SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
---------------------------
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission file number 1-13478
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3698386
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5697 Rising Sun Avenue, Philadelphia, Pennsylvania 19120
(Address of principal executive offices)
(215) 342-7700
(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of August 13, 1997,
there were 5,072,538 shares of common stock outstanding.
Page 1 of 17 Pages
Exhibit Index -- Page 16
1
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30,1997 (unaudited) and December 31, 1996...................3
Consolidated Statements of Operations - Six and three months ended June 30,
1997 and 1996 (unaudited)......................................................................4
Consolidated Statements of Cash Flows - Six months ended June 30, 1997 and
1996 (unaudited)...............................................................................5
Notes to Consolidated Financial Statements.....................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................................10
Part II. Other Information
Item 2. Changes in Securities................................................................14
Item 6. Exhibits and Reports on Form 8-K.....................................................14
Signatures....................................................................................15
</TABLE>
2
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Assets June 30, December 31,
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 927,069 $ 1,352,322
Accounts receivable, less allowance for doubtful accounts 2,703,547 2,450,119
of $452,134 and $399,000 in 1997 and 1996, respectively
Inventory 376,456 202,129
Deferred costs 957,053 1,127,887
Prepaid royalties and patent license fees 39,695 95,396
Prepaid expenses and other current assets 102,107 164,876
---------- ----------
Total current assets 5,105,927 5,392,729
----------- ----------
Goodwill, net 17,376,694 18,008,599
Fixed assets, net 2,230,195 1,948,917
Deferred financing fees, net 260,184 270,219
Other assets 903,862 198,901
--------- ----------
Total assets 25,876,862 $25,819,365
========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 4,245,428 3,238,666
Accrued liabilities 1,451,433 542,965
Deferred revenues 3,430,801 4,431,309
Estimated sales and excise tax liability 2,082,169 1,684,478
Amounts payable to affiliate 954,628 1,073,921
Capital lease obligation, current 56,528 51,775
------------ ----------
Total current liabilities 12,220,987 11,023,114
----------- ----------
Capital lease obligation, long-term 12,498 42,002
Convertible notes payable 2,624,750 2,800,000
Notes payable, net of unearned discount of $1,098,529 and $1,484,040 1,951,471 1,565,960
----------- ----------
Total liabilities 16,809,706 15,431,076
------------ ----------
Stockholders' equity:
Preferred stock, $.01 par value, authorized 1,000,000 shares; -- --
none issued
Common stock, $.01 par value, authorized 35,000,000 shares; 21,975 18,376
issued and outstanding 2,197,538 and 1,837,601 shares, respectively
Additional paid-in capital 25,865,214 22,990,766
Deferred compensation (150,399) (102,498)
Accumulated deficit (16,553,320) (12,406,504)
Cumulative foreign currency translation adjustment (16,314) (11,851)
Common stock note receivable (100,000) (100,000)
------------ -----------
Total stockholders' equity 9,067,156 10,388,289
------------ -----------
Total liabilities and stockholders' equity $25,876,862 $25,819,365
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
----------------------------------- --------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 8,604,812 $ 4,459,356 4,916,659 $ 3,131,646
Cost of sales 6,956,236 3,387,048 4,100,879 2,373,492
----------- ----------- ---------- -----------
Gross profit 1,648,576 1,072,308 815,780 758,154
----------- ----------- ---------- -----------
Selling and marketing expenses 1,367,629 1,292,376 588,966 777,094
General and administrative expenses 2,947,346 2,299,364 1,361,202 1,450,384
Depreciation and amortization 863,688 563,671 435,436 422,253
------------ ---------- ---------- -----------
Operating expenses 5,178,663 4,155,411 2,385,604 2,649,731
------------ ---------- ----------- -----------
Operating loss (3,530,087) (3,083,103) (1,569,824) (1,891,577)
Investment income 14,519 41,154 10,618 21,573
Interest expense (662,495) (87,508) (339,742) (70,282)
Other 31,247 5,600 27,047 4,200
------------ ----------- ----------- ----------
Loss before income taxes (4,146,816) (3,123,857) (1,871,901) (1,936,086)
Income tax expense -- -- -- --
Net loss $(4,146,816) $(3,123,857) $ (1,871,901) $ (1,936,086)
=========== =========== =========== ==========
Net loss per share $ (2.10) $ (2.08) $ (.90) $ (1.11)
============= ============= ============= =============
Weighted average shares of common
stock and common stock equivalents 1,974,053 1,500,222 2,090,036 1,747,124
=========== ========= ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,146,816) $(3,123,857)
Adjustments to reconcile net loss to net cash provided by or used in
operating activities:
Depreciation and amortization 863,688 556,876
Deferred compensation 103,747 230,667
Amortization of deferred financing fees 47,311 6,795
Amortization of unearned discount 385,511 --
Issuance of common stock in connection with a severance agreement 50,000 --
Loss on disposal of fixed assets 19,912 --
Changes in operating assets and liabilities, net of effects of acquisition:
(Increase) decrease in accounts receivable (253,428) 1,296,015
(Increase) decrease in inventory (174,327) 134,769
Decrease in deferred costs 170,834 46,574
Decrease in prepaid royalties and patent license fees 55,701 14,432
Decrease in prepaid expenses and other current assets 62,769 64,757
(Increase) in other assets (704,961) (18,183)
Increase (decrease) in accounts payable 1,006,762 (715,393)
Increase (decrease) in accrued liabilities 908,469 (14,192)
Increase in sales and excise taxes payable 397,691 363,427
(Decrease) increase in deferred revenue (1,000,508) 66,193
------------ -------------
Net cash used in operating activities (2,207,645) (1,091,120)
------------- -------------
Cash flows from investing activities:
Purchases of fixed assets (532,974) (222,214)
Cash acquired in excess of cash payment for acquisition -- 54,190
-------------- -------------
Net cash used in investing activities (532,974) (168,024)
------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants -- 2,656,358
Payment of notes payable to affiliate (119,293) (550,000)
Increase in notes receivable from Global Link prior to merger -- (250,655)
Proceeds from the exercise of options 4,374 --
Payments on capital lease obligation (24,751) (32,404)
Proceeds from exercise of warrants 2,500,000 --
Increase in deferred financing fees (40,501) --
-------------- --------------
Net cash provided by financing activities 2,319,829 1,823,299
------------- --------------
Effects of exchange rate changes on cash (4,463) (8,616)
-------------- --------------
Net increase (decrease) in cash (425,253) 555,539
Cash and cash equivalents at beginning of period 1,352,322 928,516
------------ --------------
Cash and cash equivalents at end of period $ 927,069 $ 1,484,055
============ ============
Supplemental disclosures:
Interest paid during the period $ 99,931 $ --
============ =============
Income taxes paid during the period $ -- $ --
============ =============
Non-cash investing and financing activities:
Issuance of common stock in connection with acquisition $ -- $ 11,039,488
============ ===========
Deferred compensation arising from grant of options and warrants $ 151,648 $ 400,000
=========== ============
Conversion of convertible notes payable into common stock $ 175,250 $ 148,850
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997
(1) Business and Basis of Presentation
Business
Global Telecommunication Solutions, Inc. (the "Company") was
incorporated on December 23, 1992 and is engaged in the marketing and
distribution of prepaid phone cards. The Company's phone cards provide
consumers access to long distance service through its switching
facilities and long distance network arrangements.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended June 30, 1997
are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997.
(2) Loss Per Share
Weighted average shares of common stock for the six months ended June
30, 1997 and 1996 does not include common stock equivalents as their
effect would be anti-dilutive.
(3) Reclassifications
Certain reclassifications have been made to the 1996 consolidated
financial statements to conform to the 1997
presentation.ReclassificationsCertain reclassifications have been made
to the 1996 consolidated financial statements to conform to the 1997
presentation.
(4) Acquisition
On February 29, 1996, pursuant to an Agreement and Plan of Merger dated
January 18, 1996, the Company, through a wholly-owned subsidiary,
acquired all the issued and outstanding common stock of Global Link
Teleco Corporation ("Global Link"). The acquisition was accounted for
as a purchase. Accordingly, the acquired assets and liabilities were
recorded at their estimated fair values at the date of acquisition and
the operating results of Global Link were included in the accompanying
consolidated statement of operations from the acquisition date.
In connection with the merger, the Company issued 572,773 shares of
common stock in exchange for all of the issued and outstanding common
stock of Global Link. In addition, the Company issued 17,602 shares of
common stock to Peoples Telephone Company, Inc. ("Peoples"), a creditor
of Global Link and a principal stockholder of the Company. The total
cost of the acquisition was approximately $11,400,000 including direct
transaction costs of approximately $344,000.
6
<PAGE>
The acquisition resulted in goodwill of $19,069,000, based on
an allocation of purchase price, calculated as follows:
Fair market value of common stock issued $11,040,000
Fair value of liabilities assumed 10,811,000
Fair value of assets acquired (3,126,000)
Acquisition related costs 344,000
-----------
Goodwill $19,069,000
The following unaudited combined pro forma information reflects the
results of operations assuming the acquisition of Global Link had been
made on January 1, 1996.
Six Months Ended
June 30, 1996
-------------------
Net sales $5,959,000
Net loss (3,806,000)
Net loss per share $ (2.25)
Pro forma adjustments include recording amortization expense of
goodwill and the elimination of interest expense on debt of Global Link
repaid in connection with the acquisition.
The pro forma results of operations are not necessarily indicative of
the actual results of operations that would have occurred had the
purchase been made at the beginning of the respective period, or of
results which may occur in the future.
(5) Reverse Stock Split
In February 1997, the Board of Directors of the Company approved an
amendment to its Amended and Restated Certificate of Incorporation to
effect a one-for-three reverse stock split, which was effected on March
24, 1997. All per share data and references to number of shares have
been retroactively restated in these financial statements to give
effect to the reverse stock split.
(6) Deferred Compensation
In January 1997, the Company extended its 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 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
$37,912 to date.
(7) Amounts Payable to Principal Stockholder
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 and the Company
agreed that it would pay Peoples the balance of approximately $954,000
in trade payables ("Trade Payables") from the proceeds of the Company's
proposed secondary offering (see note 12) within two days after the
consummation of such offering. The offering was consummated in July
1997 with the Trade Payables being repaid within the stipulated time
period.
7
<PAGE>
(8) Tax Obligations and Compliance
At June 30, 1997, the Company has not remitted certain amounts
previously collected for sales, use and excise taxes to various taxing
jurisdictions. Further, the Company has not filed certain sales and
use, excise, income or franchise tax returns in certain jurisdictions
in which it does business. Management is in the process of reviewing
the Company's tax collection, remittance and compliance policies and
procedures and has recorded a reserve for estimated tax obligations and
related compliance issues. Depending on the ultimate resolution of
these matters, it is reasonably possible that the amount of this
reserve could require adjustment in the near term and the amount of
such adjustment could be material.
(9) Liquidity
The Company has substantial capital requirements resulting from the
funding of losses from operations and the need to finance continued
growth. The Company believes that its cash balances, along with the
proceeds of $2,500,000 from the exercise of warrants in April 1997, and
the net proceeds of $13,468,863 from the Company's public offering in
July 1997 (see note 12), will satisfy the Company's cash requirements
until the end of 1998; however, there can be no assurance that this
will be the case. In the event that the Company's plans change or its
assumptions change or prove to be inaccurate (due to unanticipated
expenses, delays, difficulties or otherwise), or if cash flow proves to
be insufficient to fund the Company's operations after such period of
time, the Company will be required to seek additional financing and
curtail its expansion activities. The Company does not have any
arrangements with respect to, or sources of, additional financing and
there can be no assurance that additional financing will be available
to the Company on commercially reasonable terms, or at all. The failure
to obtain such financing could have a material adverse effect on the
Company.
(10) Warrants
Pursuant to an agreement with Wheatley Partners, L.P. ("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. In
consideration for exercising such warrants, the Company issued to
Wheatley warrants to purchase an aggregate of 250,000 shares of Common
Stock.
(11) Dial Around Compensation
In June 1997, the Company and three other parties filed a complaint
with the FCC against Sprint, challenging Sprint's application of
per-call surcharges for toll-free services originating from pay
telephones that purportedly compensate pay telephone providers. The
Company and the other complainants claim that Sprint's tariffed
per-call surcharges are inconsistent with the Communications Act of
1934 ("Communications Act") and the FCC's pay telephone compensation
order and are unlawful under long standing FCC precedent. The
complainants requested that the FCC (i) find that Sprint violated
Section 201(b) of the Communications Act by charging unjust and
unreasonable pay telephone surcharges, (ii) find the surcharges
contained in Sprint's tariffs unlawful and, therefore, unenforceable
and (iii) require Sprint to refund, with interest, any and all amounts
collected from phone card providers as a result of Sprint's imposition
of the telephone surcharges.
Commencing in February 1997, Sprint has charged the Company a total of
$441,363 in connection with the pay telephone surcharges. The Company
has provided Sprint with formal written notice indicating its dispute
with the calculation and application of the pay telephone surcharge.
The Company has not paid any of the disputed charges to Sprint and has
only accrued for a small portion thereof. In the event the Company is
unsuccessful in its dispute of Sprint's calculation and application of
the pay telephone surcharge, the application of that pay telephone
surcharge could have a material adverse effect on the Company.
8
<PAGE>
(12) Subsequent Events
The Company's Certificate of Incorporation authorizes 35,000,000 shares
of common stock, of which 2,197,538 and 1,837,601 shares were
outstanding at June 30, 1997 and December 31, 1996, respectively. In
July 1997, the Company sold in a public offering 2,875,000 shares of
its common stock which generated net proceeds of approximately $13.5
million. The proceeds are to be used (i) to expand sales and marketing
activities, (ii) to expand the Company's network of switching
platforms, (iii) to repay debt owed to Peoples and (iv) for working
capital and general corporate purposes.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-QSB and in future filings by Global
Telecommunication Solutions, Inc. ("Company") with the Securities and Exchange
Commission ("SEC"), in the Company's press releases and in oral statements made
with the approval of an authorized executive officer of the Company, the words
or phrases "will likely result," "management expects" or "the Company expects,"
"will continue," "is anticipated," "estimated" or similar expressions (including
confirmations by an authorized executive officer of the Company of any such
expressions made by a third party with respect to the Company) are intended to
identify "forward- looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Readers are cautioned not to place
undue reliance on any such forward-looking statements, each of which speak only
as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
has no obligation to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect anticipated or unanticipated
events or circumstances occurring after the date of such statements.
Company Overview
On February 29, 1996, the Company acquired, through a merger
("Global Link Merger"), all of the outstanding capital stock of Global Link
Teleco Corporation ("Global Link") for a purchase price of approximately
$11,400,000, and the assumption of liabilities. Prior to the Global Link Merger,
the Company 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,
the Company 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 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 prepaid phone card, the Company
does not incur any long distance costs associated with that revenue. As of June
30, 1997, the Company's deferred revenue was $3,430,801.
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.
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.
10
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated,
items from the Company's Consolidated Statements of Operations expressed as a
percentage of sales:
<TABLE>
<CAPTION>
Percentage of Sales
----------------------------------------------------------------
Six Months Ended Three Months Ended
June 30, June 30,
----------------------------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Traditional card sales.......................................... 81.3 89.6 81.4 95.2
Promotional card and other retail product
and service sales............................................ 18.7 10.4 18.6 4.8
----- ----- ---- ----
Net sales.............................................. 100.0 100.0 100.0 100.0
Cost of sales................................................... 80.8 75.9 83.4 75.8
----- ----- ---- ----
Gross profit........................................... 19.2 24.1 16.6 24.2
----- ----- ---- ----
Selling and marketing expenses.................................. 15.9 29.0 12.0 24.8
General and administrative expenses............................. 34.3 51.6 27.7 46.3
Depreciation and amortization................................... 10.0 12.6 8.8 13.5
----- ----- ---- ----
Operating expenses..................................... 60.2 93.2 48.5 84.6
----- ----- ---- ----
Operating loss......................................... (41.0) (69.1) (31.9) (60.4)
------ ------ ------ ------
Interest income................................................. 0.2 0.9 0.2 0.7
Interest expense................................................ (7.7) (2.0) (6.9) (2.2)
Other........................................................... 0.4 0.1 0.6 0.1
----- ------ ---- ----
Loss before income taxes............................... (48.1) (70.1) (38.1) (61.8)
Income tax expense.............................................. -- -- -- --
---- ---- ---- ----
Net loss................................................ (48.1%) (70.1%) (38.1%) (61.8%)
======= ======= ======= =======
</TABLE>
Substantially all of the increases in revenues from
traditional cards and operating expenses were attributable to the Company's
acquisition on February 29, 1996 of all of the outstanding capital stock of
Global Link. Global Link's operating results were consolidated with the
Company's commencing on March 1, 1996. Accordingly, while Global Link's
operating results were included for all six months of the period ended June 30,
1997, Global Link's operating results only were included for four months of the
period ended June 30, 1996.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Net sales for the six months ended June 30, 1997 were
$8,604,812 compared to $4,459,356 for the six months ended June 30, 1996, an
increase of $4,145,456, or 93.0%. Net sales of traditional phone cards were
approximately $6,885,000 for the six months ended June 30, 1997, compared to
approximately $3,995,000 for the six months ended June 30, 1996, an increase of
approximately $2,890,000. Net sales generated from the sale of promotional
cards, other retail products utilizing prepaid phone card technology and other
services for the six months ended June 30, 1997 were approximately $1,606,000,
compared to approximately $464,000 for the comparable period in the prior year,
an increase of approximately $1,142,000. The Company's gross margins decreased
to 19.2% of net sales for the six months ended June 30, 1997, compared to 24.0%
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.
11
<PAGE>
Selling and marketing expenses were $1,367,629 (15.9% of net
sales) for the six months ended June 30, 1997, compared to $1,292,376 (29.0% of
net sales) for the six months ended June 30, 1996. The increase was the result
of changes occurring mainly within the following areas: The provision for
doubtful accounts increased by approximately $122,500; advertising expenses
increased by approximately $20,000; and expenses for sales personnel increased
by approximately $28,000. Promotional items decreased by approximately $33,900.
Salary expenses decreased by approximately $39,800 as a result of the closing of
several of the Company's retail phone centers in the New York area.
General and administrative expenses were $2,947,346 (34.3% of
net sales) for the six months ended June 30, 1997, compared to $2,299,364 (51.6%
of net sales) for the six months ended June 30, 1996. The increase consists of
approximately $312,000 in salaries and related benefits of other additional
personnel which make up the Company's infrastructure, including accounting,
legal, customer service, customer support and information technology personnel;
approximately $164,400 in rent costs; approximately $71,100 in telephone costs;
approximately $63,400 in computer costs and approximately $50,000 expensed as a
result of the issuance of stock to a former employee.
Depreciation and amortization expense increased to $863,688
for the six months ended June 30, 1997 from $563,671 for the six months ended
June 30, 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 $14,519 for the six months
ended June 30, 1997, compared to $41,154 for the six months ended June 30, 1996.
The decrease of $26,635 was a result of lower balances of cash and cash
equivalents on hand.
Interest expense for the six months ended June 30, 1997
increased to $662,495 from $87,508 for the six months ended June 30, 1996,
primarily as a result of interest on the principal amount of convertible
debentures, amounts due to Peoples Telephone Company, Inc. ("Peoples"), and the
amortization of the unearned discount and deferred financing costs relating to
the issuance of notes payable pursuant to the private placement consummated by
the Company in December 1996.
For the foregoing reasons, the Company incurred a net loss of
$4,146,816 for the six months ended June 30, 1997, compared to a net loss of
$3,123,857 for the six months ended June 30, 1996.
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Net sales for the three months ended June 30, 1997 were
$4,916,659 compared to $3,131,646 for the three months ended June 30, 1996, an
increase of $1,785,103, or 57.0%. Net sales of traditional phone cards were
approximately $3,890,000 for the three months ended June 30, 1997, compared to
approximately $2,983,000 for the three months ended June 30, 1996, an increase
of approximately $907,000. 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 June 30, 1997 were approximately $913,000,
compared to approximately $149,000 for the comparable period in the prior year,
an increase of approximately $764,000. The Company's gross margins decreased to
16.6% of net sales for the three months ended June 30, 1997, compared to 24.2%
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 $588,966 (12.0% of net
sales) for the three months ended June 30, 1997, compared to $777,094 (24.8% of
net sales) for the three months ended June 30, 1996. The increase was the result
of changes occurring mainly within the following areas: The provision for
doubtful accounts increased by $61,419; advertising expenses increased by
approximately $21,700; and expenses for sales personnel increased by
approximately $8,200. Promotional items decreased by approximately $17,000.
Salary
12
<PAGE>
expenses decreased by approximately $201,100 as a result of the closing of
several of the Company's retail phone centers in the New York area as well as a
restructuring within the Company's sales team.
General and administrative expenses were $1,361,202 (27.7% of
net sales) for the three months ended June 30, 1997, compared to $1,450,384
(46.3% of net sales) for the three months ended June 30, 1996. The decrease was
a result of a reduction in expenditures for professional and consulting fees of
approximately $116,600.
Depreciation and amortization expense increased to $435,436
for the three months ended June 30, 1997 from $422,253 for the three months
ended June 30, 1996, primarily due to the acquisition of additional equipment.
Investment and interest income was $10,618 for the three
months ended June 30, 1997, compared to $21,573 for the three months ended June
30, 1996. The decrease of $10,955 was a result of lower balances of cash and
cash equivalents on hand.
Interest expense for the three months ended June 30, 1997
increased to $339,742 from $70,282 for the three months ended June 30, 1996,
primarily as a result of the amortization of the unearned discount and deferred
financing costs relating to the issuance of notes payable pursuant to the
private placement consummated by the Company in December 1996.
For the foregoing reasons, the Company incurred a net loss of
$1,871,901 for the three months ended June 30, 1997, compared to a net loss of
$1,936,086 for the three months ended June 30, 1996.
Liquidity and Capital Resources
At June 30, 1997 the Company had cash and cash equivalents of
$927,069 and a working capital deficit of $7,115,060, compared to $1,352,322 and
$5,630,385, respectively, at December 31, 1996.
Net cash used in operating activities for the six months ended
June 30, 1997 of $2,207,645 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, increased 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 typically will 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 six months ended June
30, 1997 consisted of $532,973 of capital expenditures. Net cash provided by
financing activities for the six months ended June 30, 1997 consisted of
payments to Peoples of $119,293, payments on capital lease obligations of
$24,751, an increase in deferred financing fees of $40,501 in connection with
the issuance of notes payable in December 1996, offset by $4,374 of proceeds
from the exercise of employee stock options and $2,500,000 of proceeds from the
exercise of warrants. Under its carrier agreement with Sprint, the Company must
fulfill a $200,000 per month usage commitment.
In April 1997, the Company filed a registration statement on
Form SB-2 with the SEC for a secondary offering of securities. The offering
("Public Offering") was consummated in July 1997 and yielded approximately $13.5
million of net proceeds to the Company.
As indicated in the accompanying financial statements, the
Company incurred a net loss of $4,146,816 for the six months ended June 30, 1997
and is in a negative working capital position of $7,115,060 at June 30, 1997.
Management's projections indicate that the Company anticipates that it will
continue to generate operating losses and negative cash flow at least through
1997. Further, the Company is delinquent on
13
<PAGE>
certain vendor obligations as of June 30, 1997 and the Company has not remitted
certain amounts previously collected for sales, use and excise taxes to various
taxing jurisdictions. The Company has substantial capital requirements resulting
from the funding of losses from operations and the need to finance continued
growth. The Company believes that its cash balances, along with the proceeds of
$2,500,000 from the exercise of warrants in April 1997, and the net proceeds of
approximately $13.5 million from its Public Offering, will satisfy the Company's
cash requirements until the end of 1998; however, there can be no assurance that
this will be the case. In the event that the Company's plans change or its
assumptions change or prove to be inaccurate (due to unanticipated expenses,
delays, difficulties or otherwise), or if cash flow proves to be insufficient to
fund the Company's operations after such period of time, the Company will be
required to seek additional financing or curtail its expansion activities. The
Company does not have any arrangements with respect to, or sources of,
additional financing and there can be no assurance that additional financing
will be available to the Company on commercially reasonable terms, or at all.
The failure to obtain such financing could have a material adverse effect on the
Company.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
(c) Recent Sales of Unregistered Securities
During the six months ended June 30, 1997, the Company made
the following sales of unregistered securities:
<TABLE>
<CAPTION>
Consideration Received
and Description of If Option, Warrant
Underwriting or Other or Convertible
Discounts to Market Exemption from Security, Terms of
Price Afforded to Registration Exercise or
Date of Sale Title of Security Number Sold Purchasers Claimed Conversion
- ------------ ----------------- ------------ ------------------------ -------------- ---------------------
<S> <C> <C> <C> <C> <C>
4/1/97 Common Stock 333,334 Exercise of warrants 4(2) N/A
- ------------------------------------------------------------------------------------------------------------------------------
Warrants issued in Exercisable through
4/28/97 Warrants 250,000 consideration for the 4(2) December 14, 1999
exercise of $2.5 million at an exercise price
of warrants of $12.00 per share
- ------------------------------------------------------------------------------------------------------------------------------
Conversion of 6%
5/30/97 and 6/2/97 Common Stock 7,422 Senior Secured 4(2) N/A
Convertible Promissory
Notes
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (6/30/97)
(b) Current Reports on Form 8-K
None
14
<PAGE>
SIGNATURES
In accordance with requirements of the Exchange Act, the
Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: August 14, 1997
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
By: /s/ Michael Kresky
-----------------------------------------
Michael Kresky, Vice President - Finance
and principal accounting officer
15
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page
27 Financial Data Schedule 17
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Jun-30-1997
<CASH> 927,069
<SECURITIES> 0
<RECEIVABLES> 3,155,681
<ALLOWANCES> 452,134
<INVENTORY> 376,456
<CURRENT-ASSETS> 5,105,927
<PP&E> 3,029,445
<DEPRECIATION> 799,250
<TOTAL-ASSETS> 25,876,862
<CURRENT-LIABILITIES> 12,220,987
<BONDS> 0
<COMMON> 21,975
0
0
<OTHER-SE> 9,045,181
<TOTAL-LIABILITY-AND-EQUITY> 25,876,862
<SALES> 8,604,812
<TOTAL-REVENUES> 8,604,812
<CGS> 0
<TOTAL-COSTS> 6,956,236
<OTHER-EXPENSES> 5,178,663
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (616,729)
<INCOME-PRETAX> (4,146,816)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,146,816)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,146,816)
<EPS-PRIMARY> (2.10)
<EPS-DILUTED> (2.10)
<PAGE>
</TABLE>
