U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission file number 1-13478
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
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(Name of small business issuer in Its charter)
Delaware 13-3698386
- - --------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5697 Rising Sun Avenue, Philadelphia, PA 19120
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(Address of Principal Executive Offices) (Zip Code)
(215) 342-7700
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class: Name of Each Exchange on Which Registered
Common Stock, par value Boston Stock Exchange, Nasdaq
$.01 per share SmallCap Market
Common Stock Boston Stock Exchange, Nasdaq
Purchase Warrants SmallCap Market
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
The issuer's revenues for its most recent fiscal year were
approximately $12.1 million.
As of April 11, 1997, the aggregate market value of the
issuer's Common Stock held by non-affiliates of the issuer (based on the average
bid and asked prices of such stock) was $13,762,082.25. At April 11, 1997,
1,856,448 shares of the issuer's Common Stock were outstanding.
Page 1 of 58 Pages
EXHIBIT INDEX - PAGE 52
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
The Company
Global Telecommunication Solutions, Inc. ("Company" or "GTS")
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 in the near future, such as voice mail and conference
calling.
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. 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 71% 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.
Corporate Background
GTS and Global Link were incorporated under the laws of the
State of Delaware in December 1992 and March 1994, respectively. The Company's
principal executive offices are located at 5697 Rising Sun Avenue, Philadelphia,
Pennsylvania 19120 and its telephone number is (215) 342-7700.
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
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calling cards, collect calling and other 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 calls 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(R) 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: 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.
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Expanding Distribution
Domestic Retail. The Company's in-house sales force markets
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:
o 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;
o 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
o recruiting additional distributors to market and
promote its prepaid phone cards to local, regional
and national retailers.
International Retail. The Company intends to increase
international distribution of its phone cards by:
o hiring additional marketing personnel to actively
solicit new sales agents and distributors in Europe,
the Far East and South America; and
o 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 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."
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,
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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:
o 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;
o 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;
o exploiting alternative technologies for prepaid
products, such as prepaid wireless services; and
o expanding strategic relationships with other
telecommunications services providers.
Products and Telecommunciations 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 and
conference calling (which the Company intends to begin offering to its customers
in the near future).
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 based on the number of minutes recharged on any card
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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 near future, and depending on customer demand, will
begin offering speed dialing, message delivery and fax mail.
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 detail
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 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 broadly introduce its World Card(TM),
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 World 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
Custom-designed promotional phone cards featuring companies'
logos, products and customized advertisements are sold to businesses that
typically will 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
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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
currently is conducting a second promotion for Kraft Foods called the "Kids'
Choice Awards," which enables 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. 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) 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.
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 two NACT STX switching
platforms, one 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 two 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. The
Company also operates a lower capacity switching facility in Elmont, New York,
which it currently is phasing out. 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
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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 of 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.
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 second 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 certain
minimum monthly usage requirements in order to receive favorable pricing.
Failure to meet such minimum requirements would obligate the Company to pay
underutilization charges. 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 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.
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Domestic Retail Sales
The Company sells its prepaid phone cards domestically through
an in-house sales force consisting of its Vice President - Domestic Sales and
eight sales personnel, 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 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.
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 seven
Company-owned and operated retail phone centers located in urban shopping areas
in Brooklyn and Queens, New York and South 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. As the number and type of prepaid phone 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 110 exclusive sales
agents located in 27 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 grow 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.
9
<PAGE>
Promotional Phone Card Sales
Custom-designed promotional phone cards featuring companies'
logos, products and customized advertisements are sold to businesses that
typically will 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 business generally is
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, 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 five 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 ActiPhone 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.
10
<PAGE>
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.
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 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.
11
<PAGE>
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 interstate and intrastate calls 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 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.
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 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
will adopt regulations similar to those which will ultimately be adopted by the
12
<PAGE>
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(R) 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(R) and the design of the Global Link(R) phone card in
several foreign countries. The Company also has filed trademark applications
with the United States Patent and Trademark Office seeking registration for (i)
ActiPhone(TM), (ii) Local Link(TM) and (iii) World Card(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 April 11, 1997, the Company had 63 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.
ITEM 2. DESCRIPTION OF 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.
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 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.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and publicly-traded warrants
("Public Warrants") are quoted on the Nasdaq SmallCap Market ("Nasdaq") under
the symbols GTST and GTSTW, respectively, and listed on the Boston Stock
Exchange under the symbols GTL and GTLW, respectively. The following table sets
forth the high and low bid 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 prices represent inter-dealer
quotations, which do not include retail mark-ups, mark-downs or commissions and
may not necessarily represent actual transactions.
Common Stock Public Warrants
-------------------- --------------------
High Low High Low
------- ------- ------ -------
1995
First Quarter ....... $ 18 $11-3/8 $2-3/4 $ 1
Second Quarter ...... 17-5/8 13-1/2 2-7/8 1-5/8
Third Quarter ....... 20-1/4 16-7/8 2-13/16 1-3/4
Fourth Quarter ...... 19-1/2 13-1/8 2-3/4 1-1/8
1996
First Quarter ....... 20-5/8 15-3/8 3 1-3/4
Second Quarter ...... 18-3/8 11-5/8 2-5/8 1-1/4
Third Quarter ....... 12 6 1-1/2 7/8
Fourth Quarter ...... 10-1/2 6 1-3/16 3/8
1997
First Quarter ....... 14-3/8 10-1/2 1-11/16 5/8
April 1 - April 11 .. 10-1/4 8-7/8 7/8 1/2
On April 11, 1997, the last sale prices for the Common Stock
and Public Warrants as reported by Nasdaq were $10-5/16 and $1, respectively.
As of April 11, 1997, there were 1,856,448 shares of Common
Stock outstanding and Public Warrants (including warrants ("May 1996 Warrants")
issued in connection with a $3,000,000 private offering consummated by the
Company in May 1996 ("May 1996 Private Placement")) to purchase 1,380,560 shares
of Common Stock outstanding, held of record by 115 and 63 holders, respectively.
The Company believes that there are in excess of 500 beneficial holders of each
of its publicly-traded securities.
Dividends
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. Certain of the Company's
agreements prevent the Company from declaring or paying cash dividends on its
capital stock.
14
<PAGE>
Recent Sales of Unregistered Securities
During the year ended December 31, 1996, 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
- - ------------ ----------------- ----------- ---------- ------- ----------
<C> <C> <C> <C> <C> <C>
1/96 - 12/96 options to purchase 104,010 options granted - no 4(2) exercisable for five
Common Stock granted consideration received years from date of
to employees by Company until vesting or grant at
exercise exercise prices
ranging from $7.875
to $18.375 per share
- - -----------------------------------------------------------------------------------------------------------------------------------
1/96 warrants to purchase 66,667 consulting services 4(2) exercisable for five
shares of Common years from date of
Stock issued to Whale grant at an exercise
Securities Co., L.P. price of $15.375 per
("Whale") and its share
designees
- - -----------------------------------------------------------------------------------------------------------------------------------
2/96 Common Stock 572,773 exchange of shares of 4(2) N/A
Global Link in
connection with Global
Link Merger
- - -----------------------------------------------------------------------------------------------------------------------------------
2/96 options to purchase 36,642 exchange of options of 4(2) exercisable for five
Common Stock granted Global Link in years from date of
to employees connection with Global grant at exercise
Link Merger prices ranging from
$1.98 to $7.92 per
share
- - -----------------------------------------------------------------------------------------------------------------------------------
2/96 Common Stock 17,602 partial satisfaction of 4(2) N/A
debt owed to Peoples
Telephone Company,
Inc.
- - -----------------------------------------------------------------------------------------------------------------------------------
3/96 options to purchase 23,338 options granted - no 4(2) exercisable for ten
Common Stock granted consideration received years from date of
to directors by Company until grant at an exercise
exercise price of $15.75 per
share
- - -----------------------------------------------------------------------------------------------------------------------------------
5/96 Common Stock 200,000 $3,000,000(1) 4(2) N/A
------------------------------------- --------------------
May 1996 Warrants to purchase exercisable through
400,000 shares December 14, 1999
of Common at an exercise price
Stock for of $12.00 per share
$12.00/share
- - -----------------------------------------------------------------------------------------------------------------------------------
12/96 December 1996 1,000,000 $3,000,000(2) 4(2) exercisable for five
Warrants years from date of
grant at an exercise
price of $7.50 per
share
- - ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Whale served as the placement agent in connection with the May 1996
Private Placement and received an option to purchase 20,000 shares of
Common Stock and May 1996 Warrants to purchase 40,000 shares of Common
Stock at an exercise price of $300,000.
(2) Whale was paid a finder's fee in connection with a $3,000,000 private
offering consummated by the Company in December 1996 ("December 1996
Private Placement") of warrants to purchase 50,000 shares of Common
Stock at an exercise price of $7.50 per share ("December 1996
Warrants"). Additionally, Graubard Mollen & Miller, the Company's
general counsel, received $50,000 of promissory notes ("December 1996
Notes") and 16,667 December 1996 Warrants in payment of certain legal
fees and expenses.
</FN>
</TABLE>
15
<PAGE>
ITEM 6. 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 Report. The discussion of results, causes and trends
should not be construed to imply any conclusion that such results or trends will
necessarily continue in the future.
Forward-Looking Statements
When used in this Report and in future filings by the Company
with the Securities and Exchange Commission ("SEC"), the words or phrases "will
likely result," "management expects" or "the Company expects," "will continue,"
"is anticipated," "estimated" or similar expressions 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 for
a purchase price of approximately $11,400,000. 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.
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%).
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. The
Company anticipates that its costs of providing long distance service as a
percentage of revenue 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.
16
<PAGE>
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,
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 revenues:
<TABLE>
<CAPTION>
Percentage of Sales
---------------------------------------
Years Ended December 31,
---------------------------------------
Actual Pro Forma
------------------- ----------------
<S> <C> <C> <C> <C>
Traditional card sales: ............ 1995 1996 1995 1996
------ ------ ------ ------
Domestic card sales ............... 33.4% 71.3% 77.2% 72.6%
International card sales .......... 1.1 8.3 4.8 8.2
------ ------ ------ ------
Total .......................... 34.5 79.6 82.0 80.8
Promotional card and specialized ... 65.5 20.4 18.0 19.2
retail product sales ............. -- -- -- --
Net sales ...................... 100.0 100.0 100.0 100.0
Cost of sales ...................... 92.0 66.5 75.7 66.7
------ ------ ------ ------
Gross profit .................. 8.0 33.5 24.3 33.3
------ ------ ------ ------
Selling and marketing expenses ..... 42.4 27.7 28.0 28.5
General and administrative expenses. 64.9 48.5 50.6 47.2
Depreciation and amortization ...... 1.3 11.8 13.5 12.5
------ ------ ------ ------
Operating expenses ............. 108.6 88.0 92.1 88.2
------ ------ ------ ------
Operating loss ................. (100.6) (54.5) (67.8) (54.9)
------ ------ ------ ------
Interest income .................... 6.1 0.6 1.9 0.6
Interest expense ................... 0 (3.3) (1.8) (3.2)
Other .............................. 0 0.1 0.1 0.1
------ ------ ------ ------
Loss before income taxes ....... (94.5) (57.1) (67.6) (57.4)
Income tax expense ................. -- -- -- --
------ ------ ------ ------
Net loss ....................... (94.5%) (57.1%) (67.6%) (57.4%)
====== ====== ====== ======
</TABLE>
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 sold domestically amounted to approximately $9,790,000 for the year
ended December 31, 1996, compared to $8,933,000 for the year ended December 31,
1995, an increase of approximately $857,000 or 9.6%. Pro forma net sales of
traditional phone cards sold internationally amounted to approximately
$1,111,000 for the year ended December 31, 1996, compared to approximately
$550,000 for the year ended December 31, 1995, an increase of approximately
$561,000 or 102%. Pro forma net sales of promotional cards and other retail
products utilizing prepaid phone card technology 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.
17
<PAGE>
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 sold domestically were $8,642,000 for the year ended
December 31, 1996, compared to $1,050,000 for the year ended December 31, 1995,
an increase of approximately $7,592,000. Net sales of traditional phone cards
sold internationally to business and leisure travelers destined for the United
States were $1,001,000 in 1996, compared to $35,000 in 1995, an increase of
$966,000. Net sales generated from the sale of promotional cards and other
retail products utilizing prepaid phone card technology 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.
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 ("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.
Liquidity and Capital Resources
At December 31, 1996 the Company had cash and cash equivalents
of $1,352,322 and working capital of ($5,630,385), compared to $928,516 and
$1,126,321, respectively, at December 31, 1995. This decrease in working capital
was primarily a result of the assumption by the Company of certain obligations
and other debt of Global Link in connection with the Global Link Merger.
18
<PAGE>
In May 1996, the Company consummated the May 1996 Private
Placement 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.
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. 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 or at the expiration dates of the phone
cards. 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 provided by financing activities
consisted of $2,611,569 of net proceeds from the issuance of Common Stock and
May 1996 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 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. 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 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. Management's
projections indicate that the Company anticipates that it will continue to
generate operating losses and negative cash flow at least through 1997. The
Company has substantial capital requirements resulting from the funding of
losses from operations and the need to finance continued growth. The Company
anticipates that it will need to raise capital during 1997 in order to meet its
capital requirements as they occur. Accordingly, the Company has entered into an
agreement with Wheatley Partners, L.P. ("Wheatley"), an affiliate of the
Company, pursuant to which Wheatley has agreed that if by June 1, 1997, the
Company does not consummate a financing raising a minimum of $2,500,000,
Wheatley will exercise a minimum of 333,333 of the December 1996 Warrants that
it received in the December 1996 Private Placement, resulting in gross proceeds
to the Company of at least $2,500,000. The Company believes that this financing
would satisfy the Company's cash requirements until the end of 1997. The Company
does not have any other 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.
19
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Global Telecommunication Solutions, Inc.
Independent Auditors' Report...........................................F-2
Consolidated Balance Sheets at December 31, 1996
and 1995............................................................F-3
Consolidated Statements of Operations for the
Years ended December 31, 1996 and 1995..............................F-4
Consolidated Statements of Stockholders' Equity
for the Years ended December 31, 1996 and 1995......................F-5
Consolidated Statements of Cash Flows for the
Years ended December 31, 1996 and 1995..............................F-6
Notes to Consolidated Financial Statements.............................F-7
20
<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.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
March 21, 1997
Philadelphia, Pennsylvania
F-2
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash $ 1,352,322 $ 928,516
Accounts receivable, less allowance for doubtful accounts
of $399,000 and $165,000 in 1996 and 1995, respectively 2,450,119 3,508,250
Inventory 202,129 268,874
Deferred costs 1,127,887 1,235,972
Convertible notes receivable -- 325,000
Note receivable -- 237,000
Prepaid royalties and patent license fees 95,396 292,911
Prepaid expenses and other current assets 164,876 155,008
------------- ------------
Total current assets 5,392,729 6,951,531
------------ -----------
Goodwill, net (notes 3 and 13) 18,008,599 --
Fixed assets, net 1,948,917 428,381
Deferred financing fees, net 270,219 --
Other assets 198,901 102,052
------------- ------------
Total assets $25,819,365 $7,481,964
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 3,238,666 1,819,813
Accrued liabilities 542,965 491,488
Deferred revenues 4,431,309 3,513,909
Estimated sales and excise tax liability (note 8) 1,684,478 --
Amounts payable to affiliate 1,073,921 --
Capital lease obligation, current 51,775
-------------
Total current liabilities 11,023,114 5,825,210
----------- ----------
Capital lease obligation, long-term 42,002 --
Convertible notes payable 2,800,000 --
Notes payable, net of unearned discount of $1,484,040 1,565,960 --
----------- -----------
Total liabilities 15,431,076 5,825,210
----------- -----------
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 1,837,601 and 1,047,226 shares, respectively 18,376 10,472
Additional paid-in capital 22,990,766 7,329,729
Deferred compensation (102,498) (197,165)
Accumulated deficit (12,406,504) (5,486,282)
Cumulative foreign currency translation adjustment (11,851) --
Common stock note receivable (100,000) --
-------------- ----------
Total stockholders' equity 10,388,289 1,656,754
----------- ----------
Total liabilities and stockholders' equity $25,819,365 $7,481,964
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net sales .................................. $ 12,121,365 $ 3,144,350
Cost of sales .............................. 8,066,315 2,892,580
------------ ------------
Gross profit .......................... 4,055,050 251,770
------------ ------------
Selling and marketing expenses ............. 3,355,778 1,332,348
General and administrative expenses ........ 5,883,858 2,041,010
Depreciation and amortization .............. 1,427,296 40,859
------------ ------------
Operating expenses .................... 10,666,932 3,414,217
------------ ------------
Operating loss ........................ (6,611,882) (3,162,447)
Interest income ............................ 73,834 192,482
Interest expense ........................... (395,674) --
Other ...................................... 14,000 344
------------ ------------
Loss before income taxes .............. (6,919,722) (2,969,621)
------------ ------------
Income tax expense ......................... 500 500
------------ ------------
Net loss .............................. $ (6,920,222) (2,970,121)
============ ============
Net loss per share ......................... $ (4.14) $ (2.84)
============ ============
Weighted average shares of common stock .... 1,670,755 1,047,226
============ ============
</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, 1996 and 1995
<TABLE>
<CAPTION>
Cumulative Total
Foreign Stock-
Additional Common Currency holder's
Common Stock 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)
----------- ----------- ----------- ----------- ----------- --------- ---------- -----------
1,837,601 18,376 22,990,766 (102,498) (12,406,504) (100,000) (11,851) 10,388,289
=========== =========== =========== =========== =========== ========= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(6,920,222) $(2,970,121)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,427,296 40,859
Amortization of deferred compensation 494,667 87,835
Amortization of unearned discount 58,004 --
Amortization of deferred financing fees 27,815 --
Write-off of convertible notes receivable and accrued interest 343,000 --
Changes in operating assets and liabilities, net of effects of acquisition
(note 3):
Decrease (increase) in accounts receivable 2,014,565 (1,608,333)
Decrease (increase) in inventory 76,745 (66,343)
Decrease (increase) in deferred costs 108,085 (640,542)
Decrease (increase) in prepaid royalties and patent license fees 197,515 (163,566)
Decrease (increase) in prepaid expenses and other current assets 34,321 (72,664)
Decrease (increase) in other assets 33,755 (83,434)
Increase (decrease) in accounts payable (923,342) 1,206,426
Increase (decrease) in accrued liabilities (450,989) 31,844
Increase in sale and excise and tax liability 957,847 --
Increase (decrease) in deferred revenue (1,080,746) 916,806
-------------- ----------
Net cash used in operating activities (3,601,684) (3,321,233)
-------------- -----------
Cash flows from investing activities:
Purchases of fixed assets (347,983) (323,511)
Convertible notes receivable -- (325,000)
Net cash acquired in acquisition 160,190 --
Note receivable -- (237,000)
-------------- ----------
Net cash used in investing activities (187,793) (885,511)
-------------- -----------
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) --
Increase in notes receivable from Global Link prior to merger (250,655) --
Payments on capital lease obligation (55,073) --
------------- ----------
Net cash provided by financing activities 4,225,134 --
-------------- ----------
Effects of exchange rate changes on cash (11,851) --
-------------- ----------
Net increase (decrease) in cash 423,806 (4,206,744)
Cash at beginning of year 928,516 5,135,260
-------------- ----------
Cash at end of year 1,352,322 928,516
============== ===========
Supplemental disclosures:
Interest paid during the period 134,999 --
============== ===========
Income taxes paid during the period 500 500
============== ===========
Noncash investing and financing activities:
Issuance of Common Stock in connection with acquisition 11,039,488 --
============== ===========
Capital lease obligations incurred to acquire fixed assets 148,850 --
Deferred compensation arising from grant of stock option ============== ===========
and warrants 400,000 285,000
============== ===========
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 --
============== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(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 design and
production of the cards. Costs are expensed as incurred,
except the cost of design and production of the card, which
are deferred and expensed when the related revenue is
recognized.
(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:
Furniture and fixtures 7 years
Machinery and equipment 7 to 10 years
Computers and office equipment 5 years
Vehicles 5 years
Leasehold improvements are amortized over the lives of the
respective leases or the useful life of the improvements,
whichever is shorter.
F-7
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 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 for the year ended
December 31, 1996.
(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,
1996 and 1995 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).
(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
F-8
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
(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
F-9
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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:
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 at the beginning of the respective years.
<TABLE>
<CAPTION>
Year ended
December 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Net sales $13,484,000 $11,574,000
Net loss (7,739,000) (7,822,000)
Net loss per share $ (4.38) $ (4.78)
</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.
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.
F-10
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 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>
1996 1995
---- ----
<S> <C> <C>
Furniture and fixtures 404,918 166,546
Machinery and equipment 218,044 159,339
Computers and office equipment 1,514,262 157,899
Leasehold improvements 419,928 10,410
---------- ----------
2,557,152 494,194
Less accumulated depreciation (608,235) (65,813)
---------- ----------
1,948,917 428,381
========== =========
</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
F-11
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
(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.
(8) Tax Obligations and Compliance
At December 31, 1996, 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 and legal counsel, 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-12
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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>
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.
F-13
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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:
Year Amount
---- --------
1997 $534,000
1998 398,000
1999 348,000
2000 228,000
2001 and thereafter 117,000
The Company has the right to terminate certain of the leases
given sufficient advance written notice. Rent expense for the
year ended December 31, 1996 and 1995 amounted to
approximately $747,704 and $115,236 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 amounted to $50,400.
(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
F-14
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 $49,203 and $13,020 for the year
ended December 31, 1996 and 1995, 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.
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.
F-15
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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>
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
F-16
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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
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 the Company
has recorded compensation expense of $157,500 to date.
(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 recorded an expense
of $58,337 to date.
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 the Company has recorded an expense of
$366,665 to date.
(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-17
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 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.
F-18
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers, key employees and directors of
the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
--------- ----- ----------
<S> <C> <C> <C>
Shelly Finkel(1) ............... 52 Chairman of the Board
Gary J. Wasserson(2) ........... 41 Chief Executive Officer and Director
John P. McCabe ................. 45 President and Director
Cory Eisner .................... 41 Vice President - Enhanced Services
Robert Teale ................... 42 Vice President - Domestic Sales
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) .......... 58 Director
Donald L. Ptalis(2) ............ 54 Director
Jack N. Tobin(1) ............... 55 Director
- - -----------------------------
<FN>
(1) Member of Compensation Committee
(2) Member of Audit Committee
</FN>
</TABLE>
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.
John P. McCabe has been the President of the Company since
March 1996 and a director of the Company since October 1995. From October 1995
through February 1996, Mr. McCabe was the Chief Executive Officer of the Company
and from March 1995 to October 1995, he was the President of the Company. From
June 1987 to March 1995, Mr. McCabe was employed by National Westminster Bank in
various capacities, including Senior Vice President of its credit card division
(January 1994 through March 1995), Senior Vice President of its business
strategies division (July 1991 through December 1993), and Senior Vice President
of its processing and custody services division (June 1987 through June 1991).
37
<PAGE>
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.
Robert Teale has been the Company's Vice President - Domestic
Sales since May 1996. From November 1995 to April 1996, Mr. Teale held a
national sales position with Tara Pharmaceuticals. From July 1976 to May 1995,
Mr. Teale was a Senior District Sales Manager with SmithKline Beecham
Pharmaceuticals.
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 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;
38
<PAGE>
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 John P. McCabe and 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. 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 "Executive Compensation -- 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.
Indemnification and Exculpation Provisions
The Company's Certificate of Incorporation provides for
indemnification of officers and directors to the fullest extent permitted by
Delaware law. In addition, under the Company's Certificate of Incorporation, no
director shall be liable personally to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director; provided that the
Certificate of Incorporation does not eliminate the liability of a director for
(i) any breach of the director's duty of loyalty to the Company or its
stockholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) acts or omissions in
respect of certain unlawful dividend payments or stock redemptions or
repurchases; or (iv) any transaction from which such director derives improper
personal benefit.
Compliance with Section 16 of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires the Company's directors and officers and persons who
beneficially own more than ten percent of the Company's Common Stock to file
with the SEC, Nasdaq and the Boston Stock Exchange initial reports of ownership
and reports of changes in ownership of Common Stock in the Company. Officers,
directors and greater-than-ten percent shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) reports they
filed. To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representation that no other
reports were required, during the fiscal year ended December 31, 1996, such
persons complied with all Section 16(a) filing requirements.
39
<PAGE>
ITEM 10. 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.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE(1)
- - -------------------------------------------------------------------------------
Annual
Compen- Long Term
sation Compensation
----------- -------------------
Restricted Options
Name and Principal Fiscal Stock (No. of
Position During Period Year Salary ($) Awards($) Shares)
- - ---------------------- ------ ---------- --------- --------
- - -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gary J. Wasserson ................... 1996 125,000 -- 45,000
Chief Executive Officer ............. 1995 -- -- --
1994 -- -- --
- - ------------------------------------- ------- ------- ------- -------
John P. McCabe ...................... 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 -- -- --
- - -----------------------------
<FN>
(1) No other executive officer received aggregate compensation equal to or
exceeding $100,000 during 1994, 1995 or 1996. None of Messrs.
Wasserson, McCabe, Eisner or Tobin received noncash compensation
benefits having a value exceeding 10% of his cash compensation during
1994, 1995 or 1996.
</FN>
</TABLE>
40
<PAGE>
The following table summarizes the number of shares and the
terms of stock options granted to the Named Executive Officers in 1996:
<TABLE>
<CAPTION>
OPTIONS/SHARES DURING YEAR ENDED DECEMBER 31, 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Individual Grants
- - --------------------------- -------------------------------------------- ------------- ---------------- -----------------
% of Total
Options/ Options/Shares Granted Exercise Market Price
Name and Position Shares to Employees in Price on Date of Expiration
During Period Granted Fiscal Year ($/Share) Grant ($) Date
- - ------------- --------- ------------- --------- --------- ----
- - --------------------------- ----------------- -------------------------- ------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Gary J. Wasserson 3,334(1) 35.3% 15.75 15.75 3/30/06
Chief Executive Officer 41,667 18.375 18.37 1/3 2/29/02;
1/3 2/29/03;
1/3 2/29/04
- - --------------------------- ----------------- -------------------------- ------------- ---------------- -----------------
John P. McCabe 3,334(1) 2.6% 15.75 15.75 3/30/06
President
- - --------------------------- ----------------- -------------------------- ------------- ---------------- -----------------
Cory Eisner 5,000 3.9% 7.875 7.875 8/24/01
Vice President
- - --------------------------- ----------------- -------------------------- ------------- ---------------- -----------------
David S. Tobin 16,667 13.1% 18.375 18.37 1/3 2/29/02;
General Counsel and 1/3 2/29/03;
Secretary 1/3 2/29/04
- - -----------------------------
<FN>
(1) Represents immediately exercisable options to purchase 3,334 shares of
Common Stock granted pursuant to the terms of the Company's 1994
Performance Equity Plan ("1994 Plan"), which provides for stock option
grants for 3,334 shares to be made to each director of the Company on
March 31st of each year. See "Executive Compensation -- 1994
Performance Equity Plan."
</FN>
</TABLE>
The following table summarizes the number of exercisable and
unexercisable options held by the Named Executive Officers at December 31, 1996,
and their value at that date if such options were in-the-money.
<TABLE>
<CAPTION>
AGGREGATE YEAR-END OPTION VALUES AT DECEMBER 31, 1996
- - ------------------------------------------------------------------------------------------------------------------------------
Number of unexercised options Value of unexercised in-the-money
Name and Position During Period at December 31, 1996 options at December 31, 1996 ($)(1)
- - ------------------------------- -------------------- -----------------------------------
- - ---------------------------------------- ---------------------------------------- -------------------------------------------
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
======================================== ================== ==================== ================== =======================
(footnote on following page)
</TABLE>
41
<PAGE>
- - -----------------------------------
(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.
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 Report, options to purchase a total of
234,188 shares of Common Stock are outstanding under the 1994 Plan. Options
outstanding under the 1994 Plan include options to purchase 32,500 shares
granted to 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 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.
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.
42
<PAGE>
In December 1994, in connection with its serving as
underwriter of the Company's initial public offering ("IPO"), the Company issued
and sold to 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 vest in three equal annual
installments commencing in March 1996 and will remain exercisable for a period
of five years from the date of vesting.
In April 1995, in connection with consulting services rendered
to the Company, 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 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. 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.
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 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.
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, John P. McCabe, its President, David S. Tobin, its General
Counsel and Secretary, Cory Eisner, its Vice President - Enhanced Services, and
43
<PAGE>
Maria Bruzzese, its Chief Financial Officer. Mr. Finkel 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. McCabe's employment agreement provides
for an initial term through March 1, 1998. Mr. Eisner's employment agreement
provides for an initial term through December 31, 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. Messrs. McCabe, Wasserson, Tobin and Eisner and Ms. Bruzzese's
employment agreements require each of them to work for the Company on a
full-time basis and provide for base annual salaries of $150,000, $150,000,
$140,000, $125,000 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. Mr.
Eisner's employment agreement provides that if his employment is terminated
without cause, he shall receive salary due through the later of December 31,
1999 and one year from the date of termination. All of these officers also may
be granted annual bonuses at the discretion of the Board of Directors. Each of
the agreements contains a provision prohibiting the employee from competing with
the Company during the term of employment and for a period of two years
thereafter.
Consultants
In February 1995, the Company entered into 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), 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.
44
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information regarding
beneficial ownership of the Company's Common Stock as of December 31, 1996, 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
Beneficially
Name and Address of Beneficial Owner Owned(1) Percent
- - ------------------------------------ -------- -------
<S> <C> <C>
Shelly Finkel ...................................... 315,912(2) 16.4%
c/o Shelly Finkel Management, Inc.
60 East 42nd Street, Suite 464
New York, New York 10165
Gary J. Wasserson .................................. 150,731(3) 8.0%
c/o Global Telecommunication Solutions, Inc.
5697 Rising Sun Avenue
Philadelphia, Pennsylvania 19120
John P. McCabe ..................................... 28,890(4) 1.5%
c/o Global Telecommunication Solutions, Inc.
40 Elmont Road
Elmont, New York 11003
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.
40 Elmont Road
Elmont, New York 11003
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) 7.5%
45 West 45th Street
New York, New York 10036
Eli Oxenhorn ....................................... 141,780(11) 7.3%
56 The Intervale
Roslyn Estates, New York 11576
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Shares
Beneficially
Name and Address of Beneficial Owner Owned(1) Percent
- - ------------------------------------ -------- -------
<S> <C> <C>
Barry Rubenstein ................................ 952,780(12) 34.7%
68 Wheatley Road
Brookville, New York 11545
Peoples Telephone Company, Inc. ................. 212,289 11.4%
2300 N.W. 89th Place
Miami, Florida 33172
Paul Silverstein ................................ 105,800(13) 5.5%
32 Edgewood Avenue
Larchmont, New York 10538
Whale Securities Co., L.P. ...................... 243,334(14) 12.0%
650 Fifth Avenue
New York, New York 10019
Wheatley Partners LLC ........................... 666,667(15) 26.4%
80 Cuttermill Road
Great Neck, New York 11021
All executive officers and directors as a group . 563,150(16) 27.7%
(9 persons)
</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
Report upon the exercise of options, warrants or convertible
securities. Each beneficial owner's percentage ownership is determined
by assuming that convertible securities, options or warrants that are
held by such person (but not those held by any other person) and which
are exercisable within 60 days of the date of this Report have been
exercised. Unless otherwise noted, the Company believes that all
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned by them.
(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. Does not include 11,111 shares of Common Stock
underlying options which vest in March 1998.
(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.
46
<PAGE>
(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) Includes 139,922 shares issuable upon conversion of Convertible
Debentures held by 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.
(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 626,667 and
40,000 shares of Common Stock underlying December 1996 Warrants owned
by Wheatley and Wheatley Foreign Partners, L.P. ("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
47
<PAGE>
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) Represents 626,667 and 40,000 shares of Common Stock underlying
December 1996 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.
(16) Includes those shares of Common Stock deemed to be included in Messrs.
Finkel, Wasserson, McCabe, Kaufman, Tobin, Ptalis, Eisner and Tobin's
respective beneficial ownership as described in notes 2, 3, 4, 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 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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
General
In March 1994, Gary J. Wasserson purchased 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 becomes due and payable on March 31, 1997 (on which date there
will be $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 "Executive Compensation -- 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 "Description of 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 (6,667 shares of Common
Stock and May 1996 Warrants to purchase 13,334 shares of Common Stock) and Mr.
Oxenhorn (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 ($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 ($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 by June 1, 1997, the
Company does not consummate a financing raising a minimum of $2,500,000,
48
<PAGE>
Wheatley would exercise a minimum of 333,333 of the December 1996 Warrants that
it received in the December 1996 Private Placement, resulting in gross proceeds
to the Company of at least $2,500,000.
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. All future transactions and loans
between the Company and its officers, directors and principal stockholders or
their affiliates will be on terms no less favorable than could be obtained from
unaffiliated third parties and will be approved by a majority of the then
disinterested directors of the Company.
The Global Link 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.
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 48,334
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 (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 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
49
<PAGE>
$954,630 of trade receivables ("Trade Receivables"). The agreement, as amended,
provides for Certain prepayments of the Trade Receivables in the event the
Company obtains additional financing or the occurrence of any change of control.
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 "Executive Compensation -- 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 346,692 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. 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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Filed.
See Exhibit Index appearing later in this Report.
(b) Reports on Form 8-K
Current Report on Form 8-K, dated December 20, 1996, filed
with the Securities and Exchange Commission on December 26,
1996.
50
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: April 14, 1997 GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
By: /s/ Shelly Finkel
------------------------------------
Shelly Finkel, Chairman of the Board
of Directors
In accordance with Section 13 or 15(d) of the Exchange Act,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Shelly Finkel Chairman of the Board of Directors April 14, 1997
- - -------------------
Shelly Finkel
/s/ Gary J. Wasserson Chief Executive Officer and Director April 14, 1997
- - ---------------------
Gary J. Wasserson
/s/ John McCabe President and Director April 14, 1997
- - --------------------
John McCabe
/s/ Alan W. Kaufman Director April 14, 1997
- - -------------------
Alan W. Kaufman
/s/ Jack N. Tobin Director April 14, 1997
- - -------------------
Jack N. Tobin
/s/ Donald L. Ptalis Director April 14, 1997
- - --------------------
Donald L. Ptalis
/s/ Maria Bruzzese Chief Financial Officer April 14, 1997
- - ------------------ (and principal accounting officer)
Maria Bruzzese
51
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- - --------- ------------
3.1 A Certificate of Incorporation
3.2 A Amendment to Certificate of Incorporation
3.3 A By-Laws
3.4 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
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 Finke
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
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
52
<PAGE>
Exhibit
Number Description
- - ------- -------------
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 * Extension of Consulting Agreement between the Company and Barry
Rubenstein
10.36 * Extension of Consulting Agreement between the Company and Eli
Oxenhorn
23 * Consent KPMG Peat Marwick LLP
27 * Financial Data Schedule
- - -----------------------------
* Filed herewith.
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.
53
<PAGE>
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).
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)
54
<PAGE>
Exhibit 10.35
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
40 ELMONT ROAD
ELMONT, NEW YORK 11003
January 2, 1997
Mr. Barry Rubenstein
68 Wheatley Road
Brookville, New York 11545
Dear Mr. Rubenstein:
This will confirm our agreement to extend your Consulting and Non-
Competition Agreement dated February 14, 1995 ("Agreement") for a two-year
period commencing on February 14, 1997.
The terms of your extended engagement shall be as set forth in the
Agreement, except that the consideration for the extended engagement shall be
the issuance to you of an option to purchase 75,000 shares of the common stock
of the Company on the terms and conditions set forth in a stock option agreement
of even date herewith.
Please confirm the extension of your agreement by signing in the space
provided below.
Very truly yours,
GLOBAL TELECOMMUNICATION
SOLUTIONS, INC.
By: /s/ Shelly Finkel
--------------------------
SHELLY FINKEL
ACCEPTED AND AGREED TO:
/s/ Barry Rubenstein
- - ----------------------
BARRY RUBENSTEIN
<PAGE>
Exhibit 10.36
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
40 ELMONT ROAD
ELMONT, NEW YORK 11003
January 2, 1997
Mr. Eli Oxenhorn
56 Intervale
Roslyn Estates, New York 11576
Dear Mr. Oxenhorn:
This will confirm our agreement to extend your Consulting and
Non- Competition Agreement dated February 14, 1995 ("Agreement") for a two-year
period commencing on February 14, 1997.
The terms of your extended engagement shall be as set forth in
the Agreement, except that the consideration for the extended engagement shall
be the issuance to you of an option to purchase 75,000 shares of the common
stock of the Company on the terms and conditions set forth in a stock option
agreement of even date herewith.
Please confirm the extension of your agreement by signing in
the space provided below.
Very truly yours,
GLOBAL TELECOMMUNICATION
SOLUTIONS, INC.
By: /s/ Shelly Finkel
--------------------------
SHELLY FINKEL
ACCEPTED AND AGREED TO:
/s/ Eli Oxenhorn
- - ----------------------------
ELI OXENHORN
<PAGE>
Exhibit 23
Consent of Independent Auditors
The Board of Directors
Global Telecommunication Solutions, Inc.
We consent to the incorporation by reference in the registration statements on
Form S-8 (No. 333-21330) and on Form S-3 (Nos. 333-6925 and 333-19005) of Global
Telecommunication Solutions, Inc. of our report dated March 21, 1997, relating
to the 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.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
April 11, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Global Telecommunication Solutions, Inc. and
subsidiaries as of December 31, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,352,322
<SECURITIES> 0
<RECEIVABLES> 2,849,119
<ALLOWANCES> 399,000
<INVENTORY> 202,129
<CURRENT-ASSETS> 1,388,159
<PP&E> 2,557,152
<DEPRECIATION> 608,235
<TOTAL-ASSETS> 25,819,365
<CURRENT-LIABILITIES> 11,023,114
<BONDS> 0
0
0
<COMMON> 18,376
<OTHER-SE> 10,369,913
<TOTAL-LIABILITY-AND-EQUITY> 25,819,365
<SALES> 0
<TOTAL-REVENUES> 12,121,365
<CGS> 8,066,315
<TOTAL-COSTS> 10,666,932
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (395,674)
<INCOME-PRETAX> (6,919,722)
<INCOME-TAX> 500
<INCOME-CONTINUING> (6,920,222)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,920,222)
<EPS-PRIMARY> (4.14)
<EPS-DILUTED> (4.14)
<PAGE>
</TABLE>
