement will not affect results from operations, financial
conditions or long-term liquidity.
(8) Tax Obligations and Compliance
At September 30, 1997, the Company has not remitted certain amounts
previously collected for sales, use and excise taxes to various taxing
jurisdictions. Further, the Company has not filed certain sales and
use, excise, income or franchise tax returns in certain jurisdictions
in which it does business. Management is in the process of reviewing
the Company's tax collection, remittance and compliance policies and
procedures and has recorded a reserve for estimated tax obligations and
related compliance issues. Depending on the ultimate resolution of
these matters, it is reasonably possible that the amount of this
reserve could require adjustment in the near term and the amount of
such adjustment could be material.
Congress has amended the statutory provisions relating to federal
excise taxes on communications services acquired by means of a prepaid
phone card. Section 4251(a) of the Internal Revenue Code has been
amended to require that the 3% federal excise tax becomes due when a
prepaid phone card is sold to a non-telecommunications carrier.
Additionally, Section 4251(a) of the Internal Revenue Code has been
amended to require that the federal excise tax on communications
acquired by means of a prepaid phone card is the product of (i) 3% and
(ii) the "face value" of the prepaid phone card. The effective date of
the amendment is November 1, 1997. The Internal Revenue Service and the
Treasury Department have indicated that they will be issuing guidance
to assist in the interpretation and application of the amendment.
However, no guidance has yet been issued.
(9) Liquidity
The Company has substantial capital requirements resulting from the
funding of losses from operations and the need to finance continued
growth. The Company believes that its cash balances, along with the
proceeds of $2,500,000 from the exercise of warrants in April 1997, and
the net proceeds of $13,468,863 from the Company's public offering in
July 1997 (see note 6), will satisfy the Company's cash requirements
until the end of 1998; however, there can be no assurance that this
will be the case. In the event that the Company's plans change or its
assumptions change or prove to be inaccurate (due to unanticipated
expenses, delays, difficulties or otherwise), or if cash flow proves to
be insufficient to fund the Company's operations after such period of
time, the Company will be required to seek additional financing and
curtail its expansion activities. The Company does not have any
arrangements with respect to, or sources of, additional financing and
there can be no assurance that additional financing will be available
to the Company on commercially reasonable terms, or at all. The failure
to obtain such financing could have a material adverse effect on the
Company.
(10) Dial Around Compensation
On October 9, 1997, the Federal Communications Commission (the "FCC")
adopted a per-call compensation rate for subscriber 800 and access code
calls originated from pay telephones in light of the United States
Court of Appeals' decision in Illinois Telecommunication Ass'n v. FCC,
which vacated and remanded portions of the FCC's prior orders relating
to dial around compensation for pay telephone service providers (In the
Matter of The Pay Telephone Reclassification and Compensation
Provisions of the Telecommunications Act of 1996, CC Docket No. 96-128
(the "Payphone Order")). The FCC established a rate of $0.284 per call
as the default compensation rate for subscriber 800 and access code
calls for the first two years of compensation. Interexchange carriers
("IXCs") must pay this percall amount to pay telephone service
providers ("PSPs") for access code and subscriber 800 calls originated
from pay telephones beginning October 7, 1997. After the first two
years of per-call compensation, the market-based local coin rate
adjusted for certain costs will be the surrogate for the default
per-call rate for subscriber 800 and access code calls. The FCC
indicated that it would address the compensation obligations applicable
during the period from November 1996 through October 6, 1997 in a
8
<PAGE>
subsequent order in this proceeding. However, the FCC tentatively
concluded that PSPs are entitled to compensation for all access code
and subscriber 800 calls during this period.
Commencing in February of 1997, Sprint Communications Co. Ltd.
("Sprint") has charged the Company a total of $441,363 in
connection with dial around compensation for the period prior to
October 7, 1997. The Company has provided Sprint with written
notice indicating it disputed these charges and the Company has
not paid any of these charges.
In addition to the adoption of the $0.284 per call compensation rate,
the Payphone Order stated that PSPs and local exchange companies
("LECs") cannot receive dial around compensation unless the LECs and
PSPs provide the IXCs with coding digits identifying that the
subscriber 800 or access code call originated from a pay telephone. By
separate order dated October 7, 1997 (the "Waiver Order"), the FCC
granted a limited waiver until March 1, 1998 to those PSPs and LECs
that cannot provide pay telephone specific digits. This limited waiver
permits those LECs and PSPs that cannot provide the coding digits to
receive the dial around compensation.
The International Telecard Association (the "ITA") has filed a
Petition for Partial Consideration with the FCC to reconsider its
Waiver Order as applied to prepaid phone card providers. The ITA
argued that the Waiver order discriminates against prepaid phone
card providers because a prepaid phone card provider cannot pass
the per-call compensation on to end users unless it receives the
coding digits in real-time. Accordingly, the ITA has requested
that the FCC reconsider the waiver as it applies to subscriber
800 and access code calls utilized in connection with prepaid
phone cards.
The Company's customers utilize its phone cards primarily by dialing a
subscriber 800 telephone number to access the Company's switching
platforms. Pursuant to the FCC's order, the Company is obligated to pay
each payphone service provider $0.284 for each subscriber 800 call
originating from a pay telephone.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth, for the periods indicated, items from the
Company's Consolidated Statements of Operations expressed as a percentage of
sales:
<TABLE>
<CAPTION>
Percentage of Sales
-------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales....................................................... 100 100 100 100
Cost of sales................................................... 87 68 82 71
------ ------ ------ ------
Gross profit........................................... 13 32 18 29
------ ------ ------ ------
Selling and marketing expenses.................................. 14 19 15 24
General and administrative expenses............................. 26 38 32 45
Depreciation and amortization................................... 9 11 10 11
------- ------ ------ ------
Net loss from operations .............................. (36) (36) (39) (51)
------ ------ ------ ------
Interest income................................................. (2) (--) (1) (--)
Interest expense................................................ 6 2 7 2
------- ------- ------- -------
Net loss before income taxes........................... (40) (38) (45) (53)
Income taxes ................................................... -- -- -- --
Net loss................................................ (40) (38) (45) (53)
====== ====== ====== ======
</TABLE>
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
Net sales for 1997 were $5,412,586 compared to $3,816,531 for
1996. The primary reason for the increase in revenues was the Company's
aggressive pursuit of retail programs which offered reduced per-minute
charges to the consumer and the de-emphasis of promotional phone card programs.
The Company's gross margins decreased to 13% of net sales for
1997, from 32% of net sales for the comparable period in the prior year. The
decrease in the gross margin was primarily a result of an increase in the sale
of cards with reduced per-minute rates to consumers and a reduction in revenues
recognized from promotional phone card programs.
Selling and marketing expenses remained relatively constant
rising slightly from $724,185 (19% of net sales) for 1996, compared to $762,663
(14% of net sales) for 1997. The decrease as a percentage of net sales was
primarily due to the Company's strategy of utilizing distributors to market the
Company's phone cards to retail establishments without increasing its sales
force.
General and administrative expenses remained relatively
constant decreasing slightly to $1,391,582 (26% of net sales) for 1997, from
$1,452,955 (38% of net sales) for 1996.
Depreciation and amortization expense increased to $493,741
for 1997 from $408,428 for 1996, primarily due to the acquisition of additional
equipment.
Investment and interest income was $123,983 for 1997, compared
to $18,817 for 1996. The increase was primarily due to interest earned on the
net proceeds from the July 1997 offering.
Interest expense for 1997 increased to $346,214 from $100,639
for 1996, primarily as a result of the amortization of the unearned discount and
deferred financing costs relating to the issuance of notes payable pursuant to
the private placement consummated by the Company in December 1996.
10
<PAGE>
For the foregoing reasons, the Company incurred a net loss of
$2,158,783 for 1997, compared to a net loss of $1,436,935 for 1996.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
A portion of the increases in revenues and general and
administrative expenses are attributable to the Company's acquisition on
February 29, 1996 of all of the outstanding capital stock of Global Link. Global
Link's operating results were consolidated with the Company's commencing on
March 1, 1996. Accordingly, while Global Link's operating results were included
for all nine months of the period ended September 30, 1997, Global Link's
operating results only were included for seven months of the period ended
September 30, 1996.
Net sales for 1997 were $14,017,001 compared to $8,412,887 for
1996. The primary reason for the increase in revenues was the result of the
acquisition of Global Link and an aggressive strategy to market the Company's
phone cards to retail establishments.
The Company's gross margins decreased to 18% of net sales for
1997, compared to 29% of net sales for the comparable period in the prior year.
The decrease in the gross margin was primarily a result of an increase in the
sale of cards from retail establishments with reduced per-minute rates to
consumers and a reduction in revenue recognized from promotional phone card
programs.
Selling and marketing expenses remained relatively constant
rising slightly from $2,016,561 (24% of net sales) for 1996 to $2,174,270 (15%
of net sales) in 1997. The decrease as a percentage of net sales was primarily
due to the Company's strategy of utilizing distributors to market the Company's
phone cards to retail establishments without increasing its sales force.
General and administrative expense increased from $3,753,514
(45% of net sales) in 1996 to $4,439,639 (32% of net sales) in 1997.
Approximately $564,000 of this increase is attributable to the additional two
months of expenses related to the acquisition of Global Link. The remaining
portion relates to increased expenditures in telephone and computer expenses.
Depreciation and amortization expense increased to $1,367,917
for 1997 from $965,304 for 1996, primarily due to the amortization of goodwill
resulting from the Global Link Merger and the acquisition of additional
switching equipment.
Interest expense for 1997 increased to $998,717 from $188,147
for 1996, primarily as a result of interest on the principal amount of
convertible debentures, amounts due to Peoples Telephone Company, Inc.
("Peoples"), and the amortization of the unearned discount and deferred
financing costs relating to the issuance of notes payable pursuant to the
private placement consummated by the Company in December 1996.
For the foregoing reasons, the Company incurred a net loss of
$6,305,599 for 1997, compared to a net loss of $4,423,792 for 1996.
Liquidity and Capital Resources
At September 30, 1997 the Company had cash and cash
equivalents of $9,891,333 and working capital of $5,370,498, compared to
$1,352,322 and a deficit of $5,630,385, respectively, at December 31, 1996.
Net cash used in operating activities for the nine months
ended September 30, 1997 of $5,827,947 was primarily due to the Company's net
loss. Net cash used in investing activities for the nine months ended September
30, 1997 consisted of $477,659 of capital expenditures. Those uses were
primarily funded from the $13,500,000 net proceeds from the July 1997 offering
and the proceeds of $2,500,000 from the exercise of warrants in April 1997.
In April 1997, the Company filed a registration statement on
Form SB-2 with the SEC for a secondary offering of securities. The offering
("Public Offering") was consummated in July 1997 and yielded approximately
$13,500,000 of net proceeds to the Company.
11
<PAGE>
As previously indicated, the Company has incurred substantial
cash losses from operations for the nine months ended September 30, 1997.
Management's projections indicate that the Company anticipates that it will
continue to generate operating losses and negative cash flow at least through
1997. Further, the Company has not remitted certain amounts previously collected
for sales, use and excise taxes to various taxing jurisdictions. The Company has
substantial capital requirements resulting from the funding of losses from
operations and the need to finance continued growth. The Company believes that
its cash balances, along with the proceeds of $2,500,000 from the exercise of
warrants in April 1997, and the net proceeds of approximately $13,5000,000 from
its Public Offering, will satisfy the Company's cash requirements until the end
of 1998; however, there can be no assurance that this will be the case. In the
event that the Company's plans change or its assumptions change or prove to be
inaccurate (due to unanticipated expenses, delays, difficulties or otherwise),
or if cash flow proves to be insufficient to fund the Company's operations after
such period of time, the Company will be required to seek additional financing
or curtail its expansion activities. The Company does not have any arrangements
with respect to, or sources of, additional financing and there can be no
assurance that additional financing will be available to the Company on
commercially reasonable terms, or at all. The failure to obtain such financing
could have a material adverse effect on the Company.
Forward-Looking Statements
When used in this Form 10-QSB and in future filings by the
Company with the Securities and Exchange Commission ("SEC"), in the Company's
press releases and in oral statements made with the approval of an authorized
executive officer of the Company, the words or phrases "will likely result,"
"management expects" or "the Company expects," "will continue," "is
anticipated," "estimated" or similar expressions (including confirmations by an
authorized executive officer of the Company of any such expressions made by a
third party with respect to the Company) are intended to identify
"forwardlooking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance
on any such forward-looking statements, each of which speak only as of the date
made. Such statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected. The Company has no obligation to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect anticipated or unanticipated events or circumstances
occurring after the date of such statements.
12
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
(c) Recent Sales of Unregistered Securities
During the three months ended September 30, 1997, the Company
made the following sales of unregistered securities:
<TABLE>
<CAPTION>
Consideration Received
and Description of If Option, Warrant
Underwriting or Other or Convertible
Discounts to Market Exemption from Security, Terms of
Price Afforded to Registration Exercise or
Date of Sale* Title of Security Number Sold Purchasers Claimed Conversion
- ---------------------- ------------------- -------------- ------------------------ ------------------ ---------------------
<S> <C> <C> <C> <C> <C>
August 1, 1997 Common Stock 100,000 Option granted in Section 4(2) Option to purchase
Purchase Option connection with hiring shares of Common
of officer Stock at $6.5625 per
share, vesting 50% in
January 1998 and
50% in June 1998
- ----------------------- ----------------- ---------------- ---------------------- ------------------- --------------------
<FN>
* Option grant
</FN>
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (9/30/97)
(b) Current Reports on Form 8-K
None
13
<PAGE>
SIGNATURES
In accordance with requirements of the Exchange Act, the
Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: November __, 1997
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
By: /s/ Michael Hoppman
-----------------------------------------
Michael Hoppman, Vice President
and Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- ------------------ --------------------
27 Financial Data Schedule
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,891,333
<SECURITIES> 0
<RECEIVABLES> 3,896,032
<ALLOWANCES> 481,902
<INVENTORY> 358,120
<CURRENT-ASSETS> 14,748,876
<PP&E> 3,021,914
<DEPRECIATION> 903,379
<TOTAL-ASSETS> 34,616,645
<CURRENT-LIABILITIES> 9,378,378
<BONDS> 0
<COMMON> 50,749
0
0
<OTHER-SE> 20,431,042
<TOTAL-LIABILITY-AND-EQUITY> 34,616,645
<SALES> 14,017,001
<TOTAL-REVENUES> 14,017,001
<CGS> 11,480,760
<TOTAL-COSTS> 7,981,626
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 998,717
<INCOME-PRETAX> (6,305,599)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,305,599)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,305,599)
<EPS-PRIMARY> (2.20)
<EPS-DILUTED> 0
</TABLE>
