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, 1997
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.
(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
----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(215) 342-7700
-----------------------------------------------
(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 $.01 per share Boston Stock Exchange
Common Stock Purchase Warrants Boston Stock Exchange
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
$18,234,640.
As of April 1, 1998, the aggregate market value of the
issuer's Common Stock held by non-affiliates of the issuer (based on the last
sale price of such stock) was $33,129,212.25. At April 1, 1998, 5,991,772 shares
of the issuer's Common Stock were outstanding.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Unless the context otherwise requires, references herein to the "Company" or
"GTS" refer to Global Telecommunication Solutions, Inc. and its subsidiaries.
General
Global Telecommunication Solutions, Inc. ("Company" or "GTS") is a
facilities-based provider of prepaid phone cards that allow users to access
reliable, convenient and cost-effective domestic and international
telecommunications services. The Company seeks to provide reliable service and
support to its prepaid phone card customers by combining experience with
innovation and technology. The Company's core product line consists of
traditional prepaid phone cards, as well as custom- designed prepaid phone cards
for business promotional use. In addition to providing users with an economical
alternative to standard credit calling cards, many of the Company's phone cards
provide enhanced services, such as customized voice greetings, data collection
and voice mail. The Company also creates and markets retail products ("Specialty
Products") which utilize prepaid phone card technology, such as interactive
games and information services.
The Company markets its telecommunications and other products in
four lines: (i) traditional prepaid phone cards marketed domestically through
distributors and retail establishments, such as convenience stores,
supermarkets, drug stores and mass merchandisers; (ii) traditional prepaid phone
cards marketed internationally to business and leisure travelers destined for
the United States; (iii) custom-designed promotional phone cards for businesses
to enhance the marketing of their products and services; and (iv) Specialty
Products marketed through retail establishments.
Recent Strategic Acquisitions
The Company recently consummated two strategic acquisitions that it
believes complement its existing operations and will serve to accelerate its
growth.
In February 1998, the Company acquired, through a merger, Networks
Around the World, Inc. ("NATW"). NATW's primary business consists of providing
traditional prepaid phone cards directly to retail establishments, including
convenience store chains, drug store chains and smaller retail outlets. NATW
also sells prepaid phone cards to distributors which market, promote and
distribute the cards directly to retail outlets and provides customized
promotional cards to businesses, universities and other organizations. NATW
generated revenues of approximately $8.0 million in 1997.
Also in February 1998, the Company acquired, through a merger,
Centerpiece Communications, Inc. ("CCI"). CCI's primary business consists of
providing traditional prepaid phone cards to distributors who, in turn, resell
such cards to retail establishments and through vending machines. CCI generated
revenues of approximately $10.0 million in 1997.
These two acquisitions substantially increase the Company's revenue
base and scope of distribution. The Company believes that the increased
aggregate telecommunications traffic resulting from these acquisitions will
enhance the Company's ability to negotiate lower rates with its
telecommunications carriers. As part of its business strategy, the Company will
seek, where appropriate, to acquire additional companies or assets that are
complementary to the Company's operations and objectives. Although the Company
regularly evaluates possible acquisition opportunities, the Company currently is
not a party to any agreements with respect to any acquisition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Corporate Background
The Company and Global Link Telecom Corporation ("Global Link"), a
wholly-owned subsidiary of the Company acquired through a merger ("Global Link
Merger") in February 1996, were incorporated under the laws of the State of
Delaware in December 1992 and March 1994, respectively. NATW was incorporated
under the laws of the State of New Jersey on February 1, 1994. CCI was
incorporated under the laws of the State of New Jersey on June 16, 1996. The
Company's principal executive offices are located at 5697 Rising Sun Avenue,
Philadelphia, Pennsylvania 19120 and its telephone number is (215) 342-7700.
2
<PAGE>
Market Opportunity
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. 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. 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.
Prepaid phone cards have been widely used throughout Europe and
Asia for more than fifteen 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 $2 billion in 1997.
Industry analysts project annual sales of prepaid phone cards in the United
States to reach approximately $4 billion by 2000. The Company anticipates that
continued industry growth will be fueled by (i) increasing consumer acceptance
of prepaid phone cards and recognition of their cost advantages over standard
credit calling cards, collect calling and other options available to consumers
seeking to place phone calls when away from the home or office and (ii) a
broader base of consumer segments using prepaid phone cards, such as business
employees, students and travelers.
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,
(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.
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 with sales efforts focused on convenience stores,
supermarkets and drug stores; (ii) expanding its 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.
Expanding Distribution
Domestic Retail. The Company's in-house sales people market the
Company's 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.
3
<PAGE>
The Company intends to increase domestic sales by focusing its
sales efforts on convenience stores, supermarkets and drug stores, and by
recruiting additional distributors to market and promote its prepaid phone cards
to local, regional and national retailers. The Company also intends to increase
domestic sales by continuing to pursue acquisitions of candidates that have
established distribution channels that compliment the Company's distribution
channels.
The Company recently introduced a new traditional phone card, the
"GTS Card." This new traditional prepaid phone card product was designed to
create brand loyalty by providing reliable telecommunications service and
responsive customer service at a good value. The Company has differentiated the
GTS Card from other traditional prepaid phone cards by charging per-minute rates
for domestic telephone calls based upon the mileage between the calling party
and the called party. A call placed to a destination under ten miles will cost
consumers substantially less than a call placed across the country. For example,
a consumer placing a "local" call will have the opportunity to speak for 90
minutes (assuming a $10 card) while a person calling across the country will
have the opportunity to speak for 30 minutes (assuming a $10 card).
Additionally, unlike other traditional phone cards, (i) the consumer always will
have the opportunity to utilize all of the value on the GTS Card (most prepaid
phone cards expire and if value remains on the card at the time of expiration,
that value is never available to the consumer) and (ii) the GTS card is fully
refundable if the customer is not satisfied.
The Company began marketing the GTS Card to national and regional
convenience store chains through direct sales and distributors during the first
quarter of 1998.
International Retail. The Company's sales agents located throughout
the world market the Company's traditional prepaid phone cards to business and
leisure travelers destined for the United States, primarily through airlines,
tour wholesalers, travel agencies, car rental agencies and other travel related
businesses. The Company intends to increase international distribution of its
phone cards by:
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 switching platforms by
installing additional switching platforms or entering into strategic
relationships with other telecommunications service providers 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,
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 400 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,
4
<PAGE>
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
companies as stand-alone operations. In February 1998, the Company acquired NATW
and CCI. See "--Recent Strategic Acquisitions." While the Company regularly
engages in discussions regarding proposed acquisitions, it currently has no
agreement, arrangement or understanding with respect to any such acquisition.
Products and Telecommunications Services
The Company's core product line consists of traditional prepaid
phone cards marketed domestically and internationally, including the GTS 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) and (iv)
sequential calling, which permits customers to place additional calls without
exiting the platform.
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 and (ii) retail promotion programs for
which the Company and the retailer share costs.
Traditional prepaid phone cards permit users to place local, long
distance and international calls from any touch-tone telephone. The Company's
rechargeable traditional phone cards enable customers to add additional calling
time to the phone cards at certain retail locations and, in some cases, by
dialing a toll-free number and furnishing major credit card information. This
allows customers to continue to use the same PINs and generates ongoing residual
sales for retailers. Unlike most products sold by retailers, the Company's
traditional phone cards enable retailers to generate revenues beyond initial
sale of the cards. The Company pays additional commissions to the retailer based
on the dollar value added on any card sold by that retailer, so long as that
retailer continues to offer the Company's phone cards. The Company believes that
this program increases retailer loyalty and creates an incentive for retailers
to sell its prepaid phone cards.
Customers utilizing the Company's traditional phone cards can place
international calls to the United States from more than 30 countries and
outbound domestic and international long distance calls from the United States
to more than 220 countries.
Traditional Phone Cards Marketed Internationally
The Company's 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. The
Company's international phone cards generally are (i) standard plastic
rechargeable prepaid phone cards which are given away with a value by a tour
wholesaler or (ii) 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.
5
<PAGE>
Promotional Phone Cards
The Company's custom-designed promotional phone cards, which
feature companies' logos, products and customized advertisements, are sold to
businesses that typically give these cards to their customers in connection with
the marketing of their products and services. A business utilizing the Company's
phone cards for promotions can access marketing and demographic data compiled by
the Company's switching platforms. The Company believes that it has
differentiated itself from most other providers of promotional phone cards by
combining enhanced services and interactive technology with its promotional
cards.
The Company believes that its in-house creative and design staffs
provide key advantages over competitors in the business promotions segment of
the prepaid phone card industry, allowing the Company to design, implement and
deliver complete, innovative promotional packages and to respond quickly to
changes in customer preferences. The Company has combined its enhanced services
and interactive technology with its promotional cards to produce business
promotions unique to the phone card industry.
Specialty Products
The Company designs and markets specialized retail products
utilizing prepaid phone card technology, which are sold to distributors and
retail establishments. The Company's in-house creative staff develops these
products by expanding the technology utilized by the Company's traditional
prepaid phone cards.
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 six STX switches, three in
Jersey City, New Jersey (the "New Jersey STX") and three in Miami, Florida (the
"Miami STX"). The Miami STX is located at the Company's leased facility and is
maintained by the Company's employees, with the assistance of National Applied
Computer Technology, Inc. ("NACT"), the manufacturer of all six platforms. The
New Jersey STX is located at the offices of NTT Data Communications Systems
Corporation, an affiliate of NTT America, Inc. ("NTT"), a former customer of the
Company, and is maintained by the Company's employees, with the assistance of
NTT representatives and NACT. The Company and NACT have entered into agreements
pursuant to which NACT licenses software to the Company and provides technical
support and platform maintenance. In addition to its own switching facilities,
the Company utilizes or has utilized the switching facilities of outside vendors
for certain of its enhanced services and/or interactive products, including
InComm Communications, a subsidiary of U.S. South Communications, Inc., and
Interactive Media Works, Inc.
The Miami STX and the New Jersey STX provide phone card services to
the Company's domestic and international traditional prepaid phone card
customers and, in many instances, end users of the Company's promotional phone
cards. These switching platforms are designed for the specific purpose of
providing prepaid phone card services, unlike many other switching platforms
which must operate contemporaneously with front end processors functioning
outside of the switching platform. These platforms allow the Company to route
each telephone call to the least expensive long distance carrier, determined by
either the origin of the call, or the city, country, area code or exchange where
the call will terminate.
6
<PAGE>
The Company's switching platforms also monitor card usage and end
user demographics and limit the Company's exposure to fraud by alerting the
Company to situations in which multiple PINs are used from any single telephone
number, the same PIN is being used from many different parts of the country
within a short period of time, or a number of invalid PINs are entered from a
single telephone number. The Company believes that its ability to minimize
unauthorized use of its cards and to provide important customer and card usage
information makes its phone cards an attractive choice for retailers.
The Company believes that the installation of switching platforms
in a number of major metropolitan areas in the United States will reduce the
Company's inbound costs for calls originating within a LATA in which a switching
platform is located. Once a switching platform is installed in a particular
LATA, the Company will be able to enter into an agreement directly with the
local exchange carrier within that LATA. As a result, the Company's costs for
access into its switching platform will be based upon the local exchange
carrier's tariffed access charges, which are substantially less than the costs
of accessing its platform through an interexchange carrier such as Sprint. The
Company also believes that the installation of switching platforms in a number
of major metropolitan areas in the United States will substantially reduce the
Company's costs for terminating calls by enabling the Company to route calls
directly to local exchange carriers within a terminating LATA rather than
through interexchange carriers. The Company can route the terminating calls to
the local exchange carrier and pay only that carrier's tariffed access charges.
In addition, the Company plans to interconnect its switching platforms in
different LATAs using dedicated access lines leased at fixed costs. As a result,
if a call originates in a LATA serviced by one of the Company's switching
platforms and terminates in a different LATA serviced by another switching
platform, the Company will not incur any variable per-minute long distance costs
for transferring calls over its interconnected network.
Carrier Agreements
The Company has carrier agreements with numerous long distance
carriers to originate toll-free access to the Company's switching facilities
domestically and internationally and to terminate domestic and international
long distance calls over these carriers' networks. The carrier agreement between
the Company and Sprint requires the Company to satisfy a $500,000 minimum
monthly usage commitment in order to receive favorable pricing. Failure to meet
such minimum commitment would obligate the Company to pay underutilization
charges equal to 25% of the difference between the minimum commitment and the
net usage. The majority of the Company's domestic toll-free origination and
termination minutes currently are carried over Sprint's network. The Company's
agreement with Sprint expires on June 30, 1998. The Company is currently
negotiating with Sprint and several other carriers with respect to the carriage
of its traffic subsequent to June 30, 1998.
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.
Domestic Retail Sales
The Company sells its prepaid phone cards domestically through an
in-house sales force consisting of 7 sales people, each focusing on a distinct
geographic or niche market. The Company's traditional prepaid phone cards are
sold (i) directly to national, regional and independent retail establishments,
7
<PAGE>
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 traditional prepaid phone cards 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 prepaid phone card sold by the
retailer so long as the 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 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 prepaid phone cards 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.
International Retail Sales
The Company's traditional prepaid phone cards are sold
internationally to business and leisure travelers destined for the United
States, primarily through airlines, tour wholesalers, travel agencies, car
rental agencies and other travel related businesses. International marketing is
conducted primarily through approximately 150 sales agents located in 28
countries.
Promotional Phone Card Sales
The Company's custom-designed promotional phone cards, which
feature companies' logos, products and customized advertisements, are sold to
businesses that typically give these cards to their customers to enhance the
marketing of their products and services. A business using the Company's phone
cards for promotions also can access marketing and demographic data compiled by
the Company's switching platforms. The Company's promotional phone card programs
generally are non-recurring.
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 8 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.
8
<PAGE>
Each account manager uses the Company's management information system to
interface with the Company's NACT STX switching platforms from his or her
computer terminal. This direct link provides the account managers with real-time
information concerning customers' accounts.
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
400 in 1997, some of which have substantially greater resources than those of
the Company. Further, the Company's prepaid phone cards not only compete with
other prepaid phone cards, but also with credit calling cards, collect calling
services, hotel telephones, public pay telephones and other long distance
services. The Company believes that it competes with any medium by which a
consumer places a telephone call when away from the home or office.
The Company believes that its established reputation in the prepaid
phone card industry among retailers, distributors and business customers, its
existing telecommunications infrastructure and its experienced management team
provide it with important advantages over competitors. The Company also believes
that the recharge capabilities of certain of its phone cards provide it with
important advantages over many of its competitors whose cards do not provide
users with these capabilities. The Company believes that the primary competitive
factors affecting the prepaid phone card market are price, quality and
reliability of service, ease of use, service features and name recognition. The
Company believes that it successfully competes in these areas.
The Company's prepaid phone cards provide a more convenient and
cost-effective alternative to other long distance services intended for use away
from a consumer's home or office. The Company's phone cards are easy to use and
can be utilized from any touch-tone telephone. Unlike credit calling cards,
prepaid phone cards do not require users to fill out credit applications and
allow consumers to budget telephone expenses effectively. The Company's phone
cards provide a less expensive alternative to credit calling cards, collect
calling services, hotel telephones and public pay telephones.
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 international telecommunications, while
state regulatory authorities have jurisdiction over telecommunications services
that originate and terminate within the same state. Various other international
authorities also may seek to regulate telecommunications services originating in
their respective countries.
Federal
The federal Communications Act, as amended by the
Telecommunications Act of 1996 (the "1996 Act"), 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 of the 1996 Act, the FCC has
promulgated numerous regulations to encourage competition and entry in the
telecommunications industry. While the Company believes that the 1996 Act, by
fostering increased competition in the telecommunications industry, will 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 1996 Act and the
rules promulgated thereunder cannot be anticipated.
The Communications 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 or its rules.
9
<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, although, as discussed below, the
issue of whether nondominant carriers must file tariffs for their interstate,
domestic, interexchange services currently is under review. The tariffs of
nondominant carriers and the rates and charges they specify are subject to FCC
review, but 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 1996 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 Section 276 of the 1996 Act, the FCC, in September
1996, adopted new rules governing the pay telephone industry that, among other
things, established a means by which all pay telephone service providers are
compensated for every interstate and intrastate call completed from their pay
telephones, including calls that utilize toll-free access and access codes
("Dial Around Compensation"). On July 1, 1997, the United States Court of
Appeals for the District of Columbia Circuit remanded to the FCC for further
consideration certain rules which could have a material adverse effect on the
Company. The Court of Appeals found that the FCC's determination setting the
per-call compensation at $0.35 was unjustified. Additionally, the Court of
Appeals found that the FCC acted arbitrarily and capriciously in establishing an
interim compensation plan which required that, during the first year, only
interexchange carriers generating $100 million or more in annual revenues must
pay a pro rata portion of $45.85 per month per pay telephone (based upon the pro
rata share of the total annual revenues for carriers generating $100 million or
more). The Court of Appeals upheld the FCC's determination that interexchange
carriers should track compensable calls and compensate pay telephone providers
for toll free and access code calls. Additionally, the Court of Appeals upheld
interexchange carrier's rights to charge long distance resellers or customers
that own toll free access numbers or access codes (such as the Company) for any
such compensable calls. In October 1997, the FCC adopted new rules governing
Dial Around Compensation, pursuant to which each pay telephone owner is entitled
to be compensated $0.284 for each dial around call originating from a pay
telephone. Simultaneously, the FCC issued an order waiving, until March 9, 1998,
the local exchange carriers' obligation to deliver an info-coding digit to the
interexchange carriers indicating that the telephone call originated from a pay
telephone. The Company, along with other phone card companies and the
International Telecard Association, filed a petition requesting that the FCC
reconsider its decision to grant the waiver. On delegated authority, the FCC's
common carrier bureau denied the request and extended the waiver through October
1998 for most local exchange carriers. The resolution of this matter by the FCC
and, if applicable, the federal courts is uncertain.
In May 1996, the Federal Reserve Board published proposed rules
governing "stored value cards" with a maximum value of $100 or more. If the
Company permits more than $100 to be credited to its prepaid phone cards, and
the rules are adopted, the Company would become subject to the new requirements,
including those related to the provision of transaction receipts and limitation
of consumers' responsibility for unauthorized transactions. Currently, virtually
all of the Company's prepaid phone cards have a maximum value of $100 or less.
State
The provision of intrastate long distance telecommunications
services and local exchange 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, California, Texas and New Jersey (where the Company
conducts a substantial part of its business), there can be no assurance that
10
<PAGE>
state regulators will grant the Company all required authorizations. Many
states, including Florida, California and Texas, have implemented or are
considering implementing other rules that specifically regulate prepaid phone
card providers. 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.
In November 1997, Congress enacted legislation that specifically
addressed the application of federal excise taxes to the sale of prepaid phone
cards. Accordingly, the Company began to file federal excise tax returns.
However, the taxation of prepaid phone cards is evolving and has not been
specifically addressed in certain states in which the Company does business. The
Company has not filed any state sales and use tax returns nor has it remitted
any such taxes to state taxing authorities. While the Company believes that it
has adequately provided for such taxes and related compliance costs, it is
possible that certain states may enact legislation or interpret current laws in
a manner that could result in additional tax liabilities, which could be
material.
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 U.S. trademarks of Global Link. Applications also have been filed
and/or registrations have been secured for Global Link(R) and/or the design of
the Global Link(R) phone card in Brazil, Canada, France, Germany, Korea, Japan,
Spain, Taiwan and the United Kingdom. The Company or Global Link also has filed
trademark applications with the United States Patent and Trademark Office
seeking registration of the following marks: ActiPhone(TM), Local Link(TM);
Global Link Worldwide(TM); and Pets-in-Need(TM). The combined name and design of
CCI's prepaid phone card, The Great Phone Card(TM), is a registered U.S.
trademark of CCI. 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 1, 1998, the Company had 64 full-time employees and 33
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. Global Link is renting this space from JilJac
Realty Company ("JilJac"), a general partnership owned by Gary J. Wasserson, the
Company's former Chief Executive Officer and currently a consultant to the
Company. 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. In July 1997, the Company leased additional storage space from
JilJac on a month-to-month basis for $3,500 per month. The Company has provided
notice to JilJac that it intends to terminate the lease solely for this
additional space on June 29, 1998.
11
<PAGE>
In July 1995, the Company entered into a sublease for 9,400 square
feet of space located at 40 Elmont Road, Elmont, New York. The term of the
sublease is through July 2000 and provides for an annual rent of $145,700,
including utilities. In February 1997, the Company subleased this space through
July 2000 for an annual rent of $89,300 for the first 12 months, $94,000 for the
second 12 months and $98,700 for the remainder of the term.
In August 1995, the Company entered into a lease for approximately
1,930 square feet of space for its sales offices located at 60 East 42nd Street,
New York, New York. The term of the lease is 62 months and provides for an
annual rent of $45,248.
In April 1997, the Company entered into a lease for approximately
2,125 square feet of space located in Roslyn Heights, New York. The Company
currently leases this space on a month-to-month basis for approximately $4,600
per month.
In January 1997, NATW entered into a lease for approximately 1,865
square feet of space located at 509 South Lenola Road, Moorestown, New Jersey,
which houses NATW's principal offices. The lease provides for an annual rent of
$25,886.16 and can be terminated on 90 days' notice.
In August 1996, CCI entered into a lease for approximately 1,873
square feet of space located at 115 Christopher Columbus Drive, Jersey City, New
Jersey, which houses CCI's principal offices. In June 1997, the lease was
amended to add an additional 869 square feet of space, for a total of 2,742
square feet. The lease provides for an annual rent of $42,216 and will terminate
on September 30, 1998.
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.
ITEM 3. LEGAL PROCEEDINGS
On April 9, 1998, the Company, CCI and NATW commenced an action for
breach of contract, unjust enrichment, implied contract and fraud against Access
Telecom, Inc. ("Access Telecom") and Douglas P. Haughn in the Circuit Court of
the Ninth Judicial Circuit in and for Orange County, Florida. Access Telecom, a
provider of long distance services to each of NATW and CCI prior to and after
the respective mergers, ceased providing such services to the prepaid phone
cards that it had sold to each of NATW and CCI, despite receiving payment for
substantially all of the phone cards. The Company is seeking damages in excess
of $1,000,000. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
<PAGE>
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 ranges of
bid prices for the Common Stock and Public Warrants for the periods indicated,
as reported by Nasdaq, the principal trading market for the Company's
securities. The quotes represent inter-dealer prices without adjustments or
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Common Stock Public Warrants
------------------------------- ---------------------------
High Low High Low
------------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
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............................................ 10-3/8 10-1/2 1-11/16 5/8
Second Quarter........................................... 10-1/4 6-3/8 31/32 7/16
Third Quarter............................................ 9-1/2 5-1/2 1 7/16
Fourth Quarter........................................... 9-5/8 4-13/16 3/4 5/32
</TABLE>
On April 1, 1998, the last bid prices for the Common Stock and
Public Warrants as reported by Nasdaq were $7-1/8 and $5/16, respectively.
As of April 1, 1998, there were 5,991,772 shares of Common Stock
outstanding and Public Warrants to purchase 1,630,560 shares of Common Stock
outstanding, held of record by 119 and 52 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.
13
<PAGE>
Recent Sales of Unregistered Securities
During the quarter ended December 31, 1997, the Company made the
following sales of unregistered securities. The sales set forth below made prior
to the quarter ended December 31, 1997 were previously unreported:
<TABLE>
<CAPTION>
Consideration Received If Option,
and Description of Warrant or
Underwriting or Other Exemption Convertible
Discounts to Market from Security, Terms
Price Afforded to Registration of Exercise or
Date of Sale Title of Security Number Sold Purchasers Claimed Conversion
- ------------- ------------------- ----------- ---------------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
7/15/97 option to purchase 250,000 option granted to 4(2) exercisable from
Common Stock representative of 7/9/98 to 7/8/02 at
underwriters in public an exercise price
offering of $9.075 per
share
7/31/97 warrants to purchase 100,000 consulting services 4(2) exercisable from
Common Stock 1/25/98 to 1/24/01
at an exercise price
of $7.00 per share
11/10/97 options to purchase 405,000 options granted - no 4(2) exercisable for
Common Stock consideration received by five years from
granted to employees Company until exercise date of vesting at
an exercise price
of $6.4375
11/11/97 options to purchase 7,500 options granted - no 4(2) exercisable for
Common Stock consideration received by five years from
granted to employee the Company until exercise date of vesting at
an exercise price
of $6.50 per share
</TABLE>
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 discussions of results, causes and
trends should not be construed to imply any conclusion that such results or
trends will necessarily continue in the future.
Safe Harbor Cautionary Statement
The Company occasionally makes forward-looking statements such as
forecasts and projections of expected future performance or statements of its
plan and objectives. When used in this Report and in future filings by the
Company with the Securities and Exchange Commission ("Commission"), in the
Company's press releases and in oral statements made with the approval of an
authorized executive officer of the Company, the words or phrases "will likely
result," "the Company expects," "will continue," "is anticipated," "estimated,"
"project," or "outlook" or similar expressions (including confirmations by an
authorized executive officer of the Company of any such expressions made by a
third party with respect to the Company) are intended to identify
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers 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
14
<PAGE>
historical earnings and those presently anticipated or projected. For a more
detailed discussion of these and other risks, reference is made to the Company's
prospectus dated July 9, 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales for 1997 were $18,234,640, compared to $12,121,365 for
1996. Net sales of traditional cards sold through retail and wholesale
distribution programs were approximately $16,047,000 in 1997, compared to
approximately $9,643,000 in 1996. Net sales of promotional cards and other
services decreased slightly to approximately $2,188,000 in 1997 from
approximately $2,478,000 in 1996. The primary reason for the increase in net
sales and shift in sales mix was the Company's aggressive pursuit of retail
programs, which offered reduced per minute charges to consumers.
The Company's gross margins decreased to 11% for 1997 from 34% for
the comparable period in the prior year. The decrease in margins was primarily
the result of an increase in the sale of cards with reduced per-minute rates to
consumers. In addition, margins were negatively impacted by approximately
$700,000 due to the disposal of inventory and deferred costs related to a
product realignment which will enable the Company to have a more consistent
product and marketing focus. The Company believes that the higher sales volumes
in 1997 will enable it to negotiate better rates with its carriers and improve
margins in future periods. However, due to the highly price competitive nature
of prepaid phone cards, there can be no assurance that any reduction in carrier
costs will result in higher margins as such reductions may be offset by a
corresponding decrease in the per-minute charges to consumers.
Selling and marketing expenses remained relatively constant,
decreasing slightly from $3,190,226 in 1997 from $3,355,778 in 1996. Selling and
marketing expenses as a percentage of sales decreased to 18% of sales in 1997
from 28% of sales in 1996. The decrease as a percentage of sales was primarily
the result of the Company's strategy of utilizing distributors to market the
Company's phone cards to retail establishments without increasing its sales
force.
General and administrative expenses remained relatively constant,
increasing to $6,450,280 in 1997 from $5,870,358 in 1996. However, as a
percentage of sales, general and administrative expenses decreased to 35% of
sales in 1997 from 48% in 1996. The Company believes that in the future general
and administrative expenses should not increase in the same proportion as
increases in sales volumes.
Depreciation and amortization increased to $2,037,222 in 1997 from
$1,427,296 in 1996, primarily due to the acquisition of additional switching and
computer equipment.
In 1997, the Company recorded a $1,500,606 restructuring charge
related to the closing of its retail store operations, a modification of an
employment agreement with the former Chief Executive Officer of the Company and
the discontinuance of technology-based equipment. The decision to close its
retail store operations was to allow the Company to concentrate its efforts on
its core distribution outlets. The disposal of equipment was primarily related
to an equipment realignment, which will enable the Company to work with a more
defined and consistent technology base. The Company does not expect that the
closing of its retail store operations will have a material adverse effect on
future operating results.
Following the Global Link Merger, the Company has experienced
significant net losses and negative cash flow from operations and current
projections indicate that this trend is expected to continue for the foreseeable
future. As a result, in the fourth quarter of 1997, the Company reviewed the
recoverability of the carrying amount of the goodwill from the Global Link
Merger. In accordance with the Company's accounting policy, this review
encompassed the preparation and review of projections of undiscounted cash flows
(covering the remaining goodwill amortization period as of December 31, 1997, a
period of approximately 13 years). This review resulted in the conclusion than
an impairment loss of $13,228,154 should be recognized to reduce goodwill to its
estimated fair value at December 31, 1997.
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
15
<PAGE>
recorded amount of goodwill is appropriate at December 31, 1997, there can be no
assurance that the Company's future results will confirm this assessment or that
an additional write-down or write-off of goodwill will not be required in the
future.
Investment and interest income increased to $253,989 in 1997 from
$73,834 in 1996, primarily due to interest earned on the net proceeds from the
Company's public offering consummated in July 1997 ("July 1997 Offering").
Interest expense for 1997 increased to $1,368,307 from $395,674 in
1996, primarily as a result of the amortization of the unearned discount and
deferred financing costs ($910,857 in 1997 compared to $85,819 in 1996)
associated with the issuance of notes payable pursuant to the private placement
consummated by the Company in December 1996 ("December 1996 Private Placement").
For the foregoing reasons, the Company incurred a net loss of
$25,535,939 for 1997, compared to a net loss of $6,920,222 for 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales for 1996 were $12,121,365, compared to $3,144,350 for
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's commencing on March 1, 1996. Net sales of
traditional phone cards were $9,643,000 for 1996, compared to $1,085,000 for
1995, an increase of approximately $8,558,000, or 788.8%. Net sales generated
from the sale of promotional cards, other retail products utilizing prepaid
phone card technology and other services during 1996 were $2,478,000, compared
to $2,059,000 in 1995, an increase of $419,000, or 20.3%. The Company's gross
margins increased to 33.5% of net sales for 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 1996, compared to $1,332,348 (42.4% of net sales) for 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 1996, compared to $2,041,010 (64.9% of net sales) for 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 1996, compared to
$192,482 for 1995. The decrease of $118,648 was a result of lower balances of
cash and cash equivalents on hand.
Interest expense for 1996 increased to $395,674 from $0 for 1995,
as a result of interest on $2,800,000 of convertible debentures ("Convertible
Debentures") and amounts due to Peoples Telephone Company, Inc. ("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 1996, compared to a net loss of $2,970,121 for 1995.
16
<PAGE>
Liquidity and Capital Resources
At December 31, 1997, the Company had cash and cash equivalents of
$7,867,566 and working capital of $620,937, compared to cash and cash
equivalents of $1,352,322 and a working capital deficit of $5,630,385 at
December 31, 1996.
Net cash used in operating activities for the year ended December
31, 1997 of $7,349,567 was primarily due to the Company's net loss offset by
non-cash items aggregating $17,562,678 such as depreciation and amortization,
financing costs and impairment of goodwill. Net cash used in investing
activities for the year ended December 31, 1997 consisted of $859,496 of capital
expenditures. These uses were primarily funded from the net proceeds of
$13,325,731 from the July 1997 Offering and the net proceeds of $2,500,000 from
the exercise of warrants in April 1997.
In connection with the Global Link Merger, the Company assumed
$2,800,000 aggregate principal amount of Convertible Debentures. $1,400,000 of
the Convertible Debentures are due and payable on June 23, 1999 and $1,400,000
of the Convertible Debentures are due and payable on September 14, 1999. The
Convertible Debentures are secured by a first lien on all of the assets of
Global Link. The Convertible Debentures bear interest at 6% per annum, payable
on May 31st 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 conversion if
certain conditions are met. During the year ended December 31, 1997, there were
$2,599,750 aggregate principal amount of Convertible Debentures.
In December 1996, the Company completed the December 1996 Private
Placement, pursuant to which the Company derived gross proceeds of $3,000,000
through the sale of $3,000,000 of promissory notes ("December 1996 Notes") and
warrants to purchase 1,000,000 shares of Common Stock ("December 1996
Warrants"). The December 1996 Notes are payable on the earlier of November 27,
1998 and the date on which the Company undergoes a change of control. If the
December 1996 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.
In February 1998, the Company acquired, through a merger, all of
the outstanding capital stock of NATW for a purchase price comprised of (i)
$2,000,000 in cash, (ii) an aggregate of 505,618 shares of Common Stock and
(iii) $1,000,000 aggregate principal amount of promissory notes ("NATW Notes"),
secured by substantially all of the assets of NATW. The NATW Notes accrue
interest at the rate of 6% per annum and are payable as follows: (i) one-half of
principal and interest accrued thereon on November 1, 1998 and (ii) four equal
payments of $125,000, plus interest accrued thereon, on April 1, 1999, July 1,
1999, October 1, 1999 and January 1, 2000. In addition, the Company may be
required to pay an additional $2,000,000 in consideration to one of the NATW
stockholders if certain financial objectives are achieved.
Also in February 1998, the Company acquired, through a merger, all
of the outstanding capital stock of CCI for a purchase price comprised of (i)
$1,500,000 in cash, (ii) 401,284 shares of Common Stock and (iii) a $1,000,000
aggregate principal amount promissory note ("CCI Note"), secured by
substantially all of the assets of CCI. The CCI Note accrues interest at the
rate of 8% per annum and is payable as follows: (i) $250,000 plus interest
accrued thereon on October 31, 1998, (ii) $250,000 plus interest accrued thereon
on January 1, 1999 and (iii) four equal payments of $125,000, plus interest
accrued thereon, on April 1, 1999, July 1, 1999, October 1, 1999 and January 1,
2000.
In February 1998, Access Telecom, a provider of long distance
services to each of NATW and CCI prior to and after the respective mergers,
ceased providing such services to the prepaid phone cards that it had sold to
each of NATW and CCI, despite receiving payment for substantially all of the
phone cards. In order to meet consumer obligations, the Company was forced to
purchase approximately $1,400,000 of telecommunications services from other
carriers through March 31, 1998. Additional payments may be required as a result
of this situation. The Company is pursuing recovery of all losses from Access
Telecom. See "Legal Proceedings."
In April 1998, the Company completed a private placement ("April
1998 Private Placement"), pursuant to which the Company received net proceeds of
approximately $1,100,000 through the sale of $1,250,000 of convertible
subordinated promissory notes ("April 1998 Notes") and warrants ("April 1998
Warrants") to purchase 178,571 shares of Common Stock. The April 1998 Warrants
are exercisable at a price equal to the lesser of: (i) $7.00 or (ii) the price
17
<PAGE>
per share at which the Company issues Common Stock in a transaction with
aggregate gross proceeds of $4,000,000 ("Qualified Private Placement"). The
April 1998 Warrants are exercisable until April 2001. The April 1998 Notes
accrue interest at the rate of 10% per annum and are payable on the earlier of
January 15, 1999 and the date of the closing of a Qualified Private Placement.
The holders have the right at any time to convert all or any portion of the
April 1998 Notes into the number of shares of Common Stock determined by
dividing the unpaid principal amount of the April 1998 Notes by the lesser of:
(i) $7.00 or (ii) the per share purchase price being paid by the purchasers in
the Qualified Private Placement.
In April 1998, certain holders of the December 1996 Notes agreed to
allow the Company to defer repayment of an aggregate of $2,400,000 of the
December 1996 Notes from November 1998 to January 1999. In addition, subsequent
to the NATW and CCI acquisitions, the sellers agreed to defer an aggregate of
$1,250,000 originally payable in 1998 under the agreements to January 1999.
In April 1998, the Company entered into an agreement with an
investor, pursuant to which the investor has agreed to acquire up to $2,000,000
of Common Stock or other securities ("$2,000,000 Commitment") at a discount to
the market price of such securities. The Company can require the investor to
acquire the securities on thirty days' written notice until December 31, 1998.
In consideration thereof, the Company issued the investor warrants to purchase
100,000 shares of Common Stock at an exercise price of $7.50 per share. The
warrants are immediately exercisable and will remain exercisable until April 13,
2001.
The Company incurred significant net losses and negative cash flow
from operations during 1996 and 1997. Due in part to the acquisitions of NATW
and CCI, and a continuation of negative cash flow from operations through March
31, 1998, the Company's cash balance has declined to less than $1,000,000 at
March 31, 1998. Further, management's current projections indicate that the
Company will continue to generate operating losses and negative cash flow from
operations through 1998, making it necessary for the Company to raise capital
during 1998 in order to satisfy its obligations as they come due. To that end,
the Company completed the April 1998 Private Placement which generated net
proceeds of approximately $1,100,000 and has obtained the $2,000,000 Commitment.
In addition, the Company has obtained loan payment deferrals aggregating
$3,650,000. The Company believes that the proceeds from the April 1998 Private
Placement and the $2,000,000 Commitment, together with the loan deferrals, will
enable the Company to meet its obligations through the end of 1998. 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.
At December 31, 1997, the Company had net operating loss
carryforwards ("NOLs") aggregating approximately $20,846,000 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. 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.
Year 2000 Compliance
The Company is in the process of evaluating the effects of
modifying its computer software systems to accommodate year 2000 transactions.
The Company has not determined the costs of such modifications and these costs
could have a material adverse effect on the Company's financial position.
18
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Global Telecommunication Solutions, Inc.
Independent Auditors' Report........................................ F-1
Consolidated Balance Sheets at December 31, 1997 and 1996........... F-2
Consolidated Statements of Operations for the Years ended
December 31, 1997 and 1996......................................... F-3
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 1997 and 1996............................. F-4
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997 and 1996......................................... F-5
Notes to Consolidated Financial Statements.......................... F-6
19
<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, 1997 and
1996, 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, 1997 and
1996, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
March 31, 1998, except for the fourth and fifth paragraphs of note 16, which are
as of April 8 and April 13, 1998, respectively
Philadelphia, Pennsylvania
F-1
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------
1997 1996
----------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,867,566 $ 1,352,322
Accounts receivable, net of reserve for
doubtful accounts of $570,000 and $399,000 2,636,878 2,450,119
Inventories 174,112 202,129
Deferred costs 32,764 1,127,887
Prepaid expenses 160,935 260,272
----------- ----------
Total current assets 10,872,255 5,392,729
----------- ----------
Goodwill, net 3,516,344 18,008,599
Property and equipment, net 1,485,348 1,948,917
Other assets, net 378,911 469,120
----------- ----------
Total assets $16,252,858 $25,819,365
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,199,134 $ 3,238,666
Accrued expenses 2,165,986 542,965
Deferred revenues 1,677,615 4,431,309
Estimated sales and excise tax liability 3,663,285 1,684,478
Amounts payable to affiliate -- 1,073,921
Notes payable, current 450,000 --
Capital lease obligation, current 95,298 51,775
------------ -----------
Total current liabilities 10,251,318 11,023,114
------------ -----------
Notes payable, net of unearned discount of
$713,018 and $1,484,040 1,886,982 1,565,960
Convertible notes payable 2,599,750 2,800,000
Capital lease obligation, long-term -- 42,002
------------ ----------
Total liabilities 14,738,050 15,431,076
------------ ----------
Commitments and contingencies (Notes 5,12,14 and 16)
Stockholders' equity
Preferred stock - $.01 par value, authorized
1,000,000 shares; none issued and outstanding -- --
Common stock, $.01 par value, authorized 35,000,000
shares; issued and outstanding 5,084,870
and 1,837,601 50,848 18,376
Additional paid in capital 39,689,698 22,990,766
Accumulated deficit (37,942,443) (12,406,504)
Deferred compensation (294,650) (102,498)
Cumulative foreign currency translation adjustment 11,355 (11,851)
Common stock note receivable -- (100,000)
----------- ------------
Total stockholders' equity 1,514,808 10,388,289
----------- ------------
Total liabilities and stockholders' equity $16,252,858 $25,819,365
=========== ============
</TABLE>
The accompanying notes are an integral part of these statements
F-2
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Year Ended
December 31,
-----------------
1997 1996
----------- -----------
<S> <C> <C>
Net sales $18,234,640 $12,121,365
Cost of sales 16,249,773 8,066,315
----------- -----------
Gross profit 1,984,867 4,055,050
----------- -----------
Selling and marketing expenses 3,190,226 3,355,778
General and administrative expenses 6,450,280 5,870,358
Depreciation and amortization 2,037,222 1,427,296
Restructuring charge 1,500,606 --
Goodwill impairment (note 3) 13,228,154 --
----------- -----------
Operating loss (24,421,621) (6,598,382)
------------ -----------
Interest income 253,989 73,834
Interest expense 1,368,307 395,674
------------ -----------
Loss before income taxes (25,535,939) (6,920,222)
Income taxes -- --
------------ -----------
Net loss $(25,535,939)$(6,920,222)
============ ============
Basic and diluted loss per share $ (7.47)$ (4.14)
============ ============
Weighted average shares outstanding - basic
and diluted 3,418,724 1,670,755
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
F-3
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Common Stock foreign
------------------ Additional Deferred Common currency
paid-in Accumulated Compen- stock note translation
Shares Amount capital deficit sation receivable adjustment Total
--------- -------- -------- ------------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 1,047,226 $10,472 $ 7,329,729 $ (5,486,282) $(197,165) -- $ -- $ 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 from
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 -- -- -- -- -- -- (11,851) (11,851)
Net loss -- -- -- (6,920,222) -- -- -- (6,920,222)
--------- ------- ----------- ------------- ---------- --------- --------- --------------
Balance at December 31, 1996 1,837,601 18,376 22,990,766 (12,406,504) (102,498) (100,000) (11,851) 10,388,289
Issuance of common stock in
public stock offering 2,875,000 28,750 13,296,981 -- -- -- -- 13,325,731
Exercise of warrants 333,334 3,333 2,496,667 -- -- -- -- 2,500,000
Conversion of notes payable 21,615 216 200,034 -- -- -- -- 200,250
Exercise of options 10,190 102 8,673 -- -- -- -- 8,775
Deferred compensation
from grant of stock options -- -- 151,648 -- (151,648) -- -- --
Issuance of common stock
as compensation 7,130 71 49,929 -- -- -- -- 50,000
Amortization of deferred
compensation -- -- -- -- 309,496 -- -- 309,496
Deferred compensation
from issuance of warrants -- -- 350,000 -- (350,000) -- -- --
Issuance of stock options
as compensation -- -- 145,000 -- -- -- -- 145,000
Forgiveness of common stock
note receivable -- -- -- -- -- 100,000 -- 100,000
Foreign currency translation -- -- -- -- -- 23,206 23,206
Net loss -- -- -- (25,535,939) -- -- -- (25,535,939)
--------- ------- ----------- ------------- ---------- --------- --------- --------------
Balance at December 31, 1997 5,084,870 $50,848 $39,689,698 $(37,942,443) $(294,650) $ -- $ 11,355 $ 1,514,808
========= ======= =========== ============= ========== ======== ========= =============
</TABLE>
The accompanying notes are an integral part of these statements
F-4
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
December 31,
---------------------------
1997 1996
----------- -------------
<S> <C> <C>
Operating activities:
Net loss (25,535,939) $(6,920,222)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,037,222 1,427,296
Provision for bad debt 171,000 234,000
Amortization of deferred compensation 309,496 494,667
Amortization of unearned discount 771,022 58,004
Amortization of deferred financing charges 139,835 27,815
Issuance of stock as compensation 50,000 --
Issuance of stock options as compensation 145,000 --
Forgiveness of common stock receivable 100,000 --
Loss on disposal of fixed assets 610,949 --
Write-off of convertible notes receivable and
accrued interest -- 343,000
Goodwill impairment 13,228,154 --
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable (357,759) 1,780,565
Inventories 28,017 76,745
Deferred costs 1,095,123 108,085
Prepaid expenses 99,337 231,836
Other assets (49,626) 33,755
Accounts payable (1,039,532) (923,342)
Accrued expenses 1,623,021 (450,989)
Deferred revenues (2,753,694) (1,080,746)
Sales and excise taxes payable 1,978,807 957,847
----------- -------------
Net cash used by operating activities (7,349,567) (3,601,684)
----------- -------------
Investing activities:
Purchases of fixed assets (859,496) (347,983)
Cash acquired in excess of cash payments
for acquisition -- 160,190
----------- -------------
Net cash used in investing activities (859,496) (187,793)
----------- -------------
Financing activities:
Proceeds from issuance of common stock 13,325,731 2,611,569
Proceeds from issuance of promissory notes
and warrants -- 2,850,000
Proceeds from the exercise of warrants 2,500,000 --
Proceeds from exercise of options 8,775 --
Payments to affiliates (1,073,921) (930,707)
Increase in notes receivable from Global
Link prior to merger -- (250,655)
Payments on capital lease obligations (59,484) (55,073)
----------- -------------
Net cash provided by financing activities 14,701,101 4,225,134
----------- -------------
Effects of exchange rates on cash 23,206 (11,851)
----------- -------------
Net increase in cash 6,515,244 423,806
Cash and cash equivalents, beginning of period 1,352,322 928,516
----------- -------------
Cash and cash equivalents, end of period $7,867,566 $1,352,322
============ =============
</TABLE>
The accompanying notes are an integral part of these statements
F-5
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
Year ended
December 31,
---------------------------
1997 1996
----------- -------------
<S> <C> <C>
Supplemental disclosures:
Cash paid for interest $ 163,185 $ 134,999
============ =============
Capital leases $ 61,005 $ 148,850
============ =============
Deferred compensation relating to options
and warrants $ 501,648 $ 400,000
============ =============
Conversion of convertible notes payable
into common stock $ 200,250 $ --
============ =============
Issuance of stock as compensation $ 50,000 $ --
============ =============
Issuance of stock options as compensation $ 145,000 $ --
============ =============
Forgiveness of common stock receivable $ 100,000 $ --
============ =============
Issuance of common stock in connection
with acquisition $ -- $11,039,488
============ =============
Issuance of notes payable in payment for
legal fees $ -- $ 50,000
============ =============
Issuance of notes payable and warrants
in private placement $ -- $ 1,617,884
============ =============
Exchange of notes receivable for property
and equipment $ -- $ 64,000
============ =============
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(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.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the financial statements
of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities,
revenue and expenses 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.
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.
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 and any prepaid long distance carrier costs,
which are included in deferred costs and expensed when the related
revenue is recognized.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with an
original maturity date of three months or less.
F-6
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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.
Goodwill
Goodwill represents the unamortized excess of the cost over the fair
values of the net assets acquired in the Global Link acquisition.
Amortization expense was computed using the straight-line method over
15 years. The Company periodically reviews goodwill to assess
recoverability and this analysis resulted in an impairment charge of
$13,228,154 in the fourth quarter of 1997. (See Note 3) The Company's
policy is to evaluate the recoverability of goodwill based on
forecasted undiscounted cash flows from operations.
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 5 years
Machinery and equipment 3 years
Computers, telecommunication switches and office equipment 3 years
Vehicles 5 years
Assets held under capital leases and leasehold improvements are
amortized over the lives of the respective leases or the useful life of
the improvements, whichever is shorter. During the year ended December
31, 1997 the estimated useful lives of certain types of property
equipment were changed. The change did not have a material impact on
the results of operations.
Other Assets
Other assets consist primarily of deposits and deferred financing fees.
Amortization expense of these fees to interest expense was computed
using the straight-line method over the term of the related debt, which
approximates the effective interest method.
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 liability and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
F-7
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Foreign Currency Translation
Assets and liabilities of the Company's Canadian subsidiary have been
translated at rates of exchange at the end of the period. Revenues,
costs and expenses have been translated at average exchange rates in
effect during each reporting period. Gains and losses resulting from
foreign currency transactions are included in income while translation
adjustments resulting from translation of financial statements are
reported separately as a component of stockholders' equity.
Stock Split
In February 1997, the Board of Directors approved a one-for-three stock
split, which became effective in March 1997. All per share data and
references to the number of shares have been restated to give effect to
the reverse stock split.
Net Loss Per Share
In February 1997 the Financial Accounting Standards Board (FASB) issued
a new standard, Statement of Financial Accounting Standards No. 128,
Earnings per Share (SFAS No. 128) which specifies the computation,
presentation and disclosure requirements for earnings per share. This
statement replaces the presentation of primary earnings per share with
a presentation of basic earnings per share and requires dual
presentation of basic and diluted earnings per share on the face of the
income statement. Restatement of earnings per share data for previous
periods is also required. Basic earnings (loss) per share is computed
by dividing net earnings or loss by the weighted average number of
common shares outstanding and diluted earnings per share gives effect
to all dilutive potential common shares that were outstanding during
the period. The statement was adopted for the year ended December 31,
1997. Basic and diluted net loss per share for 1997 and the restated
basic and diluted net loss per share for 1996 were the same as
potential common shares of 4,058,959 and 3,358,209 respectively were
not included in the calculation of the net loss per share since their
inclusion would be anti-dilutive.
Stock-Based Compensation
On January 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as an
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.
Fair Value of Financial Instruments
The carrying amounts of accounts receivable, accounts payable and notes
payable approximate fair value.
F-8
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Long-Lived Assets
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 undiscounted net cash flows to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount of 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.
New Accounting Pronouncements
The FASB issued a new standard, SFAS 129, Disclosure of Information
about Capital Structure, which requires certain disclosures about
capital structure. The Company must adopt this standard in the first
quarter of 1998. Implementation of this disclosure standard will not
affect the Company's financial position or results of operations.
The FASB issued a new standard, SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
The Company must adopt this standard in the first quarter of 1998.
Under the provisions of this standard, the Company will be required to
include a financial statement presentation of comprehensive income and
its components to conform to these new requirements. Comprehensive
income is the total of net income and all other changes in equity. As a
consequence of this change, certain reclassifications will be necessary
for previously reported amounts to achieve the required presentation of
comprehensive income. Implementation of this disclosure standard will
not affect the Company's financial position or results of operations.
The FASB issued SFAS 131, Disclosures About Segments of an Enterprise
and Related Information, which requires that companies disclose segment
data based on how management makes decisions about allocating resources
to segments and measuring their performance. The Company must adopt
this standard in the first quarter of 1998.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
(3) Acquisition and Goodwill
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 shares of common stock of
Global Link Telecom Corporation ("Global Link"). The acquisition was
accounted for as a purchase. Accordingly, the acquired assets and
liabilities were recorded at their estimated fair values at the date of
acquisition and the operating results of Global Link have been included
in the accompanying consolidated statements of operations from the
acquisition date.
F-9
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 following unaudited combined pro forma information reflects the
results of operations assuming the acquisition of Global Link had been
made on January 1, 1996.
Year Ended
December 31, 1996
-----------------
Net sales $ 13,484,000
Net loss (7,739,000)
Net loss per share $ (4.38)
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 year, or of results, which
may occur in the future.
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
===============
Following the Global Link acquisition, the Company has experienced
significant net losses and negative cash flow from operations and
current projections indicate this trend is expected to continue for the
foreseeable future. As a result, in the fourth quarter of 1997, the
Company reviewed the recoverability of the carrying amount of the
goodwill that had arisen in the Global Link acquisition. In accordance
with the Company's accounting policy, this review encompassed the
preparation and review of projections of undiscounted cash flows
(covering the remaining goodwill amortization period as of December 31,
1997, a period of approximately thirteen years). This review resulted
in the conclusion that an impairment loss of $13,228,154 should be
recognized to reduce goodwill to its estimated fair value at December
31, 1997. The following table summarizes changes in the net book value
of goodwill during 1996 and 1997.
Goodwill recorded in connection with
Global Link acquisition $ 19,069,000
1996 amortization expense (1,060,401)
-------------
Balance at December 31, 1996 18,008,599
1997 amortization expense (1,264,101)
Impairment charge (13,228,154)
-------------
Balance at December 31, 1997 $ 3,516,344
=============
F-10
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The assessment of goodwill recoverability, which is heavily dependent
on projected financial information, and the goodwill amortization
period are significant accounting estimates as contemplated by the
American Institute of Certified Public Accountants' Statement of
Position 94-6, Disclosure of Certain Significant Risks and
Uncertainties. Further, the Company operates in an industry, which is
rapidly evolving and extremely competitive. It is reasonably possible
that the Company's accounting estimates with respect to the useful life
and ultimate recoverability of goodwill could change in the near term
and that the effect of such changes on the financial statements could
be material. While management currently believes that the recorded
amount of goodwill at December 31, 1997 is recoverable, there can be no
assurance that the Company's future results will confirm this
assessment or that an additional write-down or write-off of goodwill
will not be required in the future.
(4) Property and Equipment
Property and equipment consist of the following:
December 31,
1997 1996
----------- -----------
Furniture and fixtures $ 214,491 $ 404,918
Machinery and equipment 56,361 218,044
Computers and office equipment 1,700,506 1,514,262
Leasehold improvements 193,582 419,928
----------- ---------
2,164,940 2,557,152
Less accumulated depreciation
and amortization (679,892) (608,235)
------------ -------------
$1,485,348 $ 1,948,917
========== ===========
(5) Estimated Sales and Excise Tax Liability
In November 1997, Congress enacted legislation that specifically
addressed the application of Federal excise tax to the sale of prepaid
phone cards. Accordingly, the Company began to file Federal excise tax
returns. However, the taxation of prepaid phone cards is evolving and
is not specifically addressed in certain state jurisdictions in which
the Company does business. The Company has not filed any state sales
and use tax returns nor has it remitted any such taxes to state taxing
authorities. While the Company believes it has adequately provided for
any such taxes and related compliance costs, it is possible that
certain states may enact legislation or interpret current laws, in a
manner which could result in additional tax liabilities, which could be
material.
(6) Amounts Payable to Affiliate
Simultaneously with the execution of the merger agreement, Global Link
executed an agreement with Peoples, a stockholder of the Company,
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.
F-11
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
In November 1996, the Company and Peoples executed an agreement (the
"Second Amendment") whereby Peoples agreed to restructure the payment
terms of the remaining principal balance of $366,667 at such date as
follows: $187,731 payable upon execution of the agreement with the
remaining balance of $178,936 plus accrued interest payable in three
monthly installments beginning on December 27, 1996. In addition, the
agreement provides for certain prepayments of the trade payable in the
event the Company obtains additional financing or the occurrence of any
change of control.
In March 1997, the Company entered into an agreement with Peoples
whereby Peoples agreed not to sell or otherwise dispose of its shares
of the Company's common stock until June 30, 1997 ("Termination Date").
The Company agreed that it would pay Peoples the balance of $954,630 in
trade payables from the proceeds of the Company's secondary offering
within two days after the consummation of such offering. This amount
was paid in from the proceeds of the Company's public stock offering in
July 1997.
(7) Debt Obligations
Note Payable
In December 1996, the Company completed a private placement (the
"December 1996 Private Placement") from which the Company derived gross
proceeds of $3,000,000 through the sale of $3,000,000 of promissory
notes and warrants to purchase 1,000,000 shares of common stock. Based
on a negotiation with the note holders, which occurred in 1998, the
notes are payable as follows: $2,600,000 are due on the earlier of
January 15, 1999 or the date on which the Company undergoes a change of
control; $400,000 are due and payable on the earlier of November 27,
1998 or the date on which the Company undergoes a change in 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. In addition, the Company issued $50,000 of
notes, which mature in November 1998, and warrants to purchase 16,667
shares of common stock in payment of certain legal fees associated with
the December 1996 Private Placement. The estimated fair market value of
the warrants, as determined by independent appraisal, of $1,542,044 was
recorded as a discount and is being amortized over the term of the
notes. During the years ended December 31, 1997 and 1996, $771,022 and
$58,004 of the discount was amortized to interest expense.
In connection with the December 1996 Private Placement, the Company
paid a finders fee equal to $150,000 and warrants to purchase 50,000
shares of common stock. 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 which are being amortized over
the term of the notes.
Convertible Notes Payable
In connection with the Global Link acquisition, the Company assumed
$2,800,000 aggregate principal amount of convertible debentures of
which $1,400,000 are due and payable on June 23, 1999 and $1,400,000
are due and payable on September 14, 1999. The convertible debentures
are secured by a first lien on all assets of the Company. The
convertible debentures bear interest at 6% per annum, payable on May
31st 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. During the year ended December 31, 1997
$200,250
F-12
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
debentures were converted into 21,615 shares of common shares. At
December 31, 1997 the Company has reserved 280,613 shares of common
stock for issuance upon the conversion of the convertible debentures.
Certain of the Company's debt agreements contain provisions that
prevent the Company from declaring or paying dividends.
(8) Stockholders' Equity
Proceeds from Public Stock Offering
In July 1997, the Company sold in public offering 2,875,000 shares of
its common stock, which, net of offering costs of $2,486,769, generated
proceeds of $13,325,731.
Warrants Exercised
In April 1997 the Company received $2,500,000 upon the exercise of
333,334 of the warrants issued in the December 1996 Private Placement.
As consideration for exercising such warrants, the Company issued
warrants to purchase an aggregate of 250,000 shares of common stock.
Private Placement
In May 1996, the Company sold 200,000 shares of 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 1996 Private
Placement"). Costs of issuance totaled $388,431 consisting principally
of placement agent fees and certain professional fees. In connection
with this private placement, the Company issued warrants to the
placement agent to purchase up to 20,000 shares of common stock and
40,000 warrants.
Deferred Compensation
In July 1997, the Company issued five-year warrants to an investment
banker to purchase 100,000 shares of common stock in consideration for
consulting services. The estimated fair value of these warrants of
$350,000 was recorded as deferred compensation and the Company has
recorded compensation expense related to this agreement of $145,833 for
the year ended December 31, 1997.
In January 1997, the Company extended its consulting agreements with
two of its stockholders, pursuant to which the stockholders will
provide consulting services to the Company for a two-year period ending
December 1998. In consideration for these services, the Company issued
options to purchase 50,000 shares of common stock. The estimated fair
market value of these options of $151,648 was recorded as deferred
compensation and the Company has recorded compensation expense related
to these agreements of $72,324 for the year ended December 31, 1997.
In January 1996, the Company issued five-year warrants to an
underwriter and/or its designees to purchase an aggregate of 66,667
shares of common stock 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 compensation
expense related to this agreement of $33,335 and $366,665 for the years
ended December 31, 1997 and 1996, respectively.
F-13
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
In April and October 1995, the Company issued five-year warrants to
designees of the underwriter to purchase an aggregate of 33,334 shares
of common stock in consideration for providing the Company the right of
first refusal to pursue any prospective acquisition target in the phone
card industry that the underwriter 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 expense
related to these agreements of $44,004 and $44,002 for the years ended
December 31, 1997 and 1996, respectively.
In February 1995, the Company entered into consulting agreements with
two of its stockholders pursuant to which the stockholders will provide
consulting services to the Company for a two-year period. In
consideration for these services the company issued options to purchase
66,668 shares of common stock. The estimated fair market value of these
options of $168,000 was recorded as deferred compensation and the
Company recorded compensation expense related to these agreements of
$14,000 and $84,000 for the years ended December 31, 1997 and 1996,
respectively.
(9) Income Taxes
The Company had no current Federal or state income tax liability for
the years ended December 31, 1997 and 1996 due to the net losses
recorded for those periods.
The actual income tax expense differs from the "expected" tax benefit
for 1997 and 1996, computed by applying the U.S. Federal corporate tax
rate of 34 percent to loss before income taxes, as follows:
1997 1996
---- ----
Computed "expected" tax benefit $(8,682,219) $(2,352,705)
Non-deductible impairment of goodwill 4,497,572 ---
Increase in valuation allowance (net
of effect of acquisition) 4,167,823 2,421,822
Other 16,824 (69,117)
----------- ------------
$ --- $ ---
=========== ============
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 is as follows:
1997 1996
---- ----
Deferred tax assets:
Benefit of net operating loss
carryforward $ 7,087,592 $ 4,816,655
Depreciation 156,908 ---
Capital loss carryforward 116,620 116,620
Allowance for uncollectible
accounts receivable 193,800 135,660
Deferred revenue 510,643 892,050
Deferred compensation 404,310 249,051
Sales and excise tax liability 1,209,194 572,723
Less: valuation allowance (9,607,839) (6,289,986)
------------ -----------
Net deferred tax asset 71,228 492,773
Deferred tax liabilities:
Deferred costs (65,580) (383,482)
Depreciation on fixed assets --- (88,492)
Other (5,648) (20,799)
------------- ------------
Net deferred income taxes $ --- $ ---
============= ============
F-14
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or the
entire 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 $9,608,000 at December 31, 1997.
At December 31, 1997, the Company had net operating loss carryforwards
("NOLs") aggregating approximately $20,846,000 expiring in years 2008
through 2012. 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 and the secondary stock offering which occurred in 1997, 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) Stock Option Plan
The Company has reserved 500,000 shares of 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,
and deferred stock awards and stock appreciation rights to key
employees, officers, directors and consultants. All incentive 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 is not less
than the fair market value of the common stock on the date of grant.
Incentive 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:
F-15
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Weighted
Number Average
of Shares Exercise Price
--------- --------------
Outstanding at January 1, 1996 148,011 $15.14
Granted 69,014 10.54
Canceled (31,170) 15.33
--------
Outstanding at December 31, 1996 185,855 13.40
--------
Granted 224,170 7.36
Canceled (21,614) 9.05
Exercised (555) 7.88
--------
Outstanding at December 31, 1997 387,856 $10.16
-------
At December 31, 1997, 220,018 options were exercisable and options to
purchase 111,589 shares were available for future grant.
Non-plan options:
During the year ended December 31, 1997, the Company granted
non-qualified options to employees and officers of the Company to
purchase an aggregate of 305,000 shares of common stock at exercise
prices ranging from $6.44 to $6.56. The options vest at various dates
and expire five years from date of vesting. None of the options were
exercisable at December 31, 1997.
In September 1997, in conjunction with its consulting agreement with
its former chief executive officer, the Company granted non-qualified
options to purchase 50,000 shares of common stock. The options are
immediately exercisable at $6.44 per share and expire five years form
the date of grant.
In July 1997, in connection with the Company's public stock offering
the Company granted to the representative of the underwriters an option
to purchase 250,000 shares of common stock at an exercise price of
$9.08 per share. The option is exercisable commencing July 1998 for a
period of four years.
In connection with the Global Link acquisition, options and warrants to
purchase 145,000 shares of common stock of Global Link were converted
into options to purchase an aggregate of 36,645 shares of the Company's
common stock at exercise prices ranging from $.40 to $7.92. All of
these options were exercisable, and 9,635 of these options were
exercised during the year ended December 31, 1997. Such options expire
at various dates through 2003.
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. During the year ended
December 31, 1997, 41,667 of these options were canceled. The options
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 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
were immediately exercisable and expire five years from date of grant.
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 a former officer of the Company. The options vest 33 1/3%
F-16
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
per annum commencing March 20, 1996 and will remain exercisable for a
period of five years from the date of vesting.
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.
Summarized Information for Stock Options at December 31, 1997
<TABLE>
<CAPTION>
Outstanding Exercisable
----------- -----------
Exercisable Average Average Average
Price Range Shares Life Price Shares Price
----------------- ---------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
$6.00 to $10.00 890,515 5.22 7.50 169,346 7.97
$10.01 to $14.00 16,670 9.30 11.13 16,670 11.13
$14.01 to $18.00 173,513 5.16 15.14 160,735 15.12
over $18.01 16,669 5.16 18.38 5,556 18.38
------ -------
1,097,367 352,307
========= =======
</TABLE>
As of December 31, 1997, the Company has reserved an aggregate of
1,097,367 shares of common stock for issuance upon the exercise of
options.
SFAS No. 123
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 consolidated 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 loss would
have increased the pro forma amounts indicated below:
1997 1996
---- ----
Net loss As reported $(25,535,939) $(6,920,222)
Pro forma $(26,968,802) $(7,297,311)
Net loss per share As reported $ (7.47) $ (4.14)
Pro forma $ (7.85) $ (4.37)
The per share weighted-average fair value of stock options granted
during 1997 and 1996 was $4.27 and $6.60 on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions: 1997 expected dividend yield 0%, risk-free interest rate
of 5.88%, expected life of 3 years and volatility of 78%; 1996 expected
dividend yield 0%, risk-free interest rate of 6.3%, expected life of 6
years and volatility of 22%.
Pro forma net loss reflects only options granted in 1997, 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.
F-17
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(11) Warrants
The following warrants to purchase common stock are outstanding at
December 31, 1997 (excluding underwriters' warrants below) :
Issue Date Shares Exercise Price Expiration Date
---------- ------- -------------- ----------------
July 1997 100,000 $ 7.00 January 2001
April 1997 250,000 $12.00 December 1999
December 1996 733,333 $ 7.50 November 2001
May 1996 400,000 $12.00 May 2001
February 1996 7,085 $13.64 February 2000
January 1996 66,667 $15.38 December 2000
October 1995 16,667 $15.00 October 2000
April 1995 16,667 $15.00 April 2000
December 1994 980,560 $12.00 December 1999
----------
2,570,979
=========
The December 1994 warrants are public warrants and are redeemable by
the Company at a price of $.30 per public warrant. To qualify for
redemption, the closing bid quotation of the Company's stock on all 20
trading days following the third day on which the Company gives notice
of redemption, must be at least 187.5% of the effective exercise price.
The exercise price of the public warrants is subject to adjustment in
certain circumstances.
Underwriter Warrants
In connection with the May 1996 Private Placement, the Company issued a
warrant to the underwriter to purchase, through May 10, 2001, up to
20,000 shares of common stock and 40,000 public warrants for $300,000.
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 public warrants at a purchase price of $.483 per warrant. Such
warrants are exercisable at $12.00 per warrant through December 14,
1999.
As of December 31, 1997, the Company has reserved 2,680,979 shares of
common stock for issuance upon the exercise of warrants.
(12) Commitments and Contingencies
Leases
The Company's future minimum annual rental commitments net of amounts
subleased at December 31, 1997 under operating leases for office space
are as follows:
Year Amount
---- --------
1998 $426,126
1999 $310,874
2000 $162,038
2001 $ 38,877
2002 and thereafter $ 77,800
F-18
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The Company has the right to terminate certain of the leases given
sufficient advance written notice. Rent expense for the years ended
December 31, 1997 and 1996 amounted to approximately $728,741 and
$747,704, respectively. In addition, the Company's capital lease
obligations fully mature in 1998.
In addition, the Company leases space from a former 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 approximately
$135,000. 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
former officer for the years ended December 31, 1997 and 1996 amounted
to $73,920 and $50,400, respectively.
Employment Arrangements
The Company has entered into employment arrangements with officers of
the Company which provide for aggregate base salaries of $1,080,000 per
annum. The arrangements, which expire on varying dates, also provide
for annual bonuses and covenants not-to-compete during the employment
term and for two years thereafter.
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, 1997.
The Company is obligated to provide access to long distance telephone
services through its switching platforms for issued cards until those
cards expire. The costs related to the potential utilization of the
minutes sold have not been accrued in the accompanying consolidated
financial statements, but are expensed as incurred.
As of December 31, 1997, the Company is involved in a dispute with a
former provider of telecommunications services regarding certain
amounts the carrier claims are past due. The portion of the disputed
balance, which has not been provided for by the Company, approximates
$245,000. The Company has not recorded this amount as a liability since
management believes it was inappropriately invoiced by the carrier. The
parties are presently in discussions concerning the dispute.
Dial Around Compensation
The Federal Communications Commission (FCC) has adopted certain rules
governing "Dial Around Compensation" which became effective in October
1997. Such rules establish an arrangement whereby all pay telephone
service providers are to be compensated for interstate and intrastate
calls completed from their pay telephones, including calls that utilize
toll free access codes, such as those typically made by the users of
the Company's prepaid cards. The rules require that each pay telephone
owner is entitled to be compensated $0.284 for each dial around call
originating from a pay telephones. The Company believes its estimated
obligation under the new rules from the date of enactment through
December 31, 1997 approximated $300,000. No payments had been made as
of December 31, 1997.
F-19
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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
of $50,000 annually over the term of the Agreement. Royalty expense
amounted to approximately $370,189 and $49,203 for the years ended
December 31, 1997 and 1996, respectively.
Consulting Agreement
In the fourth quarter of 1997, the Company and its then Chief Executive
Officer ("CEO") Mr. Wasserson, executed a modification to his
employment agreement whereby Mr. Wasserson agreed to act as consultant
through December 31, 1998. In consideration for these consulting
services, the Company agreed to pay Mr. Wasserson $150,000 in equal
monthly installments during the consulting period, established a
mechanism to forgive its common stock note receivable of $100,000 from
Mr. Wasserson, and issued 50,000 options with an estimated fair market
value of $145,000. In conjunction with its restructuring plan, the
Company has elected not to use Mr. Wasserson's services and,
accordingly, recorded a $395,000 charge related to the unused portion
of its consulting agreement.
(13) Major Customers and Credit Concentrations
For the year ended December 31, 1997 the Company had one customer that
accounted for approximately 14% of net sales and $279,369 of accounts
receivables at December 31, 1997. For the year ended December 31,
1996, the Company had three customers that accounted for approximately
13%, 12% and 11% of net sales, respectively.
(14) Liquidity
As indicated in the accompanying consolidated financial statements, the
Company incurred net losses of $25,535,939 in 1997 and $6,920,222 in
1996. In addition, the Company's available cash on hand as has declined
to less than $1,000,000 as of March 31, 1998. Further, management's
projections indicate that the Company anticipates that it will continue
to generate operating losses and negative cash flow from operations
through 1998. As such, the Company believes that it will need to raise
additional capital in 1998, in the form of debt or equity financing in
order to satisfy its obligations as they come due. The Company is
currently attempting to raise such additional capital and negotiate the
deferral of certain obligations. (See note 16) However, there can be no
assurance the Company will be successful in this regard.
(15) Restructuring Charge
In the fourth quarter of 1997, the Company recorded a $1,500,606
restructuring charge which was primarily related to the closure of
three retail phone center locations, the disposal or abandonment of
certain fixed assets, and the modification of an employment agreement
with its former CEO, as more fully described in note 12. The components
of the charge, which is classified separately in the accompanying
statement of operations, are as follows:
F-20
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Store closing costs $574,480
Assets disposal 531,126
Compensation relating to consulting
agreement with former CEO 395,000
----------
$1,500,606
==========
Costs associated with the closure of the retail phone centers primarily
related to lease termination costs and to a lesser extent severance for
employees all of whom were terminated as of December 31, 1997. Results
of operations for the retail phone centers have not been separately
measured by the Company. The assets impairment charge related primarily
to the discontinuance of the use of certain equipment which utilized
specific technology. The activities incorporated in the restructuring
plan had been substantially completed as of December 31, 1997.
Approximately $600,000 of the charge remains accrued at December 31,
1997, consisting principally of accrued compensation for the former CEO
and costs relating to the retail location lease terminations.
(16) Subsequent Events
Stock Option Re-pricing
In January 1998, the Company reduced the exercise prices of 196,683
outstanding options to purchase common stock at exercise prices
ranging from $7.88 to $18.38, to the then fair market value of the
common stock of $6.56.
Acquisitions
In February 1998, the Company acquired, through a merger, all of the
outstanding capital stock of Networks Around the World, Inc. ("NATW")
for a purchase price comprised of (i) $2,000,000 in cash, (ii) an
aggregate of 505,618 shares of common stock and (iii) $1,000,000
aggregate principal amount of promissory notes ("NATW Notes"), secured
by substantially all of the assets of NATW. The NATW Notes accrue
interest at the rate of 6% per annum and are payable as follows: (i)
one-half of principal and interest accrued thereon on November 1, 1998
and (ii) four equal payments of $125,000, plus interest accrued
thereon, on April 1, 1999, July 1, 1999, October 1, 1999 and January
1, 2000. In addition, the Company may be required to pay an additional
$2,000,000 in consideration if certain financial objectives are
achieved.
Also in February 1998, the Company acquired, through a merger, all of
the outstanding capital stock of Centerpiece Communications, Inc.
("CCI") for a purchase price comprised of (i) $1,500,000 in cash, (ii)
401,284 shares of common stock and (iii) a $1,000,000 aggregate
principal amount promissory note ("CCI Note"), secured by
substantially all of the assets of CCI. The CCI Note accrues interest
at the rate of 8% per annum and is payable as follows: (i) $250,000
plus interest accrued thereon on October 31, 1998, (ii) $250,000 plus
interest accrued thereon on January 1, 1999 and (iii) four equal
payments of $125,000, plus interest accrued thereon, on April 1, 1999,
July 1, 1999, October 1, 1999 and January 1, 2000.
Subsequent to the completion of the acquisitions, the sellers agreed to
defer $1,250,000 originally payable in 1998 under the agreements to
January 1999.
F-21
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Access Telecom
In February 1998, Access Telecom, Inc., one of the major providers of
long distance telephone time to NATW and CCI, ceased providing
telecommunications services on cards that were previously paid for by
NATW and CCI prior to the respective mergers. In order to meet consumer
obligations, the Company has purchased approximately $1,400,000 of
telecommunications services from other providers through March 31,
1998. Additional payments may be required as a result of this
situation. The Company is pursuing recovery of all losses from Access
Telecom.
Private Placement
In April 1998, the Company completed a private placement, pursuant to
which the Company derived net proceeds of $1,135,000 through the sale
of $1,250,000 convertible subordinated promissory notes ("April 1998
Notes")and warrants to purchase 178,571 shares of Common Stock ("April
1998 Warrants"). The April 1998 Notes accrue interest at the rate of
10% per annum and are payable on the earlier of January 15, 1999 or the
date of the closing of an equity financing transaction with aggregate
gross proceeds of $4,000,000. The holders have the right at any time to
convert all or any portion of the April 1998 Notes into the number of
shares of common stock determined by dividing the unpaid principal
amount of the April 1998 Notes by the lesser of: (i) $7.00 or (ii) the
per share purchase price being paid by the purchasers in the subsequent
financing transaction.
Financing Commitment
In April 1998, the Company entered into an agreement with an investor
pursuant to which the investor has agreed to acquire up to $2,000,000
of the Company's common stock or other securities at a discount to the
market price of such securities. The Company can require the investor
to acquire the securities on thirty days' written notice until December
31, 1998. In consideration thereof, the Company issued the investor
warrants to purchase 100,000 shares of the Company's common stock at an
exercise price of $7.50 per share. The warrants are exercisable until
April 13, 2001.
F-22
<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 information required by this item is incorporated by reference
to the information included in the Company's definitive proxy statement in
connection with the Annual Meeting of Stockholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference
to the information included in the Company's definitive proxy statement in
connection with the Annual Meeting of Stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference
to the information included in the Company's definitive proxy statement in
connection with the Annual Meeting of Stockholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference
to the information included in the Company's definitive proxy statement in
connection with the Annual Meeting of Stockholders.
PART IV
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 February 6, 1998, filed with the
Commission on February 23, 1998, relating to the acquisition of
NATW.
Current Report on Form 8-K, dated February 6, 1998, filed with the
Commission on February 23, 1998, relating to the acquisition of
CCI.
43
<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, 1998 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, 1998
- -----------------
Shelly Finkel
/s/ Robert Bogin President and Director April 14, 1998
- -----------------
Robert Bogin
/s/ Alan W. Kaufman Director April 14, 1998
- -------------------
Alan W. Kaufman
/s/ Jack N. Tobin Director April 14, 1998
- -------------------
Jack N. Tobin
/s/ Donald L. Ptalis Director April 14, 1998
- --------------------
Donald L. Ptalis
/s/ Michael Hoppman Chief Financial Officer (and April 14, 1998
- ------------------- principal accounting officer)
Michael Hoppman
44
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ---------------
<S> <C>
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
3.5 H Certificate of Merger - NATW into NATW Acquisition Corp.
3.6 I Certificate of Merger - CCI into CCI Acquisition Corp.
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 Securities Co., L.P. ("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 Finkel
10.6 A Stock Option Agreement between the Company and Paul Silverstein
10.7 A Stock Option Agreement between the Company and James Koplik
10.8 B Stock Option Agreement between the Company and John McCabe
10.9 A 1994 Performance Equity Plan
10.10 A Service Agreement between the Company and MCI Telecommunications Corporation
10.11 A Service Agreement between the Company and Sprint Corporation
10.12 A Service Agreement between Independent Properties Sales Corporation ("IPSC") and Metromedia
Communications Corporation ("Metromedia," which was later acquired by WorldCom)
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ---------------
<S> <C>
10.13 A Consent between IPSC and Metromedia allowing the assignment to the Company of IPSC's right
to receive services from Metromedia.
10.14 B Employment Agreement between the Company and John McCabe
10.15 B Consulting Agreement between the Company and Barry Rubenstein
10.16 B Consulting Agreement between the Company and Eli Oxenhorn
10.17 C Merger Agreement by and among the Company, Merger Sub and Global Link
10.18 C Directors Voting Agreement
10.19 C Peoples Agreement, together with the Company's Guaranty of Peoples Second Payment
10.20 C Ancillary Agreement between Global Link and Peoples regarding payment of the Peoples Accounts
Receivable, together with Holding Corp's Guaranty of such payment
10.21 C Amended and Restated Securities Purchase Agreement
10.22 C The Company's Guaranty of Debentures
10.23 C Employment Agreement between the Company and Gary Wasserson
10.24 C Employment Agreement between the Company and David Tobin
10.25 C Stock Option Agreement between the Company and Gary Wasserson
10.26 C Stock Option Agreement between the Company and David Tobin
10.27 A Sublease for space at 40 Elmont Road, Elmont, New York
10.28 D Form of Registration Rights Agreement for May 1996 Private Placement
10.29 D Agency Agreement between the Company and Whale for May 1996 Private Placement
10.30 D Placement Agent Warrant Agreement for May 1996 Private Placement
10.31 F Consulting Agreement dated January 22, 1996 between the Company and Whale
10.32 F First Amendment to Peoples Agreement, dated August 14, 1996
10.33 F Second Amendment to Peoples Agreement, dated November 27, 1996
10.34 E Finder's fee agreement between the Company and Whale relating to the December 1996 Private
Placement
10.35 G Extension of Consulting Agreement between the Company and Barry Rubenstein
10.36 G Extension of Consulting Agreement between the Company and Eli Oxenhorn
10.37 H Merger Agreement by among The Company, NATW Acquisition Corp., NATW, Randolph Cherkas
and Gary Ligouri
10.38 H Employment Agreement between the Company and Randolph Cherkas
10.39 H Employment Agreement between the Company and Gary Ligouri
10.40 I Merger Agreement by and among the Company, CCI Acquisition Corp., CCI and J. Mark
Rubenstein
10.41 I Employment Agreement between the Company and J. Mark Rubenstein
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ---------------
<S> <C>
21 * Subsidiaries of the Company
23 * Consent KPMG Peat Marwick LLP
27 * Financial Data Schedule
</TABLE>
- -----------------------------
* 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.
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)
G Incorporated by reference to the Company's Registration Statement on Form
SB-2 (No. 333-25389)
H Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on February 23, 1998
I Incorporated by reference to the Company's Current Report on Form 8-K filed
with the Commission on February 23, 1998.
47
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation Date of Incorporation Status
- -------------------- --------------- --------------------- -----------------------
<S> <C> <C> <C>
Global Link Telecom Delaware March 28, 1994 Wholly-owned subsidiary
Corporation
GTS Marketing, Inc. Delaware April 3, 1995 Wholly-owned subsidiary
Global Telecommunication Winnipeg December 6, 1995 Wholly-owned subsidiary
Solutions (Canada) Inc. Manitoba
Centerpiece Communications, New Jersey June 16, 1996 Wholly-owned subsidiary
Inc.
Networks Around The World, New Jersey February 1, 1994 Wholly-owned subsidiary
Inc.
Global Telecommunications Mexico, D.F. January 6, 1998 Wholly-owned subsidiary
Solutions de Mexico
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Global Telecommunication Solutions, Inc.
We consent to incorporation by reference in the registration statements on Form
S-8 (No. 333-21339) and on Form S-3 (Nos. 333-6925 and 333-19005) of Global
Telecommunication Solutions, Inc. of our report dated March 31, 1998, except for
the fourth and fifth paragraphs of Note 16, which are as of April 8, 1998 and
April 13, 1998, respectively, relating to the consolidated balance sheets of
Global Telecommunication Solutions, Inc. and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the two-year period
ended December 31, 1997, which report appears in the December 31, 1997 Annual
Report on Form 10-KSB of Global Telecommunication Solutions, Inc.
KPMG Peat Marwick LLP
April 14, 1998
Philadelphia, Pennsylvania
<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, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,867,566
<SECURITIES> 0
<RECEIVABLES> 3,206,878
<ALLOWANCES> 570,000
<INVENTORY> 174,112
<CURRENT-ASSETS> 6,872,255
<PP&E> 2,164,940
<DEPRECIATION> 679,892
<TOTAL-ASSETS> 16,252,858
<CURRENT-LIABILITIES> 10,251,318
<BONDS> 0
<COMMON> 50,648
0
0
<OTHER-SE> 1,463,960
<TOTAL-LIABILITY-AND-EQUITY> 16,252,858
<SALES> 18,234,640
<TOTAL-REVENUES> 18,234,640
<CGS> 16,249,773
<TOTAL-COSTS> 26,406,488
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,368,307
<INCOME-PRETAX> (25,535,939)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,535,939)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,535,939)
<EPS-PRIMARY> (7.47)
<EPS-DILUTED> (7.47)
</TABLE>
