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 September 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)
10 Stow Road, Marlton, New Jersey 08053
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(Address of principal executive offices)
(609) 797-3434
---------------------------------------------
(Issuer's telephone number including area code)
5697 Rising Sun Avenue, Philadelphia, Pennsylvania 19120
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(Former name, former address and former fiscal year, if
changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of November 20, 1998, the issuer
had outstanding 7,959,938 shares of common stock, par value $.01 per share.
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Page
Part I. Financial Information
Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 1998
(pro forma - unaudited), September 30, 1998
(unaudited) and December 31, 1997............................3
Consolidated Statements of Operations - Three
and nine months ended September 30, 1998 and 1997
(unaudited)..................................................4
Consolidated Statements of Cash Flows - Nine months ended
September 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..........................14
Part II. Other Information
Item 1. Legal Proceedings....................................20
Item 2. Changes in Securities and Use of Proceeds............20
Item 5. Other Information....................................20
Item 6. Exhibits and Reports on Form 8-K.....................20
Signatures....................................................21
2
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro forma
Note 15
(Unaudited) (Unaudited)
September 30, September 30, December 31,
------------- ----------- -----------
1998 1998 1997
------------- ----------- -----------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,784,028 $ 1,211,593 $ 7,867,566
Accounts receivable, net of reserve
for doubtful accounts of $348,577,
$348,577 and $570,000 4,460,623 4,460,623 2,636,878
Inventories 476,649 476,649 174,112
Other assets 215,827 215,827 193,699
------------- ----------- -----------
Total current assets 6,937,127 6,364,692 10,872,255
------------- ----------- -----------
Goodwill, net 14,579,042 14,579,042 3,516,344
Property and equipment, net 1,763,274 1,763,274 1,485,348
Other assets, net 959,128 1,318,496 378,911
------------- ----------- -----------
Total assets $ 24,238,571 $24,025,504 $ 16,252,858
============ ============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 4,731,111 $ 4,731,111 $ 2,199,134
Accrued expenses 5,806,342 5,890,657 2,165,986
Deferred revenues 3,757,012 3,757,012 1,677,615
Estimated sales and excise tax liability (Note 7) 4,877,553 4,877,553 3,663,285
Convertible notes payable, current 2,562,250 2,562,250 -
Notes payable, net current (Note 15) 2,915,248 4,165,248 450,000
Notes payable to related parties, current (Note 4) 750,000 1,500,000 -
Capital lease obligation, current 13,397 13,397 95,298
------------- ----------- -----------
Total current liabilities 25,412,913 27,497,228 10,251,318
------------- ----------- -----------
Notes payable, net - - 1,886,982
Notes payable to related parties (Note 4) 250,000 500,000 -
Convertible notes payable - - 2,599,750
------------- ----------- -----------
Total liabilities 25,662,913 27,997,228 14,738,050
------------- ----------- -----------
Commitments and Contingencies (Notes 7, 8,13 and 14)
Stockholders' Equity (Deficit)
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 7,959,938, 5,996,821 and 5,084,870 79,600 59,967 50,848
Additional paid in capital 48,991,836 46,174,586 39,689,698
Accumulated deficit (50,448,129) (50,158,628) (37,942,443)
Deferred compensation (74,057) (74,057) (294,650)
Accumulated other comprehensive income 26,408 26,408 11,355
------------- ----------- -----------
Total stockholders' equity (deficit) (1,424,342) (3,971,274) 1,514,808
------------- ----------- -----------
Total liabilities and stockholders' equity (deficit) $ 24,238,571 $ 24,025,504 $ 16,252,858
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------------- -----------------------------
1998 1997 1998 1997
--------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 9,359,063 $ 5,412,586 $ 22,523,731 $14,017,001
Cost of sales 8,647,063 4,701,152 21,385,405 11,480,760
Estimated costs of carrier default (Note 4) - - 550,000 -
--------- ------------- ------------ ------------
Gross profit 712,000 711,434 588,326 2,536,241
--------- ------------- ------------ ------------
Selling, general and adminisitrative expenses 2,857,360 2,154,245 8,249,375 6,613,909
Restructuring charge (Note 5) 891,436 - 891,436 -
Depreciation and amortization 513,073 493,741 1,463,402 1,367,717
--------- ------------- ------------ ------------
Operating loss (3,549,869) (1,936,552) (10,015,887) (5,445,385)
--------- ------------- ------------ ------------
Interest income 16,864 123,983 77,335 138,503
Interest expense 964,686 346,214 2,277,633 998,717
--------- ------------- ------------ -------------
Loss before income taxes (4,497,691) (2,158,783) (12,216,185) (6,305,599)
Income taxes - - - -
--------- ------------- ------------ -------------
Net loss $(4,497,691) $(2,158,783) $(12,216,185) (6,305,599)
========= ============= ============ =============
Basic and diluted loss per share $ (0.75) $ (0.47) $ (2.08) $ (2.20)
========= ============= ============ =============
Weighted average shares outstanding - basic and 5,993,916 4,604,832 5,873,128 2,860,616
diluted ========= ============= ============ =============
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------------
1998 1997
--------- --------------
<S> <C> <C>
Operating activities:
Net loss
(12,216,185) $ (6,305,599)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,463,403 1,367,717
Provision for bad debts 334,655 82,902
Amortization of deferred compensation 419,193 133,705
Amortization of unearned discount 578,266 578,266
Amortization of deferred financing charges 1,134,779 124,311
Issuance of stock as compensation - 50,000
Loss on disposal of fixed assets 269,382 73,902
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable (2,158,400) (1,046,913)
Inventories (302,537) (155,991)
Deferred costs 32,764 320,084
Other assets (43,278) (294,687)
Accounts payable 2,531,977 (427,445)
Accrued expenses 3,242,689 350,681
Deferred revenues 2,079,397 (1,511,752)
Sales and excise taxes payable 1,214,268 954,050
----------- ----------
Net cash used by operating activities (1,419,627) (5,706,769)
----------- ---------
Investing activities:
Purchases of property and equipment (1,233,939) (598,817)
Acquisitions and related costs (5,070,959) -
----------- ----------
Net cash used in investing activities (6,304,898) (598,817)
----------- ----------
Financing Activities:
Proceeds from issuance of common stock - 13,526,586
Proceeds from bridge loan 1,250,000 -
Proceeds from exercise of options 400 8,228
Payments to affiliates - (1,073,921)
Payments on capital lease obligations (81,901) (39,336)
Proceeds from the exercise of warrants - 2,500,000
Payments of deferred finance fees (115,000) (70,044)
----------- ----------
Net cash provided by financing activities 1,053,499 14,851,513
---------- ----------
Effects of exchange rates on cash 15,053 (6,896)
---------- ----------
Net decrease in cash (6,655,973) 8,539,031
Cash and cash equivalents, beginning of period 7,867,566 1,352,322
----------- ----------
Cash and cash equivalents, end of period $ 1,211,593 $ 9,891,353
=========== ==========
Supplemental disclosures:
Cash paid for interest $ 172,078 $ 105,165
=========== ===========
Deferred finance fees 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 $ 37,500 $ 187,750
=========== ===========
Issuance of common stock in connection with acquisition $ 4,806,580 $ -
=========== ===========
Capital leases $ - $ 61,005
=========== ===========
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
September 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 nine months ended
September 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 nine months
ended September 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 were originally
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 is required to
pay up to $2,000,000 (the "Earn Out") in additional consideration if
certain sales and financial objectives are achieved. For the nine
months ended September 30, 1998, $409,630 of the Earn Out has been
recorded as additional consideration. 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.
6
<PAGE>
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, of which 47,891 shares were
subsequently contributed back to the Company (see below) 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 was originally
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 (see Note 15).
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 the Merger
Date. The following is a preliminary allocation of the purchase price:
<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 $5.30 $5.30 $5.30
restricted common stock 20 days prior to
the closing date (using a 15% discount to
market price)
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
Earn out payable -- 409,630 409,630
Balance sheet adjustment 45,949 91,852 137,801
Estimated carrier obligation in connection 285,124 726,424 1,011,548
with mergers, net
Estimated accrued acquisition costs 50,000 50,000 100,000
------ ------ -------
Total consideration 5,007,878 6,957,681 11,965,559
Estimated fair value of assets acquired 70,949 116,852 187,801
Goodwill $4,936,929 $6,840,829 $11,777,758
</TABLE>
Pursuant to the merger agreement with NATW, the Company is required to
pay the Earn Out (up to $2,000,000 in additional consideration) if
certain sales and financial objectives are achieved. Accordingly, upon
occurrence of such events, the additional consideration will increase
goodwill. For the nine months ended September 30, 1998, $409,630 of the
Earn Out has been recorded as additional consideration.
7
<PAGE>
The Company has not allocated any of the purchase price to other
intangible assets, such as the value of non-compete agreements or
customer lists, as such valuations are not currently available. In the
event such other intangible assets are identified in the future, the
useful life of such assets may differ from the goodwill amortization
period of 15 years currently reflected in the pro forma combined
statement of operations and appropriate adjustments to the financial
statements will be made.
Pursuant to the respective merger agreements, the Company and the
former shareholders of NATW and CCI agreed to share certain costs
related to any underlying carrier's failure to provide
telecommunications services to phone cards purchased by NATW and CCI
prior to the mergers. In February 1998, Access Telecom, Inc.
("Access"), a primary provider of telecommunications services to NATW
and CCI prior to and after the respective mergers, ceased providing
such services to the prepaid phone cards that it had sold to each of
NATW and CCI, despite receiving payment for substantially all of the
phone cards. The Company estimates that the cost to provide
telecommunications services related to such cards will aggregate
$1,761,097. For purposes of the financial statements contained herein,
$451,185 and $298,364 of the estimated costs has been allocated to the
former shareholders pursuant to indemnification arrangements.
In November 1998, the Company and the former shareholder of CCI reached
a settlement on the amount due to the Company related to Access.
Pursuant to the terms of the merger agreement, the former shareholder
contributed back to the Company 47,891 shares of common stock issued as
part of the merger consideration with a fair market value of $69,867 in
consideration of $298,364 that he owed to the Company. The reserve for
the loss on the settlement of $229,497 was provided for in the
financial statements for the nine months ended September 30, 1998 (see
Note 15).
The Company and the former shareholders of NATW have not reached a
settlement on the amounts due to the Company related to Access. It is
possible that the actual settlement could materially differ from the
$451,185 currently reflected as a deferred charge in other assets.
In addition to the $1,761,097 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 nine months ended September 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.
Nine Months Ended
September 30,
1998 1997
----------- -----------
Net sales $ 24,838,250 $29,408,212
Net loss $(12,747,204) $(5,760,376)
Net loss per share $(2.13) $(1.53)
8
<PAGE>
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) Restructuring
During the third quarter of 1998, the Company recorded a $891,436
restructuring charge related to the closing of its Canadian subsidiary,
costs associated with consolidating the Company's operations and the
modification of employment agreements with two of the Company's
executive officers. The Company closed its Canadian subsidiary to focus
on selling its products domestically. The Company consolidated its
operations from five to two locations with the intent of reducing
operating expenses, including salaries and benefits, by eliminating
duplicate positions at the various locations. As part of this
consolidation, two executives' employment agreements were amended,
which included the termination of their employment. The components of
the charge, which is classified as a separate line item in the
accompanying statement of operations, are as follows:
Canadian subsidiary closing costs $ 65,111
Consolidation costs $445,111
Compensation related to amendments to
executive employment agreements $381,214
--------
$891,436
Costs associated with the closure of the Canadian subsidiary primarily
related to severance costs associated with employees terminated during
the third quarter of 1998. Total revenues and net income associated
with the Canadian subsidiary were not material to the results of
operations. Costs associated with consolidating the Company's
operations included severance costs of $26,878 associated with
employees terminated during the third quarter of 1998, incremental
operating costs of $95,000 associated with closing the Company's call
center and lease termination costs of $97,236 associated with moving
the Company's corporate offices. In addition, fixed assets net of
salvage costs of $225,995 were disposed of in conjunction with the
Company's consolidation. The activities incorporated in the
restructuring were substantially completed by September 30, 1998.
Approximately $599,960 remains accrued at September 30, 1998,
consisting primarily of accrued severance costs and lease termination
costs.
(6) New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 requires that all items
that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial
statements. The Company has adopted this statement effective January 1,
1998. The Company's only component of other comprehensive income is the
foreign currency translation adjustment. The total comprehensive loss
is $12,201,132 and $6,312,495 for the nine months ended September 30,
1998 and 1997, respectively.
9
<PAGE>
(7) 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.
(8) 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 initially
recorded as deferred compensation and is being amortized to expense
over the term of the agreement.
(9) 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.
(10) April 1998 Private Placement
In April 1998, the Company completed a private placement (the "April
1998 Private Placement"), pursuant to which it derived net proceeds of
approximately $1,135,000 through the sale of $1,250,000 convertible
subordinated promissory notes ("April 1998 Notes") and warrants to
purchase 178,571 shares of common stock ("April 1998 Warrants"). The
April 1998 Warrants are exercisable at a price ("Conversion Price")
equal to the lesser of (i) $7.00 or (ii) the offering price per share
in a "Qualified Private Placement," i.e., a private placement which
raises an aggregate of $4 million of gross proceeds for the Company.
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 Notes. 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 Conversion Price (see Note 15).
(11) Financing Commitment and Loan Deferrals
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 became exercisable in September 1998 and will remain
exercisable until April 2003. The fair market value of these
10
<PAGE>
warrants and options of $792,000 were recorded as deferred financing
fees and are being amortized to interest expense over the term of the
commitment.
In April 1998, certain holders of promissory notes issued in a private
placement consummated by the Company in December 1996 agreed to allow
the Company to defer repayment of an aggregate of $2,400,000 of such
notes from November 1998 to January 1999.
(12) Regulatory Charges
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 yet 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 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 additional material liabilities.
Pursuant to the Telecommunications Act, the FCC, in September 1996,
adopted new rules governing the pay telephone industry that, among
other things, established a means by which all pay telephone service
providers are compensated for every interstate and intrastate call
completed from their pay telephones, including calls that utilize
toll-free access and access codes ("Dial Around Compensation"). On July
1, 1997, the United States Court of Appeals for the District of
Columbia Circuit ("Court of Appeals") remanded to the FCC for further
consideration certain rules which could have a material adverse effect
on the Company. The Court of Appeals found that the FCC's determination
setting the per-call compensation at $0.35 was unjustified.
Additionally, the Court of Appeals found that the FCC acted arbitrarily
and capriciously in establishing an interim compensation plan which
required that, during the first year, only interexchange carriers
generating $100 million or more in annual revenues must pay a pro rata
portion of $45.85 per month per pay telephone (based upon the pro rata
share of the total annual revenues for carriers generating $100 million
or more). The Court of Appeals upheld the FCC's determination that
interexchange carriers should track compensable calls and compensate
pay telephone providers for toll free and access code calls.
Additionally, the Court of Appeals upheld interexchange carriers'
rights to charge long distance resellers or customers that own toll
free access numbers or access codes (such as the Company) for any such
compensable calls. In October 1997, the FCC adopted new rules governing
Dial Around Compensation, pursuant to which each pay telephone owner is
entitled to be compensated $0.284 for each dial around call originating
from a pay telephone. On May 15, 1998, the Court of Appeals found that
the FCC's explanation of the derivation of the $0.284 was rate
inadequate and remanded the rule back to the FCC for further
explanation. Also, in October 1997, the FCC issued an order waiving,
until March 9, 1998, the local exchange carriers' obligation to deliver
an info-coding digit to the interexchange carriers indicating that the
telephone call originated from a pay telephone. The Company, along with
other phone card companies and the International Telecard Association,
filed a petition requesting that the FCC reconsider its decision to
grant the waiver. On delegated authority, the FCC's common carrier
bureau denied the request and extended the waiver through October 1998
for most local exchange carriers. The resolution of this matter by the
FCC and, if applicable, the federal courts is uncertain. While the
Company believes that it has adequately provided for Dial Around
Compensation, it is possible that the FCC may enact regulations
concerning Dial Around Compensation in a manner which could result in
additional material liabilities.
(13) Liquidity and Recoverability of Goodwill
The Company incurred significant net losses and negative cash flow
from operations during 1996 and 1997. Due in part to the NATW and CCI
11
<PAGE>
mergers, and a continuation of negative cash flow from operations
through September 30, 1998, the Company's cash balance has declined to
approximately $1,300,000 at November 20, 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 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 $1,135,000 (see Note 10),
obtained a $2,000,000 financing commitment (see Note 11) and completed
a private placement in October 1998 (the "October 1998 Private
Placement") which generated net proceeds of $1,846,750 (see Note 15).
In addition, the Company converted the $1,000,000 CCI Note into common
stock during the fourth quarter of 1998 (see Note 15) and has obtained
deferrals of certain other promissory notes payable aggregating
$3,400,000 from the fourth quarter of 1998 to the first quarter of
1999 (see Notes 4 and 11). The Company believes that the proceeds from
the April 1998 Private Placement, the deferrals of certain promissory
notes and the proceeds from the October 1998 Private Placement,
together with the conversion of the CCI Note into common stock, will
enable the Company to continue its operations 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 further 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 and continues to generate
significant net losses and negative cash flow. 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 appropriate at September 30, 1998,
there can be no assurance that the Company's future results will
confirm this assessment or that an additional write-down or write-off
of goodwill will not be required in the future.
(14) Litigation
In June 1998, IDB WorldCom Services, Inc. ("Worldcom") commenced an
action against the Company in the Court of Common Pleas of
Philadelphia, Pennsylvania. The complaint alleges that from March 1995
through March 1997, Worldcom provided certain long distance and other
telecommunications services for which it was not paid. Worldcom alleges
that the Company owes Worldcom $698,419, inclusive of interest, for
such services. The Company has retained counsel in this matter and will
vigorously defend this action. The Company believes that it has
adequately accrued for this liability, after giving effect to the
Company's offsets and counterclaims.
(15) Subsequent Events
The following transactions are reflected in the accompanying unaudited
September 30, 1998 pro forma balance sheet:
October 1998 Private Placement
In October 1998, the Company consummated the October 1998 Private
Placement from which it derived net proceeds of $1,846,750 through the
sale of 1,198,000 shares of common stock for a purchase price of
$1.625 per share. The Company used a portion of the proceeds to repay
12
<PAGE>
$1,250,000 aggregate principal amount of the April 1998 Notes and
accrued interest of $24,315. In addition, in lieu of compensating
Pennsylvania Merchant Group ("PMG") for serving as placement agent of
the October 1998 Private Placement, the Company reduced the exercise
price of warrants to purchase 100,000 shares issued to PMG in July
1997 in connection with the provision of financial consulting services
from $7.00 per share to $1.625 per share. In addition, deferred
finance charges of $289,501, which are included in other assets, will
be amortized to financing costs in the fourth quarter of 1998 (see
Note 10).
November 1998 Debt Restructuring
In November 1998, J. Mark Rubenstein resigned as a director and officer
of the Company. Mr. Rubenstein was the former shareholder of CCI who
joined the Company in February 1998 when CCI merged with the Company.
In connection with his departure from the Company, Mr. Rubenstein sold
to certain investors, including Shelly Finkel, Chairman of the Board of
the Company, Michael Hoppman, Chief Financial Officer of the Company
and Barry Rubenstein, a principal stockholder (the "Investors") an
aggregate of 353,393 shares of common stock and the $1,000,000 CCI Note
for an aggregate purchase price of $575,000. Mr. Rubenstein also
contributed back to the Company 47,891 shares of common stock issued as
part of the merger consideration with a fair market value of $69,867 in
consideration of the $298,364 that he owed the Company. The reserve for
the loss on the settlement of $229,497 was recorded in the accompanying
consolidated statement of operations for the nine months ended
September 30, 1998 (see Note 4).
In November 1998, the Company offered the Investors the opportunity to
convert the $1,000,000 CCI Note into shares of common stock at a
conversion rate of $1.23 per share (such price being equal to the
average closing price of a share of common stock during October 1998).
The Investors accepted the conversion offer and converted the CCI Note
into an aggregate 813,008 shares common stock. The Investors forgave
interest of $60,000 due on the CCI Note. There was no gain or loss
recognized on the conversion of the CCI Note.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-QSB and in future filings by the Company with the
Securities and Exchange Commission ("SEC"), in the Company's press releases and
in oral statements made with the approval of an authorized executive officer of
the Company, the words or phrases "will likely result," "management expects" or
"the Company expects," "will continue," "is anticipated," "estimated" or similar
expressions (including confirmations by an authorized executive officer of the
Company of any such expressions made by a third party with respect to the
Company) are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Readers are
cautioned not to place undue reliance on any such forward-looking statements,
each of which speak only as of the date made. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company has no obligation to publicly release the results 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 September 30, 1998 Compared to Three Months Ended
September 30, 1997
Net sales for the third quarter of 1998 were $9,359,063 compared to
$5,412,586 for the third quarter of 1997. The primary reason for the increase in
net sales was due to the acquisitions, through mergers, of Networks Around the
World, Inc. ("NATW") and Centerpiece Communications, Inc. ("CCI") in February
1998. Net sales of promotional cards decreased to less than 1% of net sales in
the third quarter of 1998 from 6% of net sales in the third 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 8% of net sales for the third
quarter of 1998, from 13% 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, such as Universal Service Fees
and Dial Around Compensation, imposed on the Company 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 $2,857,360 (30%
of net sales) for the third quarter of 1998, compared to $2,154,245 (40% of net
sales) for the third 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, (ii) increased operating expenses due to the
NATW and CCI mergers and (iii) the $229,497 loss related to the settlement of an
indemnification arrangement with a related party.
During the third quarter of 1998, the Company recorded a $891,436
restructuring charge related to the closing of its Canadian subsidiary, costs
associated with consolidating the Company's operations and the modification of
employment agreements with two of the Company's executive officers. The Company
closed its Canadian subsidiary to focus on selling its products domestically.
The Company consolidated its operations from five to two locations with the
intent of reducing operating expenses, including salaries and benefits, by
eliminating duplicate positions at the various locations. As part of this
14
<PAGE>
consolidation, two executives' employment agreements were amended, which
included the termination of their employment. Approximately $599,960 remains
accrued at September 30, 1998, consisting primarily of accrued severance costs
and lease termination costs.
Depreciation and amortization expense increased to $513,073 for the third
quarter of 1998 from $493,741 for the third 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.
Investment and interest income was $16,864 for the third quarter of 1998,
compared to $123,983 for the third quarter of 1997. The decrease was primarily
due to interest earned on the net proceeds from the Company's secondary public
offering of Common Stock which was consummated in July 1997.
Interest expense and related financing expenses for the third quarter of
1998 increased to $964,686 from $346,214 for the third quarter of 1997,
primarily due to the cost of the $2,000,000 financing commitment (defined
below), the interest expense and financing costs associated with the private
placement consummated by the Company in April 1998 ("April 1998 Private
Placement") and the interest on the NATW Notes and the CCI Note (defined below).
For the foregoing reasons, the Company incurred a net loss of $4,497,691
for the third quarter of 1998 compared to a net loss of $2,158,783 for the third
quarter of 1997.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Net sales for the nine months ended September 30, 1998 were $22,523,731
compared to $14,017,001 for the same period during 1997. The primary reason for
the increase in net sales was due to the NATW and CCI mergers in February 1998.
Net sales of promotional cards decreased to less than 1% of net sales during the
nine months ended September 30, 1998 from 13% of net sales in the nine months
ended September 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 3% of net sales for the nine
months ended September 30, 1998, from 18% 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"). 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, such as Universal Service Fees and Dial Around Compensation,
imposed on the Company 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 $8,249,375 (37%
of net sales) for the nine months ended September 30, 1998, compared to
$6,613,909 (47% 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, (ii) increased operating expenses
due to the NATW and CCI mergers and (iii) the $229,497 loss related to the
settlement of an indemnification arrangement with a related party.
Depreciation and amortization expense increased to $1,463,402 for the nine
months ended September 30, 1998 from $1,367,717 for the nine months ended
September 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
15
<PAGE>
impairment of goodwill for the year ended December 31, 1997.
Investment and interest income was $77,335 for the nine months ended
September 30, 1998, compared to $138,503 for the nine months ended September 30,
1997. The decrease was primarily due to interest earned on the net proceeds from
the Company's secondary public offering of Common Stock which was consummated in
July 1997.
Interest expense and related financing expenses for the nine months ended
September 30, 1998 increased to $2,277,633 from $998,717 for the same period
during 1997, primarily due to the $2,000,000 Commitment, 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 $12,216,185
for the nine months ended September 30, 1998, compared to a net loss of
$6,305,599 for the nine months ended September 30, 1997.
Liquidity and Capital Resources
At September 30, 1998, the Company had cash and cash equivalents of
$1,211,593 and a working capital deficit of $21,132,536, compared to $7,867,566
and $620,937, respectively, at December 31, 1997.
Net cash used in operating activities for the nine months ended September
30, 1998 of $1,419,627 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
$4,199,678, 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 nine
months ended September 30, 1998 consisted of $1,233,939 of capital expenditures
and $5,070,959 related to the NATW and CCI mergers.
In February 1998, the Company acquired, through a merger, all of the
outstanding capital stock of NATW for a purchase price comprised of (i)
$2,000,000 in cash, (ii) an aggregate of 505,618 shares of common stock and
(iii) $1,000,000 aggregate principal amount of promissory notes ("NATW Notes"),
secured by substantially all of the assets of NATW. The NATW Notes accrue
interest at the rate of 6% per annum and were originally 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 is required to pay up to $2,000,000 (the "Earn Out") to one of the NATW
stockholders if certain sales and financial objectives are achieved. For the
nine months ended September 30, 1998, $409,630 was accrued for with respect to
the Earn Out. 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, of which 47,891 shares
were subsequently contributed back to the Company (see below) 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 was originally 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 November 1998, the CCI Note was converted into common stock
(see below).
16
<PAGE>
Pursuant to the respective merger agreements, the Company and the former
shareholders of NATW and CCI agreed to share certain costs related to any
underlying carrier's failure to provide telecommunications services to phone
cards purchased by NATW and CCI prior to the mergers. In February 1998, Access
Telecom, Inc. ("Access"), a primary provider of telecommunications services to
NATW and CCI prior to and after the respective mergers, ceased providing such
services to the prepaid phone cards that it had sold to each of NATW and CCI,
despite receiving payment for substantially all of the phone cards. The Company
estimates that the cost to provide telecommunications services related to such
cards will aggregate $1,761,097. For purposes of the financial statements
contained herein, $451,185 and $298,364 of the estimated costs has been
allocated to the former shareholders pursuant to indemnification arrangements.
In November 1998, the Company and the former shareholder of CCI reached a
settlement on the amount due to the Company related to Access. Pursuant to the
terms of the merger agreement, the former shareholder contributed back to the
Company 47,891 shares of common stock issued as part of the merger consideration
with a fair market value of $69,867 in consideration of $298,364 that he owed to
the Company. The reserve for the loss on the settlement of $229,497 was provided
for in the financial statements for the nine months ended September 30, 1998
(see below).
The Company and the former shareholders of NATW have not reached a
settlement on the amounts due to the Company related to Access. It is possible
that the actual settlement could materially differ from the $451,185 currently
reflected as a deferred charge in other assets.
In addition to the $1,761,097 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 nine months ended
September 30, 1998.
In April 1998, the Company completed the April 1998 Private Placement,
pursuant to which it derived net proceeds of approximately $1,135,000 through
the sale of $1,250,000 convertible subordinated promissory notes ("April 1998
Notes") and warrants ("April 1998 Warrants") to purchase 178,571 shares of
Common Stock. The April 1998 Warrants are exercisable at a price ("Conversion
Price") equal to the lesser of (i) $7.00 or (ii) the offering price per share in
a "Qualified Private Placement," i.e., a private placement which raises an
aggregate of $4 million of gross proceeds for the Company. The April 1998
Warrants are exercisable until April 2001. The April 1998 Notes accrue interest
at the rate of 10% per annum and are payable on the earlier of January 15, 1999
or the date of the closing of a Qualified Private Placement. The holders have
the right at any time to convert all or any portion of the April 1998 Notes into
the number of shares of common stock determined by dividing the unpaid principal
amount of the April 1998 Notes by the Conversion Price.
In April 1998, certain holders of promissory notes issued in a private
placement consummated by the Company in December 1996 agreed to allow the
Company to defer repayment of an aggregate of $2,400,000 of such 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 became exercisable in
September 1998 and will remain exercisable until April 2003.
17
<PAGE>
In October 1998, the Company consummated a private placement ("October 1998
Private Placement") from which it derived net proceeds of $1,846,750 through the
sale of 1,198,000 shares of common stock for a purchase price of $1.625 per
share. The Company used a portion of the proceeds to repay $1,250,000 aggregate
principal amount of April 1998 Notes and accrued interest of $24,315. In
addition, in lieu of compensating Pennsylvania Merchant Group ("PMG") for
serving as placement agent of the October 1998 Private Placement, the Company
reduced the exercise price of warrants to purchase 100,000 shares issued to PMG
in July 1997 in connection with the provision of financial consulting services
from $7.00 per share to $1.625 per share.
In November 1998, J. Mark Rubenstein resigned as a director and officer of
the Company. Mr. Rubenstein was the former shareholder of CCI who joined the
Company in February 1998 when CCI merged with the Company. In connection with
his departure from the Company, Mr. Rubenstein sold to certain investors,
including Shelly Finkel, Chairman of the Board of the Company, Michael Hoppman,
Chief Financial Officer of the Company and Barry Rubenstein, a principal
stockholder (the "Investors") an aggregate of 353,393 shares of common stock and
the $1,000,000 CCI Note for an aggregate purchase price of $575,000. Mr.
Rubenstein also contributed back to the Company 47,891 shares of common stock in
consideration of the $298,364 that he owed to the Company relating to Access.
In November 1998, the Company offered the Investors the opportunity to
convert the $1,000,000 CCI Note into shares of common stock at a conversion rate
of $1.23 per share (such price being equal to the average closing price of a
share of common stock during October 1998). The Investors accepted the
conversion offer and converted the CCI Note into an aggregate 813,008 shares
common stock. The Investors forgave interest of $60,000 due on the CCI Note.
There was no gain or loss recognized on the conversion of the CCI Note.
The Company incurred significant net losses and negative cash flow from
operations during 1996 and 1997. Due in part to the NATW and CCI mergers, and a
continuation of negative cash flow from operations through September 30, 1998,
the Company's cash balance has declined to approximately $1,300,000 at November
20, 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 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 $1,135,000, obtained the $2,000,000 Commitment and completed
the October 1998 Private Placement which generated net proceeds of $1,846,750.
In addition, the Company converted the $1,000,000 CCI Note into common stock
during the fourth quarter of 1998 and has obtained deferrals of certain other
promissory notes payable aggregating $3,400,000 from the fourth quarter of 1998
to the first quarter of 1999. The Company believes that the proceeds from the
April 1998 Private Placement, the deferrals of certain promissory notes and the
proceeds from the October 1998 Private Placement, together with the conversion
of the CCI Note into common stock, will enable the Company to continue its
operations 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 further 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 and continues to
generate significant net losses and negative cash flow. 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
appropriate at September 30, 1998, there can be no assurance that the Company's
future results will confirm this assessment or that an additional write-down or
write-off of goodwill will not be required in the future.
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<PAGE>
At September 30, 1998, the Company had net operating loss carryforwards
("NOLs") aggregating approximately $30,000,000 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 has reviewed its critical computer systems and other
computer-based operational equipment to identify how the Company may be impacted
by the Year 2000 problem. The Year 2000 problem arises because many computer
systems may not recognize the correct date at the rollover of the two-digit year
value to 00. This could cause systems to fail or process transactions
incorrectly, thus causing disruptions to operations or an inability of the
Company to provide services to its customers. The Company has contacted the
suppliers of its computer-based systems and has received written confirmation
from its suppliers that its critical computer software and hardware is Year 2000
compliant. The Company estimates the costs of its Year 2000 compliance issues
will be less than $100,000, which is not expected to be material to the
Company's financial position, cash flow or results of operations.
As part of the Company's Year 2000 compliance review, the Company is in the
process of contacting its primary vendors and customers to determine the extent
to which the Company is vulnerable to those third parties' failure to remediate
their Year 2000 compliance issues. The Company is in the early stages of this
phase of its Year 2000 review and will continue to contact its significant
vendors and customers as part of its Year 2000 compliance review. However, there
can be no guarantee that the systems of the companies on which the Company's
business relies will be timely converted or that failure to convert by another
company will not have a material adverse effect on the Company and its
operations.
The Company believes that the risks associated with the Year 2000 issues
primarily relate to the failure of its suppliers and key customers to timely
address their Year 2000 issues. Such failure could result in significant
disruption to the Company's daily operations. While the Company believes that
its Year 2000 compliance review procedures will adequately address the Company's
internal Year 2000 issues, until the Company receives responses from its
significant vendors and customers, the overall risks associated with the Year
2000 issue remain difficult to accurately describe and quantify, and there can
be no guarantee the Year 2000 issue will not have a material adverse effect on
the Company's business, operating results and financial position.
The Company currently has not implemented a Year 2000 contingency plan. The
Company intends to devote the resources necessary to assure that Year 2000
compliance issues are resolved. The Company plans to develop and implement a
contingency plan by the end of April 1999 in the event the Company's Year 2000
compliance initiatives, particularly those that relate to third parties, fall
behind schedule.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In June 1998, IDB WorldCom Services, Inc. ("Worldcom") commenced an action
against the Company in the Court of Common Pleas of Philadelphia, Pennsylvania.
The complaint alleges that from March 1995 through March 1997, Worldcom provided
certain long distance and other telecommunications services for which it was not
paid. Worldcom alleges that the Company owes $698,419.36, inclusive of interest,
for such services. The Company has retained counsel in this matter and will
vigorously defend this action. The Company believes that it has adequately
accrued for this liability, after giving effect to the Company's offsets and
counterclaims.
Item 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
During the three months ended September 30, 1998, the Company made the
following sales of unregistered securities:
<TABLE>
<CAPTION>
Consideration
Received and
Description of If Option, Warrant
Underwriting or or Convertible
Other Discounts to Exemption from Security, Terms of
Market Price Afforded Registration Exercise or
Date of Sale Title of Security Number Sold to Purchasers Claimed Conversion
- ------------- ----------------- ----------- ---------------------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
9/4/98 Common Stock 4,049 conversion of 6% 4(2) N/A
Senior Secured
Convertible Promissory
Notes
</TABLE>
Item 5. Other Information
On September 16, 1998, the Company was notified by the Nasdaq Stock Market
that its securities were delisted from the Nasdaq SmallCap Market at the close
of business on such date for failure to meet the Nasdaq listing maintenance
requirements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.45 Amendment to Employment Agreement between the Company and David
Tobin
10.46 Amendment to Merger Agreement by and among the Company, CCI and
J. Mark Rubenstein
10.47 Agreement between the Company and J. Mark Rubenstein
10.48 Termination of Employment Agreement between the Company and J.
Mark Rubenstein
27 Financial Data Schedule (9/30/98)
(b) Current Reports on Form 8-K
None.
20
<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: November 20, 1998
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
/s/ Michael Hoppman
By:______________________________________
Michael Hoppman, Vice President
and Chief Financial Officer (and principal
accounting officer)
21
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
10.45 Amendment to Employment Agreement between the Company and David Tobin
10.46 Amendment to Merger Agreement by and among the Company, CCI and J. Mark
Rubenstein
10.47 Agreement between the Company and J. Mark Rubenstein
10.48 Termination of Employment Agreement between the Company and J. Mark
Rubenstein
27 Financial Data Schedule (9/30/98)
22
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
5697 RISING SUN AVENUE
PHILADELPHIA, PENNSYLVANIA 19120
As of September 30, 1998
Mr. David Tobin
5930 N.W. 96th Drive
Parkland, Florida 33076
Re: Employment Agreement
Dear David:
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 February 29,
1996, as amended by agreement dated November 10, 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 September 30, 1998, Executive
shall no longer serve as Executive Vice President of Business Affairs
and General Counsel 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 September
30, 1998.
2. Section 2.1 of the Employment Agreement is amended to read as follows:
"As of October 1, 1998, the Company shall pay to Executive a base
salary ("Salary") of $87,500 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 all Options
granted to date 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 such
health insurance and other benefits and perquisites no less favorable
than such as are afforded to any other senior executive of the Company
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
<PAGE>
Mr. David Tobin
As of September 30, 1998
Page 2
Executive is so eligible."
5. Section 2.7 has been added to the Employment Agreement to read as
follows: "The Company shall reimburse Executive $4,500 for typical
moving expenses within 30 days of the date of the Agreement."
6. Section 3.4 of the Employment Agreement is hereby deleted.
7. Section 3.5 of the Employment Agreement is hereby deleted.
8. 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. 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 Paragraph 8.
9. 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.
10. 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.
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 amended and 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. David Tobin
As of September 30, 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/ Randy Cherkas
By:______________________________
Randy Cherkas
President
Accepted and agreed to this 30th day of September, 1998:
/s/ David S. Tobin
- ---------------------------
David S. Tobin
<PAGE>
AMENDMENT TO MERGER AND REORGANIZATION AGREEMENT
THIS AMENDMENT (the "Amendment"), dated as of November 1, 1998, is entered
into between Global Telecommunication Solutions, Inc. ("GTS"), Centerpiece
Communications, Inc. ("CCI") and J. Mark Rubenstein ("Rubenstein").
WHEREAS, GTS, CCI, Rubenstein and CCI Acquisition Corporation entered into
that certain Merger And Reorganization Agreement dated as of February 1, 1998
(the "Merger Agreement") pursuant to which CCI was merged with and into a wholly
owned subsidiary of GTS (the "Merger"); and
WHEREAS, simultaneous with the execution of this Amendment Rubenstein is
entering into a transaction pursuant to which Rubenstein will convey the
Promissory Note and the Stock Consideration he received in consideration of the
Merger to a group of investors; and
WHEREAS, simultaneous with the execution of this Amendment, Rubenstein is
entering into an agreement terminating his Employment Agreement with GTS
pursuant to which Rubenstein will no longer be employed by GTS in any capacity
whatsoever; and
WHEREAS, pursuant to Section 6.2 of the Merger Agreement, Rubenstein, on
behalf of himself and his Affiliates, agreed to not compete with GTS for a
period of four (4) years following the date of the Merger Agreement in any state
of the United States of America (all as defined in the Merger Agreement); and
WHEREAS, the parties desire to amend Section 6.2 of the Merger Agreement to
narrow Rubenstein's non-compete agreement, all as more particularly provided
herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follow:
1. Section 6.2 of the Merger Agreement is hereby amended to read as
follows:
Section 6.2 Restrictive Covenant.
(a) To assure that GTS will realize the value inherent in the transactions
contemplated by this Agreement, the Stockholder agrees with GTS that neither the
Stockholder nor any of his Affiliates (except for the Stockholder's performance
under an Employment Agreement with GTS) nor any person or entity controlling,
controlled by or in any common control with the Stockholder shall, directly or
indirectly, for a period of one (1) year following the date of this Agreement in
any state of the United States of America:
(i) own, manage, operate, control or otherwise engage in a Competitive
Business (as hereinafter defined);
(ii) attempt to solicit or solicit the customers or facilities
serviced by GTS (including, without limitation, those acquired by GTS hereunder
and in connection with GTS' merger with Networks Around The World, Inc.) in
connection with a Competitive Business; or
(iii) attempt to solicit, solicit or employ any person employed or
contracted by GTS (except Esther Hess and Bert Rubenstein) to leave their
employment or not fulfill their contractual responsibility, whether or not the
employment or contracting is full-time or temporary, pursuant to a written or
oral agreement, or for a determined period or at will.
As used in this Section 6.2, "Competitive Business" shall mean the design,
development and/or marketing of prepaid telecommunications products, including,
without limitation, prepaid phone cards, prepaid cellular products and services,
<PAGE>
prepaid dial tone and related services, or prepaid enhanced and/or prepaid
interactive telecommunications services and/or products. Notwithstanding the
foregoing or any other term of the Merger Agreement, as amended, Stockholder,
any Affiliates and any person or entity controlling, controlled by or in common
control with Stockholder may: (i) provide outside consulting services to third
party individuals and/or entities that have not ordered prepaid products or
services from GTS or any of its subsidiaries during the six (6) months
immediately preceding November 1, 1998, regardless of the nature of the business
activities in which such individuals or entities engage or to which such
consulting services relate; and (ii) provide outside consulting services to any
third party individuals and/or entities, regardless of the nature of the
business activities in which such individuals or entities engage, as long as
those consulting services do not relate to the design, development and/or
marketing of prepaid telecommunications products. Nothing in the Merger
Agreement, as amended, shall be interpreted as precluding any entity, including
without limitation, Technology Law Group, LLC ("TLG"), from providing legal
services to third party individuals and/or entities involved in a "Competitive
Business" (it being understood that Stockholder may become a member of a
consulting firm associated with TLG).
(b) If Section 6.2(a) of this Agreement, as applied to the Stockholder or
any other person, is adjudged by a court to be invalid or unenforceable, the
same will in no way affect any other provision of that Section or any other part
of this Agreement, the application of that provision in any other circumstances
or the validity or enforceability of this Agreement. If any provision, or any
part of any provision, is held to be unenforceable because of the duration of
the provision or the geographic scope of the provision, the parties agree that
the court making such determination will have the power to reduce the duration
and/or geographic scope of the provision to the longest permissible duration and
largest permissible geographic scope, and/or to delete specific words or
phrases, and in its reduced form Section 6.2(a) will then be enforced.
Because GTS will be irreparably damaged if the provisions of this Section
6.2 are not specifically enforced, GTS shall be entitled to an injunction
restraining any violation or threatened violation of this Section 6.2, or any
other appropriate decree of specific performance, without the necessity of
showing any actual damage or that monetary damages would not provide an adequate
remedy. Such remedies shall not be exclusive and shall be in addition to any
other remedy which GTS may have as a result of any such violation. Nothing
contained in this Section shall be construed as prohibiting GTS and its
Affiliates from pursuing all other remedies available to them for a breach of
the provisions of Section 6.2. The Stockholder further acknowledges and agrees
that the covenants contained in Section 6.2 are necessary for the protection of
the CCI's and Surviving Corporation's legitimate business interests, and are
reasonable in scope and content.
2. Except as set forth in Section 6.2 of the Merger Agreement as amended
herein, Rubenstein shall have no continuing obligation under the Merger
Agreement and is hereby released from all liability of any nature arising at any
time under the Merger Agreement.
3. Neither GTS, nor any of its subsidiaries, including without limitation
CCI, shall have any continuing obligation under the Merger Agreement and each of
GTS and its subsidiaries is hereby released from all liability of any nature
arising at any time under the Merger Agreement.
4. Unless otherwise amended by this Amendment, each of the provisions of
the Merger Agreement shall remain in full force and effect. In the event of a
conflict between a provision contained in this Amendment and a provision
contained in the Merger Agreement, the provision contained in this Amendment
shall prevail. All defined terms not defined in this Amendment, shall have the
meaning ascribed in the Merger Agreement.
5. In the event Rubenstein performs consulting services to third party
entities/individuals as provided in Section 6.2 of the amended Merger Agreement,
Rubenstein shall have the right to retain all earnings in connection with his
consulting services.
2
<PAGE>
6. Each of the parties acknowledge and agree that simultaneous with the
execution of this Amendment, Rubenstein shall deliver to the Company 47,891
shares of the Company's Common Stock which Rubenstein received as apart of the
Merger in full consideration of Rubenstein's liability for the failure of Access
Telecom, Inc. as provided in Section 8.1 of the Merger Agreement.
IN WITNESS WHEREOF, the parties to this Amendment have caused this
Amendment to be duly executed as of the date hereof.
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.,
a Delaware corporation
/s/ Randy Cherkas
By: ________________________________
Randy Cherkas
CENTERPIECE COMMUNICATIONS, INC.,
a New Jersey corporation
/s/ Randy Cherkas
By: _________________________________
Randy Cherkas
STOCKHOLDER:
/s/ J. Mark Rubenstein
________________________________________
J. Mark Rubenstein
3
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
10 Stow Road, Suite 200
Marlton, New Jersey 080536
As of November 1, 1998
Mr. J. Mark Rubenstein
29 Duer Place
Weehawken, New Jersey 07087
Re: Agreement
Dear Mark:
This letter, effective upon your execution and its return, shall set
forth the complete agreement between you and Global Telecommunication Solutions,
Inc. ("GTS") in connection with those matters set forth herein.
1. Within seven days of the execution of this letter agreement, GTS
will pay you any amounts GTS has actually collected for the accounts receivable
of Centerpiece Communications, Inc. ("CCI") relating to the sale of prepaid
phone cards prior to February 1, 1998. All amounts paid under this section shall
be reduced by amounts CCI owes to GTS, Networks Around The World, Inc. and
Global Phonecards LLC for prepaid phone cards/personal identification numbers
acquired prior to February 1, 1998.
2. GTS agrees that it will continue to pay Bert Rubenstein his current
salary on the current pay intervals for no less than three months after his
employment with GTS is terminated, unless otherwise agreed to by Mr. Bert
Rubenstein.
3. GTS hereby conveys to you the two computers and a fax machine
described on Exhibit A (to be mutually agreed upon by the Company and J. Mark
Rubenstein within seven days of the execution of this letter agreement) to this
letter Agreement. In the event GTS incurs and pays any sales tax in connection
with this conveyance, you agree to reimburse GTS for any amounts so incurred and
paid.
If this letter accurately sets forth our understanding and agreement
with respect to the 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/ Randy Cherkas
By:________________________________
Randy Cherkas
Accepted and agreed to as of the 1st day of November, 1998:
/s/ J. Mark Rubenstein
___________________________
J. Mark Rubenstein
<PAGE>
SCHEDULE A
One Dell Computer, 200 MHZ (plus built-in accessories)
One Dell Computer, 400 MHZ (plus built-in accessories)
One 20" monitor
One 15" monitor
One Printer
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
10 Stow Road, Suite 200
Marlton, New Jersey 080536
As of November 1,1998
Mr. J. Mark Rubenstein
29 Duer Place
Weehawken, New Jersey 07087
Re: Termination of Employment Agreement and Other Matters
Dear Mark:
This letter, effective upon your execution and its return, shall set forth
our complete agreement in connection with the termination (the "Termination
Agreement") of the Employment Agreement between you and Global Telecommunication
Solutions, Inc. (the "Company"), dated as of January 31, 1998 (the "Employment
Agreement") and such other matters as set forth herein. This Termination
Agreement, when countersigned by you, terminates the Employment Agreement.
1. Except as otherwise provided herein, the Employment Agreement is hereby
terminated and of no further force or effect.
2. Subject to the terms and conditions contained herein, the Company shall pay
you $175,000 as a severance payment in lieu of the remaining salary
payments due under Section 2.1 of the Employment Agreement (the "Severance
Payments"). The Severance Payments shall be paid in equal bi-weekly
installments commencing with the first payroll date (under the Company's
normal payroll schedule) following November 4, 1998 and ending with the
first payroll date after January 31, 2000 (the "Termination Date"). After
the date hereof and to the extent available to you at law, you will be
eligible to participate in the Company's health insurance plans through
COBRA.
3. (a) The Company's failure to make any Severance Payment when due shall
constitute a breach hereof and shall cause: (i) the acceleration of
Company's payment obligation such that the total outstanding amount due in
severance becomes due immediately; and (ii) the immediate and irrevocable
termination of all limitations on Employee's right to be involved (either
as an owner, employee, consultant or otherwise) in the in the
telecommunications industry, including without limitation, all aspects of
the "Restrictive Covenant" set forth in Section 6.2 of the Merger Agreement
as amended on even date with this Termination Agreement (the "Restrictive
Covenant"). Notwithstanding the foregoing, the Company's failure to make
any Severance Payment when due shall not constitute a breach hereof and
provide you with the remedies contained in (i) or (ii) above unless you
shall have given written notice to the Company indicating the non-payment
and, within ten (10) days after such notice, the Company shall not have
paid the Severance Payment.
<PAGE>
(b) In the event you breach (i) the Restrictive Covenant or (ii) any other
provision of this Termination Agreement, then such action shall constitute
a breach hereof and the Company shall have the right to terminate this
Termination Agreement. In the event the company terminates this Termination
Agreement as provided in this Section 3(b), the Company shall have no
further obligation to make any Severance Payments. You acknowledge and
agree that the termination of this Termination Agreement under this Section
3 shall not affect your obligations under the Restrictive Covenant which
shall remain in full force and effect in accordance with its terms.
Notwithstanding the foregoing, the Company shall not have the right to
terminate this Agreement unless the Company shall have given written notice
to you, signed by an officer of the Company, specifying the act(s) that the
Company allege constitute a breach with reasonable particularity and,
within ten (10) days after such notice, you shall not have cured or
eliminated the alleged breach.
4. You agree to (i) subject to your employment, business or personal
obligations, assist the Company as reasonably 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 in which you were involved; (ii) subject to your employment, business
or personal 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;
provided, however, you shall not be obligated to (a) devote more than 8
hours per week to such consultation until December 31, 1998 and one hour
per week thereafter until March 31, 1998 (at which point such obligation
shall cease) and (b) travel outside of the state of New Jersey in
connection with such consultation; and (iii) within 30 days after the date
of this Termination Agreement, use your best efforts to ensure an orderly
transition and to provide the Company with assistance in those projects
that you are managing as of the date hereof. 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 Paragraph 4.
5. (a) The Company agrees to indemnify and hold you harmless from and against
any and all claims, liabilities, losses, damages, costs and expenses,
including reasonable counsel fees and disbursements (singularly, a "Loss,"
and collectively, the "Losses"), arising out of or relating to actions or
claims brought against you individually after the termination of your
employment with the Company in connection with the operation of the
Company's business. Notwithstanding the foregoing, the Company shall have
no obligation to indemnify you in connection with any Loss arising from (i)
your willful misconduct or (ii) dishonest actions performed in your
dealings with, on behalf of, or in connection with the Company, its
customers, suppliers, vendors and any other person ("dishonest" for these
purposes shall mean your knowingly or recklessly making of a material
misstatement or omission for your personal benefit).
2
<PAGE>
(b) You agree to indemnify and hold harmless the Company, any Affiliate of
the Company, and the directors, officers and employees of the Company or
any of its Affiliates from and against any and all claims, liabilities,
losses, damages, costs and expenses, including reasonable counsel fees and
disbursements (singularly, a "Loss," and collectively, the "Losses"),
arising out of or relating to (i) your willful misconduct or (ii) any
dishonest actions performed in your dealings with, on behalf of, or in
connection with the Company, its customers, suppliers, vendors and any
other person ("dishonest" for these purposes shall mean your knowingly or
recklessly making of a material misstatement or omission for your personal
benefit).
6. In consideration of the Severance Payments, the Company's release hereunder
and the termination of the Employment Agreement and the other
considerations herein, you and each of your heirs, executors,
administrators, successors, personal representatives or assigns do hereby
waive, release, remise, acquit, satisfy and forever discharge the Company
and any and all affiliates or related corporations and their shareholders,
parents, subsidiaries, affiliates, successors or assigns, and their
attorneys, officers, shareholders, directors, agents and employees, past,
present or future, and their heirs, executors, administrators, successors,
personal representatives or assigns (hereafter collectively referred to as,
the "Company Second Party"), of and from any claim and all manner of action
and actions, cause and causes of action, suits, debts, obligations,
liabilities, dues, sums of money, accounts, reckonings, bonds, bills,
specialties, covenants, contracts, controversies, agreements, promises,
variances, trespasses, damages, judgments, executions, claims for
negligence, damages and demands whatsoever, whether arising out of your
employment with the Company, the Merger Agreement, the $1 million
Promissory Note entered into as of February 1, 1998 or otherwise, in law,
or in equity, arising under contract or otherwise, or arising under local,
state or federal law or otherwise, including, but not limited to any local,
state or federal employment discrimination laws, which you ever had, now
have, or which you or your heirs, executors, administrators, successors,
personal representatives or assigns hereafter can, shall or may have
against the Company or any Company Second Party, known, unknown, foreseen
or unforeseen from the beginning of the world to the date of this letter
agreement; provided, however, that the foregoing waiver and general release
shall not apply to your right to enforce (i) this Termination Agreement or
(ii) that certain letter agreement between you and the Company dated of
even date herewith (the "Letter Agreement") or (iii) that certain Amendment
to the Merger And Reorganization Agreement entered into between the
Company, you, Centerpiece Communications, Inc. and CCI Acquisition Corp. of
even date herewith (the "Merger Amendment"). Without limiting the
generality of the foregoing or GTS' indemnification hereunder, you
specifically waive any claim, demand, or action alleging or based upon an
assertion that (1) the Employment Agreement, or (2) the Merger Agreement or
(3) the Promissory Note in the principal amount of $1 million dated as of
February 1, 1998 executed by GTS in connection with the Merger Agreement,
have been breached by the Company in any manner whatsoever.
3
<PAGE>
7. In consideration of you entering into this Termination Agreement and your
general release and waiver in Paragraph 6 above, the Company and any and
all affiliates or related corporations and their successors and assigns, do
hereby waive, release, remise, acquit, satisfy and forever discharge you,
your heirs, executors, administrators, successors, personal representatives
and assigns, their attorneys, past, present or future (hereinafter referred
to collectively as "Your Second Party") of and from any claim and all
manner of action and actions, cause and causes of action, suits, debts,
obligations, liabilities, dues, sums of money, accounts, reckonings, bonds,
bills, specialties, covenants, contracts, controversies, agreements,
promises, variances, trespasses, damages, judgments, executions, claims for
negligence, damages and demands whatsoever, whether arising under your
employment relationship with the Company, the Merger Agreement (including,
without limitation, all liability arising out of Centerpiece
Communications, Inc.'s or the Company's relationship with Access Telecom,
Inc.) or otherwise, in law, or in equity, arising under contract or
otherwise, or arising under local, state or federal law or otherwise, which
the Company ever had, now has, or which it or its heirs, executors,
administrators, successors, personal representatives or assigns hereafter
can, shall or may have against you or any of Your Second Party, known,
unknown, foreseen or unforeseen from the beginning of the world to the date
of this letter agreement; provided, however, that the foregoing release
shall not apply to the Company's right to enforce (i) this Termination
Agreement or (ii) the Letter Agreement or (iii) the Merger Amendment.
Without limiting the generality of the foregoing or your indemnification
hereunder, the Company specifically waives any claim, demand, or action
alleging or based upon an assertion that (1) the Employment Agreement or
(2) the Merger Agreement has been breached by you in any manner whatsoever.
8. 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 with respect to the subject matter hereof, (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.
9. In executing this letter, The Company affirms that (i) this letter
constitutes the valid, binding and enforceable obligation of the Company,
enforceable in accordance with its terms, and (ii) this letter states the
entire agreement between you and the Company with respect to the subject
matter hereof.
10. Notwithstanding anything contained herein, Sections 4, 5, and 6 (except
Section 6.6 thereof) of the Employment Agreement are incorporated into this
Termination Agreement as if included herein and shall survive the
termination of the Employment Agreement.
4
<PAGE>
11. In the event of a Change in Control, Executive shall be entitled to receive
all payments set forth in Section 2 of this Termination Agreement, in a
single lump sum payment within seven (7) days of such Change in Control.
For purposes of this Termination Agreement, a "Change in Control" shall
have occurred if (i) the Company, as a going concern, is sold or otherwise
acquired, (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 40% of such securities or
(iii) Randy Cherkas is no longer employed by the Company as an Executive
Officer.
12. In the event of any controversy or claim arising from or related to this
Agreement, its performance or interpretation, the parties, in good faith,
initially will attempt to resolve the dispute among themselves. Failing
such resolution, the parties mutually agree to submit the matter to
arbitration before the American Arbitration Association ("AAA"), pursuant
to its Commercial Arbitration Rules, at the AAA office in New York, New
York or as otherwise agreed. The parties agree to request that the
arbitration hearing be held within one hundred twenty (120) days of
submission. The laws of the State of New York shall apply to all matters
considered in the arbitration. The party prevailing in the arbitration
shall be entitled to recover all costs reasonably incurred, including
reasonable attorneys' fees, from the other party.
If this letter accurately sets forth our understanding and agreement with
respect to the termination of 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/ Randy Cherkas
By:______________________________
Randy Cherkas
President
Accepted and agreed as of the 1st
day of November, 1998:
/s/ J. Mark Rubenstein
___________________________
J. Mark Rubenstein
5
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-1-1998
<PERIOD-END> Sep-30-1998
<CASH> 1,211,593
<SECURITIES> 0
<RECEIVABLES> 4,809,200
<ALLOWANCES> 348,577
<INVENTORY> 476,649
<CURRENT-ASSETS> 6,364,692
<PP&E> 2,713,819
<DEPRECIATION> (950,545)
<TOTAL-ASSETS> 24,025,504
<CURRENT-LIABILITIES> 27,497,228
<BONDS> 0
<COMMON> 59,967
0
0
<OTHER-SE> (4,031,691)
<TOTAL-LIABILITY-AND-EQUITY> 24,025,504
<SALES> 22,523,731
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<NET-INCOME> (12,216,185)
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</TABLE>
