U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1998
-------------------
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______________ to _______________________
Commission file number 1-13478
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 13-3698386
- ------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5697 Rising Sun Avenue, Philadelphia, Pennsylvania 19120
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(Address of principal executive offices)
(215) 342-7700
---------------------------------------------
(Issuer's telephone number including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No ___
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of May 14, 1998, the issuer had
outstanding 5,991,772 shares of Common Stock, par value $.01 per share.
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Page
------
Part I. Financial Information
- ------------------------------
Item I. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 1998 (unaudited) and
December 31, 1997..................................................3
Consolidated Statements of Operations - Three months ended
March 31, 1998 and 1997 (unaudited)................................4
Consolidated Statements of Cash Flows - Three months ended
March 31, 1998 and 1997 (unaudited)................................5
Notes to Consolidated Financial Statements.........................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................11
Part II. Other Information
- ----------------------------
Item 2. Changes in Securities....................................14
Item 6. Exhibits and Reports on Form 8-K.........................15
Signatures........................................................16
2
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
-------------------- ------------------
1998 1997
---------------- ------------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 669,129 $ 7,867,566
Accounts receivable, net of reserve for doubtful accounts of
$778,261 and $570,000 4,018,425 2,636,878
Inventories 389,845 174,112
Deferred costs 36,955 32,764
Other assets 103,192 160,935
Due from related parties (Note 4) 625,000 --
---------------- ------------------
Total current assets 5,842,546 10,872,255
---------------- ------------------
Goodwill, net 14,557,198 3,516,344
Property and equipment, net 2,091,601 1,485,348
Other assets, net 313,032 378,911
---------------- ------------------
Total assets $ 22,804,377 $ 16,252,858
================ ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,445,134 $ 2,199,134
Accrued expenses 3,009,270 2,165,986
Deferred revenues 3,679,867 1,677,615
Estimated sales and excise tax liability 3,781,283 3,663,285
Notes payable, net current 2,529,737 450,000
Notes payable to related parties, current (Note 4) 1,000,000 -
Capital lease obligation, current 34,362 95,298
---------------- ------------------
Total current liabilities 16,479,653 10,251,318
---------------- ------------------
Notes payable, net - 1,886,982
Notes payable to related parties (Note 4) 1,000,000 -
Convertible notes payable 2,599,750 2,599,750
---------------- ------------------
Total liabilities 20,079,403 14,738,050
---------------- ------------------
Commitments and Contingencies (Notes 6, 9)
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 5,991,772 and 5,084,870 59,917 50,848
Additional paid in capital 44,685,809 39,689,698
Accumulated deficit (41,742,696) (37,942,443)
Deferred compensation (305,870) (294,650)
Cumulative foreign currency translation adjustment 27,814 11,355
---------------- ------------------
Total stockholders' equity 2,724,974 1,514,808
---------------- ------------------
Total liabilities and stockholders' equity $ 22,804,377 $ 16,252,858
================ ==================
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Net sales $ 5,134,396 $ 3,688,153
Cost of sales 5,194,110 2,855,357
Estimated costs of carrier default (Note 4) 550,000 -
--------------- ---------------
Gross profit (loss) (609,714) 832,796
--------------- ---------------
Selling, general and adminsitrative expenses 2,480,318 2,360,607
Depreciation and amortization 369,656 428,252
--------------- ---------------
Operating loss (3,459,688) (1,956,063)
--------------- ---------------
Interest income 54,935 3,901
Interest expense 395,500 322,753
--------------- ---------------
Loss before income taxes (3,800,253) (2,274,915)
Income taxes - -
--------------- ---------------
Net loss $(3,800,253) $(2,274,915)
=============== ================
Basic and diluted loss per share $ (0.68) $ (1.23)
=============== ================
Weighted average shares outstanding - basic and diluted 5,618,935 1,847,786
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Operating activities:
Net loss
(3,800,253) $(2,274,915)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 369,656 428,252
Provision for bad debts 208,261 -
Amortization of deferred compensation 187,380 73,789
Amortization of unearned discount 192,755 192,755
Amortization of deferred financing charges 27,843 5,001
Issuance of stock as compensation - 50,000
Loss on disposal of fixed assets - 19,912
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable (1,589,808) 241,544
Inventories (215,733) (39,238)
Deferred costs (4,191) (92,213)
Prepaids and other assets 57,743 (56,588)
Other assets 38,036 (26,848)
Accounts payable 246,000 450,144
Accrued expenses 256,151 190,992
Deferred revenues 2,002,252 (383,464)
Sales and excise taxes payable 117,998 301,870
--------------- --------------
Net cash used in operating activities (1,905,910) (919,007)
--------------- --------------
Investing activities:
Purchases of property and equipment (735,182) (69,901)
Acquisitions and related costs (4,512,868) -
--------------- --------------
Net cash used in investing activities (5,248,050) (69,901)
--------------- --------------
Financing Activities:
Proceeds from exercise of options - 4,374
Payments to affiliates - (119,293)
Payments on capital lease obligations (60,936) (12,104)
--------------- ---------------
Net cash used by financing activities (60,936) (127,023)
--------------- --------------
Effects of exchange rates on cash 16,459 (773)
--------------- --------------
Net decrease in cash (7,198,437) (1,116,704)
Cash and cash equivalents, beginning of period 7,867,566 1,352,322
--------------- --------------
Cash and cash equivalents, end of period $ 669,129 $ 235,618
=============== ==============
Supplemental disclosures:
Cash paid for interest $ - $ 9,328
=============== ==============
Deferred compensation relating to options and warrants $ 198,600 $ 151,648
=============== ==============
Conversion of convertible notes payable into common stock $ - $ 106,500
=============== ==============
Issuance of common stock in connection with acquisition $ 4,806,580 $ -
=============== ==============
Issuance of notes payable in connection with acquisition $ 2,000,000 $ -
=============== ==============
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
(1) Business and Basis of Presentation
Business
Global Telecommunication Solutions, Inc. (the "Company") was
incorporated on December 23, 1992 and is engaged in the marketing and
distribution of prepaid phone cards. The Company's phone cards provide
consumers access to long distance service through its switching
facilities and long distance network arrangements.
The majority of the Company's customers are retail establishments,
distributors and businesses which sell phone cards to the ultimate
user, or which acquire the Company's phone cards to promote their
business or products.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31,
1998 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998.
(2) Loss Per Share
Weighted average shares of common stock for the three months ended
March 31, 1998 and 1997 does not include common stock equivalents as
their effect would be anti-dilutive.
(3) Reclassifications
Certain reclassifications have been made to the 1997 consolidated
financial statements to conform to the 1998 presentation.
(4) Acquisitions
On February 6, 1998 ("Merger Date"), 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 (the "Earn Out") in consideration if
certain sales and financial objectives are achieved. In April 1998, the
former shareholders agreed to defer payment of an aggregate of
$1,000,000 of NATW Notes and Earn Out from 1998 to January 1999.
Also on the Merger Date, 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
6
<PAGE>
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 April 1998, the former
shareholder of CCI agreed to defer payment of $250,000 of CCI Notes,
plus interest, from October 31, 1998 to January 1999.
The mergers were accounted for as a purchase. Accordingly, the assets
and liabilities were recorded at their estimated fair value at the date
of the mergers and the operating results of NATW and CCI were included
in the consolidated statement of operations from the Merger Date. The
following is a preliminary allocation of the purchase price:
CCI NATW TOTAL
------- ------- -------
Shares of common stock issued 401,284 505,618 906,902
Estimated average price per share
of restricted common stock 20
days prior to the closing date
(using a 15% discount to market
price) $5.30 $5.30 $5.30
Common stock 2,126,805 2,679,775 4,806,580
Notes payable to related parties,
current 500,000 500,000 1,000,000
Notes payable to related parties,
long term 500,000 500,000 1,000,000
Cash consideration 1,500,000 2,000,000 3,500,000
Estimated balance sheet
adjustment 89,446 91,852 181,318
Estimated carrier obligation in
connection with mergers, net 250,000 625,000 875,000
Estimated accrued acquisition
costs 50,000 50,000 100,000
------ ------ -------
Total consideration 5,016,251 6,446,627 11,462,898
Net book value of assets acquired 114,446 116,852 231,318
Goodwill $4,901,805 $6,329,775 $11,231,580
========= ========= ==========
Pursuant to the merger agreement with NATW, the Company may be
required to pay an additional $2,000,000 in consideration if certain
sales and financial objectives are achieved. Accordingly, upon
occurrence of such events, the additional consideration will increase
goodwill.
The Company has not allocated any of the excess purchase price to
other intangible assets such as the value of non-compete agreements or
customer lists as such valuations are not currently available. In the
event such other intangible assets are identified in the future, the
useful life of such assets may differ from the goodwill amortization
period of 15 years currently reflected in the pro forma combined
statement of operations and appropriate adjustments to the financial
statements will be made.
Pursuant to the respective merger agreements, the Company and the
former shareholders of NATW and CCI agreed to share certain costs
related to any underlying carrier's failure to provide
telecommunications services to phone
7
<PAGE>
cards purchased by NATW and CCI prior to the mergers. In February
1998, Access Telecom, Inc. ("Access"), a primary provider of
telecommunications services to each of NATW and CCI, ceased providing
telecommunications services to phone cards acquired by NATW and CCI
prior to the mergers (the "Access Phone Cards"). The Company estimates
that the cost to provide telecommunications services to the Access
Phone Cards will aggregate approximately $1,500,000. For purposes of
the financial statements contained herein, $625,000 and $850,000 of
the estimated costs has been allocated to the former shareholders and
the Company, respectively.
In addition to the $1,500,000 indicated above, the Company paid Access
$350,000 for cards purchased subsequent to the Merger Date for which it
received no services. Additionally, the Company spent approximately
$200,000 to print cards which could only be used on Access's platform
and, therefore, are of no use to the Company. Accordingly, the total
estimated aggregate carrier default of $550,000 was recorded in cost of
goods sold.
Pursuant to the respective merger agreements, the purchase price was to
be adjusted subsequent to the Merger Date by an amount equal to cash of
the acquired company plus the net realizable value of accounts
receivable of the acquired company minus current liabilities of the
acquired company as of the Merger Date (the "Balance Sheet
Adjustment"). The final Balance Sheet Adjustment has not been
determined and, accordingly, the estimated amounts recorded at March
31, 1998 may be different than the actual amounts owed.
The following unaudited combined pro forma information reflects the
results of operations assuming the CCI and NATW mergers had been
consummated on January 1, 1998.
Three Months Ended
March 31, 1998
------------------
Net sales $ 7,448,915
Net loss $(4,331,272)
Net loss per share $ (0.72)
Pro forma adjustments include recording amortization expense on
goodwill, interest expense on the notes payable to former shareholders,
and the elimination of intercompany sales and income taxes.
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.
(5) New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 requires that all items
that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. The Company has adopted this statement effective
January 1, 1998. The Company's only component of other comprehensive
income is the foreign currency translation adjustment. The total
comprehensive loss is $3,783,794 and $2,275,688 for the three months
ended March 31, 1998 and 1997, respectively.
(6) 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.
8
<PAGE>
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.
Deferred Compensation
In January 1998, the Company entered into a one-year consulting
agreement with JEB Partners, pursuant to which JEB Partners agreed to
provide investor relations consulting services to the Company. In
consideration for providing such services, the Company agreed to issue
JEB Partners warrants to purchase 60,000 shares of Common Stock at an
exercise price of $6.125 per share. Such options are currently
exercisable and will remain exercisable until January 2003. The
estimated fair value of these options of $198,600 was recorded as
deferred compensation.
(8) Stock Option Re-pricing
In January 1998, the Company reduced the exercise price of 196,683
outstanding options to purchase common stock from exercise prices
ranging from $7.88 to $18.38, to the then fair market value of the
common stock of $6.56.
(9) Liquidity
The Company incurred significant net losses and negative cash flow from
operations during 1996, and 1997. Due in part to the NATW and CCI
mergers, and a continuation of negative cash flow from operations
through March 31, 1998, the Company's cash balance has declined to
approximately $500,000 at May 13, 1998. Further, management's current
projections indicate that the Company will continue to generate
operating losses and negative cash flow from operations through the
remainder of 1998, making it necessary for the Company to raise capital
during 1998 in order to satisfy its obligations as they become due. To
that end, the Company completed a private placement (the "April 1998
Private Placement"), which generated net proceeds of approximately
$1,100,000 (see Note 10) and has obtained a $2,000,000 financing
commitment ("$2,000,000 Commitment") (see Note 10). In addition, the
Company has obtained deferrals of certain promissory notes payable
aggregating $3,650,000 from the fourth quarter of 1998 to the first
quarter of 1999. The Company believes that the proceeds from the April
1998 Private Placement and the $2,000,000 Commitment, together with the
deferrals of certain promissory notes payable, will enable the Company
to meet its obligations through the end of 1998. However, the Company
has significant loan payments due in the first quarter of 1999, which
it will not be able to satisfy unless it obtains additional financing
or loan payment deferrals. 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.
(10) Subsequent Events
In April 1998, the Company completed the April 1998 Private Placement,
pursuant to which the Company derived gross proceeds of approximately
$1,100,000 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 Warrants
are exercisable at a price equal to the lesser of (i) $7.00 or (ii) the
price 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 or 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.
9
<PAGE>
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
warrants to the investor to purchase 100,000 shares of Common Stock at
an exercise price of $7.50 per share. The warrants are exercisable
until April 13, 2001. In connection with introducing this investor to
the Company, the Company granted to each of Messrs. Barry Rubenstein,
a principal stockholder of the Company, and Eli Oxenhorn options to
purchase 50,000 shares of Common Stock at an exercise price of $7.125
per share. The options become exercisable in September 1998 and will
remain exercisable until April 2003.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-QSB and in future filings by the Company with
the Securities and Exchange Commission ("SEC"), in the Company's press releases
and in oral statements made with the approval of an authorized executive officer
of the Company, the words or phrases "will likely result," "management expects"
or "the Company expects," "will continue," "is anticipated," "estimated" or
similar expressions (including confirmations by an authorized executive officer
of the Company of any such expressions made by a third party with respect to the
Company) are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Readers are
cautioned not to place undue reliance on any such forward-looking statements,
each of which speak only as of the date made. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company has no obligation to public release the result of any
revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Net sales for the first quarter of 1998 were $5,134,396 compared to
$3,688,153 for the first quarter of 1997. The primary reason for the increase in
net sales was due to the mergers in February 1998 of Networks Around the World,
Inc. ("NATW") and Centerpiece Communications, Inc. ("CCI"). Net sales of
promotional cards decreased to less than 1% of net sales in the first quarter of
1998 from 18% of net sales in the first quarter of 1997. The change in the sales
mix resulted from the Company's aggressive pursuit of retail programs which
offer greater discounts and commissions to retailers and/or reduced per-minute
charges to consumers.
The Company's gross margins decreased to negative 12% of net sales for
the first quarter of 1998, from 22% of net sales for the comparable period in
the prior year. The primary reason for the decrease in the gross margins was due
to carrier default costs aggregating $550,000 associated with the default by
Access Telecom, Inc. ("Access"), a provider of long distance services that
ceased providing such services on cards purchased by the Company. The margins
were further reduced due to an increase in the sale of cards with reduced
per-minute rates to consumers and a reduction in revenues recognized from
promotional phone card programs that historically sell at higher margins.
Selling, general and administrative expenses remained relatively
constant, increasing slightly to $2,480,318 (48% of net sales) for the first
quarter of 1998, compared to $2,360,607 (64% of net sales) for the first quarter
of 1997. The Company believes that these expenses will continue to decrease in
future periods as a percentage of sales.
Depreciation and amortization expense decreased to $369,656 for the
first quarter of 1998 from $428,252 for the first quarter of 1997. The decrease
was primarily due to the impairment of goodwill for the year ended December 31,
1997. Additionally, only two months of amortization expense relating to the NATW
and CCI mergers was recorded. This decrease was offset by an increase in
depreciation expense due to the acquisition of additional telecommunications
switching equipment.
Investment and interest income was $54,395 for the first quarter of
1998, compared to $3,901 for the first quarter of 1997. The increase was
primarily due to interest earned on the net proceeds from the Company's public
offering consummated in July 1997.
Interest expense for the first quarter of 1998 increased to 395,500
from $322,753 for the first quarter of 1997, primarily due to an increase in
interest expense related to the increase in the accrual for sales and excise
taxes.
11
<PAGE>
For the foregoing reasons, the Company incurred a net loss of
$3,800,253 for the first quarter of 1998, compared to a net loss of $2,274,915
for the first quarter of 1997.
Liquidity and Capital Resources
At March 31, 1998, the Company had cash and cash equivalents of
$669,129 and a working capital deficit of $10,637,107, compared to $7,867,566
and $620,937, respectively, at December 31, 1997.
Net cash used in operating activities for the three months ended March
31, 1998 of $1,905,910 was primarily due to the Company's net loss, offset by
non-cash items aggregating $985,895 such as depreciation and amortization,
provision for bad debts and financing costs. The cash used related to the loss
from operations was partially offset by increases in deferred revenues. Net cash
used in investing activities for the three months ended March 31, 1998 consisted
of $735,182 of capital expenditures and $4,512,868 related to the NATW and CCI
mergers.
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 (the "Earn Out") to one of the NATW
stockholders if certain sales and financial objectives are achieved. In April
1998, the former shareholders of NATW agreed to defer payment of an aggregate of
$1,000,000 of NATW Notes and Earn Out from 1998 to January 1999.
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 April 1998, the former shareholder of CCI agreed to defer payment of
$250,000 of the CCI Note, plus interest, from October 31, 1998 to January 1999.
In February 1998, Access, a primary provider of long distance services
to 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
$1,800,000 of telecommunications services from other carriers through May 13,
1998. Additional payments may be required as a result of this situation. The
Company is pursuing recovery of all losses from Access Telecom.
In April 1998, the Company completed a private placement ("April 1998
Private Placement"), pursuant to which the Company derived gross proceeds of
approximately $1,100,000 through the sale of $1,250,000 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 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.
12
<PAGE>
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. In connection with introducing this investor to the Company, the Company
granted to each of Messrs. Barry Rubenstein, a principal stockholder of the
Company, and Eli Oxenhorn options to purchase 50,000 shares of Common Stock at
an exercise price of $7.125 per share. The options become exercisable in
September 1998 and will remain exercisable until April 2003.
The Company incurred significant net losses and negative cash flow from
operations during 1996 and 1997. Due in part to the NATW and CCI mergers, and a
continuation of negative cash flow from operations through March 31, 1998, the
Company's cash balance has declined to approximately $500,000 at May 13, 1998.
Further, management's current projections indicate that the Company will
continue to generate operating losses and negative cash flow from operations
through the remainder of 1998, making it necessary for the Company to raise
capital during 1998 in order to satisfy its obligations as they become 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 deferrals of
certain promissory notes payable aggregating $3,650,000 from the fourth quarter
of 1998 to the first quarter of 1999. The Company believes that the proceeds
from the April 1998 Private Placement and the $2,000,000 Commitment, together
with the deferrals of certain promissory note payable, will enable the Company
to meet its obligations through the end of 1998. However, the Company has
significant loan payments due in the first quarter of 1999, which it will not be
able to satisfy unless it obtains additional financing or loan payment
deferrals. 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 March 31, 1998, the Company had net operating loss carryforwards
("NOLs") aggregating approximately $23,000,000 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 pursuant to Section 382. Accordingly, there
can be no assurance that a significant amount of existing NOLs will be utilized
by the Company.
13
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
(c) Recent Sales of Unregistered Securities
During the three months ended March 31, 1998, the Company made the
following sales of unregistered securities:
<TABLE>
<CAPTION>
Consideration
Received and
Description of
Underwriting or If Option, Warrant
Other Discounts to or Convertible
Market Price Exemption from Security, Terms of
Title of Afforded to Registration Exercise or
Date of Sale Security Number Sold Purchasers Claimed Conversion
- --------------- ------------ ----------- ---------------------- -------------- ---------------------
<S> <C> <C> <C> <C> <C>
1/21/98 Options to 7,500 options granted - no 4(2) 2,500 shares
purchase consideration received exercisable on
Common Stock by Company until each of 1/21/98,
granted to exercise 1/21/99 and
employee 1/21/00 for five
years from date of
vesting at an
exercise price of
$6.125 per share
1/30/98 Options to 60,000 options granted - 4(2) exercisable from
purchase consulting services; 1/30/98 to 1/30/03
60,000 shares no other consideration at an exercise price
of Common received by Company of $6.125 per share
Stock granted until exercise
to consultant
2/6/98 Common Stock 505,618 shares issued as part 4(2) N/A
of merger
consideration, which
also included $2
million in cash and $1
million of promissory
notes
2/6/98 Common Stock 401,284 shares issued as part 4(2) N/A
of merger
consideration, which
also included $1.5
million in cash and $1
million of promissory
notes
3/31/98 options to 16,670 options granted - no 4(2) exercisable for ten
purchase consideration received years from date of
Common Stock by Company until grant at an
granted to exercise exercise price of
directors $7.3125 per share
</TABLE>
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (3/31/98)
(b) Current Reports on Form 8-K
Current Report on Form 8-K, dated February 6, 1998, filed with the
Commission on February 23, 1998, and amendment thereto on Form 8-K/A,
filed with the Commission on April 24, 1998, relating to the
acquisition of Networks Around the World, Inc.
Current Report on Form 8-K, dated February 6, 1998, filed with the
Commission on February 23, 1998, and amendment thereto on Form 8-K/A,
filed with the Commission on April 24, 1998, relating to the
acquisition of Centerpiece Communications, Inc.
15
<PAGE>
SIGNATURES
In accordance with requirements of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: May 14, 1998
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
BY: /s/ Michael Hoppman
--------------------------------------
Michael Hoppman, Vice President
and Chief Financial Officer
16
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page
- --------------- ------------------------- ----
27 Financial Data Schedule 18
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-1-1998
<PERIOD-END> Mar-31-1998
<CASH> 669,129
<SECURITIES> 0
<RECEIVABLES> 4,796,686
<ALLOWANCES> 778,261
<INVENTORY> 389,845
<CURRENT-ASSETS> 5,842,546
<PP&E> 3,505,711
<DEPRECIATION> 1,414,110
<TOTAL-ASSETS> 22,804,377
<CURRENT-LIABILITIES> 16,479,653
<BONDS> 0
<COMMON> 59,917
0
0
<OTHER-SE> 2,665,057
<TOTAL-LIABILITY-AND-EQUITY> 22,804,377
<SALES> 5,134,396
<TOTAL-REVENUES> 5,134,396
<CGS> 5,744,110
<TOTAL-COSTS> 2,849,974
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 395,500
<INCOME-PRETAX> (3,800,253)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,800,253)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,800,253)
<EPS-PRIMARY> (.68)
<EPS-DILUTED> (.68)
</TABLE>
