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 June 30, 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, Pnnsylvania 19120
-------------------------------------------------------
(Address of principal executive offices)
(215) 342-7700
---------------------------------------------
(Issuer's telephone number including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No |_|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of August 12, 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 - June 30, 1998 (unaudited) and
December 31, 1997..................................................3
Consolidated Statements of Operations - Three and six months
ended June 30, 1998 and 1997 (unaudited)...........................4
Consolidated Statements of Cash Flows - Six months
ended June 30, 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 and Use of Proceeds................16
Item 4. Submission of Matters to a Vote of Security Holders......16
Item 5. Other Information........................................17
Item 6. Exhibits and Reports on Form 8-K.........................17
Signatures........................................................18
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GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
June 30 December 31
---------------- ---------------
1998 1997
---------------- ---------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,215,055 $ 7,867,566
Accounts receivable, net of reserve for doubtful accounts of $596,188
and $570,000 4,569,931 2,636,878
Inventories 501,891 174,112
Deferred costs - 32,764
Other assets 142,771 160,935
---------------- ---------------
Total current assets 6,429,648 10,872,255
--------------- ---------------
Goodwill, net 14,421,708 3,516,344
Property and equipment, net 2,017,760 1,485,348
Other assets, net (Note 4) 1,971,696 378,911
--------------- ---------------
Total assets $ 24,840,812 $ 16,252,858
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,724,564 $ 2,199,134
Accrued expenses 3,869,844 2,165,986
Deferred revenues 3,939,440 1,677,615
Estimated sales and excise tax liability 4,326,485 3,663,285
Convertible notes payable, current 1,306,000 -
Notes payable, net current 3,972,493 450,000
Notes payable to related parties, current (Note 4) 1,500,000 -
Capital lease obligation, current 19,395 95,298
----------------- ---------------
Total current liabilities 22,658,221 10,251,318
--------------- ---------------
Notes payable, net - 1,886,982
Notes payable to related partiies (Note 4) 500,000 -
Convertible notes payable 1,293,750 2,599,750
--------------- ---------------
Total liabilities 24,451,971 14,738,050
--------------- ---------------
Commitments and Contingencies (Notes 4, 6 and 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 46,136,736 39,689,698
Accumulated deficit (45,660,937) (37,942,443)
Deferred compensation (171,180) (294,650)
Cumulative other comprehensive income 24,305 11,355
---------------- ----------------
Total stockholders' equity 388,841 1,514,808
---------------- ----------------
Total liabilities and stockholders' equity $ 24,840,812 $ 16,252,858
================ ================
</TABLE>
The accompanying notes are an integral part of these statements
3
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GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------------ -----------------------------------
1998 1997 1998 1997
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 8,030,272 $ 4,916,659 $13,164,668 $ 8,604,812
Cost of sales 7,544,232 4,100,879 12,738,342 6,956,236
Estimated costs of carrier default (Note 4) - - 550,000 -
----------------- ----------------- ----------------- --------------
Gross profit (loss) 486,040 815,780 (123,674) 1,648,576
----------------- ----------------- ----------------- --------------
Selling, general and adminsitrative expenses 2,911,697 1,923,121 5,392,015 4,283,728
Depreciation and amortization 580,673 435,436 950,329 863,688
----------------- ----------------- ----------------- --------------
Operating loss (3,006,330) (1,542,777) (6,466,018) (3,498,840)
----------------- ----------------- ----------------- --------------
Interest income 5,536 10,618 60,471 14,519
Interest expense 917,447 339,742 1,312,947 662,495
----------------- ----------------- ----------------- --------------
Loss before income taxes (3,918,241) (1,871,901) (7,718,494) (4,146,816)
Income taxes - - - -
----------------- ----------------- ----------------- --------------
Net loss $ (3,918,241) $ (1,871,901) $ (7,718,494) $(4,146,816)
================= ================= ================= ==============
Basic and diluted loss per share $ (0.65) $ (0.90) $ (1.33) $ (2.10)
================= ================= ================= ==============
Weighted average shares outstanding - basic and 5,991,772 2,090,036 5,806,383 1,974,053
diluted ================= ================= ================= ==============
</TABLE>
The accompanying notes are an integral part of these statements
4
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GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
Operating activities:
Net loss (7,718,494) $ (4,146,816)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 950,329 863,688
Provision for bad debts 208,261 -
Amortization of deferred compensation 322,070 103,747
Amortization of unearned discount 385,511 385,511
Amortization of deferred financing charges 578,264 47,311
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 (2,141,314) (253,428)
Inventories (327,779) (174,327)
Deferred costs 32,764 170,834
Other assets 150,542 (586,491)
Accounts payable 1,525,430 1,006,762
Accrued expenses 1,537,381 908,469
Deferred revenues 2,261,825 (1,000,508)
Sales and excise taxes payable 663,200 397,691
------------------ -----------------
Net cash used by operating activities (1,572,010) (2,207,645)
------------------ -----------------
Investing activities:
Purchases of property and equipment (982,314) (532,974)
Acquisitions and related costs (5,170,234) -
------------------ -----------------
Net cash used in investing activities (6,152,548) (532,974)
------------------ -----------------
Financing Activities:
Proceeds from bridge loan 1,250,000 -
Proceeds from exercise of options - 4,374
Payments to affiliates - (119,293)
Payments on capital lease obligations (75,903) (24,751)
Proceeds from the exercise of warrants 2,500,000
Increase in deferred finance fees (115,000) (40,501)
------------------ -----------------
Net cash provided by financing activities 1,059,097 2,319,829
Effects of exchange rates on cash 12,950 (4,463)
------------------ -----------------
Net decrease in cash (6,652,511) (425,253)
Cash and cash equivalents, beginning of period 7,867,566 1,352,322
------------------ -----------------
Cash and cash equivalents, end of period $ 1,215,055 $ 927,069
================== =================
Supplemental disclosures:
Cash paid for interest $ 79,049 $ 99,931
================== =================
Deferred finance fess relating to options and warrants $ 1,450,927 $ -
================== =================
Deferred compensation relating to options and warrants $ 198,600 $ 151,648
================== =================
Conversion of convertible notes payable into common stock $ - $ 175,250
================== =================
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
June 30, 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 and six months ended
June 30, 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 and six months
ended June 30, 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.
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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
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.
Each of the mergers was 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 February
1,1998. 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 750,000 750,000 1,500,000
Notes payable to related parties,
long term 250,000 250,000 500,000
Cash consideration 1,500,000 2,000,000 3,500,000
Balance sheet adjustment 45,949 91,852 137,801
Estimated carrier obligation in
connection with mergers, net 287,500 700,000 987,500
Estimated accrued acquisition
costs 50,000 50,000 100,000
------ ------ -------
Total consideration 5,010,254 6,521,627 11,531,881
Fair value of identifiable assets
acquired 70,949 116,852 187,801
Goodwill $4,939,305 $6,404,775 $11,344,080
========= ========= ==========
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
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<PAGE>
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 an underlying carrier's failure to provide
telecommunications services to phone 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 $1,725,000. For purposes of the financial statements
contained herein, $737,500 and $987,500 of the estimated costs has
been allocated to the former shareholders and the Company,
respectively. The amount due from the former shareholders of $737,500
has been recorded to other assets and will be offset against amounts
owed to the former shareholders of NATW and CCI, respectively. The
amount due from the former shareholders is estimated, is subject to
final resolution among the parties and, therefore, may be subject to
change.
In addition to the $1,725,000 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 during the six months ended June 30, 1998.
Pursuant to the respective merger agreements, the purchase price was
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 following unaudited combined pro forma information reflects the
results of operations assuming the CCI and NATW mergers had been
consummated on January 1, 1998.
Six Months Ended
June 30, 1998
----------------
Net sales $ 15,479,187
Net loss $ (8,249,513)
Net loss per share $ ( 1.38)
Pro forma adjustments include recording amortization expense on
goodwill, interest expense on the notes payable to former
shareholders, and the elimination of inter-company 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
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<PAGE>
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 $3,921,750 and $1,875,591 and $7,705,444 and
$4,151,297 for the three and six months ended June 30, 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. 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.
(7) 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 and is being amortized to general and
administrative expenses over the term of the consulting agreement.
(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 1997 and 1996. Due in part to the acquisitions
of NATW and CCI and a continuation of negative cash flow from
operations through June 30, 1998, the Company's cash balance has
declined to approximately $630,000 at August 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 11). 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
9
<PAGE>
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) Private Placement
In April 1998, the Company completed the April 1998 Private Placement,
pursuant to which the Company derived net proceeds of approximately
$1,100,000 through the sale of $1,250,000 of 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 estimated fair market value of these
warrants of $658,927, along with expenses associated with the April
1998 Private Placement of $115,000, were recorded as deferred
financing costs and are being amortized to interest expense over the
term of the April 1998 Warrants. The April 1998 Notes accrue interest
at the rate of 10% per annum and are payable on the earlier of January
15, 1999 or the date of the closing of 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 a Qualified Private Placement.
(11) Financing Commitment
In April 1998, the Company entered into an agreement with an investor
pursuant to which the investor has agreed to acquire up to $2,000,000
of the Company's common stock or other securities at a discount to the
market price of such securities. The Company can require the investor
to acquire the securities on thirty days' written notice until
December 31, 1998. In consideration thereof, the Company issued
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. The fair market value of these
warrants of $792,000 was recorded as deferred financing fees and is
being amortized to interest expense over the term of the commitment.
(12) Universal Service Fund
On May 8, 1997, the Federal Communications Commission ("FCC") issued
an order to implement the provisions of the Telecommunications Act of
1996 relating to the preservation and advancement of universal
telephone service (the "Universal Service Order"). The Universal
Service Order requires all telecommunications carriers providing
interstate telecommunications services to contribute to universal
service by contributing to a fund (the "Universal Service Fund").
Universal Service Fund contributions will be assessed based upon
intrastate, interstate and international "end-user" gross
telecommunications revenue effective January 1, 1998. Although the FCC
has not finally determined the contribution assessment rate, the
Company estimates the assessment could be as much as 4% of such
revenue for the calendar year 1998, and could increase or decrease in
subsequent years. While the Company believes that it has adequately
provided for its contribution to the Universal Service Fund, it is
possible that the FCC may enact regulation concerning the Universal
Service Fund in a manner which could result in material liabilities in
excess of amounts accrued.
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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 June 30, 1998 Compared to Three Months Ended June 30, 1997
Net sales for the second quarter of 1998 were $8,030,272 compared to
$4,916,659 for the second quarter of 1997. The primary reason for the increase
in net sales was due to the acquisitions of Networks Around the World, Inc.
("NATW") and Centerpiece Communications, Inc. ("CCI") in February 1998 and the
addition of new accounts such as Money Gram Payment Systems, Inc. and DB
Companies, Inc. Net sales of promotional cards decreased to less than 1% of net
sales in the second quarter of 1998 from 19% of net sales in the second quarter
of 1997. The change in the sales mix resulted from the Company's aggressive
pursuit of retail programs that offer greater discounts and commissions to
retailers and/or reduced per-minute charges to consumers.
The Company's gross margins decreased to 6% of net sales for the second
quarter of 1998, from 17% of net sales for the comparable period in the prior
year. The primary reason for the decrease in the gross margins was 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. The gross margins were further decreased
due to certain regulatory fees and surcharges imposed on the Company in 1998
which, due to the nature of the Company's business, cannot be fully collected
from the end users of the Company's products and services.
Selling, general and administrative expenses increased to $2,911,697
(36% of net sales) for the second quarter of 1998, compared to $1,923,121 (39%
of net sales) for the second quarter of 1997. The primary reason for the
increase was due to increases in sales and marketing personnel salaries and
benefits that increased as a result of higher sales volumes. In addition,
general and administrative costs were further increased due to (i) increased
expenditures on professional fees, primarily financial public relations fees,
investment banking fees and other consulting services and (ii) increased
operating expenses due to the acquisitions of NATW and CCI.
Depreciation and amortization expense increased to $580,673 for the
second quarter of 1998 from $435,436 for the second quarter of 1997. The
increase was primarily due to increased depreciation costs of newly acquired
telecommunications and computer equipment. The increase was partially offset by
a decrease in the amortization expense related to the impairment of goodwill for
the year ended December 31, 1997.
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Interest expense and related financing expenses for the second quarter
of 1998 increased to $917,447 from $339,742 for the second quarter of 1997,
primarily due to the cost of the financing commitment from Wien Securities, the
interest expense and financing costs associated with the April 1998 Private
Placement and the interest on the NATW Notes and the CCI Note (both as defined
below).
For the foregoing reasons, the Company incurred a net loss of $3,918,241
for the second quarter of 1998, compared to a net loss of $1,871,901 for the
second quarter of 1997.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Net sales for the six months ended June 30, 1998 were $13,164,668
compared to $8,604,812 for the same period during 1997. A significant
contributing factor to the increase in net sales was due to the acquisitions in
February 1998 of NATW and CCI and the addition of new accounts such as Money
Gram Payment Systems, Inc. and DB Companies, Inc. Net sales of promotional cards
decreased to less than 1% of net sales during the six months ended June 30, 1998
from 19% of net sales in the six months ended June 30, 1997. The change in the
sales mix resulted from the Company's aggressive pursuit of retail programs that
offer greater discounts and commissions to retailers and/or reduced per-minute
charges to consumers.
The Company's gross margins decreased to negative 1% of net sales for
the six months ended June 30, 1998, from 19% 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 (i) an increase in the sale of cards
with reduced per-minute rates to consumers; (ii) a reduction in revenues
recognized from promotional phone card programs that historically sell at higher
margins; and (iii) certain regulatory fees and surcharges imposed on the Company
in 1998 which, due to the nature of the Company's business, cannot be fully
collected from the end users of the Company's products and services.
Selling, general and administrative expenses increased to $5,392,015
(41% of net sales) for the six months ended June 30, 1998, compared to
$4,283,728 (50% of net sales) for the comparable period during 1997. The primary
reason for the increase was due to increases in sales and marketing personnel
salaries and benefits as a result of higher sales volumes. In addition, general
and administrative costs were further increased due to (i) increased expenditure
on professional fees, primarily financial public relations fees, investment
banking fees and other consulting services and (ii) increased operating expenses
due to the acquisitions of NATW and CCI.
Depreciation and amortization expense increased to $950,329 for the six
months ended June 30, 1998 from $863,688 for the six months ended June 30, 1997.
The increase was primarily due to increased depreciation costs of newly acquired
telecommunications and computer equipment. The increase was partially offset by
a decrease in the amortization expense related to the impairment of goodwill for
the year ended December 31, 1997.
Investment and interest income was $60,471 for the six months ended
June 30, 1998, compared to $14,519 for the six months ended June 30, 1997. The
increase was primarily due to interest earned on the net proceeds from the
Company's secondary public offering on Common Stock which was consummated in
July 1997.
Interest expense and related financing expenses for the six months
ended June 30, 1998 increased to $1,312,947 from $662,495 for the same period
during 1997, primarily due to the financing commitment from Wien Securities, the
interest expense and financing costs associated with the April 1998 Private
Placement and the interest on the NATW Notes and the CCI Note.
For the foregoing reasons, the Company incurred a net loss of
$7,718,494 for the six months ended June 30, 1998, compared to a net loss of
$4,146,816 for the six months ended June 30, 1997.
12
<PAGE>
Liquidity and Capital Resources
At June 30, 1998, the Company had cash and cash equivalents of
$1,215,055 and a working capital deficit of $16,228,573, compared to $7,867,566
of cash and cash equivalents and positive working capital of $620,737 at
December 31, 1997.
Net cash used in operating activities for the six months ended June 30,
1998 of $1,572,000 was primarily due to the Company's net loss and increases in
accounts receivable and inventory which increased due to the higher sales
volumes. The net cash used was partially offset by non-cash items aggregating
$2,444,435, such as depreciation and amortization, provision for bad debts and
financing costs; and was further offset by increases in accounts payable which
increased due to the Company's more favorable payment terms with its
telecommunications carriers and increases in deferred revenues as a result of
increased sales volumes. Net cash used in investing activities for the six
months ended June 30, 1998 consisted of $982,314 of capital expenditures and
$5,170,234 related to the NATW and CCI acquisitions.
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 the respective mergers, ceased providing such services
to the prepaid phone cards ("Access Phone Cards") that it had sold to each of
NATW and CCI, despite receiving payment for substantially all of the Access
Phone Cards. Additionally, each of NATW and CCI acquired additional phone cards
from Access after the respective mergers.In order to meet consumer obligations,
the Company was forced to purchase a total of approximately $2,025,000 of
telecommunications services from other carriers and incurred $250,000 of
additional card printing costs through August 13, 1998. Additional payments may
be required as a result of this situation. The Company is pursuing recovery of
all losses from Access. The Company estimates that the costs to provide
telecommunications services to the Access Phone Cards will aggregate
approximately $1,725,000. $737,000 of this amount has been allocated to the
former shareholders of NATW and CCI in accordance with the terms of the
respective merger agreements, which amount will be offset against amounts owed
by the Company to such former shareholders as set forth above (see Note 4). The
amount due from the former shareholders is estimated, is subject to final
resolution among the parties and, therefore, may be subject to change.
In April 1998, the Company completed a private placement
("April 1998 Private Placement"), pursuant to which the Company derived net
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
13
<PAGE>
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 estimated fair market
value of these warrants of $658,927, along with expenses associated with the
April 1998 Private Placement of $115,000, were recorded as deferred financing
costs and are being amortized to interest expense over the term of the April
1998 Warrants. The April 1998 Notes accrue interest at the rate of 10% per annum
and are payable on the earlier of January 15, 1999 and the date of the closing
of a Qualified Private Placement. The holders have the right at any time to
convert all or any portion of the April 1998 Notes into the number of shares of
Common Stock determined by dividing the unpaid principal amount of the April
1998 Notes by the lesser of: (i) $7.00 or (ii) the per share purchase price
being paid by the purchasers in the Qualified Private Placement.
In April 1998, certain holders of the December 1996 Notes agreed to
allow the Company to defer repayment of an aggregate of $2,400,000 of the
December 1996 Notes from November 1998 to January 1999.
In 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 fair market
value of these warrants of $792,000 was recorded as deferred financing fees and
is being amortized to interest expense over the term of the commitment.
The Company incurred significant net losses and negative cash flow from
operations during 1997 and 1996. Due in part to the acquisitions of NATW and CCI
and a continuation of negative cash flow from operations through June 30, 1998,
the Company's cash balance has declined to approximately $630,000 at August 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.
The assessment of goodwill recoverability, which is heavily dependent
on projected financial information, and the goodwill amortization period are
significant accounting estimates as contemplated by the American Institute of
Certified Public Accountants' Statement of Position 94-6, "Disclosure of Certain
Significant Risks and Uncertainties." Further, the Company operates in an
industry which is rapidly evolving and extremely competitive. It is reasonably
possible that the Company's accounting estimates with respect to the useful life
and ultimate recoverability of goodwill could change in the near term and that
the effect of such changes on the financial statements could be material. While
management currently believes that the recorded amount of goodwill is not
impaired, there can be no assurances that the Company's future results will
confirm this assessment or that a significant write-down or write-off of
goodwill will not be required in the future.
14
<PAGE>
At June 30, 1998, the Company had net operating loss carryforwards
("NOLs") aggregating approximately $26,000,000 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.
Year 2000 Compliance
The Company is in the process of evaluating the effects of modifying
its computer software systems to accommodate year 2000 transactions. The Company
has not determined the costs of such modifications and these costs could have a
material adverse effect on the Company's financial position.
15
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
During the three months ended June 30, 1998, the Company made the
following sales of unregistered securities:
<TABLE>
<CAPTION>
Consideration
Received and
Description of If Option, Warrant
Underwriting or Other or Convertible
Discounts to Market Exemption from Security, Terms of
Price Afforded to Registration Exercise or
Date of Sale Title of Security Number Sold Purchasers Claimed Conversion
- ---------------- ------------------ ------------ -------------------- --------------- ---------------------
<S> <C> <C> <C> <C> <C>
4/1/98 Options to 100,000 options granted - no 4(2) exercisable from
purchase other consideration 9/1/98 to 4/1/03 at an
Common Stock received by Company exercise price of
until exercise $7.125 per share
4/6/98 Convertible $1,250,000 Notes issued in 4(2) convertible into
Promissory Notes aggregate connection with private shares of common
principal amount placement stock at a conversion
rate of the lesser of
(I) $7.00 or (ii) the
offering price of a
private placement
which raises an
aggregate of $4
million of gross
proceeds for the
Company
4/6/98 Warrants 178,571 Warrants issued in 4(2) exercisable from
connection with private 4/6/98 through 4/6/01
placement at an exercise price
of $7.00 per share
4/13/98 Warrants 100,000 Warrants issued in 4(2) exercisable from
connection with an 4/13/98 through
agreement to provide 4/13/01 at an
financing to the exercise price of
Company, if necessary $7.50 per share
</TABLE>
Item 4. Submission of Matters to a Vote of Security Holders
On June 30, 1998, the Company held its annual meeting of stockholders,
at which the Company's stockholders considered the election of directors and the
approval of an amendment to the Company's 1994 Performance Equity Plan ("1994
Plan"). Stockholders voted to elect Robert Bogin and Shelly Finkel to serve as
directors for the ensuing three-year period until his respective successor is
elected and qualified. 4,079,823 shares were voted for and 64,519 shares were
withheld in Robert Bogin's election and 4,079,491 shares were voted for and
64,851 shares were withheld in Shelly Finkel's election. The stockholders also
voted on the approval of an amendment to the 1994 Plan to (i) increase the
number of shares of Common Stock available for issuance upon exercise of options
and other awards granted or which may be granted thereunder from 500,000 shares
to 1,500,000 shares and (ii) revise Section 4.2 of the 1994 Plan to (a) apply to
only non-employee directors and (b) increase the number of options granted
16
<PAGE>
annually to each non-employee director from 3,334 shares to 10,000 shares.
1,343,125 shares were voted for the amendment to the 1994 Plan, 136,368 shares
were voted against the amendment to the 1994 Plan, 54,367 shares abstained from
voting on the amendment to the 1994 Plan and 2,610,482 shares were not voted.
Item 5. Other Information
Pursuant to Rule 14a-4 promulgated by the Securities and Exchange
Commission, stockholders are advised that the Company's management shall be
permitted to exercise discretionary voting authority under proxies it solicits
and obtains for the Company's 1999 Annual Meeting of Stockholders with respect
to any proposal presented by a stockholder at such meeting, without any
discussion of the proposal in the Company's proxy statement for such meeting,
unless the Company receives notice of such proposal at its principal offices in
Philadelphia, Pennsylvania no later than May 15, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.42 Amendment to Employment Agreement between the Company and
David Tobin
10.43 Amendment to Employment Agreement between the Company and
Shelly Finkel
10.44 Amendment to Employment Agreement between the Company and
Robert Bogin
27 Financial Data Schedule (6/30/98)
(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.
17
<PAGE>
SIGNATURES
In accordance with requirements of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: August 14, 1998
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
BY: /s/ Michael Hoppman
------------------------------------------
Michael Hoppman, Vice President
and Chief Financial Officer
18
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
5697 Rising Sun Avenue
Philadelphia, Pennsylvania 19120
November 10, 1997
Mr. David Tobin
507 Baird Road
Merion, Pennsylvania 19066
Dear Mr. Tobin:
This letter sets forth certain amendments to the employment agreement dated
as of February 29, 1996 ("Employment Agreement") between you and Global
Telecommunication Solutions, Inc. ("Company"). Upon your review and acceptance
of the terms set forth herein, and in consideration of your acceptance of your
new title and duties commensurate therewith, the Employment Agreement shall be
immediately deemed amended as follows:
1. Section 1.1 of the Employment Agreement is hereby amended to provide
that, as of January 1, 1998, your title shall be Executive Vice President of
Business Affairs and General Counsel.
2. Section 2.1 of the Employment Agreement is hereby amended to provide
that, as of January 1, 1998, your Salary (as defined in the Employment
Agreement) shall be increased from $140,000 per annum to $150,000 per annum and
that you shall be entitled to receive, within 30 days of the end of each
calendar year of the Employment Term, a bonus (in addition to any other bonuses
that may be granted to you by the Board of Directors) in an amount equal to the
difference between $175,000 and your Salary at the year's end; and
3. Section 3 is amended as follows to read in its entirety, as follows:
"3. Term and Termination.
3.1 The term of this Agreement shall continue until December 31,
2000, unless sooner terminated as herein provided. Notwithstanding the
foregoing, the Company may terminate this Agreement without cause at
any time, upon 30 days' prior written notice to Executive in which
event, (a) Executive shall continue to receive his Salary, in
accordance with the Company's regular payroll schedule, through the
remainder of the Employment Term; and (b) Executive shall be paid,
within 30 days of any such termination, a cash bonus equal to the last
cash bonus paid to Executive pursuant to Section 2.1; provided,
however, that in the event of any termination without cause occurring
after any Change of Control, as defined in Section 3.6 below,
Executive shall be entitled to receive all payments set forth in (a)
and (b) above, in a single lump sum payment within seven days of such
termination.
3.2 If Executive dies during the term of this Agreement, this
Agreement shall thereupon terminate, except that the Company shall pay
to the legal representative of Executive's estate the Salary due
Executive pursuant to Section 2.1 hereof through the one-year
anniversary date of Executive's death, plus, within 30 days of
Executive' death, a cash bonus equal to the last cash bonus paid to
Executive
1
<PAGE>
pursuant to Section 2.1, less any amount Executive's estate receives
from any Company-sponsored or Company-paid source of insurance.
3.3 The Company, by notice to Executive, may terminate this
Agreement if Executive shall fail because of illness or incapacity to
render, for six consecutive months, services of the character
contemplated by this Agreement. Notwithstanding such termination, the
Company shall pay to Executive the Salary due Executive pursuant to
Section 2.1 hereof through the date of such notice, plus, within 30
days of such notice, a cash bonus equal to the last cash bonus paid to
Executive pursuant to Section 2.1, less any amount Executive receives
for such period from any Company-sponsored or Company-paid for source
of insurance, disability compensation or government program.
3.4 The Company, by notice to Executive, may terminate this
Agreement for cause. As used herein, "cause" shall include but not be
limited to: (a) the refusal or failure by Executive to carry out
specific directions of the Board of Directors or the Chairman of the
Board which are of a material nature and consistent with his status as
Executive Vice President of Business Affairs and General Counsel, or
the refusal or failure by Executive to perform a material part of
Executive's duties hereunder; (b) the commission by Executive of a
material breach of any of the provisions of this Agreement; (c) common
law fraud or dishonest action by Executive in his relations with the
Company or any of its subsidiaries or affiliates, or with any customer
or business contact of the Company or any of its subsidiaries or
affiliates ("dishonest" for these purposes shall mean Executive's
knowingly or recklessly making of a material misstatement or omission
for his personal benefit); or (d) the conviction of Executive of any
crime involving an act of moral turpitude. Notwithstanding the
foregoing, no "cause" for termination shall be deemed to exist with
respect to Executive's acts described in clauses (a) or (b) above,
unless the Company shall have given written notice to Executive
specifying the "cause" with reasonable particularity and, within ten
business days after such notice, Executive shall not have cured or
eliminated the problem or thing giving rise to such "cause"; provided,
however, that (i) any periodic breach or continual breaching after
notice and cure of any provision of clauses (a) or (b) above; or (ii)
a repeated breach after notice and cure of any provision of clauses
(a) or (b) above involving the same or substantially similar actions
or conduct shall be grounds for termination for cause without any
additional notice from the Company.
3.5 If, for any reason, (i) Executive terminates his employment
with the Company; (ii) the Company terminates Executive's employment
under the terms of this Agreement; or (iii) this Agreement expires
without being renewed or extended, then Executive will resign as a
director of the Company and all of its subsidiaries, effective upon
the occurrence of such termination or expiration, whichever is
applicable.
3.6 A "Change of Control" shall have occurred if (i) the Company,
as a going concern, is sold or otherwise acquired or (ii) any party or
group of parties not owning more than 5% of the outstanding voting
securities of the Company acquires in one or more transactions
beneficial ownership of more than 35% of such securities."
4. Except as provided herein, the Employment Agreement will remain in full
force and effect.
5. In consideration of the amended terms of your employment, you are hereby
being granted simultaneously with the execution of this letter, a cash bonus of
$25,000 (which bonus shall be deemed to have been paid pursuant to Section 2.1
of the Employment Agreement) and options to purchase 75,000 shares of the Common
Stock of the Company (under the Company's 1994 Performance Equity Plan) pursuant
to the terms of an option agreement to be executed by the Company and you
simultaneously herewith.
2
<PAGE>
If this sets forth our understanding with respect to amending the
Employment Agreement, please so indicate by signing in the space provided below.
Very truly yours,
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
/s/ Shelly Finkel
By:___________________________________
Shelly Finkel, Chairman of the Board
ACCEPTED AND AGREED TO:
/s/ David Tobin
- ----------------------------
DAVID TOBIN
3
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
5697 Rising Sun Avenue
Philadelphia, Pennsylvania 19120
November 10, 1997
Mr. Shelly Finkel
1385 York Avenue
New York, New York 10017
Dear Mr. Finkel:
This letter sets forth certain amendments to the employment agreement dated
as of November 2, 1994 ("Employment Agreement") between you and Global
Telecommunication Solutions, Inc. ("Company"). Upon your review and acceptance
of the terms set forth herein, and in consideration of your extension of your
employment term, the Employment Agreement shall be immediately deemed amended as
follows:
1. Section 2.1 of the Employment Agreement is hereby amended to provide
that, as of January 1, 1998, your Salary (as defined in the Employment
Agreement) shall be increased from $75,000 per annum to $150,000 per annum.
2. Section 3 is amended as follows to read in its entirety, as follows:
"3. Term and Termination.
3.1 The term of this Agreement shall continue until December 31, 2000,
unless sooner terminated as herein provided. Notwithstanding the foregoing,
the Company may terminate this Agreement without cause at any time, upon 30
days' prior written notice to Executive in which event, (a) Executive shall
continue to receive his Salary, in accordance with the Company's regular
payroll schedule, through the remainder of the Employment Term; and (b)
Executive shall be paid, within 30 days of any such termination, a cash
bonus equal to the last cash bonus paid to Executive pursuant to Section
2.2; provided, however, that in the event of any termination without cause
occurring after any Change of Control, as defined in Section 3.6 below,
Executive shall be entitled to receive all payments set forth in (a) and
(b) above, in a single lump sum payment within seven days of such
termination.
3.2 If Executive dies during the term of this Agreement, this
Agreement shall thereupon terminate, except that the Company shall pay to
the legal representative of Executive's estate the Salary due Executive
pursuant to Section 2.1 hereof through the one-year anniversary date of
Executive's death, plus, within 30 days of Executive's death, a cash bonus
equal to the last cash bonus paid to Executive pursuant to Section 2.2,
less any amount Executive's estate receives from any Company-sponsored or
Company-paid source of insurance.
1
<PAGE>
3.3 The Company, by notice to Executive, may terminate this Agreement
if Executive shall fail because of illness or incapacity to render, for six
consecutive months, services of the character contemplated by this
Agreement. Notwithstanding such termination, the Company shall pay to
Executive the Salary due Executive pursuant to Section 2.1 hereof through
the date of such notice, plus, within 30 days of such notice, a cash bonus
equal to the last cash bonus paid to Executive pursuant to Section 2.2,
less any amount Executive receives for such period from any
Company-sponsored or Company-paid for source of insurance, disability
compensation or government program.
3.4 The Company, by notice to Executive, may terminate this Agreement
for cause. As used herein, "cause" shall include but not be limited to: (a)
the refusal or failure by Executive to carry out specific directions of the
Board of Directors which are of a material nature and consistent with his
status as Chairman of the Board, or the refusal or failure by Executive to
perform a material part of Executive's duties hereunder; (b) the commission
by Executive of a material breach of any of the provisions of this
Agreement; (c) common law fraud or dishonest action by Executive in his
relations with the Company or any of its subsidiaries or affiliates, or
with any customer or business contact of the Company or any of its
subsidiaries or affiliates ("dishonest" for these purposes shall mean
Executive's knowingly or recklessly making of a material misstatement or
omission for his personal benefit); or (d) the conviction of Executive of
any crime involving an act of moral turpitude. Notwithstanding the
foregoing, no "cause" for termination shall be deemed to exist with respect
to Executive's acts described in clauses (a) or (b) above, unless the
Company shall have given written notice to Executive specifying the "cause"
with reasonable particularity and, within ten business days after such
notice, Executive shall not have cured or eliminated the problem or thing
giving rise to such "cause"; provided, however, that (i) any periodic
breach or continual breaching after notice and cure of any provision of
clauses (a) or (b) above; or (ii) a repeated breach after notice and cure
of any provision of clauses (a) or (b) above involving the same or
substantially similar actions or conduct shall be grounds for termination
for cause without any additional notice from the Company.
3.5 If, for any reason, (i) Executive terminates his employment with
the Company; (ii) the Company terminates Executive's employment under the
terms of this Agreement; or (iii) this Agreement expires without being
renewed or extended, then Executive will resign as a director of the
Company and all of its subsidiaries, effective upon the occurrence of such
termination or expiration, whichever is applicable.
3.6 A "Change of Control" shall have occurred if (i) the Company, as a
going concern, is sold or otherwise acquired or (ii) any party or group of
parties not owning more than 5% of the outstanding voting securities of the
Company as of November 10, 1997 acquires in one or more transactions
beneficial ownership of more than 35% of such securities."
3. Except as provided herein, the Employment Agreement will remain in full
force and effect.
4. In consideration of the amended terms of your employment, you are hereby
being granted simultaneously with the execution of this letter, options to
purchase 100,000 shares of the Common Stock of the Company (not under the
Company's 1994 Performance Equity Plan) pursuant
2
<PAGE>
to the terms of an option agreement to be executed by the Company and you
simultaneously herewith.
If this sets forth our understanding with respect to amending the
Employment Agreement, please so indicate by signing in the space provided below.
Very truly yours,
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
/s/ Robert Bogin
By:___________________________________
Robert Bogin, President
ACCEPTED AND AGREED TO:
/s/ Shelly Finkel
- ----------------------------
SHELLY FINKEL
3
<PAGE>
August 5, 1998
Mr. Robert Bogin
8221 Windsor View Terrace
Potomac, Maryland 20854
Re: Employment Agreement
Dear Bob:
This letter, effective upon your execution and its return, shall set forth
our complete agreement in connection with the modification (the "Amendment") to
the Employment Agreement between you and Global Telecommunication Solutions,
Inc. (the "Company"), dated as of August 1, 1997 (the "Employment Agreement")
and to the other matters set forth herein. This letter agreement, when
countersigned by you, amends the Employment Agreement.
1. Section 1 of the Employment Agreement is hereby deleted. Executive
acknowledges and agrees that effective August 31, 1998, Executive shall no
longer serve as President of the Company. Executive agrees to use his best
efforts to ensure an orderly transition and to provide the Company with
assistance in those projects that Executive is managing as of August 31, 1998.
2. Section 2.1 of the Employment Agreement shall be amended to read as
follows: "Effective September 1, 1998, the Company shall pay to Executive a base
salary ("Base Salary") at the aggregate rate of $100,000 per annum through the
Employment Term (as such term is defined in Section 3.1 below). Executive's
Salary shall be paid in equal, periodic installments, in accordance with the
Company's normal payroll procedures and shall be subject to withholding taxes
and other normal payroll deductions.
3. Executive and the Company acknowledge and agree that the Options granted
to Executive pursuant to Section 2.3 of the Employment Agreement shall remain
exercisable until December 31, 2001.
4. Section 2.4 of the Employment Agreement shall be amended to read as
follows: "Executive shall be entitled to continue to receive those health
insurance benefits which Executive is receiving as of the date of this Amendment
through the Employment Term; provided, however, in the event Executive becomes
employed after the date of this Amendment and, as a result of such employment,
Executive is eligible to participate in his new employer's group health
insurance plan, the Company's obligation to provide health insurance hereunder
shall terminate as of the date Executive is so eligible."
5. Section 2.6 of the Employment Agreement is hereby deleted.
6. Section 2.7 of the Employment Agreement is hereby deleted.
7. Sections 3.2 (b) and 3.2 (c) of the Employment Agreement are hereby
deleted.
8. The last sentence of Section 3.2(d) is hereby deleted.
<PAGE>
Mr. Robert Bogin
August 5, 1998
Page 2
9. Section 3.4 of the Employment Agreement is hereby deleted.
10. Before, during and after the Employment Term, you shall assist the
Company as necessary in its defense or prosecution of litigation currently
existing or commenced in the future arising out of matters transacted while you
were employed by the Company and you shall, subject to your employment or
business obligations, make yourself reasonably available for information
requests and consultation regarding business affairs and transactions of the
Company occurring or commenced during your employment by the Company.
Additionally, you agree that you will continue to work on the following matters
after August 31, 1998 until they are completed or until a representative of the
Company has taken over your duties in connection with that particular matter:
(i) financing agreement with Transamerica Business Credit Corporation ("TBCC")
in accordance with that certain proposal entered into between the Company and
TBCC dated July 23, 1998; (ii) private placement through Penn Merchant Group
pursuant to which the Company is attempting to sell 1,200,000 shares of its
common stock; and (iii) KPMG Peat Marwick ("KPMG") state tax minimization in
accordance with that certain letter from KPMG dated July 28, 1998. No additional
compensation shall be payable to you for any such assistance, information or
consultation; provided, however, the Company shall pay any reasonable out of
pocket costs to be incurred by you in fulfilling your obligations under this
Paragraph10.
11. In the event of a Change in Control, Executive shall be entitled to
receive all payments set forth in Section 2.1, as amended herein, of the
Employment Agreement, in a single lump sum payment within seven (7) days of such
Change in Control.
12. In the event the Company raises a significant amount of capital in
connection with the sale of its securities or the assumption of debt, then the
Company, at the Chairman's reasonable discretion, may choose to pay all payments
set forth in Section 2.1, as amended herein, in a single lump sum payment within
30 days after the closing of such transaction.
13. The Company acknowledges that it has accrued approximately $4 million
in liabilities that may be due and owing to certain state and federal taxing
authorities in connection with the sale of its prepaid phone cards and that such
liabilities are the liabilities of the Company as of the date of this Amendment.
Moreover, the Company acknowledges that to date, it has not satisfied those
accrued liabilities.
14. In executing this letter, you affirm that (i) you are competent and
that you understand and accept the nature, terms and scope of this letter and
the agreements contained herein, (ii) this letter constitutes your valid,
binding and enforceable obligation, enforceable in accordance with its terms,
(iii) this letter states the entire agreement between you and the Company and
that any other agreements which may have existed between you and the Company
(except the Employment Agreement as modified herein) are superseded by this
letter and are no longer effective, (iv) you acknowledge that by signing your
name below you have read, understand and accept each of the terms of this
letter, and that you have had sufficient opportunity to review it, to consult
with an attorney or other advisor, and that you are entering into it freely and
knowingly.
<PAGE>
Mr. Robert Bogin
August 5, 1998
Page 3
If this letter accurately sets forth our understanding and agreement with
respect to amending the Employment Agreement and other matters set forth herein,
please indicate by signing in the space provided below and returning this letter
agreement to me.
Very truly yours,
Global Telecommunication Solutions, Inc.
/s/ Shelly Finkel
By:______________________________
Shelly Finkel,
Chairman of the Board
Accepted and agreed to this 5th of August, 1998:
/s/ Robert Bogin
- -------------------------------------
Robert Bogin
<PAGE>
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