SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM 8-K
ON FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) February 6, 1998
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 1-13478 13-3698386
- ---------------------------- ----------- -------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
5697 Rising Sun Avenue, Philadelphia, Pennsylvania 19120
- -------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (215) 342-7700
--------------
Not Applicable
-----------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 2. Acquisition or Disposition of Assets
Networks Around the World, Inc.
On February 6, 1998, Global Telecommunication Solutions, Inc. ("GTS"),
Networks Acquisition Corp., a wholly owned subsidiary of GTS ("Networks
Acquisition Corp."), Networks Around The World, Inc. ("NATW"), Randolph Cherkas
("Cherkas") and Gary Liguori ("Liguori" and, together with Cherkas, the
"Stockholders") executed a Merger and Reorganization Agreement ("Merger
Agreement"), pursuant to which NATW was merged ("Merger") with and into Networks
Acquisition Corp. On February 10, 1998 ("Closing Date"), a Certificate of Merger
was filed with the Secretary of State of the State of New Jersey.
In connection with the Merger, GTS (i) paid $2 million in cash, (ii) issued
an aggregate of 505,618 shares of GTS's common stock ("GTS Shares") to the
Stockholders, determined by dividing $3,150,000 by the average closing sales
price of one GTS Share on the 20 consecutive trading days ending two days prior
to the Closing Date and (iii) delivered promissory notes to the Stockholders in
the aggregate principal amount of $1 million, which promissory notes are secured
by substantially all the assets of NATW.
On the Closing Date, GTS entered into an employment agreement ("Cherkas
Employment Agreement") with Cherkas, the President of NATW, who was appointed
the Chief Operating Officer of GTS. The Cherkas Employment Agreement is through
January 2001. Cherkas is to receive an annual base salary of $180,000, subject
to annual increases and bonuses as the Board of Directors of GTS may, in its
discretion, determine. Additionally GTS has agreed to cause the Board of
Directors to appoint Cherkas as a member of the Board of Directors of GTS and
nominate him for membership thereafter at each annual meeting of stockholders
for so long as Cherkas remains an executive officer of GTS.
On the Closing Date, GTS entered into an employment agreement ("Liguori
Employment Agreement") with Liguori, the Vice President of NATW, who was
appointed the Director of Wholesale Sales of GTS. The Ligouri Employment
Agreement is through January 2001. Liguori is to receive an annual base salary
of $80,000, subject to annual increases as the Board of Directors in its
discretion may determine. Additionally, Liguori and the Chief Operating Officer
will mutually determine a bonus plan for Liguori within 30 days after the
Closing Date.
Pursuant to the Merger Agreement, GTS granted "piggy-back" registration
rights to the Stockholders. Notwithstanding the foregoing, each stockholder
receiving any GTS Shares executed a "lock-up" agreement (i) prohibiting his sale
of such shares for a period of one year after the Closing Date and (ii) limiting
the number of shares he can sell to 25% of the GTS Shares acquired in connection
with the Merger during any calendar quarter during the one year period
thereafter.
Centerpiece Communications, Inc.
On February 6, 1998, GTS, CCI Acquisition Corp., a wholly owned subsidiary
of GTS ("Acquisition Corp."), Centerpiece Communications, Inc. ("CCI") and J.
Mark Rubenstein ("Rubenstein") executed a Merger and Reorganization Agreement
("Merger Agreement"), pursuant to which CCI was merged ("Merger") with and into
Acquisition Corp. On February 6, 1998 ("Closing Date"), a Certificate of Merger
was filed with the Secretary of State of the State of New Jersey.
2
<PAGE>
In connection with the Merger, GTS (i) paid $1,500,000 in cash, (ii)
issued an aggregate of 401,284 shares of GTS's common stock ("GTS Shares") to
Rubenstein, determined by dividing $2,500,000 by the average closing sales price
of one GTS Share on the 20 consecutive trading days ending two days prior to the
Closing Date and (iii) delivered a promissory note to Rubenstein in the
aggregate principal amount of $1 million, which is secured by substantially all
the assets of CCI. Furthermore, Rubenstein entered into an agreement with
Sheldon Finkel, Chairman of the Board of GTS, pursuant to which Rubenstein was
granted tag along rights to sell his shares of common stock in the event Mr.
Finkel sells shares of common stock of GTS owned by him under certain
circumstances.
On the Closing Date, GTS entered into an employment agreement
("Employment Agreement") with Rubenstein, the President of CCI, who was
appointed the Vice President Wholesale Sales of GTS. The Employment Agreement is
for a term through December 2001. Rubenstein is to receive an annual base salary
of $150,000, subject to annual increases and bonuses as the Board of Directors
of GTS may, in its discretion, determine. GTS also agreed to cause Rubenstein to
be elected to the Board of Directors of Acquisition Corp. for so long as
Rubenstein is employed by GTS or any of its affiliates.
Pursuant to the Merger Agreement, GTS agreed to file a registration
statement with the Securities and Exchange Commission ("Commission") to register
the GTS Shares issued to Rubenstein in connection with the Merger on or before
November 1, 1998, or to include all such shares in a registration statement
which has been filed but not declared effective if allowable under the
Securities Act and the rules promulgated thereunder, so that such shares may be
sold by Rubenstein. Additionally, GTS agreed to use its best efforts to cause
such registration statement to be declared effective by the Commission no later
than January 31, 1999 and once declared effective, to keep it effective until
all securities registered thereby are either sold or can be sold under Rule
144(k) under the Securities Act. Notwithstanding the foregoing, Rubenstein
executed a "lock-up" agreement (i) prohibiting his sale of such shares for a
period of one year after the Closing Date and (ii) limiting the number of such
shares which he may sell in any calendar quarter during the second year
thereafter to 25% of the GTS Shares; provided, however, in the event Rubenstein
fails to sell the complete 25% during any calendar quarter, he shall be entitled
to sell, during the next calendar quarter, the lesser of the following
percentage of the GTS Shares acquired by him in the Merger: (i) the sum of (A)
25% and (B) the difference between 25% and that percentage sold during the
immediately preceding calendar quarter; and (ii) 40%.
3
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Businesses Acquired.
Networks Around the World, Inc.
See Combined Financial Statements of Networks Around the World,
Inc. and Global Phonecards, LLC, as of December 31, 1997 and 1996
and for the years ended December 31, 1997 and 1996 beginning on
page F-1.
Centerpiece Communications, Inc.
See Financial Statements of Centerpiece Communications, Inc. as
of December 31,1997 and 1996 and for the years ended December 31,
1997 and 1996 beginning on page F-9
(b) Pro Forma Financial Information.
See Unaudited Pro Forma Combined Financial Statements of Global
Telecommunication Solutions, Inc. as of and for the year ended
December 31, 1997 beginning on page F-18.
(c) Exhibits.
Exhibit 23 - Consent of Independent Auditors
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Dated: April 23, 1998 GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
----------------------------------------
(Registrant)
/s/ Shelly Finkel
----------------------------------------
Shelly Finkel, Chairman of the Board
5
<PAGE>
Independent Auditors' Report
The Boards of Directors
Networks Around The World, Inc.
and Global Phonecards, LLC:
We have audited the accompanying combined balance sheets of Networks Around The
World, Inc. and Global Phonecards, LLC, as of December 31, 1997 and 1996, and
the related combined statements of operations, stockholders' equity, and cash
flows for the years then ended. These combined financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Networks Around The
World, Inc. and Global Phonecards, LLC, 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 priniciples.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
April 20, 1998
F-1
<PAGE>
NETWORKS AROUND THE WORLD, INC.
AND GLOBAL PHONECARDS, LLC
Combined Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Assets 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 781,377 33,657
Accounts receivable 755,992 451,225
Inventory 64,656 30,000
Deposits and advances 15,833 -
- -----------------------------------------------------------------------------------------------
Total current assets 1,617,858 514,882
Property and equipment, net 73,364 77,586
Other assets 2,157 2,157
- -----------------------------------------------------------------------------------------------
$ 1,693,379 594,625
- -----------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- -----------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 63,215 -
Amounts payable to telecommunication carriers 205,856 237,180
Reserve for carrier default (note 7) 500,000 -
Amounts payable to retirement plan 30,000 28,000
- -----------------------------------------------------------------------------------------------
Total current liabilities 799,071 265,180
- -----------------------------------------------------------------------------------------------
Commitments and contingencies (note 6)
Stockholders' equity:
Common stock, $1.00 par value, 100 shares
authorized, issued and outstanding 100 100
Additional paid-in capital 100 100
Retained earnings 894,108 329,245
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 894,308 329,445
- -----------------------------------------------------------------------------------------------
$ 1,693,379 594,625
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to combined financial statements.
F-2
<PAGE>
NETWORKS AROUND THE WORLD, INC.
AND GLOBAL PHONECARDS, LLC
Combined Statements of Operations
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Net revenues $ 11,078,061 4,832,739
Cost of revenues 9,416,933 4,065,697
- -----------------------------------------------------------------------------------------------
Gross profit 1,661,128 767,042
- -----------------------------------------------------------------------------------------------
Operating expenses:
Selling and marketing expenses 183,810 109,348
General and administrative expenses 907,945 362,831
Depreciation 17,122 19,821
- -----------------------------------------------------------------------------------------------
Income from operations 552,251 275,042
Other income:
Interest income 37,933 12,756
- -----------------------------------------------------------------------------------------------
Income before income taxes 590,184 287,798
Income tax expense 15,321 -
- -----------------------------------------------------------------------------------------------
Net income $ 574,863 287,798
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to combined financial statements.
F-3
<PAGE>
NETWORKS AROUND THE WORLD, INC.
AND GLOBAL PHONECARDS, LLC
Combined Statements of Stockholders' Equity
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Common Stock Additional Total
---------------------------- paid-in Retained stockholders'
Shares Amount capital earnings equity
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 100 $ 100 100 241,447 241,547
Net income - - - 287,798 287,798
Distributions to - - - (200,000) (200,000)
stockholders
- ----------------------------------------------------------------------------------------------
Balance at December 31, 100 100 100 329,245 329,445
1996
Net income - - - 574,863 574,863
Distributions to - - - (10,000) (10,000)
stockholders
- ----------------------------------------------------------------------------------------------
Balance at December 31, 100 $ 100 100 894,108 894,308
1997
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE>
NETWORKS AROUND THE WORLD, INC.
AND GLOBAL PHONECARDS, LLC
Combined Statements of Cash Flows
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 574,863 287,798
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 17,122 19,821
Changes in operating assets and liabilities:
Increase in accounts receivable (304,767) (183,225)
Increase in inventory (34,656) (30,000)
Increase in deposits and advances (15,833) -
Increase in other assets - (2,157)
Increase in accounts payable 63,215 -
Increase (decrease) in amounts payable to
telecommunications carriers (31,324) 180,774
Reserve for carrier default 500,000 -
Increase in amounts payable to retirement plan 2,000 28,000
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 770,620 301,011
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (12,900) (97,407)
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities (12,900) (97,407)
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders (10,000) (200,000)
- -----------------------------------------------------------------------------------------------
Net cash used in financing activities (10,000) (200,000)
- -----------------------------------------------------------------------------------------------
Net increase in cash 747,720 3,604
Cash and cash equivalents at beginning of period 33,657 30,053
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 781,377 33,657
- -----------------------------------------------------------------------------------------------
Supplemental disclosures:
Income taxes paid during the period $ 15,321 -
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE>
NETWORKS AROUND THE WORLD, INC.
AND GLOBAL PHONECARDS, LLC
Notes to Combined Financial Statements
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
(1) Business
Networks Around The World, Inc. (Networks) was incorporated on February
1, 1994. Global Phonecards, LLC (Global) was incorporated on October
10, 1996. Networks and Global (collectively the Company) are engaged in
the business of designing, marketing, and distributing prepaid phone
cards. The Company's phone cards provide consumers access to long
distance services through their agreements with telecommunications
carriers.
The majority of the Company's customers are retail establishments,
distributors, and businesses which sell the phone cards to the ultimate
user.
(2) Summary of Significant Accounting Policies
Basis of Presentation
Prior to January 31, 1998, Networks owned 51% of Global. In addition,
Networks and Global shared common management. Effective January 31,
1998, Networks acquired the remaining 49% of Global. As a result of
these relationships, Global and Networks are considered companies under
common control and the accompanying financial statements include the
accounts of both Networks and Global. The equity accounts of Global
have been eliminated in consolidation and no minority interest is
presented since the companies are under common control.
Revenue and Cost Recognition
The Company records sales when cards are sold to customers. Agent
discounts are recorded as a reduction of gross revenue.
The Company's primary cost of its prepaid phone cards is the cost of
long distance carrier services. Costs are recognized upon the sale of
prepaid phone cards to customers. Amounts payable to telecommunication
carriers at December 31, 1997 and 1996 are due to one principal vendor.
Inventory
Inventory consists of purchased carrier time which has not yet been
sold to customers and is stated at the lower of cost or market.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over five years, the estimated useful lives of the
respective assets. Expenditures for maintenance and repairs are charged
to operations as incurred.
F-6
<PAGE>
NETWORKS AROUND THE WORLD, INC.
AND GLOBAL PHONECARDS, LLC
Notes to Combined Financial Statements
- -------------------------------------------------------------------------------
(2) Continued
Income Taxes
Networks has elected S corporation status for Federal income tax
reporting purposes. Global is a limited liability company. Accordingly,
the income of the Company subject to Federal income taxes is allocated
to the stockholders of the Company for inclusion in their personal tax
returns. In addition, certain New Jersey income taxes are taxed
directly to the stockholders. Income tax expense consists of the
Company's share of current taxes payable to the State of New Jersey. No
deferred taxes have been provided as the amounts are not material.
Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities,
revenues 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.
Business and Credit Concentrations
For the year ended December 31, 1997, Networks had two customers that
accounted for approximately 46% of net revenues and $295,177 of
accounts receivable at December 31, 1997.
(3) Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Furniture and fixtures $ 3,994 $ 3,994
Machinery and equipment 39,900 27,000
Computers and office equipment 22,807 22,807
Vehicles 45,351 45,351
- -------------------------------------------------------------------------------
112,052 99,152
Less: accumulated depreciation 38,688 21,566
- -------------------------------------------------------------------------------
$ 73,364 77,586
- -------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
(4) Employee Benefit Plans
Effective January 1, 1996, Networks adopted a money purchase plan and
profit sharing plan (the Plans). Employees are eligible to participate
in the Plans upon two years of employment with Networks. Under the
money purchase plan, Networks contributes 10% of the participant's
compensation. Under the profit sharing plan, contributions are at the
discretion of Networks. Networks contributed $30,000 to the Plans in
1997 and 1996.
(5) Related-party Transaction
In January 1998 Networks sold two vehicles to a stockholder for $4,000,
resulting in a loss of approximately $19,000.
(6) Commitments and Contingencies
Leases
The Company leases office space. Future minimum lease payments or
noncancelable operating leases are $25,886 in 1998. Rent expense for
the years ended December 31, 1997 and 1996 was approximately $41,000
and $21,000, respectively.
Sales, Use, and Excise Taxes
The Company has historically not filed sales or use tax returns or paid
any such taxes. In the opinion of management, the Company is not liable
for any such taxes relating to its sales of prepaid phone cards. As the
Company is not a facilities based provider, management believes any
such tax liabilities would accrue to either the providers of
telecommunications services from whom the Company purchases time or the
Company's customers, who generally purchase the cards for resale.
However, Federal and state tax laws in this area are evolving and could
be interpreted to apply to the Company. No reserves have been
established for any such potential obligations as of December 31, 1997,
since management believes it is not probable that any liabilities
exist. However, should the Company's interpretation of law in this area
be challenged, it is reasonably possible that the Company could be
assessed with taxes and related costs and the amount of those
assessments could be material.
(7) Subsequent Events
In January 1998 cash distributions were made to the stockholders of
Networks and Global totaling $681,000.
On January 31, 1998, Global merged into Networks. In consideration for
the remaining 49% of Global, the minority member of Global received 11
shares of common stock of Networks. Concurrent with this merger, the
number of authorized shares of common stock of Networks was increased
from 100 to 10,000.
On February 6, 1998, the Company merged with Networks Acquisition
Corp., a wholly-owned subsidiary of Global Telecommunication
Solutions, Inc. (GTS).
In February 1998 one of the principal providers of long distance
telephone time to the Company ceased providing telecommunication
services for cards that were previously paid for by the Company. GTS
has purchased telecommunication services from other providers to meet
customer obligations and is pursuing recovery of all losses from the
previous service provider. The estimated cost of the default
pertaining to cards sold by the Company in 1997 has been accrued in
the accompanying financial statements.
F-8
<PAGE>
Independent Auditors' Report
The Board of Directors
Centerpiece Commmunications, Inc.:
We have audited the accompanying balance sheets of Centerpiece Commmunications,
Inc., as of December 31, 1997, and the related statements of operations,
stockholder's deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Centerpiece Commmunications,
Inc., as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
priniciples.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
April 9, 1998
F-9
<PAGE>
CENTERPIECE COMMUNICATIONS, INC.
Balance Sheet
December 31, 1997
- ------------------------------------------------------------------------------
Assets
- ------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 230,417
Accounts receivable, net of allowance for doubtful 440,253
accounts of $27,127
Inventory 98,832
Deposits and advances 3,000
- ------------------------------------------------------------------------------
Total current assets 772,502
Property and equipment, net 49,577
Other assets 6,734
- ------------------------------------------------------------------------------
$ 828,813
- ------------------------------------------------------------------------------
Liabilities and Stockholder's Equity
- ------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 125,085
Amounts payable to telecommunication carriers 420,478
Reserve for carrier default (note 6) 250,000
Due to stockholder 109,975
- ------------------------------------------------------------------------------
Total current liabilities 905,538
- ------------------------------------------------------------------------------
Commitments and contingencies (note 5)
Stockholder's deficit:
Common stock, no par value, 2,500 shares
authorized and issued; 1,875 shares outstanding 101,000
Treasury stock - 625 shares (115,000)
Accumulated deficit (62,725)
- -------------------------------------------------------------------------------
Total stockholder's deficit (76,725)
- -------------------------------------------------------------------------------
$ 828,813
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-10
<PAGE>
CENTERPIECE COMMUNICATIONS, INC.
Statement of Operations
Year ended December 31, 1997
- ------------------------------------------------------------------------------
Net revenues $ 10,644,971
Cost of revenues 9,398,244
- ------------------------------------------------------------------------------
Gross profit 1,246,727
- ------------------------------------------------------------------------------
Operating expenses:
Selling and marketing expenses 118,235
General and administrative expenses 1,061,905
Depreciation and amortization 30,305
- ------------------------------------------------------------------------------
Income from operations 36,282
Other (income) expenses:
Interest and other income (7,413)
Interest expense 22,465
- ------------------------------------------------------------------------------
Income before income taxes 21,230
Income tax expense 9,995
- -------------------------------------------------------------------------------
Net income $ 11,235
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-11
<PAGE>
CENTERPIECE COMMUNICATIONS, INC.
Statements of Stockholder's Deficit
Year ended December 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock Total
----------------------------- Treasury Accumulated shareholder's
Shares Amount stock deficit deficit
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 2,500 $ 101,000 - (73,960) 27,040
Purchase of treasury stock (625) - (115,000) - (115,000)
Net income - - - 11,235 11,235
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 1,875 $ 101,000 (115,000) (62,725) (76,725)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
CENTERPIECE COMMUNICATIONS, INC.
Statement of Cash Flows
Year ended December 31, 1997
<TABLE>
- -----------------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net income $ 11,235
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 30,305
Changes in operating assets and liabilities:
Increase in accounts receivable (249,906)
Increase in inventory (51,014)
Decrease in deposits and advances 13,376
Increase in other assets (1,394)
Increase in accounts payable and accrued expenses 64,176
Reserve for carrier default 250,000
Increase in amounts due to telecommunication carriers 317,131
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 383,909
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (54,356)
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities (54,356)
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Treasury stock repurchase (115,000)
Loan repayments (46,357)
Loan repayments to stockholder (39,000)
- -----------------------------------------------------------------------------------------------
Net cash used in financing activities (200,357)
- -----------------------------------------------------------------------------------------------
Net increase in cash 129,196
Cash and cash equivalents at beginning of period 101,221
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 230,417
- -----------------------------------------------------------------------------------------------
Supplemental disclosures:
Income taxes paid during the period $ 9,995
Interest paid 22,465
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE>
CENTERPIECE COMMUNICATIONS, INC.
Notes to Financial Statements
December 31, 1997
- -------------------------------------------------------------------------------
(1) Business
Centerpiece Communications, Inc. (the "Company") was incorporated on
June 16, 1995 and is engaged in the business of designing, marketing
and distributing prepaid phone cards. The Company's phone cards provide
consumers access to long distance services through its agreements with
telecommunications carriers.
The majority of the Company's customers are wholesalers, distributors,
and businesses which sell the phone cards to the ultimate user.
(2) Summary of Significant Accounting Policies
Revenue and Cost Recognition
The Company records sales when cards are sold to customers. Agent
discounts are recorded as a reduction of gross revenue.
The Company's primary cost of its prepaid phone cards is the cost of
long distance carrier services. Costs are recognized upon sale of
prepaid phone cards to customers. Amounts payable to telecommunications
carriers at December 31, 1997 are due to two primary vendors.
Inventory
Inventory consists of purchased carrier time which has not yet been
sold to customers and is stated at the lower of cost or market value.
Property and Equipment
Property and equipment are recorded at cost and depreciated using an
accelerated 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:
1997
- ------------------------------------------------------------------------------
Furniture and Fixtures 7 years
Machinery and equipment 5 to 7 years
Vehicle 5 years
- ------------------------------------------------------------------------------
F-14
<PAGE>
CENTERPIECE COMMUNICATIONS, INC.
Notes to Financial Statements
- ------------------------------------------------------------------------------
(2) Continued
Income Taxes
The Company has elected S corporation status for Federal income tax
reporting purposes. Accordingly, the income of the Company subject to
Federal income taxes is allocated to the stockholder of the Company for
inclusion in his personal tax return. In addition, certain New Jersey
income taxes are taxed directly to the stockholder. Income tax expense
consists of the Company's share of current taxes payable to the State
of New Jersey. No deferred taxes have been provided as the amounts are
not material.
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 financial statements in conformity with
generally accepted accounting principles. Actual results could differ
from those estimates.
Business and Credit Concentrations
For the year ended December 31, 1997, the Company's 10 largest
customers accounted for 46% of revenues and amounts due from those
customers comprise $164,825 of accounts receivable at December 31,
1997. One customer accounted for 15% of revenues for the year ended
December 31, 1997.
(3) Property and Equipment
Property and equipment consist of the following:
- ------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------
Furniture and fixtures $ 16,168
Machinery and equipment 31,153
Motor Vehicles 29,263
Leasehold improvements 9,055
- ------------------------------------------------------------------------------
85,639
Less: accumulated depreciation and amortization 36,062
- ------------------------------------------------------------------------------
$ 49,577
- ------------------------------------------------------------------------------
F-15
<PAGE>
(4) Related-party Transactions
The stockholder has loaned the Company $109,975 as of December 31,
1997. Interest is charged at a rate of 6.81% per year and the loan is
payable upon demand. Interest paid to the stockholder during 1997
totaled $16,438.
In 1997 the Company repaid a loan from a former stockholder in the
amount of $46,357. Interest paid to the former stockholder during 1997
totaled $6,027.
In January 1998 the Company sold a vehicle to its stockholder for
$19,000, resulting in a loss of approximately $4,000.
(5) Commitments and Contingencies
Leases
The Company leases office space and certain equipment. Future minimum
lease payments on noncancelable operating leases are approximately
$44,000, $9,000, and $860 in 1998, 1999, and 2000, respectively. Rent
expense was approximately $45,700 for the year ended December 31, 1997.
Sales, Use, and Excise Taxes
The Company has historically not filed sales or use tax returns or paid
any such taxes. In the opinion of management, the Company is not liable
for any such taxes relating to its sales of prepaid phone cards. As the
Company is not a facilities based provider, management believes any
such tax liabilities would accrue to either the providers of
telecommunications services from whom the Company purchases time or the
Company's customers, who generally purchase the cards for resale.
However, Federal and state tax laws in this area are evolving and could
be interpreted to apply to the Company. In addition, the Company's
agreement with one of its principal providers of telecommunication
services acknowledges that the Company is acting as a distributor and
has agreed to indemnify the provider against any state or local sales,
use, excise, gross receipts, utility, or privilege taxes, duties, fees
or similar obligations imposed or levied at the point of sale. No
reserves have been established for any such potential obligations as of
December 31, 1997, since management believes it is not probable that
any liabilities exist. However, should the Company's interpretation of
law in this area be challenged, it is reasonably possible that the
Company could be assessed with taxes and related costs and the amount
of those assessments could be material.
F-16
<PAGE>
(6) Subsequent Events
On February 6, 1998, the Company merged with CCI Acquisition Corp.,
a wholly-owned subsidiary of Global Telecommunication Solutions, Inc.
(GTS).
In February 1998 one of the principal providers of long distance
telephone time to the Company ceased providing telecommunication
services for cards that were previously paid for by the Company. GTS
has purchased telecommunication services from other providers to meet
customer obligations and is pursuing recovery of all losses from the
previous service provider. The estimated cost of the default pertaining
to cards sold by the Company in 1997 has been accrued in the
accompanying financial statements.
F-17
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
PRO FORMA COMBINED BALANCE SHEET
December 31, 1997
(Unaudited)
Assets
<TABLE>
<CAPTION>
As adjusted
Historical Historical Historical Pro Forma Pro Forma Pro Forma
GTS CCI NATW Adjustments Adjustments Combined
----------- ----------- ----------- ------------ ------------ -------------
debit credit
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 7,867,566 $230,417 $ 781,377 $ - $3,500,000 (a) $5,379,360
Accounts receivable, net 2,636,878 440,253 755,992 - 65,925 (c) 3,767,198
Inventories 174,112 98,832 64,656 - - 337,600
Deferred costs 32,764 - - - - 32,764
Prepaid expenses 160,935 3,000 15,833 - - 179,768
------------- --------- ---------- ------------ ------------- -------------
Total current assets 10,872,255 772,502 1,617,858 - 3,565,925 9,696,690
------------- --------- ---------- ------------ ------------- -------------
Goodwill, net 3,516,344 - - 10,976,269(a) - 14,492,613
Property and equipment, net 1,485,348 49,577 73,364 - - 1,608,289
Other assets, net 378,911 6,734 2,157 - - 387,802
------------ ---------- ---------- ------------- ------------ ----------
Total assets $16,252,858 $828,813 $1,693,379 $10,976,269 $3,565,925 $26,185,394
============ ========== =========== ============== ============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $2,199,134 $545,563 $269,071 $65,925 (c) $1,362,272 (a) $4,310,115
Accrued expenses 2,165,986 - 30,000 - - 2,195,986
Deferred revenues 1,677,615 - - - - 1,677,615
Estimated sales and
excise tax liability 3,663,285 - - - - 3,663,285
Reserve for carrier default - 250,000 500,000 - 125,000 (a) 875,000
Due to stockholder - 109,975 - - - 109,975
Notes payable, current 450,000 - - - 500,000 (a) 950,000
Capital lease obligation,
current 95,298 - - - - 95,298
---------- -------- ------- ----------- ------------ ----------
Total current liabilities 10,251,318 905,538 799,071 65,925 1,987,272 13,877,274
---------- -------- ------- ----------- ------------ ----------
Notes payable, net 1,886,982 - - - 1,500,000 (a) 3,386,982
Convertible notes payable 2,599,750 - - - - 2,599,750
---------- -------- ------- --------- ------------- ----------
Total liabilities 14,738,050 905,538 799,071 65,925 3,487,272 19,864,006
---------- -------- ------- ---------- ------------- ----------
Commitments and Contingencies
Stockholders' Equity
Preferred stock - - - - - -
Common stock 50,848 101,000 100 101,100 (b) 9,069 (a) 59,917
Treasury stock - (115,000) - - 115,000 (b) -
Additional paid in capital 39,689,698 - 100 100 (b) 4,797,511 (a) 44,487,209
Accumulated earnings
(deficit) (37,942,443) (62,725) 894,108 831,383 (b) - (37,942,443)
Deferred compensation (294,650) - - - - (294,650)
Cumulative foreign currency
translation adjustment 11,355 - - - - 11,355
---------- --------- --------- ------------- ------------- ------------
Total stockholders' equity 1,514,808 (76,725) 894,308 932,583 4,921,580 6,321,388
---------- --------- --------- ------------- ------------- ------------
Total liabilities and
stockholders' equity $16,252,858 $828,813 $1,693,379 $998,508 $8,408,852 $26,185,394
=========== ========= ========== ============ ============== ===========
</TABLE>
The accompanying notes are an integral part of these statements
F-18
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
Year ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
As adjusted
Historical Historical Historical Pro Forma Pro Forma Pro Forma
GTS CCI NATW Adjustments Adjustments Combined
------------- -------------- ------------- -------------- ----------- ------------
debit credit
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 18,234,640 $ 10,644,971 $ 11,078,061 $ 542,271 (d) $ 39,415,401
Cost of sales 16,249,773 9,398,244 9,416,933 (542,271)(d) 34,522,679
------------ ------------ ------------ ------------ -------- -------------
Gross profit 1,984,867 1,246,727 1,661,128 542,271 (542,271) 4,892,722
------------ ------------ ------------ ------------ -------- -------------
Selling and marketing expenses 3,190,226 118,235 183,810 3,492,271
General and administrative expenses 6,450,280 1,061,905 907,945 8,420,130
Depreciation and amortization 2,037,222 30,305 17,122 731,751 (e) 2,816,400
Restructuring charge 1,500,606 -- -- 1,500,606
Goodwill impairment 13,228,154 -- -- -- -- 13,228,154
------------ ------------ ------------ ------------ -------- ------------
Operating income (loss) (24,421,621) 36,282 552,251 (189,480) (542,271) (24,564,839)
------------ ------------ ------------ ------------ -------- ------------
Interest income (253,989) (7,413) (37,933) (299,335)
Interest expense 1,368,307 22,465 -- 140,000 (f) 1,530,772
------------ ------------ ------------ ------------ -------- ------------
Income (loss) before income taxes (25,535,939) 21,230 590,184 (329,480) (542,271) (25,796,276)
Income taxes -- 9,995 15,321 25,316 (g) --
------------ ------------ ------------ ------------ -------- -------------
Net income (loss) $(25,535,939) $ 11,235 $ 574,863 $(329,480) $(567,587) $(25,796,276)
============ ============ ============ ============ ======== ============
Loss per share $ (5.96)
============
Weighted average shares outstanding 4,325,626 (h)
============
</TABLE>
The accompanying notes are an integral part of these statements
F-19
<PAGE>
PRO FORMA COMBINED FINANCIAL STATEMENTS
(Unaudited)
On February 6, 1998, Global Telecommunications Solutions, Inc. (the "Company" or
"GTS") acquired all of the issued and outstanding common stock of Centerpiece
Communications, Inc. ("CCI") and Networks Around the World, Inc. ("NATW") for a
combination of cash, notes and restricted common stock of the Company. The
transactions are subject to a closing balance sheet adjustment. The following
pro forma combined financial statements are based on the historical financial
statements of GTS, CCI, and NATW and give effect to the merger of CCI and NATW
with and into the Company (the "Mergers"). The Mergers were accounted for under
the purchase method of accounting and are based upon a preliminary allocation of
the purchase price and upon the assumptions and adjustments described in the
accompanying notes. The pro forma combined statements of operations for the year
ended December 31, 1997 give effect to the Mergers as if they occurred on
January 1, 1997. The pro forma combined balance sheet gives effect to the
Mergers as if they occurred on December 31, 1997.
These pro forma combined financial statements should be read in conjunction with
the notes to the pro forma combined financial statements and the historical
financial statements of all the companies. The pro forma combined financial
statements are not necessarily indicative of the results that would have been
reported or the financial position of the Company had such events actually
occurred on the dates specified, nor is it indicative of the Company's future
results or financial position.
F-20
<PAGE>
GLOBAL TELECOMMUNICATIONS SOLUTIONS, INC.
Notes to Pro Forma Combined Financial Statements
(Unaudited)
(1) Basis of Presentation
The pro forma combined financial statements have been prepared to reflect
the effect of the Mergers using the purchase method of accounting. The pro
forma combined balance sheet gives effect to the Mergers as if they
occurred on December 31, 1997. The pro forma combined statement of
operations gives effect to the Mergers as if they occurred on January 1,
1997.
(2) Pro forma adjustments are as follows:
(a) To record the purchase price of the mergers
<TABLE>
<CAPTION>
CCI NATW Total
<S> <C> <C> <C>
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 $ 5.30 $ 5.30
Common stock 2,126,805 2,679,775 4,806,580
Notes payable, current - 500,000 500,000
Notes payable, long term 1,000,000 500,000 1,500,000
Cash consideration 1,500,000 2,000,000 3,500,000
Balance sheet adjustment 15,132 1,247,140 1,262,272
Adjustment to reserve for carrier default, net - 125,000 125,000
Estimated accrued acquisition costs 50,000 50,000 100,000
---------- --------- ------------
Total consideration 4,691,937 7,101,915 11,793,852
Net book value of assets acquired (76,725) 894,308 817,583
---------- --------- -------------
Goodwill $4,768,662 $6,207,607 $10,976,269
========== ========== =============
</TABLE>
Pursuant to the merger agreement with NATW, the Company may be required
to pay an additional $2,000,000 in consideration if certain financial
objectives are achieved. Accordingly, upon occurrence of such events,
the additional consideration would 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.
Pursuant to the respective merger agreements, the Company agreed that
it would pay for telecommunication services on cards purchased by CCI
and NATW prior to the merger in the event the primary provider of
telecommunication services to CCI and NATW [Access Telecom, Inc.
("Access")] stopped providing such services. In February, 1998 Access
ceased providing telecommunications services on these cards. The
Company estimates it will have to purchase $1,500,000 of
telecommunication services from other providers in order to meet
consumer obligations related to these cards. Pursuant to the merger
agreements, the former shareholders of CCI and NATW agreed to reimburse
the Company for a portion of these costs. The liability was calculated
as follows:
F-21
<PAGE>
GLOBAL TELECOMMUNICATIONS SOLUTIONS, INC.
Notes to Pro Forma Combined Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
CCI NATW Total
--------- ---------- --------
<S> <C> <C> <C>
Estimated gross payments to
telecommunication service providers $500,000 $1,000,000 $1,500,000
Amounts accrued at December 31, 1997 250,000 500,000 750,000
Amount to be reimbursed from
former shareholders of CCI and NATW 250,000 375,000 625,000
--------- ---------- --------
Adjustment to reserve for carrier default, net $ - $ 125,000 $ 125,000
========= ========== ===========
</TABLE>
Pursuant to the respective merger agreements the purchase price for the
net assets acquired was to be adjusted by an amount equal to cash plus
the net realizable value of accounts receivable minus current
liabilities as of the merger date (the "Balance sheet adjustment").
Such amounts were to be paid by or reimbursed to the Company within 90
days from the merger date. The amount that was computed in the pro
forma combined balance sheet at December 31, 1997 is based upon the
historical financial statements of CCI and NATW at December 31, 1997
and may not be indicative of the actual amount owed as of the merger
date. The estimated balance sheet adjustment of $1,262,272 was recorded
to accrued expenses in the pro forma combined balance sheet.
(b) To eliminate the historical equity of CCI and NATW
<TABLE>
<CAPTION>
CCI NATW Total
--------- ---------- --------
<S> <C> <C> <C>
Common stock $ 101,000 $ 100 $ 101,100
Treasury stock $(115,000) $ - $(115,000)
Additional paid in capital $ - $ 100 $ 100
Retained earnings (deficit) $( 62,725) $ 894,108 $ 831,383
</TABLE>
(c) To eliminate intercompany accounts
<TABLE>
<CAPTION>
CCI NATW Total
--------- ---------- --------
<S> <C> <C> <C>
Accounts receivable $29,525 $36,400 $65,925
Accounts payable $36,400 $29,525 $65,925
</TABLE>
(d) To eliminate inter-company sales
<TABLE>
<CAPTION>
CCI NATW Total
--------- ---------- --------
<S> <C> <C> <C>
Sales $447,705 $94,566 $542,271
</TABLE>
F-22
<PAGE>
GLOBAL TELECOMMUNICATIONS SOLUTIONS, INC.
Notes to Pro Forma Combined Financial Statements
(Unaudited)
(e) To record amortization of goodwill over 15 years
CCI NATW Total
--------- ---------- --------
Goodwill amortization $317,911 $413,840 $731,751
(f) To record interest expense on notes payable to former stockholders of
CCI and NATW
CCI NATW Total
--------- ---------- --------
Interest Expense $80,000 $60,000 $140,000
(g) To eliminate income tax expense
CCI NATW Total
--------- ---------- --------
Income Tax Expense $9,995 $15,321 $25,316
(h) Represents the weighted average shares outstanding during 1997 plus
shares issued to CCI and NATW shareholders of 401,284 and 505,618
respectively.
F-23
<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 reports dated April 9, 1998, and April
20, 1998, relating to the balance sheets of Centerpiece Communications, Inc. as
of December 31, 1997, and the related statements of operations, stockholders'
deficit and cash flows for the year then ended, and the combined balance sheets
of Networks Around The World, Inc. and Global Phonecards, LLC, as of December
31, 1997 and 1996, and the related combined statements of operations,
stockholder's equity and cash flows for the years then ended, which reports
appear in Amendment No. 1 to Form 8-K on Form 8-K/A of Global
Telecommunication Solutions, Inc.
KPMG Peat Marwick LLP
April 24, 1998
Philadelphia, Pennsylvania
