<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1997.
REGISTRATION NO. 333-25389
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 13-3698386
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification
Number)
</TABLE>
5697 RISING SUN AVENUE
PHILADELPHIA, PENNSYLVANIA 19120
(215) 342-7700 (PHONE)
(215) 745-9108 (TELECOPY)
(Address and telephone number of principal executive offices)
--------------------------
5697 RISING SUN AVENUE
PHILADELPHIA, PENNSYLVANIA 19120
(Address of principal place of business or intended principal place of business)
--------------------------
GARY J. WASSERSON, CHIEF EXECUTIVE OFFICER
5697 RISING SUN AVENUE
PHILADELPHIA, PENNSYLVANIA 19120
(215) 342-7700 (PHONE)
(215) 745-9108 (TELECOPY)
(Name, address and telephone number of agent for service)
--------------------------
COPIES TO:
DAVID ALAN MILLER, ESQ. RICHARD W. COHEN, ESQ.
GRAUBARD MOLLEN & MILLER ROBINSON BROG LEINWAND GREENE
600 THIRD AVENUE GENOVESE & GLUCK P.C.
NEW YORK, NEW YORK 10016 1345 AVENUE OF THE AMERICAS
(212) 818-8800 (PHONE) NEW YORK, NEW YORK 10105
(212) 818-8881 (TELECOPY) (212) 586-4050 (PHONE)
(212) 956-2164 (TELECOPY)
--------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this registration statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- -------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- -------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 19, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
[LOGO]
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
2,500,000 SHARES OF COMMON STOCK
All of the shares of Common Stock offered hereby (the "Offering") are being sold
by Global Telecommunication Solutions, Inc. ("GTS" or the "Company"). The Common
Stock currently is quoted on the Nasdaq SmallCap Market under the symbol "GTST."
On June 13, 1997, the last sale price of the Common Stock was $7 1/8 per share.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND SUBSTANTIAL
DILUTION. SEE "RISK FACTORS" AT PAGE 10 HEREOF AND "DILUTION" AT PAGE 20 HEREOF.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................. $ $ $
Total(3).................................. $ $ $
</TABLE>
(1) Does not include a 3% nonaccountable expense allowance which the Company has
agreed to pay to the Representative. The Company also has agreed to sell the
Representative an option to purchase up to 250,000 shares of Common Stock
("Representative's Purchase Option") and to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company, including the
nonaccountable expense allowance, estimated at approximately $ .
(3) The Company has granted the Underwriters an option, exercisable within 45
business days from the date of this Prospectus, to purchase up to an
additional 375,000 shares of Common Stock on the same terms as set forth
above, solely for the purpose of covering over-allotments, if any. If such
over-allotment option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are being offered by the Underwriters on a firm
commitment basis subject to prior sale, when, as, and if delivered to and
accepted by the Underwriters and subject to the approval of certain legal
matters by counsel and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify the Offering and to reject any order in
whole or in part. It is expected that delivery of certificates representing the
shares of Common Stock will be made against payment therefor at the offices of
GKN Securities Corp. in New York City on or about , 1997.
GKN SECURITIES CORP. BARINGTON CAPITAL GROUP, L.P.
, 1997
<PAGE>
[Pictures of prepaid phone cards and specialized
products developed by the company and individuals
utilizing those phone cards and products.]
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ SMALLCAP MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company can be inspected and copied at the principal office of the
Commission, Public Reference Room, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois,
60651-2511 and at Seven World Trade Center, Suite 1300, New York, New York
10048. Copies can be obtained from the Commission at prescribed rates by writing
to the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of such Web site is http://www.sec.gov. The
Common Stock and certain warrants ("Public Warrants") of the Company are quoted
on the Nasdaq SmallCap Market (Symbols: GTST; GTSTW) and such reports, proxy
statements and other information concerning the Company also can be inspected at
the offices of the Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C.
20006.
The Company has filed with the Commission a registration statement (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to sales of the shares of Common Stock offered
hereby. This Prospectus omits certain information contained in the Registration
Statement. For further information, reference is made to the Registration
Statement, the exhibits and financial statements filed as a part thereof, which
may be examined without charge at the office of the Commission, and photocopies
of which, or any portion thereof, may be obtained upon payment of the prescribed
fee.
Statements contained in this Prospectus as to the contents of any agreement
or other document referred to are not complete, and where such agreement or
other document is an exhibit to the Registration Statement, each statement is
deemed to be qualified and amplified in all respects by the provisions of the
exhibit.
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS, INCLUDING THE INFORMATION SET FORTH UNDER "RISK
FACTORS." CERTAIN STATEMENTS CONTAINED IN THE PROSPECTUS SUMMARY AND ELSEWHERE
IN THIS PROSPECTUS REGARDING MATTERS THAT ARE NOT HISTORICAL FACTS, SUCH AS
STATEMENTS REGARDING GROWTH TRENDS IN THE PREPAID PHONE CARD INDUSTRY AND THE
COMPANY'S GROWTH STRATEGY AND PLANS TO INTRODUCE ADDITIONAL PRODUCTS OR
SERVICES, ARE FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE
SECURITIES ACT). SINCE SUCH FORWARD-LOOKING STATEMENTS INCLUDE RISKS AND
UNCERTAINTIES, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR
IMPLIED BY SUCH STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED HEREIN UNDER "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THIS PROSPECTUS.
EXCEPT AS OTHERWISE SPECIFIED, ALL SHARE, PER SHARE AND FINANCIAL
INFORMATION SET FORTH HEREIN IS BASED ON THE ASSUMPTION THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION IS NOT EXERCISED AND GIVES EFFECT TO A ONE-FOR-THREE
REVERSE STOCK SPLIT EFFECTED IN MARCH 1997. UNLESS THE CONTEXT OTHERWISE
REQUIRES, REFERENCES HEREIN TO THE "COMPANY" OR "GTS" REFER TO GLOBAL
TELECOMMUNICATION SOLUTIONS, INC. AND ITS SUBSIDIARIES.
THE COMPANY
Global Telecommunication Solutions, Inc. is a facilities-based global
provider of prepaid phone cards that offer users reliable, convenient and
cost-effective access to domestic and international telecommunications services.
The Company's core product line consists of traditional prepaid phone cards
marketed domestically and internationally, such as its signature product, the
Global Link-Registered Trademark- Card. The Company also offers custom-designed
prepaid phone cards for business promotional use and retail products utilizing
prepaid phone card technology for specialized purposes, such as information
access and interactive games. Many of the Company's phone cards are offered with
enhanced services, such as interactive applications, customized voice greetings
and data collection, and the Company intends to begin offering other enhanced
services, such as voice mail and conference calling, in the second quarter of
1997. The Company's phone cards are a cost-effective alternative to standard
credit calling cards, collect calling and other options available to consumers
seeking to place domestic and international phone calls when away from the home
or office. For example, a caller using a GTS phone card to make a direct dial
three-minute call from New York to Los Angeles between the weekday hours of 8:00
a.m. and 5:00 p.m. could save between approximately 66% and 74%, compared to a
caller that uses an AT&T credit calling card or MCI 800 Collect service for the
same call.
The Company generated revenues of approximately $12.1 million in 1996,
compared to $3.1 million in 1995. It activated approximately 1.5 million
traditional prepaid phone cards in 1996, compared to 554,000 cards in 1995, and
decremented approximately 21.9 million minutes from its traditional phone cards
in 1996, compared to 4.3 million minutes in 1995. The Company also activated
approximately 24.6 million custom-designed promotional phone cards in 1996,
compared to 139,000 cards in 1995, and decremented approximately 1.5 million
minutes from its promotional phone cards in 1996, compared to 550,000 minutes in
1995. Substantially all of the increases in revenues, activations of traditional
cards and decremented minutes from traditional cards were attributable to GTS'
acquisition on February 29, 1996 of all of the outstanding capital stock of
Global Link Teleco Corporation ("Global Link"). Global Link's operating results
were consolidated with the Company's commencing on March 1, 1996. Substantially
all of the increases in activations of promotional cards and decremented minutes
from promotional cards were attributable to a promotional campaign created by
the Company for Kraft Foods. Approximately 6,000 retail outlets were carrying
the Company's phone cards as of March 31, 1997, compared with approximately
1,750 as of March 31, 1996 and approximately 5,400 as of December 31, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Prepaid phone cards have been widely used throughout Europe and Asia for
more than ten years. Although prepaid phone cards were not used on a widespread
basis in the United States prior to 1994, the
4
<PAGE>
market in the United States is rapidly expanding, with annual sales of prepaid
phone cards growing from an estimated $100 million in 1993 to an estimated $1.1
billion in 1996. Industry analysts project annual sales of prepaid phone cards
in the United States to reach $2.5 billion by 2000. The Company anticipates that
continued industry growth will be fueled by (i) increasing consumer acceptance
of prepaid phone cards and recognition of their cost advantages over standard
credit calling cards, collect calling and other options available to consumers
seeking to place phone calls when away from the home or office and (ii) a
broader base of consumer segments using prepaid phone cards, such as business
employees, students and travelers.
The Company currently markets its prepaid phone cards in four product lines:
(i) traditional prepaid phone cards marketed domestically through distributors
and retail establishments, such as convenience stores, supermarkets, drug stores
and mass merchandisers; (ii) traditional prepaid phone cards marketed
internationally to business and leisure travelers destined for the United
States; (iii) custom-designed promotional phone cards sold to businesses to
enhance the marketing of their products and services; and (iv) specialized
retail products utilizing prepaid phone card technology. The Company believes
that its established reputation in the prepaid phone card industry among
retailers, distributors and business customers, its existing infrastructure and
its experienced management team provide it with important advantages over many
competitors. In 1995, the Company was named the prepaid phone card company of
the year by TELECARD WORLD, an industry trade publication.
TRADITIONAL PHONE CARDS MARKETED DOMESTICALLY. The Company's Global Link
Card and other traditional prepaid phone cards are sold domestically through
seven in-house sales managers (i) directly to national, regional and independent
retail establishments, which sell the phone cards to a wide range of end users,
(ii) to independent distributors with widespread distribution channels and
access to a substantial number of retailers, such as newsstand distributors,
food brokers and tobacco and confectionery distributors and (iii) to other
marketing companies and organizations that sell the phone cards to consumers
within specific niche markets. The Company's prepaid phone cards currently are
carried by supermarkets such as Von's, Sloan's and Genuardi; convenience stores
such as ABC and Food Spot; distributors such as Quality Distribution Network and
Acosta News; and other marketing outlets such as the Phoenix International
Airport and Seamen's Church Institute of Florida. The Company also markets its
traditional phone cards through Company-owned and operated retail phone centers.
TRADITIONAL PHONE CARDS MARKETED INTERNATIONALLY. The Company's Global Link
Card and other traditional prepaid phone cards are sold internationally to
business and leisure travelers destined for the United States, primarily through
airlines, tour wholesalers, travel agencies, car rental agencies and other
travel related businesses. International marketing is conducted primarily
through approximately 150 sales agents located in 28 countries. The Company's
international phone cards currently are sold by international sales agents such
as Mike Gurnell & Associates; travel agencies such as C.A. Ferntouristik; tour
wholesalers such as Guest International Marketing Services--Germany and American
Express Vacations; airlines such as United Vacations (United Airlines), Tower
Air, Air New Zealand Holidays and Iceland Air; and Alamo Rent-A-Car.
PROMOTIONAL PHONE CARDS. The Company's custom-designed promotional phone
cards, which feature companies' logos, products and customized advertisements,
are sold to businesses that typically give these cards to their customers to
enhance the marketing of their products and services. A business utilizing the
Company's phone cards for promotions also can access marketing and demographic
data compiled by the Company's switching platforms. The Company believes that it
has differentiated itself from most other providers of promotional phone cards
by combining enhanced services and interactive technology with its promotional
cards. In 1996, the Company conducted a promotion for Kraft Foods called "Kids
Pick the President," which enabled children to use a GTS phone card to vote for
a candidate in the 1996 presidential election. This promotion received a Gold
Medal award for "outstanding phone card promotion" from PROMO MAGAZINE, an
advertising industry trade publication. Other businesses for which the Company
has conducted promotional phone card programs include Microsoft, Icelandair,
Lufthansa, Taco
5
<PAGE>
Bell, RJ Reynolds, Meineke Muffler, Rollerblade, NatWest, Arm 'n Hammer, Dial,
Seagrams, The 1996 Masters Golf Tournament and the Toronto Blue Jays.
SPECIALIZED RETAIL PHONE CARD PRODUCTS. The Company designs and markets
specialized retail products utilizing prepaid phone card technology which are
sold principally to distributors and retail establishments that carry the
Company's traditional prepaid phone cards, such as Von's and ABC. The Company
also sells these products to businesses not presently engaged in the sale of the
Company's prepaid phone cards, such as Eckerd Drugs and Stop & Shop. Recent
examples of these products include KIDS-IN-TOUCH SAFETY PHONE CARDS, PSYCHIC
PHONE CARDS, CALL SANTA ACTIVITY PHONE CARDS, MARVEL SUPERHEROES BATTLEPACKS
(comprised of three games played using a touch-tone telephone as a joystick),
SESAME STREET TELEPHONE STORY TAGS, which enable children to call a designated
toll-free number to listen to stories told by SESAME STREET characters, and
PETS-IN-NEED PHONETAGS, which are attached to a pet's collar. In the event that
the pet becomes lost, a good samaritan can contact the pet's owner by calling
the toll-free number imprinted on the tag, which automatically connects to the
owner's designated phone number.
The Company's prepaid telecommunications services currently are delivered
through three Company-owned switching platforms, one located in Miami, Florida
and two located in Jersey City, New Jersey. These switching platforms, together
with the Company's agreements with multiple domestic and international long
distance carriers, allow for redundant routing of calling traffic and for the
provision of least-cost routing. Using multiple carriers enables the Company to
reduce costs and compete more effectively.
In June 1996, the Company introduced its LOCAL LINK-TM- service, which
enables callers using the Company's phone cards in the New York metropolitan
area to receive reduced per-minute rates by accessing the Company's Jersey City
switching platform through a local number instead of a toll-free number. The
Company's costs are substantially reduced when a customer accesses the Company's
switching platform in this manner or terminates a call in a LOCAL LINK service
area, which serves to improve the Company's gross profit margins and provide the
Company with flexibility to withstand price competition. The Company anticipates
offering its LOCAL LINK service to end users in other major metropolitan areas
commencing in the third quarter of 1997.
STRATEGY
The Company's strategy is to continue the rapid growth of its operations and
capture an increasing share of the expanding prepaid phone card market. Key
components of the Company's strategy include:
- expanding the domestic and international retail distribution channels for
the Company's phone cards primarily through the hiring of additional
domestic and international sales and marketing personnel;
- expanding the network of Company-owned switching platforms by installing
additional switching platforms in a number of major metropolitan areas in
the United States and interconnecting them to provide reliable,
cost-effective telecommunications services;
- acquiring companies or assets to achieve the Company's strategic goals;
and
- pursuing other growth opportunities, including: (i) identifying a broader
base of consumer segments for the Company's prepaid phone cards, such as
business employees, students and travelers; (ii) exploring alternative
methods of prepaid phone card distribution, such as vending machines and
ATM machines; (iii) exploiting alternative technologies for prepaid
products, such as prepaid wireless services; and (iv) expanding strategic
relationships with other telecommunications services providers.
CORPORATE BACKGROUND
On February 29, 1996, the Company acquired through a merger (the "Global
Link Merger") all of the outstanding capital stock of Global Link for a purchase
price of approximately $11,400,000, and the
6
<PAGE>
assumption of liabilities. Prior to the Global Link Merger, GTS focused on
marketing custom-designed prepaid phone cards for business promotional use and
other retail products utilizing prepaid phone card technology. Global Link
marketed primarily traditional prepaid phone cards through various retailers and
distributors, including supermarkets, convenience stores, travel agencies and
tour wholesalers and Company-owned and operated retail phone centers.
Capitalizing on the strengths of their prior businesses, GTS and Global Link
have integrated their operations to create a more diversified prepaid phone card
company.
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 5697 Rising Sun Avenue, Philadelphia,
Pennsylvania 19120 and its telephone number is (215) 342-7700.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered......................... 2,500,000 shares
Common Stock Outstanding after the 4,697,538 shares (1)
Offering...................................
Use of Proceeds.............................. To expand sales and marketing activities
aimed at both domestic and international
customers; to expand the Company's network of
Company-owned switching platforms; to repay
certain indebtedness; and for working capital
and general corporate purposes, including
potential acquisitions. See "Use of
Proceeds."
Nasdaq SmallCap Market Symbol................ GTST (2)
Risk Factors................................. The shares of Common Stock offered hereby
involve a high degree of risk and immediate
substantial dilution. See "Risk Factors"
beginning on page 10, and "Dilution" at page
20.
</TABLE>
- ------------------------
(1) Does not include an aggregate of 3,819,548 shares of Common Stock as
follows: (i) 1,230,560 shares of Common Stock reserved for issuance upon
exercise of the warrants issued in the Company's initial public offering
("IPO") in December 1994 and other warrants of the same class ("Public
Warrants"); (ii) 400,000 shares of Common Stock reserved for issuance upon
exercise of warrants ("May 1996 Warrants") issued in connection with the
Company's private placement in May 1996 ("May 1996 Private Placement");
(iii) 733,333 shares of Common Stock reserved for issuance upon exercise of
warrants ("December 1996 Warrants," and together with the May 1996 Warrants
and the Public Warrants, the "Warrants") issued in connection with the
Company's private placement in December 1996 ("December 1996 Private
Placement"); (iv) 250,858 shares of Common Stock reserved for issuance upon
exercise of outstanding options granted under the Company's 1994 Performance
Equity Plan ("1994 Plan"); (v) 248,587 shares of Common Stock reserved for
issuance upon exercise of options available for future grant under the
Company's 1994 Plan; (vi) 422,900 shares of Common Stock reserved for
issuance upon exercise of non-plan options and warrants granted to certain
officers, consultants and stockholders of the Company; (vii) 283,310 shares
of Common Stock reserved for issuance upon conversion of certain outstanding
convertible debentures ("Convertible Debentures"); and (viii) 250,000 shares
of Common Stock reserved for issuance upon exercise of the Representative's
Purchase Option. See "Management -- 1994 Performance Equity Plan" and "--
Other Options and Warrants," "Certain Transactions" and "Description of
Securities."
(2) The Company's Public Warrants also are quoted on the Nasdaq SmallCap Market
under the symbol "GTSTW."
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements, including
the Notes thereto, included elsewhere in this Prospectus. The consolidated
statement of operations data for the years ended December 31, 1995 and 1996 and
the consolidated balance sheet data at December 31, 1996 are derived from the
Company's audited Consolidated Financial Statements included elsewhere in this
Prospectus. The consolidated statement of operations data for the years ended
December 31, 1993 and 1994 are derived from the Company's audited financial
statements for those years, which are not included in this Prospectus. The
consolidated statement of operations data for the three months ended March 31,
1996 and 1997 and the consolidated balance sheet data at March 31, 1997 have
been derived from unaudited interim financial statements included elsewhere in
this Prospectus and include all adjustments that the Company considers necessary
for a fair presentation of the financial position and results of operations at
that date and for such periods. The operating results for the three months ended
March 31, 1997 are not necessarily indicative of the results to be expected for
the full year or for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
--------------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACTUAL PRO FORMA(2) ACTUAL
--------------------------------------------- ---------------------- ------------------------
<CAPTION>
1993 1994 1995 1996(1) 1995 1996 1996(1) 1997
--------- ---------- ---------- ---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................. $ 133,107 $1,377,900 $3,144,350 $12,121,365 $11,574,213 $13,484,395 $1,327,710 $3,688,153
Gross profit (loss)....... (11,077) 461,679 251,770 4,055,050 2,810,670 4,492,675 314,154 832,796
Operating expenses........ 531,971 2,292,835 3,414,217 10,666,932 10,662,478 11,891,979 1,505,680 2,793,059
Operating loss............ (543,048) (1,831,156) (3,162,447) (6,611,882) (7,851,808) (7,399,304) (1,191,526) (1,960,263)
Net loss.................. (569,120) (1,946,526) (2,970,121) (6,920,222) (7,821,915) (7,739,468) (1,187,771) (2,274,915)
Net loss per share........ $ (.87) $ (2.97) $ (2.84) $ (4.14) $ (4.78) $ (4.38) $ (0.95) $ (1.23)
Weighted average number of
shares outstanding...... 653,338 654,785 1,047,226 1,670,755 1,637,600 1,765,925 1,254,830 1,847,786
<CAPTION>
<S> <C>
PRO FORMA(2)
-------------
1996
-------------
<S> <C>
STATEMENT OF OPERATIONS DA
Net sales................. $ 2,690,740
Gross profit (loss)....... 751,779
Operating expenses........ 2,730,727
Operating loss............ (1,978,948)
Net loss.................. (2,007,017)
Net loss per share........ $ (1.23)
Weighted average number of
shares outstanding...... 1,637,600
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACTUAL ACTUAL
------------ ----------
BALANCE SHEET DATA:
Cash and cash equivalents.................................................................. $1,352,322 $ 235,618
Working capital (deficit).................................................................. (5,630,385) (7,247,176)
Total assets............................................................................... 25,819,365 24,290,658
Deferred revenue(4)........................................................................ 4,431,309 4,047,845
Short-term debt............................................................................ 1,125,696 1,012,736
Total liabilities.......................................................................... 15,431,076 15,945,476
Stockholders' equity....................................................................... $10,388,289 $8,345,182
<CAPTION>
<S> <C>
AS ADJUSTED(3)
--------------
BALANCE SHEET DATA:
Cash and cash equiva $ 16,805,990
Working capital (def 10,277,824
Total assets........ 40,859,887
Deferred revenue(4). 4,047,845
Short-term debt..... 58,108
Total liabilities... 14,922,098
Stockholders' equity $ 25,937,789
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
--------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ACTUAL PRO FORMA(2) ACTUAL PRO FORMA(2)
--------------------- ---------------------- -------------------- -------------
<CAPTION>
1995 1996(1) 1995 1996 1996(1) 1997 1996
--------- ---------- ---------- ---------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Net activation value(5)........................ $2,711,761 $14,244,667 $12,971,772 $15,658,452 $1,361,976 $3,556,512 $ 2,775,761
Number of cards activated:
Traditional.................................. 553,706 1,478,999 1,278,505 1,585,666 288,385 469,847 395,052
Promotional.................................. 138,662 24,599,536 138,662 24,599,536 841 531,927 841
Number of minutes decremented(6):
Traditional.................................. 4,280,337 21,856,165 18,409,458 24,792,348 2,348,393 8,515,984 5,284,576
Promotional.................................. 550,342 1,472,961 550,342 1,472,961 160,407 1,078,367 160,407
</TABLE>
8
<PAGE>
(1) Includes the operating results of Global Link from March 1, 1996, the
effective date of the Global Link Merger. See Note 3 of Notes to
Consolidated Financial Statements.
(2) Reflects the results of operations assuming the Global Link Merger had
occurred at the beginning of the respective periods.
(3) Gives effect to the exercise in April 1997 by Wheatley Partners, L.P.
("Wheatley") and Wheatley Foreign Partners, L.P. ("Wheatley Foreign") of an
aggregate of 333,334 December 1996 Warrants at an exercise price of $7.50
per share, resulting in $2,500,000 of gross proceeds to the Company
("Wheatley Warrant Exercise"), the conversion after March 31, 1997 of
$68,750 of Convertible Debentures into 7,422 shares of Common Stock
("Debenture Conversion") and the sale of the shares of Common Stock offered
hereby (assuming a price of $7.00 per share) and the application of the
estimated net proceeds therefrom. See "Use of Proceeds."
(4) Represents amounts for products shipped to retailers that the Company has
invoiced, which, as of the date presented, have not been used by customers.
Upon customer usage or the expiration of the cards that are the subject of
these invoices, or, in the case of promotional phone cards, during the
period the program is executed, the Company will recognize revenue and
reduce the deferred revenue account. At the time the revenue is recognized,
the costs to which that revenue specifically relates also will be
recognized.
(5) Represents gross retail value of phone cards activated, net of discounts to
retailers and distributors.
(6) Represents minutes used by customers to place telephone calls utilizing the
Company's phone cards.
9
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS IN THE SHARES OFFERED HEREBY SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION APPEARING IN
THIS PROSPECTUS.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; SIGNIFICANT ACCUMULATED AND
WORKING CAPITAL DEFICITS
GTS and Global Link were incorporated in December 1992 and March 1994,
respectively. Accordingly, the Company has a limited operating history upon
which an evaluation of its future performance and prospects can be made. The
Company's prospects must be considered in light of the risks, expenses, delays
and difficulties frequently encountered in establishing a new business in an
emerging and evolving industry characterized by intense competition. Since
inception, the Company has incurred significant losses, including net losses of
$1,946,526 and $2,970,121 for the years ended December 31, 1994 and 1995,
respectively, and $6,920,222 for the year ended December 31, 1996, the year in
which the Company acquired Global Link. In addition, the Company incurred a net
loss of $2,274,915 for the three months ended March 31, 1997. As of March 31,
1997, the Company had an accumulated deficit of $14,681,419, a working capital
deficit of $7,247,176 and negative tangible book value of $9,648,849. Inasmuch
as the Company will continue to have a high level of operating expenses and will
be required to make significant up-front expenditures in connection with its
continuing expansion (including salaries of executive, creative, sales,
marketing, technical and other personnel and purchase and installation costs for
its proposed switching platforms), the Company anticipates that it will continue
to incur losses for the foreseeable future. There can be no assurance that the
Company will ever achieve or sustain profitability.
INTENSE COMPETITION
The telecommunications services industry generally, and the prepaid phone
card industry specifically, is intensely competitive, rapidly evolving and
subject to constant technological change. As the prepaid phone card industry has
grown, industry analysts estimate that the number of companies marketing prepaid
phone cards has increased from approximately 75 companies in 1994 to more than
500 in 1996. Further, the Company's prepaid phone cards not only compete with
other phone cards, but also with credit calling cards, collect calling services,
hotel telephones, public pay telephones and other long distance services. The
Company believes that it competes with any medium by which a consumer places a
telephone call away from the home or office. Many of these products and services
are marketed by well-established companies with reputations for success in the
development and sale of products and services and which possess significantly
greater financial, marketing, distribution, personnel and other resources than
the Company. These resources allow such companies to implement extensive
advertising and promotional campaigns, both generally and in response to
specific marketing efforts by competitors, to rapidly enter into new markets and
to introduce new products and services. Competitors with greater financial
resources than the Company also may be able to provide more attractive incentive
packages to retailers in order to encourage them to carry products that compete
with those offered by the Company. In addition, competitors with greater
resources than the Company may be better situated to negotiate favorable
contracts with retailers. Certain of these competitors, such as AT&T, MCI and
Sprint, have the financial resources to withstand substantial price competition,
which the Company expects to increase significantly. Many of the large telephone
companies, retailers and other companies have already entered the prepaid phone
card market. There can be no assurance that the Company will be able to compete
successfully in its markets.
DEPENDENCE ON LONG DISTANCE CARRIERS; POSSIBLE SERVICE INTERRUPTIONS AND
EQUIPMENT FAILURES
The Company currently is dependent on a limited number of domestic and
international long distance carriers, including MCI and Sprint, to provide its
card users with access to cost-effective long distance
10
<PAGE>
service. The Company has entered into carrier agreements or arrangements with
these long distance carriers pursuant to which the Company acquires large
volumes of long distance service and resells it through its switching
facilities. Failure to obtain continuing access to transmission facilities and
long distance networks would have a material adverse effect on the Company,
including possibly requiring the Company to significantly curtail or cease its
operations. Additionally, any increase in the rates charged by the Company's
carriers could materially adversely affect the Company's operating margins. The
Company's operations require that its carriers' long distance networks operate
on a continuous basis. It is not unusual for carriers to experience equipment
failures and service interruptions that last for significant periods of time.
Service interruptions and equipment failures resulting in material delays could
adversely affect customer confidence, as well as the Company's business
operations and reputation. Further, as the Company decrements its cards at fixed
per-minute rates, any service interruption forcing the Company to re-route
calling traffic through alternate routes or carriers providing the Company with
volume discounts or per-minute costs less favorable than those provided by the
primary routes and carriers could have a material adverse effect on the
Company's operating margins. The Company's carrier agreement with Sprint
requires the Company to satisfy certain minimum monthly usage requirements in
order to receive the most favorable pricing available under the agreement.
Failure to meet such minimum requirements would obligate the Company to pay
underutilization charges, which could have a material adverse effect on the
Company.
DEPENDENCE ON MAJOR CUSTOMERS
The Company is substantially dependent on a small number of traditional
phone card customers, the loss of any of which could have a material adverse
effect on the Company. Two of these customers, Southern New England Telephone
Company and Seamen's Church Institute of Florida, Inc., accounted for
approximately 13% and 11%, respectively, of the Company's revenues for the year
ended December 31, 1996. Promotional phone card customers usually generate
non-recurring revenues, and one of these customers, Kraft Foods, accounted for
approximately 12% of the Company's revenues for the year ended December 31,
1996.
NON-RECURRING REVENUES
Generally, sales of promotional cards to business customers generate
non-recurring revenues. For the years ended December 31, 1994, 1995 and 1996,
approximately 10.2%, 25.2% and 17.4%, respectively, of the Company's revenues
were derived from sales of promotional cards to a limited number of these
customers. For the year ended December 31, 1996, promotions for Kraft Foods
accounted for approximately 11.6% of the Company's revenues. The Company may
remain dependent on non-recurring sales of promotional cards to a limited
customer base for a significant portion of its revenues.
RISKS INHERENT IN RAPID EXPANSION
The Company is pursuing a strategy of growth and seeks to expand its
distribution capabilities to achieve greater penetration into new and emerging
markets. The success of this growth strategy is dependent on, among other
factors, the Company's ability to: (i) establish additional distribution
arrangements targeting various market segments, including retail, promotional
and business markets; (ii) hire and retain skilled management, financial,
marketing, technical, creative and other personnel; (iii) successfully manage
growth (including monitoring operations, controlling costs and maintaining
effective quality, inventory and service controls); and (iv) implement and/or
improve its technical, administrative, financial control and reporting systems.
The Company's financial controls and reporting systems will require enhancement
and substantial investment in the future to accommodate the Company's
anticipated growth. There can be no assurance that the Company will be able to
successfully enhance its financial controls and reporting systems to meet the
Company's future needs. The Company also may seek to expand its operations by
acquiring companies or assets to achieve its strategic goals. The Company
intends to target
11
<PAGE>
companies that sell and market prepaid phone cards, as well as those that
operate alternative technologies marketed within distribution channels similar
to those in which the Company's products are marketed, including prepaid
wireless services and prepaid home telephone service. The Company also may
consider acquisitions with related entities, although it does not presently
intend to do so. There can be no assurance that the Company will be able to
implement its business strategy successfully or otherwise expand its operations,
or that the Company ultimately will effect any acquisition or successfully
integrate into its operations any business or assets that it may acquire.
NEW INDUSTRY; UNCERTAINTY OF MARKET ACCEPTANCE
The prepaid phone card industry is an emerging market characterized by an
increasing and substantial number of new competitors that have introduced or are
developing an array of new products and services, including interactive,
enhanced and value-added services. Each of these entrants is seeking to position
its products and services as the preferred method for accessing prepaid long
distance telecommunications services. As is typical in an emerging industry,
market acceptance of newly introduced products and services is uncertain. There
can be no assurance that substantial markets for prepaid phone cards will
continue to develop or that the Company will be able to meet its current
marketing objectives, succeed in positioning its cards and services as a
preferred method for accessing prepaid long distance telecommunications services
or achieve significant market acceptance for its products and services.
RAPID TECHNOLOGICAL CHANGE AND PRODUCT OBSOLESCENCE
The telecommunications industry is characterized by frequent and rapid
changes in technology and evolving industry standards, which often result in
product obsolescence or short product life cycles. The proliferation of new
telecommunications technologies, including personal communication services,
cellular telephone products and services, and prepaid phone cards employing
alternative technologies, may reduce demand for prepaid phone cards. For
example, NYNEX has installed pay telephones in New York City that employ "smart
card" technology, which utilizes computer chips, magnetic strips, or optical
readers built into cards that must be swiped through or inserted into
specially-designed pay telephones. Such technology could be perceived as a more
convenient method of accessing prepaid long distance service than the remote
memory technology employed by most prepaid phone card companies, including GTS.
The proliferation and widespread commercial use and acceptance of alternative
technologies such as "smart card" technology could materially adversely affect
demand for the Company's prepaid phone cards.
DEPENDENCE ON MANUFACTURERS OF SWITCHING FACILITIES; DAMAGE, FAILURE AND
DOWNTIME
The Company's switching platforms are manufactured by National Applied
Computer Technology, Inc. ("NACT"). The Company and NACT have entered into
agreements pursuant to which NACT licenses software to the Company and provides
technical support and platform maintenance. Termination of these agreements
could materially adversely affect the Company's business until alternative
arrangements were secured. There can be no assurance that similar arrangements
could be made with other switch manufacturers. The Company's operations also are
dependent upon the protection of its equipment and data at the switching
facilities against damage caused by fire, power loss, technical failures,
unauthorized intrusion, natural disasters, sabotage and other events. There can
be no assurance that such an event will not cause a failure of a significant
technical component and result in a service outage having a material adverse
effect on the Company. Although the Company maintains business interruption
insurance providing for aggregate coverage of approximately $1.0 million per
occurrence, there can be no assurance that the Company will be able to maintain
its business interruption insurance, that such insurance would continue to be
available at reasonable prices, that such insurance would cover all such losses
or that such insurance would be sufficient to compensate the Company for losses
it experiences due to the Company's inability to provide services to its
customers.
12
<PAGE>
UNAUTHORIZED ACCESS TO SERVICES
The Company has experienced unauthorized access to its switching services by
unauthorized disclosure of PINs and unauthorized activation of prepaid phone
cards, which have resulted in the Company's inability to recover the long
distance service and switching charges associated with the use of such PINs and
cards. Any unauthorized access to the Company's services for a prolonged period
of time could have a material adverse effect on the Company's operations.
REGULATION
Long distance telecommunications services are subject to regulation by the
Federal Communications Commission (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
telecommunications services. Changes in existing laws and regulations,
particularly as a result of the Telecommunications Act of 1996 (the
"Telecommunications Act"), which provides for greater competition among
providers of telecommunications services, may have a material impact on the
Company's activities and operating results. The Company is also subject to
Federal Trade Commission regulation and other federal and state laws relating to
the promotion, advertising, labeling and packaging of its products. The Company
believes that it is in compliance with all laws, rules and regulations material
to its operations and has obtained, or is in the process of obtaining, all
licenses, tariffs and approvals necessary for the conduct of its business. There
can be no assurance, however, that the Company will be able to obtain required
licenses or approvals in the future or that the FCC or state regulatory
authorities will not require the Company to comply with more stringent
regulatory requirements. Conformance of the Company's operations with new
statutes and regulations could require the Company to alter methods of
operation, at costs which could be material, or otherwise limit the types of
services offered by the Company.
Many states regulate prepaid phone card providers by requiring them to apply
for certification. While the Company either has obtained, applied or is applying
for certification in the states of Florida, New York and California (where the
Company conducts a substantial part of its business), there can be no assurance
that state regulators will grant the Company all required authorizations.
Currently, the Florida Public Service Commission ("FPSC") also is considering
implementing other rules that specifically regulate prepaid phone card
providers. The FPSC is the first state regulatory agency that has taken an
aggressive approach toward the regulation of prepaid phone cards. The Company
believes that other state regulatory agencies are likely to adopt regulations
similar to those ultimately adopted by the FPSC. There can be no assurance that
the implementation of these rules will not materially adversely affect the
Company's operations.
Pursuant to the Telecommunications Act, the FCC recently adopted new rules
governing the pay telephone industry that, among other things, establish a means
by which all pay telephone service providers are compensated for every
interstate and intrastate call originating from their pay telephones, including
calls that utilize toll-free access. Under the new rules, long distance carriers
are required to compensate pay telephone owners a per-call fee for those calls
made after October 7, 1996 for which the pay telephone owner is not otherwise
compensated. Until October 8, 1997, only long distance carriers that generate
$100 million or more in revenues will be required to pay a pre-determined
monthly amount. Those long distance carriers have the right to charge phone card
companies, such as the Company, a fee for each call originating from a pay
telephone. One of the Company's long distance carriers has indicated that it
intends to charge the Company such fees, although the Company currently is
disputing this carrier's method of calculation of payment. After October 8,
1997, interexchange carriers, including the Company, will be required to
compensate pay telephone providers $.35 for each call completed from a pay
telephone where the caller accesses the long distance carrier through a
toll-free access number. It is unclear who will be responsible for invoicing and
collecting the per-call compensation fees from the interexchange carriers. The
FCC's new rules currently are being reviewed by the United States Court of
Appeals for the District of
13
<PAGE>
Columbia Circuit. To the extent that payments of this type cannot be passed on
to card users, the new rules could have a material adverse effect on the
Company.
POSSIBLE FEDERAL EXCISE TAX AND STATE SALES AND USE TAX LIABILITIES
The sale of long distance services through the use of prepaid phone cards
has been deemed a taxable event by the Internal Revenue Service (the "IRS") and
most state taxing authorities. The IRS has established a task force to determine
the application of the 3% federal telecommunications excise tax (the
"Telecommunications Excise Tax") to the sale and provision of long distance
services through prepaid phone cards. The task force has not taken a formal
position on the application of the Telecommunications Excise Tax. Additionally,
the Company believes that the sale of long distance services through prepaid
phone cards is subject to state sales, excise, use and gross receipt taxes
("State Taxes"). The Company has established a reserve in anticipation of the
required payment of Telecommunications Excise Tax and State Taxes. However,
there can be no assurance that the IRS or a state taxing authority will concur
with the Company's method of determining the applicable taxes payable. The
Company's failure to accrue sufficiently for the anticipated taxes could
materially adversely affect the Company's operations. (See Note 8 to the
Consolidated Financial Statements.)
POSSIBLE INABILITY TO RECOGNIZE DEFERRED REVENUE
The sale of long distance telecommunications service through prepaid phone
cards may be subject to the "escheat" laws of various states. These laws
generally provide that payments or deposits received in advance or in
anticipation of the provision of utility services (including telephone service)
that remain unclaimed for a specific period of time after the termination of
such services are deemed to be "abandoned property" and must be remitted to the
state. Although the Company is not aware of any case in which these laws have
been applied to the sale of prepaid phone cards, and does not believe that such
laws are applicable, in the event that such laws are deemed to be applicable,
the Company may be unable to recognize a portion of the deferred revenue
remaining upon the expiration of phone cards with unused calling time. In this
event, the Company may be required to deliver such amounts to certain states in
accordance with these laws, which could have a material adverse effect on the
Company. For the year ended December 31, 1996 and the three months ended March
31, 1997, approximately 19.4% and 18.9%, respectively, of the Company's revenues
were derived from the recognition of deferred revenue upon card expiration or,
in the case of promotional cards, during the period the program is executed.
LIMITED TRADING MARKET AND POSSIBLE VOLATILITY OF COMMON STOCK PRICES
For the 12 months ended March 31, 1997, the average daily trading volume of
the Common Stock was approximately 7,150 shares. This low trading volume may
have had a significant effect on the market price of the Common Stock and,
accordingly, historic prices may not necessarily be indicative of market prices
in a more liquid market. The trading price of the Common Stock in the future
could be subject to wide fluctuations in response to variations in quarterly
operating results, failure to meet expectations of, or a change in
recommendations by, securities analysts, announcements of technological
innovations or new products by the Company or its competitors, government policy
changes and other events or factors, including factors outside the Company's
control.
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SYSTEM
The Company's Common Stock and Public Warrants are listed on the Nasdaq
SmallCap Market ("Nasdaq"). On November 6, 1996, the Board of Directors of The
Nasdaq Stock Market, Inc. approved changes to the maintenance requirements that
companies listed on Nasdaq (such as the Company) must meet in order to have
their securities listed on Nasdaq. The failure to meet these maintenance
criteria in the future may result in the delisting of the Company's securities
from Nasdaq and trading, if any, in the Company's securities would thereafter be
conducted on the OTC Bulletin Board. As a result of such
14
<PAGE>
delisting, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Company's securities. In
addition, if the Common Stock was to become delisted from trading on Nasdaq and
the trading price of the Common Stock was to fall below $5.00 per share, trading
in the Common Stock also would be subject to the requirements of certain rules
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), which require additional disclosure by broker-dealers in connection with
any trades involving a stock defined as a penny stock (generally, any non-Nasdaq
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to sale. The additional burdens imposed upon broker-dealers by
such requirements may discourage them from effecting transactions in the
Company's securities, which could severely limit the liquidity of the Company's
securities and the ability of purchasers in this Offering to sell such
securities in the secondary market.
BROAD DISCRETION IN APPLICATION OF NET PROCEEDS BY MANAGEMENT
Approximately $4,071,000, or 27.1%, (assuming a $7.00 per share offering
price) of the estimated net proceeds of the Offering has been allocated to
working capital and general corporate purposes. Accordingly, the Company's
management will have broad discretion as to the application of these proceeds. A
portion of the proceeds allocated to working capital may be used by the Company
to pay salaries, including salaries of its executive officers, and for
acquisitions. Although the Company currently has no agreement, arrangement or
understanding with respect to any acquisition, should an acquisition opportunity
be identified by the Company, the Board of Directors may have the ability to
approve such acquisition without seeking stockholder approval.
RELATED PARTY TRANSACTIONS; POSSIBLE CONFLICTS OF INTEREST
The Company has engaged in transactions with certain of its officers,
directors and principal stockholders, and is a party to consulting agreements
with two of its principal stockholders which will continue after the
consummation of this Offering. The terms of such transactions were determined
without arms' length negotiations and could create, or appear to create,
potential conflicts of interest which may not necessarily be resolved in the
Company's favor. See "Certain Transactions."
DEPENDENCE ON KEY PERSONNEL
The success of the Company is largely dependent on the personal efforts of
Shelly Finkel, its Chairman of the Board, Gary J. Wasserson, its Chief Executive
Officer, and other key personnel. The loss of the services of either Mr. Finkel
or Mr. Wasserson could have a material adverse effect on the Company's business
and prospects. The Company's employment agreement with Mr. Finkel requires him
to devote only 50% of his business time to the Company's affairs. Both Messrs.
Finkel's and Wasserson's employment agreements contain a provision prohibiting
them from competing with the Company during their terms of employment and for a
period of two years thereafter. In addition, in order to successfully implement
and manage its proposed expansion, the Company will be dependent upon, among
other things, the successful recruiting of qualified management, marketing,
sales, technical and creative personnel with experience in the business
activities conducted by the Company. Competition for the type of qualified
individuals sought by the Company is intense and there can be no assurance that
the Company will be able to retain existing employees or that it will be able to
find, attract and retain additional qualified personnel on acceptable terms.
15
<PAGE>
MANAGEMENT'S RIGHT TO NOMINATE DIRECTORS
Pursuant to the terms of a voting agreement among the Company and two groups
of stockholders, until February 28, 1999, the Company is obligated to nominate
four persons designated by one group of stockholders and three persons appointed
by a second group of stockholders for election to the Board of Directors at the
various stockholder meetings, so long as each group of stockholders continues to
hold an aggregate of 183,334 shares of Common Stock. Further, each of these
groups of stockholders has agreed to vote for the other group's designees as
directors of the Company. These stockholders, in the aggregate, will own
approximately 15.9% of the outstanding shares of Common Stock after the
Offering, without giving effect to the exercise of any outstanding warrants or
options or the conversion of the Convertible Debentures. Accordingly, these
stockholders, acting together, will continue to be in a position to influence
the outcome of any election of the directors of the Company.
SHARES ELIGIBLE FOR FUTURE SALE; OUTSTANDING WARRANTS, OPTIONS AND CONVERTIBLE
DEBENTURES; POTENTIAL ADVERSE EFFECT ON MARKET PRICE OF COMMON STOCK AND
WARRANTS
Substantially all of the currently outstanding shares of Common Stock have
been or will be registered for sale under the Securities Act or are eligible for
sale under an exemption therefrom. The possibility that substantial amounts of
Common Stock may be sold in the public market may materially adversely affect
prevailing market prices for the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities.
Additionally, as of the date of this Prospectus, the Company has reserved an
aggregate of 3,819,548 shares of Common Stock for issuance upon exercise of the
Warrants, other outstanding options and warrants and the Representative's
Purchase Option and conversion of the Convertible Debentures. Sale of
substantially all of the shares of Common Stock underlying such securities has
been registered under the Securities Act. To the extent that the Warrants, other
outstanding options and warrants and the Representative's Purchase Option are
exercised or the Convertible Debentures are converted, dilution of the
percentage ownership of the Company's stockholders will occur, and any sales in
the public market of the Common Stock underlying the Warrants, other options and
warrants, the Representative's Purchase Option or Convertible Debentures may
materially adversely affect the prevailing market price for the Common Stock.
Moreover, the terms upon which the Company will be able to obtain additional
equity capital may be materially adversely affected because the holders of the
Warrants, other outstanding options and warrants and the Representative's
Purchase Option can be expected to exercise them at a time when the Company
would, in all likelihood, be able to obtain any needed capital on terms more
favorable to the Company than those provided in the Warrants, other outstanding
options and warrants and the Representative's Purchase Option. The directors and
executive officers and certain principal stockholders of the Company holding, in
the aggregate, 1,068,519 shares of Common Stock and options or warrants to
purchase an aggregate of 1,054,768 shares of Common Stock, have agreed not to
sell or otherwise dispose of any of such shares for periods ranging from six to
twelve months from the date of this Prospectus without the prior written consent
of the Representative. The Representative may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements.
DILUTION
The public offering price is substantially higher than the net tangible book
value per share of the currently outstanding Common Stock. Investors purchasing
shares of Common Stock in the Offering will therefore experience immediate
dilution in net tangible book value of $5.31 per share, assuming a $7.00 per
share offering price.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $15,025,000 ($17,361,250 if the
Underwriters' over-allotment option is exercised in full), assuming a public
offering price of $7.00 per share, and after deducting the underwriting
discounts and commissions and estimated offering expenses payable by the
Company. The Company intends to apply the net proceeds as follows:
(i) approximately $5,000,000 to expand sales and marketing activities aimed
at both domestic and international customers, including hiring additional
domestic and international sales and marketing personnel, increasing
advertising, participation in trade shows and other promotional
activities;
(ii) approximately $5,000,000 to expand its network of Company-owned
switching platforms by installing additional switching platforms in a
number of major metropolitan areas throughout the United States and
interconnecting them to provide reliable, cost-effective
telecommunications services;
(iii) $954,000 to repay debt ("Peoples Debt") owed to Peoples Telephone
Company, Inc. ("Peoples"), which was incurred by Global Link prior to the
consummation of the Global Link Merger. See "Certain Transactions -- The
Global Link Merger"; and
(iv) the remainder (approximately $4,071,000) for working capital and
general corporate purposes, including paying salaries (including salaries
of its executive officers), and for possible acquisitions. While the
Company regularly engages in discussions regarding proposed acquisitions,
it currently has no agreement, arrangement or understanding with respect
to any acquisition. A portion of the proceeds allocated to working
capital will be used to pay taxing authorities amounts due for sales, use
and excise taxes, as well as to make payments to certain vendors which
are currently past due. If the Underwriters exercise the over-allotment
option in full, the Company will realize additional net proceeds of
$2,336,250, which will be added to working capital. Management will have
significant discretion regarding how and when such proceeds will be
applied.
The allocation of the net proceeds of the Offering set forth above
represents the Company's best estimates based upon its current plans and certain
assumptions regarding industry and general economic conditions and the Company's
future revenues and expenditures. If any of these factors change, the Company
may find it necessary or advisable to reallocate some of the proceeds within the
above-described categories.
Proceeds not immediately required for the purposes described above will be
invested temporarily, pending their application as described above, in
short-term United States government securities, short-term bank certificates of
deposit, money market funds or other investment grade, short-term, interest-
bearing instruments.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations (including the costs associated with its growth
strategy), that the proceeds of the Offering, together with its existing
financial resources and cash flow from operations, should be sufficient to
satisfy its anticipated cash requirements until the end of 1998; however, there
can be no assurance that this will be the case. The Company's actual cash
requirements may vary materially from those now planned and will depend upon
numerous factors, including the general market acceptance of the Company's new
and existing products and services, the growth of the Company's distribution
channels, the technological advances and activities of competitors, and other
factors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
17
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain earnings, if any, to finance the growth
and development of its business and does not anticipate paying any cash
dividends in the foreseeable future. The agreements relating to the Convertible
Debentures and the promissory notes issued in connection with the December 1996
Private Placement ("December 1996 Notes") prevent the Company from declaring or
paying cash dividends on its capital stock.
PRICE RANGE OF SECURITIES
The Company's Common Stock and Public Warrants are quoted on the Nasdaq
SmallCap Market under the symbols GTST and GTSTW, respectively. The following
table sets forth the ranges of high and low sale prices for the Common Stock and
Public 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.
For the 12 months ended March 31, 1997, the average daily trading volume of
the Common Stock was approximately 7,150 shares. This low trading volume may
have had a significant effect on the market price of the Common Stock and,
accordingly, historic prices may not necessarily be indicative of market prices
in a more liquid market. See "Risk Factors--Limited Trading Market and Possible
Volatility of Common Stock Prices."
<TABLE>
<CAPTION>
COMMON STOCK PUBLIC WARRANTS
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
1995
First Quarter..... $19 1/2 $11 5/8 $ 2 7/8 $ 1
Second Quarter.... 18 3/8 13 1/2 3 1/16 1 5/8
Third Quarter..... 21 17 1/4 3 1/8 1 3/4
Fourth Quarter.... 20 5/8 13 1/8 2 7/8 1 1/8
1996
First Quarter..... 21 3/8 15 3/8 3 1/8 1 3/4
Second Quarter.... 19 1/8 12 2 13/16 1 1/4
Third Quarter..... 13 1/2 6 1 3/4 7/8
Fourth Quarter.... 11 1/4 6 1 5/16 3/8
1997
First Quarter..... 14 1/2 9 1 3/4 21/32
Second Quarter
(through June
13, 1997)....... 10 5/16 7 1/8 1 1/16 1/2
</TABLE>
See the cover page of this Prospectus for a recent closing price of the
Common Stock on the Nasdaq SmallCap Market. The last sale price of the Public
Warrants on June 13, 1997 was $ 5/8.
As of June 13, 1997, there were 2,197,538 shares of Common Stock and Public
Warrants and May 1996 Warrants to purchase 1,630,560 shares of Common Stock
outstanding, held of record by 63 and 55 holders, respectively. The Company
believes that there are in excess of 500 beneficial holders of each of its
publicly-traded securities.
18
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company (i) as of March 31, 1997 and (ii) as adjusted to give effect to the
Wheatley Warrant Exercise, the Debenture Conversion and the consummation of the
Offering (assuming a price of $7.00 per share) and the application of the
estimated net proceeds therefrom, after deducting the underwriting discounts and
commissions and estimated offering expenses. The table should be read in
conjunction with the Consolidated Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------
<S> <C> <C>
AS
ACTUAL ADJUSTED
------------- ---------------
Short-term debt(1)........................................... $1,012,736 $ 58,108
Long-term debt, net of unearned discount of $1,291,285....... 4,475,780 4,407,030
------------- ---------------
Total debt................................................... 5,488,516 4,465,138
------------- ---------------
Stockholders' equity (deficit):
Preferred stock--$.01 par value, 1,000,000 shares
authorized; no shares issued and outstanding........... -- --
Common stock--$.01 par value, 35,000,000 shares
authorized; 1,856,782 shares issued and outstanding
(actual), 4,697,538 shares issued and outstanding (as
adjusted)(2)........................................... 18,568 46,975
Additional paid-in capital............................... 23,301,014 40,865,214
Deferred compensation.................................... (180,357) (180,357)
Cumulative foreign translation adjustment................ (12,624) (12,624)
Common stock note receivable............................. (100,000) (100,000)
Accumulated deficit...................................... (14,681,419) (14,681,419)
------------- ---------------
Total stockholders' equity............................... 8,345,182 25,937,789
------------- ---------------
Total capitalization (including short-term debt)............. $13,833,698 $ 30,402,927
------------- ---------------
------------- ---------------
</TABLE>
- ------------------------
(1) Includes $954,628 of Peoples Debt to be paid out of the proceeds of the
Offering. See "Use of Proceeds."
(2) Does not include 3,819,548 shares of Common Stock as follows: (i) 2,363,893
shares of Common Stock reserved for issuance upon exercise of the Warrants;
(ii) 250,858 shares of Common Stock reserved for issuance upon exercise of
outstanding options granted under the 1994 Plan; (iii) 248,587 shares of
Common Stock reserved for issuance upon exercise of options available for
future grant under the 1994 Plan; (iv) 422,900 shares of Common Stock
reserved for issuance upon exercise of non-plan options and warrants granted
to certain officers, consultants and stockholders of the Company; (v)
283,310 shares of Common Stock reserved for issuance upon conversion of the
Convertible Debentures; and (vi) 250,000 shares of Common Stock reserved for
issuance upon exercise of the Representative's Purchase Option. See
"Management -- 1994 Performance Equity Plan" and "-- Other Options and
Warrants," "Certain Transactions" and "Description of Securities."
19
<PAGE>
DILUTION
As of March 31, 1997, after giving effect to the Wheatley Warrant Exercise
and the Debenture Conversion, the Company's net tangible book value was
approximately $(7,080,099), or $(3.22) per share. Net tangible book value per
share represents the amount of tangible assets less total liabilities, divided
by the number of shares of Common Stock outstanding. After giving effect to the
consummation of the Offering at an assumed price of $7.00 per share (after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by the Company), the net tangible book value of the Company as
of March 31, 1997, would have been $7,944,901 or $1.69 per share. This
represents an immediate increase in net tangible book value of $4.91 per share
to existing stockholders and an immediate dilution of $5.31 per share to new
investors purchasing the Common Stock in this Offering. Dilution is determined
by subtracting net tangible book value per share after the Offering from the
amount of cash paid by a new investor for a share of Common Stock.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share.................................... $ 7.00
Net tangible book value per share as of March 31, 1997
(after giving effect to the Wheatley Warrant Exercise and
the Debenture Conversion).................................. $ (3.22)
Increase per share attributable to this Offering........... 4.91
---------
Net tangible book value per share after this Offering.............. 1.69
---------
Dilution per share to new investors................................ $ 5.31
---------
---------
</TABLE>
The following table summarizes, as of March 31, 1997, after giving effect to
the Wheatley Warrant Exercise and the Debenture Conversion, the number of shares
of Common Stock purchased from the Company, the total consideration paid to the
Company and the average price per share paid by existing stockholders and by new
investors purchasing the shares of Common Stock offered hereby (before deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- --------------------------
NUMBER PERCENT AMOUNT PERCENT AVERAGE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................................... 2,197,538 46.8% $ 13,321,658 43.2% $ 6.06
New investors............................................ 2,500,000 53.2 17,500,000 56.8 7.00
---------- ----- ------------- -----
Total................................................ 4,697,538 100.0% 30,821,658 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements, including
the Notes thereto, included elsewhere in this Prospectus. The consolidated
statement of operations data for the years ended December 31, 1995 and 1996 and
the consolidated balance sheet data at December 31, 1996 are derived from the
Company's Consolidated Financial Statements, which have been audited by KPMG
Peat Marwick LLP, independent auditors, included elsewhere in this Prospectus.
The consolidated statement of operations data for the years ended December 31,
1993 and 1994 are derived from the Company's audited financial statements for
those years, which are not included in this Prospectus. The consolidated
statement of operations data for the three months ended March 31, 1996 and 1997
and the consolidated balance sheet data at March 31, 1997 have been derived from
unaudited interim financial statements included elsewhere in this Prospectus and
include all adjustments that the Company considers necessary for a fair
presentation of the financial position and results of operations at that date
and for such periods. The operating results for the three months ended March 31,
1997 are not necessarily indicative of the results to be expected for the full
year or for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
--------------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACTUAL PRO FORMA(2) ACTUAL
--------------------------------------------- ---------------------- ------------------------
<CAPTION>
1993 1994 1995 1996(1) 1995 1996 1996(1) 1997
--------- ---------- ---------- ---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................. $ 133,107 $1,377,900 $3,144,350 $12,121,365 $11,574,213 $13,484,395 $1,327,710 $3,688,153
Gross profit (loss)....... (11,077) 461,679 251,770 4,055,050 2,810,670 4,492,675 314,154 832,796
Operating expenses........ 531,971 2,292,835 3,414,217 10,666,932 10,662,478 11,891,979 1,505,680 2,793,059
Operating loss............ (543,048) (1,831,156) (3,162,447) (6,611,882) (7,851,808) (7,399,304) (1,191,526) (1,960,263)
Net loss.................. (569,120) (1,946,526) (2,970,121) (6,920,222) (7,821,915) (7,739,468) (1,187,771) (2,274,915)
Net loss per share........ $ (.87) $ (2.97) $ (2.84) $ (4.14) $ (4.78) $ (4.38) $ (0.95) $ (1.23)
Weighted average number of
shares outstanding...... 653,338 654,785 1,047,226 1,670,755 1,637,600 1,765,925 1,254,830 1,847,786
<CAPTION>
<S> <C>
PRO FORMA(2)
-------------
1996
-------------
<S> <C>
STATEMENT OF OPERATIONS DA
Net sales................. $ 2,690,740
Gross profit (loss)....... 751,779
Operating expenses........ 2,730,727
Operating loss............ (1,978,948)
Net loss.................. (2,007,017)
Net loss per share........ $ (1.23)
Weighted average number of
shares outstanding...... 1,637,600
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACTUAL ACTUAL
------------ ----------
BALANCE SHEET DATA:
Cash and cash equivalents.................................................................. $1,352,322 $ 235,618
Working capital (deficit).................................................................. (5,630,385) (7,247,176)
Total assets............................................................................... 25,819,365 24,290,658
Deferred revenue(4)........................................................................ 4,431,309 4,047,845
Short-term debt............................................................................ 1,125,696 1,012,736
Total liabilities.......................................................................... 15,431,076 15,945,476
Stockholders' equity....................................................................... $10,388,289 $8,345,182
<CAPTION>
<S> <C>
AS ADJUSTED(3)
--------------
BALANCE SHEET DATA:
Cash and cash equiva $ 16,805,990
Working capital (def 10,277,824
Total assets........ 40,859,887
Deferred revenue(4). 4,047,845
Short-term debt..... 58,108
Total liabilities... 14,922,098
Stockholders' equity $ 25,937,789
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
--------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ACTUAL PRO FORMA(2) ACTUAL PRO FORMA(2)
--------------------- ---------------------- -------------------- -------------
<CAPTION>
1995 1996(1) 1995 1996 1996(1) 1997 1996
--------- ---------- ---------- ---------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Net activation value(5)........................ $2,711,761 $14,244,667 $12,971,772 $15,658,452 $1,361,976 $3,556,512 $ 2,775,761
Number of cards activated:
Traditional.................................. 553,706 1,478,999 1,278,505 1,585,666 288,385 469,847 395,052
Promotional.................................. 138,662 24,599,536 138,662 24,599,536 841 531,927 841
Number of minutes decremented(6):
Traditional.................................. 4,280,337 21,856,165 18,409,458 24,792,348 2,348,393 8,515,984 5,284,576
Promotional.................................. 550,342 1,472,961 550,342 1,472,961 160,407 1,078,367 160,407
</TABLE>
21
<PAGE>
(1) Includes the operating results of Global Link from March 1, 1996, the
effective date of the Global Link Merger. See Note 3 of Notes to
Consolidated Financial Statements.
(2) Reflects the results of operations assuming the Global Link Merger had
occurred at the beginning of the respective periods.
(3) Gives effect to the Wheatley Warrant Exercise, the Debenture Conversion and
the sale of the shares of Common Stock offered hereby (assuming a price of
$7.00 per share) and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
(4) Represents amounts for products shipped to retailers that the Company has
invoiced, which, as of the date presented, have not been used by customers.
Upon customer usage or the expiration of the cards that are the subject of
these invoices, or, in the case of promotional phone cards, during the
period the program is executed, the Company will recognize revenue and
reduce the deferred revenue account. At the time the revenue is recognized,
the costs to which that revenue specifically relates also will be
recognized.
(5) Represents gross retail value of phone cards activated, net of discounts to
retailers and distributors.
(6) Represents minutes used by customers to place telephone calls utilizing the
Company's phone cards.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements, including the Notes thereto, appearing
elsewhere in this Prospectus.
COMPANY OVERVIEW
On February 29, 1996, the Company acquired, through a merger, all of the
outstanding capital stock of Global Link for a purchase price of approximately
$11,400,000, and the assumption of liabilities. Prior to the Global Link Merger,
GTS focused on marketing custom-designed prepaid phone cards for business
promotional use and other retail products utilizing prepaid phone card
technology. Global Link marketed primarily traditional prepaid phone cards
through various retailers and distributors, including supermarkets, convenience
stores, travel agencies and tour wholesalers and Company-owned and operated
retail phone centers. Capitalizing on the strengths of their prior businesses,
GTS and Global Link have integrated their operations to create a more
diversified prepaid phone card company. Global Link's operating results were
consolidated with the Company's commencing on March 1, 1996.
The Company generates revenues from the sales of prepaid phone cards. Since
its inception, the Company's annual revenues have consistently increased.
However, the Company has made significant up-front expenditures in connection
with its continuing expansion, which also have caused the Company's annual
operating expenses (including salaries of executive, creative, sales, marketing,
technical and other personnel) to steadily increase. Consequently, the Company's
expenses have exceeded its revenues, resulting in losses of $6,920,222 and
$2,970,121, respectively, for the years ended December 31, 1996 and 1995, and
$2,274,915 and $1,187,771, respectively, for the three months ended March 31,
1997 and 1996.
The Company records deferred revenue at the time it sells its prepaid phone
cards. The Company recognizes revenue (i) at the time the consumer accesses long
distance services utilizing the Company's phone cards or (ii) when the phone
card expires (generally 12 to 18 months after issuance or six to 12 months after
last use). At the time revenue is recognized, the costs to which that revenue
specifically relates also are recognized. When the Company recognizes revenue
due to the expiration of a phone card, the Company does not incur any long
distance costs associated with that revenue. As of December 31, 1996 and 1995,
the Company's deferred revenue was $4,431,309 and $3,513,909, respectively (an
increase of $917,400 or 26.1%). As of March 31, 1997, deferred revenue was
$4,047,845.
The Company's primary cost of sales are the costs of providing the long
distance service and the design and production of its prepaid phone cards. The
cost of providing long distance service represents obligations to carriers that
provide minutes of long distance over their networks and services associated
with the Company's phone cards. Long distance carrier costs constituted 55% and
59% of net sales for 1996 and 1995, respectively, and 73% and 54% of net sales
for the three months ended March 31, 1997 and 1996, respectively. The Company
anticipates that the per-minute costs of providing long distance service will
decrease as these carriers begin to offer volume discounts to the Company based
on an increased number of minutes carried over their networks.
The Company's selling and marketing expenses consist primarily of salary and
related employment expenses for the Company's in-house sales force, advertising
and promotional expenses, and commissions payable to third party distributors,
sales agents and brokers. The Company's general and administrative expenses
consist primarily of salaries and occupancy costs.
At December 31, 1996, the Company had net operating loss carryforwards
("NOLs") aggregating approximately $14,167,000 available to offset future
taxable income. Under Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"), utilization of prior NOLs is limited after an ownership
change, as defined in this Section, to an amount equal to the value of the loss
corporation's outstanding stock immediately before the date of the ownership
change, multiplied by the federal long-term tax-exempt rate in effect during the
month that the ownership change occurred. As a result of the Global Link Merger,
23
<PAGE>
the Company is subject to limitations on the use of its NOLs as provided under
Section 382. Accordingly, there can be no assurance that a significant amount of
existing NOLs will be utilized by the Company.
RESULTS OF OPERATIONS
The following table sets forth, for the period indicated, items from the
Company's Consolidated Statements of Operations expressed as a percentage of
sales:
<TABLE>
<CAPTION>
PERCENTAGE OF SALES
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------ -----------------------------------
<CAPTION>
ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1)
-------------------- -------------------- -------------------- -------------
1995 1996 1995 1996 1996 1997 1996
--------- --------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Traditional card sales................... 34.5% 79.6% 82.0% 80.8% 76.3% 81.2% 86.6%
Promotional card and other retail product
and service sales...................... 65.5 20.4 18.0 19.2 23.7 18.8 13.4
--------- --------- --------- --------- --------- --------- ------
Net sales...................... 100.0 100.0 100.0 100.0 100.0 100.0 100
Cost of sales............................ 92.0 66.5 75.7 66.7 76.3 77.4 72.1
--------- --------- --------- --------- --------- --------- ------
Gross profit................... 8.0 33.5 24.3 33.3 23.7 22.6 27.9
--------- --------- --------- --------- --------- --------- ------
Selling and marketing expenses........... 42.4 27.7 28.0 28.5 38.8 21.1 30.2
General and administrative expenses...... 64.9 48.5 50.6 47.2 63.9 43.0 56.5
Depreciation and amortization............ 1.3 11.8 13.5 12.5 10.7 11.6 14.8
--------- --------- --------- --------- --------- --------- ------
Operating expenses............. 108.6 88.0 92.1 88.2 113.4 75.7 101.5
--------- --------- --------- --------- --------- --------- ------
Operating loss................. (100.6) (54.5) (67.8) (54.9) (89.7) (53.1) (73.6)
--------- --------- --------- --------- --------- --------- ------
Interest income.......................... 6.1 0.6 1.9 0.6 1.5 0.1 0.7
Interest expense......................... -- (3.3) (1.8) (3.2) (1.3) (8.8) (1.9)
Other.................................... -- 0.1 0.1 0.1 -- 0.1 0.2
--------- --------- --------- --------- --------- --------- ------
Loss before income taxes....... (94.5) (57.1) (67.6) (57.4) (89.5) (61.7) (74.6)
Income tax expense....................... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ------
Net loss....................... (94.5)% (57.1)% (67.6)% (57.4)% (89.5)% (61.7)% (74.6)%
--------- --------- --------- --------- --------- --------- ------
--------- --------- --------- --------- --------- --------- ------
</TABLE>
- ------------------------
(1) Reflects the results of operations assuming the Global Link Merger had
occurred at the beginning of the respective periods.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO PRO FORMA THREE MONTHS ENDED MARCH
31, 1996
Net sales for the three months ended March 31, 1997 were $3,688,153,
compared to pro forma net sales of $2,690,740 for the three months ended March
31, 1996, an increase of $997,413 or 37.1%. Net sales of traditional phone cards
amounted to approximately $2,995,000 for the three months ended March 31, 1997,
compared to approximately $2,329,000 for the three months ended March 31, 1996,
an increase of $666,000, or 28.6%. Net sales of promotional cards, other retail
products utilizing prepaid phone card technology and other services increased to
$693,000 for the three months ended March 31, 1997 from approximately $362,000
for the three months ended March 31, 1996, an increase of $331,000, or 91.4%.
Gross margins decreased to 22.6% of net sales for the three months ended March
31, 1997, compared to 27.9% of pro forma net sales for the three months ended
March 31, 1996. 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 an
increase in patent license fees as a result of an increase in revenues subject
to such fees, offset by a decrease in production and switch administration costs
as a percentage of sales.
24
<PAGE>
The net loss for the three months ended March 31, 1997 was approximately
$2,275,000, compared to a pro forma net loss of approximately $2,007,000 for the
three months ended March 31, 1996, an increase of $268,000 or 13.3%. This
increase was a result of an increase in operating expenses of approximately
$62,000 and an increase of approximately $287,000 in interest expense, net of
interest income, offset by an increase in gross profit of approximately $81,000
due to the increase in sales.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Net sales for the three months ended March 31, 1997 were $3,688,153 compared
to $1,327,710 for the three months ended March 1996, an increase of $2,360,443,
or 177.8%. Net sales of traditional phone cards were approximately $2,995,000
for the three months ended March 31, 1997, compared to approximately $1,013,000
for the three months ended March 31, 1996, an increase of approximately
$1,982,000, or 195.7%. Net sales generated from the sale of promotional cards,
other retail products utilizing prepaid phone card technology and other services
for the three months ended March 31, 1997 were approximately $693,000, compared
to approximately $315,000 for the comparable period in the prior year, an
increase of approximately $378,000, or 120.0%. The Company's gross margins
decreased to 22.6% of net sales for the three months ended March 31, 1997,
compared to 23.7% 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 an increase in patent
license fees as a result of an increase in revenues subject to such fees, offset
by a decrease in production and switch administration costs as a percentage of
sales.
Selling and marketing expenses were $778,663 (21.1% of net sales) for the
three months ended March 31, 1997, compared to $515,282 (38.8% of net sales) for
the three months ended March 31,1996. Approximately $69,500 of the increase was
due to increased salaries and benefits of marketing and sales personnel.
Additionally, approximately $33,200 of the increase was due to additional travel
expenses, $54,200 to commissions paid to independent third party distributors,
sales agents and brokers, $33,200 to costs associated with the Company's
attendance at trade shows, and $59,000 to an increase in the provision for
uncollectible accounts receivable, all of which increased as a result of the
increase in net sales.
General and administrative expenses were $1,586,144 (43.0% of net sales) for
the three months ended March 31, 1997, compared to $848,980 (63.9% of net sales)
for the three months ended March 31, 1996. The increase consists of
approximately $288,300 in salaries and related benefits of other additional
personnel which make up the Company's infrastructure, including accounting,
legal, customer service and support and information technology personnel;
approximately $150,600 in rent costs; approximately $73,100 in professional
fees; and approximately $50,000 expensed as a result of the issuance of stock to
a former employee.
Depreciation and amortization expense increased to $428,252 for the three
months ended March 31, 1997 from $141,418 for the three months ended March 31,
1996, primarily due to the amortization of goodwill resulting from the Global
Link Merger and the acquisition of additional switching equipment.
Investment and interest income was $3,901 for the three months ended March
31, 1997, compared to $19,581 for the three months ended March 31, 1996. The
decrease of $15,680 was a result of lower balances of cash and cash equivalents
on hand.
Interest expense for the three months ended March 31, 1997 increased to
$322,753 from $17,226 for the three months ended March 31, 1996, primarily as a
result of interest on the principal amount of Convertible Debentures, amounts
due to Peoples, and the amortization of the unearned discount and deferred
financing costs relating to the issuance of notes payable pursuant to the
December 1996 Private Placement.
For the foregoing reasons, the Company incurred a net loss of $2,274,915 for
the three months ended March 31, 1997, compared to a net loss of $1,187,771 for
the three months ended March 31, 1996.
25
<PAGE>
PRO FORMA YEAR ENDED DECEMBER 31, 1996 COMPARED TO PRO FORMA YEAR ENDED
DECEMBER 31, 1995
Pro forma net sales for the year ended December 31, 1996 were $13,485,000,
compared to approximately $11,574,000 for the year ended December 31, 1995, an
increase of $1,911,000 or 16.5%. Pro forma net sales of traditional phone cards
amounted to approximately $10,901,000 for the year ended December 31, 1996,
compared to approximately $9,483,000 for the year ended December 31, 1995, an
increase of approximately $1,418,000 or 15.0%. Pro forma net sales of
promotional cards, other retail products utilizing prepaid phone card technology
and other services increased to $2,584,000 in 1996 from $2,091,000 in 1995, an
increase of $493,000 or 23.6%. Gross margins increased to 33% of net sales for
the year ended December 31, 1996, compared to 24% of net sales for the prior
year. The increase in the gross margin was primarily a result of a decrease in
transmission costs as a percentage of sales.
The pro forma net loss for the year ended December 31, 1996 was
approximately $7,739,000, compared to $7,822,000 for the year ended December 31,
1995, a decrease of $83,000 or 1.1%. This decrease was a result of a significant
increase in gross profit of approximately $1,682,000 discussed above, offset by
an increase in operating expenses of approximately $1,230,000 and an increase of
approximately $370,000 in interest expense, net of interest income.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales for the year ended December 31, 1996 were $12,121,365, compared to
$3,144,350 for the year ended December 31, 1995, an increase of $8,977,015, or
285.5 %. Approximately $8,137,000 of the total 1996 net sales were derived from
Global Link, whose operating results were consolidated with the Company
commencing on March 1, 1996. Net sales of traditional phone cards were
$9,643,000 for the year ended December 31, 1996, compared to $1,085,000 for the
year ended December 31, 1995, an increase of approximately $8,558,000, or
788.8%. Net sales generated from the sale of promotional cards, other retail
products utilizing prepaid phone card technology and other services during 1996
were $2,478,000, compared to $2,059,000 in 1995, an increase of $419,000, or
20.3%. The Company's gross margins increased to 33.5% of net sales for the year
ended December 31, 1996, compared to 8.0% of net sales for the prior year. The
increase in the gross margin was primarily a result of a decrease in
transmission costs as a percentage of sales and a decrease in production costs
as a percentage of sales. The decrease in transmission costs was primarily
attributable to volume discounts, which were negotiated with the Company's
carriers based upon a substantial increase in the minutes of use.
Selling and marketing expenses were $3,355,778 (27.7% of net sales) for the
year ended December 31, 1996, compared to $1,332,348 (42.4% of net sales) for
the year ended December 31, 1995. Approximately $1,125,000 of the increase was
due to increased salaries and benefits of marketing and sales personnel.
Additionally, approximately $161,000 of the increase was due to additional
travel expenses, $173,000 to commissions paid to independent third party
distributors, sales agents and brokers, and $345,000 to an increase in the
provision for uncollectible accounts receivable, all of which increased as a
result of the significant increase in net sales.
General and administrative expenses were $5,883,858 (48.5% of net sales) for
the year ended December 31, 1996, compared to $2,041,010 (64.9% of net sales)
for the year ended December 31, 1995. The increase consists of approximately
$1,294,000 in salaries and related benefits of other additional personnel which
make up the Company's infrastructure, including accounting, legal, customer
service and support and information technology personnel; approximately $407,000
of additional amortization of deferred compensation costs with respect to
warrants issued to outside consultants; approximately $632,000 in rent costs;
approximately $192,000 due to the write-off of the remaining net assets of
certain retail phone centers closed or scheduled to close in 1997; $150,000 in
severance to be paid to a former officer; and $343,000 due to the write-off of
convertible notes receivable and accrued interest thereon.
Depreciation and amortization expense increased by approximately $1,387,000,
primarily due to the amortization of goodwill of $1,061,000 resulting from the
Global Link Merger and the acquisition of additional switching equipment.
26
<PAGE>
Investment and interest income was $73,834 for the year ended December
31,1996, compared to $192,482 for the year ended December 31, 1995. The decrease
of $118,648 was a result of lower balances of cash and cash equivalents on hand.
Interest expense for the year ended December 31, 1996 increased to $395,674
from $0 for the year ended December 31, 1995, as a result of interest on the
$2,800,000 Convertible Debentures and amounts due to Peoples, interest expense
on capital lease obligations recorded in 1996 and the amortization of the
unearned discount and deferred financing costs relating to the issuance of notes
payable pursuant to the December 1996 Private Placement.
For the foregoing reasons, the Company incurred a net loss of $6,920,222 for
the year ended December 31, 1996, compared to a net loss of $2,970,121 for the
year ended December 31, 1995.
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 on February 29, 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 was 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 for the year ended December 31, 1995 were
$1,332,348 (42.4% of net sales), compared to $1,057,404 for the year ended
December 31, 1994 (76.7% of net sales). Approximately $568,000 of the increase
was a result of hiring additional marketing and sales personnel, approximately
$80,000 was attributable to additional costs incurred in connection with
attendance at trade shows and approximately $79,000 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
$274,000, a decrease in selling commissions paid to distributors and independent
sales agents of approximately $169,000 and a decrease in other selling and
marketing expenses of $11,000.
General and administrative expenses increased to $2,041,010 (64.9% of net
sales) for the year ended December 31, 1995, compared to $1,216,311 (88.3% of
net sales) for the year ended December 31, 1994. This increase was primarily 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
27
<PAGE>
attributable to the increased personnel, which accounted for approximately
$295,000 of the increase. Furthermore, the Company incurred additional expenses
with respect to the utilization of outside consultants and temporary personnel
of approximately $250,000, an increase in costs resulting from the relocation of
the Company's headquarters to a larger facility of approximately $55,000, an
increase in taxes of $59,000, an increase in professional fees of approximately
$116,000 and an increase in other general and administrative costs of
approximately $49,000.
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 March 31, 1997, the Company had cash and cash equivalents of $235,618 and
a working capital deficit of $7,247,176, compared to $1,352,322 and $5,630,385,
respectively, at December 31, 1996.
In May 1996, the Company consummated the May 1996 Private Placement, a
private offering from which the Company derived gross proceeds of $3,000,000
through the sale of 200,000 shares of Common Stock and May 1996 Warrants to
purchase 400,000 shares of Common Stock.
In December 1996, the Company consummated the December 1996 Private
Placement, a private offering from which the Company derived gross proceeds of
$3,000,000 through the sale of December 1996 Notes in the aggregate principal
amount of $3,000,000 and 1,000,000 December 1996 Warrants. Pursuant to an
agreement the Company entered into in April 1997, Wheatley and Wheatley Foreign,
principal stockholders of the Company, exercised an aggregate of 333,334
December 1996 Warrants issued to them in the December 1996 Private Placement,
resulting in $2,500,000 of gross proceeds to the Company. In consideration for
exercising such December 1996 Warrants, the Company issued to Wheatley and
Wheatley Foreign Public Warrants to purchase an aggregate of 250,000 shares of
Common Stock.
Net cash used in operating activities for the year ended December 31, 1996
of $3,601,684 was primarily due to the Company's net loss and a decrease in
accounts payable and accrued liabilities and deferred revenue, offset by
non-cash items such as depreciation and amortization, increases in sales and
excise taxes payable and a decrease in accounts receivable. Net cash used in
operating activities for the three months ended March 31, 1997 of $880,613 was
primarily due to the Company's net loss and a decrease in deferred revenue,
offset by non-cash items such as depreciation and amortization, increases in
accounts payable, accrued expenses and sales and excise taxes payable and a
decrease in accounts receivable. Accounts receivable are generated pursuant to
sales of prepaid phone cards primarily to distributors and retail
establishments. Typically, the Company provides 30-day terms (or less) to
reputable retail establishments that sell its phone cards. 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, at the expiration dates of the phone cards or, in
the case of promotional phone card programs, during the period the program is
executed. Net cash used in investing activities for the year ended December 31,
1996 consisted of $347,983 of capital expenditures, net of $160,190 in net cash
acquired in the Global Link Merger. Net cash used in investing activities for
the three months ended March 31, 1997 consisted of $69,901 of capital
expenditures. Net cash provided by financing activities for the year ended
December 31, 1996 consisted of $2,611,569 of net proceeds from the issuance of
Common Stock and warrants in connection with the May 1996 Private Placement,
$2,850,000 of net proceeds from the issuance of notes payable in connection with
the December 1996 Private Placement, net
28
<PAGE>
of payments to Peoples of $930,707, the lending of $250,655 to Global Link prior
to the Global Link Merger and payments on capital lease obligations of $55,073.
Net cash used in financing activities for the three months ended March 31, 1997
consisted of payments to Peoples of $119,293, payments on capital lease
obligations of $12,104, an increase in deferred financing fees of $38,394 in
connection with the issuance of notes payable in December 1996, offset by $4,374
of proceeds from the exercise of employee stock options. Under its carrier
agreement with Sprint, the Company must fulfill a $200,000 per month usage
commitment.
During 1996, the Company experienced significant losses and negative cash
flow from operations, particularly in the last ten months of the year following
the Global Link Merger. As a result, the Company assessed the recoverability of
goodwill as of December 31, 1996. In connection with its assessment of
recoverability, management prepared and reviewed estimates of future cash flows
(undiscounted and without interest charges) and also considered whether the 15
year amortization period originally assigned to the goodwill remained
appropriate as of the balance sheet date. The Company's projections considered
recent developments in the Company's business as well as projected growth rates
for the prepaid phone card industry obtained from external sources. Based on
this assessment, management concluded that no impairment loss was required to be
recognized as of December 31, 1996. In addition, management concluded that the
15 year amortization period initially selected at the time of the Global Link
Merger remains appropriate as of December 31, 1996.
The assessment of goodwill recoverability, which is heavily dependent on
projected financial information and the goodwill amortization period, are
significant accounting estimates as contemplated by the American Institute of
Certified Public Accountants' Statement of Position 94-6, "DISCLOSURE OF CERTAIN
SIGNIFICANT RISKS AND UNCERTAINTIES." Further, the Company operates in an
industry which is rapidly evolving and extremely competitive. It is reasonably
possible that the Company's accounting estimates with respect to the useful life
and ultimate recoverability of goodwill could change in the near term and that
the effect of such changes on the financial statements could be material. While
management currently believes that the recorded amount of goodwill is not
impaired, there can be no assurance that the Company's future results will
confirm this assessment or that a significant write-down or write-off of
goodwill will not be required in the future.
As indicated in the accompanying financial statements, the Company incurred
net losses of $6,920,222 and $2,274,915 for the year ended December 31, 1996 and
the three months ended March 31, 1997, respectively, and is in a negative
working capital position of $7,247,176 at March 31, 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 is delinquent on certain vendor obligations as of March 31, 1997 and
the Company has not remitted certain amounts previously collected for sales, use
and excise taxes to various taxing jurisdictions. The Company anticipates, based
on currently proposed plans and assumptions relating to its operations
(including the costs associated with its growth strategy), that the proceeds of
the Offering, together with its existing financial resources and cash flow from
operations, should be sufficient to satisfy the Company's anticipated cash
requirements until the end of 1998; however, there can be no assurance that this
will be the case. It is the Company's present intention to utilize $5,000,000 of
the proceeds of this Offering to expand sales and marketing activities,
$5,000,000 to expand its network of Company-owned switching platforms and
approximately $954,000 to repay debt owed to Peoples. A portion of the proceeds
allocated to working capital will be used to pay taxing authorities amounts due
for sales, use and excise taxes as well as to make payments to certain vendors
which are currently past due. See "Use of Proceeds." 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. As of the consummation of the Offering, 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.
29
<PAGE>
BUSINESS
THE COMPANY
The Company is a facilities-based global provider of prepaid phone cards
that offer users reliable, convenient and cost-effective access to domestic and
international telecommunications services. The Company's core product line
consists of traditional prepaid phone cards marketed domestically and
internationally, such as its signature product, the Global Link Card. The
Company also offers custom-designed prepaid phone cards for business promotional
use and retail products utilizing prepaid phone card technology for specialized
purposes, such as information access and interactive games. Many of the
Company's phone cards are offered with enhanced services, such as interactive
applications, customized voice greetings and data collection, and the Company
intends to begin offering other enhanced services, such as voice mail and
conference calling, in the second quarter of 1997.
The Company generated revenues of approximately $12.1 million in 1996,
compared to $3.1 million in 1995. It activated approximately 1.5 million
traditional prepaid phone cards in 1996, compared to 554,000 cards in 1995, and
decremented approximately 21.9 million minutes from its traditional phone cards
in 1996, compared to 4.3 million minutes in 1995. The Company also activated
approximately 24.6 million custom-designed promotional phone cards in 1996,
compared to 139,000 cards in 1995, and decremented approximately 1.5 million
minutes from its promotional phone cards in 1996, compared to 550,000 minutes in
1995. Substantially all of the increases in revenues, activations of traditional
cards and decremented minutes from traditional cards were attributable to GTS'
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. Substantially all of the increases in
activations of promotional cards and decremented minutes from promotional cards
were attributable to a promotional campaign created by the Company for Kraft
Foods. Approximately 6,000 retail outlets were carrying the Company's phone
cards as of March 31, 1997, compared with approximately 1,750 as of March 31,
1996 and approximately 5,400 as of December 31, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company currently markets its prepaid phone cards in four product lines:
(i) traditional prepaid phone cards marketed domestically through distributors
and retail establishments, such as convenience stores, supermarkets, drug stores
and mass merchandisers, which represented approximately 72% of the Company's
revenues in 1996; (ii) traditional prepaid phone cards marketed internationally
to business and leisure travelers destined for the United States, which
represented approximately 8% of the Company's revenues in 1996; (iii)
custom-designed promotional phone cards sold to businesses to enhance the
marketing of their products and services, which represented approximately 17% of
the Company's revenues in 1996; and (iv) specialized retail products utilizing
prepaid phone card technology, which represented approximately 3% of the
Company's revenues in 1996. The Company believes that its established reputation
in the prepaid phone card industry among retailers, distributors and business
customers, its existing infrastructure and experienced management team provide
it with important advantages over many competitors. In 1995, the Company was
named the prepaid phone card company of the year by TELECARD WORLD, an industry
trade publication.
MARKET OVERVIEW AND OPPORTUNITY
Prepaid phone cards have been widely used throughout Europe and Asia for
more than ten years. Although prepaid phone cards were not used on a widespread
basis in the United States prior to 1994, the market in the United States is
rapidly expanding, with annual sales of prepaid phone cards growing from an
estimated $100 million in 1993 to an estimated $1.1 billion in 1996. Industry
analysts project annual sales of prepaid phone cards in the United States to
reach $2.5 billion by 2000. The Company anticipates that continued industry
growth will be fueled by (i) increasing consumer acceptance of prepaid phone
cards and recognition of their cost advantages over standard credit calling
cards, collect calling and other
30
<PAGE>
options available to consumers seeking to place phone calls when away from the
house or office and (ii) a broader base of consumer segments using prepaid phone
cards, such as business employees, students and travelers.
The court-directed divestiture of the Bell System in 1984 created
competition in the long distance market. Over time, alternatives to AT&T, the
long distance carrier resulting from the divestiture, began to emerge to compete
for long distance customers. In 1995, the United States long distance industry
generated revenues of more than $75 billion. One type of competitor that emerged
from the changing long distance market was the reseller, an entity that
purchases a high volume of long distance minutes from major carriers at rates
significantly lower than those that could be obtained by individuals and small
businesses, and, in turn, resells those minutes to its own customer base.
Eventually, certain resellers began to market resold long distance minutes
through the sale of prepaid phone cards.
Prepaid phone cards are a reliable, convenient and cost-effective
alternative to coin-operated calling, collect calling, operator assisted calling
and standard credit calling cards. Unlike credit calling cards, which provide
virtually unlimited credit and impose surcharges on long distance services,
prepaid phone cards are paid for in advance and provide finite amounts of
calling time. Currently, two types of prepaid phone card technologies 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 local,
long distance and international calls from any touch-tone-Registered Trademark-
phone by dialing a toll-free or local access number to connect to a prepaid
phone card switching platform. After being prompted to enter a PIN, the caller
is advised of the value remaining on the card and is prompted to enter the
telephone number to be called. The call is then routed to its destination. The
per-minute charges for the call are automatically decremented from the prepaid
account corresponding to the PIN as the call progresses.
In contrast, "smart card" technology utilizes computer chips, magnetic
strips or optical readers built into cards that must be swiped through or
inserted into specially-designed pay telephones. Smart card technology requires
the replacement of standard telephones with telephones that are equipped with
mechanisms capable of reading such cards. In order for smart card technology to
be widely used in any particular area, all or substantially all of the public
pay telephones in that area must be equipped to read the smart cards. Those
telephones that do not contain a smart card reader, such as hotel and office
telephones, still require the consumer to use a phone card with remote memory
technology. 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 NYNEX, U.S. West and GTE.
As the prepaid phone card industry evolves, the Company believes that
traditional prepaid phone cards will increasingly become a commodity and that
the successful competitors will be those that (i) establish a brand name
recognized for reliable telecommunications services and responsive customer
service, (ii) improve operating margins by optimizing their own switching and
network facilities to reduce transmission costs through least-cost routing and
providing transmission capacity for small telecommunications services providers,
(iii) possess the experience and calling volume to negotiate carrier agreements
with multiple long distance carriers that provide favorable volume discounts and
(iv) differentiate their cards and services by offering a variety of convenient
features, such as the ability to easily recharge the cards, interactive features
for business promotions and entertainment applications, and value-added enhanced
services, such as voice mail, fax mail, conference calling and speed dialing.
STRATEGY
The Company's strategy is to continue the rapid growth of its operations and
capture an increasing share of the expanding prepaid phone card market. Key
components of the Company's strategy include: (i) expanding the domestic and
international retail distribution channels for the Company's prepaid phone
cards; (ii) expanding its Company-owned, interconnected switching network; (iii)
acquiring companies or assets to achieve the Company's strategic goals; and (iv)
pursuing other growth opportunities including:
31
<PAGE>
identifying a broader base of consumer segments for the Company's prepaid phone
cards, such as business employees, students and travelers; exploring alternative
methods of prepaid phone card distribution, such as vending machines and ATM
machines; exploiting alternative technologies for prepaid products, such as
prepaid wireless services; and expanding strategic relationships with other
telecommunications services providers.
EXPANDING DISTRIBUTION
DOMESTIC RETAIL. The Company's seven in-house sales managers market the
Company's Global Link Card and other traditional prepaid phone cards
domestically (i) directly to national, regional and independent retail
establishments, which sell the phone cards to a wide range of end users, (ii) to
independent distributors with widespread distribution channels and access to a
substantial number of retailers, such as newsstand distributors, food brokers
and tobacco and confectionery distributors and (iii) to other marketing
companies and organizations that sell the phone cards to consumers within
specific niche markets. The Company also markets its prepaid phone cards through
Company-owned and operated retail phone centers.
The Company believes that it can increase domestic retail penetration by:
- creating smaller regions and hiring additional Regional Sales Managers and
other sales personnel who could then focus on specific target markets and
address individual retailer requirements;
- increasing its sales force in each market where it installs a switching
platform in order to promote, market and sell its LOCAL LINK services; and
- recruiting additional distributors to market and promote its prepaid phone
cards to local, regional and national retailers.
INTERNATIONAL RETAIL. Approximately 150 sales agents located in 28
countries market the Company's Global Link Card and other traditional prepaid
phone cards internationally to business and leisure travelers destined for the
United States, primarily through airlines, tour wholesalers, travel agencies,
car rental agencies and other travel related businesses. The Company intends to
increase international distribution of its phone cards by:
- hiring additional marketing personnel to actively solicit new sales agents
and distributors in Europe, the Far East and South America; and
- introducing telecommunications services that will provide end users with
convenient, cost-effective access within and between more than 30
countries, including the United States and Canada.
PROMOTIONAL PHONE CARDS. The Company intends to broaden its promotional
phone card offerings by hiring additional creative, design and marketing
personnel, as well as sales representatives to focus primarily on large business
customers, advertising agencies and promotional companies.
EXPANDING SWITCHING NETWORK
The Company intends to expand its network of three Company-owned switching
platforms by installing additional switching platforms in a number of major
metropolitan areas in the United States and interconnecting them to provide
reliable, cost-effective telecommunications services. The Company believes that
the installation of switching platforms in strategically located markets can
substantially reduce costs associated with customers accessing its switching
platforms and terminating domestic telephone calls. See "-- Telecommunications
Infrastructure."
32
<PAGE>
PURSUING ACQUISITION OPPORTUNITIES
Numerous companies have entered the prepaid phone card industry over the
last few years, attracted by the industry's dramatic growth and barriers to
entry that, initially, were minimal. Many of these entrants, while possessing
access to potentially strong distribution channels or innovative products, did
not anticipate the complexity of the phone card business and have not been able
to exploit all of the elements necessary for success, such as an established
infrastructure, a dedicated sales force, an established reputation in the
prepaid phone card industry among retailers, distributors and business
customers, access to capital and an experienced management team. The Company
believes that the highly fragmented prepaid phone card industry presents an
opportunity for consolidation through acquisitions and subsequent integration of
acquired businesses. Accordingly, the Company intends to acquire companies or
assets to achieve its strategic goals.
Industry analysts estimate that there are approximately 500 prepaid phone
card companies competing within the industry. The Company believes that a large
majority of these companies are small and have limited access to capital, and
that many of them represent suitable acquisition candidates for more developed
companies, such as the Company, that have access to capital, management
expertise and an established telecommunications infrastructure important to
integrate the viable aspects of acquired companies' operations into their own
and to capitalize on the economies of scale which may result from such
acquisitions. The Company anticipates that once its integrated network of
switching platforms is in place, it will be able to integrate the
telecommunications volume generated by acquired companies' customer bases and to
benefit from economies of scale that were previously unavailable to the acquired
company as a stand-alone operation. While the Company regularly engages in
discussions regarding proposed acquisitions, it currently has no agreement,
arrangement or understanding with respect to any such acquisition.
PURSUING OTHER GROWTH OPPORTUNITIES
The Company intends to pursue other growth opportunities, including:
- identifying a broader base of consumer segments for the Company's prepaid
phone cards, such as business employees for their use when away from the
office, students and travelers temporarily living away from home;
- exploring alternative methods of prepaid phone card distribution, such as
vending machines and ATM machines placed in heavily traveled locations
such as airports, shopping malls and amusement parks;
- exploiting alternative technologies for prepaid products, such as prepaid
wireless services; and
- expanding strategic relationships with other telecommunications services
providers.
PRODUCTS AND TELECOMMUNICATIONS SERVICES
The Company's core product line consists of traditional prepaid phone cards
marketed domestically and internationally, including the Global Link Card. The
Company also offers custom-designed promotional phone cards for business
promotional use and retail products utilizing prepaid phone card technology for
specialized purposes, such as information access and interactive games. Some of
the enhanced services typically offered with the Company's phone cards include
(i) customized voice greetings (which the Company believes to be an attractive
feature to large retailers and businesses that utilize the Company's promotional
phone cards), (ii) foreign language voice prompts and instructions, (iii) data
collection (used to gather marketing and demographic information), (iv)
sequential calling, which permits customers to place additional calls without
exiting the platform and (v) voice mail (which the Company intends to begin
offering to its customers in the second quarter of 1997).
33
<PAGE>
TRADITIONAL PHONE CARDS MARKETED DOMESTICALLY
The Company's primary marketing and distribution strategy is to target
retailers directly and through distributors that sell the Company's phone cards
to end users. The Company has and will continue to increase retailers' awareness
of the profit potential of offering prepaid telecommunications services, the
minimal space needed to sell the Company's phone cards and the ability of the
Company's phone cards to generate ongoing residuals for retailers through
recharge revenues. In furtherance of its strategy, the Company facilitates the
display of its phone cards by providing (i) turnkey merchandising materials,
which include customized cards and retail packaging and complete display and
signage systems, (ii) retail promotion programs for which the Company and the
retailer share costs and (iii) access to marketing information generated by the
Company's switching platforms.
Traditional prepaid phone cards permit users to place local, long distance
and international calls from any touch-tone telephone. The Company's
rechargeable traditional phone cards enable customers to add additional calling
time to the phone cards at certain retail locations and, in some cases, by
dialing a toll-free number and furnishing major credit card information. This
allows customers to continue to use the same PINs and generates ongoing residual
sales for retailers. Unlike most products sold by retailers, the Company's
traditional phone cards enable retailers to generate revenues beyond initial
sale of the cards. The Company pays additional commissions to the retailer based
on the dollar value added to any card sold by that retailer, so long as that
retailer continues to offer the Company's phone cards. The Company believes that
this program increases retailer loyalty and creates an incentive for retailers
to sell its prepaid phone cards.
The Company's phone cards can be activated and recharged at the retail level
through (i) a touch-tone system utilizing a designated telephone line and a
touch-tone telephone, (ii) the Company's customer service department through a
toll-free number and (iii) the Company's proprietary ACTIPHONE-TM- system, which
utilizes a standard credit card reader. The software-based ACTIPHONE system was
designed and developed by the Company to provide detailed sales information in
response to queries by the Company's employees, agents and customers, allowing
the Company to monitor sales of its phone cards efficiently.
Customers utilizing the Company's traditional phone cards can place
international calls to the United States from more than 28 countries and
outbound domestic and international long distance calls from the United States
to more than 220 countries. The Company intends to begin offering voice mail and
conference calling in the second quarter of 1997, and depending on customer
demand, will begin offering other services, such as speed dialing, message
delivery and fax mail, in the second half of 1997.
The Company intends to market traditional prepaid phone cards through its
CORPORATE+ Program to domestic and international businesses for their employees'
use when away from the office. The Company believes that its phone cards can
afford many businesses substantial savings compared to standard credit calling
cards and can enable management to control long distance costs more effectively.
Additionally, the Company's switching platforms can provide information such as
the length of a call, the time a call was made and locations from and to which a
call was placed, providing businesses with an effective mechanism to monitor
usage. The Company plans to implement its CORPORATE+ Program by increasing the
size of its sales force to focus on (i) expanding the Company's relationships
with its current business customers and (ii) targeting businesses not presently
engaged in the sale of prepaid phone cards whose employees spend a significant
amount of time away from the office.
TRADITIONAL PHONE CARDS MARKETED INTERNATIONALLY
The Company's Global Link Card and other traditional prepaid phone cards are
sold internationally to business and leisure travelers destined for the United
States. These phone cards are identical to the Company's traditional phone cards
except that, in most cases, the phone cards are activated by a credit card
through the Company's switching network either by following simple automated
instructions or by calling the Company's toll-free customer service number. The
Company's international phone cards
34
<PAGE>
generally are packaged in a "tear-off" format with travel documents that include
marketing information about the Company's phone cards. The Company's
international phone cards frequently are accompanied by an offer of free
telephone time in exchange for the customer's activation of the card for a
minimum value.
The Company intends to introduce its Global Link Worldwide-TM- Card, which
will provide end users with convenient, competitively priced access within and
between more than 30 countries, including the United States and Canada. The
Company intends to target individuals who originate calls outside the United
States by marketing the Global Link Worldwide Card (i) domestically through
travel agencies and other travel-related businesses and (ii) internationally
through a network of sales agents and retail establishments in Europe, South
America and the Far East.
PROMOTIONAL PHONE CARDS
The Company's custom-designed promotional phone cards, which feature
companies' logos, products and customized advertisements, are sold to businesses
that typically give these cards to their customers in connection with the
marketing of their products and services. A business utilizing the Company's
phone cards for promotions can access marketing and demographic data compiled by
the Company's switching platforms. The Company believes that it has
differentiated itself from most other providers of promotional phone cards by
combining enhanced services and interactive technology with its promotional
cards.
The Company believes that its in-house creative and design staffs provide
key advantages over competitors in the business promotions segment of the
prepaid phone card industry, allowing the Company to design, implement and
deliver complete, innovative promotional packages and to respond quickly to
changes in customer preferences. The Company has combined its enhanced services
and interactive technology with its promotional cards to produce business
promotions unique to the phone card industry. In 1996, the Company conducted a
promotion for Kraft Foods called "Kids Pick the President," which enabled
children to use a GTS phone card to vote for a candidate in the 1996
presidential election. This promotion received a Gold Medal award for
"outstanding phone card promotion" from PROMO MAGAZINE, an advertising industry
trade publication. The Company recently conducted a second promotion for Kraft
Foods called the "Kids' Choice Awards," which enabled children to use a phone
card to vote for their favorite actor, actress, television program and musician.
Other businesses for which the Company has conducted promotional phone card
programs include Microsoft, Icelandair, Lufthansa, Taco Bell, RJ Reynolds,
Meineke Muffler, Rollerblade, NatWest, Arm 'n Hammer, Dial, Seagrams, The 1996
Masters Golf Tournament and the Toronto Blue Jays.
SPECIALIZED RETAIL PHONE CARD PRODUCTS
The Company designs and markets specialized retail products utilizing
prepaid phone card technology, which are sold to distributors and retail
establishments that carry the Company's traditional prepaid phone cards, such as
Von's and ABC. The Company also sells these products to businesses not presently
engaged in the sale of the Company's prepaid phone cards, such as Eckerd Drugs
and Stop & Shop. The Company's in-house creative staff develops these products
by expanding the technology utilized by the Company's traditional prepaid phone
cards. Recent examples of these products include KIDS-IN-TOUCH SAFETY PHONE
CARDS, PSYCHIC PHONE CARDS, CALL SANTA ACTIVITY PHONE CARDS, MARVEL SUPERHEROES
BATTLEPACKS (comprised of three games played using a touch-tone telephone as a
joystick), PETS-IN-NEED PHONETAGS and SESAME STREET TELEPHONE STORY TAGS,
created pursuant to a license agreement with the Children's Television Workshop.
SESAME STREET TELEPHONE STORY TAGS enable children to call a designated
toll-free number to listen to stories told by SESAME STREET characters ELMO, BIG
BIRD and ERNIE. PETS-IN-NEED PHONETAGS are attached to a pet's collar. In the
event that the pet becomes lost, a good samaritan can contact the pet's owner by
calling the toll-free number imprinted on the tag, which automatically connects
to the owner's designated phone number.
35
<PAGE>
TELECOMMUNICATIONS INFRASTRUCTURE
GENERAL
Each call made using the Company's traditional phone card is comprised of
two components: (i) an inbound or originating call, which accesses one of the
Company's switching platforms and (ii) an outbound or terminating call, which
connects the end user to the destination called. Currently, most customers
access the Company's switching platforms by dialing a toll-free number. This
inbound service, purchased by the Company from carriers such as Sprint or MCI,
constitutes a significant portion of the Company's costs with respect to the
telephone call. Once the Company's switching platform is accessed, the call is
directed by the Company's switching platform to the network of an interexchange
carrier for transport to the appropriate call destination. Costs incurred by the
Company in connection with consumers accessing the Company's switching platforms
and the carriage of a call from the Company's switching platform to the call
destination include variable costs incurred in accessing the local exchange
carrier in each local access transport area ("LATA").
SWITCHING FACILITIES
The Company currently owns and operates three NACT STX switching platforms,
two in Jersey City, New Jersey (the "New Jersey STX") and the other in Miami,
Florida (the "Miami STX"). The Miami STX is located at the offices of Peoples
Telephone Company, Inc. ("Peoples") (the previous owner of Global Link) and is
maintained by the Company's employees, with the assistance of Peoples'
representatives. The New Jersey STX is located at the offices of NTT Data
Communications Systems Corporation, an affiliate of NTT America, Inc. ("NTT"), a
customer of the Company, and is maintained by the Company's employees, with the
assistance of NTT representatives. These three switching platforms are
manufactured by NACT. The Company and NACT have entered into agreements pursuant
to which NACT licenses software to the Company and provides technical support
and platform maintenance. In addition to its own switching facilities, the
Company utilizes the switching facilities of outside vendors for certain of its
enhanced services and/or interactive products, including InComm Communications,
a subsidiary of U.S. South Communications, Inc., and Interactive Media Works,
Inc.
The Miami STX and the New Jersey STX provide phone card services to the
Company's domestic and international traditional prepaid phone card customers
and, in many instances, end users of the Company's promotional phone cards.
These switching platforms are designed for the specific purpose of providing
prepaid phone card services, unlike many other switching platforms which must
operate contemporaneously with front end processors functioning outside of the
switching platform. These platforms allow the Company to route each telephone
call to the least expensive long distance carrier, determined by either the
origin of the call, or the city, country, area code or exchange where the call
will terminate.
The Company's switching platforms also monitor card usage and end user
demographics and limit the Company's exposure to fraud by alerting the Company
to situations in which multiple PINs are used from any single telephone number,
the same PIN is being used from many different parts of the country within a
short period of time, or a number of invalid PINs are entered from a single
telephone number. The Company believes that its ability to minimize unauthorized
use of its cards and to provide important customer and card usage information
makes its Global Link Card an attractive choice for retailers.
The Company believes that the installation of switching platforms in a
number of major metropolitan areas in the United States will reduce the
Company's inbound costs for calls originating within a LATA in which a switching
platform is located. Once a switching platform is installed in a particular
LATA, the Company will be able to offer LOCAL LINK service in that LATA and
customers originating calls in that LATA will be able to choose a local access
number instead of a toll-free number to access the Company's switching platform,
and thereby receive reduced per-minute rates. As a result, the Company will not
have to pay any per-minute costs for access into its switching platform. Rather,
the Company will have to pay
36
<PAGE>
only the fixed cost of leasing the dedicated access lines necessary for the
Company to provide local access. The Company has entered into interconnection
agreements with local exchange carriers such as Teleport Communications Group,
Inc. ("TCG") and intends to enter into additional agreements with TCG and other
local exchange carriers to lease dedicated access lines. The Company also
believes that the installation of switching platforms in a number of major
metropolitan areas in the United States will substantially reduce the Company's
costs for terminating calls by enabling the Company to route calls directly to
local exchange carriers within a terminating LATA rather than through
interexchange carriers. The Company will be able to route calls delivered to its
switching platform by an interexchange carrier over dedicated access lines to
their destination, incurring only the fixed cost of leasing the lines and
avoiding variable per minute local access costs. In addition, the Company plans
to interconnect its switching platforms in different LATAs using dedicated
access lines leased at fixed costs. As a result, if a call originates in a LATA
serviced by one of the Company's switching platforms and terminates in a
different LATA serviced by another Company-owned switching platform, the Company
will not incur any variable per-minute long distance costs for transferring
calls over its interconnected network.
LOCAL LINK SERVICE
In June 1996, the Company introduced its LOCAL LINK service, which enables
callers using the Company's phone cards in the New York metropolitan area to
receive reduced per-minute rates by accessing the Company's New Jersey STX
switching platform through a local number instead of a toll-free number. The
Company's costs are substantially reduced when a customer accesses the Company's
regional switching platform in this manner or terminates a call in a LOCAL LINK
service area, which serves to improve the Company's gross profit margins and
provide the Company with flexibility to withstand price competition. LOCAL LINK
service also enables the Company's end users to terminate telephone calls in the
New York metropolitan area at reduced per-minute charges. Additionally, if the
customer originates the call on a local access line, the Company can charge
reduced international rates. The Company anticipates offering its LOCAL LINK
service to end users in the Philadelphia and New Jersey markets commencing in
the third quarter of 1997.
CARRIER AGREEMENTS
The Company has carrier agreements with numerous long distance carriers,
such as Sprint and MCI, to originate toll-free access to the Company's switching
facilities domestically and internationally and to terminate domestic and
international long distance calls over these carriers' networks. The carrier
agreement between the Company and Sprint requires the Company to satisfy a
$200,000 minimum monthly usage commitment in order to receive favorable pricing.
Failure to meet such minimum commitment would obligate the Company to pay
underutilization charges equal to 25% of the difference between the minimum
commitment and the net usage. The majority of the Company's domestic toll-free
origination and termination minutes currently are carried over Sprint's network.
The Company's carrier agreements with multiple domestic and international
long distance carriers allow for redundant routing of call traffic to ensure
that if one carrier experiences difficulties the Company's phone card customers
are able to complete their telephone calls by automatically switching to an
unaffected carrier's network. Moreover, these multiple carrier agreements enable
the Company to route each telephone call to the least expensive long distance
carrier for that particular call, whether by country, city, area code or
exchange. This least-cost routing allows the Company to competitively price its
phone cards.
LICENSE
In August 1995, the Company obtained a nonexclusive patent license from
Ronald A. Katz Technology Licensing, L.P. to use over 25 patents related to
telecommunications processes. The Company is required
37
<PAGE>
to pay a percentage of annual activation revenues, subject to annual minimum
royalty payments. The term of the license continues until November 2011, when
the last patent expires.
SALES
The Company sells its prepaid phone cards and other services to domestic and
international retailers and distributors, and to business customers. The Company
also participates in trade shows, direct marketing and print advertising and
develops promotional kits to market its promotional and custom-designed cards to
retailers and businesses.
The following chart sets forth current estimated information regarding
certain retail establishments, distributors and other niche outlets currently
marketing the Company's traditional prepaid phone cards in the United States:
<TABLE>
<CAPTION>
ESTIMATED
NUMBER OF
LOCATIONS
ESTIMATED THAT
TOTAL NUMBER CURRENTLY
NAME TYPE OF LOCATIONS CARRY CARDS
- ------------------------------------------------ --------------------------------- ------------- -------------
<S> <C> <C> <C>
Von's supermarket 330 255
Sloan's supermarket 55 35
Genuardi supermarket 25 25
Twin County Grocers supermarket 50 40
ABC convenience store 50 40
Food Spot convenience store 25 25
Eckerd Drugs drug store 1,845 1,845
Quality Distribution Network candy and tobacco distributor 18,000 800
Phoenix International Airport airport N/A 15
Seamen's Church Institute of Florida maritime outlet distributor 80 45
</TABLE>
DOMESTIC RETAIL SALES
The Company sells its prepaid phone cards domestically through an in-house
sales force consisting of seven sales managers, each focusing on a distinct
geographic or niche market. The Company's Global Link Card and other traditional
prepaid phone cards are sold (i) directly to national, regional and independent
retail establishments, which sell the phone cards to a wide range of end users,
(ii) to independent distributors with widespread distribution channels and
access to a substantial number of retailers, such as newsstand distributors,
food brokers and tobacco and confectionery distributors and (iii) to other
marketing companies and organizations that sell the phone cards to consumers
within specific niche markets. The Company's diverse domestic retail base
includes convenience stores, supermarkets, drug stores, mass merchandisers,
maritime outlets (through which cards are sold to individuals working on cruise
ships and cargo vessels) and similar retail outlets. In November 1996, the
Company began to implement a new marketing structure, which established a system
to enable regional managers to supervise the solicitation of potential customers
in a more focused manner. Additionally, beginning in October 1996, the Company
commenced distribution of its specialized retail products through domestic
retailers and distributors that carry the Company's traditional prepaid phone
cards and to businesses not presently engaged in the sale of prepaid phone
cards, creating new revenue streams for the Company and its customers.
In marketing the Global Link Card to retailers, the Company emphasizes
profit potential, including the possible generation of ongoing commissions to
the retailer through payment of additional commissions based on the number of
minutes recharged on any Global Link Card sold by the retailer so long as the
retailer continues to offer the Global Link Card. The Company believes that this
program increases retailer loyalty and creates an incentive for retailers to
sell the Company's prepaid phone cards. The limited retail shelf space necessary
to offer the Company's products also is emphasized by the Company in its retail
marketing efforts. Additionally, the Company assists retailers in promoting the
Global Link Card and the Company's other products by providing turnkey
merchandising and marketing materials, including customized retail packaging and
display systems.
38
<PAGE>
The Company has agreements with retailers and distributors, which generally
provide for a term of one to three years and require that the retailer or
distributor sell the Company's phone cards exclusively. These agreements also
provide for wholesale prices reflecting discounts ranging from 20% to 50% of the
retail selling price and contain customary covenants and conditions, including
indemnification, confidentiality and other standard provisions acceptable to the
Company. Additionally, the Company has arrangements with retailers and
distributors that are not embodied in written agreements having specific terms
which can be terminated at any time. Certain of the Company's agreements with
international distributors provide for the payment of commissions based on the
number of cards sold.
The Company also sells its prepaid phone cards through four Company-owned
and operated retail phone centers located in urban shopping areas in Brooklyn,
New York and Miami Beach, Florida. These retail phone centers serve two primary
functions: (i) to sell the Company's prepaid phone cards and (ii) to enable
customers to place telephone calls and pay for those calls with the phone card.
Sales generated from the Company's phone centers were approximately $1,715,000
and $336,000 for the year ended December 31, 1996 and the three months ended
March 31, 1997, respectively. As the number and type of prepaid phone card users
have grown, the Company has de-emphasized the sale of phone cards through its
retail phone centers.
INTERNATIONAL RETAIL SALES
The Company's Global Link Card and other traditional prepaid phone cards are
sold internationally to business and leisure travelers destined for the United
States, primarily through airlines, tour wholesalers, travel agencies, car
rental agencies and other travel related businesses. International marketing is
conducted primarily through approximately 150 sales agents located in 28
countries, managed by the Company's Vice President--International Sales and
International Sales Manager. The Company's international phone cards currently
are sold by international sales agents such as Mike Gurnell & Associates; travel
agencies such as C.A. Ferntouristik; tour wholesalers such as Guest
International Marketing Services--Germany and American Express Vacations;
international airlines such as United Vacations (United Airlines), Tower Air,
Air New Zealand Holidays and Iceland Air; and Alamo Rent-A-Car.
The Company currently is pursuing opportunities to expand its existing
business in the Canadian phone card market. The emerging Canadian prepaid phone
card market resembles the United States prepaid phone card market of several
years ago. 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, taking advantage of the insight derived from
the Company's experiences associated with its early entrance into the United
States prepaid phone card market.
PROMOTIONAL PHONE CARD SALES
The Company's custom-designed promotional phone cards, which feature
companies' logos, products and customized advertisements, are sold to businesses
that typically give these cards to their customers to enhance the marketing of
their products and services. A business using the Company's phone cards for
promotions also can access marketing and demographic data compiled by the
Company's switching platforms. Businesses for which the Company has conducted
promotional phone card programs include Kraft Foods, Microsoft, Icelandair,
Lufthansa, Taco Bell, RJ Reynolds, Meineke Muffler, Rollerblade, NatWest, Arm 'n
Hammer, Dial, Seagrams, The 1996 Masters Golf Tournament and the Toronto Blue
Jays. Although the Company's promotional phone card programs generally are
non-recurring, the Company has conducted a second promotional phone card program
for both Kraft Foods and Dial.
DESIGN AND MANUFACTURING
The Company's in-house design staff creates original designs for promotional
and custom-designed cards. Upon completion of a phone card design, the Company
produces paper samples of such card,
39
<PAGE>
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.
CUSTOMER SUPPORT AND SERVICE
The Company believes that effective customer service is essential to
attracting and retaining reputable retail customers. Additionally, the Company
believes that it must support both the end users of the Company's phone cards
and the retail establishments and distributors that purchase the Company's phone
cards for resale to end users. Accordingly, the Company has established two
customer service divisions.
The Company's customer support division, which consists of its Vice
President--Support Services and four account managers, provides support to its
retail customers and distributors, which are divided into groups. Each account
manager is assigned a particular group for which he or she serves as liaison.
Each account manager uses the Company's management information system to
interface with the Company's NACT STX switching platforms from his or her
computer terminal. This direct link provides the account managers with real-time
information concerning customers' accounts and the ability to activate and
recharge customers' phone cards.
Each prepaid phone card contains a toll-free customer service number. The
Company's customer service operators are available 24 hours a day, seven days a
week, 365 days a year to assist users of the Company's phone cards.
Additionally, customer service operators can address concerns relating to the
operation of the Company's phone cards and any billing related question by
accessing real-time call detail records through the Company's switching
platforms.
COMPETITION
The telecommunications services industry generally, and the prepaid phone
card industry specifically, is intensely competitive, rapidly evolving and
subject to constant technological change. As the prepaid phone card industry has
grown, industry analysts estimate that the number of companies marketing prepaid
phone cards has increased from approximately 75 companies in 1994 to more than
500 in 1996, some of which have substantially greater resources than those of
the Company. Further, the Company's prepaid phone cards not only compete with
other prepaid phone cards, but also with credit calling cards, collect calling
services, hotel telephones, public pay telephones and other long distance
services. The Company believes that it competes with any medium by which a
consumer places a telephone call when away from the home or office.
The Company believes that its established reputation in the prepaid phone
card industry among retailers, distributors and business customers, its existing
telecommunications infrastructure and its experienced management team provide it
with important advantages over competitors. The Company also believes that the
recharge capabilities of certain of its phone cards provide it with important
advantages over many of its competitors whose cards do not provide users with
these capabilities. The Company believes that the primary competitive factors
affecting the prepaid phone card market are price, quality and reliability of
service, ease of use, service features and name recognition. The Company
believes that it successfully competes in these areas.
The Company's prepaid phone cards provide a more convenient and
cost-effective alternative to other long distance services intended for use away
from a consumer's home or office. The Company's phone cards are easy to use and
can be utilized from any touch-tone telephone. Unlike credit calling cards,
prepaid phone cards do not require users to fill out credit applications and
allow consumers to budget telephone expenses effectively. The Company's phone
cards provide a less expensive alternative to credit calling cards, collect
calling services, hotel telephones and public pay telephones. The following
chart compares a direct dial three-minute call from New York to Los Angeles
between the weekday hours of
40
<PAGE>
8:00 a.m. and 5:00 p.m. using the Company's prepaid phone card (Local Link and
non-Local Link) and a public telephone, MCI 800 Collect calling service and AT&T
credit calling card:
COST COMPARISON BY SERVICE TYPE FOR DOMESTICALLY ORIGINATED AND TERMINATED PHONE
CALLS(1)
<TABLE>
<CAPTION>
NYNEX PAY PHONE GTS
- ---------------------------- MCI AT&T ----------------------------------------
CREDIT CARD(2) COIN(3) COLLECT CALLING CARD STANDARD PREPAID LOCAL LINK PREPAID
- --------------- ----------- ----------- ------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
$ 2.81 $ 5.20 $ 2.88 $ 2.21 $ 0.75 $ 0.40
</TABLE>
- ------------------------
(1) Prices are based on information contained in tariffs filed with the FCC on
November 27, 1996 (NYNEX and AT&T) and March 1, 1997 (MCI).
(2) Represents a credit card call placed from a NYNEX pay telephone utilizing
NYNEX's designated operator services provider by dialing "0" plus a seven
digit number.
(3) Represents a call placed from a NYNEX pay telephone utilizing coins
deposited into the pay telephone.
The Company's phone cards will provide an even more cost-effective
alternative once the Company's proposed interconnected prepaid switching
platform is in place and its LOCAL LINK service is available in both Los Angeles
and New York.
The following chart compares a direct dial three-minute call from New York
to London between the weekday hours of 8:00 a.m. and 4:00 p.m. using the
Company's prepaid phone card (LOCAL LINK and non-LOCAL LINK) and a private
telephone, a hotel telephone, Sprint Collect calling service and AT&T calling
card:
COST COMPARISON BY SERVICE TYPE FOR CALLS ORIGINATED DOMESTICALLY AND TERMINATED
INTERNATIONALLY(1)
<TABLE>
<CAPTION>
GTS
HOTEL SPRINT AT&T ----------------------------------------
PRIVATE TELEPHONE TELEPHONE COLLECT CALLING CARD STANDARD PREPAID LOCAL LINK PREPAID
- ------------------- ----------- ----------- ------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
3.27.$......... $ 9.21 $ 8.77 $ 7.71 $ 1.80 $ 0.68
</TABLE>
- ------------------------
(1) Prices are based on information contained in tariffs filed with the FCC on
March 1, 1997 (AT&T from private and hotel telephone and calling card) and
October 1, 1996 (Sprint).
GOVERNMENT REGULATION
The provision of telecommunications services is regulated by the federal and
state governments of the United States. Federal laws and FCC regulations apply
to interstate and interLATA telecommunications, while state regulatory
authorities have jurisdiction over telecommunications services that originate
and terminate within the same state or LATA. Various international authorities
also may seek to regulate telecommunications services originating or terminating
in their respective countries.
FEDERAL. On February 8, 1996, President Clinton signed into law the
Telecommunications Act, which allows local exchange carriers, including the
RBOCs upon satisfaction of certain conditions, to provide interstate and
interLATA long distance telecommunications services and grants the FCC the
authority to deregulate other aspects of the telecommunications industry. In
order to implement the objectives and spirit of the Telecommunications Act, the
FCC has initiated proceedings to define the rules affecting competition in the
telecommunications industry and the companies that participate in this industry.
While the Company believes that the Telecommunications Act will foster increased
competition in the telecommunications industry and create new opportunities for
the Company to participate in various segments of
41
<PAGE>
the industry, the near and long-term effects on the Company of the
Telecommunications Act and the rules to be promulgated thereunder 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
transmission services using other common carriers' facilities. The Company has
applied for and received all necessary authority from the FCC to provide
domestic and international telecommunications services through the resale of
switched services of U.S. facilities-based carriers. The FCC reserves the right
to condition, modify or revoke such authority for violations of the
Communications Act of 1934, as amended, or its rules.
Nondominant carriers (i.e., carriers that do not have the power to control
prices), such as the Company, currently must maintain tariffs on file with the
FCC for their international services, and, as discussed below, the issue of
whether nondominant carriers must file tariffs for their interstate, domestic,
interexchange services currently is under review. Although the tariffs of
nondominant carriers and the rates and charges they specify are subject to FCC
review, they are presumed to be lawful and are seldom contested. In general,
nondominant domestic common carriers are required to charge reasonable rates and
are prohibited from engaging in unreasonable practices in the provision of their
services. As an international nondominant carrier, the Company is required to
include detailed rate schedules in its international tariffs. The Company has
filed all required tariffs with the FCC.
On October 31, 1996, the FCC released an order eliminating the requirement
that nondominant interstate carriers, such as the Company, maintain tariffs on
file with the FCC for domestic interstate services. The FCC's rules are pursuant
to authority granted to the FCC in the Telecommunications Act to "forbear" from
regulating any telecommunications service provider if the FCC determines that
the public interest will be served. Under the new rules, after a nine-month
transition period, nondominant interstate carriers need no longer file tariffs,
although they have the option of ceasing to file such tariffs immediately.
Petitions for review of the FCC's order were filed by MCI, among others, with
the United States Court of Appeals for the District of Columbia Circuit, which
on February 13, 1997 stayed the FCC's order. Accordingly, on March 6, 1997, the
FCC reinstated its prior rules requiring nondominant carriers providing
interstate, domestic, interexchange service to file tariffs.
Pursuant to the Telecommunications Act, the FCC recently adopted new rules
governing the pay telephone industry that, among other things, establish a means
by which all pay telephone service providers are compensated for every
interstate and intrastate call originating from their pay telephones, including
calls that utilize toll-free access. Under the new rules, long distance carriers
are required to compensate pay telephone owners a per-call fee for those calls
made after October 7, 1996 for which the pay telephone owner is not otherwise
compensated. Until October 8, 1997, only long distance carriers that generate
$100 million or more in revenues will be required to pay a pre-determined
monthly amount. Those long distance carriers have the right to charge phone card
companies, such as the Company, a fee for each call originating from a pay
telephone. One of the Company's long distance carriers has indicated that it
intends to charge the Company such fees, although the Company currently is
disputing such carrier's method of calculation of payment. After October 8,
1997, interexchange carriers, including the Company, will be required to
compensate pay telephone providers $.35 for each call completed from a pay
telephone where the caller accesses the long distance carrier through a
toll-free number. It is unclear who will be responsible for invoicing and
collecting the per-call compensation fees from the interexchange carriers. The
FCC's new rules currently are being reviewed by the United States Court of
Appeals for the District of Columbia Circuit. To the extent that such payments
cannot be passed on to card users, the new rules could have a material adverse
effect on the Company.
STATE. The provision of intraLATA or intrastate long distance
telecommunications services is subject to various state laws and regulations,
including prior certification, notification and/or registration requirements.
The scope of such regulation varies from state to state, with certain states
requiring the filing and regulatory approval of various certifications and state
tariffs. For example, many states regulate prepaid
42
<PAGE>
phone card providers by requiring them to apply for certification. While the
Company either has obtained, applied or is applying for certification in the
states of Florida, New York and California (where the Company conducts a
substantial part of its business), there can be no assurance that state
regulators will grant the Company all required authorizations. Currently, the
FPSC also is considering implementing other rules that specifically regulate
prepaid phone card providers. The FPSC is the first state regulatory agency that
has taken an aggressive approach toward the regulation of prepaid phone cards.
The Company believes that other state regulatory agencies will adopt regulations
similar to those which will ultimately be adopted by the FPSC. The Company
continually evaluates the regulations governing the provision of intrastate
telecommunications services in numerous states and seeks to obtain operating
authority in those states in which it provides or expects to provide service and
that require authority. Certificates of authority can generally be conditioned,
modified, canceled, terminated or revoked by state regulatory authorities for
failure to comply with state law and/or the rules, regulations and policies of
the state regulatory authorities. Fines and other penalties, including, for
example, the return of all monies received for intrastate traffic from residents
of a state, may be imposed for such violations.
The Company believes that it is in compliance with all laws, rules and
regulations material to 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, in particular the
currently proposed relaxation of existing regulations, 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 operation, 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.
TRADEMARKS
Global Link-Registered Trademark- and the design of the Global Link prepaid
phone card are registered trademarks of Global Link. Applications also have been
filed to register Global Link-Registered Trademark- and the design of the Global
Link-Registered Trademark- phone card in several foreign countries. The Company
or Global Link also has filed trademark applications with the United States
Patent and Trademark Office seeking registration for ACTIPHONE-TM-, LOCAL
LINK-TM- and GLOBAL LINK WORLDWIDE-TM-. There can be no assurance that the
Company will receive registrations 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.
EMPLOYEES
As of June 13, 1997, the Company had 55 full-time employees and 32 part-time
employees. None of the Company's employees is covered by a collective bargaining
agreement. The Company never has experienced an employment-related work stoppage
and considers its employee relations to be satisfactory.
PROPERTY
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 the Company's principal executive offices, computer
systems and packaging facilities. The term of the lease is five years and
provides for an annual rent 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 Company, a general partnership owned by Gary J. Wasserson, the
Company's Chief Executive Officer.
43
<PAGE>
In July 1995, the Company entered into a sublease for 9,400 square feet of
space located at 40 Elmont Road, Elmont, New York. The term of the sublease is
through July 2000 and provides for an annual rent of $145,700, including
utilities. In February 1997, the Company subleased this space through July 2000
for an annual rent of $89,300 for the first 12 months, $94,000 for the second 12
months and $98,700 for the remainder of the term.
In August 1995, the Company entered into a lease for approximately 1,930
square feet of space for its sales offices located at 60 East 42nd Street, New
York, New York. The term of the lease is 62 months and provides for an annual
rent of $45,248.
In April 1997, the Company entered into a lease for approximately 2,125
square feet of space located in Roslyn Heights, New York. The term of the lease
is for one year and provides for an annual rent of $55,781.
The Company believes that its facilities are adequate for its present
purposes. The Company believes that as it grows, it will require additional
facilities, and that such facilities will be readily available.
LEGAL PROCEEDINGS
The Company is not aware of any pending legal proceedings against the
Company which, individually or in the aggregate, would materially adversely
affect the Company.
44
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The current executive officers, key employees and directors of the Company
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------------------------- --- ------------------------------------------
<S> <C> <C>
Shelly Finkel(1)................................................ 52 Chairman of the Board
Gary J. Wasserson(2)............................................ 41 Chief Executive Officer and Director
Cory Eisner..................................................... 41 Vice President--Enhanced Services
Lon Torman...................................................... 56 Vice President--International Sales
Mary Berger..................................................... 38 Vice President--Support Services
David S. Tobin.................................................. 32 General Counsel and Secretary
Maria Bruzzese.................................................. 33 Chief Financial Officer
Alan W. Kaufman(1)(2)........................................... 59 Director
Donald L. Ptalis(2)............................................. 54 Director
Jack N. Tobin(1)................................................ 55 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
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.
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.
CORY EISNER has been the Company's Vice President--Enhanced Services since
October 1994. From 1977 to October 1994, Mr. Eisner was employed by Phone
Programs, Inc., a telepromotions agency specializing in interactive phone
services, most recently as Executive Vice President of Sales.
LON TORMAN has been the Company's Vice President--International Sales since
March 1996 and has held the same position with Global Link since February 1995.
From January 1993 to February 1995, Mr. Torman held the same position at PTC
Services, a division of Peoples and from May 1992 to January 1993, he worked in
the cellular phone division at PTC Services. From January 1990 to May 1992, Mr.
Torman was the Managing Director of Carifone Cellular Phone Rental, Inc., which
was sold to Peoples in May 1992.
MARY BERGER has been the Company's Vice President--Support Services since
March 1996 and has held the same position with Global Link since February 1995.
From 1992 to February 1995, Ms. Berger held the same position at PTC Services, a
division of Peoples, where she developed customer support, technical support and
management information system 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 and general corporate
45
<PAGE>
matters. From 1990 to April 1992, Mr. Tobin was an associate of the law firm of
Ruden, McClosky, Smith, Schuster and Russell, P.A. David Tobin is the son of
Jack N. 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 The Netplex Group, Inc. (formerly CompLink, Ltd.), a
developer of computer software products primarily for 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.
ALAN W. KAUFMAN has been a director of the Company since November 1994. From
April 1986 to December 1996, Mr. Kaufman held various positions, including Vice
President of Marketing and Vice President of Sales and Marketing, and most
recently Executive Vice President of Sales of Cheyenne Software, Inc. Mr.
Kaufman was the founding President of the New York Software Industry
Association.
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.
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 that 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. Jack
Tobin is the father of David Tobin, the General Counsel and Secretary of the
Company.
BOARD OF DIRECTORS
The Board of Directors of the Company is divided into three classes, each of
which serves for a term of three years, with only one class of directors being
elected in each year. The term of the first class of directors, currently
consisting of Shelly Finkel and Gary J. Wasserson, will expire at the annual
meeting of stockholders to be held in 1997; the term of the second class of
directors, currently consisting of Alan W. Kaufman and Donald L. Ptalis, will
expire at the annual meeting of stockholders to be held in 1998; and the term of
the third class of directors, currently consisting of Jack N. Tobin, will expire
at the annual meeting of stockholders to be held in 1999. 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 members of the Company's Board of Directors do not receive any cash
compensation for serving as directors, however, the Company reimburses directors
for travel and related expenses incurred to attend Board meetings. On March 31st
of each calendar year, each person who is then a director of the Company is
granted immediately exercisable ten-year options to purchase 3,334 shares of
Common Stock at the fair market value thereof at the time of grant. See "-- 1994
Performance Equity Plan."
The Company has appointed a Compensation Committee and an Audit Committee of
the Board of Directors. The Compensation Committee, consisting of Shelly Finkel,
Alan W. Kaufman and Jack N. Tobin, reviews the salaries and other compensation
of the Company's executive officers. The role of the Audit Committee, consisting
of Gary J. Wasserson, Alan W. Kaufman and Donald L. Ptalis is to review (i) the
scope of Company's annual audit and other services provided by the Company's
independent auditors and (ii) the audit results and the auditors'
recommendations regarding policies, systems and controls.
46
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation of the
Company's Chief Executive Officer and the three other most highly compensated
executive officers (collectively, the "Named Executive Officers") for 1994, 1995
and 1996:
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
ANNUAL LONG TERM COMPENSATION
COMPENSATION -----------------------
NAME AND PRINCIPAL ------------- OPTIONS
POSITION DURING PERIOD FISCAL YEAR SALARY ($) (NO. OF SHARES)
- ------------------------------------------------------------- ------------- ------------- -----------------------
<S> <C> <C> <C>
Gary J. Wasserson............................................ 1996 125,000 45,000
Chief Executive Officer 1995 -- --
1994 -- --
John P. McCabe(2)............................................ 1996 150,000 3,334
President 1995 121,154 33,334
1994 -- --
Cory Eisner.................................................. 1996 155,000 5,000
Vice President 1995 93,750 3,334
1994 22,500 8,334
David S. Tobin............................................... 1996 116,667 29,303
General Counsel and Secretary 1995 -- --
1994 -- --
</TABLE>
- ------------------------
(1) No other executive officer received aggregate compensation equal to or
exceeding $100,000 during 1994, 1995 or 1996. None of Messrs. Wasserson,
McCabe, Eisner or Tobin received noncash compensation benefits having a
value exceeding 10% of his cash compensation during 1994, 1995 or 1996.
(2) Mr. McCabe resigned as President and a director of the Company in May 1997.
Pursuant to the terms of Mr. McCabe's termination agreement, the Company
agreed to pay him three months severance and to accelerate the vesting of
options to purchase 11,111 shares of Common Stock. The Company also canceled
options to purchase 3,334 shares of Common Stock granted to Mr. McCabe in
March 1997.
47
<PAGE>
The following table summarizes the number of shares and the terms of stock
options granted to the Named Executive Officers in 1996:
OPTIONS/SHARES DURING YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------
<S> <C> <C> <C> <C> <C>
% OF TOTAL
OPTIONS/SHARES
GRANTED TO EXERCISE MARKET PRICE
NAME AND POSITION OPTIONS/SHARES EMPLOYEES IN PRICE ($/ ON DATE OF EXPIRATION
DURING PERIOD GRANTED FISCAL YEAR SHARE) GRANT ($) DATE
- ------------------------ -------------- ------------------------- ------------- ----------------- -------------
Gary J. Wasserson....... 3,334(1) 35.3% 15.75 15.75 3/30/06
Chief Executive 41,667 18.375 18.375 1/3 2/29/02;
Officer 1/3 2/29/03;
1/3 2/29/04
John P. McCabe.......... 3,334 (1) 2.6% 15.75 15.75 3/30/06
President
Cory Eisner............. 5,000 3.9% 7.875 7.875 8/24/01
Vice President
David S. Tobin.......... 16,667 13.1% 18.375 18.375 1/3 2/29/02;
General Counsel and 1/3 2/29/03;
Secretary 1/3 2/29/04
</TABLE>
- ------------------------
(1) Represents immediately exercisable options to purchase 3,334 shares of
Common Stock granted pursuant to the terms of the Company's 1994 Plan, which
provides for stock option grants for 3,334 shares to be made to each
director of the Company on March 31st of each year. See "-- 1994 Performance
Equity Plan."
The following table summarizes the number of exercisable and unexercisable
options held by the Named Executive Officers at December 31, 1996, and their
value at that date if such options were in-the-money:
AGGREGATE YEAR-END OPTION VALUES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996 ($)(1)
NAME AND POSITION -------------------------- --------------------------
DURING PERIOD EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gary J. Wasserson......................................... 3,334 41,667 -- --
Chief Executive Officer
John P. McCabe............................................ 14,445 22,222 -- --
President
Cory Eisner............................................... 9,584 7,083 $ 3,125 $ 6,250
Vice President
David S. Tobin............................................ 12,636 16,667 $ 23,124 --
General Counsel and Secretary
</TABLE>
- ------------------------
(1) Represents the difference between the aggregate market value at December 31,
1996 of the Common Stock underlying the options (based on a last sale price
of $9.75 on that date) and the options' aggregate exercise price.
48
<PAGE>
1994 PERFORMANCE EQUITY PLAN
In October 1994, the Board of Directors of the Company adopted, and the
stockholders approved, the 1994 Plan. The 1994 Plan currently authorizes the
granting of awards of up to 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. The 1994 Plan is
administered by the Board of Directors, which determines the persons 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.
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 3,334 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.
Each stock option may be granted at a price determined by the Board of
Directors, not to 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 qualified
stock options granted to a holder of 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. 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 (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 250,858
shares of Common Stock are outstanding under the 1994 Plan. Options outstanding
under the 1994 Plan include options to purchase 30,002 shares granted to
executive officers, at exercise prices ranging from $7.875 to $17.25 per share.
In addition, pursuant to the terms of the 1994 Plan, on March 31, 1995, the
Company granted to each director of the Company immediately exercisable ten-year
options to purchase 3,334 shares for $17.625 per share, on March 31, 1996,
immediately exercisable ten-year options to purchase 3,334 shares for $15.75 per
share and on March 31, 1997, immediately exercisable ten-year options to
purchase 3,334 shares for $11.125 per share. In connection with John McCabe's
resignation as President and a director of the Company in May 1997, the Company
canceled options to purchase 3,334 shares of Common Stock granted to Mr. McCabe
in March 1997. In February 1995, in connection with their respective consulting
agreements with the Company, Barry Rubenstein and Eli Oxenhorn, stockholders of
the Company, each were granted options under the 1994 Plan to purchase 33,334
shares of Common Stock at an exercise price of $14.25 per share. These options
vested in February 1996 and remain exercisable until February 2001. In January
1997, in connection with the extension of their respective consulting
agreements, Messrs. Rubenstein and Oxenhorn were each granted options under the
1994 Plan to purchase 25,000 shares of Common Stock at an exercise price of
$9.00 per share. These options vested in February 1997 and remain exercisable
until February 2002. The exercise prices of all of the foregoing options are
equal to the fair market value of the Common Stock on the date of grant.
49
<PAGE>
OTHER OPTIONS AND WARRANTS
In October 1994, the Company granted ten-year options to purchase an
aggregate of 25,000 shares of Common Stock at an exercise price of $9.99 per
share to three individuals, 10,000 of which were granted to Shelly Finkel,
Chairman of the Board of the Company.
In December 1994, in connection with its serving as underwriter of the IPO,
the Company issued and sold to Whale Securities Co., L.P. ("Whale") and its
designees, for nominal consideration, five-year warrants to purchase up to
50,000 shares of Common Stock at a purchase price of $24.15 per share and/or
Public Warrants to purchase up to 50,000 shares of Common Stock, which Public
Warrants are exercisable at a price of $12.00 per share.
In March 1995, in connection with his employment with the Company, John
McCabe was granted options to purchase 33,334 shares of Common Stock at an
exercise price of $15.00 per share (the fair market value of the Common Stock on
the date of grant). These options originally vested 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 connection with Mr. McCabe's
resignation as President and a director of the Company, the Company accelerated
the vesting of options to purchase 11,111 shares of Common Stock.
In April 1995, in connection with consulting services rendered to the
Company, two individuals were granted options to purchase an aggregate of 2,500
shares of Common Stock at an exercise price of $16.50 per share (the fair market
value of the Common Stock on the date of grant).
In April 1995, the Company issued five-year warrants to a designee of Whale
to purchase 16,667 shares of Common Stock at an exercise price of $15.00 per
share (the fair market value of the Common Stock on the date of grant) in
consideration of Whale's granting the Company the right of first refusal to
pursue any prospective acquisition target in the phone card industry that Whale
identifies prior to February 1998. In October 1995, the Company issued five-year
warrants to another designee of Whale to purchase 16,667 shares of Common Stock
at an exercise price of $15.00 per share (the fair market value of the Common
Stock on the date of grant). In January 1996, the Company issued five-year
warrants to Whale and two of its designees to purchase an aggregate of 66,667
shares at an exercise price of $15.375 per share (the fair market value of the
Common Stock on the date of grant) in consideration of consulting services
provided to the Company.
In February 1996, in connection with their employment with the Company,
Messrs. Gary J. Wasserson and David S. Tobin, the Company's Chief Executive
Officer and General Counsel and Secretary, respectively, were granted options to
purchase 41,667 and 16,667 shares, respectively, at an exercise price of $18.375
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 February
1997 and will remain exercisable for a period of five years from the date of
vesting.
In connection with the acquisition of Global Link, options to purchase
145,000 shares of common stock of Global Link were converted into options to
purchase 36,642 shares of Common Stock, at exercise prices ranging from $1.98 to
$7.92 per share. In addition, warrants issued in connection with the issuance of
the Convertible Debentures were converted into warrants to purchase 7,085 shares
of Common Stock at an exercise price of $18.00 per share.
In May 1996, the Company consummated the May 1996 Private Placement, a
$3,000,000 private offering in which it sold 30 Units ("Units"), each Unit
consisting of 6,667 shares of Common Stock and May 1996 Warrants to purchase
13,334 shares of Common Stock. Whale served as the placement agent in connection
with the May 1996 Private Placement and received an option to purchase three
Units (an aggregate of 20,000 shares of Common Stock and May 1996 Warrants to
purchase 40,000 shares of Common Stock), which Units are identical to the Units
sold in the May 1996 Private Placement, at an exercise price of $100,000 per
Unit, exercisable until May 10, 2001.
In December 1996, the Company consummated the December 1996 Private
Placement, a private offering from which the Company derived gross proceeds of
$3,000,000 through the sale of December 1996
50
<PAGE>
Notes in the aggregate principal amount of $3,000,000 and 1,000,000 December
1996 Warrants. Whale was paid a finder's fee in connection with the December
1996 Private Placement of 50,000 December 1996 Warrants. Additionally, Graubard
Mollen & Miller, the Company's general counsel, received $50,000 of December
1996 Notes and 16,667 December 1996 Warrants in payment of certain legal fees
and expenses.
In April 1997, Wheatley and Wheatley Foreign exercised an aggregate of
333,334 December 1996 Warrants at an exercise price of $7.50 per share,
resulting in $2,500,000 of gross proceeds to the Company. In consideration for
exercising such December 1996 Warrants, the Company issued to Wheatley and
Wheatley Foreign Public Warrants to purchase an aggregate of 250,000 shares of
Common Stock. See "Certain Transactions."
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Shelly
Finkel, its Chairman of the Board, Gary J. Wasserson, its Chief Executive
Officer, David S. Tobin, its General Counsel and Secretary, and Maria Bruzzese,
its Chief Financial Officer. Mr. Finkel's and Ms. Bruzzese's employment
agreements each provide for an initial term through December 14, 1997. Messrs.
Wasserson's and Tobin's employment agreements each provide for an initial term
through March 1, 1999. 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 $75,000. The employment
agreements of Messrs. Wasserson, Tobin and Ms. Bruzzese require each of them to
work for the Company on a full-time basis and provide for base annual salaries
of $150,000, $140,000 and $95,000, respectively, during the term of the
agreements. Messrs. Wasserson's and Tobin's employment agreements each provide
that if his employment is terminated without cause, he shall receive his 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. The Company
currently does not have a written employment agreement with Cory Eisner, its
Vice President -- Enhanced Services. The Company currently pays Mr. Eisner a
base annual salary of $105,000, plus discretionary annual bonuses. The Company
anticipates that it will enter into a written employment agreement with Mr.
Eisner after the consummation of this Offering, but there can be no assurance of
this.
CONSULTANTS
In February 1995, the Company entered into two-year consulting agreements
with each of Barry Rubenstein, a principal stockholder of the Company, and Eli
Oxenhorn. In January 1997, such agreements were extended through February 1999.
Each of Messrs. Rubenstein and Oxenhorn has held senior executive positions and
directorships with numerous publicly-held companies, including Cheyenne
Software, Inc., a computer company that Mr. Rubenstein founded and for which Mr.
Oxenhorn served as Chairman of the Board. Mr. Rubenstein also was a founder of
Novell, Inc., a computer software company. Messrs. Rubenstein and Oxenhorn have
knowledge and expertise in founding and developing technology-based companies
and in negotiating and consummating mergers and acquisitions and establishing
commercial relationships, which abilities the Company believes will be valuable
in the pursuit of its strategy of rapid growth. Pursuant to the terms of their
respective consulting agreements, Messrs. Rubenstein and Oxenhorn are to render
consulting services for a maximum of eight hours per month 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. In February 1995, the Company
granted to each of Messrs. Rubenstein and Oxenhorn, in consideration for the
specified consulting services, options to purchase 33,334 shares of Common Stock
at an exercise price $14.25 per share (the fair market value of the Common Stock
on the date of grant),
51
<PAGE>
which options became exercisable in February 1996 and remain exercisable until
February 2001. In January 1997, in connection with the extension of their
respective consulting agreements, each of Messrs. Rubenstein and Oxenhorn were
granted options to purchase 25,000 shares of Common Stock at an exercise price
of $9.00 per share (the fair market value of the Common Stock on the date of
grant). These options became exercisable in February 1997 and remain exercisable
until February 2002.
CERTAIN TRANSACTIONS
In March 1994, Gary J. Wasserson purchased all of his shares of common stock
of Global Link with a promissory note in the aggregate principal amount of
$100,000 bearing interest at a rate of five percent per annum. Although the
promissory note became due and payable on March 31, 1997 (on which date there
was $15,000 of accrued and unpaid interest on the note), the Board of Directors
extended the payment of such note until March 31, 1998.
In February 1995, the Company entered into consulting agreements with each
of Barry Rubenstein and Eli Oxenhorn, which were extended in January 1997. See
"Management -- Consultants."
The principal executive offices of the Company are leased from JilJac Realty
Company, a general partnership owned by Gary J. Wasserson, the Company's Chief
Executive Officer. See "Business -- Property."
In February 1996, the Company and two groups of stockholders entered into a
voting agreement, pursuant to which, until February 28, 1999, the Company is
obligated to nominate four persons designated by one group of stockholders and
three persons appointed by a second group of stockholders for election to the
Board of Directors at the various stockholders meetings, so long as each group
of stockholders continues to hold an aggregate of 183,334 shares of Common
Stock. Further, these two groups of stockholders have agreed to vote for the
other group's designees as directors of the Company. See "-- The Global Link
Merger."
In May 1996, the Company consummated the May 1996 Private Placement. Among
the purchasers in the May 1996 Private Placement were a limited partnership in
which Mr. Rubenstein is a general partner (which purchased 6,667 shares of
Common Stock and May 1996 Warrants to purchase 13,334 shares of Common Stock)
and Mr. Oxenhorn (who purchased 6,667 shares of Common Stock and May 1996
Warrants to purchase 13,334 shares of Common Stock).
In December 1996, the Company consummated the December 1996 Private
Placement. Among the purchasers in the December 1996 Private Placement were
Shelly Finkel, Chairman of the Board of the Company (who purchased $50,000 of
December 1996 Notes and 16,667 December 1996 Warrants), and limited partnerships
in which Mr. Rubenstein is either a general partner or an officer and member of
a limited liability company that is a general partner (which purchased
$2,400,000 of December 1996 Notes and 800,000 December 1996 Warrants).
In March 1997, the Company entered into an agreement with Wheatley, pursuant
to which Wheatley agreed that if the Company does not consummate a financing
resulting in gross proceeds to the Company of at least $2,500,000 by June 1,
1997, then Wheatley and Wheatley Foreign would exercise an aggregate of at least
333,334 of the December 1996 Warrants that they received in the December 1996
Private Placement, which would result in the Company's receipt of gross proceeds
of at least $2,500,000. In April 1997, the Company requested that Wheatley and
Wheatley Foreign exercise 333,334 December 1996 Warrants prior to June 1, 1997
and, in consideration of such exercise, the Company issued to Wheatley and
Wheatley Foreign Public Warrants to purchase an aggregate of 250,000 shares of
Common Stock.
The Company believes that each of the foregoing transactions were on terms
no less favorable to the Company than those which could have been obtained from
unaffiliated third parties. The terms of the foregoing transactions were
determined without arms' length negotiations and could create, or appear to
create, potential conflicts of interest which may not necessarily be resolved in
the Company's favor. All future transactions and loans between the Company and
its officers, directors and principal stockholders or
52
<PAGE>
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 MERGER
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 with and into Global Link and Global Link became a wholly-owned
subsidiary of the Company. The Global Link Merger was consummated on February
29, 1996 (the "Merger Date"). The purchase price paid for Global Link was
approximately $11,400,000, and the assumption of liabilities.
In connection with the Global Link 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 572,773 shares of the Company's Common
Stock. Outstanding options to purchase an aggregate of 145,000 Global Link
Shares were automatically converted into the right to purchase an aggregate of
36,642 shares of Common Stock.
Pursuant to the Merger Agreement, the Company agreed to register the shares
of Common Stock issued in the Global Link Merger, as well as the Conversion
Shares (as defined below) and the Peoples Shares (as defined below), by means of
a registration statement which was declared effective on September 30, 1996.
Notwithstanding the foregoing, each stockholder to be included in such
registration statement executed a lock-up agreement prohibiting his sale of such
shares for a period of one year after the Merger Date (which period has expired)
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 Convertible 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 (as defined below)
during the one-year period immediately following the Merger Date in excess of
53,334 shares of Common Stock.
In addition, the holders of $2,800,000 aggregate principal amount of
Convertible Debentures executed a securities purchase agreement, pursuant to
which such holders consented to the Global Link Merger and waived certain
rights. The Convertible Debentures are due and payable on June 23, 1999 and are
secured by a first lien on all assets of Global Link. The Convertible Debentures
bear interest at 6% per annum, payable on May 30th and November 30th of each
year. At the option of the holders, the Convertible Debentures are immediately
due and payable upon a change in control of Global Link. The Company has
guaranteed the payment of principal and interest owed under the Convertible
Debentures. The principal amount of the Convertible 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 $9.264 per share. The Company may
force the conversion of the Convertible 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 at a price equal to or
greater than $12.00 per share; (ii) the Conversion Shares are the subject of an
effective registration statement under the Securities 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 has been at least $10.50 for 30 days prior to the consummation of the
offering referred to in (i); and (v) the lock-up agreements of the Convertible
Debenture holders are terminated. Global Link may prepay the Convertible
Debentures, subject to the holders' right of conversion, if the Conversion
Shares are registered under the Securities 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 Convertible
Debentures are terminated.
Also in connection with the Global Link Merger, Global Link and Peoples
executed an agreement, pursuant to which, as amended, Peoples was paid or owed
(i) $550,000 on the Merger Date, (ii) $500,000 plus accrued interest at the rate
of 8% per annum in increments over the ten-month period after the
53
<PAGE>
Merger Date and (iii) 17,602 shares of Common Stock ("Peoples Shares") in full
satisfaction of any and all monies owed by Global Link to Peoples other than
$954,630 of trade receivables ("Trade Receivables"). The Company intends to use
a portion of the proceeds of the Offering to repay the Trade Receivables.
On the Merger Date, the Company entered into an employment agreement with
each of Gary J. Wasserson and David S. Tobin, who were the Chief Executive
Officer and General Counsel, respectively, of Global Link, and then became the
Chief Executive Officer and General Counsel and Secretary of the Company,
respectively. See "Management -- Employment Agreements."
In connection with the Global Link Merger, a group consisting of Shelly
Finkel, James Koplik, Paul Silverstein and Joseph Clark (collectively, the "GTS
Major Stockholders"), who hold an aggregate of 398,580 shares of Common Stock,
and another group consisting of 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 346,703 shares of Common Stock, entered into a 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. Paul Silverstein and Joseph Clark have given Shelly Finkel the
right to select the GTS Designees on their behalf. 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. The term of the voting agreement expires on February 28, 1999.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding beneficial
ownership of the Company's Common Stock as of June 13, 1997, by (i) each person
known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each Named Executive Officer and (iv) all directors and executive offers as a
group. Unless otherwise indicated, each person in the table has sole voting and
investment power as to the shares shown.
<TABLE>
<CAPTION>
SHARES PERCENT PERCENT
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ------------------------------------------------------------------------- --------------- ----------- -----------
<S> <C> <C> <C>
Shelly Finkel............................................................ 315,912(2) 13.9% 6.6%
c/o Shelly Finkel Management, Inc.
60 East 42nd Street, Suite 464
New York, New York 10165
Gary J. Wasserson........................................................ 150,731(3) 6.8% 3.2%
c/o Global Telecommunication Solutions, Inc.
5697 Rising Sun Avenue
Philadelphia, Pennsylvania 19120
John P. McCabe........................................................... 36,667(4) 1.6% *
c/o Global Telecommunication Solutions, Inc.
2 Expressway Plaza, Suite 206
Roslyn Heights, New York 11577
Alan W. Kaufman.......................................................... 13,334(5) * *
1150 Park Avenue #9A
New York, New York 10177
Jack N. Tobin............................................................ 6,667(6) * *
7759 Highlands Circle
Margate, Florida 33063
Donald L. Ptalis......................................................... 12,432(7) * *
16 Ross Avenue
Emerson, New Jersey 07630
Cory Eisner.............................................................. 10,250(8) * *
c/o Global Telecommunication Solutions, Inc.
2 Expressway Plaza, Suite 206
Roslyn Heights, New York 11577
David S. Tobin........................................................... 18,192(9) * *
c/o Global Telecommunication Solutions, Inc.
5697 Rising Sun Avenue
Philadelphia, Pennsylvania 19120
Laifer Capital Management, Inc........................................... 150,069 10) 6.4% 3.1%
45 West 45th Street
New York, New York 10036
Eli Oxenhorn............................................................. 141,780 11) 6.2% 3.0%
56 The Intervale
Roslyn Estates, New York 11576
Barry Rubenstein......................................................... 1,202,780 12) 40.0% 21.9%
68 Wheatley Road
Brookville, New York 11545
Peoples Telephone Company, Inc........................................... 212,623 9.7% 4.5%
2300 N.W. 89th Place
Miami, Florida 33172
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENT PERCENT
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ------------------------------------------------------------------------- --------------- ----------- -----------
<S> <C> <C> <C>
Paul Silverstein......................................................... 105,800 13) 4.8% 2.2%
32 Edgewood Avenue
Larchmont, New York 10538
Whale Securities Co., L.P................................................ 243,334 14) 10.0% 4.9%
650 Fifth Avenue
New York, New York 10019
Wheatley Partners LLC.................................................... 916,667 15) 33.0% 17.4%
80 Cuttermill Road
Great Neck, New York 11021
All executive officers and directors as a group (8 persons).............. 536,103 16) 22.8% 11.0%
</TABLE>
- ------------------------
* Less than 1%.
(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 Prospectus
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 Prospectus 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.
(2) Includes (i) 16,667 shares of Common Stock underlying December 1996
Warrants, (ii) 20,000 shares of Common Stock issuable upon exercise of
currently exercisable options and (iii) an aggregate of 30,873 shares of
Common Stock underlying Public Warrants.
(3) Represents 130,175 shares of Common Stock which are owned jointly by Mr.
Wasserson and his spouse and 20,556 shares of Common Stock issuable upon
exercise of currently exercisable options. Does not include 27,778 shares of
Common Stock underlying options, 50% of which vest in each of February 1998
and 1999.
(4) Represents shares of Common Stock issuable upon exercise of currently
exercisable options.
(5) Includes 1,667 shares of Common Stock underlying Public Warrants and 10,000
shares of Common Stock issuable upon exercise of currently exercisable
options.
(6) Represents shares of Common Stock issuable upon exercise of currently
exercisable options.
(7) Includes 5,398 shares of Common Stock issuable upon conversion of $50,000
principal amount of Convertible Debentures, 127 shares of Common Stock
issuable upon exercise of warrants issued in connection with the Convertible
Debentures and 6,667 shares of Common Stock issuable upon exercise of
currently exercisable options.
(8) Includes 334 shares of Common Stock underlying Public Warrants and 9,584
shares of Common Stock issuable upon exercise of currently exercisable
options. Does not include 7,083 shares of Common Stock underlying options,
1,667 of which vest in August 1997, 2,917 of which vest in October 1997,
1,667 of which vest in August 1998 and 833 of which vest in October 1998.
(9) Represents 18,192 shares of Common Stock issuable upon exercise of currently
exercisable options. Does not include 11,111 shares of Common Stock
underlying options, 50% of which vest in each of February 1998 and 1999.
(10) Represents 10,147 shares of Common Stock and 139,922 shares issuable upon
conversion of Convertible Debentures held by Hilltop Partners, L.P., Wolfson
Equities and Hilltop Offshore Limited, entities for which Laifer Capital
Management, Inc. ("Laifer") acts as an investment adviser registered under
Section 203 of the Investment Advisers Act of 1940. Such information was
obtained by the Company from a Schedule 13G filed by Laifer with the
Commission on February 6, 1997.
56
<PAGE>
(11) Includes 334 shares of Common Stock and 334 shares issuable upon exercise
of Public Warrants owned by Mr. Oxenhorn's son, of which he disclaims
beneficial ownership, 31,390 shares of Common Stock issuable upon exercise
of Public Warrants and 58,334 shares issuable upon exercise of currently
exercisable options.
(12) Includes 334 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 6,667 shares of Common Stock owned by Marilyn
Rubenstein, Mr. Rubenstein's spouse. Mr. Rubenstein disclaims beneficial
ownership over all of such shares. Also includes 101,667 shares of Common
Stock (including 13,334 shares of Common Stock underlying Public Warrants
and 66,667 shares underlying December 1996 Warrants) owned by Woodland
Partners, a New York general partnership of which Mr. Rubenstein is a
partner. Also includes 36,334 shares of Common Stock (including 33,334
shares of Common Stock underlying December 1996 Warrants) owned by the
Woodland Venture Fund, a New York limited partnership of which Mr.
Rubenstein is a general partner. Also includes 33,334 shares of Common Stock
underlying December 1996 Warrants owned by Seneca Ventures, a New York
limited partnership of which Mr. Rubenstein is a general partner. Also
includes 313,333 and 20,000 shares of Common Stock underlying December 1996
Warrants owned by Wheatley and Wheatley Foreign, respectively. Also includes
235,000 and 15,000 shares of Common Stock underlying Public Warrants owned
by Wheatley and Wheatley Foreign, respectively. Mr. Rubenstein is a member
and officer of Wheatley Partners LLC, a Delaware limited liability company
which is the general partner of Wheatley, and also a general partner of
Wheatley Foreign. Mr. Rubenstein disclaims beneficial ownership of the
securities owned by Woodland Partners, Woodland Venture Fund, Seneca
Ventures, Wheatley and Wheatley Foreign except to the extent of his equity
interest therein. Also includes 18,057 shares of Common Stock owned
individually by Barry Rubenstein, 13,334 shares of Common Stock held in his
IRA Rollover account, 18,057 shares of Common Stock underlying Public
Warrants and 58,334 shares issuable upon exercise of currently exercisable
options.
(13) Includes 16,667 shares issuable upon exercise of currently exercisable
options and 5,834 shares of Common Stock underlying Public Warrants. Mr.
Silverstein was an executive officer of the Company until May 1996. Pursuant
to the terms of Mr. Silverstein's termination agreement, the Company agreed
to pay him an aggregate of $150,000 of severance payments over a 12-month
period commencing in March 1997.
(14) Does not include shares held in Whale's trading account. Includes (i)
33,334 shares underlying warrants issued to Whale in consideration of
certain investment banking services rendered to the Company, (ii) 50,000
shares underlying December 1996 Warrants issued to Whale in connection with
the December 1996 Private Placement, (iii) 20,000 shares of Common Stock and
May 1996 Warrants to purchase 40,000 shares of Common Stock issuable upon
exercise of a purchase option ("UPO") issued to Whale in connection with the
May 1996 Private Placement and (iv) 50,000 shares of Common Stock and 50,000
shares underlying Public Warrants issuable to Whale pursuant to the warrant
issued to Whale in connection with the Company's IPO ("Underwriter's
Warrant"). All of the shares underlying the UPO and the Underwriter's
Warrant are held in the name of Whale Securities Co., L.P. for the account
of its equity owners and certain of its employees, pending transferability
of such warrants pursuant to the rules of the National Association of
Securities Dealers, Inc.
(15) Includes 313,333 and 20,000 shares of Common Stock underlying December 1996
Warrants owned by Wheatley and Wheatley Foreign, respectively. Also includes
235,000 and 15,000 shares of Common Stock underlying Public Warrants owned
by Wheatley and Wheatley Foreign, respectively. Such entities are controlled
by Wheatley Partners LLC, a Delaware limited liability company which is the
general partner of Wheatley and a general partner of Wheatley Foreign. The
members and officers of Wheatley Partners LLC are Barry Rubenstein, Irwin
Lieber, Barry Fingerhut, Seth Lieber, Jonathan Lieber and Matthew Smith.
(16) Includes those shares of Common Stock deemed to be included in Messrs.
Finkel, Wasserson, Kaufman, Jack Tobin, Ptalis, Eisner and David Tobin's
respective beneficial ownership as described in notes 2, 3, 5, 6, 7, 8 and 9
above. Also includes 7,917 shares of Common Stock issuable upon exercise of
currently exercisable options held by Maria Bruzzese, Chief Financial
Officer of the Company. Also includes 334 shares of Common Stock and 334
shares underlying Public Warrants beneficially owned
57
<PAGE>
by Ms. Bruzzese. Does not include 5,418 shares underlying options granted to
Ms. Bruzzese, 1,667 of which vest in August 1997, 2,084 of which vest in
October 1997 and 1,667 of which vest in August 1998.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 35,000,000 shares of
Common Stock, $.01 par value per share, and 1,000,000 shares of Preferred Stock,
$.01 par value per share. Upon consummation of this Offering, there will be
outstanding 4,697,538 shares of Common Stock and no shares of Preferred Stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders, including the election of
directors. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election if they choose to do so. The Certificate of Incorporation
does not provide for cumulative voting for the election of directors. Holders of
Common Stock will be entitled to receive ratably such dividends, if any, as may
be declared from time to time by the Board of Directors out of funds legally
available therefor, and will be entitled to receive, pro rata, all assets of the
Company available for distribution to such holders upon liquidation. Holders of
Common Stock have no preemptive, subscription or redemption rights. All
outstanding shares of Common Stock are, and the Common Stock offered hereby,
upon issuance and sale, will be, fully paid and nonassessable.
PREFERRED STOCK
Pursuant to the Certificate of Incorporation, the Company is authorized to
issue "blank check" preferred stock, which may be issued from time to time in
one or more series upon authorization by the Company's Board of Directors. The
Board of Directors, without further approval of the stockholders, is authorized
to fix the dividend rights and terms, conversion rights, voting rights,
redemption rights and terms, liquidation preferences, and any other rights,
preferences, privileges and restrictions applicable to each series of preferred
stock. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes could, among
other things, adversely affect the voting power of the holders of Common Stock
and, under certain circumstances, make it more difficult for a third party to
gain control of the Company, discourage bids for the Company's Common Stock at a
premium or otherwise adversely affect the market price of the Common Stock.
PUBLIC WARRANTS
There are currently Public Warrants to purchase 1,230,560 shares of Common
Stock outstanding, excluding May 1996 Warrants to purchase 400,000 shares of
Common Stock referred to below. The Public Warrants, exercisable through
December 14, 1999, entitle the holders to purchase shares of Common Stock for
$12.00 per share, subject to adjustment in certain circumstances. The Public
Warrants are redeemable by the Company, with the consent of the underwriter of
its IPO, at any time, upon notice of not less than 30 days, at a nominal price,
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% (currently $22.50, subject to adjustment) of the then
effective exercise price of the Public Warrants.
OTHER WARRANTS
In connection with the May 1996 Private Placement, the Company issued May
1996 Warrants to purchase 400,000 shares of Common Stock. The May 1996 Warrants
are exercisable through December 14, 1999 to purchase shares of Common Stock for
$12.00 per share. The May 1996 Warrants are identical to the Public Warrants,
except that the May 1996 Warrants are not redeemable by the Company until such
58
<PAGE>
time that they are (i) registered for public sale under the Securities Act and
(ii) transferred by the original purchasers thereof.
In connection with its December 1996 Private Placement, the Company issued
1,066,667 December 1996 Warrants. Each December 1996 Warrant is exercisable
through November 27, 2001 to purchase one share of Common Stock for $7.50 per
share. In April 1997, an aggregate of 333,334 December 1996 warrants were
exercised by Wheatley and Wheatley Foreign.
CONVERTIBLE DEBENTURES
The Convertible Debentures are currently in the aggregate principal amount
of $2,624,750, are due and payable on June 23, 1999 and are secured by a first
lien on all of the assets of Global Link. The Convertible Debentures bear
interest at 6% per annum, payable on May 30th and November 30th of each year.
The Company has guaranteed the payment of principal and interest owed under the
Convertible Debentures. The principal amount of the Convertible Debentures is
convertible at the option of the holders at any time into shares of Common Stock
("Conversion Shares") at a conversion price of $9.264 per share. As of the date
of this Prospectus, an aggregate of $175,250 of such Convertible Debentures have
been converted into 18,918 shares of Common Stock. The Company may force the
conversion of the Convertible 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 at a price equal to or greater
than $12.00 per share; (ii) the Conversion Shares are the subject of an
effective registration statement under the Securities 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 $10.50 for 30 days prior to the consummation of the offering
referred to in (i); and (v) the lock-up agreements of the Convertible Debenture
holders are terminated. Global Link may prepay the Convertible Debentures,
subject to the holders' right to conversion, if the Conversion Shares are
registered under the Securities 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 Convertible Debentures are
terminated.
DECEMBER 1996 NOTES
In connection with the December 1996 Private Placement, the Company issued
an aggregate of $3,000,000 of December 1996 Notes. The December 1996 Notes are
payable on the earlier of (i) November 27, 1998 and (ii) the date on which the
Company undergoes a "change in control" in which any person other than an
officer, director or 5% stockholder on the date of the December 1996 Notes
acquires securities of the Company having 50% or more of the total voting power
of all of the Company's securities then outstanding ("Maturity Date"). No
interest will accrue on the December 1996 Notes unless such notes are not paid
on or prior to the Maturity Date, at which time the outstanding principal will
immediately begin to accrue interest at the rate of 12% per annum and the
principal amount outstanding and interest accrued thereon will become
convertible, at the option of the holders, into that number of shares of Common
Stock equal to the principal amount and interest being converted divided by the
lesser of (i) $6.00 and (ii) 80% of the average of the closing bid prices of the
Common Stock on the five trading days ending on the date immediately following
the date a holder elects to convert.
STATUTORY PROVISIONS AFFECTING STOCKHOLDERS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. Subject to certain exceptions, Section 203 prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
interested stockholder attained such status with the approval of the Board of
Directors or unless the business combination is
59
<PAGE>
approved in a prescribed manner. A "business combination" includes certain
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with his or her affiliates and
associates, owns, or within three years prior did own, 15% or more of the
corporation's voting stock. The statute could prohibit or delay mergers or other
takeover or change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.
TRANSFER AGENT, WARRANT AGENT AND REGISTRAR
The transfer agent, warrant agent and registrar for the Common Stock and
Public Warrants is Continental Stock Transfer & Trust Company, New York, New
York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 4,697,538 shares of
Common Stock outstanding, not including shares of Common Stock issuable upon
exercise of the Warrants or other outstanding options and warrants and the
conversion of the Convertible Debentures. All 2,500,000 shares of Common Stock
being offered hereby will be immediately tradeable without restriction or
further registration under the Securities Act. In addition, substantially all of
the currently outstanding shares of Common Stock have been or will be registered
for sale under the Securities Act or are eligible for sale under an exemption
therefrom. Additionally, as of the date of this Prospectus, the Company has
reserved an aggregate of 3,819,548 shares of Common Stock for issuance upon
exercise of the Warrants, other outstanding options and warrants and the
Representative's Purchase Option and conversion of the Convertible Debentures.
Sale of substantially all of the shares of Common Stock underlying such
securities has been registered under the Securities Act. The directors and
executive officers and certain principal stockholders of the Company holding, in
the aggregate, 1,068,519 shares of Common Stock and options or warrants to
purchase an aggregate of 1,054,768 shares of Common Stock, have agreed not to
sell or otherwise dispose of any of such shares for periods ranging from six to
twelve months from the date of this Prospectus without the prior written consent
of the Representative. The Representative may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements.
UNDERWRITING
The Underwriters named herein, for whom GKN Securities Corp. is acting as
representative ("Representative"), have severally agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase a total of shares of
Common Stock from the Company. The number of shares of Common Stock that each
Underwriter has agreed to purchase is set forth opposite its name:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- ---------------------
<S> <C>
GKN Securities Corp........................................................
Barington Capital Group, L.P...............................................
---
Total..................................................................
---
---
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to approval of certain legal matters by counsel to the Underwriters
and various other conditions precedent, and that the Underwriters are obligated
to purchase all the shares of Common Stock offered hereby (other than the shares
of Common Stock covered by the over-allotment option described below) if any are
purchased.
60
<PAGE>
The Representative has advised the Company that the Underwriters propose to
offer the shares of Common Stock to the public at the price set forth on the
cover page of this Prospectus and to certain dealers at those prices less a
concession not in excess of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain other dealers. After the Offering, the offering prices and other terms
may be changed by the Representative.
The Company has granted to the Underwriters an option, exercisable during
the 45-day period after the date of this Prospectus, to purchase from the
Company at the offering price set forth on the cover page of this Prospectus,
less underwriting discounts and commissions, up to 375,000 additional shares of
Common Stock for the sole purpose of covering over-allotments, if any.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company also
has agreed to pay the Representative an expense allowance on a nonaccountable
basis equal to 3% of the gross proceeds derived from the sale of the shares of
Common Stock underwritten (including the sale of any shares of Common Stock
subject to the Underwriters' over-allotment option), $50,000 of which has been
paid to date.
In connection with the Offering, the Company has agreed to sell to the
Representative, for nominal consideration, the right to purchase up to an
aggregate of 250,000 shares of Common Stock ("Representative's Purchase
Option"). The Representative's Purchase Option is exercisable at $ per
share (155% of the offering price) for a period of four years commencing one
year from the date of this Prospectus. The Representative's Purchase Option
grants to the holders thereof certain "piggyback" and demand rights for periods
of seven and five years, respectively, from the date of this Prospectus with
respect to the registration under the Securities Act of the shares issuable upon
exercise of the Representative's Purchase Option. The Representative's Purchase
Option cannot be transferred, sold, assigned or hypothecated during the one year
period following the date of this Prospectus, except to officers of the
Representative and to Underwriters and selected dealers and their officers or
partners.
Pursuant to the Underwriting Agreement, the directors and executive officers
and certain principal stockholders of the Company holding, in the aggregate,
1,068,519 shares of Common Stock and options and warrants to purchase an
aggregate of 1,054,768 shares of Common Stock, have agreed not to sell or
otherwise dispose of any of such shares for periods ranging from six to twelve
months from the date of this Prospectus without the prior written consent of the
Representative. The Representative may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements. In addition, the Underwriting Agreement provides that, for a period
of five years from the date of this Prospectus, the Company will recommend and
use its best efforts to elect a designee of the Representative as a member of
the Board of Directors. Alternatively, the Representative will have the right to
send a representative to observe each meeting of the Board of Directors. The
Representative has not yet selected such designee or representative.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate short covering transactions and penalty bids in accordance with
Regulation M under the Exchange Act. Over-allotment involves sales by the
underwriting syndicate in excess of the offering size, which creates a syndicate
short position. Stabilizing transactions permit bids to purchase the shares of
Common Stock so long as the stabilizing bids do not exceed a specified maximum.
Syndicate short covering transactions involve purchases of the shares of Common
Stock in the open market after the distribution has been completed in order to
cover syndicate short positions. Penalty bids permit the Underwriters to reclaim
a selling concession from a selling group member when the shares of Common Stock
originally sold by such selling group member are repurchased in the open market
by the Underwriters. Such stabilizing transactions, syndicate short covering
transactions and penalty bids may cause the price of the shares of Common Stock
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on the Nasdaq SmallCap Market or otherwise
and, if commenced, may be discontinued at any time.
61
<PAGE>
In general, the rules of the Commission will prohibit the Underwriters from
making a market in the Common Stock during a "restricted period" commencing up
to five days prior to the pricing of the offering of Common Stock offered hereby
and extending until completion of the Offering. The Commission has, however,
adopted exceptions from these rules that permit passive market making under
certain conditions. These rules permit an underwriter to continue to make a
market subject to the conditions, among others, that its bid not exceed the
highest bid by a market maker not connected with the Offering and that its net
purchases on any one trading day not exceed prescribed limits. Pursuant to these
exemptions, the Underwriters, selling group members (if any) or their respective
affiliates may engage in passive market making in the Company's Common Stock
during the restricted period.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Graubard Mollen & Miller, New York, New York and for the Underwriters
by Robinson Brog Leinwand Greene Genovese & Gluck P.C., New York, New York.
Graubard Mollen & Miller received $50,000 of December 1996 Notes and 16,667
December 1996 Warrants in payment of certain legal fees and expenses. Graubard
Mollen & Miller represents GKN Securities Corp., the Representative of the
Underwriters, in other matters.
EXPERTS
The Consolidated Financial Statements and schedules of the Company as of
December 31, 1996 and 1995 and for each of the two years in the period ended
December 31, 1996 included in this Prospectus and elsewhere in the Registration
Statement have been audited by KPMG Peat Marwick LLP, independent public
accountants for the Company, as set forth in its reports thereon appearing
elsewhere herein, and are included in reliance upon such reports, given upon the
authority of such firm as experts in accounting and auditing.
62
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
Independent Auditors' Report....................................................... F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 and March 31, 1997....... F-3
Consolidated Statements of Operations for the years ended December 31, 1995 and
1996 and the three months ended March 31, 1996 and 1997.......................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1995 and 1996 and the three months ended March 31, 1997.......................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and
1996 and the three months ended March 31, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements......................................... F-7
GLOBAL LINK TELECO CORPORATION
Independent Auditors' Report....................................................... F-21
Balance Sheet at December 31, 1995................................................. F-22
Statement of Operations for the year ended December 31, 1995....................... F-23
Statement of Cash Flows for the year ended December 31, 1995....................... F-24
Statement of Stockholders' Equity for the year ended December 31, 1995............. F-25
Notes to Financial Statements...................................................... F-26
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
Pro Forma Statement of Operations for the year ended December 31, 1996............. F-36
Notes to Pro Forma Statement of Operations......................................... F-37
</TABLE>
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, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity 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, 1996 and
1995, 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
March 21, 1997, except for the second and third
paragraphs of note 15, as to which the dates are
April 18, 1997 and April 22, 1997, respectively
Philadelphia, Pennsylvania
F-2
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1997
----------------------------- --------------
1995 1996 (UNAUDITED)
------------- --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................................................. $ 928,516 $ 1,352,322 $ 235,618
Accounts receivable, less allowance for doubtful accounts of $165,000
and $399,000 in 1995 and 1996, and $502,700 at March 31, 1997,
respectively....................................................... 3,508,250 2,450,119 2,208,575
Inventory............................................................ 268,874 202,129 241,367
Deferred costs....................................................... 1,235,972 1,127,887 1,220,100
Convertible notes receivable......................................... 325,000 -- --
Note receivable...................................................... 237,000 -- --
Prepaid royalties and patent license fees............................ 292,911 95,396 70,876
Prepaid expenses and other current assets............................ 155,008 164,876 245,984
------------- -------------- --------------
Total current assets............................................. 6,951,531 5,392,729 4,222,520
------------- -------------- --------------
Goodwill, net (notes 3 and 13)......................................... -- 18,008,599 17,692,501
Fixed assets, net...................................................... 428,381 1,948,917 1,886,752
Deferred financing fees, net........................................... -- 270,219 301,530
Other assets........................................................... 102,052 198,901 187,355
------------- -------------- --------------
Total assets..................................................... $ 7,481,964 $ 25,819,365 $ 24,290,658
------------- -------------- --------------
------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... 1,819,813 3,238,666 3,688,810
Accrued liabilities.................................................. 491,488 542,965 733,957
Deferred revenues.................................................... 3,513,909 4,431,309 4,047,845
Estimated sales and excise tax liability (note 8).................... -- 1,684,478 1,986,348
Amounts payable to affiliate......................................... -- 1,073,921 954,628
Capital lease obligation, current.................................... -- 51,775 58,108
------------- -------------- --------------
Total current liabilities........................................ 5,825,210 11,023,114 11,469,696
------------- -------------- --------------
Capital lease obligation, long-term.................................. -- 42,002 23,565
Convertible notes payable.............................................. -- 2,800,000 2,693,500
Notes payable, net of unearned discount of $1,484,040 in 1996 and
$1,291,285 at March 31, 1997......................................... -- 1,565,960 1,758,715
------------- -------------- --------------
Total liabilities................................................ 5,825,210 15,431,076 15,945,476
------------- -------------- --------------
Commitments and contingencies (notes 8, 10 and 14)
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
and outstanding 1,047,226, 1,837,601 and 1,856,782 shares,
respectively....................................................... 10,472 18,376 18,568
Additional paid-in capital........................................... 7,329,729 22,990,766 23,301,014
Deferred compensation................................................ (197,165) (102,498) (180,357)
Accumulated deficit.................................................. (5,486,282) (12,406,504) (14,681,419)
Cumulative foreign currency translation adjustment................... -- (11,851) (12,624)
Common stock note receivable......................................... -- (100,000) (100,000)
------------- -------------- --------------
Total stockholders' equity............................................. 1,656,754 10,388,289 8,345,182
------------- -------------- --------------
Total liabilities and stockholders' equity............................. $ 7,481,964 $ 25,819,365 $ 24,290,658
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
---------------------------- ----------------------------
1995 1996 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net sales............................................ $ 3,144,350 $ 12,121,365 $ 1,327,710 $ 3,688,153
Cost of sales........................................ 2,892,580 8,066,315 1,013,556 2,855,357
------------- ------------- ------------- -------------
Gross profit..................................... 251,770 4,055,050 314,154 832,796
------------- ------------- ------------- -------------
Selling and marketing expenses....................... 1,332,348 3,355,778 515,282 778,663
General and administrative expenses.................. 2,041,010 5,883,858 848,980 1,586,144
Depreciation and amortization........................ 40,859 1,427,296 141,418 428,252
------------- ------------- ------------- -------------
Operating expenses............................... 3,414,217 10,666,932 1,505,680 2,793,059
------------- ------------- ------------- -------------
Operating loss................................... (3,162,447) (6,611,882) (1,191,526) (1,960,263)
Interest income...................................... 192,482 73,834 19,581 3,901
Interest expense..................................... -- (395,674) (17,226) (322,753)
Other................................................ 344 14,000 1,400 4,200
------------- ------------- ------------- -------------
Loss before income taxes......................... (2,969,621) (6,919,722) (1,187,771) (2,274,915)
------------- ------------- ------------- -------------
Income tax expense................................... 500 500 -- --
------------- ------------- ------------- -------------
Net loss......................................... (2,970,121) $ (6,920,222) $ (1,187,771) $ (2,274,915)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss per share................................... $ (2.84) $ (4.14) $ (.95) $ (1.23)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average shares of common stock.............. 1,047,226 1,670,755 1,254,830 1,847,786
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
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 1996
AND THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN TOTAL
COMMON STOCK ADDITIONAL COMMON CURRENCY STOCKHOLDER'S
---------------------- PAID-IN DEFERRED ACCUMULATED STOCK NOTE TRANSLATION EQUITY
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT RECEIVABLE ADJUSTMENT (DEFICIT)
--------- ----------- ----------- ------------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995................. 1,047,226 10,472 7,044,729 -- (2,516,161) -- -- 4,539,040
Deferred compensation
arising from grant of
stock options and
warrant.............. -- -- 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................. 1,047,226 10,472 7,329,729 (197,165) (5,486,282) -- -- 1,656,754
--------- ----------- ----------- ------------- ------------ ----------- ----------- -------------
Issuance of common
stock in connection
with merger.......... 590,375 5,904 11,033,584 -- -- (100,000) -- 10,939,488
Deferred compensation
arising from grant of
stock options and
warrants............. -- -- 400,000 (400,000) -- -- -- --
Issuance of common
stock and warrants... 200,000 2,000 2,609,569 -- -- -- -- 2,611,569
Issuance of warrants... -- -- 1,617,884 -- -- -- -- 1,617,884
Amortization of
deferred
compensation......... -- -- -- 494,667 -- -- -- 494,667
Foreign currency
translation
adjustment........... -- -- -- -- -- -- (11,851) (11,851)
Net loss for 1996...... -- -- -- -- (6,920,222) -- -- (6,920,222)
--------- ----------- ----------- ------------- ------------ ----------- ----------- -------------
Balance at December 31,
1996................. 1,837,601 18,376 22,990,766 (102,498) (12,406,504) (100,000) (11,851) 10,388,289
--------- ----------- ----------- ------------- ------------ ----------- ----------- -------------
Conversion of notes
payable
(unaudited).......... 11,496 115 104,303 -- -- -- -- 104,418
Employee exercise of
options
(unaudited).......... 555 6 4,368 -- -- -- -- 4,374
Deferred compensation
arising from grant of
stock options
(unaudited).......... -- -- 151,648 (151,648) -- -- -- --
Issuance of common
stock (unaudited).... 7,130 71 49,929 -- -- -- -- 50,000
Amortization of
deferred compensation
(unaudited).......... -- -- -- 73,789 -- -- -- 73,789
Foreign currency
translation
adjustment
(unaudited).......... -- -- -- -- -- -- (773) (773)
Net loss for period
(unaudited).......... -- -- -- -- (2,274,915) -- -- (2,274,915)
--------- ----------- ----------- ------------- ------------ ----------- ----------- -------------
Balance at March 31,
1997 (unaudited)..... 1,856,782 18,568 23,301,014 (180,357) (14,681,419) (100,000) (12,624) 8,345,182
--------- ----------- ----------- ------------- ------------ ----------- ----------- -------------
--------- ----------- ----------- ------------- ------------ ----------- ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------- ----------------------
1995 1996 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net loss..................................................... $(2,970,121) $(6,920,222) $(1,187,771) $(2,274,915)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................ 40,859 1,427,296 141,418 428,252
Amortization of deferred compensation........................ 87,835 494,667 98,667 73,789
Amortization of unearned discount............................ -- 58,004 -- 192,755
Amortization of deferred financing fees...................... -- 27,815 1,699 5,001
Write-off of convertible notes receivable and accrued
interest................................................... -- 343,000 -- --
Issuance of common stock as severance........................ -- -- -- 50,000
Loss on disposal of fixed assets............................. -- -- -- 19,912
Changes in operating assets and liabilities, net of effects of
acquisition (note 3):
Decrease (increase) in accounts receivable................... (1,608,333) 2,014,565 1,883,903 241,544
Decrease (increase) in inventory............................. (66,343) 76,745 (24,796) (39,238)
Decrease (increase) in deferred costs........................ (640,542) 108,085 (46,573) (92,213)
Decrease (increase) in prepaid royalties and patent license
fees....................................................... (163,566) 197,515 5,926 24,520
Decrease (increase) in prepaid expenses and other current
assets..................................................... (72,664) 34,321 12,096 (81,108)
Decrease (increase) in other assets.......................... (83,434) 33,755 (9) 11,546
Increase (decrease) in accounts payable...................... 1,206,426 (923,342) (319,765) 450,144
Increase (decrease) in accrued liabilities................... 31,844 (450,989) 134,813 190,992
Increase in sale and excise and tax liability................ -- 957,847 153,045 301,870
Increase (decrease) in deferred revenue...................... 916,806 (1,080,746) (74,688) (383,464)
---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities........ (3,321,233) (3,601,684) 777,965 (880,613)
---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchases of fixed assets.................................... (323,511) (347,983) (57,851) (69,901)
Convertible notes receivable................................. (325,000) -- -- --
Net cash acquired in acquisition............................. -- 160,190 54,190 --
Note receivable.............................................. (237,000) -- -- --
---------- ---------- ---------- ----------
Net cash used in investing activities...................... (885,511) (187,793) (3,661) (69,901)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants...... -- 2,611,569 -- --
Net proceeds from issuance of promissory notes and
warrants................................................... -- 2,850,000 -- --
Payment of notes payable to affiliate........................ -- (930,707) (550,000) (119,293)
Increase in notes receivable from Global Link prior to
merger..................................................... -- (250,655) (250,655) --
Payments on capital lease obligation......................... -- (55,073) -- (12,104)
Proceeds from exercise of options............................ -- -- -- 4,374
Increase in deferred financing fees.......................... -- -- -- (38,394)
---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities........ -- 4,225,134 (800,655) (165,417)
---------- ---------- ---------- ----------
Effects of exchange rate changes on cash................... -- (11,851) (2,657) (773)
---------- ---------- ---------- ----------
Net increase (decrease) in cash.......................... (4,206,744) 423,806 (29,008) (1,116,704)
Cash at beginning of period.................................... 5,135,260 928,516 928,516 1,352,322
---------- ---------- ---------- ----------
Cash at end of period.......................................... 928,516 1,352,322 899,508 235,618
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Supplemental disclosures:
Interest paid during the period.............................. -- 134,999 -- 9,328
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income taxes paid during the period.......................... 500 500 -- --
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Noncash investing and financing activities:
Issuance of Common Stock in connection with acquisition...... -- 11,039,488 11,039,488 --
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Capital lease obligations incurred to acquire fixed assets... -- 148,850 -- --
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Deferred compensation arising from grant of stock options and
warrants................................................... 285,000 400,000 400,000 151,648
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Issuance of notes payable in payment of certain legal fees... -- 50,000 -- --
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Issuance of notes payable and warrants in connection with
private placement (note 4)................................. -- 1,617,884 -- --
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Exchange of notes receivable for fixed assets................ -- 64,000 -- --
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Conversion of convertible notes payable to common stock...... -- -- -- 106,500
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(1) 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
services through its switching facilities and long distance network
arrangements.
The majority of the Company's customers are retail establishments,
distributors and businesses which sell the phone cards to the ultimate user, or
which acquire the Company's phone cards to promote their business or products.
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
after issuance or six to twelve months after last use. The Company records the
net sales price as deferred revenue when cards are sold and recognizes revenue
as the ultimate consumer utilizes calling time or, in the case of promotional
phone card programs, during the period the program is executed. Deferred revenue
relating to unused calling time remaining at each card's expiration is
recognized as revenue upon the expiration of such card. Agent discounts are
recorded as a reduction of gross revenue.
The Company's primary costs of its prepaid phone cards include the cost of
long distance carrier services and the production of the cards. The cost of
production of the card and any prepaid long distance carrier costs are included
in deferred costs and expensed when the related revenue is recognized. Research
and development costs are expensed as incurred.
(B) INVENTORY
Inventory consists of phone card production and packaging costs and is
stated at the lower of cost or market, with cost determined using the average
cost method.
(C) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets.
Expenditures for maintenance and repairs are charged to operations as incurred.
The estimated useful lives used in computing depreciation of property and
equipment are as follows:
<TABLE>
<S> <C>
Furniture and fixtures........................................ 7 years
Machinery and equipment....................................... 7 to 10
years
Computers and office equipment................................ 5 years
Vehicles...................................................... 5 years
</TABLE>
Leasehold improvements are amortized over the lives of the respective leases
or the useful life of the improvements, whichever is shorter.
F-7
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) GOODWILL
Goodwill represents the unamortized excess of the cost over the fair values
of the net assets acquired in the Global Link acquisition (see note 3 for a
description of the acquisition). Amortization expense of $1,060,501 for the year
ended December 31, 1996 and $316,098 for the three months ended March 31, 1997
was computed by using the straight-line method over 15 years. The Company
periodically reviews goodwill to assess recoverability and any impairment would
be charged to operations in the period in which such impairment becomes evident.
The Company's policy is to evaluate the recoverability of goodwill based on
forecasted undiscounted cash flows from operations (See note 13).
(E) DEFERRED FINANCING FEES
Deferred financing fees represent costs incurred in raising capital and are
included in other assets. Amortization of those costs to interest expense is
calculated using the interest method and totaled $27,815 and $5,001 for the year
ended December 31, 1996 and the three months ended March 31, 1997, respectively.
(F) 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.
(G) LOSS PER SHARE
Net loss per share is based on the weighted average number of shares of
common stock outstanding. Common stock equivalents were not included in the
calculation of weighted average common shares outstanding for the years ended
December 31, 1995 and 1996 and the three months ended March 31, 1996 and 1997
since their effect would be to decrease net loss per share.
(H) 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 (See note 13).
(I) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable and accounts payable approximate
fair value because of the short maturity of those items. The carrying amount of
the notes payable is significantly less than its face amount since it is
presented net of the unearned discount (See note 4).
F-8
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(J) FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's Canadian subsidiary 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 transactions
are included in income while translation adjustments resulting from translation
of financial statements are reported separately as a component of stockholders'
equity.
(K) STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense generally would be recorded on the date of grant
only if the current market price of the underlying stock exceeded the exercise
price of options granted. On January 1, 1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation, which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income and
pro forma earnings per share disclosures for employee stock option grants made
in 1995 and future years as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and adopt the pro forma disclosure provisions
of SFAS No. 123 (See note 11).
(L) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations or liquidity.
(M) OBLIGATIONS TO LONG DISTANCE CARRIERS
The Company has entered into carrier agreements or arrangements with certain
long distance carriers to provide its card users with access to long distance
service. The Company accrues for the cost of long distance services in the
period such services are rendered based on contract rates and call volumes per
traffic reports.
F-9
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(N) BUSINESS AND CREDIT CONCENTRATIONS
The majority of the Company's customers are retail establishments,
distributors and businesses which sell the phone cards to the ultimate user, or
which utilize the card to promote their business or products. For the year ended
December 31, 1996, the Company had three customers that accounted for
approximately 13%, 12% and 11% of net sales. For the year ended December 31,
1995, one customer accounted for approximately 18% of net sales.
(3) ACQUISITION
On February 29, 1996, pursuant to an Agreement and Plan of Merger dated
January 18, 1996, the Company through a wholly owned subsidiary acquired all the
issued and outstanding common stock of Global Link Teleco 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 have been
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 an affiliate.
The total cost of the acquisition was approximately $11,400,000 including direct
transaction costs of approximately $344,000.
The acquisition resulted in goodwill of $19,069,000, based on an allocation
of purchase price, calculated as follows:
<TABLE>
<S> <C>
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
----------
----------
</TABLE>
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.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31, 1996
---------------------------- -------------------
<S> <C> <C> <C>
1995 1996
------------- -------------
Net sales................................. $ 11,574,000 $ 13,484,000 $ 2,690,740
Net loss.................................. (7,822,000) (7,739,000) (2,007,017)
Net loss per share........................ $ (4.78) $ (4.38) $ (1.23)
</TABLE>
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.
F-10
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(3) ACQUISITION (CONTINUED)
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.
(4) FINANCING TRANSACTIONS AND DEBT OBLIGATIONS
In May 1996, the Company sold 200,000 shares of the Company's common stock
and warrants to purchase 400,000 shares of common stock through a private
placement for an aggregate of $3,000,000 (the "May Private Placement"). Costs of
issuance totaled $388,431 consisting principally of placement agent fees and
certain professional fees. Each warrant entitles the holder to purchase shares
of common stock at a price of $12.00 per share, subject to adjustment in certain
circumstances. The warrants are redeemable by the Company at any time upon
notice of not less than 30 days, 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, however, they are not redeemable by the Company
until the warrants are registered for sale and transferred by the original
purchasers. In connection with this private placement, the Company issued a
warrant to Whale Securities Co., L.P., the placement agent ("Whale") to purchase
through May 10, 2001, up to 20,000 shares of common stock and warrants to
purchase 40,000 shares of common stock for $15.00 per each share of common stock
and two warrants.
On December 20, 1996, the Company completed a private placement (the
"December Private Placement") from which the Company derived gross proceeds of
$3,000,000 through the sale of $3,000,000 of promissory notes and 1,000,000
common stock purchase warrants. Each warrant is exercisable at any time during
the period commencing March 1, 1997 and ending on November 27, 2001, at an
exercise price of $7.50 per share. The notes are payable on the earlier of
November 27, 1998 and the date on which the Company undergoes a change of
control. If the notes are not paid upon maturity, the outstanding principal will
begin to accrue interest at the rate of 12% per annum and the principal and
accrued interest will become convertible into common stock, at the option of the
holders. The estimated fair market value of the warrants, as determined by
independent appraisal, of $1,516,764 was recorded as a discount and is being
amortized over the term of the notes.
In connection with the December Private Placement, the Company paid Whale a
finders fee equal to $150,000 and delivered 50,000 warrants. The estimated fair
market value of these warrants of $75,840 along with the cash payment totaled
$225,840 and was recorded as deferred financing fees and are being amortized
over the term of the notes.
In addition, the Company issued $50,000 of notes and 16,667 warrants in
payment of certain legal fees. The estimated fair market value of the warrants
of $25,280 was recorded as a discount and is being amortized over the term of
the notes.
In connection with the Global Link acquisition, the Company assumed
$2,800,000 aggregate principal amount of convertible debentures. The convertible
debentures are due and payable on June 23, 1999 and are secured by a first lien
on all assets of Global Link. The convertible debentures bear interest at 6% per
annum, payable on May 30th and November 30th of each year. At the option of the
holders, the convertible debentures are immediately due and payable upon a
change in control of Global Link. The
F-11
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(4) FINANCING TRANSACTIONS AND DEBT OBLIGATIONS (CONTINUED)
principal amount of the convertible debentures is convertible at the option of
the holders at any time into shares of common stock at a conversion price of
$9.264 per share. The Company may force the conversion of the convertible
debentures if certain conditions are met. The Company has reserved 292,081
shares of common stock for issuance upon conversion of the debentures.
Certain of the Company's debt agreements contain provisions that prevent the
Company from declaring or paying dividends.
(5) FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------- ----------
<S> <C> <C> <C>
1995 1996 1997
--------- ---------- ----------
Furniture and fixtures................................... 166,546 404,918 404,918
Machinery and equipment.................................. 159,339 218,044 247,517
Computers and office equipment........................... 157,899 1,514,262 1,504,690
Leasehold improvements................................... 10,410 419,928 409,248
--------- ---------- ----------
494,194 2,557,152 2,566,373
Less accumulated depreciation............................ (65,813) (608,235) (679,621)
--------- ---------- ----------
428,381 1,948,917 1,886,752
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
(6) CONVERTIBLE NOTES RECEIVABLE AND NOTE RECEIVABLE
In March and May 1995, the Company advanced $200,000 and $125,000,
respectively, to Fone America, Inc. ("Fone") evidenced by convertible promissory
notes bearing interest at 10% per annum. The principal and accrued interest
thereon was due and payable on June 23, 1995 and July 14, 1995, respectively.
The Company has the option of converting any part of the principal into shares
of Fone's common stock on the basis of two shares for each $1.00 of principal.
Fone has also agreed that, at the Company's option, Fone will repay the notes by
allowing the Company to utilize services which Fone will provide. Such services
consist of access to Fone's switching platforms, the utilization of Fone's
network personnel and the sale and service of phone card vending machines.
During 1996, the Company obtained software with a fair market value of $64,000
as partial repayment of the notes. Although management intends to pursue the
collection of this receivable, in the fourth quarter of 1996 the Company wrote
off the note receivable and the remaining accrued interest thereon aggregating
$343,000 due to the uncertainty regarding its ultimate recoverability.
In November 1995, the Company advanced $237,000 to 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 3), the
guaranty was terminated.
F-12
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(7) AMOUNTS PAYABLE TO AFFILIATE
Simultaneously with the execution of the merger agreement, Global Link
executed an agreement with Peoples, a shareholder, pursuant to which Peoples
agreed to accept $1,050,000 ($550,000 of which was paid on the date of the
merger with the balance of $500,000 payable on June 28, 1996) and 17,602 shares
of GTS common stock in full satisfaction of any and all amounts owed by Global
Link to Peoples, except for $954,630 in trade payables (due in four equal
quarterly installments commencing in January 1997). In August 1996, the Company
and Peoples executed an agreement (the "First Amendment") whereby Peoples agreed
to restructure the payment terms of the remaining $500,000 as follows: $100,000
payable upon execution of the agreement and a monthly payment of $33,333
beginning in November 1996 until all amounts including accrued interest at 8%
per annum are paid.
In November 1996, the Company and Peoples executed an agreement (the "Second
Amendment") whereby Peoples agreed to restructure the payment terms of the
remaining principal balance of $366,667 at such date as follows: $187,731
payable upon execution of the agreement with the remaining balance of $178,936
plus accrued interest payable in three monthly installments beginning on
December 27, 1996. In addition, the agreement provides for certain prepayments
of the trade payable in the event the Company obtains additional financing or
the occurrence of any change of control.
In March 1997, the Company entered into an agreement with Peoples whereby
Peoples agreed not to sell or otherwise dispose of its shares of the Company's
common stock until June 30, 1997 ("Termination Date"). The Company agreed that
it would pay Peoples the balance of approximately $954,000 in trade payables
from the proceeds of the Company's proposed secondary offering (note 15) within
two days after the consummation of such offering ("Closing Date"). If the
offering is consummated before June 30, 1997, and the trade payables are paid
within two days, Peoples agreed to extend the Termination Date to the six month
anniversary of the Closing Date.
(8) TAX OBLIGATIONS AND COMPLIANCE
At December 31, 1996 and March 31, 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 sales and use, excise,
income or franchise tax returns in certain of the 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 compliance issues. Depending on the
ultimate resolution of these matters, it is reasonably possible that the amount
of reserve could require adjustment in the near term and the amount of such
adjustment could be material.
In the opinion of the Company's management, the Company is not subject to
"escheat" laws of various states pertaining to unclaimed payments or deposits.
Accordingly, no provision has been made in the accompanying financial statements
for potential escheat assessments.
F-13
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(9) INCOME TAXES
Income tax expense consists of the following for the years ended December
31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Current:
Federal....................................................................... -- --
State......................................................................... 500 500
--- ---
500 500
Deferred income tax............................................................. -- --
--- ---
500 500
--- ---
--- ---
</TABLE>
The actual income tax expense differs from the "expected" tax benefit for
1996 and 1995, computed by applying the U.S. Federal corporate tax rate of 34
percent to loss before income taxes, as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Computed "expected" tax benefit.................................... (2,352,705) (1,009,671)
Increase (reduction) in income taxes resulting from: state income
taxes, net of federal benefit.................................... 330 330
Increase in valuation allowance (net of effect of acquisition)..... 2,421,822 990,689
Other.............................................................. (68,947) 19,152
----------- -----------
500 500
----------- -----------
----------- -----------
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Benefit of net operating loss carryforward....................... 4,816,655 1,756,952
Capital loss carryforward........................................ 116,620 --
Allowance for uncollectible accounts receivable.................. 135,660 56,100
Deferred revenue................................................. 892,050 441,508
Deferred compensation............................................ 249,051 28,164
Sales and excise tax liability................................... 572,723 --
Less: valuation allowance........................................ (6,289,986) (1,836,280)
----------- -----------
Net deferred tax asset......................................... 492,773 446,444
Deferred tax liabilities:
Deferred costs................................................... (383,482) (420,230)
Depreciation on fixed assets..................................... (88,492) (16,113)
Other............................................................ (20,799) (10,101)
----------- -----------
Net deferred income taxes...................................... -- --
----------- -----------
----------- -----------
</TABLE>
F-14
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(9) INCOME TAXES (CONTINUED)
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
$6,289,986 at December 31, 1996.
At December 31, 1996, the Company had net operating loss carryforwards
("NOLs") aggregating approximately $14,167,000 expiring in years 2008 through
2011. Under Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), utilization of prior NOLs is limited after an ownership change, as
defined in such Section 382, to an amount equal to the value of the loss
corporation's outstanding stock immediately before the date of the ownership
change, multiplied by the federal long-term tax-exempt rate in effect during the
month that the ownership change occurred. As a result of the Company's
acquisition of Global Link, the Company is subject to limitations on the use of
its NOLs as provided under Section 382. Accordingly, there can be no assurance
that a significant amount of existing NOLs will be available to the Company.
(10) COMMITMENTS
(A) LEASES
The Company's future minimum annual rental commitments at December 31, 1996
under operating leases for various calling center locations, office space and
equipment are approximately as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1997.............................................................................. $ 534,000
1998.............................................................................. 398,000
1999.............................................................................. 348,000
2000.............................................................................. 228,000
2001 and thereafter............................................................... 117,000
</TABLE>
The Company has the right to terminate certain of the leases given
sufficient advance written notice. Rent expense for the year ended December 31,
1995 and 1996 and the three months ended March 31, 1996 and 1997 amounted to
approximately $115,236, $747,704, $98,945 and $189,028, respectively.
In addition, the Company leases space from an officer of the Company. The
lease, which is for a five year period beginning January 1, 1995, provides for
escalating rental payments throughout the term of the lease. The total future
commitment under the lease is $166,810. The Company also has the option to
extend the lease for five years. In addition to the rental, the Company pays for
improvements and maintenance relating to the leased property. The rent paid to
this officer for the year ended December 31, 1996 and the three months ended
March 31, 1997 amounted to $50,400 and $13,230, respectively.
F-15
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(10) COMMITMENTS (CONTINUED)
(B) EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with six officers of the
Company which provide for aggregate base salaries of $735,000 per annum. 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) CARRIER 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, 1996.
The Company is obligated to provide access to long distance telephone
services through its switching platforms for issued cards until those cards
expire. 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.
(D) LICENSE
In August 1995, the Company obtained a nonexclusive license from a third
party relating to various patents related to telecommunications processes. The
term of the license is through November 2011, when the last patent expires. The
Company is obligated to make minimum payments or $50,000 annually over the term
of the Agreement. Royalty expense amounted to approximately $13,020, $49,203,
$5,463 and $47,953 for the year ended December 31, 1995 and 1996, and the three
months ended March 31, 1996 and 1997, respectively.
(11) STOCK OPTIONS AND WARRANTS
The Company has reserved 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.
F-16
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(11) STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of activity under the 1994 Plan is as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- -----------------
<S> <C> <C>
Outstanding at January 1, 1995................................... 67,338 $ 15.00
Granted.......................................................... 102,008 $ 15.20
Canceled......................................................... (21,335) $ 15.00
---------
Outstanding at December 31, 1995................................. 148,011 $ 15.14
---------
Granted.......................................................... 69,014 $ 10.54
Canceled......................................................... (31,170) $ 15.33
---------
Outstanding at December 31, 1996................................. 185,855 $ 13.40
---------
---------
</TABLE>
At December 31, 1996, 143,653 options were exercisable and options to
purchase 314,145 shares were available for future grant.
NON-PLAN OPTIONS:
In October 1994, the Board of Directors granted to certain officers and/or
directors immediately exercisable ten-year options to purchase 25,000 shares of
common stock at an exercise price of $9.99 per share.
In March 1995, the Company granted non-qualified options to purchase 33,334
shares of common stock at an exercise price of $15.00 per share to an officer of
the Company. The options 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 2,500 shares of common
stock at an exercise price of $16.50 per share. Such options are immediately
exercisable and expire five years from date of grant.
In February 1996, the Company granted non-qualified options to purchase an
aggregate of 58,334 shares of common stock at an exercise price of $18.375 per
share to officers of the Company. The options will vest in three annual
installments commencing in February 1997 and will remain exercisable for a
period of five years from the date of vesting.
In connection with the merger, options and warrants to purchase 145,000
shares of common stock of Global Link were converted into options to purchase an
aggregate of 36,642 shares of the Company's common stock at exercise prices
ranging from $1.98 to $7.92. Options to purchase 32,852 shares of common stock
are currently exercisable. Such options expire at various dates through 2003.
At December 31, 1996, the weighted average remaining contractual life of the
outstanding options was 6.25 years and the weighted average exercise price of
exercisable options at December 31, 1996 and 1995 was $9.57 and $17.625,
respectively.
F-17
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(11) STOCK OPTIONS AND WARRANTS (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for stock options and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C> <C>
Net loss........................................ As reported $ (6,920,222) $ (2,970,121)
Pro forma (7,297,311) (3,099,721)
Net loss per share.............................. As reported $ (4.14) $ (2.84)
Pro forma $ (4.37) $ (2.96)
</TABLE>
The per share weighted-average fair value of stock options granted during
1996 and 1995 was $6.60 and $8.28 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
1996--expected dividend yield 0%, risk-free interest rate of 6.3%, expected life
of 6 years and volatility of 22%; 1995--expected dividend yield 0%, risk-free
interest rate of 7.0%, expected life of 7 years and volatility of 22%.
Pro forma net loss reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options vesting period and
compensation cost for options granted prior to January 1, 1995 is not
considered.
In connection with its initial public offering, the Company sold to the
underwriter for an aggregate of $150, warrants to purchase up to 50,000 shares
of common stock at a purchase price of $24.15 per share and/or 50,000 warrants
at a purchase price of $.483 per warrant. Such warrants being exercisable at
$12.00 per warrant through December 14, 1999.
In addition, the Company has 980,560 public warrants outstanding as of
December 31, 1996. Each public warrant entitles the holder to purchase one share
of common stock at a price of $12.00, subject to adjustment in certain
circumstances, at any time commencing June 14, 1995 through December 14, 1999.
The public warrants are redeemable by the Company at any time after becoming
exercisable, upon notice of not less than 30 days, at a price of $.30 per public
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
public warrants.
As of December 31, 1996, the Company has reserved an aggregate of 3,358,209
shares of common stock for issuance upon the exercise of options and warrants
and conversion of the convertible debentures (See note 4).
(12) DEFERRED COMPENSATION
(A) CONSULTING AGREEMENT
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 33,334
shares
F-18
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(12) DEFERRED COMPENSATION (CONTINUED)
of common stock at $14.25 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 has been fully amortized as
of February 1997.
In January 1997, the Company extended its consulting agreement with each of
the stockholders, pursuant to which the stockholders will provide consulting
services to the Company for a two-year period ending February 1999. As
consideration for these services, the Company issued options to purchase 25,000
shares of common stock at $9.00 per share to each stockholder. These options
became exercisable in February 1997 and remain exercisable until February 2002.
The estimated fair market value of these options of $151,648 was recorded as
deferred compensation and the Company has recorded compensation expense of
$18,957 for the three months ended March 31, 1997.
(B) WARRANTS
In April and October 1995, the Company issued five-year warrants to Whale to
purchase an aggregate of 33,334 shares of common stock at $15.00 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 amortized
$69,334 to expense as of March 31, 1997.
In January 1996, the Company issued five-year warrants to Whale and/or its
designees to purchase an aggregate of 66,667 shares of common stock at $15.375
per share in consideration for consulting services. The estimated fair market
value of these warrants of $400,000 was recorded as deferred compensation and
has been fully amortized as of March 31, 1997.
(C) EMPLOYMENT AGREEMENT
In connection with the termination of an employment agreement, the Company
entered into an arrangement with a former officer whereby the Company agreed to
pay the former officer $150,000 in 12 equal monthly installments without
interest commencing March 1997. The Company has accrued the total obligation of
$150,000 as of December 31, 1996.
(13) GOODWILL
During 1996, the Company experienced significant losses and negative cash
flow from operations, particularly in the last ten months of the year following
the Global Link acquisition. As a result, the Company assessed the
recoverability of goodwill as of December 31, 1996. In connection with its
assessment of recoverability management prepared and reviewed estimates of
future cash flows (undiscounted and without interest charges) and also
considered whether the 15 year amortization period originally assigned to the
goodwill remained appropriate as of the balance sheet date. The Company's
projections considered recent developments in the Company's business as well as
projected growth rates for the prepaid calling card industry obtained from
external sources. Based on this assessment, management concluded that no
impairment loss was required to be recognized as of December 31, 1996. In
addition, management concluded that the 15 year amortization period initially
selected at the time of the Global Link acquisition remains appropriate as of
December 31, 1996.
F-19
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(13) GOODWILL (CONTINUED)
The assessment of goodwill recoverability, which is heavily dependent on
projected financial information, and the goodwill amortization period are
significant accounting estimates as contemplated by the American Institute of
Certified Public Accountants' Statement of Position 94-6, "Disclosure of Certain
Significant Risks and Uncertainties." Further, the Company operates in an
industry which is rapidly evolving and extremely competitive. It is reasonably
possible that the Company's accounting estimates with respect to the useful life
and ultimate recoverability of goodwill could change in the near term and that
the effect of such changes on the financial statements could be material. While
management currently believes that the recorded amount of goodwill is not
impaired, there can be no assurance that the Company's future results will
confirm this assessment or that a significant write-down or write-off of
goodwill will not be required in the future.
(14) LIQUIDITY
As indicated in the accompanying financial statements, the Company incurred
a net loss of $6,920,222 in 1996 and is in a negative working capital position
of approximately $5,630,385 at December 31, 1996. Further, the Company is
delinquent on certain vendor obligations as of the balance sheet date.
Management's projections indicate that the Company anticipates that it will
continue to generate operating losses and negative cash flow at least through
1997. As such, the Company anticipates that it will need to raise additional
capital in 1997, in the form of debt or equity financing, in order to meet its
obligations as they come due. The Company currently intends to raise capital
during 1997, however, there can be no assurance that the Company will be
successful.
On March 14, 1997, the Company obtained a commitment from Wheatley Partners,
L.P. ("Wheatley"), an existing investor to infuse a minimum of $2.5 million of
additional equity capital into the Company by June 1, 1997 should the Company be
unable to raise at least this amount of capital from other sources. In the
opinion of management, the availability of committed financing from this
investor, as well as cash from other sources, such as the collection or
factoring of accounts receivable, will enable the Company to satisfy its
obligations through at least December 31, 1997.
(15) SUBSEQUENT EVENTS
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. 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.
In April 1997, the Company filed a registration statement on Form SB-2 with
the Securities and Exchange Commission for a secondary offering of securities.
The Company is attempting to raise approximately $18 million in gross proceeds.
Pursuant to an agreement with Wheatley, in April 1997, the Company received
$2,500,000 upon the exercise of warrants to purchase 333,334 shares of Common
Stock issued to Wheatley in a private placement consummated by the Company in
December 1996 (See Note 4 and 14). In consideration for exercising such
warrants, the Company issued to Wheatley warrants to purchase an aggregate of
250,000 shares of Common Stock.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Global Link Teleco Corporation:
We have audited the accompanying balance sheet of Global Link Teleco
Corporation as of December 31, 1995, and the related statements of operations,
shareholders' equity (deficit) and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As further discussed in note 12, the Company was acquired by Global
Telecommunication Solutions, Inc. on February 29, 1996.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Global Link Teleco
Corporation as of December 31, 1995 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
May 8, 1996
Philadelphia, Pennsylvania
F-21
<PAGE>
GLOBAL LINK TELECO CORPORATION
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
1995
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................................ $ 213,482
Accounts receivable, net of allowance for doubtful accounts of $120,147.......................... 1,137,562
Inventory........................................................................................ 97,000
Other current assets............................................................................. 38,675
-------------
Total current assets......................................................................... 1,486,719
Fixed assets, net.................................................................................. 1,352,177
Goodwill, net...................................................................................... 7,654,789
Other assets....................................................................................... 212,566
-------------
Total assets................................................................................. $ 10,706,251
-------------
-------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable to related party (notes 6 and 12)............................... 422,000
Trade accounts payable........................................................................... 2,203,336
Amounts payable to related parties............................................................... 477,338
Accrued interest to related party................................................................ 617,226
Deferred revenue................................................................................. 1,822,424
Estimated sales and excise tax related obligations (note 9)...................................... 620,000
Other current liabilities........................................................................ 589,706
-------------
Total current liabilities.................................................................... 6,752,030
Notes payable to related party..................................................................... 6,078,000
Senior convertible promissory notes payable........................................................ 2,800,000
-------------
Total liabilities............................................................................ 15,630,030
-------------
-------------
Commitments and contingencies (notes 9, 11 and 13)
Shareholders' equity (deficit):
Series A convertible cumulative preferred stock, $.0001 par value, 50,000 shares authorized, none
issued......................................................................................... --
Common stock, $.0001 par value, authorized 9,950,000 shares; 2,369,784 shares issued and
2,108,705 shares outstanding................................................................... 211
Additional paid-in capital....................................................................... 287,751
Accumulated deficit.............................................................................. (5,111,741)
Common stock subscription receivable............................................................. (100,000)
-------------
Total shareholders' equity (deficit)............................................................... (4,923,779)
-------------
Total liabilities and shareholders' equity (deficit)............................................... $ 10,706,251
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
GLOBAL LINK TELECO CORPORATION
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Net revenues.................................................................... $8,429,863
Cost of revenues................................................................ 5,870,963
----------
Gross profit.................................................................... 2,558,900
Sales and marketing expenses.................................................... 1,836,351
General and administrative expenses............................................. 3,893,620
Depreciation and amortization................................................... 757,590
----------
Operating loss.................................................................. (3,928,661)
Other income (expense):
Rental income................................................................. 19,600
Interest income............................................................... 29,540
Interest expense.............................................................. (683,880)
----------
Net loss........................................................................ $(4,563,401)
----------
----------
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
GLOBAL LINK TELECO CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Cash flows from operating activities:
<S> <C>
Net loss...................................................................... $(4,563,401)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................... 757,590
Changes in operating assets and liabilities, net of effects of 1995
acquisition (note 3):
Accounts receivable....................................................... (984,422)
Inventory................................................................. (72,000)
Other current assets...................................................... (15,904)
Other assets.............................................................. 83,814
Deferred revenue.......................................................... 1,822,424
Trade accounts payable and other current liabilities...................... 2,484,003
Estimated sales and excise tax obligations................................ 620,000
----------
Net cash provided by operating activities....................................... 132,104
----------
Cash flows from investing activities:
Purchase of property and equipment............................................ (954,115)
Acquisition of business....................................................... (1,000,000)
----------
Net cash used in investing activities........................................... (1,954,115)
Cash flows from financing activities:
Principal payment on notes payable to related party........................... (250,000)
Amounts payable to related party.............................................. 256,161
----------
Net cash provided by financing activities....................................... 6,161
----------
Decrease in cash and cash equivalents........................................... (1,815,850)
Cash and cash equivalents at beginning of period................................ 2,029,332
----------
Cash and cash equivalents at end of period...................................... $ 213,482
----------
----------
Supplemental disclosure of cash flow information Cash paid during the year for
interest...................................................................... $ 66,000
----------
----------
Refer to notes 3, 6, 7 and 8 for supplemental disclosures concerning certain
noncash investing and financing activities.
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
GLOBAL LINK TELECO CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL
---------------------- ------------------------ PAID-IN ACCUMULATED SUBSCRIPTIONS
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE
--------- ----------- --------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1994........................ 2,030,195 203 -- -- 130,739 (548,340) (100,000)
Shares issued in connection
with 1995 acquisition....... 339,589 8 -- -- 157,012 -- --
Shares reacquired from Peoples
(note 7).................... -- -- 261,079 -- -- -- --
Net loss...................... -- -- -- -- -- (4,563,401) --
--
--------- ----- --------- ----------- ------------ -------------
Balances at December 31,
1995........................ 2,369,784 $ 211 261,079 -- $ 287,751 (5,111,741) (100,000)
--
--
--------- ----- --------- ----------- ------------ -------------
--------- ----- --------- ----------- ------------ -------------
<CAPTION>
SHAREHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Balances at December 31,
1994........................ (517,398)
Shares issued in connection
with 1995 acquisition....... 157,020
Shares reacquired from Peoples
(note 7).................... --
Net loss...................... (4,563,401)
-------------
Balances at December 31,
1995........................ (4,923,779)
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
GLOBAL LINK TELECO CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
(1) NATURE OF OPERATIONS
Global Link Teleco Corporation ("Global Link" or the "Company") was
incorporated on March 28, 1994 as Phone Zone Teleco Corporation and subsequently
changed its name to Global Link Teleco Corporation on June 20, 1994. The Company
is engaged in designing, developing and marketing prepaid phone cards. The
Company sells the prepaid phone cards through retail telephone calling centers
located in the New York Metropolitan Area and Miami Beach as well as through
arrangements with various companies and individuals that market the Global Link
phone cards through distribution channels or via direct marketing to the public.
The Global Link phone cards provide inter-exchange and international
telecommunications alternatives to conventional phone service. The Company also
provides fax and photocopy service, wire transfers, money orders, mail box
rentals, and utility payment services at the retail calling centers.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company defines cash and
cash equivalents as those highly liquid investments purchased with an original
maturity date of three months or less.
REVENUE RECOGNITION
The Company records revenue from prepaid phone cards sold at its retail
calling centers when the calling time is utilized by the customer. Revenue from
ancillary services is recorded when the services are provided.
With respect to cards sold wholesale through third party agents at a
discount, the Company records deferred revenue at the time of the sale and
recognizes revenue as the ultimate customer utilizes calling time. Agent
discounts are recorded as a reduction of gross revenue.
INVENTORY
Inventory consists of phone card materials and is stated at the lower of
cost or market, with cost determined using the average cost method.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets.
Expenditures for maintenance and repairs are charged to operations as incurred.
The estimated useful lives used in computing depreciation of property and
equipment are as follows:
<TABLE>
<S> <C>
Furniture and fixtures........................................ 7 years
Machinery and equipment....................................... 7 to 10
years
Computers and office equipment................................ 5 years
Vehicles...................................................... 5 years
</TABLE>
Leasehold improvements are amortized over the lives of the respective leases
or the useful life of the improvements, whichever is shorter.
F-26
<PAGE>
GLOBAL LINK TELECO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill represents the unamortized excess of the cost over the fair values
of the net assets acquired (see note 3 for a description of acquisitions).
Amortization expense of $434,339 for the year ended December 31, 1995 is
computed by using the straight-line method over periods ranging from 15 to 20
years. The Company periodically reviews goodwill to assess recoverability and
any impairment would be charged to operations in the period in which such
impairment becomes evident.
OTHER INTANGIBLES
Other intangibles included in other assets included a license fee and
technical service agreement which were being amortized over 25 years and one
year, respectively. Amortization expense was $18,750 for the year ended December
31, 1995. During 1995 in connection with the 1995 purchase agreement discussed
in note 3, the license fee was reclassified to goodwill. The technical service
agreement was fully amortized in 1995.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Recognition is subject to a valuation allowance if it is more likely than
not that some or all of a deferred tax asset will not be realized.
DEFERRED FINANCING FEES
Deferred financing fees are amortized, using the interest method, and are
included in other assets. Amortization of these costs is classified as interest
expense and totaled $19,801 for the year ended December 31, 1995.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable, and
accounts payable approximates fair value due to the short maturity of these
instruments.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the recorded amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
CONCENTRATION OF RISK
Currently the Company utilizes two principal suppliers of long distance
telephone service. While the Company believes that there are alternate
suppliers, there is no guarantee that the Company will be able to secure the
same rates as currently contracted in the event the relationship with one or
both suppliers is
F-27
<PAGE>
GLOBAL LINK TELECO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
terminated. Recorded amounts due to these suppliers totaled $1,699,475 at
December 31, 1995. (See also note 11--Carrier Billing Dispute).
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,
(SFAS 121) was issued in March 1995. SFAS 121 requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company has not
yet evaluated how SFAS 121 will impact its financial statements.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) was issued in October 1995. SFAS 123 gives
companies the option to adopt the fair value method for expense recognition of
employee stock options and stock based awards or to continue to account for such
items using the intrinsic value method as outlined under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25) with
pro forma disclosures of net income and net income per share as if the fair
value method had been applied. The Company intends to continue to apply APB 25
for future stock options and stock based awards, and, accordingly, does not
anticipate that the adoption of SFAS 123 will have a material impact on its
results of operations or financial position.
The Company plans to adopt both SFAS 121 and 123 effective January 1, 1996.
(3) ACQUISITIONS
1994 PURCHASE AGREEMENT
Pursuant to an Asset Purchase and License Agreement dated March 31, 1994
between the Company and Peoples Telephone Company, Inc. (Peoples), the Company
purchased two retail calling centers and an exclusive license to open and
operate retail calling stores in the United States which sell the Global Link
prepaid calling cards for $2.5 million plus 167,361 shares of common stock
equivalent to 10% of the issued and outstanding common stock of the Company on a
fully diluted basis. Such shares were obtained from existing stockholders and
were valued upon issuance to Peoples at $.15 per share for a total of
approximately $26,000. Including acquisition costs, the purchase price of
approximately $2,550,000 was allocated to the fair value of assets acquired
which included fixed assets ($150,000), the license fee ($100,000) and other
assets ($120,000), with the remainder allocated to goodwill, which is being
amortized over twenty years.
As further described in note 12, Peoples and the Company entered into an
agreement in February of 1996 which significantly reduced Global Link's
obligations to Peoples.
1995 PURCHASE AGREEMENT
Pursuant to an asset purchase agreement dated February 15, 1995 between the
Company and Peoples, the Company purchased certain assets of Peoples' remaining
prepaid phone card division for $6,250,000 plus common stock equal to 9.99% of
the issued and outstanding capital stock (see also note 7--Treasury
F-28
<PAGE>
GLOBAL LINK TELECO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
(3) ACQUISITIONS (CONTINUED)
Stock). The purchase price consisted of $1,000,000 in cash, an 8-1/2% promissory
note for $5,250,000 and 78,510 shares of common stock valued at $2 per share.
The promissory note is payable in full in three years with interest payable
quarterly.
The purchase price of $6,407,020 was allocated to the fair value of assets
acquired which included inventory ($25,000), fixed assets ($433,606), with the
remainder allocated to goodwill, which is being amortized over 15 years.
The Company also obtained a noncompete agreement from Peoples for the period
covered by the term of the promissory note and for a period of three years
following the date of scheduled full payment of such note. In addition, the
Company agreed to prepay $250,000 of a promissory note related to the 1994
purchase agreement with Peoples (see note 6).
Peoples also agreed to allow the Company to utilize and come under its
existing Federal Communications Commission ("FCC") and state licenses for such
time as may be reasonably necessary.
As further described in note 12, Peoples and the Company entered into an
agreement in February of 1996 which significantly reduced Global Link's
obligations to Peoples.
(4) RELATED PARTY TRANSACTIONS
The Company had an agreement to purchase telecommunications services
exclusively from Peoples from April 1, 1994 to February 15, 1995, the date of
the 1995 purchase agreement. Peoples paid the transmission costs of all calls
and provided 24-hour customer service. The Company paid to Peoples an amount
ranging from 55-60 percent of the price charged to its customers. In addition to
providing inter-exchange and international service to the Company, Peoples was
responsible for the installation and maintenance of the telephone lines in all
of the Company's telephone calling centers. The Company recorded $305,485 and
$733,486 of expense related to this agreement for the year ended December 31,
1995 and from inception to December 31, 1994, respectively.
Amounts payable to related parties also include $237,000 at December 31,
1995, due to Global Telecommunication Solutions, Inc. ("GTS"). This amount was
provided as a bridge financing on a noninterest-bearing basis pending closure of
the transaction described in note 12.
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1995:
<TABLE>
<S> <C>
Furniture and fixtures.......................................... $ 274,992
Machinery and equipment......................................... 12,700
Computers and office equipment.................................. 712,478
Vehicles........................................................ 26,057
Leasehold improvements.......................................... 543,153
---------
1,569,380
Less accumulated depreciation................................... 217,203
---------
$1,352,177
---------
---------
</TABLE>
F-29
<PAGE>
GLOBAL LINK TELECO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
(6) DEBT
NOTES PAYABLE TO RELATED PARTY
In connection with the 1994 purchase agreement with Peoples described in
note 3, the Company issued (a) a five-year promissory note in the amount of
$1,900,000 with principal and interest (at 8%) payable semi-annually through
December 31, 1998, (b) a noninterest-bearing note payable of $500,000 due in 90
days, and (c) a promissory note in the amount of $100,000 with principal and
interest (at 8%) payable semi-annually through December 31, 1998 in
consideration for the exclusive license granted. The Company made principal
payments of $400,000, $500,000, and $100,000, respectively, on these notes
during 1994. The Company elected to pay the $100,000 note in full during 1994 as
permitted by the provisions of the note. During 1995 the Company made a $250,000
principal payment on the $1,900,000 note.
In connection with the 1995 purchase agreement with Peoples described in
note 3, the Company issued a three year promissory note in the amount of
$5,250,000 with interest (at 8.5%) payable annually through 1998. No principal
payments have been made on this note.
At December 31, 1995, the notes are secured by substantially all of the
assets of the Company. In the event of default on the notes issued in relation
to the 1994 Peoples acquisition, as described in the asset purchase and license
agreement, Peoples has the right to assume possession of all calling centers and
the Company would be subject to early termination fees.
In February of 1996, the Peoples notes were adjusted; see note 12.
SENIOR CONVERTIBLE PROMISSORY NOTES PAYABLE
Through private placement offerings in June of 1994, the Company issued a
total of $2.8 million of 6% secured promissory notes ("Securities"). Each
Security matures in full on the fifth anniversary of issuance, is convertible at
$2.00 per share into shares of common stock, subject to certain anti-dilution
provisions, or, under certain circumstances, is convertible into cumulative
redeemable preferred stock of the Company, and may be redeemed after the second
year at varying prices. Interest is payable semi-annually on May 31 and November
30. The agreement contains certain covenants including restrictions on dividend
payments. The agreement also provides that the stockholders have certain
registration rights with respect to shares of common stock issued or issuable to
them.
At December 31, 1995, the Securities are secured by the assets of the
Company in accordance with the provisions of the Security Agreement, subject to
the security interest of Peoples. Additionally, in the event of a change in
control of the Company, the holders of the Securities are entitled to redemption
of the Securities up to 110% of the original principal amount depending upon the
date of redemption (see note 12).
At December 31, 1995, the Company was in default on the November 30, 1995
interest payment amounting to $85,095 which was waived by the noteholders in
1996 (see note 12). In March of 1996, the Company paid $550,000 of the principal
payments due in 1996.
Based on the revised Peoples agreement discussed in note 12, the Company is
required to pay $1,050,000 in principal payments on long-term debt in 1996 and
$2,800,000 in 1999, unless the Securities are converted (see note 12).
F-30
<PAGE>
GLOBAL LINK TELECO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
(7) SHAREHOLDERS' EQUITY
RECENT TRANSACTIONS
In connection with the 1995 purchase agreement with Peoples described in
note 3, the Company issued 78,510 shares of common stock (net) valued at $2 per
share.
COMMON STOCK SUBSCRIPTIONS RECEIVABLE
In connection with the purchase of 353,391 shares of common stock by an
officer of the Company, the Company received a $58,602 three-year promissory
note with interest payable on the outstanding principal amount at the annual
rate of 5%. Additionally, in consideration for the purchase of 249,612 shares of
common stock by this officer, the Company received $41,398 in the form of a
three-year promissory note with interest payable on the outstanding principal
amount at the rate of 5%. The officer's right to purchase this stock vests over
a four-year period. No payments have been made on this subscription receivable
as of December 31, 1995.
TREASURY STOCK
At December 31, 1995, the Company holds 261,079 shares of treasury stock at
a zero cost basis. Such shares were issued to Peoples in connection with the
1995 purchase agreement but returned to the Company in May of 1995 based on
Peoples' desire to limit their equity ownership in the Company to less than 20%.
STOCK OPTIONS AND STOCK COMPENSATION
During 1995, the Company granted options to two employees to purchase 45,000
shares of the Company's common stock at $2 per share. Options to purchase 14,999
shares vested in 1995; the remaining options vest ratably in 1996 and 1997.
Pursuant to employment agreements with two key employees, the Company
granted options in 1994 to purchase 100,000 shares of the Company's common stock
at $.50 per share for 50,000 shares and at $2 per share for 50,000 shares.
Management believes the fair market value of the shares at the date these
options were granted was $.15 per share. Options to purchase 80,000 of the
100,000 shares vested in 1994; the remaining options vest on January 1, 1996. At
December 31, 1995, none of these options have been exercised.
The Company also issued 24,000 shares of common stock in 1994 to certain
employees. Management believes the fair market value of such stock was $.15 per
share and, accordingly, compensation expense was recorded in connection with
this transaction.
(8) WARRANTS
During 1995, each holder of the senior promissory notes payable described in
note 6 was granted 250 common stock purchase warrants for the purchase of shares
of the Company's common stock at an exercise price of $6.00 per share,
exercisable for a period of five years from February 15, 1995 for each $25,000
of original principal amounts of notes held. A total of 28,000 warrants were
issued. Each warrant is callable at the Company's option at par value on or
after the date the common stock market price is $7.25 or more per share and
contains anti-dilution provision. The options were granted as an inducement for
the
F-31
<PAGE>
GLOBAL LINK TELECO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
(8) WARRANTS (CONTINUED)
noteholders to sign the necessary consent and waivers related to the 1995
Peoples purchase agreement. No value was assigned to these warrants since the
exercise price significantly exceeded the estimated fair value of the Company's
common stock as of the date of issuance.
(9) TAX OBLIGATIONS AND COMPLIANCE
At December 31, 1995, the Company is delinquent in remitting certain amounts
previously collected for sales, use, and excise taxes to various taxing
jurisdictions. Further, the Company has not filed sales and use, excise, income
or franchise tax returns in any of the jurisdictions in which it does business
since the inception of its operations. Management is in the process of reviewing
the Company's tax collection, remittance and compliance policies and procedures
and has recorded a reserve for estimated tax obligations and related compliance
issues. Depending on the ultimate resolution of these matters, it is reasonably
possible that the amount of this reserve could require adjustment in the near
term and the amount of such adjustment could be material.
(10) INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Deferred revenue............................................... $ 619,624
Sales/excise tax obligations................................... 210,800
Bed debt reserve............................................... 40,850
Tax loss carryforwards......................................... 845,306
---------
Total gross deferred tax asset................................... 1,716,580
Less valuation allowance......................................... (1,674,078)
---------
Net deferred tax asset........................................... 42,502
---------
Deferred tax liabilities:
Depreciable assets, including goodwill......................... (42,502)
---------
Total deferred tax liabilities................................... (42,502)
---------
Net deferred taxes............................................... $ --
---------
---------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will be realized. The ultimate realization of the deferred tax asset is
dependent upon the generation of future taxable income during the periods in
which temporary differences or net operating loss carryforwards become
deductible. Management considers scheduled reversals of deferred tax
liabilities, projected future taxable income, and tax planning strategies which
can be implemented by the Company in making this assessment. Based upon the
Company's operating loss and scheduled reversal of deferred tax liabilities, the
Company has established a valuation allowance. The net change in the valuation
allowance for the year ended December 31, 1995 was an increase of $1,504,078.
The Company's tax operating loss carryforward of approximately $4,985,000
expires in the year 2010. If certain substantial changes in the Company's
ownership should occur, there would be
F-32
<PAGE>
GLOBAL LINK TELECO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
(10) INCOME TAXES (CONTINUED)
an annual limitation on the amount of carryforwards which can be utilized and
some or all of the carryforwards could expire unutilized (see note 12).
(11) COMMITMENTS AND CONTINGENCIES
The Company's future minimum annual rental commitments at December 31, 1995
under operating leases for various calling center locations are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1996.............................................................................. $ 531,701
1997.............................................................................. 476,245
1998.............................................................................. 409,352
1999.............................................................................. 324,380
2000 and thereafter............................................................... $ 301,690
</TABLE>
The Company has the right to terminate certain of the leases given
sufficient advance written notice. Rent expense for the year ended December 31,
1995 amounted to approximately $504,949.
In addition, the Company leases space from an officer of the Company. The
lease, which is for a five year period beginning January 1, 1995, provides for
escalating rental payments throughout the term of the lease. The total future
commitment under this lease is $217,230. The Company also has the option to
extend the lease for five years. In addition to the rental, the Company pays for
improvements and maintenance relating to the leased property. The rent paid to
this officer for the year ended December 31, 1995 amounted to $48,000.
As of December 31, 1995, the Company has committed to acquire 350 Verifones
Tranz 330 terminals and PT 900 printers totaling $143,500, of which $70,926 was
paid in the first quarter of 1996.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain key
employees. The agreements provide for annual salaries, scheduled salary
increases, bonus compensation, life insurance coverage, options to purchase
shares of the Company's common stock, and severance benefits. The agreements are
for a two-year period and expire from April 1, 1996 to December 1, 1996, with
each agreement containing an automatic two-year extension provision, unless
either the Company or the employee provides the other party with prior written
notice.
In connection with the GTS Merger described in note 12, revised agreements
were executed between two key executives and GTS. The agreements have a term of
three years from the merger date. Salary commitments for the executives total
$870,000 over the term of these agreements.
CARRIER BILLING DISPUTE
As of December 31, 1995, a significant provider of telecommunication
services has billed the Company approximately $540,000 which is in dispute. The
Company has not recorded this amount as a liability in the accompanying
financial statements since management believes it was inappropriately
F-33
<PAGE>
GLOBAL LINK TELECO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
invoiced by the carrier and further believes that the Company is not obligated
to make these payments. The parties are presently in discussions regarding this
dispute.
LITIGATION
In August 1995, the Company was served with a claim in the amount of
approximately $330,000 for collection of invoices for alleged service rendered
to Peoples. In November 1995, Peoples and the Company received a letter alleging
breach of a Partnership Marketing Agreement dated October 22, 1993 between
plaintiffs and Peoples. This letter includes allegations against the Company and
its president for intentional and negligent business torts, with respect to,
among other things, the net assets associated with the sale of Peoples' prepaid
calling card division to the Company. This letter requests certain information
and an accounting regarding business and revenues alleged to be covered by such
partnership agreement, and threatens possible litigation, but does not quantify
any alleged damages.
In connection with the agreement discussed in note 12, Peoples has
indemnified the Company with respect to these claims.
The Company is also involved in various other legal actions incidental to
the conduct of its business. Management is contesting these cases vigorously and
believes it has meritorious defenses in each matter. Management does not believe
the ultimate outcome of these various legal actions will have a material effect
on the Company's financial condition, results of operations or working capital
requirements.
(12) SUBSEQUENT EVENT--MERGER
On February 29, 1996, the Company and GTS executed an agreement and plan of
merger ("Merger Agreement") pursuant to which the Company became a wholly-owned
subsidiary of GTS. In connection with the merger, GTS issued to the holders of
the Company's common stock approximately 1.7 million common shares based on an
exchange ratio of .64763 shares for each share of the Company's outstanding
common stock. Additionally, the outstanding options and warrants of the Company
automatically converted into the right to purchase GTS common stock at the rate
of .75811 shares of GTS common stock for each share of the Company's common
stock (with an exercise price of 1.32 times the original exercise price).
GTS guaranteed the payment of principal and interest on, and the costs of
collection of, the Company's senior convertible promissory notes payable in the
aggregate principal amount of $2,800,000. The holders of the Securities agreed
in the Amended and Restated Securities Purchase Agreement that the Securities
are convertible into an aggregate of 906,682 shares of GTS common stock.
Additionally, in accordance with the Consent and Waiver executed by the holders
of the Securities, the holders agreed to waive their right of redemption upon
the merger of the Company with another entity and also agreed to waive interest
payments for November 1995, May 1996, and November 1996 in exchange for 62,679
shares of GTS. The Company may require the conversion of the promissory notes
into GTS common stock or may prepay the promissory notes if certain criteria are
met.
In connection with the merger, the Company executed an agreement (Peoples
Agreement) with Peoples, pursuant to which Peoples has agreed to accept
$1,050,000 and 52,805 shares of GTS common stock in full satisfaction of any and
all amounts owed by the Company to Peoples as of the date of the Merger
Agreement, except for $954,630 owed by Global Link to Peoples. Peoples has
agreed that the
F-34
<PAGE>
GLOBAL LINK TELECO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
(12) SUBSEQUENT EVENT--MERGER (CONTINUED)
payment of the $954,630 can be made in four equal quarterly installments
commencing one year after the closing date of the Merger Agreement.
Peoples was also issued an additional 481,858 shares of Global Link's common
stock as follows: (1) 131,595 shares in consideration for Peoples'
indemnification of the Company in connection with certain litigation described
in note 11, and (2) 350,263 shares related to antidilution provisions of the
March 1994 and February 1995 purchase agreements between Peoples and the
Company.
The Company also agreed to lease space from Peoples for some of its
switching equipment and its customer service network at a monthly rate of
$2,500. This agreement is cancelable upon six months written notice. In
addition, the Company agreed to pay monthly recurring expenses of approximately
$11,743 for circuit and usage costs.
(13) LIQUIDITY
As indicated in the accompanying financial statements, the Company incurred
a net loss of $4.6 million in 1995 and is in a negative working capital position
of approximately $5.3 million at December 31, 1995. Management of GTS and the
Company plan to reduce operating costs and integrate the activities of the two
entities where practical. In addition, GTS plans to raise additional capital for
the combined business via a private placement transaction. GTS has stated its
intention to provide necessary capital to enable the Company to continue to
operate its business during 1996. Although there can be no assurance that
management will be successful in implementing its plans, the Company believes
that it will be able to generate sufficient cash from its operations, and
financial support from GTS, to enable it to satisfy its obligations in the
normal course of business during 1996.
F-35
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
The following pro forma combined statement of operations (unaudited) combines on
a purchase basis of accounting, the statements of operations of the Company and
Global Link for the year ended December 31, 1996. The pro forma statement of
operations gives effect to the acquisition of Global Link as if it occurred at
the beginning of the year.
The pro forma combined statement of operations is not necessarily indicative
of future operating results and should not be used as a forecast of future
operations. This pro forma statement of operations should be read in conjunction
with the notes to the pro forma statement of operations and the historical
financial statements of both companies. The Global Link Teleco Corporation
statement of operations includes the operating data for the period from January
1, 1996 to the date of the Merger.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996--UNAUDITED
-----------------------------------------------------------
GLOBAL GLOBAL LINK
TELECOMMUNICATION TELECO PRO FORMA
SOLUTIONS, INC. CORPORATION ADJUSTMENTS PRO FORMA
----------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Net sales.................................... $ 12,121,365 $ 1,363,030 -- $ 13,484,395
Cost of sales................................ 8,066,315 925,405 -- 8,991,720
----------------- ------------ ----------- -------------
Gross profit............................... 4,055,050 437,625 -- 4,492,675
----------------- ------------ ----------- -------------
Operating expenses........................... 10,666,932 1,090,957 134,090(a) 11,891,979
Operating loss............................... (6,611,882) (653,332) (134,090) (7,399,304)
Other income (expense):
Interest income............................ 73,834 255 -- 74,089
Interest expense........................... (395,674) (119,476) 84,597(b) (430,553)
Other...................................... 14,000 2,800 -- 16,800
----------------- ------------ ----------- -------------
Loss before income taxes................. (6,919,722) (769,753) (49,493) (7,738,968)
Provision for income taxes................... 500 -- -- 500
----------------- ------------ ----------- -------------
Net loss for period...................... (6,920,222) (769,753) (49,493) (7,739,468)
----------------- ------------ ----------- -------------
----------------- ------------ ----------- -------------
Net loss per share........................... $ (4.38)
Weighted average common shares outstanding... 1,765,925(c)
</TABLE>
F-36
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
DECEMBER 31, 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION
The acquisition of Global Link is accounted for as a purchase and, in
accordance with generally accepted accounting principles, the purchase price is
allocated to the assets and liabilities of Global Link based on their fair
values at the date of acquisition.
(2) PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
The pro forma combined financial statements of the Company and Global Link
give effect to the following pro forma adjustments and assumptions:
(a) To record the amortization of goodwill on a straight-line basis over
15 years and to eliminate amortization of the predecessor's goodwill.
(b) To eliminate interest expense on amounts due to Peoples Telephone
Company, Inc. ("Peoples"), which were adjusted as a result of an
agreement pursuant to which Peoples accepted $1,050,000 ($550,000 of
which was paid on the merger date and $500,000 plus interest at the
rate of 8% per annum) and 17,602 shares of the Company's Common Stock
in full satisfaction of all amounts due Peoples other than $954,630
of accounts payable. As a result of the agreement with Peoples,
Global Link reduced its liabilities and the goodwill associated with
the purchase from Peoples by approximately $5,053,000. No gain or
loss was recognized by Global Link with respect to this adjustment.
The total cost of the acquisition, including estimated acquisition
costs of $344,000 and the 17,602 shares, was approximately $11.4
million and resulted in goodwill of approximately $19.1 million.
(c) Represents the weighted average common shares for the period assuming
the 590,375 shares of the Company's Common Stock issued in connection
with the merger were issued on January 1, 1996.
F-37
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE
DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information........................... 3
Prospectus Summary.............................. 4
Risk Factors.................................... 10
Use of Proceeds................................. 17
Dividend Policy................................. 18
Price Range of Securities....................... 18
Capitalization.................................. 19
Dilution........................................ 20
Selected Consolidated Financial Data............ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 23
Business........................................ 30
Management...................................... 45
Certain Transactions............................ 52
Principal Stockholders.......................... 55
Description of Securities....................... 58
Shares Eligible for Future Sale................. 60
Underwriting.................................... 60
Legal Matters................................... 62
Experts......................................... 62
Index to Financial Statements................... F-1
</TABLE>
[LOGO]
GLOBAL
TELECOMMUNICATION
SOLUTIONS, INC.
2,500,000 SHARES OF COMMON STOCK
-------------
PROSPECTUS
-------------
GKN SECURITIES CORP.
BARINGTON CAPITAL GROUP, L.P.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of Delaware, as amended ("GCL"),
authorizes a Delaware corporation to indemnify its officers, directors,
employees and agents under certain circumstances against expenses and
liabilities incurred in legal proceedings involving such persons because of
their holding or having held such positions with the corporation and to purchase
and maintain insurance for such indemnification. The Company's By-Laws and
Article Sixth of its Certificate of Incorporation, as amended, substantively
provide that the Company indemnify its officers, directors, employees and agents
to the fullest extent permitted by Section 145 of the GCL.
Paragraph 7 of Section 102(b) of the GCL permits a Delaware corporation, by
so providing in its Certificate of Incorporation, to eliminate or limit the
personal liability of a director to the corporation for damages arising out of
certain alleged breaches of the director's duties to the corporation. The GCL,
however, provides that no such limitation of liability may affect a director's
liability with respect to any of the following: (i) for breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for unlawful payment of dividends or unlawful purchase
or redemption of its capital stock, or (iv) for any transaction from which the
director derived an improper personal benefit. Article Seventh of the Company's
Certificate of Incorporation, as amended, eliminates the personal liability of
the directors of the Company to the fullest extent permitted by Paragraph 7 of
Section 102(b) of the GCL.
ITEM 25. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION.
The Registrant estimates that expenses payable by it in connection with the
Offering described in this Registration Statement (other than the underwriting
discount and commissions and reasonable expense allowance) will be as follows:
<TABLE>
<S> <C>
SEC registration fee........................................... $ 7,636.37
NASD filing fee................................................ $ 3,020.00
Printing and engraving expenses................................ $100,000.00
Accounting fees and expenses................................... $150,000.00
Legal fees and expenses (other than Blue Sky).................. $200,000.00
Nasdaq and Boston Stock Exchange filing fees................... $12,500.00
Blue sky fees and expenses (including legal and filing fees)... $25,000.00
Miscellaneous.................................................. $51,843.63
----------
Total...................................................... $550,000.00
----------
----------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following securities were issued by the Company within the past three
years and were not registered under the Securities Act.
In October 1994, the Company granted ten-year nonplan options to purchase an
aggregate of 25,000 shares of Common Stock at an exercise price of $9.99 per
share to three individuals, 10,000 of which were granted to each of Shelly
Finkel, Chairman of the Board of the Company and Paul Silverstein, a former
officer and director of the Company and 5,000 of which were granted to James
Koplik, a stockholder of the Company. Each of the foregoing persons was an
accredited investor. The Company relied upon the
II-1
<PAGE>
exemption provided by Section 4(2) of the Securities Act as a transaction to a
limited number of investors which did not involve a public offering, general
solicitation or general advertisement.
In February 1995, in connection with their respective consulting agreements
with the Company, Barry Rubenstein and Eli Oxenhorn (both accredited investors)
each were granted options under the 1994 Plan to purchase 33,334 shares of
Common Stock at an exercise price of $14.25 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. In January 1997, in
connection with the extension of their respective consulting agreements, each of
Messrs. Rubenstein and Oxenhorn were granted options under the 1994 Plan to
purchase 25,000 shares of Common Stock at an exercise price of $9.00 per share
(the fair market value of the Common Stock on the date of grant). These options
became exercisable in February 1997 and remain exercisable until February 2002.
The Company relied upon the exemption provided by Section 4(2) of the Securities
Act as a transaction to a limited number of investors which did not involve a
public offering, general solicitation or general advertisement.
In March 1995, in connection with his employment with the Company, John
McCabe (an accredited investor) was granted nonplan options to purchase 33,334
shares of Common Stock at an exercise price of $15.00 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. The Company relied upon the
exemption provided by Section 4(2) of the Securities Act as a transaction to a
limited number of investors which did not involve a public offering, general
solicitation or general advertisement.
In March 1995, the Company granted to each director of the Company (all
accredited investors) immediately exercisable ten-year options under the 1994
Plan to purchase 3,334 shares of Common Stock at an exercise price of $15.75 per
share (the fair market value of the Common Stock on the date of grant). The
Company relied upon the exemption provided by Section 4(2) of the Securities Act
as a transaction to a limited number of investors which did not involve a public
offering, general solicitation or general advertisement.
In April 1995, in connection with consulting services rendered to the
Company, two individuals were granted options to purchase an aggregate of 2,500
shares of Common Stock at an exercise price of $16.50 per share (the fair market
value of the Common Stock on the date of grant). The Company relied upon the
exemption provided by Section 4(2) of the Securities Act as a transaction to a
limited number of investors which did not involve a public offering, general
solicitation or general advertisement.
In April 1995, the Company issued five-year warrants to a designee of Whale
Securities Co., L.P. ("Whale") to purchase 16,667 shares of Common Stock at an
exercise price of $15.00 per share (the fair market value of the Common Stock on
the date of grant) in consideration of Whale granting the Company the right of
first refusal to pursue any prospective acquisition target in the phone card
industry that Whale identifies prior to February 1998. In October 1995, the
Company issued five-year warrants to another designee of Whale to purchase
16,667 shares of Common Stock at an exercise price of $15.00 per share (the fair
market value of the Common Stock on the date of grant). In January 1996, the
Company issued five-year warrants to Whale to purchase 66,667 shares of Common
Stock at an exercise price of $15.375 per share (the fair market value of the
Common Stock on the date of grant) in consideration of consulting services
provided to the Company. The Company relied upon the exemption provided by
Section 4(2) of the Securities Act as a transaction to a limited number of
investors which did not involve a public offering, general solicitation or
general advertisement.
In February 1996, in connection with their employment with the Company,
Messrs. Gary J. Wasserson and David S. Tobin (both accredited investors), the
Company's Chief Executive Officer and General Counsel and Secretary,
respectively, were granted nonplan options to purchase 41,667 and 16,667 shares
of Common Stock, respectively, at an exercise price of $18.375 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
II-2
<PAGE>
February 1997 and will remain exercisable for a period of five years from the
date of vesting. The Company relied upon the exemption provided by Section 4(2)
of the Securities Act as a transaction to a limited number of investors which
did not involve a public offering, general solicitation or general
advertisement.
In connection with the acquisition of Global Link Teleco Corporation
("Global Link") in February 1996, the Company issued to the holders of Global
Link's common stock (all accredited investors) an aggregate of 572,773 shares of
the Company's Common Stock. In addition, outstanding options and warrants to
purchase 48,334 shares of common stock of Global Link were converted into
options to purchase 36,642 shares of Common Stock at exercise prices ranging
from $1.98 to $7.92 per share. The Company also issued to Peoples Telephone
Company, Inc. ("Peoples") (an accredited investor) an aggregate of 17,602 shares
of Common Stock in partial satisfaction of any and all monies owed by Global
Link to Peoples prior to the acquisition. In addition, warrants issued in
connection with the issuance of the convertible debentures ("Convertible
Debentures") to accredited investors were converted into warrants to purchase
7,085 shares of Common Stock, at an exercise price of $18.00 per share. The
Company relied upon the exemption provided by Section 4(2) of the Securities Act
as a transaction to a limited number of investors which did not involve a public
offering, general solicitation or general advertisement.
In March 1996, the Company granted to each director of the Company (all
accredited investors) immediately exercisable ten-year options under the 1994
Plan to purchase 3,334 shares of Common Stock at an exercise price of $17.625
per share (the fair market value of the Common Stock on the date of grant). The
Company relied upon the exemption provided by Section 4(2) of the Securities Act
as a transaction to a limited number of investors which did not involve a public
offering, general solicitation or general advertisement.
In May 1996, the Company consummated a $3,000,000 private placement ("May
1996 Private Placement") pursuant to which it issued to accredited investors an
aggregate of 200,000 shares of Common Stock and warrants to purchase 400,000
shares of Common Stock ("May 1996 Warrants"). The May 1996 Warrants are
exercisable through December 14, 1999 to purchase shares of Common Stock for
$12.00 per share. The Company relied upon the exemption provided by Section 4(2)
of the Securities Act as a transaction to a limited number of investors which
did not involve a public offering, general solicitation or general
advertisement.
In December 1996, the Company consummated a $3,000,000 private placement
("December 1996 Private Placement") pursuant to which it issued to accredited
investors an aggregate of 1,066,667 warrants ("December 1996 Warrants"),
including 50,000 December 1996 Warrants issued to Whale as a finder's fee and
16,667 December 1996 Warrants issued to Graubard Mollen & Miller, the Company's
general counsel, in payment of certain legal fees and expenses. The Company
relied upon the exemption provided by Section 4(2) of the Securities Act as a
transaction to a limited number of investors which did not involve a public
offering, general solicitation or general advertisement.
In January 1997, the Company issued 7,130 shares of Common Stock to a former
employee of the Company (an accredited investor) in accordance with the terms of
such employee's termination agreement with the Company. The Company relied upon
the exemption provided by Section 4(2) of the Securities Act as a transaction to
a limited number of investors which did not involve a public offering, general
solicitation or general advertisement.
As of June 13, 1997, the Company has issued an aggregate of 18,918 shares of
Common Stock to accredited investors upon conversion of $175,250 of Convertible
Debentures at a conversion price of $9.264 per share. The Convertible Debentures
are currently in the aggregate principal amount of $2,624,750. The Company
relied upon the exemption provided by Section 4(2) of the Securities Act as a
transaction to a limited number of investors which did not involve a public
offering, general solicitation or general advertisement.
II-3
<PAGE>
In April 1997, the Company issued to Wheatley and Wheatley Foreign (both
accredited investors) an aggegate of 333,334 shares of Common Stock upon their
exercise of 333,334 December 1996 Warrants and Public Warrants to purchase an
aggregate of 250,000 shares of Common Stock in consideration for Wheatley and
Wheatley Foreign agreeing to exercise such December 1996 Warrants at an exercise
price of $7.50 per share. The Company relied upon the exemption provided by
Section 4(2) of the Securities Act as transactions to a limited number of
investors which did not involve a public offering, general solicitation or
general advertisement.
As of June 13, 1997, options under the 1994 Plan to purchase an aggregate of
104,184 shares of Common Stock, with exercise prices ranging from $7.875 to
$18.00 per share, have been granted to the Company's employees and are
outstanding. The Company relied upon the exemption provided by Section 4(2) of
the Securities Act as transactions to a limited number of investors which did
not involve a public offering, general solicitation or general advertisement.
ITEM 27. EXHIBITS
(a) The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------
<C> <C> <S>
1.1 * Form of Underwriting Agreement
3.1 A Certificate of Incorporation
3.2 A Amendment to Certificate of Incorporation
3.3 H Amendment to Certificate of Incorporation
3.4 A By-Laws
3.5 C Certificate of Merger of Merger Sub into Global Link
4.1 A Form of Common Stock Certificate
4.2 A Form of Redeemable Warrant Certificate
4.3 A Warrant Agreement between the Company and Whale
4.4 A Underwriter's Warrant issued to Whale
4.5 D Placement Agent Warrant dated May 10, 1996 issued to Whale
4.6 F Warrant Agreement dated April 15, 1995 between the Company and Craig Shapiro
4.7 F Warrant Agreement dated October 26, 1995 between the Company and Frog Hollow Partners
4.8 F Warrant Agreement dated January 22, 1996 between Company and Whale
4.9 E Form of Subscription Agreement for December 1996 Private Placement
4.10 E Form of Warrant issued in the December 1996 Private Placement
4.11 E Form of Promissory Note issued in the December 1996 Private Placement
4.12 * Form of Representative's Purchase Option granted to GKN Securities Corp.
4.13 ** Form of Lock-up Agreement
5.1 ** Opinion of Graubard Mollen & Miller (including consent)
10.1 A Sublease for 342 Madison Avenue, New York, New York
10.2 A Sublease for additional space at 342 Madison Avenue, New York, New York
10.3 A Employment Agreement between the Company and Shelly Finkel
10.4 A Employment Agreement between the Company and Maria Bruzzese
10.5 A Stock Option Agreement between the Company and Shelly Finkel
10.6 A Stock Option Agreement between the Company and Paul Silverstein
10.7 A Stock Option Agreement between the Company and James Koplik
10.8 B Stock Option Agreement between the Company and John McCabe
10.9 A 1994 Performance Equity Plan
10.10 A Service Agreement between the Company and MCI Telecommunications Corporation
10.11 A Service Agreement between the Company and Sprint Corporation
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------
<C> <C> <S>
10.12 A Service Agreement between Independent Properties Sales Corporation ("IPSC") and Metromedia
Communications Corporation ("Metromedia," which was later acquired by WorldCom)
10.13 A Consent between IPSC and Metromedia allowing the assignment to the Company of IPSC's right
to receive services from Metromedia.
10.14 B Employment Agreement between the Company and John McCabe
10.15 B Consulting Agreement between the Company and Barry Rubenstein
10.16 B Consulting Agreement between the Company and Eli Oxenhorn
10.17 C Merger Agreement by and among the Company, Merger Sub and Global Link
10.18 C Directors Voting Agreement
10.19 C Peoples Agreement, together with the Company's Guaranty of Peoples Second Payment
10.20 C Ancillary Agreement between Global Link and Peoples regarding payment of the Peoples
Accounts Receivable, together with Holding Corp's Guaranty of such payment
10.21 C Amended and Restated Securities Purchase Agreement
10.22 C The Company's Guaranty of Debentures
10.23 C Employment Agreement between the Company and Gary Wasserson
10.24 C Employment Agreement between the Company and David Tobin
10.25 C Stock Option Agreement between the Company and Gary Wasserson
10.26 C Stock Option Agreement between the Company and David Tobin
10.27 A Sublease for space at 40 Elmont Road, Elmont, New York
10.28 D Form of Registration Rights Agreement for May 1996 Private Placement
10.29 D Agency Agreement between the Company and Whale for May 1996 Private Placement
10.30 D Placement Agent Warrant Agreement for May 1996 Private Placement
10.31 F Consulting Agreement dated January 22, 1996 between the Company and Whale
10.32 F First Amendment to Peoples Agreement, dated August 14, 1996
10.33 F Second Amendment to Peoples Agreement, dated November 27, 1996
10.34 E Finder's fee agreement between the Company and Whale relating to the December 1996 Private
Placement
10.35 G Extension of Consulting Agreement between the Company and Barry Rubenstein
10.36 G Extension of Consulting Agreement between the Company and Eli Oxenhorn
10.37 ** Agreement between the Company and Wheatley Partners, L.P., dated March 14, 1997
10.38 ** Amendment to agreement between the Company and Wheatley Partners, L.P., dated April 16,
1997
23.1 * Consent KPMG Peat Marwick LLP
23.2 ** Consent of Graubard Mollen & Miller (filed as part of Exhibit 5.1)
</TABLE>
- ------------------------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.
(A) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (No. 33-85998).
(B) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1994.
(C) Incorporated by reference to the Company's Current Report on Form 8-K, filed
with the Commission on March 15, 1996.
(D) Incorporated by reference to Post-Effective Amendment No. 2 to the Company's
Registration Statement on Form SB-2 on Form S-3 (No. 33-85998).
II-5
<PAGE>
(E) Incorporated by reference to the Company's Current Report on Form 8-K, filed
with the Commission on December 26, 1996.
(F) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-19005)
(G) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996
(H) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 1997.
ITEM 28. UNDERTAKINGS.
The undersigned Company hereby undertakes to:
(a) (1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) Include any additional or changed material information on the plan
of distribution. (2) For determining liability under the Securities Act,
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering. (3) File a post-effective amendment to
remove from registration any of the securities that remain unsold at the end
of the offering.
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the provisions referred to under Item 24 of
this Registration Statement, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or a controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of competent jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(f) (1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company under Rule 424(b)(1), or (4), or 497(h) under
the Securities Act as part of this Registration Statement as of the time the
Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of New
York, state of New York, on June 16, 1997.
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
BY: /S/ SHELLY FINKEL
-----------------------------------------
Shelly Finkel, CHAIRMAN OF THE BOARD
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates stated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ SHELLY FINKEL Chairman of the Board
- ------------------------------ June 16, 1997
Shelly Finkel
* Chief Executive Officer and
- ------------------------------ Director June 16, 1997
Gary Wasserson
* Director
- ------------------------------ June 16, 1997
Alan Kaufman
* Director
- ------------------------------ June 16, 1997
Jack Tobin
* Director
- ------------------------------ June 16, 1997
Donald Ptalis
* Chief Financial Officer
- ------------------------------ (and principal accounting June 16, 1997
Maria Bruzzese officer)
*By: /s/ SHELLY FINKEL
--------------------------------------
Shelly Finkel, AS ATTORNEY-IN-FACT
II-7
<PAGE>
UNDERWRITING AGREEMENT
between
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
and
GKN SECURITIES CORP.,
as Representative
Dated: June , 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEX OF DEFINITIONS........................................................ iv
1. Purchase and Sale of Securities.......................................... 1
1.1 Firm Securities................................................... 1
1.1.1 Purchase of Firm Securities................................. 1
1.1.2 Payment and Delivery........................................ 1
1.2 Over-Allotment Option............................................. 2
1.2.1 Option Securities........................................... 2
1.2.2 Exercise of Option.......................................... 2
1.2.3 Payment and Delivery........................................ 2
1.3 Representative's Purchase Option.................................. 2
1.3.1 Purchase Option............................................. 2
1.3.2 Payment and Delivery........................................ 3
2. Representations and Warranties of the Company............................ 3
2.1 Filing of Registration Statement.................................. 3
2.2 No Stop Orders, Etc............................................... 3
2.3 Disclosures in Registration Statement............................. 3
2.3.1 Securities Act and Exchange Act Representation.............. 3
2.3.2 Disclosure of Contracts..................................... 4
2.3.3 Prior Securities Transactions............................... 4
2.4 Changes After Dates in Registration Statement..................... 4
2.4.1 No Material Adverse Change ................................. 4
2.4.2 Recent Securities Transactions, Etc......................... 5
2.5 Independent Accountants........................................... 5
2.6 Financial Statements.............................................. 5
2.7 Authorized Capital; Options; Etc.................................. 5
2.8 Valid Issuance of Securities; Etc................................. 5
2.8.1 Outstanding Securities...................................... 5
2.8.2 Securities Sold Pursuant to this Agreement.................. 6
2.9 Registration Rights of Third Parties.............................. 6
2.10 Validity and Binding Effect of Agreements......................... 6
2.11 No Conflicts, Etc................................................. 6
2.12 No Defaults; Violations........................................... 7
2.13 Corporate Power; Licenses; Consents............................... 7
2.13.1 Conduct of Business...................................... 7
2.13.2 Transactions Contemplated Herein........................... 7
2.14 Title to Property; Insurance...................................... 8
2.15 Litigation; Governmental Proceedings.............................. 8
2.16 Good Standing..................................................... 8
2.17 Taxes............................................................. 8
2.18 Foreign Corrupt Practices Act..................................... 8
2.19 Nasdaq and The Boston Stock Exchange Eligibility.................. 9
2.20 Intangibles....................................................... 9
2.21 Relations With Employees.......................................... 9
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
2.21.1 Employee Matters........................................... 9
2.21.2 Employee Benefit Plans..................................... 9
2.22 Officers' Certificate............................................ 10
2.23 Subsidiaries..................................................... 10
3. Covenants of the Company................................................. 10
3.1 Amendments to Registration Statement............................. 10
3.2 Federal Securities Laws.......................................... 10
3.2.1 Compliance................................................. 10
3.2.2 Filing of Final Prospectus................................. 11
3.2.3 Exchange Act Registration.................................. 11
3.3 Blue Sky Filing.................................................. 11
3.4 Delivery to the Underwriters of Prospectuses..................... 11
3.5 Events Requiring Notice to the Representative.................... 11
3.6 Review of Financial Statements................................... 11
3.7 Reserved......................................................... 12
3.8 Secondary Market Trading and Standard & Poor's................... 12
3.9 Nasdaq and BSE Maintenance....................................... 12
3.10 Reserved......................................................... 12
3.11 Reserved......................................................... 12
3.12 Reports to the Representative and Others......................... 12
3.12.1 Periodic Reports, Etc..................................... 12
3.12.2 Transfer Sheets and Weekly Position Listings.............. 12
3.13 Representative's Purchase Option................................. 12
3.14 Reserved......................................................... 12
3.15 Payment of Expenses.............................................. 12
3.15.1 General Expenses.......................................... 12
3.15.2 Non-Accountable Expenses.................................. 13
3.16 Application of Net Proceeds...................................... 13
3.17 Delivery of Earnings Statements to Security Holders.............. 14
3.18 Key Person Life Insurance........................................ 14
3.19 Stabilization.................................................... 14
3.20 Internal Controls................................................ 14
3.21 Accountants and Lawyers.......................................... 14
3.22 Transfer Agent................................................... 14
4. Conditions of the Underwriters' Obligations............................. 14
4.1 Regulatory Matters............................................... 15
4.1.1 Effectiveness of Registration Statement.................... 15
4.1.2 NASD Clearance............................................. 15
4.1.3 No Blue Sky Stop Orders.................................... 15
4.2 Company Counsel Matters.......................................... 15
4.2.1 Effective Date Opinion of Counsel.......................... 15
4.2.2 Opinion of Trademark Counsel............................... 18
4.2.3 Opinion of FCC Counsel..................................... 19
4.2.4 Closing Date and Option Closing Date Opinions of Counsel... 19
4.2.5 Reliance................................................... 19
4.3 Cold Comfort Letter.............................................. 19
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
4.4 Officers' Certificates........................................... 20
4.4.1 Officers' Certificate...................................... 20
4.4.2 Secretary's Certificate.................................... 20
4.5 No Material Changes.............................................. 21
4.6 Delivery of Representative's Purchase Option..................... 21
4.7 Opinion of Counsel to the Underwriters........................... 21
4.8 Unaudited Financials............................................. 22
5. Indemnification......................................................... 22
5.1 Indemnification of the Underwriters.............................. 22
5.1.1 General.................................................... 22
5.1.2 Procedure.................................................. 22
5.2 Indemnification of the........................................... 23
5.3 Contribution..................................................... 23
5.3.1 Contribution Rights........................................ 23
5.3.2 Contribution Procedure..................................... 24
6. Default by an Underwriter............................................... 24
6.1 Default Not Exceeding 10% of Firm Securities..................... 24
6.2 Default Exceeding 10% of Firm Securities......................... 24
6.3 Postponement of Closing Date..................................... 25
7. Additional Covenants.................................................... 25
7.1 Board Designee................................................... 25
7.2 Insider Sales.................................................... 25
7.3 Compensation and Other Arrangements.............................. 25
8. Representations and Agreements to Survive Delivery...................... 25
9. Effective Date of This Agreement and Termination Thereof................ 26
9.1 Effective Date................................................... 26
9.2 Termination...................................................... 26
9.3 Notice........................................................... 26
9.4 Expenses......................................................... 26
9.5 Indemnification.................................................. 26
10. Miscellaneous........................................................... 27
10.1 Notices......................................................... 27
10.2 Headings........................................................ 27
10.3 Amendment....................................................... 27
10.4 Entire Agreement................................................ 27
10.5 Binding Effect..................................................... 27
10.6 Governing Law, Jurisdiction........................................ 28
10.7 Execution in Counterparts.......................................... 28
10.8 Waiver, Etc........................................................ 28
</TABLE>
iii
<PAGE>
INDEX OF DEFINITIONS
<TABLE>
<CAPTION>
TERM SECTION
- ---- -------
<S> <C>
Act................................................................. 2.1
BSE................................................................. 2.19
Closing Date....................................................... 1.1.2
Code.............................................................. 2.21.2
Commission........................................................... 2.1
Common Stock....................................................... 1.1.1
Company........................................... Introductory Paragraph
Effective Date..................................................... 1.2.2
ERISA............................................................. 2.21.2
ERISA Plans....................................................... 2.21.2
Exchange Act....................................................... 3.2.1
Firm Securities..................................................... 1.1.1
Insiders............................................................. 7.2
Intangibles.......................................................... 2.20
NASD................................................................ 3.15
Nasdaq.............................................................. 2.19
Option Closing Date................................................ 1.2.2
Option Securities.................................................. 1.2.1
Over-allotment Option.............................................. 1.2.1
Preliminary Prospectus............................................... 2.1
Prospectus........................................................... 2.1
Public Securities.................................................. 1.2.1
Registration Statement............................................... 2.1
Regulations.......................................................... 2.1
Representative.................................... Introductory Paragraph
Representative's Purchase Option................................... 1.3.1
Representative's Securities........................................ 1.3.1
Representative's Shares............................................ 1.3.1
SAS.................................................................. 4.3
Securities......................................................... 1.3.1
Transfer Agent...................................................... 3.22
Unaudited Financials................................................. 4.8
Underwriters...................................... Introductory Paragraph
</TABLE>
iv
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
2,500,000 Shares of Common Stock
UNDERWRITING AGREEMENT
----------------------
New York, New York
June , 1997
GKN Securities Corp.
61 Broadway
12th Floor
New York, New York 10006
Ladies and Gentlemen:
The undersigned, Global Telecommunication Solutions, Inc., a Delaware
corporation ("Company"), hereby confirms its agreement with GKN Securities
Corp. (being referred to herein variously as the "Representative" or "you")
and the other underwriters named on Schedule I hereto (the Representative and
the other underwriters being collectively called the "Underwriters" or,
individually, an "Underwriter") as follows:
1. Purchase and Sale of Securities.
1.1 FIRM SECURITIES.
1.1.1 Purchase of Firm Securities. On the basis of the
representations and warranties herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to issue and sell, severally
and not jointly, to the several Underwriters 2,500,000 shares of the
Company's Common Stock, par value $.01 per share ("Common Stock"), at a
purchase price, net of commissions, of $ per share (being referred to
herein as "Firm Securities"). The Underwriters, severally and not jointly,
agree to purchase from the Company the number of Firm Securities set forth
opposite their respective names on Schedule I attached hereto and made a part
hereof.
1.1.2 Payment and Delivery. Delivery and payment for the Firm
Securities shall be made at 10:00 A.M., New York time, on or before the third
business day following the date that the Firm Securities commence trading or
at such earlier time as the Representative shall determine, or at such other
time as shall be agreed upon by the Representative and the Company at the
offices of the Representative or at such other place as shall be agreed upon
by the Representative and the Company. The hour and date of delivery and
payment for the Firm Securities are called the "Closing Date." Payment for
the Firm Securities shall be made on the Closing Date at the Representative's
election by wire transfer or by certified or bank cashier's check(s) in New
York Clearing House funds, payable to the order of the Company, upon delivery
to you of certificates (in form and substance satisfactory to the
Representative) representing the Firm Securities for the account of the
respective accounts of the Underwriters. The Firm Securities shall be
registered in such name or names and in such authorized denominations as the
Representative may request in writing at least two full business days prior
to the Closing Date. The Company will permit the Representative to examine
and package the Firm Securities
<PAGE>
for delivery at least one full business day prior to the Closing Date. The
Company shall not be obligated to sell or deliver the Firm Securities except
upon tender of payment by the Underwriters for all the Firm Securities.
1.2 OVER-ALLOTMENT OPTION.
1.2.1 Option Securities. For the purposes of covering any
over-allotments in connection with the distribution and sale of the Firm
Securities, the Underwriters are hereby granted an option ("Over-allotment
Option") to purchase up to an additional 375,000 shares of Common Stock from
the Company ("Option Securities"). The Firm Securities and the Option
Securities are hereinafter referred to collectively as the "Public
Securities." The purchase price to be paid for the Option Securities will be
the same price per Option Security as the price per Firm Security set forth
in Section 1.1.1 hereof.
1.2.2 Exercise of Option. The Over-allotment Option granted
pursuant to Section 1.2.1 hereof may be exercised by the Representative on
behalf of the Underwriters as to all or any part of the Option Securities at
any time, from time to time, but not more than twice, within forty-five days
after the effective date ("Effective Date") of the Registration Statement (as
hereinafter defined). The Underwriters will not be under any obligation to
purchase any Option Securities prior to the exercise of the Over-allotment
Option. The Over-allotment Option granted hereby may be exercised by the
giving of oral notice to the Company from the Representative, which must be
confirmed by a letter or telecopy setting forth the number of Option
Securities to be purchased, the date and time for delivery of and payment for
the Option Securities and stating that the Option Securities referred to
therein are to be used for the purpose of covering over-allotments in
connection with the distribution and sale of the Firm Securities. If such
notice is given at least two full business days prior to the Closing Date,
the date set forth therein for such delivery and payment will be the Closing
Date. If such notice is given thereafter, the date set forth therein for such
delivery and payment will not be earlier than three business days after the
date of the notice, unless we mutually agree to an earlier date. If such
delivery and payment for the Option Securities does not occur on the Closing
Date, the date and time of the closing for such Option Securities will be as
set forth in the notice (hereinafter "Option Closing Date"). Upon exercise of
the Over-allotment Option, the Company will become obligated to convey to the
Underwriters, and, subject to the terms and conditions set forth herein, the
Underwriters will become obligated to purchase, the number of Option
Securities specified insuch notice.
1.2.3 Payment and Delivery. Payment for the Option Securities will
be, at the Representative's election, by wire transfer or by certified or
bank cashier's check(s) in New York Clearing House funds, payable to the
order of the Company at the offices of the Representative or at such other
place as shall be agreed upon by the Representative and the Company, upon
delivery to the Representative of certificates representing such securities
for the respective accounts of the Underwriters. The certificates
representing the Option Securities to be delivered will be in such
denominations and registered in such names as the Representative requests not
less than two full business days prior to the Closing Date or the Option
Closing Date, as the case may be, and will be made available to the
Representative for inspection, checking and packaging at the aforesaid office
of the Company's transfer agent or correspondent not less than one full
business day prior to such Closing Date.
1.3 REPRESENTATIVE'S PURCHASE OPTION.
1.3.1 Purchase Option. The Company hereby agrees to issue and sell
to the Representative (and/or its designees) on the Closing Date, for an
aggregate purchase price of
2
<PAGE>
$100, an option ("Representative's Purchase Option") exercisable, at any
time, in whole or in part, for a period of four years commencing one year
from the Effective Date, to purchase an aggregate of 200,000 shares of Common
Stock ("Representative's Shares") at an initial exercise price of % of the
initial offering price of a share of Common Stock (i.e., $ per share
of Common Stock). The Representative's Purchase Option and the
Representative's Shares are hereinafter referred to collectively as the
"Representative's Securities." The Public Securities and the Representative's
Securities are hereinafter referred to collectively as the "Securities."
1.3.2 Payment and Delivery. Delivery and payment for the
Representative's Purchase Option shall be made on the Closing Date. The
Company shall deliver to the Representative, upon payment therefor,
certificates for the Representative's Purchase Option in the name or names
and in such authorized denominations as the Representative may request.
2. Representations and Warranties of the Company. The Company represents and
warrants to the Representative as follows:
2.1 FILING OF REGISTRATION STATEMENT. The Company has filed with the
Securities and Exchange Commission ("Commission") a registration statement
and an amendment or amendments thereto, on Form SB-2 (No. 333-25389),
including any related preliminary prospectus ("Preliminary Prospectus"), for
the registration of the Securities under the Securities Act of 1933, as
amended ("Act"), which registration statement and amendment or amendments
have been prepared by the Company in conformity with the requirements of the
Act and the rules and regulations ("Regulations") of the Commission under the
Act. Except as the context may otherwise require, such registration
statement, as amended, on file with the Commission at the time the
registration statement becomes effective (including the prospectus, financial
statements, schedules, exhibits and all other documents filed as a part
thereof or incorporated therein and all information deemed to be a part
thereof as of such time pursuant to paragraph (b) of Rule 430A of the
Regulations), is hereinafter called the "Registration Statement," and the
form of the final prospectus dated the Effective Date (or, if applicable, the
form of final prospectus filed with the Commission pursuant to Rule 424 of
the Regulations), is hereinafter called the "Prospectus." The Registration
Statement has been declared effective by the Commission on the date hereof.
2.2 No Stop Orders, Etc. Neither the Commission nor, to the best of the
Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus or has
instituted or, to the best of the Company's knowledge, threatened to
institute any proceedings with respect to such an order.
2.3 DISCLOSURES IN REGISTRATION STATEMENT.
2.3.1 Securities Act and Exchange Act Representation. At the time
the Registration Statement became effective and at all times subsequent
thereto up to and including the Closing Date and the Option Closing Date, if
any, the Registration Statement and the Prospectus and any amendment or
supplement thereto contained and will contain all material statements which
are required to be stated therein in accordance with the Act and the
Regulations, and conformed and will conform in all material respects to the
requirements of the Act and the Regulations; neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto, during
such time period and on such dates, contained or will contain any untrue
statement of a material fact or omitted or
will omit to state any material fact required to be stated therein or necessary
to make the statements therein not misleading, nor did they or will they contain
any untrue statement of a material fact nor did they or will they omit to state
any material fact required to be stated therein or necessary to make the
statements
3
<PAGE>
therein, in light of the circumstances under which they were made, not
misleading. When any Preliminary Prospectus was first filed with the
Commission (whether filed as part of the Registration Statement for the
registration of the Securities or any amendment thereto or pursuant to Rule
424(a) of the Regulations) and when any amendment thereof or supplement
thereto was first filed with the Commission, such Preliminary Prospectus and
any amendments thereof and supplements thereto complied or will comply in all
material respects with the applicable provisions of the Act and the
Regulations and did not contain an untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading. The representation and warranty made in
this Section 2.3.1 does not apply to statements made or statements omitted in
reliance upon and in conformity with written information furnished to the
Company with respect to the Underwriters by the Representative expressly for
use in the Registration Statement or Prospectus or any amendment thereof or
supplement thereto.
2.3.2 Disclosure of Contracts. The description in the Registration
Statement and the Prospectus of contracts and other documents is accurate in
all material respects and presents fairly the information required to be
disclosed and there are no contracts or other documents required to be
described in the Registration Statement or the Prospectus or to be filed with
the Commission as exhibits to the Registration Statement which have not been
so described or filed. Each contract or other instrument (however
characterized or described) to which the Company is a party or by which its
property or business is or may be bound or affected and which is (i) referred
to in the Prospectus, or (ii) material to the Company's business, has been
duly and validly executed, is in full force and effect in all material
respects and is enforceable against the Company and, to the Company's
knowledge, the other parties thereto in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally, as enforceability of
any indemnification provision may be limited under the federal and state
securities laws, and that the remedy of specific performance and injunctive
and other forms of equitable relief may be subject to the equitable defenses
and to the discretion of the court before which any proceeding therefor may
be brought. None of such contracts or instruments has been assigned by the
Company, and neither the Company nor, to the best of the Company's knowledge,
any other party, is in default thereunder and, to the best of the Company's
knowledge, no event has occurred which, with the lapse of time or the giving
of notice, or both, would constitute a default thereunder. To the best of the
Company's knowledge, none of the material provisions of such contracts or
instruments violates or will result in a violation of any existing applicable
law, rule, regulation, judgment, order or decree of any governmental agency
or court having jurisdiction over the Company or any of its assets or
businesses, including, without limitation, those relating to environmental
laws and regulations.
2.3.3 Prior Securities Transactions. No securities of the Company
have been sold by the Company or by or on behalf of, or for the benefit of,
any person or persons controlling, controlled by, or under common control
with the Company within the three years prior to the date hereof, except as
disclosed in the Registration Statement.
2.4 CHANGES AFTER DATES IN REGISTRATION STATEMENT.
2.4.1 No Material Adverse Change. Since the respective dates as of
which information is given in the Registration Statement and the Prospectus,
except as otherwise specifically stated therein, (i) there has been no
material adverse change in the condition, financial or otherwise, or in the
results of operations, business or business prospects of the
4
<PAGE>
Company, including, but not limited to, a material loss or interference with
its business from fire, storm, explosion, flood or other casualty, whether or
not covered by insurance, or from any labor dispute or court or governmental
action, order or decree, whether or not arising in the ordinary course of
business, and (ii) there have been no transactions entered into by the
Company, other than those in the ordinary course of business, which are
material with respect to the condition, financial or otherwise, or to the
results of operations, business or business prospects of the Company.
2.4.2 Recent Securities Transactions, Etc. Subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, and except as may otherwise be indicated or
contemplated herein or therein, the Company has not (i) issued any securities
or incurred any liability or obligation, direct or contingent, for borrowed
money; or (ii) declared or paid any dividend or made any other distribution
on or in respect to its capital stock.
2.5 INDEPENDENT ACCOUNTANTS. KPMG Peat Marwick LLP, whose report is filed
with the Commission as part of the Registration Statement, are independent
accountants as required by the Act and the Regulations.
2.6 FINANCIAL STATEMENTS. The financial statements, including the notes
thereto and supporting schedules included in the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
of the Company at the dates and for the periods to which they apply; and such
financial statements have been prepared in conformity with generally accepted
accounting principles, consistently applied throughout the periods involved; and
the supporting schedules included in the Registration Statement present fairly
the information required to be stated therein.
2.7 AUTHORIZED CAPITAL; OPTIONS; ETC. The Company had at the date or dates
indicated in the Prospectus duly authorized, issued and outstanding
capitalization as set forth in "Capitalization" in the Registration Statement
and the Prospectus. Based on the assumptions and adjustments stated in the
Registration Statement and the Prospectus, the Company will have on the Closing
Date the adjusted stock capitalization set forth in "Capitalization." Except as
set forth in the Registration Statement and the Prospectus, on the Effective
Date and on the Closing Date there will be no options, warrants, or other rights
to purchase or otherwise acquire any authorized but unissued shares of Common
Stock of the Company, including any obligations to issue any shares pursuant to
anti-dilution provisions, or any security convertible into shares of Common
Stock of the Company, or any contracts or commitments to issue or sell shares of
Common Stock or any such options, warrants, rights or convertible securities.
2.8 VALID ISSUANCE OF SECURITIES; ETC.
2.8.1 Outstanding Securities. All issued and outstanding securities
of the Company have been duly authorized and validly issued and are fully paid
and non-assessable; the holders thereof have no rights of rescission with
respect thereto, and are not subject to personal liability by reason of being
such holders; and none of such securities were issued in violation of the
preemptive rights of any holders of any security of the Company or similar
contractual rights granted by the Company. The outstanding options and warrants
to purchase shares of Common Stock constitute the valid and binding obligations
of the Company, enforceable in accordance with their terms, except (i) as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (ii) as enforceability of
any indemnification provision may be limited under the federal and state
5
<PAGE>
securities laws, and (iii) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought. The authorized Common Stock and outstanding options and warrants
to purchase shares of Common Stock conform in all material respects to all
statements relating thereto contained in the Registration Statement and the
Prospectus. The offers and sales of the outstanding Common Stock, options and
warrants to purchase shares of Common Stock were at all relevant times either
registered or qualified under the Act and the applicable state securities or
Blue Sky Laws or exempt from such registration requirements.
2.8.2 Securities Sold Pursuant to this Agreement. The Securities
have been duly authorized and, when issued and paid for, will be validly
issued, fully paid and non-assessable; the holders thereof are not and will
not be subject to personal liability by reason of being such holders; the
Securities are not and will not be subject to the preemptive rights of any
holders of any security of the Company or similar contractual rights granted
by the Company; and all corporate action required to be taken for the
authorization, issuance and sale of the Securities has been duly and validly
taken. When issued, the Representative's Purchase Option will constitute a
valid and binding obligation of the Company to issue and sell, upon exercise
thereof and payment therefor, the number and type of securities of the
Company called for thereby and the Representative's Purchase Option will be
enforceable against the Company in accordance with its terms, except (i) as
such enforceability may be limited by bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally, (ii) as enforceability
of any indemnification provision may be limited under the federal and state
securities laws, and (iii) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
2.9 REGISTRATION RIGHTS OF THIRD PARTIES. Other than as set forth in the
Prospectus, no holders of any securities of the Company or of any options or
warrants of the Company exercisable for or convertible or exchangeable into
securities of the Company have the right to require the Company to register any
such securities of the Company under the Act or to include any such securities
in a registration statement to be filed by the Company, except for holders with
such rights whose securities have already been registered by the Company.
2.10 VALIDITY AND BINDING EFFECT OF AGREEMENTS. This Agreement and the
Representative's Purchase Option have been duly and validly authorized by the
Company, and constitute, or when executed and delivered, will constitute, the
valid and binding agreements of the Company, enforceable against the Company in
accordance with their respective terms, except (i) as such enforceability may be
limited by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, (ii) as enforceability of any indemnification
provision may be limited under the federal and state securities laws, and (iii)
that the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to the equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought.
2.11 No Conflicts, Etc. The execution, delivery, and performance by the
Company of this Agreement and the Representative's Purchase Option, the
consummation by the Company of the transactions herein and therein
contemplated and the compliance by the Company with the terms hereof and
thereof do not and will not, with or without the giving of notice or the
lapse of time or both, (i) result in a breach of, or conflict with any of the
terms and provisions of, or constitute a default under, or result in the
creation, modification, termination or imposition of any
6
<PAGE>
lien, charge or encumbrance upon any property or assets of the Company
pursuant to the terms of any indenture, mortgage, deed of trust, note, loan
or credit agreement or any other material agreement or instrument evidencing
an obligation for borrowed money, or any other agreement or instrument to
which the Company is a party or by which the Company may be bound or to which
any of the property or assets of the Company is subject; (ii) result in any
violation of the provisions of the Certificate of Incorporation or the
By-Laws of the Company; (iii) violate any existing applicable law, rule,
regulation, judgment, order or decree of any governmental agency or court,
domestic or foreign, having jurisdiction over the Company or any of its
properties or business; or (iv) have any material adverse effect on any
permit, license, certificate, registration, approval, consent, license or
franchise necessary for the Company to own or lease and operate any of its
properties or to conduct its business.
2.12 NO DEFAULTS; VIOLATIONS. Except as described in the Prospectus, no
default exists in the due performance and observance of any term, covenant or
condition of any material license, contract, indenture, mortgage, deed of trust,
note, loan or credit agreement, or any other agreement or instrument evidencing
an obligation for borrowed money, or any other material agreement or instrument
to which the Company is a party or by which the Company may be bound or to which
any of the properties or assets of the Company is subject, except where such
default, singly or in the aggregate, would not have a material adverse effect on
the financial position, prospects, value or the operation of the properties or
the business of the Company, taken as a whole. The Company is not in violation
of any term or provision of its Certificate of Incorporation or By-Laws or in
violation of any franchise, license, permit, applicable law, rule, regulation,
judgment or decree of any governmental agency or court, domestic or foreign,
having jurisdiction over the Company or any of its properties or business,
except as described in the Prospectus and except where such violation, singly or
in the aggregate, would not have a material adverse effect on the financial
position, prospects, value or the operation of the properties or the business of
the Company, taken as a whole.
2.13 CORPORATE POWER; LICENSES; CONSENTS.
2.13.1 Conduct of Business. The Company has all requisite corporate
power and authority, and has all necessary authorizations, approvals, orders,
licenses, certificates and permits of and from all governmental regulatory
officials and bodies to own or lease its properties and conduct its business
as described in the Prospectus, except for those which, if not obtained,
would not, singly or in the aggregate, have a material adverse effect on the
Company. The Company is and has been doing business in compliance with all
such authorizations, approvals, orders, licenses, certificates and permits
and all federal, state and local rules and regulations, except where
non-compliance would not, singly or in the aggregate, have a material adverse
effect on the Company. The disclosures in the Registration Statement
concerning the effects of federal, state and local regulation on the
Company's business as currently contemplated are correct in all material
respects.
2.13.2 Transactions Contemplated Herein. The Company has all
corporate power and authority to enter into this Agreement and to carry out
the provisions and conditions hereof, and all consents, authorizations,
approvals and orders required in connection therewith have been obtained. No
consent, authorization or order of, and no filing with, any court, government
agency or other body is required for the valid issuance, sale and delivery,
of the Securities pursuant to this Agreement and the Representative's
Purchase Option, and as contemplated by the Prospectus, except with respect
to applicable federal and state securities laws.
7
<PAGE>
2.14 TITLE TO PROPERTY; INSURANCE. The Company has good and defensible
title to, or valid and enforceable leasehold estates in, all items of real and
personal property (tangible and intangible) owned or leased by it, free and
clear of all liens, encumbrances, claims, security interests, defects and
restrictions of any material nature whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable or arising by law.
The Company has insured its properties against loss or damage by fire or other
casualty and maintains such insurance in adequate amounts.
2.15 LITIGATION; GOVERNMENTAL PROCEEDINGS. Except as set forth in the
Prospectus, there is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding pending or, to the best of
the Company's knowledge, threatened against, or involving the properties or
business of, the Company which is likely to materially and adversely affect the
financial position, prospects, value or the operation of the properties or the
business of the Company, or which questions the validity of the capital stock of
the Company or this Agreement or of any action taken or to be taken by the
Company pursuant to, or in connection with, this Agreement. There are no
outstanding orders, judgments or decrees of any court, governmental agency or
other tribunal, domestic or foreign, naming the Company and enjoining the
Company from taking, or requiring the Company to take, any action, or to which
the Company, its properties or business is bound or subject.
2.16 GOOD STANDING. The Company has been duly organized and is validly
existing as a corporation and is in good standing under the laws of the state of
its incorporation. The Company is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which ownership or
leasing of any properties or the character of its operations requires such
qualification or licensing, except where the failure to qualify would not have a
material adverse effect on its properties or business.
2.17 TAXES. Except as set forth on Schedule 2.17, the Company has filed
all returns (as hereinafter defined) required to be filed with taxing
authorities prior to the date hereof or has duly obtained extensions of time
for the filing thereof, and has paid all taxes (as hereinafter defined) shown
as due on such returns that were filed and has paid all taxes imposed on or
assessed against the Company. The provisions for taxes payable, if any, shown
on the financial statements filed with or as part of the Registration
Statement are sufficient for all accrued and unpaid taxes, whether or not
disputed, and for all periods to and including the dates of such consolidated
financial statements. Except as disclosed on Schedule 2.17, (i) no issues
have been raised (and are currently pending) by any taxing authority in
connection with any of the returns or taxes asserted as due from the Company,
and (ii) no waivers of statutes of limitation with respect to the returns or
collection of taxes have been given by or requested from the Company. The
term "taxes" mean all federal, state, local, foreign, and other net income,
gross income, gross receipts, sales, use, ad valorem, transfer, franchise,
profits, license, lease, service, service use, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property, windfall
profits, customs, duties or other taxes, fees, assessments, or charges of any
kind whatever, together with any interest and any penalties, additions to
tax, or additional amounts with respect thereto. The term "returns" means all
returns, declarations, reports, statements, and other documents required to
be filed in respect to taxes.
2.18 FOREIGN CORRUPT PRACTICES ACT. Neither the Company nor any of its
officers, directors, employees or agents or any other person acting on behalf of
the Company has, directly or indirectly, given or agreed to give any money, gift
or similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or agent of a
customer or supplier, or official or employee of any governmental agency
8
<PAGE>
or instrumentality of any government (domestic or foreign) or any political
party or candidate for office (domestic or foreign) or other person who was,
is, or may be in a position to help or hinder the business of the Company (or
assist it in connection with any actual or proposed transaction) which (i) is
likely to subject the Company to any damage or penalty in any civil, criminal
or governmental litigation or proceeding, (ii) if not given in the past,
might have had a materially adverse effect on the assets, business or
operations of the Company as reflected in any of the financial statements
contained in the Prospectus or (iii) if not continued in the future, might
adversely affect the assets, business, operations or prospects of the
Company. The internal accounting controls and procedures of the Company are
sufficient to cause the Company to comply with the Foreign Corrupt Practices
Act of 1977, as amended.
2.19 NASDAQ AND THE BOSTON STOCK EXCHANGE ELIGIBILITY. As of the Effective
Date, the Public Securities have been approved for trading on the Nasdaq
SmallCap Market ("Nasdaq") and for listing on the Boston Stock Exchange ("BSE").
2.20 INTANGIBLES. The Company owns or possesses the requisite licenses or
rights to use all trademarks, service marks, service names, trade names, patents
and patent applications, copyrights and other rights (collectively,
"Intangibles") described as being licensed to or owned by it in the Registration
Statement. The Company's Intangibles which have been registered in the United
States Patent and Trademark Office have been fully maintained and are in full
force and effect. There is no claim or action by any person pertaining to, or
proceeding pending or, to the best of the Company's knowledge, threatened and
the Company has not received any notice of conflict with, the asserted rights of
others which challenges the exclusive right of the Company with respect to any
Intangibles used in the conduct of the Company's business except as described in
the Prospectus. To the best of the Company's knowledge, the Intangibles and the
Company's current products, services and processes do not infringe on any
Intangibles held by any third party. To the best of the Company's knowledge, no
others have infringed upon the Intangibles of the Company.
2.21 RELATIONS WITH EMPLOYEES.
2.21.1 Employee Matters. The Company has generally enjoyed a
satisfactory employer-employee relationship with its employees and is in
compliance in all material respects with all federal, state and local laws
and regulations respecting the employment of its employees and employment
practices, terms and conditions of employment and wages and hours relating
thereto. To the best of the Company's knowledge, there are no pending
investigations involving the Company by the U.S. Department of Labor, or any
other governmental agency responsible for the enforcement of such federal,
state and local laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or
stoppage pending or, to the best of the Company's knowledge, threatened
against or involving the Company or any predecessor entity, and none has ever
occurred. To the best of the Company's knowledge, no question concerning
representation exists respecting the employees of the Company and no
collective bargaining agreement or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is pending
under any expired or existing collective bargaining agreements of the
Company, if any.
2.21.2 Employee Benefit Plans. Other than as set forth in the
Registration Statement, the Company neither maintains, sponsors nor
contributes to, nor is it required to contribute to, any program or
arrangement that is an "employee pension benefit plan," an "employee welfare
benefit plan," or a "multi-employer plan" as such terms are defined in
Sections
9
<PAGE>
3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does
not maintain or contribute to, and has at no time maintained or contributed
to, a defined benefit plan, as defined in Section 3(35) of ERISA. If the
Company does maintain or contribute to a defined benefit plan, any
termination of the plan on the date hereof would not give rise to liability
under Title IV of ERISA. No ERISA Plan (or any trust created thereunder) has
engaged in a "prohibited transaction" within the meaning of Section 406 of
ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended
("Code"), which could subject the Company to any tax penalty for prohibited
transactions and which has not adequately been corrected. Each ERISA Plan is
in compliance with all material reporting, disclosure and other requirements
of the Code and ERISA as they relate to any such ERISA Plan. Determination
letters have been received from the Internal Revenue Service with respect to
each ERISA Plan which is intended to comply with Code Section 401(a), stating
that such ERISA Plan and the attendant trust are qualified thereunder. The
Company has never completely or partially withdrawn from a "multi-employer
plan."
2.22 OFFICERS' CERTIFICATE. Any certificate signed by an officer of the
Company and delivered to the Representative or its counsel shall be deemed a
representation and warranty by the Company to the Representative as to the
matters covered thereby.
2.23 SUBSIDIARIES. Except as set forth on Schedule 2.23, the Company does
not own an interest in any corporation, partnership, joint venture, trust or
other business entity. The Company has no subsidiaries other than Global
Telecommunication Solutions (Canada), Inc., GTS Marketing, Inc. and Global Link
Teleco Corporation, each a corporation duly organized and validly existing under
the laws of the jurisdiction of its incorporation (collectively, the
"Subsidiaries"). The Company owns all of the capital stock of each Subsidiary
free and clear of all liens, security interests and other encumbrances of any
nature whatsoever, except as set forth in the Prospectus. There are no options
or warrants for the purchase of, or other rights to purchase, or outstanding
voting securities convertible into or exchangeable for, any capital stock or
other securities of any Subsidiary. Unless the context otherwise requires, the
representations and warranties made by the Company in this Agreement shall also
apply and be true with respect to each Subsidiary, individually and taken as a
whole with the Company and all other Subsidiaries, as if each representation and
warranty contained herein made specific reference to the Subsidiary each time
the term "Company" was used.
3. Covenants of the Company. The Company covenants and agrees as follows:
3.1 AMENDMENTS TO REGISTRATION STATEMENT. The Company will deliver to the
Representative, prior to filing, any amendment or supplement to the Registration
Statement or Prospectus proposed to be filed after the Effective Date and not
file any such amendment or supplement to which the Representative shall
reasonably object.
3.2 FEDERAL SECURITIES LAWS. 3.2.1 Compliance. During the time when a
Prospectus is required to be delivered under the Act, the Company will use all
reasonable efforts to comply with all requirements imposed upon it by the Act,
the Regulations and the Securities Exchange Act of 1934, as amended ("Exchange
Act") and by the regulations under the Exchange Act, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus. If
at any time when a Prospectus relating to the Securities is required to be
delivered under the Act any event shall have occurred as a result of which, in
the opinion of counsel for the Company or counsel for the Representative,
10
<PAGE>
the Prospectus, as then amended or supplemented, includes an untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify the Representative promptly and prepare and file with the
Commission, subject to Section 3.1 hereof, an appropriate amendment or
supplement in accordance with Section 10 of the Act.
3.2.2 Filing of Final Prospectus. The Company will file the
Prospectus (in form and substance satisfactory to the Representative) with
the Commission pursuant to the requirements of Rule 424 of the Regulations.
3.2.3 Exchange Act Registration. For a period of five years from the
Effective Date, the Company will use its best efforts to maintain the
registration of the Common Stock under the provisions of Section 12 of the
Exchange Act.
3.3 BLUE SKY FILING. The Company will endeavor in good faith, in
cooperation with the Representative, at or prior to the time the Registration
Statement becomes effective, to qualify the Securities for offering and sale
under the securities laws of such jurisdictions as the Representative may
reasonably designate, provided that no such qualification shall be required in
any jurisdiction where, as a result thereof, the Company would be subject to
service of general process or to taxation as a foreign corporation doing
business in such jurisdiction. In each jurisdiction where such qualification
shall be effected, the Company will, unless the Representative agrees that such
action is not at the time necessary or advisable, use all reasonable efforts to
file and make such statements or reports at such times as are or may be required
by the laws of such jurisdiction.
3.4 DELIVERY TO THE UNDERWRITERS OF PROSPECTUSES. The Company will deliver
to each of the several Underwriters, without charge, from time to time during
the period when the Prospectus is required to be delivered under the Act or the
Exchange Act, such number of copies of each Preliminary Prospectus and the
Prospectus as such Underwriter may reasonably request and, as soon as the
Registration Statement or any amendment or supplement thereto becomes effective,
deliver to you two original executed Registration Statements, including
exhibits, and all post-effective amendments thereto and copies of all exhibits
filed therewith or incorporated therein by reference and all original executed
consents of certified experts.
3.5 EVENTS REQUIRING NOTICE TO THE REPRESENTATIVE. The Company will
notify the Representative immediately and confirm the notice in writing (i)
of the effectiveness of the Registration Statement and any amendment thereto,
(ii) of the issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceeding for that purpose, (iii) of
the issuance by any state securities commission of any proceedings for the
suspension of the qualification of the Securities for offering or sale in any
jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose, (iv) of the mailing and delivery to the Commission for filing
of any amendment or supplement to the Registration Statement or Prospectus,
(v) of the receipt of any comments or request for any additional information
from the Commission, and (vi) of the happening of any event during the period
described in Section 3.4 hereof which, in the judgment of the Company, makes
any statement of a material fact made in the Registration Statement or the
Prospectus untrue or which requires the making of any changes in the
Registration Statement or the Prospectus in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. If the Commission or any
11
<PAGE>
state securities commission shall enter a stop order or suspend such
qualification at any time, the Company will make every reasonable effort to
obtain promptly the lifting of such order.
3.6 REVIEW OF FINANCIAL STATEMENTS. For a period of five years from the
Effective Date, the Company, at its expense, shall cause its regularly engaged
independent certified public accountants to participate in the preparation and
presentation (but not audit) of the Company's financial statements for each of
the first three fiscal quarters prior to the announcement of quarterly financial
information, the filing of the Company's Form 10-QSB quarterly reports and the
mailing of quarterly financial information to stockholders.
3.7 RESERVED.
3.8 Secondary Market Trading and Standard & Poor's. The Company will
take all necessary and appropriate actions to maintain publication in
Standard and Poor's Corporation Records Corporate Descriptions with updated
quarterly information for a period of five years from the Effective Date,
including the payment of any necessary fees and expenses. The Company shall
take such action as may be reasonably requested by the Representative to
obtain a secondary market trading exemption in such states as may be
requested by the Representative, including the payment of any necessary fees
and expenses and the filing of a Form (e.g. 25101(b)) for secondary market
trading in the State of California on the Effective Date or as soon
thereafter as is permissible.
3.9 NASDAQ AND BSE MAINTENANCE. For a period of five years from the date
hereof, the Company will use its best efforts to maintain the quotation on
Nasdaq and the listing on the BSE of the Common Stock and, if the Company
satisfies the inclusion standards of the Nasdaq National Market System, apply
for and maintain quotations on the Nasdaq National Market System of the Common
Stock during such period.
3.10 RESERVED.
3.11 RESERVED.
3.12 REPORTS TO THE REPRESENTATIVE AND OTHERS.
3.12.1 Periodic Reports, Etc. For a period of five years from the
Effective Date, the Company will promptly furnish to the Representative, and
to each other Underwriter who may so request, copies of such financial
statements and other periodic and special reports as the Company from time to
time files with any governmental authority or furnishes generally to holders
of any class of its securities, and promptly furnish to the Representative
(i) a copy of each periodic report the Company shall be required to file with
the Commission, (ii) a copy of every press release with respect to the
Company or its affairs which was released by the Company, or (iii) a copy of
each Form 8-K or Schedules 13D, 13G, 14D-1 or 13E-4 received or prepared by
the Company.
3.12.2 Transfer Sheets and Weekly Position Listings. For a period of
five years from the Closing Date, the Company will furnish to the
Representative at the Company's sole expense such transfer sheets and
position listings of the Company's securities as the Representative may
reasonably request, including the daily, weekly and monthly consolidated
transfer sheets of the transfer agent of the Company and the weekly position
listings of the Depository Trust Company.
12
<PAGE>
3.13 REPRESENTATIVE'S PURCHASE OPTION. On the Closing Date, the Company
will execute and deliver the Representative's Purchase Option to the
Representative substantially in the form filed as an exhibit to the Registration
Statement.
3.14 RESERVED.
3.15 PAYMENT OF EXPENSES.
3.15.1 General Expenses. The Company hereby
agrees to pay on each of the Closing Date and, to the extent not paid at Closing
Date, the Option Closing Date, if any, all expenses incident to the performance
of the obligations of the Company under this Agreement, including but not
limited to (i) the preparation, printing, filing, delivery and mailing
(including the payment of postage with respect to such mailing) of the
Registration Statement, the Prospectus and the Preliminary Prospectuses and the
printing and mailing of this Agreement and related documents, including the cost
of all copies thereof and any amendments thereof or supplements thereto supplied
to the Underwriters in quantities as may be reasonably required by the
Underwriters, (ii) the printing, engraving, issuance and delivery of the shares
of Common Stock and the Representative's Purchase Option, including any transfer
or other taxes payable thereon, (iii) the qualification of the Securities under
state or foreign securities or Blue Sky laws, including the filing fees under
such Blue Sky laws and disbursements of the Representative's counsel, (iv) costs
associated with applications for assignments of a rating of the Securities by
qualified rating agencies, (v) filing fees incurred in registering the offering
with the National Association of Securities Dealers, Inc. ("NASD"), (vi) costs
of placing "tombstone" advertisements in The Wall Street Journal, The New York
Times and a third publication to be mutually selected by the Representative and
the Company, (vii) fees and disbursements of the transfer agent, (viii) the
Company's expenses associated with "due diligence" meetings arranged by the
Representative; (ix) the preparation, binding and delivery of transaction
"bibles" and lucite cubes or similar commemorative items in a style and quantity
as reasonably requested by the Representative, (x) any listing of the Securities
on the Nasdaq SmallCap Market, and any securities exchange or any listing in
Standard & Poor's, and (xi) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section 3.15.1. The Representative may deduct from the net
proceeds of the offering payable to the Company on the Closing Date, or the
Option Closing Date, if any, the expenses set forth herein to be paid by the
Company to the Representative and/or to third parties.
3.15.2 Non-Accountable Expenses. The Company further agrees that,
in addition to the expenses payable pursuant to Section 3.15.1, it will pay
to the Representative a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of
the Securities, of which $50,000 has been paid to date, and the Company will
pay the balance on the Closing Date and any additional monies owed
attributable to the Option Securities or otherwise on the Option Closing Date
by certified or bank cashier's check or, at the election of the
Representative, by deduction from the proceeds of the offering contemplated
herein. If the offering contemplated by this Agreement is not consummated for
any reason whatsoever other than a breach by the Representative of this
Agreement, then the following provisions shall apply: The Company's liability
for payment to the Representative of the non-accountable expense allowance
shall be equal to the sum of the Representative's actual out-of-pocket
expenses (including, but not limited to, counsel fees, "road-show" and due
diligence expenses). The Representative shall retain such part of the
non-accountable expense allowance previously paid as shall equal such actual
out-of-pocket expenses. If the amount previously paid is insufficient to
cover such actual out-of-pocket expenses, the Company shall remain liable for
and promptly pay any other actual out-of-pocket expenses. If the amount
previously paid
13
<PAGE>
exceeds the amount of actual out-of-pocket expenses, the Representative shall
promptly remit to the Company any such excess.
3.16 APPLICATION OF NET PROCEEDS. The Company will apply the net proceeds
from the offering received by it in a manner consistent in all material respects
with the application described under the caption "USE OF PROCEEDS" in the
Prospectus.
3.17 DELIVERY OF EARNINGS STATEMENTS TO SECURITY HOLDERS. The Company will
make generally available to its security holders as soon as practicable, but not
later than the first day of the fifteenth full calendar month following the
Effective Date, an earnings statement (which need not be certified by
independent public or independent certified public accountants unless required
by the Act or the Regulations, but which shall satisfy the provisions of Rule
158(a) under Section 11(a) of the Act) covering a period of at least twelve
consecutive months beginning after the Effective Date.
3.18 KEY PERSON LIFE INSURANCE. The Company will maintain key person life
insurance in an amount not less than $1,000,000 on the life of Gary J. Wasserson
and pay the annual premiums therefor naming the Company as the sole beneficiary
thereof for at least three years following the Effective Date.
3.19 STABILIZATION. Neither the Company, nor, to its knowledge, any of its
employees, directors or stockholders has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result in, under the Exchange Act, or
otherwise, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
3.20 INTERNAL CONTROLS. The Company maintains and will continue to
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance with
management's general or specific authorization, (ii) transactions are recorded
as necessary in order to permit preparation of financial statements in
accordance with generally accepted accounting principles and to maintain
accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
3.21 ACCOUNTANTS AND LAWYERS. For a period of five years from the
Effective Date, the Company shall retain independent public accountants and
securities lawyers acceptable to the Representative. Accountants KPMG Peat
Marwick LLP, and lawyers Graubard Mollen & Miller, are acceptable to the
Representative.
3.22 TRANSFER AGENT. For a period of five years from the Effective Date,
the Company shall retain a transfer agent for the Common Stock acceptable to the
Representative. Continental Stock Transfer & Trust Company ("Transfer Agent") is
acceptable to the Representative.
4. Conditions of the Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Securities, as provided herein,
shall be subject to the continuing accuracy of the representations and
warranties of the Company as of the date hereof and as of each of the Closing
Date and the Option Closing Date, if any, to the accuracy of the statements of
officers of the Company made pursuant to the provisions hereof and to the
performance by the Company of its obligations hereunder and to the following
conditions:
14
<PAGE>
4.1 REGULATORY MATTERS. 4.1.1 Effectiveness of Registration Statement. The
Registration Statement has been declared effective on the date of this Agreement
and, at each of the Closing Date and the Option Closing Date, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for such purpose shall have been instituted or shall
be pending or, to the best knowledge of the Company, contemplated by the
Commission and any request on the part of the Commission for additional
information shall have been complied with to the reasonable satisfaction of
Robinson Brog Leinwand Greene Genovese & Gluck, P.C., counsel to the
Underwriters.
4.1.2 NASD Clearance. By the Effective Date, the Representative
shall have received clearance from the NASD as to the amount of compensation
allowable or payable to the Underwriters as described in the Registration
Statement.
4.1.3 No Blue Sky Stop Orders. No order suspending the sale of the
Securities in any jurisdiction designated by the Representative pursuant to
Section 3.3 hereof shall have been issued on either on the Closing Date or
the Option Closing Date, and no proceedings for that purpose shall have been
instituted or, to the best knowledge of the Company, shall be contemplated.
4.2 COMPANY COUNSEL MATTERS.
4.2.1 Effective Date Opinion of Counsel. On
the Effective Date, the Representative shall have received the opinion of
Graubard Mollen & Miller, counsel to the Company (which shall not cover any FCC
or intellectual property matters), dated the Effective Date, addressed to the
Representative and in form and substance reasonably satisfactory to Robinson
Brog Leinwand Greene Genovese & Gluck, P.C., counsel to the Underwriters, to the
effect that:
(i) The Company has been duly organized and is validly
existing as a corporation and is in good standing under the laws of the State
of Delaware, with full corporate power and authority to own or lease and
operate its properties and to conduct its business as described in the
Prospectus. Each of the Subsidiaries is a corporation duly organized and
validly existing under the laws of the jurisdiction of its incorporation,
with full corporate power and authority to own or lease and operate its
properties and to conduct its business as described in the Prospectus. Based
solely on our review of the stock records of the Subsidiaries, the Company
owns all of the outstanding capital stock of the Subsidiaries, except as set
forth in the Prospectus. Unless the context otherwise requires, all
references to the "Company" in this opinion shall also include the
Subsidiaries.
(ii) The Company has all requisite corporate power and
authority, and, to the best of such counsel's knowledge, has all necessary
authorizations, approvals, orders, licenses, certificates and permits of and
from all governmental or regulatory officials and bodies to own or lease its
properties and conduct its business as described in the Prospectus, and, to
the best of such counsel's knowledge, the Company is and has been doing
business in compliance with all such authorizations, approvals, orders,
licenses, certificates and permits, except where the failure to obtain or to
comply would not have a material adverse effect on the Company. The Company
has all corporate power and authority to enter into this Agreement and the
Representative's Purchase Option and to carry out the provisions and
conditions hereof, and all consents, authorizations, approvals and orders
required in connection therewith have been
15
<PAGE>
obtained, except where the failure to obtain such consents, authorizations,
approvals and orders would not have a material adverse effect on the Company.
No consents, approvals, authorizations or orders of, and no filing with, any
court or governmental agency or body is required for the valid offer,
authorization, issuance, sale and delivery of the Securities, and the
consummation of the transactions and agreements contemplated by this
Agreement and the Representative's Purchase Option, and as contemplated by
the Prospectus or if so required, all such authorizations, approvals,
consents, orders, registrations, licenses and permits have been duly obtained
and are in full force and effect.
(iii) All issued and outstanding securities of the Company
have been duly authorized and validly issued and are fully paid and
non-assessable; the holders thereof are not subject to personal liability by
reason of being such holders; and none of such securities were issued in
violation of statutory preemptive rights of any holders of any security of
the Company or, to the best of such counsel's knowledge, similar contractual
rights granted by the Company. The outstanding options and warrants to
purchase shares of Common Stock known to such counsel to be outstanding
constitute the valid and binding obligations of the Company, enforceable in
accordance with their terms, except (a) as such enforceability may be limited
by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, (b) as enforceability of any indemnification
provision may be limited under the federal and state securities laws and
public policy, and (c) that the remedy of specific performance and injunctive
and other forms of equitable relief may be subject to the equitable defenses
and to the discretion of the court before which any proceeding therefor may
be brought. The authorized and, to such counsel's knowledge, outstanding
capital stock of the Company is as set forth under the caption
"Capitalization" in the Prospectus.
(iv) The Securities have been duly authorized and, when
issued and paid for, will be validly issued, fully paid and non-assessable;
the holders thereof are not and will not be subject to personal liability by
reason of being such holders. The Securities are not and will not be subject
to the statutory preemptive rights of any holders of any security of the
Company or, to the best of such counsel's knowledge, similar contractual
rights granted by the Company. All corporate action required to be taken for
the authorization, issuance and sale of the Securities has been duly and
validly taken. When issued, the Representative's Purchase Option will
constitute a valid and binding obligation of the Company to issue and sell,
upon exercise thereof and payment therefor as provided therein, the number
and type of securities of the Company called for thereby and the
Representative's Purchase Option, when issued, will be enforceable against
the Company in accordance with its terms, except (a) as such enforceability
may be limited by bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally, (b) as enforceability of any
indemnification and contribution provisions may be limited under the federal
and state securities laws and public policy, and (c) that the remedy of
specific performance and injunctive and other forms of equitable relief may
be subject to the equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought. The forms of
certificates representing the Securities are in due and proper form under
Delaware corporate law.
(v) To the best of such counsel's knowledge, other than as
set forth in the Prospectus, no holders of any securities of the Company or
of any options, warrants or securities of the Company exercisable for or
convertible or exchangeable into securities of the Company have the right to
require the Company to register any such securities of the Company under the
Act or to include any such securities in a registration statement to be filed
by the Company, except for holders with such rights whose securities have
already been registered by the Company.
16
<PAGE>
(vi) This Agreement has been duly and validly authorized and,
assuming the due and valid authorization, execution and delivery of such
agreement by the Representative, will constitute the valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except (a) as such enforceability may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally, (b) as enforceability of any indemnification and contribution
provisions may be limited under the federal and state securities laws and
public policy, and (c) that the remedy of specific performance and injunctive
and other forms of equitable relief may be subject to the equitable defenses
and to the discretion of the court before which any proceeding therefor may
be brought.
(vii) The execution, delivery and performance by the Company
of this Agreement and the Representative's Purchase Option, the issuance and
sale of the Securities, the consummation of the transactions contemplated
hereby and thereby and the compliance by the Company with the terms and
provisions hereof and thereof, do not and will not, with or without the
giving of notice or the lapse of time, or both, (a) conflict with, or result
in a breach of, any of the terms or provisions of, or constitute a default
under, or result in the creation or modification of any lien, security
interest, charge or encumbrance upon any of the properties or assets of the
Company pursuant to the terms of, any material mortgage, deed of trust, note,
indenture, loan, contract, commitment or other material agreement or
instrument to which the Company is a party or by which the Company or any of
its properties or assets is bound, except where such breaches, defaults,
liens, security interests, charges or encumbrances, singly or in the
aggregate, would not have a material adverse effect on the Company, (b)
result in any violation of the provisions of the Certificate of Incorporation
or the By-Laws of the Company, (c) violate any judgment, order or decree of
which such counsel has knowledge, statute, rule or regulation applicable to
the Company of any court, domestic or foreign, or of any federal, state or
other regulatory authority or other governmental body having jurisdiction
over the Company, its properties or assets except where such violations,
singly or in the aggregate, would not have a material adverse effect on the
Company, or (d) have a material adverse effect on any permit, certification,
registration, approval, consent, license or franchise of the Company.
(viii) The Registration Statement and the Prospectus (other
than the financial statements and other financial data included therein, as
to which no opinion need be rendered) comply as to form in all material
respects with the requirements of the Act and Regulations. The Securities and
all other securities issued or issuable by the Company conform in all
material respects to the description thereof contained in the Registration
Statement and the Prospectus. The statements in the Prospectus under "Risk
Factors," "Business," "Management," "Certain Transactions," "Principal
Stockholders," "Description of Securities" and "Shares Eligible for Future
Sale" have been reviewed by such counsel, and insofar as they contain
descriptions of law, statutes, licenses, rules or regulations are correct in
all material respects. No statute or regulation or legal or governmental
proceeding required to be described in the Prospectus is not described as
required, nor are any contracts or documents of which such counsel has
knowledge of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement not so described or filed as required.
(ix) The Registration Statement is effective under the Act,
and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act or applicable state securities laws.
(x) Except as described in the Prospectus, to the best of
such counsel's knowledge, no default exists in the due performance and
observance of any term, covenant or
17
<PAGE>
condition of any material license, contract, indenture, mortgage, deed of
trust, note, loan or credit agreement, commitment, or any other material
agreement or instrument to which the Company is a party or by which the
Company is bound or to which any of its properties or assets is subject,
except for such defaults which, singly or in the aggregate, would not have a
material adverse effect on the Company. The Company is not in violation of
any term or provision of its Certificate of Incorporation or, to the best of
such counsel's knowledge, its By-Laws. To the best of such counsel's
knowledge, the Company is not in violation of any judgment, order or decree
of which such counsel has knowledge, franchise, license, permit, law, rule or
regulation applicable to the Company, of any governmental agency or
court,domestic or foreign, having jurisdiction over the Company or any of its
properties or business, except where such violations, singly or in the
aggregate, would not have a material adverse effect on the Company.
(xi) To the best of such counsel's knowledge, except as
described in Schedule 2.23 to the Underwriting Agreement, the Company does
not own an interest in any corporation, partnership, joint venture, trust or
other business entity.
(xii) To the best of such counsel's knowledge, except as set
forth in the Prospectus, there is no action, suit or proceeding before or by
any court or governmental agency or body, domestic or foreign, now pending or
threatened against the Company, which would reasonably be expected to have a
material adverse effect on the business, properties or financial condition of
the Company.
Counsel has participated in conferences with officers and other
representatives of the Company, representatives of the independent public
accountants for the Company and representatives of the Underwriters at which
the contents of the Registration Statement, the Prospectus and related
matters were discussed and although such counsel is not passing upon, and
does not assume any responsibility for, the accuracy, completeness or
fairness of the statements contained in the Registration Statement and
Prospectus (except as otherwise set forth in counsel's opinion), no facts
have come to the attention of such counsel which lead them to believe that
either the Registration Statement or the Prospectus or any amendment or
supplement thereto contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading (it being understood that such counsel need express no opinion
with respect to the financial statements and other financial and statistical
data contained in or omitted from the Registration Statement or Prospectus).
The opinion of counsel for the Company shall include a statement to
the effect that it may be relied upon by counsel for the Underwriters in its
opinion delivered to the Representative.
4.2.2 Opinion of Trademark Counsel.
On the Effective Date, the Representative also shall have received the
opinion of , trademark counsel to the Company, addressed to the
Representative and in the form attached hereto as Exhibit A.
4.2.3 Opinion of FCC Counsel. On the Effective Date, the
Representative also shall have received the opinion of Latham & Watkins, FCC
counsel to the Company, addressed to the Representative and in the form
attached hereto as Exhibit B.
4.2.4 Closing Date and Option Closing Date Opinions of Counsel. On
each of the Closing Date and the Option Closing Date, if any, the
Representative shall have received the opinions of Graubard Mollen & Miller,
counsel to the Company, ,
18
<PAGE>
trademark counsel to the Company, and Latham & Watkins, FCC counsel to the
Company, dated the Closing Date or the Option Closing Date, as the case may
be, addressed to the Representative and in form and substance satisfactory to
Robinson Brog Leinwand Green Genovese & Gluck, P.C., counsel to the
Underwriters, confirming as of the Closing Date and, if applicable, the
Option Closing Date, the statements made by Graubard Mollen & Miller,
, and Latham & Watkins in their respective opinions delivered
on the Effective Date.
4.2.5 Reliance. In rendering such opinions, such counsel may
rely (i) as to matters involving the application of laws other than the laws
of the United States and jurisdictions in which they are admitted, to the
extent such counsel deems proper and to the extent specified in such
opinions, if at all, upon an opinion or opinions (in form and substance
reasonably satisfactory to Representative's counsel) of other counsel
reasonably acceptable to Representative's counsel, familiar with the
applicable laws, and (ii) as to matters of fact, to the extent they deem
proper, on certificates or other written statements of officers of the
Company and, respecting the corporate existence or good standing of the
Company, of officers of departments of various jurisdictions having custody
of documents, provided that copies of any such statements or certificates
shall be delivered to counsel to the Underwriters if requested. Any opinion
relied upon by counsel for the Company shall include a statement to the
effect that it may be relied upon by counsel for the Representative in its
opinion delivered to the Representative.
4.3 COLD COMFORT LETTER. At the time this Agreement is executed, and at
each of the Closing Date and the Option Closing Date, if any, you shall have
received a letter, addressed to the Representative and in form and substance
satisfactory in all respects (including the non-material nature of the changes
or decreases, if any, referred to in clause (iii) below) to you and to Robinson
Brog Leinwand Greene Genovese & Gluck, P.C., counsel to the Underwriters, from
KPMG Peat Marwick LLP, dated, respectively, as of the date of this Agreement and
as of the Closing Date and the Option Closing Date, if any:
(i) confirming that they are independent accountants with
respect to the Company within the meaning of the Act and the applicable
Regulations;
(ii) stating that in their opinion the financial statements
of the Company included in the Registration Statement and Prospectus comply
as to form in all material respects with the applicable accounting
requirements of the Act and the published Regulations thereunder;
(iii) stating that, based on the performance of procedures
specified by the American Institute of Certified Public Accountants for a
review of the latest available unaudited interim financial statements of the
Company (as described in Statement on Auditing Standards ("SAS") No.
71--"Interim Financial Information"), with an indication of the date of the
latest available unaudited interim financial statements, a reading of the
latest available minutes of the stockholders and board of directors and the
various committees of the board of directors, consultations with officers and
other employees of the Company responsible for financial and accounting
matters and other specified procedures and inquiries, nothing has come to
their attention which would lead them to believe that (a) the unaudited
financial statements of the
19
<PAGE>
Company included in the Registration Statement do not comply as to form in
all material respects with the applicable accounting requirements of the Act
and the Regulations or any material modification should be made to the
unaudited interim financial statements included in the Registration Statement
for them to be in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
financial statements of the Company included in the Registration Statement,
(b) at a date not later than five days prior to the Effective Date, Closing
Date or Option Closing Date, as the case may be, there was any change in the
capital stock or long-term debt of the Company, or any decrease in the
stockholders' equity of the Company as compared with amounts shown in the
December 31, 1996 balance sheet included in the Registration Statement, other
than as set forth in or contemplated by the Registration Statement, or, if
there was any decrease, setting forth the amount of such decrease, and (c)
during the period from December 31, 1996 to a specified date not later than
five days prior to the Effective Date, Closing Date or Option Closing Date,
as the case may be, there was any decrease in revenues, net earnings or net
earnings per share of Common Stock, in each case as compared with the
corresponding period in the preceding year and as compared with the
corresponding period in the preceding quarter, other than as set forth in or
contemplated by the Registration Statement, or, if there was any such
decrease, setting forth the amount of such decrease;
(iv) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the Prospectus
in each case to the extent that such amounts, numbers, percentages,
statements and information may be derived from the general accounting
records, and work sheets, of the Company with the results obtained from the
application of specified readings, inquiries and other appropriate procedures
(which procedures do not constitute an examination in accordance with
generally accepted auditing standards) set forth in the letter and found them
to be in agreement;
(v) statements as to such other matters incident to the
transaction contemplated hereby as you may reasonably request.
4.4 OFFICERS' CERTIFICATES.
4.4.1 Officers' Certificate. At each of the Closing Date and the
Option Closing Date, if any, the Representative shall have received a
certificate of the Company signed by the Chief Executive Officer, the Chief
Financial Officer and General Counsel of the Company, dated the Closing Date
or the Option Closing Date, as the case may be, respectively, to the effect
that the Company has performed all covenants and complied with all conditions
required by this Agreement to be performed or complied with by the Company
prior to and as of the Closing Date, or the Option Closing Date, as the case
may be, and that the conditions set forth in Section 4.5 hereof have been
satisfied as of such date and that, as of Closing Date and the Option Closing
Date, as the case may be, the representations and warranties of the Company
set forth in Section 2 hereof are true and correct. In addition, the
Representative will have received such other and further certificates of
officers of the Company as the Representative may reasonably request.
4.4.2 Secretary's Certificate. At each of the Closing Date and the
Option Closing Date, if any, the Representative shall have received a
certificate of the Company signed by the Secretary of the Company, dated the
Closing Date or the Option Date, as the case may be, respectively, certifying
(i) that the By-Laws and Certificate of Incorporation, as amended, of the
Company are true and complete, have not been modified and are in full force
and effect, (ii) that the resolutions relating to the public offering
contemplated by this Agreement are in full force and effect and have not been
modified, (iii) all correspondence between the Company or its counsel and the
Commission, (iv) all correspondence between the Company or its counsel and
the NASD concerning inclusion of the Securities on Nasdaq, (v) all
correspondence between the Company or its counsel and the BSE concerning
listing on the BSE, and (vi) as to the incumbency of the
20
<PAGE>
officers of the Company. The documents referred to in such certificate shall
be attached to such certificate.
4.5 NO MATERIAL CHANGES. Prior to and on each of the Closing Date and the
Option Closing Date, if any, (i) there shall have been no material adverse
change or development involving a prospective material change in the condition
or prospects or the business activities, financial or otherwise, of the Company
from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus provided, however, that continued losses,
consistent with prior periods, shall not be deemed a material adverse change or
development, (ii) there shall have been no transaction, not in the ordinary
course of business, entered into by the Company from the latest date as of which
the financial condition of the Company is set forth in the Registration
Statement and Prospectus which is materially adverse to the Company, taken as a
whole, (iii) the Company shall not be in default under any provision of any
instrument relating to any outstanding indebtedness which default would have a
material adverse effect on the Company, (iv) no material amount of the assets of
the Company shall have been pledged or mortgaged, except as set forth in the
Registration Statement and Prospectus, (v) no action suit or proceeding, at law
or in equity, shall have been pending or threatened against the Company or
affecting any of its property or business before or by any court or federal or
state commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding may materially adversely affect the business,
operations, prospects or financial condition or income of the Company, except as
set forth in the Registration Statement and Prospectus, (vi) no stop order shall
have been issued under the Act and no proceedings therefor shall have been
initiated or threatened by the Commission, and (vii) the Registration Statement
and the Prospectus and any amendments or supplements thereto contain all
material statements which are required to be stated therein in accordance with
the Act and the Regulations and conform in all material respects to the
requirements of the Act and the Regulations, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement thereto contains
any untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
4.6 DELIVERY OF REPRESENTATIVE'S PURCHASE OPTION. The Company has
delivered to the Representative an executed copy of the Representative's
Purchase Option.
4.7 OPINION OF COUNSEL TO THE UNDERWRITERS. All proceedings taken in
connection with the authorization, issuance or sale of the Securities as
herein contemplated shall be reasonably satisfactory in form and substance to
you and to Robinson Brog Leinwand Greene Genovese & Gluck, P.C., counsel to
the Underwriters, and you shall have received from such counsel a favorable
opinion, dated the Closing Date and the Option Closing Date, if any, with
respect to such of these proceedings as you may reasonably require. On or
prior to the Effective Date, the Closing Date and the Option Closing Date, as
the case may be, counsel to the Underwriters shall have been furnished such
documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
this Section 4.7, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions herein
contained.
4.8 UNAUDITED FINANCIALS. The Company has furnished to the Representative
a copy of the latest available unaudited interim financial statements for the
quarter ended March 31, 1997 ("Unaudited Financials") of the Company which have
been read by the Company's independent accountants, as stated in their letter
dated as of the Closing Date to be furnished pursuant to Section 4.3 hereof.
21
<PAGE>
5. Indemnification.
5.1 INDEMNIFICATION OF THE UNDERWRITERS.
5.1.1 General. Subject to the conditions set forth below, the
Company agrees to indemnify and hold harmless each of the Underwriters, their
respective directors, officers, agents and employees and each person, if any,
who controls any such Underwriter ("controlling person") within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, against any
and all loss, liability, claim, damage and expense whatsoever (including but
not limited to any and all legal or other expenses reasonably incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, whether arising out of any action between any of the Underwriters
and the Company or between any of the Underwriters and any third-party or
otherwise) to which they or any of them may become subject under the Act, the
Exchange Act or any other statute or at common law or otherwise or under the
laws of foreign countries, arising out of or based upon any untrue statement
or alleged untrue statement of a material fact directly relating to the
transactions effected by the Underwriters in connection with this offering
contained in (i) any Preliminary Prospectus, the Registration Statement or
the Prospectus (as from time to time each may be amended and supplemented);
(ii) in any post-effective amendment or amendments or any new registration
statement and prospectus in which are included securities of the Company
issued or issuable upon exercise of the Representative's Purchase Option; or
(iii) any application or other document or written communication (in this
Section 5 collectively called "application") executed by the Company or based
upon written information furnished by the Company in any jurisdiction in
order to qualify the Securities under the securities laws thereof or filed
with the Commission, any state securities commission or agency, Nasdaq or any
securities exchange; or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, unless such statement or omission was made in reliance
upon, and in strict conformity with, written information furnished to the
Company with respect to an Underwriter by or on behalf of such Underwriter
expressly for use in any Preliminary Prospectus, the Registration Statement
or Prospectus, or any amendment or supplement thereof, or in any application,
as the case may be; provided, further, that the indemnification hereunder
shall not be applicable to any Preliminary Prospectus if the untrue statement
or alleged untrue statement was contained in a Preliminary Prospectus and was
corrected in the Prospectus. The Company agrees promptly to notify the
Representative of the commencement of any litigation or proceedings against
the Company or any of its officers, directors or controlling persons in
connection with the issue and sale of the Securities or in connection with
the Registration Statement or Prospectus.
5.1.2 Procedure. If any action is brought against an Underwriter or
controlling person in respect of which indemnity may be sought against the
Company pursuant to Section 5.1.1, such Underwriter shall promptly notify the
Company in writing of the institution of such action and the Company shall
assume the defense of such action, including the employment and fees of
counsel (subject to the approval of such Underwriter) and payment of actual
expenses. Underwriter or controlling person shall have the right to employ
its or their own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such Underwriter or such controlling
person unless (i) the employment of such counsel shall have been authorized
in writing by the Company in connection with the defense of such action, or
(ii) the Company shall not have employed counsel to have charge of the
defense of such action, or (iii) such indemnified party or parties shall have
reasonably concluded that there may be defenses available to it or them which
are different from or additional to those available to the Company (in which
case the Company shall not have the right to direct the defense of such
action on
22
<PAGE>
behalf of the indemnified party or parties), in any of which events the fees
and expenses of not more than one additional firm of attorneys selected by
the Underwriter and/or controlling person shall be borne by the Company.
Notwithstanding anything to the contrary contained herein, if an Underwriter
or controlling person shall assume the defense of such action as provided
above, the Company shall have the right to approve the terms of any
settlement of such action which approval shall not be unreasonably withheld.
5.2 INDEMNIFICATION OF THE COMPANY. Each Underwriter, severally and not
jointly, agrees to indemnify and hold harmless the Company against any and
all loss, liability, claim, damage and expense described in the foregoing
indemnity from the Company to the several Underwriters, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements
or omissions by the Underwriters made in any Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment or supplement thereto
or in any application in reliance upon, and in strict conformity with,
written information furnished to the Company with respect to such Underwriter
by or on behalf of such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment or
supplement thereto or in any such application. In case any action shall be
brought against the Company or any other person so indemnified based on any
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or any application, and in respect of which
indemnity may be sought against any Underwriter, such Underwriter shall have
the rights and duties given to the Company, and the Company and each other
person so indemnified shall have the rights and duties given to the several
Underwriters by the provisions of Section 5.1.2.
5.3 CONTRIBUTION.
5.3.1 Contribution Rights. In order to provide for just
and equitable contribution under the Act in any case in which (i) any person
entitled to indemnification under this Section 5 makes claim for indemnification
pursuant hereto but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 5 provides for indemnification in such case, or (ii) contribution
under the Act, the Exchange Act or otherwise may be required on the part of any
such person in circumstances for which indemnification is provided under this
Section 5, then, and in each such case, the Company and the Underwriters shall
contribute to the aggregate losses, liabilities, claims, damages and expenses of
the nature contemplated by said indemnity agreement incurred by the Company and
the Underwriters, as incurred, in such proportions that the Underwriters are
responsible for that portion represented by the percentage that the underwriting
discount appearing on the cover page of the Prospectus bears to the initial
offering price appearing thereon and the Company is responsible for the balance;
provided, that, no person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Notwithstanding
the provisions of this Section 5.3, no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Securities underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay in respect of such losses, liabilities, claims,
damages and expenses. For purposes of this Section, each director, officer and
employee of an Underwriter, and each person, if any, who controls an Underwriter
within the meaning of Section 15 of the Act, shall have the same rights to
contribution as such Underwriter, and each director, officer and employee of the
Company, and
23
<PAGE>
each person, if any, who controls the Company within the meaning of Section
15 of the Act, shall have the same rights to contribution as the Company.
5.3.2 Contribution Procedure. Within fifteen days after receipt by
any party to this Agreement (or its representative) of notice of the
commencement of any action, suit or proceeding, such party will, if a claim
for contribution in respect thereof is to be made against another party
("contributing party"), notify the contributing party of the commencement
thereof, but the omission to so notify the contributing party will not
relieve it from any liability which it may have to any other party other than
for contribution hereunder. In case any such action, suit or proceeding is
brought against any party, and such party notifies a contributing party or
its representative of the commencement thereof within the aforesaid fifteen
days, the contributing party will be entitled to participate therein with the
notifying party and any other contributing party similarly notified. Any such
contributing party shall not be liable to any party seeking contribution on
account of any settlement of any claim, action or proceeding effected by such
party seeking contribution on account of any settlement of any claim, action
or proceeding which was effected by the party seeking contribution without
the written consent of the contributing party. The contribution provisions
contained in this Section are intended to supersede, to the extent permitted
by law, any right to contribution under the Act, the Exchange Act or
otherwise available.
6. Default by an Underwriter.
6.1 Default Not Exceeding 10% of Firm Securities. If any Underwriter or
Underwriters shall default in its or their obligations to purchase the Firm
Securities or the Option Securities if exercised, hereunder, and if the
number of the Firm Securities with respect to which such default relates does
not exceed in the aggregate 10% of the number of Firm Securities or Option
Securities which all Underwriters have agreed to purchase hereunder, then
such Firm Securities or Option Securities to which the default relates shall
be purchased by the non-defaulting Underwriters in proportion to their
respective commitments hereunder.
6.2 Default Exceeding 10% of Firm Securities. In the event that such
default relates to more than 10% of the Firm Securities or Option Securities,
you may in your discretion arrange for yourself or for another party or
parties to purchase such Firm Securities or Option Securities to which such
default relates on the terms contained herein. If within one business day
after such default relating to more than 10% of the Firm Securities or Option
Securities you do not arrange for the purchase of such Firm Securities or
Option Securities, then the Company shall be entitled to a further period of
one business day within which to procure another party or parties
satisfactory to you to purchase said Firm Securities or Option Securities on
such terms. In the event that neither you nor the Company arrange for the
purchase of the Firm Securities or Option Securities to which a default
relates as provided in this Section 6, this Agreement may be terminated by
you or the Company without liability on the part of the Company (except as
provided in Section 3.15 and Sections 5.1 hereof) or the several
Underwriters; provided, however, that if such default occurs with respect to
the Option Securities, this Agreement will not terminate as to the Firm
Securities, and provided further that nothing herein shall relieve a
defaulting Underwriter of its liability, if any, to the other several
Underwriters and to the Company for damages occasioned by its default
hereunder.
6.3 POSTPONEMENT OF CLOSING DATE. In the event that the Firm Securities or
Option Securities to which the default relates are to be purchased by the
non-defaulting Underwriters, or are to be purchased by another party or parties
as aforesaid, you or the Company shall have the right to postpone the Closing
Date or Option Closing Date for a reasonable period, but not in any event
exceeding five business days, in order to effect whatever changes may thereby be
24
<PAGE>
made necessary in the Registration Statement or the Prospectus or in any
other documents and arrangements, and the Company agrees to file promptly any
amendment to the Registration Statement or the Prospectus which in the
opinion of counsel for the Underwriters may thereby be made necessary. The
term "Underwriter" as used in this Agreement shall include any party
substituted under this Section 6 with like effect as if it had originally
been a party to this Agreement with respect to such Securities.
7. Additional Covenants.
7.1 BOARD DESIGNEE. For a period of five years from the Effective Date,
the Company will elect a designee of the Representative (reasonably
acceptable to the Company) as a member of the Board of Directors of the
Company. Such designee shall receive no more or less compensation than is
paid to other non-management directors of the Company. If the Representative
does not exercise its option to designate a member of the Company's Board of
Directors, the Representative shall nevertheless have the right to send a
representative (who need not be the same individual from meeting to meeting)
to observe each meeting of the Board of Directors. Such person, whether a
member of the Board of Directors or a representative, shall be entitled to
receive reimbursement for all reasonable costs incurred in attending such
meetings, including, but not limited to, food, lodging and transportation.
7.2 INSIDER SALES. During the five year period following the Effective
Date, the Representative shall have the right to purchase for the
Representative's account or to sell for the account of the insiders set forth on
Schedule 7.2 hereto ("Insiders") any securities sold on any United States
securities market or exchange, including, but not limited to, open market sales
or sales pursuant to Rule 144 under the Act. Each of the Insiders will agree to
consult with the Representative with regard to any such sales and will offer the
Representative the exclusive opportunity to purchase or sell such securities on
terms at least as favorable to the Insiders as they can secure elsewhere. If the
Representative fails to accept in writing any such proposal for sale by the
Insiders within one business day after receipt of a notice containing such
proposal, then the Representative shall have no claim or right with respect to
any such sales contained in any such notice. If, thereafter, such proposal is
modified in any material respect, the Insiders shall adopt the same procedures
as with respect to the original proposal.
7.3 COMPENSATION AND OTHER ARRANGEMENTS. The Company hereby agrees that
for a period of three years from the Effective Date, all compensation and other
arrangements between the Company and its officers, directors and affiliates
shall be approved by the Option Plan/Compensation Committee of the Company's
Board of Directors, a majority of the members of which shall be independent.
8. Representations and Agreements to Survive Delivery. Except as the context
otherwise requires, all representations, warranties and agreements contained in
this Agreement shall be deemed to be representations, warranties and agreements
at the Closing Dates and such representations, warranties and agreements of the
Underwriters and Company, including the indemnity agreements contained in
Section 5 hereof, shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any Underwriter, the Company or any
controlling person, and shall survive termination of this Agreement or the
issuance and delivery of the Securities to the several Underwriters until the
earlier of the expiration of any applicable statute of limitations and the
seventh anniversary of the later of the Closing Date or the Option Closing Date,
if any, at which time the representations, warranties and agreements shall
terminate and be of no further force and effect.
25
<PAGE>
9. Effective Date of This Agreement and Termination Thereof.
9.1 EFFECTIVE DATE. This Agreement shall become effective on the Effective
Date at the time that the Registration Statement is declared effective.
9.2 TERMINATION. You shall have the right to terminate this Agreement
at any time prior to any Closing Date, (i) if any domestic or international
event or act or occurrence has materially disrupted, or in your opinion will
in the immediate future materially disrupt, general securities markets in the
United States; or (ii) if trading on the New York Stock Exchange, the
American Stock Exchange, The Boston Stock Exchange or in the over-the-counter
market shall have been suspended, or minimum or maximum prices for trading
shall have been fixed, or maximum ranges for prices for securities shall have
been fixed, or maximum ranges for prices for securities shall have been
required on the over-the-counter market by the NASD or by order of the
Commission or any other government authority having jurisdiction, or (iii) if
the United States shall have become involved in a war or major hostilities,
or (iv) if a banking moratorium has been declared by a New York State or
federal authority, or (v) if a moratorium on foreign exchange trading has
been declared which materially adversely impacts the United States securities
market, or (vi) if the Company shall have sustained a material loss by fire,
flood, accident, hurricane, earthquake, theft, sabotage or other calamity or
malicious act which, whether or not such loss shall have been insured, will,
in your opinion, make it inadvisable to proceed with the delivery of the
Securities, or (vii) if Gary J. Wasserson or David S. Tobin, Esq. shall no
longer serve the Company in their present capacities, or (viii) if the
Company has breached any of its representations, warranties or obligations
hereunder, or (ix) if the Representative shall have become aware after the
date hereof of such a material adverse change in the condition (financial or
otherwise), business, or prospects of the Company, or such adverse material
change in general market conditions, as in the Representative's judgment
would make it impracticable to proceed with the offering, sale and/or
delivery of the Securities or to enforce contracts made by the Underwriters
for the sale of the Securities.
9.3 NOTICE. If you elect to prevent this Agreement from becoming effective
or to terminate this Agreement as provided in this Section 9, the Company shall
be notified on the same day as such election is made by you by telephone or
telecopy, confirmed by letter.
9.4 EXPENSES. In the event that this Agreement shall not be carried out
for any reason whatsoever, within the time specified herein or any extensions
thereof pursuant to the terms herein, the obligations of the Company to pay the
expenses related to the transactions contemplated herein shall be governed by
Section 3.15 hereof.
9.5 INDEMNIFICATION. Notwithstanding any contrary provision contained in
this Agreement, any election hereunder or any termination of this Agreement, and
whether or not this Agreement is otherwise carried out, the provisions of
Section 5 shall not be in any way affected by such election or termination or
failure to carry out the terms of this Agreement or any part hereof.
10. Miscellaneous.
10.1 NOTICES. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and shall be mailed, delivered or
telecopied and confirmed
26
<PAGE>
If to the Representative:
GKN Securities Corp.
61 Broadway
12th Floor
New York, New York 10006
Attention: David M. Nussbaum, Chairman
Copy to:
Robinson Brog Leinwand Greene Genovese & Gluck, P.C.
1345 Avenue of the Americas
New York, New York 10105
Attention: Richard W. Cohen, Esq.
If to the Company:
Global Telecommunication Solutions, Inc.
5697 Rising Sun Avenue
Philadelphia, Pennsylvania 19120
Attention: David S. Tobin, Esq.
Copy to:
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Attention: David Alan Miller, Esq.
10.2 HEADINGS. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Agreement.
10.3 AMENDMENT. This Agreement may be amended only by a written instrument
executed by each of the parties hereto.
10.4 ENTIRE AGREEMENT. This Agreement (together with the other agreements
and documents being delivered pursuant to or in connection with this Agreement)
constitutes the entire agreement of the parties hereto with respect to the
subject matter hereof, and supersedes all prior agreements and understandings of
the parties, oral and written, with respect to the subject matter hereof.
10.5 BINDING EFFECT. This Agreement shall inure solely to the benefit
of and shall be binding upon, the Representative, the Underwriters, the
Company and the controlling persons, directors and officers referred to in
Section 5 hereof, and their respective successors, legal representatives and
assigns, and no other person shall have or be construed to have any legal or
equitable right, remedy or claim under or in respect of or by virtue of this
Agreement or any provisions herein contained.
10.6 Governing Law, Jurisdiction. This Agreement shall be governed by and
construed and enforced in accordance with the law of the State of New York,
without giving effect
27
<PAGE>
to conflicts of law. The Company hereby agrees that any action, proceeding or
claim against it arising out of, relating in any way to this Agreement shall
be brought and enforced in the courts of the State of New York or the United
States District Court for the Southern District of New York, and irrevocably
submits to such jurisdiction, which jurisdiction shall be exclusive. The
Company hereby waives any objection to such exclusive jurisdiction and that
such courts represent an inconvenient forum. Any such process or summons to
be served upon the Company may be served by transmitting a copy thereof by
registered or certified mail, return receipt requested, postage prepaid,
addressed to it at the address set forth in Section 10.1 hereof. Such mailing
shall be deemed personal service and shall be legal and binding upon the
Company in any action, proceeding or claim. The parties hereto agree that the
prevailing party(ies) in any such action shall be entitled to recover from
the other party(ies) all of its reasonable attorneys' fees and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
10.7 EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate counterparts,
each of which shall be deemed to be an original, but all of which taken together
shall constitute one and the same agreement, and shall become effective when one
or more counterparts has been signed by each of the parties hereto and delivered
to each of the other parties hereto.
10.8 Waiver, Etc. The failure of any of the parties hereto to at any
time enforce any of the provisions of this Agreement shall not be deemed or
construed to be a waiver of any such provision, nor to in any way affect the
validity of this Agreement or any provision hereof or the right of any of the
parties hereto to thereafter enforce each and every provision of this
Agreement. No waiver of any breach, non-compliance or non-fulfillment of any
of the provisions of this Agreement shall be effective unless set forth in a
written instrument executed by the party or parties against whom or which
enforcement of such waiver is sought; and no waiver of any such breach,
non-compliance or non-fulfillment shall be construed or deemed to be a waiver
of any other or subsequent breach, non-compliance or non-fulfillment.
28
<PAGE>
If the foregoing correctly sets forth the understanding between the
Representative and the Company, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement between us.
VERY TRULY YOURS,
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
By:
-------------------------------------
Name: Gary J. Wasserson
Title: Chief Executive Officer
Accepted as of the date first
above written.
NEW YORK, NEW YORK
GKN SECURITIES CORP.
(for itself and as Representative
of the Underwriters listed on
Schedule I hereto)
By:
-------------------------------
Deborah S. Novick
Title: Senior Vice President
29
<PAGE>
SCHEDULE I
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
2,000,000 Shares of Common Stock
<TABLE>
<CAPTION>
NUMBER OF FIRM
SECURITIES
UNDERWRITER TO BE PURCHASED
- ----------- ---------------
<S> <C>
GKN Securities Corp.
Barington Capital Group, L.P. ---------------
Total
---------------
---------------
</TABLE>
30
<PAGE>
Exhibit 4.12
THE REGISTERED HOLDER OF THIS PURCHASE OPTION BY ITS ACCEPTANCE HEREOF,
AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE OPTION EXCEPT
AS HEREIN PROVIDED.
NOT EXERCISABLE PRIOR TO June , 1998. VOID AFTER 5:00 P.M. EASTERN
TIME, June , 2002.
PURCHASE OPTION
FOR THE PURCHASE OF
_______ SHARES OF COMMON STOCK
of
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
(A Delaware Corporation)
1. Purchase Option.
THIS CERTIFIES THAT, in consideration of $100.00 duly paid by or on
behalf of ("Holder"), as registered owner of this Purchase Option, to
Global Telecommunication Solutions, Inc. ("Company"), Holder is entitled, at
any time or from time to time on or after June , 1998 ("Commencement
Date"), and at or before 5:00 p.m., Eastern Time, June , 2002
("Expiration Date"), but not thereafter, to subscribe for, purchase and
receive, in whole or in part, up to ( ) shares of Common Stock of
the Company, $0.01 par value ("Common Stock"). The shares of Common Stock are
sometimes referred to herein as the "Securities". If the Expiration Date is a
day on which banking institutions are authorized by law to close, then this
Purchase Option may be exercised on the next succeeding day which is not such
a day in accordance with the terms herein. During the period commencing the
date of issue of the Purchase Option and ending on the Expiration Date, the
Company agrees not to take any action that would terminate the Purchase
Option. This Purchase Option is initially exercisable at $ per share of
Common Stock purchased; provided, however, that upon the occurrence of any of
the events specified in Section 6 hereof, the rights granted by this Purchase
Option, including the exercise price and the number of shares of Common Stock
to be received upon such exercise, shall be adjusted as therein specified.
The term "Exercise Price" shall mean the initial exercise price or the
adjusted exercise price, depending on the context of a share of Common Stock.
2. Exercise.
2.1 EXERCISE FORM. In order to exercise this Purchase Option, the
exercise form attached hereto must be duly executed and completed and
delivered to the Company, together with this Purchase Option and payment of
the Exercise Price in cash or by certified check or official bank check for
the Securities being purchased. If the subscription rights represented hereby
shall not be exercised at or before 5:00 p.m., Eastern time, on the
Expiration Date this
<PAGE>
Purchase Option shall become and be void without further force or effect, and
all rights represented hereby shall cease and expire.
2.2 LEGEND. Each certificate for Securities purchased under this
Purchase Option shall bear a legend as follows unless such Securities have
been registered under the Securities Act of 1933, as amended ("Act"):
"The securities represented by this certificate have
not been registered under the Securities Act of 1933,
as amended ("Act") or applicable state law. The securities
may not be offered for sale, sold or otherwise transferred
except pursuant to an effective registration statement under
the Act, or pursuant to an exemption from registration under
the Act and applicable state law."
2.3 CASHLESS EXERCISE.
2.3.1 Determination of Amount. In lieu of the payment of the Exercise
Price in the manner required by Section 2.1, the Holder shall have the right
(but not the obligation) to convert any exercisable but unexercised portion
of this Purchase Option into securities ("Conversion Right") as follows: Upon
exercise of the Conversion Right, the Company shall deliver to the Holder
(without payment by the Holder of any of the Exercise Price in cash) that
number of shares of Common Stock equal to the quotient obtained by dividing
(x) the "Value" (as defined below) of the portion of the Purchase Option
being converted by (y) the Market Price (as defined below). The "Value" of
the portion of the Purchase Option being converted shall equal the remainder
derived from subtracting (a) the Exercise Price multiplied by the number of
shares of Common Stock underlying the portion of the Purchase Option being
converted from (b) the Market Price of the Common Stock multiplied by the
number of shares of Common Stock underlying the portion of the Purchase
Option being converted. As used herein, the term "Market Price" shall be
deemed to be the last reported sale price of the Common Stock on the date
prior to the date the Conversion Right is exercised, or, in case no such
reported sale takes place on such day, the average of the last reported sale
prices for the immediately preceding three trading days, in either case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading, or, if the Common Stock is not listed
or admitted to trading on any national securities exchange or if any such
exchange on which the Common Stock is listed is not its principal trading
market, the last reported sale price as furnished by the National Association
of Securities Dealers, Inc. ("NASD") through the Nasdaq National Market or
SmallCap Market, or, if applicable, the OTC Bulletin Board, or if the Common
Stock is not listed or admitted to trading on any of the foregoing markets,
or similar organization, as determined in good faith by resolution of the
Board of Directors of the Company, based on the best information available to
it.
2.3.2 Mechanics of Cashless Exercise. The Conversion Right may be
exercised by the Holder on any business day on or after the Commencement Date
and not later than the Expiration Date by delivering to the Company the
Purchase Option with a duly executed exercise form attached hereto with the
cashless exercise section completed.
3. Transfer.
3.1 GENERAL RESTRICTIONS. The registered Holder of this Purchase
Option, by its acceptance hereof, agrees that it will not sell, transfer or
assign or hypothecate this Purchase Option prior to the Commencement Date to
anyone other than (i) an officer of GKN Securities Corp. ("Representative")
or an officer or partner of any other underwriter listed on Schedule I to
2
<PAGE>
the Underwriting Agreement ("Underwriters") or any broker-dealer which
executed the Selected Dealer Agreement between the Representative and the
members of the selling group ("Selected Dealer") in connection with the
Company's public offering with respect to which this Purchase Option has been
issued, or (ii) the Representative or any Underwriter or Selected Dealer. On
and after the Commencement Date, transfers to others may be made subject to
compliance with or exemptions from applicable securities laws. In order to
make any permitted assignment, the Holder must deliver to the Company the
assignment form attached hereto duly executed and completed, together with
the Purchase Option and payment of all transfer taxes, if any, payable in
connection therewith. The Company shall immediately transfer this Purchase
Option on the books of the Company and shall execute and deliver a new
Purchase Option or Purchase Options of like tenor to the appropriate
assignee(s) expressly evidencing the right to purchase the aggregate number
of shares of Common Stock purchasable hereunder or such portion of such
number as shall be contemplated by any such assignment.
3.2 RESTRICTIONS IMPOSED BY THE ACT. This Purchase Option and the
Securities underlying this Purchase Option shall not be transferred unless
and until (i) the Company has received the opinion of counsel for the Holder
that this Purchase Option or the Securities, as the case may be, may be
transferred pursuant to an exemption from registration under the Act and
applicable state law, the availability of which is established to the
reasonable satisfaction of the Company, or (ii) a registration statement
relating to such Purchase Option or Securities, as the case may be, has been
filed by the Company and declared effective by the Securities and Exchange
Commission ("Commission") and is in compliance with applicable state law.
4. New Purchase Options to be Issued.
4.1 PARTIAL EXERCISE, CONVERSION OR TRANSFER. Subject to the restrictions
in Section 3 hereof, this Purchase Option may be exercised, converted or
assigned in whole or in part. In the event of the exercise, conversion or
assignment hereof in part only, upon surrender of this Purchase Option for
cancellation, together with the duly executed exercise or assignment form and
funds (except in the case of conversion) sufficient to pay any Exercise Price
and/or transfer tax, the Company shall cause to be delivered to the Holder
without charge a new Purchase Option of like tenor to this Purchase Option in
the name of the Holder evidencing the right of the Holder to purchase the
aggregate number of shares of Common Stock purchasable hereunder as to which
this Purchase Option has not been exercised, converted or assigned.
4.2 LOST CERTIFICATE. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this
Purchase Option and of reasonably satisfactory indemnification, the Company
shall execute and deliver a new Purchase Option of like tenor and date. Any
such new Purchase Option executed and delivered as a result of such loss,
theft, mutilation or destruction shall constitute a substitute contractual
obligation on the part of the Company.
5. Registration Rights.
5.1 DEMAND REGISTRATION.
5.1.1 Grant of Right. The Company, upon written demand ("Initial Demand
Notice") of the Holder(s) of at least 51% of the Purchase Options and/or the
underlying shares of Common Stock ("Majority Holders"), agrees to register,
on one occasion, all or any portion of the Purchase Options requested by the
Majority Holders in the Initial Demand Notice and all of the Securities
underlying such Purchase Options (collectively, the "Registrable
Securities"). On such occasion, the Company will file a Registration
Statement covering the Registrable Securities
3
<PAGE>
within sixty days after receipt of the Initial Demand Notice and use its best
efforts to have such registration statement declared effective promptly
thereafter. If the Company fails to comply with the provisions of this
Section 5.1.1, the Company shall, in addition to any other equitable or other
relief available to the Holder(s), be liable for any and all incidental,
special and consequential damages sustained by the Holder(s). The demand for
registration may be made at any time during a period of four years beginning
one year from the Effective Date. The Company covenants and agrees to give
written notice of its receipt of any Initial Demand Notice by any Holder(s)
to all other registered Holders of the Purchase Options and/or the
Registrable Securities within ten days from the date of the receipt of any
such Initial Demand Notice.
5.1.2 Terms. The Company shall bear all fees and expenses attendant to
registering the Registrable Securities, but the Holders shall pay any and all
underwriting commissions and the expenses of any legal counsel selected by
the Holders to represent them in connection with the sale of the Registrable
Securities. The Company agrees to use its best efforts to cause the filing
required herein to become effective promptly and to qualify or register the
Registrable Securities in such States as are reasonably requested by the
Holder(s); provided, however, that in no event shall the Company be required
to register the Registrable Securities in a State in which such registration
would cause (i) the Company to be obligated to register or license to do
business in such State, or (ii) the principal stockholders of the Company to
be obligated to escrow their shares of capital stock of the Company. The
Company shall cause any registration statement filed pursuant to the demand
rights granted under Section 5.1.1 to remain effective until all of the
Registrable Securities covered by such registration statement are sold or the
Holders may sell such securities without registration under an exemption from
registration requirements.
5.2 "PIGGY-BACK" REGISTRATION.
5.2.1 Grant of Right. In addition to the demand right of registration,
the Holders of the Purchase Options shall have the right, for a period of six
years commencing one year from the Effective Date, to include the Registrable
Securities as part of any other registration of securities filed by the
Company (other than in connection with a transaction contemplated by Rule
145(a) promulgated under the Act or pursuant to Form S-8 or any equivalent
form) provided, however, that if, in the written opinion of the Company's
managing underwriter or underwriters, if any, for such offering, the
inclusion of the Registrable Securities, when added to the securities being
registered by the Company or the selling stockholder(s), will exceed the
maximum amount of the Company's securities which can be marketed (i) at a
price reasonably related to their then current market value, or (ii) without
materially and adversely affecting the entire offering, the Company shall
nevertheless register all or any portion of the Registrable Securities
required to be so registered but such Registrable Securities shall not be
sold by the Holders until 180 days after the registration statement for such
offering has become effective and provided further that, if any securities
are registered for sale on behalf of other stockholders in such offering and
such stockholders have not agreed to defer such sale until the expiration of
such 180 day period, the number of securities to be sold by all stockholders
in such public offering during such 180 day period shall be apportioned pro
rata among all such selling stockholders, including all holders of the
Registrable Securities, according to the total amount of securities of the
Company owned by said selling stockholders, including all holders of the
Registrable Securities.
5.2.2 Terms. The Company shall bear all fees and expenses attendant to
registering the Registrable Securities, but the Holders shall pay any and all
underwriting commissions and the expenses of any legal counsel selected by
the Holders to represent them in connection with the sale of the Registrable
Securities. In the event of such a proposed regis-
4
<PAGE>
tration, the Company shall furnish the then Holders of outstanding
Registrable Securities with not less than thirty days written notice prior to
the proposed date of filing of such registration statement. Such notice to
the Holders shall continue to be given for each registration statement filed
by the Company until such time as all of the Registrable Securities have been
sold by the Holder. The holders of the Registrable Securities shall exercise
the "piggy-back" rights provided for herein by giving written notice, within
twenty days of the receipt of the Company's notice of its intention to file a
registration statement. The Company shall cause any registration statement
filed pursuant to the above "piggyback" rights to remain effective until all
of the Registrable Securities are sold or the Holders may sell such
securities without restriction under an exemption from registration
requirements.
5.3 GENERAL TERMS.
5.3.1 Indemnification. The Company shall indemnify the Holder(s) of the
Registrable Securities to be sold pursuant to any registration statement
hereunder and each person, if any, who controls such Holders within the
meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange
Act of 1934, as amended ("Exchange Act"), against all loss, claim, damage,
expense or liability (including all reasonable attorneys' fees and other
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act,
the Exchange Act or otherwise, arising from such registration statement but
only to the same extent and with the same effect as the provisions pursuant
to which the Company has agreed to indemnify the Representative contained in
Section 5 of the Underwriting Agreement between the Representative and the
Company, dated the Effective Date. The Holder(s) of the Registrable
Securities to be sold pursuant to such registration statement, and their
successors and assigns, shall severally, and not jointly, indemnify the
Company, against all loss, claim, damage, expense or liability (including all
reasonable attorneys' fees and other expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or otherwise, arising
from information furnished by or on behalf of such Holders, or their
successors or assigns, in writing, for specific inclusion in such
registration statement to the same extent and with the same effect as the
provisions contained in Section 5 of the Underwriting Agreement pursuant to
which the Underwriters have agreed to indemnify the Company.
5.3.2 Exercise of Purchase Option. Nothing contained in this Purchase
Option shall be construed as requiring the Holder(s) to exercise their
Purchase Options prior to or after the initial filing of any registration
statement or the effectiveness thereof.
5.3.3 Documents Delivered to Holders. The Company shall furnish to each
Holder participating in any of the foregoing offerings and to each
underwriter of any such offering, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company,
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, an opinion dated the
date of the closing under any underwriting agreement related thereto), and
(ii) a "cold comfort" letter dated the effective date of such
registration statement (and, if such registration includes an underwritten
public offering, a letter dated the date of the closing under the
underwriting agreement) signed by the independent public accountants who have
issued a report on the Company's financial statements included in such
registration statement, in each case covering substantially the same matters
with respect to such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters delivered
to underwriters in underwritten public offerings of securities. The
5
<PAGE>
Company shall also deliver promptly to each Holder participating in the
offering requesting the correspondence and memoranda described below and to
the managing underwriter copies of all correspondence between the Commission
and the Company, its counsel or auditors and all memoranda relating to
discussions with the Commission or its staff with respect to the registration
statement and permit each Holder and underwriter to do such investigation,
upon reasonable advance notice, with respect to information contained in or
omitted from the registration statement as it deems reasonably necessary to
comply with applicable securities laws or rules of the NASD. Such
investigation shall include access to books, records and properties and
opportunities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable
times and as often as any such Holder shall reasonably request.
5.3.4 Underwriting Agreement. The Company shall enter into an
underwriting agreement with the managing underwriter(s) selected by any
Holders whose Registrable Securities are being registered pursuant to this
Section 5. Such agreement shall be reasonably satisfactory in form and
substance to the Company, each Holder and such managing underwriters, and
shall contain such representations, warranties and covenants by the Company
and such other terms as are customarily contained in agreements of that type
used by the managing underwriter. The Holders shall be parties to any
underwriting agreement relating to an underwritten sale of their Registrable
Securities and may, at their option, require that any or all the
representations, warranties and covenants of the Company to or for the
benefit of such underwriters shall also be made to and for the benefit of
such Holders. Such Holders shall not be required to make any representations
or warranties to or agreements with the Company or the underwriters except as
they may relate to such Holders, their shares and their intended methods of
distribution.
5.3.5 Documents to be Delivered by Holder(s). Each of the Holder(s)
participating in any of the foregoing offerings shall furnish to the Company
a completed and executed questionnaire provided by the Company requesting
information customarily sought of selling security holders.
6. Adjustments.
6.1 ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES. The Exercise
Price and the number of shares of Common Stock underlying the Purchase Option
shall be subject to adjustment from time to time as hereinafter set forth:
6.1.1 Stock Dividends--Recapitalization, Reclassification, Split-Ups. If
after the date hereof, and subject to the provisions of Section 6.3 below,
the number of outstanding shares of Common Stock is increased by a stock
dividend payable in shares of Common Stock or by a split-up, recapitalization
or reclassification of shares of Common Stock or other similar event, then,
on the effective date thereof, the number of shares of Common Stock issuable
on exercise of the Purchase Option shall be increased in proportion to such
increase in outstanding shares.
6.1.2 Aggregation of Shares. If after the date hereof, and subject to
the provisions of Section 6.3, the number of outstanding shares of Common
Stock is decreased by a consolidation, combination or reclassification of
shares of Common Stock or other similar event, then, upon the effective date
thereof, the number of shares of Common Stock issuable on exercise of the
Purchase Option shall be decreased in proportion to such decrease in
outstanding shares.
6
<PAGE>
6.1.3 Adjustments in Exercise Price. Whenever the number of shares of
Common Stock issuable upon the exercise of this Purchase Option is adjusted,
as provided in this Section 6.1, the Exercise Price shall be adjusted (to the
nearest cent) by multiplying such Exercise Price immediately prior to such
adjustment by a fraction (x) the numerator of which shall be the number of
shares of Common Stock purchasable upon the exercise of this Purchase Option
immediately prior to such adjustment, and (y) the denominator of which shall
be the number of shares of Common Stock so purchasable immediately thereafter.
6.1.4 Replacement of Securities upon Reorganization, etc. In case of any
reclassification or reorganization of the outstanding shares of Common Stock
other than a change covered by Section 6.1.1 hereof or which solely affects
the par value of such shares of Common Stock, or in the case of any merger or
consolidation of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the continuing corporation
and which does not result in any reclassification or reorganization of the
outstanding shares of Common Stock), or in the case of any sale or conveyance
to another corporation or entity of the property of the Company as an
entirety or substantially as an entirety in connection with which the Company
is dissolved, the Holder of this Purchase Option shall have the right
thereafter (until the expiration of the right of exercise of this Purchase
Option) to receive upon the exercise hereof, for the same aggregate Exercise
Price payable hereunder immediately prior to such event, the kind and amount
of shares of stock or other securities or property (including cash)
receivable upon such reclassification, reorganization, merger or
consolidation, or upon a dissolution following any such sale or other
transfer, by a Holder of the number of shares of Common Stock of the Company
obtainable upon exercise of this Purchase Option immediately prior to such
event; and if any reclassification also results in a change in shares of
Common Stock covered by Section 6.1.1, then such adjustment shall be made
pursuant to Sections 6.1.1, 6.1.3 and this Section 6.1.4. The provisions of
this Section 6.1.4 shall similarly apply to successive reclassifications,
reorganizations, mergers or consolidations, sales or other transfers.
6.1.5 Changes in Form of Purchase Option. This form of Purchase Option
need not be changed because of any change pursuant to this Section, and
Purchase Options issued after such change may state the same Exercise Price
and the same number of shares of Common Stock as are stated in the Purchase
Options initially issued pursuant to this Agreement. The acceptance by any
Holder of the issuance of new Purchase Options reflecting a required or
permissive change shall not be deemed to waive any rights to a prior
adjustment or the computation thereof.
6.2 [Intentionally Omitted]
6.3 ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be
required to issue certificates representing fractions of shares of Common
Stock upon the exercise or transfer of the Purchase Option, nor shall it be
required to issue scrip or pay cash in lieu of any fractional interests, it
being the intent of the parties that all fractional interests shall be
eliminated by rounding any fraction up or down to the nearest whole number of
shares of Common Stock or other securities, properties or rights.
7. Reservation and Listing. The Company shall at all times reserve and keep
available out of its authorized shares of Common Stock, solely for the
purpose of issuance upon exercise of the Purchase Options, such number of
shares of Common Stock or other securities, properties or rights as shall be
issuable upon the exercise thereof. The Company covenants and agrees that,
upon exercise of the Purchase Options and payment of the Exercise Price
therefor, all shares of Common Stock and other securities issuable upon such
exercise shall be duly and
7
<PAGE>
validly issued, fully paid and non-assessable and not subject to preemptive
rights of any stockholder. As long as the Purchase Options shall be
outstanding, the Company shall cause all the shares of Common Stock issuable
upon exercise of the Purchase Options to be listed (subject to official
notice of issuance) on all securities exchanges (or, if applicable on Nasdaq)
on which the Common Stock issued to the public in connection herewith are
then listed and/or quoted.
8. Certain Notice Requirements.
8.1 HOLDER'S RIGHT TO RECEIVE NOTICE. Nothing herein shall be construed
as conferring upon the Holders the right to vote or consent or to receive
notice as a stockholder for the election of directors or any other matter, or
as having any rights whatsoever as a stockholder of the Company. If, however,
at any time prior to the expiration of the Purchase Options and their
exercise, any of the events described in Section 8.2 shall occur, then, in
one or more of said events, the Company shall give written notice of such
event at least fifteen days prior to the date fixed as a record date or the
date of closing the transfer books for the determination of the stockholders
entitled to such dividend, distribution, conversion or exchange of securities
or subscription rights, or entitled to vote on such proposed dissolution,
liquidation, winding up, consolidation, merger or sale. Such notice shall
specify such record date or the date of the closing of the transfer books, as
the case may be.
8.2 EVENTS REQUIRING NOTICE. The Company shall be required to give the
notice described in this Section 8 upon one or more of the following events:
(i) if the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive any dividend or
distribution, or (ii) the Company shall offer to all the holders of its
Common Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital stock of
the Company, or any option, right or warrant to subscribe therefor, or
(iii) a dissolution, liquidation or winding up of the Company, or a
consolidation or merger where the Company is not the survivor, or a sale of
all or substantially all of its property, assets and business shall be
proposed.
8.3 NOTICE OF CHANGE IN EXERCISE PRICE. The Company shall, promptly
after an event requiring a change in the Exercise Price pursuant to Section 6
hereof, send notice to the Holders of such event and change ("Price
Notice"). The Price Notice shall describe the event causing the change and
the method of calculating same and shall be certified as being true and
accurate by the Company's Chief Executive Officer and Chief Financial Officer.
8.4 TRANSMITTAL OF NOTICES. All notices, requests, consents and other
communications under this Purchase Option shall be in writing and shall be
deemed to have been duly made on the date of delivery if delivered personally
or sent by overnight courier, with acknowledgment of receipt to the party to
which notice is given, or on the fifth day after mailing if mailed to the
party to whom notice is to be given, by registered or certified mail, return
receipt requested, postage prepaid and properly addressed as follows: (i)
if to the registered Holder of the Purchase Option, to the address of such
Holder as shown on the books of the Company, or (ii) if to the Company, to
its principal executive office.
9. Miscellaneous.
9.1 AMENDMENTS. The Company and the Representative may from time to time
supplement or amend this Purchase Option without the approval of any of the
Holders in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
other provisions herein, or to make any other provisions in
8
<PAGE>
regard to matters or questions arising hereunder which the Company and the
Representative may deem necessary or desirable and which the Company and the
Representative deem shall not adversely affect the interest of the Holders.
All other modifications or amendments shall require the written consent of
the party against whom enforcement of the modification or amendment is sought.
9.2 HEADINGS. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the
meaning or interpretation of any of the terms or provisions of this Purchase
Option.
9.3 ENTIRE AGREEMENT. This Purchase Option (together with the other
agreements and documents being delivered pursuant to or in connection with
this Purchase Option) constitutes the entire agreement of the parties hereto
with respect to the subject matter hereof, and supersedes all prior
agreements and understandings of the parties, oral and written, with respect
to the subject matter hereof.
9.4 BINDING EFFECT. This Purchase Option shall inure solely to the
benefit of and shall be binding upon, the Holder and the Company and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or
claim under or in respect of or by virtue of this Purchase Option or any
provisions herein contained.
9.5 GOVERNING LAW; SUBMISSION TO JURISDICTION. This Purchase Option
shall be governed by and construed and enforced in accordance with the laws
of the State of New York, without giving effect to conflict of laws. The
Company hereby agrees that any action, proceeding or claim against it arising
out of, or relating in any way to this Purchase Option shall be brought and
enforced in the courts of the State of New York or of the United States of
America for the Southern District of New York, and irrevocably submits to
such jurisdiction, which jurisdiction shall be exclusive. The Company hereby
waives any objection to such exclusive jurisdiction and that such courts
represent an inconvenient forum. Any process or summons to be served upon the
Company may be served by transmitting a copy thereof by registered or
certified mail, return receipt requested, postage prepaid, addressed to it at
the address set forth in Section 8.4 hereof. Such mailing shall be deemed
personal service and shall be legal and binding upon the Company in any
action, proceeding or claim. The Company agrees that the prevailing
party(ies) in any such action shall be entitled to recover from the other
party(ies) all of its reasonable attorneys' fees and expenses relating to
such action or proceeding and/or incurred in connection with the preparation
therefor.
9.6 WAIVER, ETC. The failure of the Company or the Holder to at any time
enforce any of the provisions of this Purchase Option shall not be deemed or
construed to be a waiver of any such provision, nor to in any way affect the
validity of this Purchase Option or any provision hereof or the right of the
Company or any Holder to thereafter enforce each and every provision of this
Purchase Option. No waiver of any breach, non-compliance or non-fulfillment
of any of the provisions of this Purchase Option shall be effective unless
set forth in a written instrument executed by the party or parties against
whom or which enforcement of such waiver is sought; and no waiver of any such
breach, non-compliance or non-fulfillment shall be construed or deemed to be
a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
9.7 EXECUTION IN COUNTERPARTS. This Purchase Option may be executed in
one or more counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original, but all of
which taken together shall constitute one and the same
9
<PAGE>
agreement, and shall become effective when one or more counterparts has been
signed by each of the parties hereto and delivered to each of the other
parties hereto.
9.8 EXCHANGE AGREEMENT. As a condition of the Holder's receipt and
acceptance of this Purchase Option, Holder agrees that, at any time prior to
the complete exercise of this Purchase Option by Holder, if the Company and
the Representative enter into an agreement ("Exchange Agreement") pursuant
to which they agree that all outstanding Purchase Options will be exchanged
for securities or cash or a combination of both, then Holder shall agree to
such exchange and become a party to the Exchange Agreement.
10
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Purchase Option to be
signed by its duly authorized officer as of the _____ day of June, 1997.
GLOBAL TELECOMMUNICATION
SOLUTIONS, INC.
By:
-----------------------
Name: Gary J. Wasserson
Title: Chief Executive Officer
11
<PAGE>
Form to be used to exercise Purchase Option:
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
Date: ______________, 1998
The undersigned hereby elects irrevocably to exercise the within
Purchase Option and to purchase ______ shares of Common Stock of Global
Telecommunication Solutions, Inc. and hereby makes payment of $_________ (at
the rate of $_________ per share of Common Stock) in payment of the Exercise
Price pursuant thereto. Please issue the Common Stock as to which this
Purchase Option is exercised in accordance with the instructions given below.
or
The undersigned hereby elects irrevocably to convert the Purchase
Options to purchase ______ shares of Common Stock into ______ shares of
Common Stock of Global Telecommunication Solutions, Inc. The portion of this
Purchase Option being converted has a "Value" of $_________ based on a
"Market Price" of $_________ per share of Common Stock. Please issue the
Common Stock in accordance with the instructions given below.
---------------------------------
Signature
---------------------------------
Print Name
- ---------------------------------
Signature Guaranteed
NOTICE: The signature to this form must correspond with the name as
written upon the face of the within Purchase Option in every particular
without alteration or enlargement or any change whatsoever, and must be
guaranteed by a bank, other than a savings bank, or by a trust company or by
a firm having membership on a reported national securities exchange.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name
-------------------------------------------------------
(Print in Block Letters)
Address
----------------------------------------------------
<PAGE>
Form to be used to assign Purchase Option:
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer of the
within Purchase Option):
FOR VALUE RECEIVED, ___________________________________________________
does hereby sell, assign and transfer unto _________________________________
the right to purchase ______ shares of Common Stock of Global
Telecommunication Solutions, Inc. ("Company") evidenced by the within
Purchase Option and does hereby authorize the Company to transfer such right
on the books of the Company.
Dated: _______________, 19__
--------------------------------
Signature
--------------------------------
Print Name
NOTICE: The signature to this form must correspond with the name as
written upon the face of the within Purchase Option in every particular
without alteration or enlargement or any change whatsoever.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Global Telecommunication Solutions, Inc.:
We consent to the use of our reports included herein and to the references to
our firm under the headings "Selected Consolidated Financial Data" and "Experts"
in the Prospectus.
/s/ KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
June 17, 1997
