U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
OR
[ ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-13478
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
-------------------------------------------
(Name of Small Business Issuer in Its charter)
Delaware 13-3698386
- ------------------------------- ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
10 Stow Road, Suite 200, Marlton, New Jersey 08053
- -------------------------------------------- -------------
(Address of Principal Executive Offices) (Zip Code)
(609) 797-3434
----------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class: Name of Each Exchange on Which Registered:
Common Stock, par value $.01 per share Boston Stock Exchange
Common Stock Purchase Warrants Boston Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: None
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 |_|
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The information required in Part III by Items 9, 10, 11 and 12 is
incorporated by reference to the issuer's proxy statement in connection with its
Annual Meeting of Stockholders which will be filed by the issuer within 120 days
after the close of its fiscal year.
The issuer's revenues for its most recent fiscal year were $31,178,125.
As of April 1, 1999, the aggregate market value of the issuer's Common
Stock held by non-affiliates of the issuer (based on the last sale price of such
stock) was $6,296,289. At April 1, 1999, 14,429,081 shares of the issuer's
Common Stock were outstanding.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
Global Telecommunication Solutions, Inc. ("Company" or "GTS") provides
prepaid phone cards that allow users to access reliable, convenient and
cost-effective domestic and international telecommunications services. The
Company markets (1) traditional prepaid phone cards to consumers through
distributors and retail establishments, such as convenience stores,
supermarkets, drug stores and mass merchandisers and (2) custom-designed
promotional phone cards directly to businesses to enhance the marketing of their
products and services.
As of March 31, 1999, the Company has experienced significant cash flow
difficulties. The Company's ability to implement its business strategy as set
forth below is contingent upon its ability to obtain additional financing.
During the first quarter of 1999, the Company negotiated with several potential
financing sources in an attempt to raise additional debt capital, but, to date,
has been unsuccessful. For a more detailed discussion of the Company's current
financial position, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Corporate Background
The Company was incorporated under the laws of the State of Delaware in
December 1992. The Company's principal executive offices are located at 10 Stow
Road, Suite 200, Marlton, New Jersey 08053 and its telephone number is (609)
797-3434. In February 1998, the Company acquired, through two separate mergers,
Centerpiece Communications, Inc., a New Jersey corporation ("CCI"), and
Networks Around the World, Inc. ("NATW"). For further information relating to
these mergers, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources."
Market Opportunity
The court-directed divestiture of the Bell System in 1984 created
competition in the long distance market. Over time, alternatives to AT&T, the
long distance carrier resulting from the divestiture, began to emerge to compete
for long distance customers. One type of competitor that emerged from the
changing long distance market was the reseller, an entity that purchases a high
volume of long distance minutes from major carriers at rates significantly lower
than those that could be obtained by individuals and small businesses, and
resells those minutes to its own customer base. Eventually, certain resellers
began to market resold long distance minutes through the sale of prepaid phone
cards.
Prepaid phone cards are a reliable, convenient and cost-effective
alternative to coin-operated calling, collect calling, operator assisted calls
and standard credit calling cards. Unlike credit calling cards, which provide
virtually unlimited credit and impose surcharges on long distance services,
prepaid phone cards are paid for in advance and provide finite amounts of
calling time. Most domestic prepaid phone cards, including the Company's cards,
utilize a remote memory technology, which permits users to place local, long
distance and international calls from any touch-tone(R) phone by dialing a
toll-free or local access number to connect to a prepaid phone card switching
platform. After being prompted to enter a PIN, the caller is advised of the
value remaining on the card and is prompted to enter the telephone number to be
called. The call is then routed to its destination. The per-minute charges for
the call are automatically decremented from the prepaid account corresponding to
the PIN as the call progresses.
Prepaid phone cards have been widely used throughout Europe and Asia for
more than fifteen years. Although prepaid phone cards were not used on a
widespread basis in the United States prior to 1994, the market in the United
States is rapidly expanding, with annual sales of prepaid phone cards growing
from an estimated $100 million in 1993 to an estimated $3.2 billion in 1997.
Industry analysts project annual sales of prepaid phone cards in the United
States to reach approximately $4.8 billion by 2000. The Company anticipates that
continued industry growth will be fueled by (1) increasing consumer acceptance
of prepaid phone cards and recognition of their cost and convenience advantages
over standard credit calling cards, collect calling and other options available
to consumers seeking to place phone calls when away from the home or office and
(2) a broader base of consumer segments using prepaid phone cards, such as
business employees, students and travelers.
As the prepaid phone card industry evolves, the Company believes that
traditional prepaid phone cards will increasingly become a commodity and that
the successful competitors will be those that (1) establish a brand name
recognized for reliable telecommunications services and responsive customer
2
<PAGE>
service, (2) improve operating margins by optimizing their own switching and
network facilities to reduce transmission costs through least-cost routing, (3)
possess the experience and calling volume to negotiate carrier agreements with
multiple long distance carriers that provide favorable volume discounts and (4)
differentiate their cards and services.
Strategy
The Company's strategy is to continue the rapid growth of its operations
and capture an increasing share of the expanding prepaid phone card market. Key
components of the Company's strategy include:
o expanding the domestic retail distribution channels for the Company's
prepaid phone cards with sales efforts focused on convenience stores,
supermarkets and drug stores;
o continuing to expand its interconnected switching network;
o pursuing electronic distribution of its prepaid phone cards through the
Internet; and
o pursuing other growth opportunities including: identifying a broader base
of consumer segments for the Company's prepaid phone cards, such as
business employees, students and travelers; exploring alternative methods
of prepaid phone card distribution, such as electronic inventory
distribution control terminals ("EIDC Terminals"), vending machines and ATM
machines; leveraging its existing distribution relationships to sell
alternative prepaid products, such as prepaid cellular telephones and
prepaid local telephone service; and expanding strategic relationships with
other telecommunications services providers.
Expanding Distribution
Domestic Retail. The Company's in-house sales people market the Company's
traditional prepaid phone cards domestically
o directly to national, regional and independent retail establishments that
sell phone cards to a wide range of end users,
o to independent distributors with widespread distribution channels and
access to a substantial number of retailers, such as phone card
distributors, newsstand distributors, food brokers and tobacco and
confectionery distributors, and
o to other marketing companies and organizations that sell phone cards to
consumers within specific niche markets.
The Company intends to increase domestic sales by focusing its sales
efforts on convenience stores, supermarkets and drug stores, and by recruiting
additional distributors to market and promote its prepaid phone cards to local,
regional and national retailers. The Company also will attempt to increase sales
by distributing phone cards over the Internet to customers.
Promotional Phone Cards. The Company intends to broaden its promotional
phone card offerings by combining a team of highly experienced sales
professionals with a group of voice response marketers. The Company has acquired
an interactive voice response unit. This unit will permit the Company to provide
its corporate customers with demographic and other information from those
customers that utilize the Company's promotional phone cards. The Company is
specifically marketing its promotional phone card programs to the health care
industry in an effort to expand its promotional phone card distribution. The
health care industry spends in excess of $20 billion per year in marketing and
promotional activities.
Expanding Switching Network
The Company intends to continue to expand its network of switching
platforms by installing additional switching platforms or entering into
strategic relationships with other telecommunications service providers within
3
<PAGE>
and outside the United States to provide reliable, cost-effective
telecommunications services. The Company believes that the installation of
switching platforms in strategically located markets can substantially reduce
costs associated with customers accessing its switching platforms and
terminating telephone calls. See "-Telecommunications Infrastructure."
Products and Telecommunications Services
The Company's core product line consists of traditional prepaid phone cards
marketed domestically. The Company also offers custom-designed promotional phone
cards for business promotional use. The Company intends to offer traditional
phone cards electronically over the Internet. Some of the enhanced services
typically offered with the Company's phone cards include the following:
o customized voice greetings, which the Company believes to be an
attractive feature to large retailers and businesses that utilize the
Company's promotional phone cards,
o foreign language voice prompts and instructions, and
o sequential calling, which permits customers to place additional calls
without exiting the platform.
In addition, the Company intends to offer other prepaid telecommunications
products through its established distribution channels, such as prepaid cellular
telephones and prepaid local telephone service. Many of the Company's
distributors offer other products and services to their retail customers. The
Company believes that it can leverage its relationships with these distributors
to sell additional prepaid telecommunications products and services through the
same distribution channels.
Traditional Phone Cards Marketed Domestically
The Company's primary marketing and distribution strategy is to target
retailers directly and through distributors that sell the Company's phone cards
to end users. The Company has and will continue to increase retailers' awareness
of the profit potential of offering prepaid telecommunications services, the
minimal space needed to sell the Company's phone cards and the ability of the
Company's phone cards to generate ongoing residuals for retailers through
recharge revenues. In furtherance of its strategy, the Company facilitates the
display of its phone cards by providing (1) turnkey merchandising materials,
which include retail packaging and complete point of sale display and signage
systems and (2) retail promotion programs for which the Company and the retailer
share costs. Additionally, the Company has begun offering its EIDC Terminals to
its retail customers.
The Company's EIDC Terminal is a device installed at the retailer's
business that provides PIN inventory management for each of the Company's retail
customers that utilizes the EIDC Terminal. The EIDC Terminal is equipped with a
printer that prints the back of the phone card, including the PIN, at the time
the retailer sells the phone card to a customer. This process eliminates all
inventory management and control issues for the retailer, including theft of
active PINs. Moreover, the EIDC Terminal provides the retailer with the ability
to instantly generate reports detailing phone card sales by, among other things,
location, clerk shift and range of dates. Finally, the EIDC Terminal eliminates
all inventory costs for the retailers because they are only billed for phone
cards sold.
Traditional prepaid phone cards permit users to place local, long distance
and international calls from any touch-tone telephone. Customers utilizing the
Company*s traditional phone cards can place outbound domestic and international
long distance calls from the United States to more than 220 countries. The
Company's rechargeable traditional phone cards enable customers to add
additional calling time to the phone cards at certain retail locations and, in
some cases, by dialing a toll-free number and furnishing major credit card
information. This allows customers to continue to use the same PIN and generates
ongoing residual sales for retailers. Unlike most products sold by retailers,
the Company's traditional phone cards enable retailers to generate revenues
beyond initial sale of the cards. The Company pays additional commissions to the
retailer based on the dollar value added on any card sold by that retailer, so
long as that retailer continues to offer the Company's phone cards. The Company
believes that this program increases retailer loyalty and creates an incentive
for retailers to sell its prepaid phone cards.
During the first quarter of 1998, the Company introduced the "GTS Card," a
new traditional phone card. The GTS Card was designed to create brand loyalty by
providing reliable telecommunications service and responsive customer service at
4
<PAGE>
a good value. The Company has differentiated the GTS Card from other traditional
prepaid phone cards by charging per-minute rates for domestic telephone calls
based upon the mileage between the calling party and the called party. A call
placed to a destination under ten miles will cost consumers substantially less
than a call placed across the country. For example, assuming a $10 card, a
consumer placing a local call will have the opportunity to speak for 90 minutes,
while a person calling across the country will have the opportunity to speak for
30 minutes. Additionally, unlike other traditional phone cards, (1) consumers
always have the opportunity to utilize all of the value on the GTS Card because
it never expires and (2) the GTS card is fully refundable if the customer is not
satisfied. The Company markets the GTS Card to national and regional convenience
store chains through direct sales and distributors.
Promotional Phone Cards
The Company's custom-designed promotional phone cards, which feature
companies' logos, products and customized advertisements, are sold to businesses
that typically give these cards to their customers in connection with the
marketing of their products and services. A business utilizing the Company's
phone cards for promotions can access marketing and demographic data compiled by
the Company's switching platforms. The Company believes that it has
differentiated itself from most other providers of promotional phone cards by
combining enhanced services and interactive technology with its promotional
cards.
Telecommunications Infrastructure
General
Each call made using the Company's traditional phone card is comprised of
two components: (1) an inbound or originating call, which accesses one of the
Company's switching platforms and (2) an outbound or terminating call, which
connects the end user to the destination called. Currently, most customers
access the Company's switching platforms by dialing a toll-free number. This
inbound service, purchased by the Company from carriers such as Sprint,
constitutes a significant portion of the Company's costs with respect to the
telephone call. Once the Company's switching platform is accessed, the call is
directed by the Company's switching platform to the network of a long distance
reseller for transport to the appropriate call destination. Costs incurred by
the Company in connection with consumers accessing the Company's switching
platforms and the carriage of a call from the Company's switching platform to
the call destination include variable costs incurred in accessing the local
exchange carrier in each local access transport area ("LATA").
Switching Facilities
The Company currently owns and operates six STX switches manufactured by
NACT Telecommunications, Inc. ("NACT"). Three of these switches are located in
Jersey City, New Jersey ("New Jersey STX") and three are located in Miami,
Florida ("Miami STX"). The Miami STX is located at the Company's leased facility
and is maintained by the Company's employees, with the assistance of NACT. The
New Jersey STX is located at the offices of NTT Data Communications Systems
Corporation ("NTT") and is maintained by the Company's employees, with the
assistance of NTT representatives and NACT. The Company and NACT have entered
into agreements pursuant to which NACT licenses software to the Company and
provides technical support and platform maintenance. The Company also owns and
is in the process of installing an interactive voice response system
manufactured by APEX Voice Communications ("APEX"). This system is located at
the Company's leased facility in Los Angeles, California and is maintained by
the Company's employees with the assistance of APEX. In addition to its own
switching facilities, the Company utilizes or has utilized the switching
facilities of outside vendors for certain of its enhanced services and/or
interactive products, including Interactive Communications International, Inc.,
a subsidiary of U.S. South Communications, Inc., and Interactive Media Works,
Inc.
The Miami STX and the New Jersey STX provide phone card services to the
Company's domestic traditional prepaid phone card customers and, in many
instances, end users of the Company's promotional phone cards. These switching
5
<PAGE>
platforms are designed for the specific purpose of providing prepaid phone card
services, unlike many other switching platforms that must operate
contemporaneously with front end processors functioning outside of the switching
platform. These platforms allow the Company to route each telephone call to the
least expensive long distance carrier, determined by either the origin of the
call, or the city, country, area code or exchange where the call will terminate.
The Company's switching platforms also monitor card usage and end user
demographics and limit the Company's exposure to fraud by alerting the Company
to situations in which multiple PINs are used from any single telephone number,
the same PIN is being used from many different parts of the country within a
short period of time, or a number of invalid PINs are entered from a single
telephone number. The Company believes that its ability to minimize unauthorized
use of its cards and to provide important customer and card usage information
makes its phone cards an attractive choice for retailers.
The Company's APEX interactive voice response system will allow the Company
to provide enhanced service and interactive phone card programs. This system
will give the Company flexibility in the creation and management of corporate
promotional phone card programs and will enable the Company to provide its
corporate customers with specialty programs such as voice mail, surveys and fax
mail. This system also will serve as a west coast point of presence that could
provide the Company with connectivity to carriers whose services may not be
available economically on the east coast.
Carrier Agreements
The Company has carrier agreements with numerous long distance carriers to
originate toll-free access to the Company's switching facilities domestically
and internationally and to terminate domestic and international long distance
calls over these carriers' networks. The carrier agreement between the Company
and Sprint requires the Company to satisfy a $1,000,000 minimum monthly usage
commitment to receive favorable pricing. Failure to meet the minimum commitment
would obligate the Company to pay underutilization charges equal to 25% of the
difference between the minimum commitment and the net usage. The majority of the
Company's domestic toll-free origination and termination minutes currently are
carried over Sprint's network. The Company's agreement with Sprint expires on
November 30, 1999. The Company believes that it will be able to renew this
contract or otherwise negotiate comparable arrangements.
The Company's carrier agreements with multiple domestic and international
long distance carriers allow for redundant routing of call traffic to ensure
that if one carrier experiences difficulties the Company's phone card customers
are able to complete their telephone calls by automatically switching to an
unaffected carrier's network. Moreover, these multiple carrier agreements enable
the Company to route each telephone call to the least expensive long distance
carrier for that particular call, whether by country, city, area code or
exchange. This least-cost routing allows the Company to competitively price its
phone cards.
License
In August 1995, the Company obtained a nonexclusive patent license from
Ronald A. Katz Technology Licensing, L.P. to use over 25 patents related to
telecommunications processes. The Company is required to pay a percentage of
annual activation revenues, subject to annual minimum royalty payments. The term
of the license continues until November 2011, when the last patent expires.
Although the Company is not current in its royalty payments to the licensor, the
Company believes that it has adequately accrued for this liability. The Company
has not fully investigated the implications related to the nonpayment of the
license fees. However, it is possible that this situation could have a material
adverse effect on the Company.
Sales
The Company sells its prepaid phone cards and other services to domestic
retailers and distributors, and to business customers. The Company also
participates in trade shows, direct marketing and print advertising and develops
promotional kits to market its promotional and custom-designed cards to
retailers and businesses.
Domestic Retail Sales
The Company sells its prepaid phone cards domestically through an in-house
sales force consisting of seven sales people and a network of independent
brokers and distributors. The Company's traditional prepaid phone cards are sold
o directly to national, regional and independent retail establishments that
sell phone cards to a wide range of end users,
6
<PAGE>
o to independent phone card distributors with widespread distribution
channels and access to a substantial number of retailers, such as newsstand
distributors, food brokers and tobacco and confectionery distributors, and
o to other marketing companies and organizations that sell phone cards to
consumers within specific niche markets.
The Company's diverse domestic retail base includes convenience stores,
supermarkets, drug stores, mass merchandisers, maritime outlets (through which
cards are sold to individuals working on cruise ships and cargo vessels) and
similar retail outlets.
In marketing traditional prepaid phone cards to retailers, the Company
emphasizes profit potential, including the possible generation of ongoing
commissions to the retailer through payment of additional commissions based on
thenumber of minutes recharged on any prepaid phone card sold by the retailer so
long as the retailer continues to offer the Company's phone cards. The Company
believes that this program increases retailer loyalty and creates an incentive
for retailers to sell the Company's prepaid phone cards. The limited retail
shelf space necessary to offer the Company's products also is emphasized by the
Company in its retail marketing efforts. Additionally, the Company assists
retailers in promoting the prepaid phone cards and the Company's other products
by providing turnkey merchandising and marketing materials, including customized
retail packaging and point of sale display systems.
The Company has agreements with retailers and distributors that generally
provide for a term of one to three years and require that the retailer or
distributor sell the Company's phone cards exclusively. These agreements also
provide for wholesale prices reflecting discounts ranging from 20% to 50% of the
retail selling price and contain customary covenants and conditions, including
indemnification, confidentiality and other standard provisions acceptable to the
Company. Additionally, the Company has arrangements with retailers and
distributors that are not embodied in written agreements having specific terms
which can be terminated at any time.
Promotional Phone Card Sales
The Company's custom-designed promotional phone cards, which feature
companies' logos, products and customized advertisements, are sold to businesses
that typically give these cards to their customers to enhance the marketing of
their products and services. A business using the Company's phone cards for
promotions also can access marketing and demographic data compiled by the
Company's switching platforms. The Company's promotional phone card programs
generally are non-recurring.
Design and Manufacturing
The Company's in-house design staff creates original designs for
promotional and custom-designed cards. Upon completion of a phone card design,
the Company produces paper samples of such card, converts it into a film
production sample and delivers it to a manufacturer, which prints the card on
plastic sheets and cuts the sheets into phone cards. The Company utilizes
several manufacturers for the production of its phone cards and believes that
there are adequate sources of supply and manufacturing capacity to address the
Company's requirements.
Customer Support and Service
The Company believes that effective customer service is essential to
attracting and retaining reputable retail customers. Additionally, the Company
believes that it must support both the end users of the Company's phone cards
and the retail establishments and distributors that purchase the Company's phone
cards for resale to end users. Accordingly, the Company has established two
customer service divisions.
The Company's customer support division provides support to its retail
customers and distributors, which are divided into groups. Each account manager
is assigned a particular group for which he or she serves as liaison. Each
account manager uses the Company's management information system to interface
with the Company's NACT STX switching platforms from his or her computer
terminal. This direct link provides the account managers with real-time
information concerning customers' accounts.
7
<PAGE>
Each prepaid phone card contains a toll-free customer service number. The
Company's customer service operators are available 24 hours a day, seven days a
week, 365 days a year to assist users of the Company's phone cards.
Additionally, customer service operators can address concerns relating to the
operation of the Company's phone cards and any billing related question by
accessing real-time call detail records through the Company's switching
platforms.
Competition
The telecommunications services industry generally, and the prepaid phone
card industry specifically, is intensely competitive, rapidly evolving and
subject to constant technological change. As the prepaid phone card industry has
grown, industry analysts estimate that the number of companies marketing prepaid
phone cards has increased from approximately 75 companies in 1994 to more than
500 in 1998, some of which have substantially greater resources than those of
the Company. Further, the Company's prepaid phone cards not only compete with
other prepaid phone cards, but also with credit calling cards, collect calling
services, hotel telephones, public pay telephones and other long distance
services. The Company believes that it competes with any medium by which a
consumer places a telephone call when away from the home or office.
The Company believes that its established reputation in the prepaid phone
card industry among retailers, distributors and business customers, its existing
telecommunications infrastructure and its experienced management team provide it
with important advantages over competitors. The Company believes that the
primary competitive factors affecting the prepaid phone card market are price,
quality and reliability of service, ease of use, service features and name
recognition. The Company believes that it is competitive in these areas.
The Company's prepaid phone cards provide a more convenient and
cost-effective alternative to other long distance services intended for use away
from a consumer's home or office. The Company's phone cards are easy to use and
can be utilized from any touch-tone telephone. Unlike credit calling cards,
prepaid phone cards do not require users to fill out credit applications and
allow consumers to budget telephone expenses effectively. The Company's phone
cards provide a less expensive alternative to most credit calling cards, collect
calling services, hotel telephones and public pay telephones.
Government Regulation
The provision of telecommunications services is regulated by the federal
and state governments of the United States. Federal laws and regulations
promulgated by the Federal Communications Commission ("FCC") apply to interstate
and international telecommunications, while state regulatory authorities have
jurisdiction over telecommunications services that originate and terminate
within the same state. Various other international authorities also may seek to
regulate telecommunications services originating in their respective countries.
Federal
The federal Communications Act, as amended by the Telecommunications Act of
1996 (the "1996 Act"), allows local exchange carriers, including the RBOCs upon
satisfaction of certain conditions, to provide interstate and interLATA long
distance telecommunications services and grants the FCC the authority to
deregulate other aspects of the telecommunications industry. To implement the
objectives of the 1996 Act, the FCC has promulgated numerous regulations to
encourage competition and entry in the telecommunications industry. While the
Company believes that the 1996 Act, by fostering increased competition in the
telecommunications industry, will create new opportunities for the Company to
participate in various segments of the industry, the near and long-term effects
on the Company of the 1996 Act and the rules promulgated thereunder cannot be
anticipated.
The Communications Act governs all common carriers, including AT&T, MCI
Worldcom and Sprint, as well as entities, such as the Company, that resell
transmission services using other common carriers' facilities. The Company has
applied for and received all necessary authority from the FCC to provide
domestic and international telecommunications services through the resale of
switched services of U.S. facilities-based carriers. The FCC reserves the right
to condition, modify or revoke such authority for violations of the
Communications Act or its rules.
Nondominant carriers (i.e., carriers that do not have the power to control
prices), such as the Company, currently must maintain tariffs on file with the
FCC for their international services, although, as discussed below, the issue of
whether nondominant carriers must file tariffs for their interstate, domestic,
8
<PAGE>
long distance services currently is under review. The tariffs of nondominant
carriers and the rates and charges they specify are subject to FCC review, but
are presumed to be lawful and are seldom contested. In general, nondominant
domestic common carriers are required to charge reasonable rates and are
prohibited from engaging in unreasonable practices in the provision of their
services. As an international nondominant carrier, the Company is required to
include detailed rate schedules in its international tariffs. The Company has
filed all required tariffs with the FCC.
On October 31, 1996, the FCC released an order eliminating the requirement
that nondominant interstate carriers, such as the Company, maintain tariffs on
file with the FCC for domestic interstate services. The FCC's rules are pursuant
to authority granted to the FCC in the 1996 Act to forbear from regulating any
telecommunications service provider if the FCC determines that the public
interest will be served. Under the new rules, after a nine-month transition
period, nondominant interstate carriers need no longer file tariffs, although
they have the option of ceasing to file such tariffs immediately. Petitions for
review of the FCC's order were filed by MCI, among others, with the United
States Court of Appeals for the District of Columbia Circuit, which on February
13, 1997 stayed the FCC's order. Accordingly, on March 6, 1997, the FCC
reinstated its prior rules requiring nondominant carriers providing interstate,
domestic, long distance service to file tariffs.
In September 1996, the FCC adopted rules governing the pay telephone
industry that established a means to compensate all pay telephone service
providers for every call completed from their pay telephones, including calls
that utilize toll-free access and access codes. The FCC's compensation plan, as
amended, requires long distance resellers, such as the Company, to compensate
pay telephone providers $0.24 for each completed dial around call made from
October 1, 1997. However, the FCC did not address the per-call compensation rate
for the period from October 1996 to October 1, 1997, but indicated that it would
be addressed in a future order.
In October 1997, the FCC issued an order waiving certain obligations of
local telecommunications companies to provide long distance resellers with the
information necessary to determine whether a call originated from a pay
telephone. The FCC extended this waiver to October 1998, but has not acted to
date to enforce the obligation for provision of the pay phone specific
identifier. This is problematic to the Company because while the Company is
still responsible for compensating pay telephone service providers as required
by the FCC, the Company cannot pass these charges through to its phone card
users unless the Company knows that the call originated from a pay telephone at
the time the call was placed. While the Company believes that it has adequately
accrued for potential obligations related to this compensation obligation, it is
possible that the FCC may enact regulations that could result in material
liabilities. No payments related to these fees had been made as of December 31,
1998.
In May 1997, the FCC issued an order to preserve and advance universal
telephone service. The order requires all telecommunications carriers providing
interstate telecommunications services to contribute to a fund. Effective
January 1, 1998, contributions are assessed based upon intrastate, interstate
and international end user gross telecommunications revenue. Although the FCC
has not yet finally determined the contribution assessment rate, the Company
estimates that the assessment could be as much as 5% of such revenue for the
calendar year 1998, and could increase or decrease in subsequent years. While
the Company believes that it has adequately accrued for its contribution to this
fund, it is possible that the FCC may enact regulations concerning the fund that
could result in additional material liabilities. No payments related to these
fees had been made as of December 31, 1998.
The Company has not yet fully investigated the implications related to the
nonpayment of these regulatory fees. However, it is possible that this
situation could have a material adverse effect on the Company.
State
The provision of intrastate long distance telecommunications services and
local exchange services is subject to various state laws and regulations,
including prior certification, notification and/or registration requirements.
The scope of such regulation varies from state to state, with certain states
requiring the filing and regulatory approval of various certifications and state
tariffs. For example, many states regulate prepaid phone card providers by
requiring them to apply for certification. The Company conducts a substantial
part of its business in Florida, New York, California, Texas and New Jersey.
While the Company either has obtained or applied for certification in these
states, there can be no assurance that state regulators will grant the Company
all required authorizations. Many states, including Florida, California and
Texas, have implemented or are considering implementing other rules that
specifically regulate prepaid phone card providers. The Company continually
evaluates the regulations governing the provision of intrastate
telecommunications services in numerous states and seeks to obtain operating
9
<PAGE>
authority in those states in which it provides or expects to provide service and
that require authority. Certificates of authority can generally be conditioned,
modified, canceled, terminated or revoked by state regulatory authorities for
failure to comply with state law and/or the rules, regulations and policies of
the state regulatory authorities. Fines and other penalties, including, for
example, the return of all monies received for intrastate traffic from residents
of a state, may be imposed for such violations.
In November 1997, Congress enacted legislation that specifically addressed
the application of federal excise taxes to the sale of prepaid phone cards.
Accordingly, the Company began to file federal excise tax returns. Since then,
the Internal Revenue Service has issued draft regulations further defining the
application of federal excise taxes to prepaid phone cards. However, the
taxation of prepaid phone cards is evolving and is not specifically addressed
in certain state jurisdictions in which the Company does business. Many
states have adopted or are considering legislation intended to tax prepaid phone
cards at the point of sale rather than based upon card usage. The Company has
not filed any state sales and use tax returns nor has it remitted any such taxes
to state taxing authorities. While the Company believes that it has adequately
provided for such taxes and related compliance costs, it is possible that
certain states may enact legislation or interpret current laws in a manner that
could result in additional tax liabilities, which could be material.
In the future, legislation enacted by Congress, court decisions relating to
the telecommunications industry, or regulatory actions taken by the FCC or the
states in which the Company operates could adversely impact the Company's
business. Changes in existing laws and regulations, in particular the currently
proposed relaxation of existing regulations, may have a significant impact on
the Company's activities and on the Company's operating results. Adoption of new
statutes and regulations and the Company's expansion into new geographic markets
could require the Company to alter methods of operation, at costs which could be
substantial, or otherwise limit the types of services offered by the Company.
There can be no assurance that the Company will be able to comply with
additional applicable laws, regulations and licensing requirements.
Trademarks
Global Link(R) and the design of the Global Link prepaid phone card are
registered U.S. trademarks of Global Link Telecom Corporation, a wholly-owned
subsidiary of the Company ("Global Link"). Applications also have been filed
and/or registrations have been secured for Global Link(R) and/or the design of
the Global Link(R) phone card in Australia, Brazil, Canada, France, Germany,
Korea, Japan, Spain, Taiwan and the United Kingdom. The Company or Global Link
also has filed trademark applications with the United States Patent and
Trademark Office seeking registration of the following marks: Connecting People
Around the Globe(TM); Global Link Worldwide(TM); and Pets-in-Need(TM). The
combined name and design of CCI's prepaid phone card, The Great Phone Card(R),
is a registered U.S. trademark of CCI. There can be no assurance that the
Company will receive registrations for any applied for trademarks or that any
registered trademark will provide the Company with any significant marketing or
industry recognition, protection, advantage or benefit.
Employees
As of April 1, 1999, the Company had 61 full-time employees and 12
part-time employees. None of the Company's employees is covered by a collective
bargaining agreement. The Company never has experienced an employment-related
work stoppage and considers its employee relations to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
In January 1995, Global Link entered into a lease for approximately 7,500
square feet of space located at 5697 Rising Sun Avenue, Philadelphia,
Pennsylvania, which, until August 1998, housed the Company's principal executive
offices, computer systems and packaging facilities. Global Link rents this space
from JilJac Realty Company ("JilJac"), a general partnership owned by Gary J.
Wasserson, the Company's former Chief Executive Officer and a consultant to the
Company until December 31, 1998. The term of the lease is five years and
provides for an annual rent of $50,400 during 1996, $52,900 during 1997, $55,566
during 1998, and $58,344 during 1999. In July 1997, the Company leased
additional storage space from JilJac on a month-to-month basis for $3,500 per
month. The Company terminated the lease solely for this additional space on June
29, 1998.
10
<PAGE>
In July 1995, the Company entered into a sublease for 9,400 square feet of
space located at 40 Elmont Road, Elmont, New York. The term of the sublease is
through July 2000 and provides for an annual rent of $145,700, including
utilities. In February 1997, the Company subleased this space through July 2000
for an annual rent of $89,300 for the first 12 months, $94,000 for the second 12
months and $98,700 for the remainder of the term.
In August 1995, the Company entered into a lease for approximately 1,930
square feet of space for its sales offices located at 60 East 42nd Street, New
York, New York. The term of the lease is 62 months and provides for an annual
rent of $45,248. In December 1998, the Company entered into an agreement with
Shelly Finkel Management ("SFM"), a company owned by Shelly Finkel, the
Company's Chairman of the Board, pursuant to which, in consideration of the
Company's $48,000 payment to SFM, SFM agreed to assume all of the obligations
under the lease and indemnify and hold the Company harmless from all losses,
costs and expenses associated with the lease arising after December 31, 1998. To
date, the Company has paid SFM $24,000.
In June 1998, the Company entered into a lease for approximately 500 square
feet of space for its marketing office at 233 7th Street, Garden City, New York.
The lease was originally for a three-month period with an option to extend for
an additional three months. The Company now occupies the space on a
month-to-month basis for a monthly rental of $1,000.
In August 1998, the Company entered into a lease for 9,362 square feet of
space located at 10 Stow Road, Suite 200, Marlton, New Jersey, which houses the
Company's principal executive offices and computer systems. The term of the
lease is five years and provides for an annual rent of $87,875 during the first
year, $89,875 during the second year, $92,683 during the third year, $95,492
during the fourth year and $98,301 during the fifth year.
The Company believes that its facilities are adequate for its present
purposes. The Company believes that as it grows, it will require additional
facilities, and that such facilities will be readily available.
ITEM 3. LEGAL PROCEEDINGS
On April 9, 1998, the Company, CCI and NATW commenced an action for
breach of contract, unjust enrichment, implied contract and fraud against Access
Telecom, Inc. ("Access Telecom") and Douglas P. Haughn in the Circuit Court of
the Ninth Judicial Circuit in and for Orange County, Florida. NATW and CCI are
wholly-owned subsidiaries of the Company that were merged into the Company in
February 1998. Access Telecom, a provider of long distance services to each of
NATW and CCI prior to and after the respective mergers, ceased providing such
services to the prepaid phone cards that it had sold to each of NATW and CCI,
despite receiving payment for substantially all of the phone cards. The Company
is seeking damages in excess of $1,000,000.
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 $698,419.36, inclusive of
interest. The Company intends to vigorously defend this action. The Company
believes that it has adequately accrued for this liability.
The Company also is involved in litigation incidental to its business.
Such litigation can be expensive and time consuming to prosecute or defend.
The Company believes that these pending litigation matters, in the aggregate,
could have a material adverse effect on its operating results and financial
condition if resolved against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
11
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On December 14, 1994, the Company's Common Stock and Warrants commenced
quotation on the Nasdaq SmallCap Market ("Nasdaq") under the symbols GTST and
GTSTW, respectively, and became listed on the Boston Stock Exchange under the
symbols GTL and GTLW, respectively. The Common Stock and Warrants were delisted
from Nasdaq on September 17, 1998 because the Company was not in compliance with
various requirements for continued listing. The Common Stock and Warrants
currently are traded on the OTC Bulletin Board. The following table sets forth
the ranges of bid prices for the Common Stock and Warrants for the periods
indicated, as reported by the OTC Bulletin Board or Nasdaq, as the case may be,
the principal trading market for the Company's securities. The quotes represent
inter-dealer prices without adjustments or mark-ups, mark-downs or commissions
and may not necessarily represent actual transactions.
Common Stock Warrants
----------------------------- -------------------------------
High Low High Low
-------------- ----------- ------------ ---------------
1997
- ----
First Quarter 10-3/8 10-1/2 1-11/16 5/8
Second Quarter 10-1/4 6-3/8 31/32 7/16
Third Quarter 9-1/2 5-1/2 1 7/16
Fourth Quarter 9-5/8 4-13/16 3/4 5/32
1998
- -----
First Quarter 8 5-7/8 7/16 1/4
Second Quarter 7-3/8 3-1/8 9/32 1/16
Third Quarter 3-5/16 1-1/4 1/32 0
Fourth Quarter 2 3/4 1/32 0
On April 1, 1999, the last sale prices for the Common Stock and Warrants as
reported by the OTC Bulletin Board were $0.6875 and $0.02, respectively.
As of April 1, 1999, there were 14,429,081 shares of Common Stock
outstanding and 1,630,560 Warrants outstanding, held of record by 185 and 51
holders, respectively. The Company believes that there are in excess of 500
beneficial holders of each of its publicly-traded securities.
Dividends
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain earnings, if any, to finance the growth
and development of its business and does not anticipate paying any cash
dividends in the foreseeable future. Certain of the Company's agreements prevent
the Company from declaring or paying cash dividends on its capital stock.
12
<PAGE>
Recent Sales of Unregistered Securities
During the quarter ended December 31, 1998 and through March 31, 1999, the
Company made the following sales of unregistered securities.
<TABLE>
<CAPTION>
Consideration Received If Option,
and Description of Warrant or
Underwriting or Other Exempption Convertible
Discounts to Market from Security, Terms
Price Afforded Registration of Exercise or
Date of Sale Title of Security Number Sold to Purchasers Claimed Conversion
- -------------- ----------------- ------------- ---------------------- ------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
10/1/98 Common Stock 1,198,000 $1.625 per share 4(2) N/A
10/1/98 Warrants to 30,000 In lieu of cash 4(2) Exercisable from
purchase Common compensation for acting 10/1/98 to
Stock as placement agent 10/1/03 at an
exercise price of
$1.625 per share
11/1/98 Common Stock 813,008 Conversion of 3(a)(9) Converted at a
promissory note conversion price
of $1.23 per share
12/23/98 Common Stock 3,170,912 Conversion of 3(a)(9) Converted at
promissory notes conversion prices
ranging from
$.7025 to $.968
per share
12/23/98 Common Stock 146,342 Exchange of Warrants 3(a)(9) Exchanged at a
rate of 4.555
warrants per share
1/15/99 Common Stock 3,155,938 Conversion of debentures 3(a)(9) Converted at a
conversion rate
of $.80 per share
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Report. The discussions of results, causes and trends should
not be construed to imply any conclusion that such results or trends will
necessarily continue in the future.
Forward-Looking Statements
When used in this Report and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in oral
statements made with the approval of an authorized executive officer of the
Company, the words or phrases "management believes," "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.
13
<PAGE>
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales for the year ended December 31, 1998 were $31,178,125, compared
to $18,234,640 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
year ended December 31, 1998 from 12% of net sales in the year ended December
31, 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. On a pro forma basis
giving effect to the mergers, sales declined from $39,415,401 during the year
ended December 31, 1997 to $33,492,644 during the year ended December 31, 1998.
The primary reason for the decrease was due to the loss of certain key
customers.
The Company's gross margins decreased to 5% of net sales for the year ended
December 31, 1998, from 11% 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. The margins were further reduced due to (1) an increase in the sale of
cards with reduced per-minute rates to consumers; (2) a reduction in revenues
recognized from promotional phone card programs that historically sell at higher
margins; and (3) 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 $11,194,989 (36%
of net sales) for the year ended December 31, 1998, compared to $9,640,506 (53%
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 further increased due to (1) increases in professional
fees, primarily financial public relations fees, investment banking fees and
other consulting services, (2) increased operating expenses due to the NATW and
CCI mergers and (3) the $228,497 loss related to the settlement of an
indemnification arrangement with a related party.
Depreciation and amortization expense decreased to $1,914,337 for the year
ended December 31, 1998 from $2,037,222 for the year ended December 31, 1997.
The decrease was primarily due to decreased amortization expense resulting from
the impairment of goodwill for the year ended December 31, 1997. The decrease
was partially offset by an increase in depreciation costs related to newly
acquired telecommunications and computer equipment.
During the year ended December 31, 1998, the Company recorded a $1,091,436
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 three of the Company's executive officers. The
Company closed its Canadian subsidiary due to recurring losses and its desire to
no longer fund such operations. The closure permits the Company to focus on
selling its products domestically. The Company also 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, three executives' employment
agreements were amended, which included the termination of their employment.
Approximately $389,906 remains accrued at December 31, 1998, consisting
primarily of accrued severance costs and lease termination costs.
The Company has experienced significant net losses and negative cash flow
from operations since the NATW and CCI mergers and current projections indicate
this trend is expected to continue for the foreseeable future. As a result, in
the fourth quarter of 1998, the Company reviewed the recoverability of the
carrying amount of the goodwill that had arisen related to these mergers. In
accordance with the Company's accounting policy, this review encompassed the
preparation and review of projections of undiscounted cash flows covering the
remaining goodwill amortization period as of December 31, 1998. This review
resulted in the conclusion that an impairment loss of $12,820,868 should be
recognized to reduce goodwill to its estimated fair value at December 31, 1998
of $1,952,000. In connection with the 1998 impairment review, the Company also
re-evaluated the amortization period for the remaining goodwill and effective
January 1, 1999, goodwill will be amortized on a straight-line basis over three
years.
14
<PAGE>
The assessment of goodwill recoverability, which is heavily dependent on
projected financial information and the goodwill amortization period, are
significant accounting estimates as contemplated by the American Institute of
Certified Public Accountants' Statement of Position 94-6, "Disclosure of Certain
Significant Risks and Uncertainties." Further, the Company operates in an
industry which is rapidly evolving and extremely competitive. It is reasonably
possible that the Company's accounting estimates with respect to the useful life
and ultimate recoverability of goodwill could change in the near term and that
the effect of such changes on the financial statements could be material. While
management currently believes that the recorded amount of goodwill is
appropriate at December 31, 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.
Investment and interest income was $94,617 for the year ended December 31,
1998, compared to $253,989 for the year ended December 31, 1997. The decrease
was primarily due to the Company's relatively lower cash position during 1998
compared to interest earned during 1997 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 year ended December
31, 1998 increased to $3,191,822 from $1,368,307 for the same period during
1997, primarily due to commitment fees related to a $2,000,000 financing
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 $28,569,796
for the year ended December 31, 1998, compared to a net loss of $25,535,939 for
the year ended December 31, 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales for 1997 were $18,234,640, compared to $12,121,365 for 1996. Net
sales of traditional cards sold through retail and wholesale distribution
programs were approximately $16,047,000 in 1997, compared to approximately
$9,643,000 in 1996. Net sales of promotional cards and other services decreased
slightly to approximately $2,188,000 in 1997 from approximately $2,478,000 in
1996. The primary reason for the increase in net sales and shift in sales mix
was the Company's aggressive pursuit of retail programs, which offered reduced
per minute charges to consumers. The majority of the sales increase was
primarily due to a significant increase in minutes used which was partially
offset by decreases in selling prices.
The Company's gross margins decreased to 11% for 1997 from 34% for the
comparable period in the prior year. The decrease in margins was primarily the
result of an increase in the sale of cards with reduced per-minute rates to
consumers. In addition, margins were negatively impacted by approximately
$700,000 due to the disposal of inventory and deferred costs related to a
product realignment that will enable the Company to have a more consistent
product and marketing focus. The Company believes that the higher sales volumes
in 1997 will enable it to negotiate better rates with its carriers. However, due
to the highly price competitive nature of prepaid phone cards, there can be no
assurance that any reduction in carrier costs will result in higher margins as
such reductions may be offset by a corresponding decrease in the per-minute
charges to consumers.
Selling, general and administrative expenses remained relatively constant,
increasing marginally to $9,640,506 (53% of net sales) for the year ended
December 31, 1997, from $9,226,136 (76% of net sales) for the comparable period
during 1996. The Company believes that in the future, selling, general and
administrative expenses should not increase in the same proportion as increases
in sales volume due to relatively fixed general and administrative costs.
Depreciation and amortization increased to $2,037,222 in 1997 from
$1,427,296 in 1996, primarily due to the acquisition of additional switching and
computer equipment.
In 1997, the Company recorded a $1,500,606 restructuring charge related to
the closing of its retail store operations, a modification of an employment
agreement with the former Chief Executive Officer of the Company and the
discontinuance of technology-based equipment. The decision to close its retail
15
<PAGE>
store operations was to allow the Company to concentrate its efforts on its core
distribution outlets. The disposal of equipment was primarily related to an
equipment realignment, which will enable the Company to work with a more defined
and consistent technology base. The Company does not expect that the closing of
its retail store operations will have a material adverse effect on future
operating results.
Following the Global Link merger, the Company has experienced significant
net losses and negative cash flow from operations and current projections
indicate that this trend is expected to continue for the foreseeable future. As
a result, in the fourth quarter of 1997, the Company reviewed the recoverability
of the carrying amount of the goodwill from the Global Link merger. In
accordance with the Company's accounting policy, this review encompassed the
preparation and review of projections of undiscounted cash flows (covering the
remaining goodwill amortization period as of December 31, 1997, a period of
approximately 13 years). This review resulted in the conclusion that an
impairment loss of $13,228,154 should be recognized to reduce goodwill to its
estimated fair value at December 31, 1997.
Investment and interest income increased to $253,989 in 1997 from $73,834
in 1996, primarily due to interest earned on the net proceeds from the Company's
public offering consummated in July 1997.
Interest expense for 1997 increased to $1,368,307 from $395,674 in 1996,
primarily as a result of the amortization of the unearned discount and deferred
financing costs ($910,857 in 1997 compared to $85,819 in 1996) associated with
the issuance of notes payable pursuant to the private placement consummated by
the Company in December 1996.
For the foregoing reasons, the Company incurred a net loss of $25,535,939
for 1997, compared to a net loss of $6,920,222 for 1996.
Liquidity and Capital Resources
At December 31, 1998, the Company had cash and cash equivalents of
$1,604,166 and a working capital deficit of $18,669,755, compared to $7,867,566
and positive working capital of $620,937, respectively, at December 31, 1997.
Subsequent to December 31, 1998, the Company continues to generate negative cash
losses from operations. The Company's cash balance has declined to approximately
$655,000 at March 31, 1999.
Net cash used in operating activities for the year ended December 31, 1998
of $372,434 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
$18,635,951, such as depreciation and amortization, provision for bad debts and
financing costs and a goodwill impairment charge, 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 year ended December 31, 1998 consisted of
$1,918,867 of capital expenditures and $5,320,681 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 (1)
$2,000,000 in cash, (2) an aggregate of 505,618 shares of Common Stock and (3)
$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: (1)
one-half of principal and interest accrued thereon on November 1, 1998 and (2)
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 ("Earn Out") to Randy Cherkas (the
Company's President and one of the former shareholders of NATW) if certain sales
and financial objectives are achieved. In April 1998, the former shareholders of
NATW agreed to defer payment of an aggregate of $1,000,000 of NATW Notes and
Earn Out from 1998 to January 1999. In December 1998, the former shareholders of
NATW preliminarily agreed to convert the NATW Notes into Common Stock (see
below). From the consummation of the NATW merger in February 1998 through March
31, 1999, the Company has paid Mr. Cherkas $341,355 of the aggregate amount of
$838,900 owed to him during that period under the Earn Out. To date, Mr. Cherkas
has the opportunity to earn up to an additional $1,161,100 under the Earn Out.
The Company currently is negotiating with Mr. Cherkas the payment terms of
amounts owed and to be owed to him under the Earn Out.
16
<PAGE>
Also in February 1998, the Company acquired, through a merger, all of the
outstanding capital stock of CCI for a purchase price comprised of (1)
$1,500,000 in cash, (2) 401,284 shares of Common Stock, of which 47,891 shares
were subsequently contributed back to the Company (see below) and (3) 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: (1) $250,000 plus
interest accrued thereon on October 31, 1998, (2) $250,000 plus interest accrued
thereon on January 1, 1999 and (3) 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).
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, 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 cost to provide
telecommunications services related to such cards aggregated $1,761,097 during
the year ended December 31, 1998. For purposes of the consolidated 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 Telecom. Pursuant
to the terms of an amendment to 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 year ended
December 31, 1998 (see below).
In December 1998, the former shareholders of NATW preliminarily agreed to
offset the amounts due to the Company related to Access Telecom against the
$1,000,000 of NATW Notes payable to the former shareholders of NATW, and to
subsequently convert the net amount due under the NATW Notes into Common Stock
at a conversion rate of $0.80 per share. The Company and the former shareholders
of NATW have not reached a final settlement on the amount due to the Company
related to Access Telecom. It is possible that the actual settlement could
materially differ from the $451,185 currently reflected as a reduction in the
$1,000,000 NATW Note.
In addition to the $1,761,097 indicated above, the Company paid Access
Telecom $350,000 for cards purchased subsequent to the date of the respective
mergers for which it received no services. Additionally, the Company spent
$200,000 to print cards which could only be used on Access's platform and,
therefore, were of no use to the Company. Accordingly, the aggregate carrier
default of $550,000 was recorded in cost of goods sold during the year ended
December 31, 1998.
In April 1998, the Company completed a 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 178,573 shares of Common Stock. The
April 1998 Warrants are exercisable through April 6, 2001 at an initial exercise
price of $7.00 per share. The April 1998 Notes were repaid from the proceeds of
the private placement consummated by the Company in October 1998 (see below).
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 December 1998, these notes were converted into
Common Stock as described below.
In April 1998, the Company entered into an agreement with an investor,
pursuant to which the investor 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 had the ability to require the investor to
acquire the securities on thirty days' written notice until December 31, 1998.
The Company did not utilize the $2,000,000 Commitment prior to its expiration on
December 31, 1998.
17
<PAGE>
In consideration of the $2,000,000 Commitment, 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.
In October 1998, the Company consummated a 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
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 and in full satisfaction of his and the Company's obligations to
each other, Mr. Rubenstein sold an aggregate of 353,393 shares of Common Stock
and the $1,000,000 CCI Note for an aggregate purchase price of $575,000. Among
the purchasers were Shelly Finkel, Chairman of the Board of the Company, Michael
Hoppman, Chief Financial Officer of the Company and Barry Rubenstein, a
principal stockholder (no relation to J. Mark Rubenstein). Mr. Rubenstein also
contributed back to the Company 47,891 shares of Common Stock with a fair market
value of $69,867 in consideration of $298,364 that he owed to the Company
relating to Access Telecom. The reserve for the loss on the settlement of
$229,497 has been provided for in the Company's financial statements. After the
group of investors purchased the CCI Note and shares from Mr. Rubenstein, they
accepted the Company's offer to convert the principal amount of the CCI Note
into 813,008 shares of Common Stock at a conversion rate of $1.23 per share. The
purchasers forgave interest of $60,000 due on the CCI Note. There was no gain or
loss recognized on the conversion of the CCI Note.
In December 1998, the Company offered holders of $3,050,000 aggregate
principal amount of promissory notes acquired from the Company in December 1996
the opportunity to convert their notes into shares of Common Stock at a
conversion rate of $0.80 per share and to exchange an aggregate of 683,333
common stock purchase warrants for shares of Common Stock at an exchange rate of
4.5555 warrants per share. $3,000,000 of the notes and 666,667 of the warrants
were converted into an aggregate of 3,245,518 shares of Common Stock. In
addition, holders that accepted this conversion offer forgave interest of
approximately $14,000 due on these notes. Among these holders were Shelly
Finkel, Chairman of the Board, and limited partnerships in which Barry
Rubenstein, a principal stockholder, is either a general partner or an officer
and member of a limited liability company that is a general partner. The
remaining $50,000 of notes plus interest accrued were converted pursuant to the
terms of the notes into an aggregate of 71,736 shares of Common Stock at a
conversion rate of $.7025 per share.
In December 1998, the Company offered holders of $2,599,750 aggregate
principal amount of debentures acquired from the Company in June and September
1994 the opportunity to convert their debentures into shares of Common Stock at
a conversion rate of $0.80 per share. In January 1999, holders of $2,524,750
aggregate principal amount of debentures converted their debentures into
3,155,938 shares of Common Stock. The Company offered the debenture holders the
opportunity to convert their debentures into shares because the Company
anticipated that it would not be able to pay off the principal amount of the
debentures when due in June and September 1999.
The Company has incurred significant losses and negative cash flow from
operations during 1997 and 1998. In the second half of 1998, the Company
implemented a restructuring plan in an effort to reduce administrative overhead
costs and improve the efficiency of its operations. Specific actions taken
included the consolidation of facilities, including the closure of its Canadian
operations and the termination of certain employment contracts. In addition, the
Company negotiated the conversion of $6,574,750 in debt to equity.
Notwithstanding these efforts, as of December 31, 1998, the Company had a
working capital deficiency of approximately $18.7 million and its total
liabilities exceeded its total assets by approximately $14.3 million. The
18
<PAGE>
Company's reported net losses for the two years ended December 31, 1998 exceeded
$54 million and included approximately $26 million in goodwill impairment
charges. During the year ended December 31, 1998, accrued expenses, which
include certain sales, excise and other regulatory taxes and fees, increased by
approximately $6.4 million as the Company principally financed its operations
through the nonpayment of these obligations. As of March 31, 1999, the Company
has experienced significant cash flow difficulties and may be unable to meet its
obligations in the short term. In addition, the Company's sales have declined
steadily during the three quarters ended March 31, 1999. This has negatively
impacted receivable levels and short term cash collections, which is the
Company's principal source of cash used to satisfy its obligations. During the
first quarter of 1999, the Company negotiated with several potential financing
sources in an attempt to raise additional debt capital. However, to date, the
Company has been unsuccessful in its attempts to secure short-term financing.
The Company's financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. However, absent
the Company's ability to execute its plans to increase revenues and gross
margins and arrange short-term financing, the Company may be unable to continue
as a going concern, which could significantly impact the liquidation or
settlement value of its assets and liabilities.
At December 31, 1998, the Company had net operating loss carryforwards
("NOLs") aggregating $28,900,000 available to offset future taxable income.
Under Section 382 of the Internal Revenue Code of 1986, as amended, 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.
19
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto are included herewith commencing
on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
information included in the Company's definitive proxy statement in connection
with the Annual Meeting of Stockholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information included in the Company's definitive proxy statement in connection
with the Annual Meeting of Stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information included in the Company's definitive proxy statement in connection
with the Annual Meeting of Stockholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information included in the Company's definitive proxy statement in connection
with the Annual Meeting of Stockholders.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Filed.
See Exhibit Index appearing later in this Report.
(b) Reports on Form 8-K.
None.
21
<PAGE>
Index to Consolidated Financial Statements
Global Telecommunication Solutions, Inc.
Independent Auditors' Report ......................................... F-1
Consolidated Balance Sheets at December 31, 1998 and 1997............. F-2
Consolidated Statements of Operations and Comprehensive Loss
for the Years ended December 31, 1998 and 1997........................ F-3
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years ended December 31, 1998 and 1997........................ F-4
Consolidated Statements of Cash Flows for the Years ended
December 31, 1998 and 1997............................................ F-5
Notes to Consolidated Financial Statements............................ F-6
22
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Global Telecommunication Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Global
Telecommunication Solutions, Inc. and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations and comprehensive
loss, stockholders' equity (deficit) and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Global
Telecommunication Solutions, Inc. and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
3 to the consolidated financial statements, the Company has suffered recurring
losses from operations and has a significant net working capital deficiency at
December 31, 1998 and has not made certain payments of taxes and regulatory
fees. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 3. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
- ---------------------
KPMG LLP
April 9, 1999
Philadelphia, Pennsylvania
F-1
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
---------------- ---------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,604,166 $ 7,867,566
Restricted cash 300,000 -
Accounts receivable, net of reserve for
doubtful accounts of $361,336 and $570,000 3,234,106 2,636,878
Inventories 436,883 174,112
Other assets 103,929 193,699
---------------- ---------------
Total current assets 5,679,084 10,872,255
---------------- ---------------
Goodwill, net (Note 3) 1,952,000 3,516,344
Property and equipment, net (Note 5) 2,225,402 1,485,348
Other assets, net 160,842 378,911
---------------- ---------------
Total assets $ 10,017,328 $ 16,252,858
================ ===============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 5,180,275 $ 2,199,134
Accrued regulatory and license fees 3,241,999 657,164
Accrued earn-out to related party 634,085 -
Accrued expense 3,361,247 1,508,822
Deferred revenues 3,160,958 1,677,615
Estimated sales and excise tax liability (Note 6) 5,621,710 3,663,285
Convertible notes payable, current (Note 7) 2,599,750 -
Notes payable, net current (Note 7) - 450,000
Notes payable to related parties, net (Note 4) 548,815 -
Capital lease obligation - 95,298
---------------- ---------------
Total current liabilities 24,348,839 10,251,318
---------------- ---------------
Notes payable, net (Note 7) - 1,886,982
Convertible notes payable (Note 7) - 2,599,750
---------------- ---------------
Total liabilities 24,348,839 14,738,050
---------------- ---------------
Commitments and Contingencies (Notes 3, 6, and 12)
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 11,321,034 and 5,084,870 113,211 50,848
Additional paid in capital 52,120,397 39,689,698
Accumulated deficit (66,512,239) (37,942,443)
Deferred compensation (6,102) (294,650)
Accumulated other comprehensive income 23,089 11,355
Less: Treasury stock, 47,891 shares (69,867) -
---------------- ---------------
Total stockholders' equity (deficit) (14,351,511) 1,514,808
---------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 10,017,328 $ 16,252,858
================ ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-2
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Year ended
December 31,
--------------------------
1998 1997
----------- -----------
Net sales $ 31,178,125 $ 18,234,640
Cost of sales (exclusive of depreciation) 29,629,086 16,249,773
------------ ------------
Gross profit 1,549,039 1,984,867
------------ ------------
Selling, general and administrative expenses 11,194,989 9,640,506
Depreciation and amortization 1,914,337 2,037,222
Restructuring charge (Note 14) 1,091,436 1,500,606
Goodwill impairment (Note 4) 12,820,868 13,228,154
------------ ------------
Operating loss (25,472,591) (24,421,621)
------------ ------------
Interest income 94,617 253,989
Interest expense and other financing costs 3,191,822 1,368,307
------------ ------------
Loss before income taxes (28,569,796) (25,535,939)
Income taxes - -
------------ ------------
Net loss $(28,569,796) $(25,535,939)
------------ ------------
Foreign currency translation adjustment 11,734 23,206
------------ ------------
Comprehensive loss $(28,558,062) $(25,512,733)
============== =============
Basic and diluted loss per share $ (4.41) $ (7.47)
============== =============
Weighted average shares outstanding - basic
and diluted 6,483,659 3,418,724
============== =============
The accompanying notes are an integral part of these
consolidated financial statements
F-3
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
December 31,
--------------------------------------
1998 1997
----------------- -------------------
<S> <C> <C>
Operating activities:
Net loss $(28,569,796) $(25,535,939)
Adjustment to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 1,914,337 2,037,222
Provision for bad debts 671,380 171,000
Amortization of deferred compensation 487,148 309,496
Amortization of unearned discount 713,018 771,022
Amortization of deferred financing charges 1,672,700 139,835
Issuance of stock in exchange for warrants 1,463 -
Issuance of warrants for services rendered 78,345 -
Issuance of stock as compensation - 50,000
Issuance of stock options as compensation - 145,000
Forgiveness of common stock receivable - 100,000
Loss on disposal of fixed assets 276,692 610,949
Goodwill impairment 12,820,868 13,228,154
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable (1,268,608) (357,759)
Inventories (262,771) 28,017
Deferred costs 32,764 1,095,123
Other assets 168,301 49,711
Accounts payable 2,981,141 (1,039,532)
Accrued expenses and other fees 4,468,816 1,623,021
Deferred revenues 1,483,343 (2,753,694)
Sales and excise taxes payable 1,958,425 1,978,807
----------------- -------------------
Net cash used in operating activities (372,434) (7,349,567)
----------------- -------------------
Investing activities:
Purchases of property and equipment (1,918,867) (859,496)
Acquisitions and related costs (5,320,681) -
----------------- -------------------
Net cash used in investing activities (7,239,548) (859,496)
----------------- -------------------
Financing activities:
Proceeds from issuance of common stock 1,846,750 13,325,731
Proceeds from notes payable 1,250,000 -
Proceeds from the exercise of warrants - 2,500,000
Proceeds from exercise of options 396 8,775
Cash used to secure letter of credit (300,000) -
Payment of notes payable (1,250,000) -
Payments to affiliates - (1,073,921)
Payments on capital lease obligations (95,298) (59,484)
Payments of deferred finance fees (115,000) -
----------------- -------------------
Net cash provided by financing activities 1,336,848 14,701,101
----------------- -------------------
Effects of exchange rates on cash 11,734 23,206
----------------- -------------------
Net increase (decrease) in cash (6,263,400) 6,515,244
Cash and cash equivalents, beginning of period 7,867,566 1,352,322
----------------- -------------------
Cash and cash equivalents, end of period $ 1,604,166 $ 7,867,566
================= ===================
</TABLE>
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
December 31,
--------------------------------------
1998 1997
----------------- -------------------
<S> <C> <C>
Supplemental disclosures:
Cash paid for interest $ 212,249 $ 163,185
================= ===================
Deferred finance fees relating to options and warrants $ 1,450,927 $ -
================= ===================
Deferred compensation relating to options and warrants $ 198,600 $ 501,648
================= ===================
Conversion of convertible notes payable into common stock $ 3,087,500 $ 200,250
================= ===================
Conversion of note payable to related party into common stock $ 1,060,000 $ -
================= ===================
Issuance of stock as compensation $ - $ 50,000
================= ===================
Issuance of stock options as compensation $ - $ 145,000
================= ===================
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 $ -
================= ===================
Forgiveness of common stock receivable $ - $ 100,000
================= ===================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-4
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Accumulated
Common Stock Addi- other
-------------------- tional Accumu- Deferred Common compre-
paid-in ated compen- stock note hensive Treasury
Shares Amount capital deficit sation receivable income stock Total
--------- --------- ----------- ----------- --------- ---------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 1,837,601 18,376 22,990,766 (12,406,504) (102,498) (100,000) (11,851) - 10,388,289
Issuance of common stock in
public stock offering 2,875,000 28,750 13,296,981 - - - - - 13,325,731
Exercise of warrants 333,334 3,333 2,496,667 - - - - - 2,500,000
Conversion of notes payable 21,615 216 200,034 - - - - - 200,250
Exercise of options 10,190 102 8,673 - - - - - 8,775
Deferred compensation arising
from grant of stock options - - 151,648 - (151,648) - - - -
Issuance of common stock
as compensation 7,130 71 49,929 - - - - - 50,000
Amortization of deferred
compensation - - - - 309,496 - - - 309,496
Deferred compensation arising
from issuance of warrants - - 350,000 - (350,000) - - - -
Issuance of stock options
as compensation - - 145,000 - - - - - 145,000
Forgiveness of common stock
note receivable - - - - - 100,000 - - 100,000
Foreign currency translation - - - - - - 23,206 - 23,206
Net loss - - - (25,535,939) - - - - (25,535,939)
-----------------------------------------------------------------------------------------------------
Balance at December 31,
1997 $5,084,870 $50,848 $39,689,698 $(37,942,443) $(294,650) $ - $11,355 $ - $ 1,514,808
Exercise of options 1,000 10 386 - - - - - 396
Amortization of deferred
compensation - - - - 487,148 - - - 487,148
Deferred compensation arising
from issuance of warrants - - 198,600 - (198,600) - - - -
Issuance of common stock in
connection with merger 906,902 9,069 4,797,511 - - - - - 4,806,580
Issuance of warrants related
to April 1998 private
placement - - 658,927 - - - - - 658,927
Issuance of warrants and
options related to
financing commitment - - 792,000 - - - - - 792,000
Issuance of common stock
related to October 1998
private placement 1,198,000 11,980 1,834,770 - - - - - 1,846,750
Issuance of warrants
as compensation - - 78,345 - - - - - 78,345
Conversion of related party
note payable to common
stock 813,008 8,130 1,051,870 - - - - - 1,060,000
Repurchased shares related to
receivable from related
party - - - - - - - (69,867) (69,867)
Conversion of December 1996
notes payable to common
stock 3,170,912 31,711 3,018,290 - - - - - 3,050,001
Issuance of common stock in
exchange for warrants 146,342 1,463 - - - - - - 1,463
Foreign currency translation - - - - - - 11,734 - 11,734
Net loss - - - (28,569,796) - - - - (28,569,796)
------------------------------------------------------------------------------------------------------
Balance at December 31,
1998 11,321,034 $113,211 $52,120,397 $(66,512,239) $ (6,102) $ - $23,089 $(69,867) $(14,351,511)
=========== ======== =========== ============= ========= ======= ======= ========= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-5
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) Business
Global Telecommunication Solutions, Inc. (the "Company") was incorporated
on December 23, 1992 and is engaged in the marketing and distribution of
prepaid phone cards. The Company's phone cards provide consumers access to
long distance services through its switching facilities and long distance
network arrangements.
The majority of the Company's customers are retail establishments,
distributors and businesses which sell the phone cards to the ultimate
user, or which require the Company's phone cards to promote their business
or products.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the financial statements of
the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, revenue and expenses
and the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
Revenue and Cost Recognition
Substantially all the prepaid phone cards sold by the Company are
non-refundable and have expiration dates ranging from twelve to eighteen
months after issuance or six to twelve months after last use. The Company
records the net sales price as deferred revenue when cards are sold and
recognizes revenue as the ultimate consumer utilizes calling time, or, in
the case of promotional phone card programs, during the period the program
is executed. Deferred revenue relating to unused calling time remaining at
each card's expiration is recognized as revenue upon the expiration of such
card.
The Company's primary costs of its prepaid phone cards include the cost of
long distance carrier services, regulatory fees and the design, production
and packaging of the cards. Costs are expensed as incurred, except the
costs of design and production of the card, which are included in inventory
and are expensed when the related revenue is recognized.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with an
original maturity date of three months or less. Restricted cash consists of
a deposit to secure a $300,000 letter of credit required under a carrier
arrangement.
F-6
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Inventory
Inventory consists of phone card production and packaging costs and is
stated at the lower of cost or market, with cost determined using the
average cost method.
Goodwill
Goodwill represents the unamortized excess of the cost over the fair values
of the net assets acquired in acquisitions. Amortization expense has
historically been computed using the straight-line method over 15 years.
The Company periodically reviews goodwill to assess recoverability and this
analysis resulted in an impairment charge of $12,820,868 and $13,228,154 in
the fourth quarter of 1998 and 1997, respectively. In connection with the
1998 impairment review, the Company also re-evaluated the amortization
period for the remaining goodwill and effective January 1, 1999, goodwill
will be amortized on a straight-line basis over three years (See Note 4).
The Company's policy is to evaluate the recoverability of goodwill based on
forecasted undiscounted cash flows from operations.
Goodwill is assessed for impairment whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable.
Impairment losses are measured as the amount by which the carrying
amount of goodwill exceeds its fair value.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective
assets. Expenditures for maintenance and repairs are charged to operations
as incurred.
The estimated useful lives used in computing depreciation of property and
equipment are as follows:
Furniture and fixtures 5 years
Machinery and equipment 3 years
Computers and office equipment 3 years
Vehicles 5 years
Switch equipment 5 years
Assets held under capital leases and leasehold improvements are amortized
over the lives of the respective leases or the useful life of the asset,
whichever is shorter. During the year ended December 31, 1997, the
estimated useful lives of certain types of property and equipment were
changed. The change did not have a material impact on the results of
operations.
Other Assets
Other assets consist primarily of deposits and deferred financing fees.
Amortization expense of these fees to interest expense was computed using
the straight-line method over the term of the related debt which
approximates the effective interest method.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
F-7
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Foreign Currency Translation
Assets and liabilities of the Company's Canadian subsidiary have been
translated at rates of exchange at the end of the period where applicable.
Revenues, costs and expenses have been translated at average exchange rates
in effect during each reporting period. Gains and losses resulting from
foreign currency transactions are included in earnings while translation
adjustments resulting from translation of financial statements are reported
directly in stockholders' equity (deficit)(See Note 14).
Stock Split
In February 1997, the Board of Directors approved a one-for-three stock
split, which became effective in March 1997. All per share data and
references to the number of shares have been restated to give effect to the
reverse stock split.
Net Loss Per Share
Basic loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding, and diluted earnings per share
gives effect to all dilutive potential common shares that were outstanding
during the period. Basic and diluted net loss per share for 1998 and 1997
were the same because potential common shares of 4,629,852 and 4,058,959,
respectively, were not included in the calculation of the net loss per
share since their inclusion would be anti-dilutive.
Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123), which permits
entities to recognize as an expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net loss and pro forma loss per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of AFB Opinion No.
25.
Fair Value of Financial Instruments
The carrying amounts of accounts receivable, accounts payable and notes
payable approximate fair value because of the short maturities of these
amounts.
Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future undiscounted net cash flows to be generated by
the asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount of which the carrying amount of the
assets exceeds the fair value of the assets (See Note 4). Assets to be
disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
F-8
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
New Accounting Pronouncements
In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and display of comprehensive
income and its components in the financial statements.
In March 1998, the American Institute of Certified Public Accounts (AICPA)
issued Statement of Position 98-1, Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use, (SOP 98-1). SOP 98-1 is
effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to
capitalize specified costs and amortization of such costs. The Company does
not expect the adoption of this standard to have a material effect on the
Company's capitalization policy.
The FASB issued SFAS 131, Disclosures About Segments of an Enterprise and
Related Information, which requires that companies disclose segment data
based on how management makes decisions about allocating resources to
segments and measuring their performance. The Company does not have
separate or identifiable segments as it primarily sells one type of product
through standard distribution channels.
Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year presentation.
(3) Going Concern
The Company has incurred significant losses and negative cash flow from
operations during 1997 and 1998. As of December 31, 1998, the Company had a
working capital deficiency of approximately $18.7 million and its total
liabilities exceeded its total assets by approximately $14.3 million. The
Company's reported net losses for the two years ended December 31, 1998
exceeded $54 million and included approximately $26 million in goodwill
impairment charges. During the year ended December 31, 1998, accrued
expenses, which include certain sales, excise and other regulatory taxes
and fees, increased by approximately $6.4 million as the Company
principally financed its operations through the nonpayment of these
obligations. As of March 31, 1999, the Company has experienced significant
cash flow difficulties and may be unable to meet its obligations in the
short term. In addition, the Company's sales have declined steadily during
the three quarters ended March 31, 1999. This has negatively impacted
receivable levels and short term cash collections, which is the Company's
principal source of cash used to satisfy its obligations. During the first
quarter of 1999, the Company negotiated with several potential financing
sources in an attempt to raise additional debt capital. However, to date,
the Company has been unsuccessful in its attempts to secure short-term
financing.
The accompanying consolidated financial statements have been prepared on a
going concern basis which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business.
However, absent the Company's ability to execute the plans described in the
following paragraph, the Company may be unable to continue as a going
concern, which could significantly impact the liquidation or settlement
value of its assets and liabilities.
F-9
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
In the second half of 1998, the Company implemented a restructuring plan in
an effort to reduce administrative overhead costs and improve the
efficiency of its operations. Specific actions taken included the
consolidation of facilities, including the closure of its Canadian
operations and the termination of certain employment contracts (See Note
14). In addition, the Company negotiated the conversion of $6,574,750 in
debt to equity (See Notes 7 and 15). Currently, the Company is exploring
opportunities to increase revenues and gross margins and arrange short-term
financing to enable it to continue its operations. However, there can be no
assurance that the Company will be able to successfully accomplish these
objectives.
(4) Acquisitions and Goodwill
NATW and CCI Mergers
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 to Randy Cherkas, the Company's President and
one of the former shareholders of NATW, if certain sales and financial
objectives are achieved. Accordingly, upon occurrence of such events the
additional consideration will increase goodwill. For the year ended
December 31, 1998, $838,900 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. In December 1998, the former shareholders of NATW
preliminarily agreed to convert the NATW Notes into common stock (See Note
7). From the consummation of the NATW merger in February 1998 through March
31, 1999, the Company has paid Mr. Cherkas $341,355 of the aggregate amount
of $838,900 owed to him during that period under the Earn Out. To date, Mr.
Cherkas has the opportunity to earn up to an additional $1,161,100 under
the Earn Out. The Company currently is negotiating with Mr. Cherkas the
payment terms of amounts owed and to be owed to him under the Earn Out.
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 accrued 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. In November 1998, the CCI Note was converted into 813,008 shares of
common stock (See Note 8).
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
purchase price was allocated as follows:
F-10
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
<TABLE>
CCI NATW TOTAL
-------- ------- -------
<S> <C> <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 1,000,000 1,000,000 2,000,000
Cash consideration 1,500,000 2,000,000 3,500,000
Earn out payable -- 838,900 838,900
Balance sheet adjustment 57,661 91,852 149,513
Carrier obligation in connection with 285,124 726,424 1,011,548
mergers, net
Acquisition costs 50,000 50,000 100,000
----------- ---------- -----------
Total consideration 5,019,590 7,386,951 12,406,541
Estimated fair value of assets acquired 70,949 116,852 187,801
---------- ---------- -----------
Goodwill $4,948,641 $7,270,099 $12,218,740
========== ========== ===========
</TABLE>
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 cost to the Company of
providing telecommunications services related to such cards aggregated
$1,761,097. For purposes of the consolidated financial statements contained
herein, $451,185 and $298,364 of the costs have been allocated to the
former shareholders pursuant to indemnification arrangements.
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, were 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 year ended December 31, 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").
F-11
<PAGE>
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 loss on the settlement of
$228,497 was recorded in the consolidated financial statements for the year
ended December 31, 1998.
The following unaudited combined pro forma information reflects the results
of operations assuming the CCI and NATW mergers had been consummated on
January 1, 1997.
Year ended December 31,
--------------------------------
1998 1997
------------ -----------
Net sales $33,492,644 $39,415,401
Net loss ($29,100,815) ($25,796,276)
Net loss per share ($4.49) ($5.96)
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 purchases
been made at the beginning of 1997, or of results which may occur in the
future.
Global Link Merger
On February 29, 1996, pursuant to an Agreement and Plan of Merger dated
January 18, 1996, the Company, through a wholly-owned subsidiary, acquired
all the issued and outstanding shares of common stock of Global Link
Telecom Corporation ("Global Link"). The merger was accounted for as a
purchase. Accordingly, the acquired assets and liabilities were recorded at
their estimated fair values at the date of acquisition and the operating
results of Global Link have been included in the accompanying consolidated
statements of operations from the merger date.
In connection with the merger, the Company issued 572,773 shares of common
stock in exchange for all of the issued and outstanding common stock of
Global Link. In addition, the Company issued 17,602 shares of common stock
to Peoples Telephone Company, Inc. ("Peoples"), a creditor of Global Link
and an affiliate. The total cost of the merger was approximately
$11,400,000, including direct transaction costs of approximately $344,000.
The acquisition resulted in goodwill of $19,069,000, based on allocation of
purchase price:
F-12
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Fairmarket value of common stock issued $ 11,040,000
Fair value of liabilities assumed 10,811,000
Fair value of assets acquired (3,126,000)
Acquisition related costs 344,000
------------
Goodwill $ 19,069,000
============
Goodwill
The Company has experienced significant net losses and negative cash flow
from operations since the respective mergers and current projections
indicate this trend is expected to continue for the foreseeable future. As
a result, in the fourth quarter of 1998 and 1997, the Company reviewed the
recoverability of the carrying amount of the goodwill that had arisen
related to the mergers. In accordance with the Company's accounting policy,
this review encompassed the preparation and review of projections of
undiscounted cash flows (covering the remaining goodwill amortization
period as of December 31, 1998 and 1997). This review resulted in the
conclusion that an impairment loss of $12,820,868 and $13,228,154 should be
recognized to reduce goodwill to its estimated fair value at December 31,
1998 and 1997 respectively. The following table summarizes changes in the
net book value of goodwill during 1997 and 1998.
Balance at December 31, 1996 $ 18,008,599
1997 amortization expense (1,264,101)
Impairment charge (13,228,154)
-------------
Balance at December 31, 1997 3,516,344
Goodwill recorded in connection
with NATW and CCI mergers 12,218,740
1998 amortization expense (962,216)
Impairment charge (12,820,868)
Balance at December 31, 1998 $ 1,952,000
===========
The assessment of goodwill recoverability, which is heavily dependent on
projected financial information, and the goodwill amortization period are
significant accounting estimates as contemplated by the American Institute
of Certified Public Accountants' Statement of Position 94-6, Disclosure of
Certain Significant Risks and Uncertainties. Further, the Company operates
in an industry which is rapidly evolving and extremely competitive. It is
reasonably possible that the Company 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 consolidated financial
statements could be material. While management currently believes that the
recorded amount of goodwill at December 31, 1998 is recoverable, there can
be no assurance that the Company's future results will confirm this
assessment or that an additional write-down or write-off of goodwill will
not be required in the future.
(5) Property and Equipment
Property and equipment consist of the following:
December 31,
------------------------
1998 1997
------- --------
Furniture and fixtures $50,949 $214,491
Machinery and equipment 240,141 56,361
Computers and office equipment 3,069,321 1,700,506
Leasehold improvements 31,702 193,582
--------- ---------
3,392,113 2,164,940
Less accumulated depreciation
and amortization (1,166,711) (679,892)
----------- ---------
$2,225,402 $1,485,348
=========== ===========
F-13
<PAGE>
(6) Estimated Sales and Excise Tax Liability
In November 1997, Congress enacted legislation that specifically addressed
the application of federal excise taxes to the sale of prepaid phone cards.
Accordingly, the Company began to file federal excise tax returns. However,
the taxation of prepaid phone cards is evolving and is not specifically
addressed in certain state jurisdictions in which the Company does
business. Many states have adopted or are considering legislation intended
to tax prepaid phone cards at the point of sale rather than based upon card
usage. The Company has not filed any state sales and use tax returns nor
has it remitted any such taxes to state taxing authorities. Management is
in the process of reviewing the Company's tax collection, remittance and
compliance policies and procedures and has recorded a reserve for estimated
tax obligations and compliance issues. Depending on the ultimate resolution
of these matters, it is reasonably possible that the amount of reserve
could require adjustment in the near term and the amount of such adjustment
could be material.
(7) Debt Obligations
April 1998 Notes
In April 1998, the Company completed a private placement (the "April 1998
Private Placement") pursuant to which it received 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
178,573 shares of common stock ("April 1998 Warrants"). The April 1998
Warrants are exercisable through April 2001 at an initial exercise price of
$7.00 per share. 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 were
amortized to interest expense over the term of the April 1998 Notes. The
April 1998 Notes accrued interest at the rate of 10% per annum and were
payable on the earlier of January 15, 1999 or the date of the closing of a
Qualified Private Placement. The holders had 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 amount of the
April 1998 Notes by the Conversion Price. In October 1998, the notes were
repaid with the proceeds from the October 1998 Private Placement and all
remaining deferred financing costs were expensed (See Note 8).
December 1996 Notes
In December 1996, the Company completed a private placement (the "December
1996 Private Placement") from which the Company derived proceeds of
$3,000,000 through the sale of $3,000,000 of promissory notes and warrants
to purchase 1,000,000 shares of common stock. Based on negotiations with
the note holders in 1998, the notes were payable as follows: $400,000 was
due and payable on the earlier of November 27, 1998 or the date on which
the Company undergoes a change in control; $2,600,000 was due on the
earlier of January 15, 1999 or the date on which the Company undergoes a
change of control. If the notes were not paid upon maturity, the
outstanding principal was to begin to accrue interest at the rate of 12%
per annum and the principal and accrued interest was to become convertible
into common stock, at the option of the holders. In addition, the Company
issued $50,000 of notes, which matured in November 1998, and warrants to
purchase 16,667 shares of common stock in payment of certain legal fees
associated with the December 1996 Private Placement. The estimated fair
market value of the warrants of $1,542,044, as determined by independent
appraisal, was recorded as a discount and is being amortized over the term
of the notes. During the years ended December 31, 1998 and 1997, $713,018
and $771,022 of the discount was amortized to interest expense. In December
1998, the notes were converted into 3,170,912 shares of common stock (See
Note 8).
F-14
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
In connection with the December 1996 Private Placement, the Company paid a
finders fee equal to $150,000 and warrants to purchase 50,000 shares of
common stock. The estimated fair market value of these warrants of $75,840,
along with the cash payment, totaled $225,840 and was recorded as deferred
financing fees which were amortized over the term of the notes.
Convertible Notes Payable
In connection with the Global Link merger, the Company assumed $2,800,000
aggregate principal amount of convertible debentures of which $1,400,000
were due and payable on June 23, 1999 and $1,400,000 were due and payable
on September 14, 1999. The convertible debentures are secured by a first
lien on all assets of the Company. The convertible debentures bear interest
at 6% per annum, payable on May 31st and November 30th of each year. At the
option of the holders, the convertible debentures are immediately due and
payable upon a change in control of Global Link. The principal amount of
the convertible debentures is convertible at the option of the holders at
any time into shares of common stock at a conversion price of $9.264 per
share. The Company may force the conversion of the convertible debentures
if certain conditions are met. During the year ended December 31, 1997,
$200,250 of the debentures were converted into 21,615 shares of common
stock. In January 1999, holders of $2,524,750 aggregate principal amount of
debentures converted the debentures into 3,155,938 shares of common stock
(See Note 15).
Certain of the Company's debt agreements contain provisions that prevent
the Company from declaring or paying dividends.
Notes Payable to Related Parties
In December 1998, the former shareholders of NATW preliminarily agreed to
offset the amounts due to the Company related to Access against the
$1,000,000 of NATW Notes payable owed to the former shareholders of NATW,
and to subsequently convert the net amount due under the NATW Notes into
common stock at a conversion rate of $0.80 per share. The Company and the
former shareholders have not reached a final settlement on the amount 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
reduction of notes payable to related parties (See Note 3).
Financing Commitment
In April 1998, the Company entered into an agreement with an investor
pursuant to which the investor 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 was able to 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 common stock (See Note 11). 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 (See Note 10).
The fair market value of these warrants and options of $792,000 was
recorded as deferred financing fees and were amortized to interest expense
and other financing costs during the year ended December 31, 1998. The
commitment expired unutilized.
(8) Stockholders' Equity
December 1998 Debt Conversion
In December 1998, holders of $3,050,000 principal amount of promissory
notes, converted their notes into an aggregate 3,170,912 shares of common
stock. Certain of the note holders also exchanged 666,667 common stock
purchase warrants for an aggregate of 146,342 shares of common stock.
Further, certain note holders forgave interest of $14,000 due on the notes.
F-15
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
November 1998 Debt Conversion
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.
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.
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 $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 were recorded to interest expense
during the year ended December 31, 1998. Also in October 1998, the Company
issued 30,000 warrants with a value of $78,345 to PMG as consideration for
investment advisory services. The warrants are exercisable at $1.62 per
warrant through January 2001.
Proceeds from Public Stock Offering
In July 1997, the Company sold in a public offering 2,875,000 shares of its
common stock, which, net of offering costs of $2,486,769, generated
proceeds of $13,325,731.
Warrants Exercised
In April 1997, the Company received $2,500,000 upon the exercise of 333,334
of the warrants issued in the December 1996 Private Placement. As
consideration for exercising such warrants, the Company issued warrants to
purchase an aggregate of 250,000 shares of common stock.
Private Placement
In May 1996, the Company sold 200,000 shares of common stock and warrants
to purchase 400,000 shares of common stock through a private placement for
an aggregate of $3,000,000 (the "May 1996 Private Placement"). Costs of
issuance totaled $388,431 consisting principally of placement agent fees
and certain professional fees. In connection with this private placement,
the Company issued an option to the placement agent to purchase up to
20,000 shares of common stock and 40,000 warrants. The value of the
warrants issued was accounted for as a cost of capital.
F-16
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 (See Note 10). The estimated fair
value of these options of $198,600 was initially recorded as deferred
compensation. Expense related to this agreement of $192,498 was recorded
during the year ended December 31, 1998.
In July 1997, the Company issued five-year warrants to an investment bank
to purchase 100,000 shares of common stock in consideration for a one-year
consulting agreement. The estimated fair value of these warrants of
$350,000 was recorded as deferred compensation and the Company has recorded
expense related to this agreement of $204,165 and $145,833 for the year
ended December 31, 1998 and 1997, respectively. The value of these warrants
was fully expensed as of December 31, 1998.
In January 1997, the Company extended its consulting agreements with two of
its stockholders, pursuant to which the stockholders provided consulting
services to the Company for a two-year period ending December 1998. In
consideration for these services, the Company issued options to purchase
50,000 shares of common stock. The estimated fair market value of these
options of $151,648 was recorded as deferred compensation and the Company
has recorded expense related to these agreements of $75,824 and $72,324 for
the year ended December 31, 1998 and 1997, respectively. The value of these
options was fully expensed as of December 31, 1998.
In January 1996, the Company issued five-year warrants to an underwriter
and/or its designees to purchase an aggregate of 66,667 shares of common
stock in consideration for consulting services. The estimated fair market
value of these warrants of $400,000 was recorded as deferred compensation
and the Company has recorded expense related to this agreement of $33,335
for the year ended December 31, 1997. The value of these warrants was fully
expensed as of December 31, 1998.
In April and October 1995, the Company issued five-year warrants to
designees of the underwriter to purchase an aggregate of 33,334 shares of
common stock in consideration for providing the Company the right of first
refusal to pursue any prospective acquisition target in the phone card
industry that the underwriter identified through February 1998. The
estimated fair market value of these warrants of $117,000 was recorded as
deferred compensation and the Company has recorded expense related to these
agreements of $14,667 and $44,004 for the years ended December 31, 1998 and
1997, respectively. The value of these warrants was fully expensed as of
December 31, 1998.
In February 1995, the Company entered into consulting agreements with two
of its stockholders pursuant to which the stockholders provided consulting
services to the Company for a two-year period. In consideration for these
services the company issued options to purchase 66,668 shares of common
stock. The estimated fair market value of these options of $168,000 was
recorded as deferred compensation and the Company recorded an expense
related to these agreements of $14,000 for the year ended December 31,
1997. The value of these options was fully expensed as of December 31,
1997.
F-17
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(9) Income Taxes
The Company had no current federal or state income tax liability for the
years ended December 31, 1998 and 1997 due to the net losses recorded for
those periods.
The actual income tax expense differs from the "expected" tax benefit for
1998 and 1997, computed by applying the U.S. federal corporate tax rate of
34 percent to loss before income taxes, as follows:
1998 1997
---- ----
Computed "expected" tax benefit $ (9,713,730) $(8,682,219)
Non-deductible impairment of goodwill 4,378,147 4,497,572
Increase in valuation allowance (net
of effect of acquisitions) 6,132,601 4,587,751
Other - 16,824
State tax benefit (797,018) (419,928)
------------- -----------
$ -- $ --
============= ===========
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 is as follows:
1998 1997
---- ----
Deferred tax assets:
Benefit of net operating loss
carryforward $9,810,499 $7,087,592
Depreciation 288,164 184,320
Capital loss carryforward 116,620 116,620
Allowance for uncollectible
accounts receivable 144,318 227,658
Deferred revenue 1,262,487 599,855
Deferred compensation 473,947 474,945
Sales and excise tax liability 1,692,164 1,420,447
Other accruals 1,509,262 --
Less: valuation allowance (15,286,192) (10,027,765)
------------ ----------
Net deferred tax asset 11,269 83,672
Deferred tax liabilities:
Deferred costs (11,269) (77,037)
Depreciation on fixed assets -- --
Other -- (6,635)
----------- -----------
Net deferred income taxes -- --
=========== ===========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not some portion or the entire deferred tax
asset will be realized. The ultimate realization of the deferred tax asset
is dependent upon the generation of future taxable income during the
periods in which temporary differences or net operating loss carryforwards
become deductible. Management considers scheduled reversals of deferred tax
liabilities, projected future taxable income, and tax planning strategies
which can be implemented by the Company in making this assessment. Based
upon the Company's historical operating losses and scheduled reversal of
deferred tax liabilities, the Company has established a valuation allowance
of $15,286,192 at December 31, 1998. The change in the valuation allowance
for deferred tax assets was an increase of $5,258,427.
At December 31, 1998, the Company had net operating loss carryforwards
("NOLs") aggregating approximately $28,900,000 expiring in years 2007
through 2018. Under Section 382 of the Internal Revenue Code of 1986, as
amended, utilization of prior NOL's is limited after an ownership change,
as defined in such Section 382, to an amount equal to the value of the loss
corporation's outstanding stock immediately before the date of the
ownership change, multiplied by the federal long-term tax exempt rate in
effect during the month that the ownership change occurred. As a result of
the Global Link merger and the secondary stock offering which occurred in
1997, the Company is subject to limitations on the use of its NOL's as
provided under Section 382. In addition, additional ownership charges may
have occurred in 1998 as a result of various equity and financing
transactions. Accordingly, there can be no assurance that a significant
amount of existing NOL's will be available to the Company.
F-18
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(10) Stock Option Plan
The Company has reserved 1,500,000 shares of common stock under its 1994
incentive and nonqualified stock option plan ("1994 Plan"). The 1994 Plan
authorizes the granting of stock options, restricted stock awards, and
deferred stock awards and stock appreciation rights to key employees,
officers, directors and consultants. All incentive stock options which will
be granted by the Company, with the exception of those options granted to
persons holding more than ten percent of the voting common stock in the
Company on the date of grant, expire ten years after grant and are issued
at exercise prices which are not less than the fair market value of the
common stock on the date of grant. Incentive options granted to persons
holding more than ten percent of the voting common stock of the Company on
the date of grant expire five years after grant and are issued at exercise
prices which are not less than 110 percent of the fair market value of the
stock on the date of grant. Nonqualified stock options granted under the
1994 Plan may be granted at any price determined by the Board of Directors,
however, the price may not be less than the fair market value of the common
stock on the date of grant. Stock options vest over a period determined by
the Board of Directors. The 1994 Plan contains certain change in control
provisions, which include those that could cause options to become
immediately exercisable.
A summary of activity under the 1994 Plan is as follows:
Weighted
Average
Number Exercise
of Shares Price
---------- -------
Outstanding at January 1, 1997 185,855 $ 9.97
Granted 224,170 6.81
Canceled (21,614) 9.05
Exercised (555) 7.88
---------- -------
Outstanding at December 31, 1997 387,856 5.37
Granted 958,511 2.32
Canceled (98,538) 4.95
Exercised -- --
--------- ------
Outstanding at December 31, 1998 1,247,829 $ 3.94
========= ======
At December 31, 1998, 347,854 options were exercisable and 252,172 options
to purchase shares were available for future grant.
Non-plan options
In connection with the financing commitment entered into in April 1998, the
Company granted 50,000 options to each of Messrs. Barry Rubenstein, a
principal shareholder of the Company, and Eli Oxenhorn as consideration for
introducing the investor to the Company (See Note 7). These options became
exercisable in September 1998, and will remain exercisable until April 2003
and have an exercise price of $7.125 per share.
F-19
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
In January 1998, in connection with a consulting agreement with JEB
Partners, the Company granted options to purchase 60,000 shares of common
stock at an exercise price of $6.125 (See Note 8). The options are
immediately exercisable and expire five years from the date of grant.
During the year ended December 31, 1997, the Company granted non-qualified
options to employees and officers of the Company to purchase an aggregate
of 305,000 shares of common stock at exercise prices ranging from $6.44 to
$6.56. The options vest at various dates and expire five years from date of
vesting. During the year ended December 31, 1998, 40,000 of these options
were canceled. At December 31, 1998, 173,334 of these options were
exercisable.
In July 1997, in connection with the Company's public stock offering the
Company granted to the representative of the underwriters an option to
purchase 250,000 shares of common stock at an exercise price of $9.08 per
share. The option is exercisable commencing July 1998 for a period of four
years.
In connection with the Global Link merger, options and warrants to purchase
145,000 shares of common stock of Global Link were converted into options
to purchase an aggregate of 36,645 shares of the Company's common stock at
exercise prices ranging from $.40 to $7.92. All of these options were
exercisable, and 1,000 and 9,635 of these options were exercised during the
years ended December 31, 1998 and 1997, respectively. Such options expire
at various dates through 2003. In January 1998 certain of these options
were repriced to $6.563, the then fair value of the Company's common stock.
In February 1996, the Company granted nonqualified options to purchase an
aggregate of 58,334 shares of common stock at an exercise price of $18.375
per share to officers of the Company. During the year ended December 31,
1997, 41,667 of these options were canceled. The options vest in three
annual installments commencing in February 1997 and will remain exercisable
for a period of five years from the date of vesting. In January 1998, these
options were repriced to $6.563, the then fair value of the Company's
common stock.
In April 1995, the Board of Directors granted to certain consultants
nonqualified stock options to purchase an aggregate of 2,500 shares of
common stock at an exercise price of $16.50 per share. Such options were
immediately exercisable and expire five years from the date of grant.
In March 1995, the Company granted non-qualified options to purchase 33,334
shares of common stock at an exercise price of $15.00 per share to a former
officer of the Company. The options vest 33 1/3% per annum commencing March
20, 1996 and will remain exercisable for a period of five years from the
date of vesting.
In October 1994, the Board of Directors granted to certain officers and/or
directors immediately exercisable ten-year options to purchase 25,000
shares of common stock at an exercise price of $9.99 per share. In January
1998, certain of these options were repriced to $6.563, the then fair value
of the Company's common stock.
F-20
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Summarized Information for Stock Options at December 31, 1998
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------- ---------------------------
Exercisable Average Average Average
Price Range Shares Life Price Shares Price
----------- ------ ---- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C>
$0.00 to $6.00 756,142 6.85 $ 1.50 2,001 $0.40
$6.00 to $10.00 1,166,016 4.01 $ 7.13 922,963 $6.15
$10.01 and over 104,180 5.70 $14.92 104,180 $14.92
------- -------
2,026,338 1,029,144
========= =========
</TABLE>
As of December 31, 1998, the Company has reserved an aggregate of 2,026,338
shares of common stock for issuance upon the exercise of options.
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.
SFAS No. 123
The Company applies APB Opinion No. 25 in accounting for stock options and,
accordingly, no compensation cost has been recognized for its stock options
in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss would have increased to
the pro forma amounts indicated below:
1998 1997
---- ----
Net loss As reported ($28,569,796) ($25,535,939)
Pro forma ($29,829,794) ($26,968,802)
Net loss per share As reported ($4.41) ($7.47)
Pro forma ($4.60) ($7.85)
The per share weighted-average fair value of stock options granted during
1998 and 1997 was $1.67 and $4.27 on the date of grant using the Black
Scholes option-pricing model with the following weighted-average
assumptions: 1998 expected dividend yield 0%, risk-free interest rate of
4.15%, expected life of 3 years and volatility of 214%; 1997 expected
dividend yield 0%, risk-free interest rate of 5.85%, expected life of 3
years and volatility of 78%.
Pro forma net loss reflects only options granted in 1998, 1997, 1996 and
1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the
options vesting period and compensation cost for options granted prior to
January 1, 1995 is not considered.
F-21
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(11) Warrants
The following warrants to purchase common stock were outstanding at
December 31, 1998 (excluding underwriters' warrants below):
Issue Date Shares Exercise Price Expiration Date
---------- ------ -------------- ---------------
October 1998 30,000 $ 1.63 October 2003
April 1998 178,573 $ 7.00 April 2003
April 1998 100,000 $ 7.50 April 2001
July 1997 100,000 $ 1.63 January 2001
April 1997 250,000 $12.00 December 1999
December 1996 66,666 $ 7.50 November 2001
May 1996 400,000 $12.00 December 1999
February 1996 7,085 $13.64 February 2000
January 1996 66,667 $15.38 December 2000
October 1995 16,667 $15.00 October 2000
April 1995 16,667 $15.00 April 2000
December 1994 980,560 $12.00 December 1999
---------
2,212,885
=========
The December 1994 warrants are public warrants and are redeemable by the
Company at a price of $.30 per public warrant. To qualify for redemption,
the closing bid quotation of the Company's stock on all 20 trading days
following the third day on which the Company gives notice of redemption,
must be at least 187.5% of the effective exercise price. The exercise price
of the public warrants is subject to adjustment in certain circumstances.
Underwriter Warrants
In connection with its initial public offering, the Company sold to the
underwriter for an aggregate of $150, warrants to purchase up to 50,000
shares of common stock at a purchase price of $24.15 per share and/or
50,000 public warrants at a purchase price of $.483 per warrant. Such
warrants are exercisable at $12.00 per warrant through December 14, 1999.
As of December 31, 1998, the Company had reserved 2,302,885 shares of
common stock for issuance upon the exercise of warrants.
(12) Commitments and Contingencies
Lease Commitments
The Company's future minimum annual rental commitments, net of amounts
subleased, at December 31, 1998 under operating leases for office space are
as follows:
Year Amount
---- ------
1999 $360,961
2000 236,910
2001 151,497
2002 190,420
2003 and thereafter 93,850
----------
$1,034,088
==========
The Company has the right to terminate certain of the leases given
sufficient advance written notice. Rent expense for the years ended
December 31, 1998 and 1997 amounted to approximately $369,000 and $729,000,
respectively. In addition, the Company's capital lease obligations fully
matured in 1998.
F-22
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The Company leases space from a former officer of the Company. The lease,
which is for a five-year period beginning January 1, 1995, provides for
escalating rental payments throughout the term of the lease. The total
future commitment under the lease is approximately $58,000. The Company
has the option to extend the lease for five years. In addition to rental
payments, the Company pays for improvements and maintenance relating to the
leased property. The rent paid to this former officer for the years ended
December 31, 1998 and 1997 amounted to $82,650 and $73,920, respectively.
In August 1995, the Company entered into a lease for approximately 1,930
square feet of space for its sales offices located at 60 East 42nd Street,
New York, New York. The term of the lease is 62 months and provides for an
annual rent of $45,248. In December 1998, the Company entered into an
agreement with Shelly Finkel Management ("SFM"), a company owned by Shelly
Finkel, the Company's Chairman of the Board, pursuant to which, in
consideration of the Company's $48,000 payment to SFM, SFM agreed to
assume all of the obligations under the lease and indemnify and hold the
Company harmless from all losses, costs and expenses associated with the
lease arising after December 31, 1998. To date, the Company has paid SFM
$24,000.
Employment Arrangements
The Company has entered into employment arrangements with officers of the
Company which provide for aggregate base salaries of $455,000 per annum.
The arrangements, which expire on varying dates also provide for annual
bonuses and covenants not-to-compete during the employment term and for two
years thereafter.
Carrier Arrangements
TheCompany's arrangements with long distance service providers obligate the
Company to generate certain minimum monthly or annual usage through each
network and, if not attained, the Company is subject to underutilization
charges which are recognized as incurred. No such charges were incurred
through December 31, 1998.
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
actions. The Company believes that it has adequately accrued for this
liability, after giving effect to the Company's offsets and counterclaims.
The Company also is involved in litigation incidental to its business. Such
litigation can be expensive and time consuming to prosecute and defend. The
Company believes that these pending litigation matters, in the aggregate,
could have a material adverse effect on its operating results and financial
condition if resolved against the Company.
Dial Around Compensation
The Federal Communications Commission (FCC) has adopted certain rules
governing "Dial Around Compensation" which became effective in October
1997. Such rules establish an arrangement whereby all pay telephone service
providers are to be compensated for interstate and intrastate calls
completed from their pay telephone, including calls that utilize toll free
access codes, such as those typically made by the users of the Company's
prepaid cards. The rules as amended require that each pay telephone owner
is entitled to be compensated $0.24 for each call originating from a pay
telephone. The Company believes that it has adequately accrued for this
liability, which has been estimated based upon pay phone specific
identifiers that are received by the Company as a part of the call detail
records. No payments related to these fees have been made as of December
31, 1998.
F-23
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Universal Service Order
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 5% 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. No payments related to these
fees had been made as of December 31, 1998.
License
In August 1995, the Company obtained a nonexclusive license from a third
party relating to various patents related to telecommunications processes.
The term of the license is through November 2011, when the last patent
expires. The Company is obligated to make minimum payments of $50,000
annually over the term of the agreement. Royalty expense amounted to
$537,640 and $370,189 for the years ended December 31, 1998 and 1997,
respectively. No payments were made during the year ended December 31,
1998.
Consulting Agreement
During the year ended December 31, 1997, the Company and its then Chief
Executive Officer ("CEO") Mr. Wasserson, executed a modification to his
employment agreement whereby Mr. Wasserson agreed to act as consultant
through December 31, 1998. In consideration for these consulting services,
the Company agreed to pay Mr. Wasserson $150,000 in equal monthly
installments during the consulting period, established a mechanism to
forgive its common stock note receivable of $100,000 from Mr. Wasserson,
and issued 50,000 options with an estimated fair market value of $145,000.
In conjunction with its 1997 restructuring plan, the Company elected not to
use Mr. Wasserson's services and, accordingly, recorded a $395,000 charge
to expense related to the unused portion of its consulting agreement.
(13) Major Customers and Credit Concentrations
For the year ended December 31, 1997, the Company had one customer that
accounted for 14% of net sales and $279,369 of accounts receivable at
December 31, 1997.
(14) Restructuring Charge
1998 Restructuring
During the year ended December 31, 1998, the Company recorded a $1,091,436
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 three 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, three executives'
employment agreements were amended, which included the termination of their
employment. The components of the charge, which is classified as a separate
F-24
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
line item in the accompanying consolidated statement of operations, are as
follows:
Canadian subsidiary closing costs $65,111
Consolidation costs 445,111
Compensation related to amendments to
executive employment agreements 581,214
----------
$1,091,436
==========
Costs associated with the closure of the Canadian subsidiary primarily
related to severance costs associated with employees terminated. 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. 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 completed by December 31, 1998. There have been
no adjustments to the liability and $589,906 remains accrued at December
31, 1998, consisting primarily of accrued severance costs and future lease
payments.
1997 Restructuring
During the year ended December 31, 1997, the Company recorded a $1,500,606
restructuring charge which was primarily related to the closure of three
retail phone center locations, the disposal or abandonment of certain fixed
assets, and the modification of an employment agreement with its former CEO
(See Note 12). The components of the charge, which is classified separately
in the accompanying consolidated statement of operations, are as follows:
Store closing costs $574,480
Assets disposal 531,126
Compensation relating to consulting
agreement with former CEO 395,000
--------
$1,500,606
==========
Costs associated with the closure of the retail phone centers primarily
related to lease termination cost and to a lessor extent severance for
employees all of whom were terminated as of December 31, 1997. Results of
operations for the retail phone centers have not been separately measured
by the Company. The assets impairment charge related primarily to the
discontinuance of the use of certain equipment which utilized specific
technology. The activities incorporated in the restructuring plan had been
substantially completed as of December 31, 1997. There have been no
adjustments to the liability and $205,529 of the charge remains accrued at
December 31, 1998, consisting principally of future lease payments.
(15) Subsequent Event
In December 1998, the Company offered the holders of $2,599,750 aggregate
principal amount of debentures the opportunity to convert the debentures
into shares of common stock at a conversion rate of $.80 per share. In
January 1999, holders of $2,524,750 aggregate principal amount of
debentures accepted the offer and converted the debentures into 3,155,938
shares of common stock. In connection with the conversion, the Company will
incur an extraordinary loss of $1,420,172 related to the difference between
the market value of the shares issued on the closing date as compared to
the conversion value.
F-25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: April 14, 1999 GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
By: /s/ Shelly Finkel
--------------------------------------
Shelly Finkel, Chairman of the Board of Directors
In accordance with Section 13 or 15(d) of the Exchange Act, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
/s/ Shelly Finkel
- ------------------ Chairman of the Board of Directors April 14, 1999
Shelly Finkel
/s/ Randolph Cherkas
- -------------------- President and Director April 14, 1999
Randolph Cherkas
/s/ Alan W. Kaufman
- -------------------- Director April 14, 1999
Alan W. Kaufman
/s/ David Lipson
- -------------------- Director April 14, 1999
David Lipson
/s/ Donald L. Ptalis
- -------------------- Director April 14, 1999
Donald L. Ptalis
/s/ Jack N. Tobin
- ------------------ Director April 14, 1999
Jack N. Tobin
/s/ Michael D. Hoppman
- ---------------------- Chief Financial Officer (and April 14, 1999
Michael D. Hoppman principal accounting officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- ----------
3.1 A Certificate of Incorporation
3.2 A Amendment to Certificate of Incorporation
3.3 A By-Laws
3.4 B Certificate of Merger of Merger Sub into Global Link
3.5 F Certificate of Merger - NATW into NATW Acquisition Corp.
3.6 F Certificate of Merger - CCI into CCI Acquisition Corp.
4.1 A Form of Common Stock Certificate
4.2 A Form of Warrant Certificate
4.3 A Warrant Agreement between the Company and Whale Securities Co.,
L.P.
4.4 A Underwriter's Warrant issued to Whale
4.5 C Placement Agent Warrant dated May 10, 1996 issued to Whale
4.6 E Warrant, dated April 15, 1995 between the Company and Craig
Shapiro
4.7 E Warrant, dated October 26, 1995 between the Company and Frog
Hollow Partners
4.8 E Warrant, dated January 22, 1996 between the Company and Whale
4.9 D Form of Warrant issued in the December 1996 Private Placement
4.10 * Note and Warrant Purchase Agreement dated April 8, 1998 among
the Company, Penn Merchant and each of the investors
4.11 * Form of Series A Convertible Subordinated Note issued in the
April 1998 Private Placement
4.12 * Form of Warrant issued in the April 1998 Private Placement
4.13 * Common Stock Purchase Agreement dated September 17, 1998 between
the Company and each of the investors
4.14 * Registration Rights Agreement dated October 1, 1998 among the
Company, Penn Merchant and each of the investors
5.1 * Opinion of Graubard Mollen & Miller (including consent)
10.1 A Employment Agreement between the Company and Shelly Finkel
10.2 A Stock Option Agreement between the Company and Shelly Finkel
10.3 A 1994 Performance Equity Plan
10.4 A Service Agreement between the Company and Sprint Corporation
10.5 B Amended and Restated Securities Purchase Agreement
<PAGE>
Exhibit
Number Description
------- ----------
10.6 B The Company's Guaranty of Debentures
10.7 B Employment Agreement between the Company and David Tobin
10.8 B Stock Option Agreement between the Company and David Tobin
10.9 A Sublease for space at 40 Elmont Road, Elmont, New York
10.10 F Merger Agreement by among the Company, NATW Acquisition Corp.,
NATW, Randolph Cherkas and Gary Liguori
10.11 F Employment Agreement between the Company and Randolph Cherkas
10.12 F Merger Agreement by and among the Company, CCI Acquisition Corp.,
CCI and J. Mark Rubenstein
10.13 G Amendment to Employment Agreement between the Company
and David Tobin
10.14 G Amendment to Employment Agreement between the Company and Shelly
Finkel
10.15 H Amendment to Employment Agreement between the Company and David
Tobin
10.16 H Amendment to Merger Agreement by and among the Company, CCI and
J. Mark Rubenstein
10.17 H Agreement between the Company and J. Mark Rubenstein
10.18 H Termination of Employment Agreement between the Company and
J. Mark Rubenstein
21 * Subsidiaries of the Company
23.1 * Consent of KPMG LLP
23.2 * Consent of Graubard Mollen & Miller (filed as part of Exhibit
5.1)
- -----------------------------
* Filed herewith.
A Incorporated by reference to the Company's Registration Statement on Form
SB-2 (No. 33-85998).
B Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the SEC on March 15, 1996.
C Incorporated by reference to Post-Effective Amendment No. 2 to the
Company's Registration Statement on Form SB-2 on Form S-3 (No. 33-85998).
D Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the SEC on December 26, 1996.
E Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-19005).
F Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the SEC on February 23, 1998.
G Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1998.
H Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1998.
<PAGE>
EXHIBIT 4.10
NOTE AND WARRANT PURCHASE AGREEMENT
Among
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
and
PENNSYLVANIA MERCHANT GROUP
and
THE UNDERSIGNED PERSONS AND
ENTITIES LISTED ON SCHEDULE A HERETO
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page
<S> <C> <C> <C>
RECITALS ...........................................................................................................1
ARTICLE I REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF GTS
1.1 Organization.......................................................................................1
1.2 Subsidiaries.......................................................................................1
1.3 Authority..........................................................................................2
1.4 Capital Structure..................................................................................2
1.5 No Distributions on Capital Stock..................................................................3
1.6 Financial Statements...............................................................................3
1.7 Material Changes Since September 30, 1997..........................................................3
1.8 Availability of Assets and Legality of Use.........................................................3
1.9 Title to Property..................................................................................3
1.10 Accounts Receivable................................................................................3
1.11 Governmental Permits...............................................................................3
1.12 Real Property and Leases...........................................................................4
1.13 Insurance..........................................................................................4
1.14 No Undisclosed Liabilities.........................................................................4
1.15 No Default, Violation or Litigation................................................................4
1.16 No Omissions.......................................................................................4
1.17 Finders............................................................................................4
ARTICLE II DELIVERIES
2.1 Deliveries by GTS at the Closing...................................................................5
2.2 Deliveries by PMG at the Closing...................................................................6
ARTICLE III COVENANTS OF GTS
3.1 Affirmative Covenants..............................................................................6
3.2 Negative Covenants.................................................................................7
ARTICLE IV ADJUSTMENTS TO EXERCISE PRICE OF THE WARRANTS AND CONVERSION
PRICE OF THE NOTES
4.1 Adjustment to Exercise Price and Conversion Price and Number
of Shares of Common Stock.......................................................................8
4.2 Elimination of Fractional Interests................................................................9
ARTICLE V REGISTRATION AND RELATED RIGHTS
5.1 Piggyback Registration............................................................................10
5.2 Registration Rights...............................................................................11
5.3 Further Obligations of GTS........................................................................11
5.4 Expenses, etc.....................................................................................12
5.5 Indemnification...................................................................................12
5.6 Withdrawal........................................................................................14
</TABLE>
(i)
<PAGE>
<TABLE>
Page
<S> <C> <C> <C>
ARTICLE VI SURVIVAL OF OBLIGATIONS; INDEMNIFICATION
6.1 Survival of Obligations...........................................................................14
6.2 Indemnification...................................................................................14
ARTICLE VII INVESTMENT REPRESENTATIONS
7.1 Investment Representations........................................................................15
ARTICLE VIII MISCELLANEOUS
8.1 Notices...........................................................................................17
8.2 Expenses..........................................................................................17
8.3 Governing Law.....................................................................................17
8.4 Successors and Assigns............................................................................17
8.5 Partial Invalidity................................................................................18
8.6 Execution in Counterparts.........................................................................18
8.7 Titles and Headings...............................................................................18
8.8 Entire Agreement; Amendments and Waivers..........................................................18
SIGNATURES...........................................................................................................19
SCHEDULES
Schedule A List of Warrant and Note Holders
Schedule 1.1 Principal Subsidiaries
Schedule 1.2 Subsidiaries
Schedule 1.3 Rights Under Agreements
Schedule 1.5 Distributions on Capital Stock
Schedule 1.7 Material Changes Since September 30, 1997
Schedule 1.14 Liabilities
Schedule 3.2 Compensation
</TABLE>
(ii)
<PAGE>
NOTE AND WARRANT PURCHASE AGREEMENT
THIS NOTE AND WARRANT PURCHASE AGREEMENT made and entered into this 8th
day of April, 1998 (the "Agreement") among GLOBAL TELECOMMUNICATION SOLUTIONS,
INC., a Delaware corporation ("GTS"), PENNSYLVANIA MERCHANT GROUP as placement
agent ("PMG"), and the undersigned persons and entities listed on Schedule A
attached hereto (the "Investors").
WITNESSETH:
WHEREAS, PMG has agreed as placement agent to locate investors to
purchase $1,250,000 in aggregate principal amount of convertible subordinated
notes of GTS in substantially the form of Exhibit A hereto (the "Notes"); and
WHEREAS, GTS has agreed to issue to the Investors warrants in
substantially the form of Exhibit B hereto (the "Warrants") which Warrants will
entitle the Investors to purchase an aggregate of 178,571 shares of Common Stock
of GTS at the price set forth in the Warrants in consideration of the purchase
of the Notes by the Investors; and
WHEREAS, GTS intends to raise, with PMG acting as placement agent, not
less than $4.0 million of gross proceeds from a private placement of Common
Stock of GTS pursuant to Regulation D and Regulation S promulgated under the
Securities Act of 1933 (the "Act") on or before May 15, 1998 (the "Qualified
Private Placement"), although no assurance is hereby given to the Investors that
the Qualified Private Placement will be completed as contemplated herein;
NOW, THEREFORE, the Investors, PMG and GTS, in consideration of the
agreements, covenants and conditions contained herein and intending to be
legally bound hereby, hereby make the following representations and warranties,
give the following covenants and agree as follows:
ARTICLE I
REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF GTS
As an inducement to the Investors and PMG to enter into this Agreement
and to consummate the transactions contemplated herein, GTS represents and
warrants to the Investors and PMG and agrees as follows:
1.1 Organization. Each of GTS and its subsidiaries listed on Schedule 1.1
attached hereto (collectively, the "Subsidiaries") is a corporation duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation and is licensed to transact business in
each jurisdiction where the business transacted by it so requires except where
the failure to be so qualified would not have a material adverse effect on the
business, operations or financial condition of GTS and the Subsidiaries. Each of
GTS and the Subsidiaries has the corporate power and authority and other
authorizations necessary or required in order for it to own or lease and operate
its properties and to carry on its business as now conducted.
1.2 Subsidiaries. Schedule 1.2 hereto contains a list of all of the
subsidiaries of GTS.
1.3 Authority. This Agreement, the Notes and the Warrants (collectively,
the "Transaction Documents") and the transactions contemplated herein and
therein have been duly approved by all necessary action on the part of GTS. The
Transaction Documents, when executed and delivered by GTS and, assuming the due
execution hereof by the Investors and PMG, will constitute the valid, legal and
binding agreements of GTS enforceable in accordance with their respective terms,
except as enforcement of such agreements may be limited by bankruptcy,
insolvency or other similar laws affecting creditors' rights generally and that
<PAGE>
the remedy of specific performance is subject to the discretion of the court
before which proceedings therefor are brought and except as enforceability of
any indemnification provision may be limited under federal and state securities
laws. Neither the execution nor the delivery of the Transaction Documents nor
the consummation of the transactions contemplated herein and therein, nor
compliance with nor fulfillment of the terms and provisions hereof and thereof,
will (i) conflict with the conditions or provisions of or constitute a default
under the Certificate of Incorporation or By-laws of GTS, (ii) result in a
breach of the terms, conditions or provisions of any instrument, agreement,
mortgage, judgment, order, award, decree or other restriction to which GTS is a
party or by which it is bound or any statute or regulatory provisions affecting
it; (iii) except as set forth in Schedule 1.3 attached hereto, give any party to
or with rights under any such instrument, agreement, mortgage, judgment, order,
award, decree or other restriction the right to terminate, modify or otherwise
change the rights or obligations of GTS under such instrument, agreement,
judgment, order, award, decree, mortgage or other restriction; or (iv) require
the approval, consent or authorization of or any filing with or notification to
any federal, state or local court, governmental authority or regulatory body,
except, with respect to clauses (ii), (iii) and (iv), if such breaches, rights,
obligations or failure to obtain such approvals, consents or authorizations or
make such filings would not have a material adverse effect on the business,
operations or financial condition of GTS and the Subsidiaries. GTS has full
corporate power and authority to do and perform all acts and things required to
be done by GTS under each of the Transaction Documents. True and complete copies
of the Certificate of Incorporation and By-laws of GTS have been delivered to
PMG.
1.4 Capital Structure.
(a) The authorized capital stock of GTS consists after giving effect
to a one-for-three reverse stock split effected in March 1997 by GTS of (i)
35,000,000 shares of Common Stock, par value $.01 per share, of which 5,991,772
shares have been issued and are outstanding and of which 4,159,626 shares are
reserved for issuance upon the exercise or conversion of outstanding options,
warrants or convertible securities and (ii) 1,000,000 shares of Preferred Stock,
par value $.01 per share, of which no shares are issued and outstanding and of
which no shares are reserved for issuance upon the exercise or conversion of
outstanding options, warrants or convertible securities.
(b) Except for this Agreement and the outstanding options, warrants
and convertible securities for which shares of GTS's Common Stock are reserved
(including options which may be granted under GTS's 1994 Performance Equity
Plan), there are no agreements, arrangements, options, warrants or other rights
or commitments of any character relating to the issuance, sale, purchase or
redemption of any shares of capital stock of GTS. All of the outstanding shares
of Common Stock of GTS are validly issued, fully paid and nonassessable with no
liability attaching to the ownership thereof.
(c) The shares of Common Stock of GTS to be issued upon exercise of
the Warrants or conversion of the Notes will be validly issued, fully paid and
nonassessable shares of GTS.
1.5 No Distributions on Capital Stock. Except as set forth on Schedule 1.5
attached hereto, GTS has not purchased or redeemed any shares of its outstanding
capital stock within the last two years.
1.6 Financial Statements. The financial statements of GTS at and for the
year ended December 31, 1996 and the nine months ended September 30, 1997 as
delivered to PMG (collectively, the "Financial Statements") fairly present the
consolidated financial position of GTS and the Subsidiaries as at the respective
dates thereof and the consolidated results of their operations and their cash
flows for the respective periods covered thereby. Such Financial Statements have
been prepared in conformity with generally accepted accounting principles which,
except as otherwise stated therein, have been consistently applied except to the
extent set forth in the notes contained in the quarterly reports filed after
December 31, 1996.
2
<PAGE>
1.7 Material Changes Since September 30, 1997. Except as set forth on
Schedule 1.7 attached hereto, since September 30, 1997, the business of GTS and
the Subsidiaries have been operated only in the ordinary course and, whether or
not in the ordinary course of business, there has not been, occurred or arisen
(i) any material adverse change in the financial condition of GTS and the
Subsidiaries from that shown in the Financial Statements; (ii) any damage or
destruction in the nature of a casualty loss, whether covered by insurance or
not, to any property or business of GTS which is material to the financial
condition, operations or business of GTS and the Subsidiaries; (iii) any
amendment or termination of any agreement, or cancellation or reduction of any
debt owing to GTS or any of the Subsidiaries or waiver or relinquishment of any
right of material value to GTS or any of the Subsidiaries or (iv) any other
event, condition or state of facts of any character which materially and
adversely affects the results of operations or business, financial condition or
property of GTS or any of the Subsidiaries.
1.8 Availability of Assets and Legality of Use. The assets owned, licensed
or leased by GTS or any of the Subsidiaries includes the assets which are
necessary for the operation of the business of GTS and the Subsidiaries, and
such assets are in good and serviceable condition, normal wear and tear and
obsolescence excepted, and suitable for the uses for which intended and such
assets and their uses conform in all material respects to all applicable laws.
1.9 Title to Property. Each of GTS and the Subsidiaries has good title to
all of the assets owned by it, including the assets reflected in the Financial
Statements, except to the extent that such assets have been disposed of for fair
value in the ordinary course of business since September 30, 1997, and except
for liens incurred in the ordinary course of business, which do not,
individually or in the aggregate, have a material adverse effect on GTS or any
of the Subsidiaries.
1.10 Accounts Receivable. All accounts receivable reflected on the
Financial Statements arising prior to the date thereof, and not collected at the
date thereof, have arisen from bona fide transactions in the ordinary course of
GTS's business.
1.11 Governmental Permits. Each of GTS and the Subsidiaries possesses all
licenses, permits and other authorizations necessary to own or lease and operate
its properties and to conduct its business as now conducted, except where the
failure to possess such licenses and permits would not have a material adverse
effect on the business, results of operation or financial condition of GTS or
the Subsidiaries. All of such licenses, permits and authorizations of GTS and
the Subsidiaries are hereinafter collectively called the "Permits". All Permits
are in full force and effect and will continue in effect after the date hereof
without the consent, approval or act of, or the making of any filing with, any
governmental or regulatory agency, commission or authority. Neither GTS nor any
of the Subsidiaries is, to the best of GTS's knowledge and belief, in violation
in any material respect of the terms of any Permit, and neither GTS nor any of
the Subsidiaries has received notice of any violation or claimed violation
thereunder.
1.12 Real Property and Leases. Every lease or agreement under which GTS or
any of the Subsidiaries is lessee or sublessee of or holds or operates any real
property owned by any third party is in full force and effect and constitutes a
legal, valid and binding obligation of GTS or the Subsidiary which is a party
thereto, as the case may be, except as enforcement of such agreements may be
limited by bankruptcy, insolvency or other similar laws affecting creditors'
rights generally and that the remedy of specific performance is subject to the
discretion of the court before which proceedings therefor are brought and, to
the best of the knowledge of GTS, the other parties thereto, neither GTS nor any
of the Subsidiaries is in default under any such lease or agreement nor has any
event occurred which with the passage of time or giving of notice would
constitute such a default except for any defaults which would not have a
material adverse effect on the business, results of operation or financial
condition of GTS and the Subsidiaries.
3
<PAGE>
1.13 Insurance. Each of GTS and the Subsidiaries maintains policies of fire
and casualty, product and other liability and other forms of insurance in such
amounts and against such risks and losses as are adequate and reasonable for its
business and properties. Each of GTS and the Subsidiaries has complied with each
of such policies and has not failed to give any notice or present any known
claim thereunder, except for any noncompliance or failure to give notice which
would not have a material adverse effect on the business, results of operation
or financial condition of GTS and the Subsidiaries.
1.14 No Undisclosed Liabilities. Except as set forth on Schedule 1.14
hereto, neither GTS nor any of the Subsidiaries is subject to any material
liability (including unasserted claims), absolute or contingent, which is not
shown or which is in excess of amounts shown or reserved for in the Financial
Statements, other than liabilities of the same nature as those set forth in the
balance sheets included in such Financial Statements and reasonably incurred in
the ordinary course of its business after September 30, 1997. Except as set
forth on Schedule 1.14 attached hereto, there is no pending or threatened
litigation outside the ordinary course of business in excess of $25,000.
1.15 No Default, Violation or Litigation. Neither GTS nor any of the
Subsidiaries is in default under any agreement, lease or other document to which
it is a party, or in violation of any law, rule, order, writ, injunction or
decree of any court or federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, which default
or violation, individually or in the aggregate, would have a material adverse
effect on the business, results of operation or financial condition of GTS or
any of the Subsidiaries. There is no action, suit, proceeding or investigation
pending, threatened or contemplated which questions the legality, validity or
propriety of the transactions contemplated by this Agreement.
1.16 No Omissions. None of the representations or warranties of GTS
contained herein, and none of the other information or documents furnished to
PMG or the Investors by GTS in connection with this Agreement when taken
together with the SEC Documents (as hereinafter defined), is false or misleading
in any material respect or omits to state a material fact herein or therein
necessary to make the statements herein or therein not misleading in any
material respect.
1.17 Finders. GTS has not paid or become obligated to pay any fee or
commission to any broker, finder or intermediary in connection with the
transactions contemplated by this Agreement other than PMG.
ARTICLE II
DELIVERIES
2.1 Deliveries by GTS at the Closing. At the closing hereunder (the
"Closing"), which shall occur on April 8, 1998, GTS shall deliver to PMG the
following items:
(a) Notes in a principal amount aggregating $1,250,000, duly executed
by GTS, in substantially the form of Exhibit A hereto and in such amounts and
registrations as PMG shall specify to GTS in writing.
(b) Warrants aggregating rights to purchase 178,571 shares of GTS
Common Stock (after giving effect to the reverse split effected by GTS in March
1997), duly executed by GTS, in substantially the form of Exhibit B hereto and
in such denominations and registrations as PMG shall specify to GTS in writing.
(c) The sum equal to (i) 8% of the aggregate principal amount of the
Notes, which sum represents PMG's fee as placement agent, plus (ii) the
4
<PAGE>
amount of out-of-pocket expenses, including legal fees and costs, incurred by
PMG as placement agent hereunder, to the order of PMG by wire transfer or by
bank cashier's check or in such other form as PMG may reasonably request.
(d) The opinion of Graubard, Mollen & Miller, counsel to GTS, dated
the date of the Closing in form and substance satisfactory to PMG and its
counsel and addressed to PMG and the Investors, to the effect that:
(i) Each of GTS and the Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation and has full corporate power and
authority to own or lease and operate its properties and to carry on its
business as now conducted.
(ii) This Agreement and the transactions contemplated herein have
been duly approved by all necessary corporate action of GTS. This Agreement, the
Notes and the Warrants have been duly and validly executed and delivered by GTS
and the Agreement, assuming due execution thereof by PMG and the Investors, the
Notes and the Warrants are the valid and binding agreements of GTS enforceable
against GTS in accordance with their respective terms, except as enforcement of
such agreements may be limited by bankruptcy, insolvency or other similar laws
affecting creditors' rights generally and that the remedy of specific
performance is subject to the discretion of the court before which proceedings
therefor are brought and except as enforceability of any indemnification
provision may be limited under federal and state securities laws.
(iii) GTS has full power and authority to execute and deliver
this Agreement, the Notes and the Warrants, as the case may be, and to perform
its obligations thereunder. Neither the execution and delivery of this
Agreement, the Notes and the Warrants, nor the consummation of the transactions
contemplated herein or therein, nor compliance with and fulfillment of the terms
and provisions hereof or thereof (i) conflicts with or results in the breach of
the terms, conditions or provisions of, or constitutes a default under, the
Certificate of Incorporation or the By-laws of GTS or any agreement or
instrument known to such counsel to which GTS is a party or by which it is
bound; (ii) gives any party to or with rights under any such agreement or
instrument the right to terminate, modify or otherwise change the rights or
obligations of GTS under any such agreement or instrument or (iii) requires the
consent, approval or authorization of or any filing with or notification to any
federal, state or local court, governmental authority or regulatory body not
already obtained or made, as the case may be.
In giving such opinion, counsel for GTS may rely, as to matters of fact,
upon certificates of officers of GTS, and as to matters relating to the law of
any state other than the State of Delaware, upon opinions of other counsel
satisfactory to them, provided that such counsel shall state that they believe
that they are justified in relying upon such certificates and opinions and
deliver copies thereof to PMG prior to the Closing Date.
(e) A certificate of the President of GTS, dated the date of the
Closing, that the representations and warranties contained in Article I of this
Agreement are true, complete and correct in all material respects as of the date
of the Closing, and that GTS has performed and complied with all agreements
contained herein required to be performed or complied with by GTS on or before
the Closing.
2.2 Deliveries by PMG at the Closing. At the Closing, PMG shall deliver or
cause to be delivered to GTS the following items:
(a) The sum of $1,250,000 to the order of GTS by wire transfer or by
bank cashier's check or in such other form as GTS may reasonably request.
5
<PAGE>
(b) The written acknowledgment of each Investor by execution of this
Agreement that the Notes and the Warrants to be issued at the Closing and the
shares of GTS Common Stock for which such Warrants are exercisable or into which
such Notes are convertible have not been registered under the Act, and each
Investor agrees that as to itself it is acquiring such Notes and the Warrants
purchased by it for investment purposes only and not with a view to any sale or
other distribution thereof in a manner that would violate the Act. Each Investor
consents to the placement of the following legend on the certificate or
certificates representing the Notes and the Warrants to be issued to it:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
TRANSFERRED OR SOLD UNLESS (i) A REGISTRATION STATEMENT UNDER
SUCH ACT IS THEN IN EFFECT WITH RESPECT THERETO, (ii) A
WRITTEN OPINION REASONABLY SATISFACTORY TO THE ISSUER FROM
COUNSEL FOR THE ISSUER OR OTHER COUNSEL FOR THE HOLDER
REASONABLY ACCEPTABLE TO THE ISSUER HAS BEEN OBTAINED TO THE
EFFECT THAT NO SUCH REGISTRATION IS REQUIRED OR (iii) A
"NO-ACTION" LETTER OR ITS THEN EQUIVALENT HAS BEEN ISSUED BY
THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION."
ARTICLE III
COVENANTS OF GTS
3.1 Affirmative Covenants. GTS hereby covenants that, so long as the Notes
remain outstanding, GTS shall comply with the following affirmative covenants:
(a) Financial Statements. GTS shall furnish to PMG the following
financial statements, reports and other documents, such financial statements to
be prepared in accordance with generally accepted accounting principles
consistently applied, certified by GTS's chief executive or financial officer:
(i) Promptly after its filing with the Securities and Exchange
Commission (the "Commission"), and in any event within 120 days after the end of
each fiscal year of GTS, a consolidated balance sheet of GTS as of the end of
such fiscal year and related consolidated statements of operations,
stockholders' equity and cash flows for such fiscal year, all in reasonable
detail and setting forth in comparative form the figures as of the end of and
for the previous fiscal year, which financial statements shall have been
audited, and shall be accompanied by an opinion addressed to GTS from its
independent auditors.
(ii) Promptly after its filing with the Commission, and in any
event within 55 days after the end of each fiscal quarter, an unaudited balance
sheet and unaudited statements of operations, stockholders' equity and cash
flows.
(b) Additional Information.
(i) GTS shall, as promptly as possible, but, in any event, within
ten days after sending, making available, or filing the same, furnish PMG with
all reports and financial statements that GTS shall send or make available to
the stockholders of GTS or the Commission.
6
<PAGE>
(ii) GTS shall furnish PMG with such other nonconfidential
information with respect to the business, properties, assets, or the condition
of operations, financial or otherwise, of GTS or any of the Subsidiaries as PMG
may, from time to time, reasonably request.
(c) Inspection. GTS shall permit, at any reasonable time and from time
to time, upon two business days advance written notice, PMG or its duly
authorized agents or representatives to examine and make extracts from
nonconfidential information contained in GTS's records, books of account,
documents and other materials, to visit its properties, and to discuss the
affairs, finances and accounts of GTS with any of GTS's officers, directors or
independent accountants.
(d) Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Common Stock of GTS to the public without registration, GTS
agrees to:
(i) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Act;
(ii) Use its best efforts to file with the Commission in a timely
manner all reports and other documents required of GTS under the Securities
Exchange Act of 1934 (the "1934 Act"); and
(iii) So long as an Investor owns any Warrants or Notes, to furnish
to the Investor forthwith upon request a written statement by GTS as to its
compliance with the reporting requirements of Rule 144, the Act and the 1934
Act, a copy of the most recent annual or quarterly report of GTS, and such other
reports and documents of GTS as the Investor may reasonably request in availing
itself of any rule or regulation of the Commission allowing the Investor to sell
any such securities without registration.
3.2 Negative Covenants. GTS hereby covenants that, so long as the Notes
remain outstanding, GTS shall comply with the following negative covenants:
(a) Compensation. GTS shall not, without the prior written consent of
PMG, pay any bonuses to any executive officer of GTS other than bonuses that GTS
is obligated to grant under existing employment agreements or that are
consistent with past practices of GTS.
(b) Additional Issuances and Repurchases. Until the earlier of May 15,
1998 or the consummation of the Qualified Private Placement or the termination
of the Letter of Intent between PMG and GTS dated March 17, 1998, except as
required or permitted by this Agreement, GTS shall not, without the prior
written consent of PMG, (i) create, authorize or issue any additional shares of
capital stock, or any rights to acquire any shares of capital stock or any other
security (other than the issuance or exercise of options consistent with past
practices of GTS) or (ii) repurchase any shares of its capital stock.
(c) Amendment of Certificate of Incorporation. Without the prior
written consent of PMG, GTS shall not amend its Certificate of Incorporation or
By-laws in a manner which would have a material adverse effect on the interests
of the Investors.
7
<PAGE>
ARTICLE IV
ADJUSTMENTS TO EXERCISE PRICE OF THE WARRANTS
AND CONVERSION PRICE OF THE NOTES
4.1 Adjustment to Exercise Price and Conversion Price and Number of Shares
of Common Stock. The Exercise Price of the Warrants and the Conversion Price of
the Notes (such Exercise Price or Conversion Price hereinafter referred to as
the "Purchase Price" unless the context otherwise requires) and the number of
shares of Common Stock issuable upon exercise of the Warrants and conversion of
the Notes shall be subject to adjustment from time to time as hereinafter set
forth:
(a) Adjustments for Qualified Private Placement. Concurrently with the
completion of the Qualified Private Placement, in the event the Purchase Price
is greater than the price at which the Common Stock of GTS is sold in the
Qualified Private Placement, (i) the Purchase Price shall be adjusted to the
price per share at which the Common Stock of GTS is sold in the Qualified
Private Placement and (ii) the number of shares of Common Stock issuable upon
exercise of the Warrants shall be adjusted to an amount equal to the principal
amount of the respective Investor's Note divided by the price per share at which
the Common Stock of GTS is sold in the Qualified Private Placement.
(b) Stock Dividends - Recapitalization, Reclassification, Split-Ups.
If, after the date hereof, and subject to the provisions of Section 4.2 hereof,
the number of outstanding shares of Common Stock of GTS is increased by a stock
dividend on the Common Stock of GTS payable in shares of Common Stock of GTS or
by a split-up, recapitalization or reclassification of shares of Common Stock of
GTS or other similar event, then, on the record date therefor, the number of
shares of Common Stock of GTS issuable on exercise of the Warrants and
conversion of the Notes shall be increased in proportion to such increase in
outstanding shares.
(c) Aggregation of Shares. If after the date hereof, and subject to
the provisions of Section 4.2 hereof, the number of outstanding shares of Common
Stock of GTS is decreased by a consolidation, combination or reclassification of
shares of Common Stock of GTS or other similar event, then, upon the record date
therefor, the number of shares of Common Stock of GTS issuable on exercise of
the Warrants and conversion of the Notes shall be decreased in proportion to
such decrease in outstanding shares.
(d) Adjustments in Purchase Price. Whenever the number of shares of
Common Stock of GTS purchasable upon the exercise of the Warrants or conversion
of the Notes is adjusted, as provided in this Section 4.1, the Purchase Price
shall be adjusted (to the nearest cent) by multiplying the Purchase Price
immediately prior to such adjustment by a fraction (x) the numerator of which
shall be the number of shares of Common Stock of GTS purchasable upon the
exercise of the Warrants or conversion of the Notes, as the case may be,
immediately prior to such adjustment, and (y) the denominator of which shall be
the number of shares of Common Stock of GTS so purchasable immediately
thereafter.
(e) Replacement of Securities upon Reorganization, etc. In case of any
reclassification or reorganization of the outstanding shares of Common Stock of
GTS other than a change covered by Subsection 4.1(b) hereof or which solely
affects the par value of such shares of Common Stock of GTS, or in the case of
any merger or consolidation of GTS with or into another corporation (other than
a consolidation or merger in which GTS is the continuing corporation and which
does not result in any reclassification or reorganization of the outstanding
shares of Common Stock of GTS), or in the case of any sale or conveyance to
another corporation or entity of the property of GTS as an entirety or
substantially as an entirety in connection with which GTS is dissolved, each
holder of the Warrants and the Notes shall have the right thereafter (until the
expiration of the right of exercise of the Warrants or conversion of the Notes,
8
<PAGE>
as the case may be) to receive upon the exercise or conversion thereof, for the
same aggregate Purchase Price payable thereunder immediately prior to such
event, the kind and amount of shares of Common Stock or other securities or
property (including cash) receivable upon such reclassification, reorganization,
merger or consolidation, or upon a dissolution following any such sale or other
transfer, by a holder of the number of shares of Common Stock of GTS obtainable
upon exercise of the Warrants or conversion of the Notes immediately prior to
such event; and if any reclassification also results in a change in shares of
Common Stock of GTS covered by Subsections 4.1(b) or 4.1(c) hereof, then such
adjustment shall be made pursuant to Subsections 4.1(b), 4.1(c), 4.1(d) and this
Subsection 4.1(e) hereof. The provisions of this Subsection 4.1(e) shall
similarly apply to successive reclassifications, reorganizations, mergers or
consolidations, sales or other transfers.
(f) Changes in Form of Warrant or Note. The form of Warrant or Note
need not be changed because of any change pursuant to this Section 4.1, and
Warrants and Notes issued after such change may state the same Purchase Price
and the same number of shares of Common Stock of GTS as are stated in the
Warrants or Notes initially issued pursuant to this Agreement. The acceptance by
any holder of the issuance of new Warrants or Notes reflecting a required or
permissive change shall not be deemed to waive any rights to a prior adjustment
or the computation thereof.
(g) Notice of Adjustments. Whenever the Purchase Price or the number of
shares of Common Stock issuable upon exercise of the Warrants or conversion of
the Notes shall be adjusted pursuant to this Section 4.1, GTS shall, within ten
calendar days after such event, make a certificate signed by the President or a
Vice President and by the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary of GTS, setting forth, in reasonable detail, a
description of the adjustment, the event requiring the adjustment and the method
by which such adjustment was calculated, and cause copies of such certificate to
be delivered to each registered holder of the Notes and/or the Warrants in
accordance with the provisions of Section 8.1 hereof.
4.2 Elimination of Fractional Interests. GTS shall not be required to issue
certificates representing fractions of shares of Common Stock of GTS upon the
exercise of the Warrants or conversion of the Notes, nor shall it be required to
issue scrip or pay cash in lieu of any fractional interests, it being the intent
of the parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of shares of Common Stock of GTS or
other securities, properties or rights.
ARTICLE V
REGISTRATION AND RELATED RIGHTS
5.1 Piggyback Registration.
(a) As used in this Section 5, the following terms shall have the
following respective meanings:
(i) "Registration Stock" shall mean: (A) any shares of Common
Stock or other securities issued or issuable upon exercise in whole or in part
of the Warrants or upon conversion in whole or in part of the Notes and (B) any
shares of Common Stock or other securities issued in respect of any such
securities upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event; provided, however, that Registration Stock shall
not include any such shares disposed of pursuant to one or more registration
statements under the Act or pursuant to Rule 144 under the Act. For purposes of
this Section 5, any record holder of at least 20% of the securities originally
acquired by any Investor hereunder which are either convertible into or
exercisable for the purchase of Registration Stock or exercisable for securities
which are convertible into Registration Stock shall be deemed to be the holder
of the Registration Stock issuable upon such exercise and/or conversion.
9
<PAGE>
(ii) "Additional Registration Stock" shall mean any shares of
Common Stock of GTS which have been issued or shall be issued in the future and
which have rights given in writing to be included in GTS registrations under the
Act.
(b) If, at any time GTS shall seek to register under the Act or
qualify any of the securities holdings of GTS or any of its stockholders except
in connection with any stock option plan, stock purchase plan, savings or
similar plan or an acquisition, merger or exchange of stock and if the form of
registration statement proposed to be used may be used for the registration of
the Registration Stock, then, on each such occasion, GTS shall either include in
such registration statement or furnish the Investors with at least 20 days prior
written notice thereof. At the written request of an Investor (a "Selling
Investor"), given within 10 days after the receipt of such notice, GTS will
cause all of the Registration Stock for which registration shall have been
requested by the Investors to be included in such registration statement. In the
event that GTS offers any of its securities in an offering exempt from
registration under the Act pursuant to Regulation A, GTS will provide to the
Investors rights comparable to those provided herein.
If GTS's legal counsel advises GTS in writing that it is their opinion
that, by reason of Rule 144 or otherwise, a sale of all Registration Stock
proposed to be sold by a Selling Investor may be effected without registration
under the Act, then GTS shall not be obligated to provide registration rights
under this Section 5.1 or Section 5.2 hereof with respect to such Registration
Stock.
GTS' obligation under this Section 5.1 shall be subject to the Selling
Investors' obligation to make such representations or warranties or agreements
with GTS or an underwriter with respect to the Investors, their securities and
their intended methods of distribution as are usual and customary.
In the event the distribution of securities covered by a registration
statement described in this Section 5.1(b) is to be underwritten, GTS's
obligation to include the Registration Stock in such registration statement
shall be subject, at GTS's option, to the following further conditions:
(i) If the underwriters so request, the distribution for the
account of the Selling Investors shall be underwritten by the same underwriters
who are underwriting the distribution of the securities for the account of GTS
and/or any other persons whose securities are covered by such registration
statement, and the Selling Investors shall enter into an agreement with such
underwriters containing customary provisions;
(ii) If the underwriting agreement entered into with the
aforesaid underwriters contains restrictions upon the sale of securities of GTS,
other than the securities which are to be included in the proposed distribution,
for a period not exceeding 180 days from the effective date of the registration
statement, then such restrictions shall be binding upon each of the Selling
Investors and, if requested by GTS, each of the Selling Investors shall enter
into a written agreement to that effect; and
(iii) If the underwriters shall state in writing that they are
unwilling to include any or all of the Selling Investors' securities in the
proposed underwriting because such inclusion will materially interfere with the
orderly sale and distribution of the securities being offered by GTS, then the
number of Selling Investors' securities and securities held by any other
stockholder of GTS to be included shall be reduced pro rata on the basis of the
number of shares owned by such holders, or there shall be no inclusion of
Selling Investors' securities in the registration statement and proposed
distribution, in accordance with such statement by the underwriters.
5.2 Registration Rights. Upon completion of the Qualified Private
Placement, the holders of the Registration Stock shall be granted registration
rights identical to the registration rights granted to the purchasers of Common
Stock in the Qualified Private Placement. It is currently anticipated that such
registration rights will include the agreement of GTS to file a registration
10
<PAGE>
statement covering the Common Stock sold in the Qualified Private Placement
within 60 days following the date of the Closing of the Qualified Private
Placement.
5.3 Further Obligations of GTS. Whenever GTS is required to register any
of the Registration Stock pursuant to any of the provisions of this Article V,
GTS shall also be obligated to do the following:
(a) Prepare for filing with the Commission such amendments and
supplements to said registration statement and the prospectus used in connection
therewith as may be necessary to keep said registration statement effective and
to comply with the provisions of the Act with respect to the sale of securities
covered by said registration statement for the period necessary, but in no event
more than nine months, to complete the proposed public offering;
(b) Furnish to each Selling Investor such copies of preliminary and
final prospectuses and such other documents as said Selling Investor may
reasonably request to facilitate the public offering of such Selling Investor's
Registration Stock;
(c) Keep such registration statement current for a period of 180 days
after the effective date thereof;
(d) Provided the Registration Stock is sold pursuant to an
underwritten offering described in Section 5.1(b)(i) hereof, furnish to the
Selling Investors, and any underwriters or broker-dealers through whom the
Registration Stock may be sold, an opinion or opinions of counsel for GTS and a
letter or letters of the independent certified public accountants for GTS, in
form and substance customary for similar offerings;
(e) Provided the Registration Stock is sold pursuant to an
underwritten offering described in Section 5.1(b)(i) hereof, permit each Selling
Investor or his counsel or other representatives, at the Selling Investor's
expense, to inspect and copy such corporate documents and records as may
reasonably be requested by them; and
(f) Furnish to each Selling Investor a copy of all preliminary and
final prospectuses filed in connection with any such offering.
5.4 Expenses, etc. All expenses in connection with the preparation and
filing of any registration statement under this Section 5, any registration or
qualification under the securities or Blue Sky laws of states in which the
offering will be made under such registration statement, and any filing fee of
the National Association of Securities Dealers, Inc. relating to such offering,
shall be borne in full by GTS, except for any underwriters' or brokers'
commissions, fees required to be paid by a selling stockholder rather than GTS
in order to comply with applicable Blue Sky or state securities laws, fees or
expenses expressly applicable to securities being sold by the holders of
securities, and fees or expenses of their counsel.
5.5 Indemnification.
(a) GTS shall indemnify the Selling Investors of Registration Stock,
and, to the extent required in any agreement with any underwriter or
broker-dealer through whom the Registration Stock may be sold, any such
underwriter or broker-dealer and each person, if any, who controls any such
underwriter or broker-dealer (within the meaning of the Act) against all losses,
claims, damages, liabilities, expenses or actions in respect thereof (under the
Act or common law or otherwise) caused by any untrue statement or alleged untrue
statement of a material fact contained in any registration statement under which
such Registration Stock was registered under the Act, any preliminary or final
prospectus contained therein, or any amendment or supplement thereto, or caused
by any omission or alleged omission to state therein a material fact required to
11
<PAGE>
be stated therein or necessary to make the statements therein not misleading;
and will reimburse the Selling Investors of Registration Stock for any legal or
other out-of-pocket expenses reasonably incurred by such Selling Investors in
connection with investigation for defending against such loss, claim, damage,
liability or action; except insofar as such losses, claims, damages, liabilities
or expenses are caused by any untrue statement or omission contained in
information furnished in writing to GTS by such Selling Investors expressly for
use therein. In connection with any such registration statement, the Selling
Investors of Registration Stock will furnish GTS in writing such information as
may reasonably be requested by GTS for use in any such registration statement or
prospectus and will indemnify GTS, its directors and officers, and, to the
extent required in any agreement with any underwriter or broker-dealer, each
such underwriter or broker-dealer and each person, if any, who controls GTS or
any underwriter or broker-dealer (within the meaning of the Act) against any
losses, claims, damages, liabilities, expenses and actions in respect thereof
(under the Act or common law or otherwise) resulting from any untrue statement
or alleged untrue statement of a material fact required to be stated in such
registration statement or prospectus and necessary to make the statements
therein not misleading; and will reimburse GTS or any legal or other
out-of-pocket expenses reasonably incurred by it in connection with
investigating or defending against such loss, claim, damage, liability or
action; but only to the extent that such untrue statement or omission was
contained in information so furnished in writing by the Selling Investors of
Registration Stock expressly for use therein, and only to the extent of proceeds
received by the Selling Investors of Registration Stock in the offering. GTS
further agrees that, in connection with any underwritten public offering, it
also will enter into customary contribution arrangements with the Selling
Investors of Registration Stock and the underwriters or broker-dealers through
whom the Registration Stock may be sold, with respect to situations in which
indemnification is potentially unavailable.
(b) Notice. Promptly after receipt by an indemnified party under this
Section 5.5 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if such party desires to make
a claim in respect thereof against any indemnifying party under this Section
5.5, deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in, and,
to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with counsel
mutually satisfactory to the parties; provided, however, that an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if representation of such indemnified
party by the counsel retained by the indemnifying party would not be appropriate
due to actual or potential conflict of interests between such indemnified party
and any other party represented by such counsel in such proceeding. The failure
to deliver written notice to the indemnifying party within a reasonable time of
the commencement of any such action, if prejudicial to its ability to defend
such action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 5.5, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 5.5.
(c) Defect Eliminated in Final Prospectus. The foregoing indemnity
agreements of GTS and the Selling Investors are subject to the condition that,
insofar as they relate to any untrue statement or omission made in a preliminary
prospectus but eliminated or remedied in the amended prospectus on file with the
Commission pursuant to Rule 424(b) (the "Final Prospectus"), such indemnity
agreement shall not inure to the benefit of any person if a copy of the Final
Prospectus was furnished to the indemnified party and was not furnished to the
person asserting the loss, liability, claim or damage at or prior to the time
such action is required by the Act.
(d) Contribution. In order to provide for just and equitable
contribution to joint liability under the Act in any case in which either (i)
any holder exercising rights under this Agreement, or any controlling person of
any such holder, makes a claim of indemnification pursuant to this Section 5.5
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 5.5 provides
12
<PAGE>
for indemnification in such case or (ii) contribution under the Act may be
required on the part of any such Selling Investor or any such required on the
part of any such Selling Investor or any such controlling person in
circumstances for which indemnification is provided under this Section 5.5;
then, and in each case, GTS and such holder will contribute to the aggregate
losses, claims, damages or liabilities to which they may be subject (after
contribution from others) (i) in such proportion as is appropriate and equitable
to reflect the relative fault of GTS, on the one hand, and the holder, on the
other hand, (such fault to be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied or withheld by GTS or the holder and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission) or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
and equitable to reflect not only the relative fault of GTS and the holder, but
also the relative benefits received by GTS on the one hand and the holder, on
the other hand, as well as any other relevant equitable considerations;
provided, however, that, in any such case, no person or entity guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation.
(e) Survival. The obligations of GTS and Selling Investors under this
Section 5.5 shall survive the completion of any offering of Registration Stock
in a registration statement, and otherwise.
5.6 Withdrawal. GTS reserves the right, at its option, to withdraw or
terminate any registration statement filed by GTS pursuant to Section 5.1 hereof
prior to its effective date without penalty under this Agreement, provided such
withdrawal or termination shall not relieve GTS of its obligations under this
Article V to register the Registration Stock pursuant to Section 5.1 hereof.
ARTICLE VI
SURVIVAL OF OBLIGATIONS; INDEMNIFICATION
6.1 Survival of Obligations. All certifications, representations and
warranties respectively made herein by GTS and the Investors and their
respective obligations to be performed pursuant to the terms hereof, shall
survive the Closing hereunder, notwithstanding any notice of any inaccuracy,
breach or failure to perform not waived in writing and notwithstanding the
consummation of the transactions contemplated herein with knowledge of such
inaccuracy, breach or failure. All representations and warranties contained
herein shall terminate two years after the Closing hereunder.
6.2 Indemnification.
(a) GTS agrees to indemnify and hold harmless PMG and the Investors
and their respective affiliates, successors and assigns from and against any and
all (x) liabilities, losses, costs, deficiencies or damages ("Loss") only to the
extent of the proceeds received by GTS from the sale of the Notes and the
Warrants contemplated hereby, and (y) reasonable attorneys' and accountants'
fees and expenses, court costs and all other reasonable out-of-pocket expenses
("Expense") incurred by PMG or the Investors, in each case net of any insurance
proceeds received and retained by PMG or the Investors, in connection with or
arising from (i) any breach by GTS of any of its covenants in, or failure of GTS
to perform any of its obligations under, this Agreement or (ii) any breach of
any warranty or the inaccuracy of any representation of GTS contained in this
Agreement or in any certificate delivered by or on behalf of GTS pursuant
hereto.
(b) The Investors agree to indemnify and hold harmless GTS and its
successors and assigns from and against any and all Loss and Expense incurred by
GTS in each case net of any insurance received and retained by GTS in connection
with or arising from (i) any breach by the Investors of any of their covenants
in, or any failure of the Investors to perform any of their obligations
13
<PAGE>
under, this Agreement or (ii) any breach of any warranty or the inaccuracy of
any representation of the Investors contained in this Agreement or in any
certificate delivered by or on behalf of the Investors pursuant hereto.
(c) No claim shall be made for indemnity pursuant to this Section 6.2
until the aggregate amount of Loss and Expense exceeds $50,000, but if the
aggregate amount of such Loss and Expense exceeds such amount, the person
responsible therefor (an "Indemnifying Person") shall be liable for all Loss and
Expense, including such initial $50,000 amount to the person incurring such loss
or expense (an "Indemnified Person").
(d) If any Indemnified Person has suffered or incurred any Loss or
incurred any Expense, the Indemnified Person shall so notify the Indemnifying
Person promptly in writing describing such Loss or Expense, the amount thereof,
if known, and the method of computation of such Loss or Expense, all with
reasonable particularity and containing a reference to the provisions of this
Agreement or any certificate delivered pursuant hereto in respect of which such
Loss or Expense shall have occurred. If any action at law or suit in equity is
instituted by or against a third party with respect to which any Indemnified
Person intends to claim any liability or expense as Loss or Expense under this
Section 6.2, such Indemnified Person shall promptly notify the Indemnifying
Person of such action or suit.
(e) An Indemnifying Person shall have the right to participate in and,
to the extent the Indemnifying Person so desires, jointly with any other
Indemnifying Person similarly noticed, to assume the defense thereof with
counsel mutually satisfactory to the parties; provided, however, that an
Indemnified Person shall have the right to retain its own counsel, with the fees
and expenses to be paid by the Indemnifying Person, if representation of such
Indemnified Person by the counsel retained by the Indemnifying Person would not
be appropriate due to actual or potential conflict of interests between such
Indemnified Person and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the Indemnifying Person
within a reasonable time of the commencement of any such action, if prejudicial
to its ability to defend such action, shall relieve such Indemnifying Person of
any liability to the Indemnified Person under this Section 6.2, but the omission
so to deliver written notice to the Indemnifying Person will not relieve it of
any liability that it may have to any Indemnified Person otherwise than under
this Section 6.2.
ARTICLE VII
INVESTMENT REPRESENTATIONS
7.1 Investment Representations. Each Investor hereby severally represents
and warrants as to itself to GTS that:
(a) Purchase for Own Account. The Notes, the Warrants and any shares
of Common Stock purchased upon exercise of the Warrants or issued upon
conversion of the Notes and any other securities of GTS or any other issuer that
may be receivable under the Warrants or Notes (collectively, the "Securities")
are being, and will be, acquired by the Investor for investment purposes only
for the Investor's own account, not as nominee or agent, and not with the view
to the public resale or distribution thereof within the meaning of the Act.
(b) Disclosure of Information. The Investor acknowledges that it has
received and read all information it considers necessary or appropriate for
deciding whether or not to purchase the Securities, including but not limited to
the Form 10-K of GTS for the year ended December 31, 1996, the Form 10-QSB of
GTS for the period ended September 30, 1997, the Prospectus of GTS dated July 9,
1997, in particular the risk factors contained therein, and the two Forms 8-K of
GTS each dated February 23, 1998 (collectively, the "SEC Documents") and the
disclosures reflecting the material events occurring since September 30, 1997
14
<PAGE>
contained in this Agreement, and has had an opportunity to ask questions and to
receive answers from GTS and its officers regarding the Securities. The Investor
has received no representation or warranty from GTS or its officers, employees
or agents with respect to its investment and has received no information
relating to the operations or business of GTS and the Subsidiaries other than as
set forth in this Agreement and in the publicly-filed documents of GTS.
(c) Investment Experience. The Investor has experience in investing in
securities of companies in the developmental stage, such as GTS, and
acknowledges that the Investor is able to fend for itself and to assess the
economic risk of investment in any of the Securities and has such knowledge and
experience in financial and business matters that it can be assumed to be
capable of evaluating the merits and risks of an investment in any of the
Securities and of protecting its interests in such an investment. The Investor
has not been organized for the purpose of acquiring any of the Securities.
(d) Residency. The Investor's primary residence is at the address set
forth under such Investor's name on the signature page of this Agreement.
(e) Accredited Investor. The Investor understands that GTS is relying
on its representations and agreements for the purpose of determining that this
transaction meets the requirements of the exemptions granted under federal and
state laws. The Investor is an "Accredited Investor" as defined in Regulation D
promulgated under the Act.
(f) Restricted Securities. The Investor understands that the
Securities are and will be characterized as "restricted securities" under the
Act inasmuch as they are being acquired from GTS in a transaction not involving
a public offering and that under the Act and applicable regulations thereunder,
the Securities may be resold without registration under the Act only in limited
circumstances. In this regard the Investor represents that it is familiar with
the terms and conditions of Rule 144 promulgated under the Act, as presently in
effect, and understands the limitations on resale and transfer of the Securities
imposed thereby and by the Act.
(g) Risk. The Investor understands that its investment involves a
certain degree of risk and that there is no assurance as to the future
performance of GTS.
(h) Automatic Conversion of Notes. The Investor acknowledges that the
entire outstanding principal balance of the Notes and the unpaid accrued
interest on the outstanding principal balance of the Notes shall be
automatically converted into shares of Common Stock of GTS on the date of the
closing of the Qualified Private Placement without any further action on the
part of the Investor.
(i) Legends.
(i) The Investor understands that the Securities will bear
legends in substantially the form of the legend set forth above, together with
any other legends required by applicable securities laws.
(ii)Investor acknowledges the following:
EACH PENNSYLVANIA RESIDENT WHO SUBSCRIBES FOR THE SECURI-
TIES BEING OFFERED HEREBY AGREES NOT TO SELL THOSE SHARES FOR
A PERIOD OF 12 MONTHS AFTER THE DATE OF PURCHASE UNLESS
PERMITTED UNDER PENNSYLVANIA "BLUE SKY" OR SECURITIES LAWS.
PURSUANT TO SECTION 207(M) OF THE PENNSYLVANIA SECURITIES ACT
OF 1972, EACH PENNSYLVANIA RESIDENT WHO ACCEPTS AN OFFER TO
PURCHASE THE SECURITIES MADE PURSUANT TO THIS
15
<PAGE>
AGREEMENT, EXEMPTED FROM REGISTRATION, DIRECTLY FROM AN ISSUER
OR AN AFFILIATE OF AN ISSUER, SHALL HAVE THE RIGHT TO WITHDRAW
FROM THIS AGREEMENT AND RECEIVE A FULL REFUND OF ALL MONIES
PAID, WITHOUT INCURRING ANY LIABILITY TO GTS, PMG OR ANY OTHER
PERSON, WITHIN TWO BUSINESS DAYS FROM THE DATE OF RECEIPT BY
GTS OF THIS AGREEMENT. IF THE INVESTOR DESIRES TO WITHDRAW IN
ACCORDANCE WITH THE FOREGOING, THE INVESTOR NEED ONLY, WITHIN
THE TIME SPECIFIED ABOVE, (I) CAUSE A WRITTEN NOTICE OF ITS
INTENTION TO WITHDRAW TO BE RECEIVED BY PMG AT FOUR FALLS
CORPORATE CENTER, WEST CONSHOHOCKEN, PA 19428, ATTENTION: MARY
E. BOWLER, VICE PRESIDENT, ADMINISTRATION, OR (II) DELIVER
SAID NOTICE OF INTENTION TO WITHDRAW TO A TELEGRAPH OFFICE OR
OTHER MESSAGE SERVICE FOR TRANSMITTAL TO PMG AT SAID ADDRESS
OR (III) DEPOSIT SAID NOTICE IN THE UNITED STATES MAILS
(EITHER REGISTERED OR CERTIFIED MAIL) ADDRESSED TO PMG AT SAID
ADDRESS. SUCH LETTER OR TELEGRAM SHOULD BE SENT AND
POST-MARKED PRIOR TO THE END OF THE AFOREMENTIONED SECOND
BUSINESS DAY. ALL TELEGRAPH, POSTAGE OR OTHER TRANSMITTAL FEES
SHALL BE PAID BY THE INVESTOR. SHOULD THE INVESTOR MAKE THE
REQUEST ORALLY, IT SHOULD ASK FOR WRITTEN CONFIRMATION THAT
THE REQUEST HAS BEEN RECEIVED.
ARTICLE VII
MISCELLANEOUS
8.1 Notices. All notices or other communications required or permitted
hereunder shall be in writing and shall be given by confirmed telex or telecopy
or reputable overnight delivery service addressed, if to GTS, to: Global
Telecommunication Solutions, Inc., 10 Stow Road, Suite 200, Marlton, New Jersey
08053, Attention: Daivd Tobin, with a copy to Graubard, Mollen & Miller, 600
Third Avenue, New York, New York 10016, Attention: David Alan Miller, Esquire
and, if to PMG or any Investor, to: Pennsylvania Merchant Group, Four Falls
Corporate Center, West Conshohocken, Pennsylvania 19428, Attention: Mary E.
Bowler, Vice President, Administration with a copy to Duane, Morris & Heckscher
LLP, 4200 One Liberty Place, Philadelphia, PA 19103, Attention: Frederick W.
Dreher, Esquire.
8.2 Expenses. Each party hereto shall pay its own expenses including,
without limitation, legal and accounting fees and expenses, incident to its
negotiation and preparation of this Agreement and to its performance and
compliance with the provisions contained herein.
8.3 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania, without regard to
its rules on conflicts of law.
8.4 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns; provided that the rights of GTS and the rights of any Investor may only
be assigned to such other business organization which shall succeed to
substantially all the assets, liabilities and business of GTS or such Investor,
as the case may be.
8.5 Partial Invalidity. In case any one or more of the provisions contained
herein shall, for any reason, be held to be invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Agreement, but this Agreement shall be construed as
if such invalid, illegal or unenforceable provision or provisions had never been
16
<PAGE>
contained herein unless the deletion of such provision or provisions would
result in such a material change as to cause completion of the transactions
contemplated herein to be unreasonable.
8.6 Execution in Counterparts. This Agreement may be executed in two or
more counterparts, all of which shall be considered one and the same agreement,
and shall become a binding agreement when one or more counterparts have been
signed by each of the parties and delivered to each of the other parties.
8.7 Titles and Headings. Titles and headings to Articles and Sections
herein are inserted for convenience of reference only and are not intended to be
a part of or to affect the meaning or interpretation of this Agreement.
8.8 Entire Agreement; Amendments and Waivers. This Agreement and the Notes
and the Warrants contain the entire understanding of the parties hereto with
regard to the subject matter contained herein. GTS, on the one hand, and PMG and
Investors holding at least 80% of the remaining outstanding principal balance of
the Notes, on the other hand, may, by written instrument, extend the time for
the performance of any of the obligations or other acts of the other parties and
with respect to this Agreement, (a) waive any inaccuracies in the
representations and warranties of the other parties in this Agreement or in any
document delivered pursuant to this Agreement, (b) waive compliance with any of
the covenants of the other parties contained in this Agreement, (c) waive the
other parties' performance of any of its obligations set out in this Agreement
or (d) amend, modify and supplement this Agreement. The failure of any party
hereto to enforce at any time any provision of this Agreement shall not be
construed to be a waiver of such provision, nor in any way to affect the
validity of this Agreement or any part hereof or the right of such party
thereafter to enforce each and every such provision. No waiver of any breach of
this Agreement shall be held to constitute a waiver of any other or subsequent
breach.
17
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto by their duly authorized representatives.
GLOBAL TELECOMMUNICATION INVESTOR (INDIVIDUAL)
SOLUTIONS, INC.
By: _____________________________ _______________________
Randy Cherkas, President (Signature)
________________________
(Name - Please Print)
________________________
(Address)
________________________
(Social Security Number)
PENNSYLVANIA MERCHANT GROUP INVESTOR (ENTITY)
By:________________________ __________________________
(Name - Please Print)
________________________
(Address)
________________________
(Tax Identification Number)
By:_______________________
Name:_____________________
Title:____________________
18
<PAGE>
SCHEDULE A
List of Warrant and Note Holders
<TABLE>
<CAPTION>
Number of Shares
of
Number of Shares Common Stock
of Common Stock Initially Issuable on
Principal Amount Initially Issuable on Conversion of
Name and Address of Notes Exercise of Warrants Notes
-------------------- ------------------ ----------------------- --------------------
<S> <C> <C> <C>
Total: $1,250,000 __________ __________
==========
</TABLE>
19
<PAGE>
SCHEDULE 1.1
Principal Subsidiaries
Global Link Telecom Corporation
GTS Marketing, Inc.
Networks Around The World, Inc.
Centerpiece Communications, Inc.
20
<PAGE>
SCHEDULE 1.2
Subsidiaries
See Schedule 1.1.
21
<PAGE>
SCHEDULE 1.3
Rights under Agreements
None.
22
<PAGE>
SCHEDULE 1.5
Distributions on Capital Stock
None.
23
<PAGE>
SCHEDULE 1.7
Material Events Since
September 30, 1997
1. The acquisition of two subsidiaries, Networks Around the World, Inc.
("Networks") and Centerpiece Communications, Inc. ("Centerpiece"), and
the consequent liability to Access Telecom.
2. Termination of GTS' relationship with ABC Stores and Von Supermarkets,
each of which was a material customer of GTS.
24
<PAGE>
SCHEDULE 1.14
Liabilities
The Company has incurred certain liabilities relating to the cost of
telecommunications usage for prepaid phone cards which had been acquired by
Networks and Centerpiece from Access Telecom, Inc. ("Access"). Prior to the
acquisitions of Networks and Centerpiece, each of Networks and Centerpiece
bought phone cards from Access, i.e., Access served as the telecommunications
provider. Networks and Centerpiece continued to acquire phone cards from Access
after the consummation of the acquisitions. On February 24, 1998, Access advised
GTS, Networks and Centerpiece that it would no longer provide services for the
phone cards acquired by Networks and Centerpiece, despite having been paid for
all or substantially all of those phone cards. Consequently, GTS entered into
agreements with alternative carriers pursuant to which the carriers have agreed
to provide telecommunications services to the phone cards and GTS has agreed to
pay those carriers for any usage associated with the phone cards.
GTS and the former shareholders of Networks and Centerpiece have
agreed to share the liabilities associated with this matter. GTS estimates that
the total liabilities associated with this matter may exceed $1,000,000.
25
<PAGE>
EXHIBIT 4.11
THE SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED OR SOLD UNLESS (i) A
REGISTRATION STATEMENT UNDER SUCH ACT IS THEN IN EFFECT WITH RESPECT THERETO,
(ii) A WRITTEN OPINION REASONABLY SATISFACTORY TO THE ISSUER FROM COUNSEL FOR
THE ISSUER OR OTHER COUNSEL FOR THE HOLDER REASONABLY ACCEPTABLE TO THE ISSUER
HAS BEEN OBTAINED TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED OR (iii) A
"NO-ACTION" LETTER OR ITS THEN EQUIVALENT HAS BEEN ISSUED BY THE STAFF OF THE
SECURITIES AND EXCHANGE COMMISSION.
SERIES A CONVERTIBLE SUBORDINATED NOTE
$________ As of April 8, 1998
FOR VALUE RECEIVED, GLOBAL TELECOMMUNICATION SOLUTIONS, INC.,
a Delaware corporation ("Maker"), hereby promises to pay to the order of
_______________ ("Payee"), in legal and lawful money of the United States of
America, the aggregate sum of __________________________________ ($_________)
with interest thereon according to the terms hereof. The principal amount
hereof, and all accrued and unpaid interest hereon, shall be paid in full to
Payee on the earlier to occur of (i) January 15, 1999 or (ii) the date of the
closing ("Closing Date") by Maker of an equity financing transaction with
aggregate gross proceeds of $4,000,000 (the "Qualified Private Placement").
Section 1. Note Agreement. This Note is one of the Series A
Convertible Subordinated Notes (collectively, the "Notes") of Maker in the
aggregate principal amount of $1,250,000 issued pursuant to the Note and Warrant
Purchase Agreement dated of even date herewith among Maker, Payee, Pennsylvania
Merchant Group ("PMG") and certain other investors (the "Note Agreement").
Section 2. Interest. Interest shall accrue on the outstanding
principal hereof at an annual rate of ten percent (10%). Subject to the terms
and conditions hereof, accrued interest shall be payable semi-annually on the
fifteenth day of each July and January, beginning July 15, 1998.
Section 3. Manner of Payments. Upon 15 days prior written
notice to Payee, Maker shall be entitled to prepay this Note in whole or in part
at any time and from time to time without penalty or premium. Any prepayment on
this Note shall first be applied to unpaid accrued interest hereon, and the
balance of such prepayment shall then be applied to the unpaid principal on this
Note.
Section 4. Place of Payment. All payments due to Payee
hereunder shall be paid to Payee at the following address on or before the due
date of such payment as provided herein: c/o Pennsylvania Merchant Group, Four
Falls Corporate Center, West Conshohocken, Pennsylvania 19428, or to such other
address of which Payee shall give written notice to Maker.
Section 5. Conversion. Subject to and upon compliance with the
provisions hereof, the holder of this Note shall have the right, at any time and
from time to time, to convert all or any portion of the principal amount hereof
(in denominations of $1,000 or multiples thereof) into shares of Common Stock of
Maker determined by dividing the unpaid principal amount of this Note by the
lesser
<PAGE>
of: (i) $7.00 or (ii) the per share purchase price being paid by the purchasers
in the Qualified Private Placement (the "Conversion Price"). In order to
exercise such conversion privilege, the holder hereof shall surrender this Note
to Maker at its principal office accompanied by a written statement (the
"Conversion Notice") designating the portion of the unpaid principal amount of
this Note to be converted (in denominations of $100,000 or multiples thereof)
and stating the name and address of the person or persons in whose name or names
the certificate or certificates for shares of Common Stock are to be registered.
As promptly as practicable (but in any event within 15 business days) after the
receipt of such Conversion Notice and surrender of this Note as aforesaid, Maker
shall issue and deliver to the holder, issued in the name of such holder or such
other person or persons as such holder may request, a certificate or
certificates for the number of full shares of Common Stock issuable upon the
conversion of this Note (or specified portion thereof). Such conversion shall be
deemed to have been effected and the Conversion Price shall be determined as of
the close of business on the last full business day immediately preceding the
date on which such Conversion Notice shall have been received by Maker and this
Note shall have been surrendered as aforesaid, and at such time the rights of
the holder of this Note (or specified portion thereof) as such holder shall
cease, and the person or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon such conversion
shall be deemed to have become the holder or holders of record of the shares of
Common Stock represented thereby. Notwithstanding the foregoing, the entire
outstanding principal balance of this Note and all unpaid accrued interest on
the outstanding principal balance of this Note shall be automatically converted
into shares of Common Stock of Maker on the Closing Date at the Conversion Price
without any further action on the part of the Payee. Upon the issuance of such
shares, this Note shall be deemed paid in full and cancelled.
Section 6. Reservation of Shares. Maker hereby agrees that at
all times there shall be reserved for issuance and/or delivery upon conversion
of this Note such number of shares of its Common Stock as shall be required for
issuance and/or delivery upon conversion of this Note.
Section 7. Fractional Shares. Maker shall not be required to
issue certificates representing fractions of shares of Common Stock of Maker
upon the conversion of the Notes, nor shall it be required to issue scrip or pay
cash in lieu of any fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Common Stock of Maker or other securities,
properties or rights.
Section 8. Rights of Payee. Payee shall not, by virtue hereof,
be entitled to any rights of a shareholder in Maker either at law or equity, and
the rights of Payee are limited to those expressed in this Note or incorporated
by reference herein and are not enforceable against Maker to the extent not set
forth herein or incorporated by reference herein.
Section 9. Anti-Dilution Provisions. The Conversion Price of
this Note and the number of shares of Common Stock issuable upon conversion of
this Note are subject to adjustment to protect against dilution to the extent
set forth in Article IV of the Note Agreement and said Article IV is
incorporated by reference herein with the same force and effect as if fully set
forth herein.
Section 10. Transfer to Comply With the Securities Act of
1933 (the "Act").
1. This Note or any security issued or issuable upon
conversion of this Note may not be offered or sold except in conformity with the
Act, as amended, and then only against receipt of an agreement of such person to
whom such offer or sale is made to comply with the provisions of this Section 10
with respect to any resale or other disposition of such securities.
2. Maker may cause the following legend to be set forth on
each Note and certificate representing any security issued or issuable upon
conversion of this Note not theretofore distributed to the public pursuant to an
<PAGE>
effective registration statement under the Act, unless counsel for Maker is of
the opinion as to any such certificate that an exemption from registration under
the Act is available and that such legend is unnecessary.
"The securities represented by this note have not been
registered under the Securities Act of 1993 and may not be
transferred or sold unless (i) a registration statement under
such act is then in effect with respect thereto, (ii) a
written opinion reasonably satisfactory to the issuer from
counsel for the issuer or other counsel for the holder
reasonably acceptable to the issuer has been obtained to the
effect that no such registration is required or (iii) a
"no-action" letter or its then equivalent has been issued by
the staff of the Securities and Exchange Commission."
3. Payee is entitled to piggyback registration rights in
accordance with Article V of the Note Agreement.
Section 11. Subordination. This Note shall be subordinated in
right of payment only to any of Maker's secured indebtedness outstanding on the
date hereof or hereafter incurred and any of Maker's unsecured indebtedness
outstanding on the date hereof, excluding any obligation of Maker to any trade
creditor entered into in the ordinary course of business, and, in any such case,
only in the event of: (i) any insolvency or bankruptcy case or proceeding or any
receivership, liquidation, reorganization or other similar case or proceeding in
connection therewith relative to Maker or its creditors, as such, or its assets;
(ii) any liquidation, dissolution or other winding up of Maker or (iii) any
assignment for the benefit of creditors or any other marshaling of assets and
liabilities of Maker. Except as provided in this Section 11, this Note shall be
senior to any other indebtedness incurred by Maker and any debt securities
issued by Maker.
Section 12. Events of Default and Remedies. If any of the
following events of default (individually, an "Event of Default") shall occur
for any reason whatsoever (and whether it shall be voluntary or involuntary or
occur or be affected by operation of law or otherwise):
A. Maker fails to make payment when due of any
principal or interest payable under this Note, and such failure continues for a
period of 5 days after written notice that such payment is due and unpaid;
B. Maker defaults in the observance or performance of
any material agreement or condition under this Note or the Note Agreement (other
than non-payment which shall be governed by Section 12.A. hereof), and such
default continues for a period of 30 days after written notice of such default
is given to Maker by Payee;
C. Any representation or warranty made by Maker in
the Note Agreement shall prove to have been false in any material respect on the
date when made and such violation is not cured by Maker within 30 days after
written notice is given to Maker by Payee;
<PAGE>
D. Maker shall default under any material agreement
for borrowed money which causes the other party thereto to accelerate such
obligation which would result in the payment by GTS of a minimum of $100,000;
E. Maker shall (i) file, or consent by answer or
otherwise to the filing against it of a petition for relief or reorganization or
arrangement or any other petition in bankruptcy or insolvency law of any
jurisdiction, (ii) make an assignment for the benefit of its creditors, (iii)
consent to the appointment of a custodian, receiver, trustee, or other officer
with similar powers of itself or of any substantial part of its property, (iv)
be adjudicated insolvent or be liquidated or (v) take appropriate action for the
purpose of any of the foregoing; or
F. A court or governmental authority of competent
jurisdiction shall enter an order appointing a custodian, receiver, trustee or
other officer with similar powers with respect to Maker or any substantial
amount of its properties, or if an order for relief with respect to Maker shall
be entered in any case or proceeding for liquidation or reorganization or
otherwise to take advantage of any bankruptcy or insolvency law of any
jurisdiction, or ordering the dissolution, winding up or liquidation of Maker,
or if any petition for any such relief shall be filed against Maker, and such
order or petition shall not be dismissed or stayed within 60 days after the date
of such filing, then automatically upon the occurrence of such Event of Default
the entire unpaid principal amount of, and the unpaid accrued interest on, this
Note shall become immediately due and payable.
Section 13. Additional Remedies. If any Event of Default
hereunder shall have occurred, Payee may proceed to protect and enforce its
rights under this Note by exercising such remedies as are available to it in
respect thereof under the terms of this Note or applicable law, either by suit
in equity or by action at law, or both, whether for specific performance of any
agreement contained in this Note or in aid of the exercise of any power granted
in this Note. No remedy is intended to be exclusive and each such remedy shall
be cumulative.
Section 14. Amendments and Waivers. PMG and the holders of at
least 80% of the outstanding principal balance of all notes issued pursuant to
the Note Agreement may, by written instrument: (a) extend the time for the
performance of any of the obligations or other acts of Maker, including without
limitation, payment obligations; (b) waive compliance with any of the covenants
of Maker contained herein and (c) waive Maker's performance of any of its
obligations hereunder. Neither the failure of Payee nor any delay on the part of
Payee to exercise any right, power or privilege under this Note shall operate as
a waiver thereof, nor shall any single or partial exercise by Payee of any
right, power or privilege preclude any other or further exercise of that or any
other right, power or privilege.
Section 15. Expenses. Upon the occurrence of an Event of
Default hereunder, Maker shall reimburse Payee promptly for all reasonable
counsel fees, costs and other expenses incurred by Payee in connection with the
collection and/or enforcement of this Note.
Section 16. Payment Due on Holidays. If the principal of or
interest on this Note falls due on a Saturday, Sunday or legal holiday at the
place of payment, such payment shall be made on the next succeeding business day
and such extended time shall be included in computing interest.
Section 17. Applicable Law. The construction, interpretation
and enforcement of this Note shall be governed by the laws of the Commonwealth
of Pennsylvania.
<PAGE>
Section 18. Severability. If any provision of this Note shall
be held invalid under any applicable laws, such invalidity shall not affect any
other provision of this Note that can be given effect without the invalid
provision and, to this end, the provisions hereof are severable.
IN WITNESS WHEREOF, and intending to be legally bound hereby,
Maker has caused this Note to be executed and delivered by its proper and duly
authorized officers as of the date first above written.
GLOBAL TELECOMMUNICATION
SOLUTIONS, INC.
Attest:
________________________ By:______________________________
David Tobin, Secretary Randy Cherkas, President
<PAGE>
EXHIBIT 4.12
THE SECURITIES REPRESENTED BY THIS WARRANT CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED OR SOLD UNLESS (i) A
REGISTRATION STATEMENT UNDER SUCH ACT IS THEN IN EFFECT WITH RESPECT THERETO,
(ii) A WRITTEN OPINION REASONABLY SATISFACTORY TO THE ISSUER FROM COUNSEL FOR
THE ISSUER OR OTHER COUNSEL FOR THE HOLDER REASONABLY ACCEPTABLE TO THE ISSUER
HAS BEEN OBTAINED TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED OR (iii) A
"NO-ACTION" LETTER OR ITS THEN EQUIVALENT HAS BEEN ISSUED BY THE STAFF OF THE
SECURITIES AND EXCHANGE COMMISSION.
Void after 5:00 P.M., New York Time, on April 7, 2003
Warrant to Purchase _____
Shares of Common Stock
WARRANT TO PURCHASE COMMON STOCK
OF
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
This is to certify that, for VALUE RECEIVED, __________________, his successors
and assigns (the "Holder"), is entitled to purchase, subject to provisions of
this Warrant, from Global Telecommunication Solutions, Inc., a Delaware
corporation (the "Company"), at any time on or after the date hereof, and not
later than 5:00 p.m. New York time, on April 7, 2003, _______ shares of the
Company's Common Stock, $.01 par value, at a purchase price per share of $7.00.
The number of shares of Common Stock to be received upon the exercise of this
Warrant and the price to be paid for a share of Common Stock may be adjusted
from time to time as set forth in Section F hereof. The shares of Common Stock
deliverable upon such exercise and as adjusted from time to time, are
hereinafter sometimes referred to as "Warrant Stock" and the exercise price for
a share of Common Stock in effect at any time and as adjusted from time to time
is hereinafter sometimes referred to as the "Exercise Price".
A. Exercise of Warrant. This Warrant may be exercised in whole or in
part at any time, or from time to time, on or after the date hereof, but not
later than 5:00 p.m. New York time, on April 7, 2003, or if April 7, 2003 is a
day on which banking institutions are authorized by law to close, then on the
next succeeding day which shall not be such a day, by presentation and surrender
hereof to the Company or at the office of its stock transfer agent, if any, with
the Purchase Form annexed hereto duly executed and accompanied by payment of the
Exercise Price for the number of shares specified in such form, together with
all federal and state taxes applicable upon such exercise. If this Warrant
should be exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the Holder to purchase the balance of the shares purchasable hereunder. Upon
receipt by the Company of this Warrant at the office or agency of the Company,
in proper form for exercise, the Holder shall be deemed to be the holder of
record of the shares of Common Stock issuable upon such exercise notwithstanding
that the stock transfer books of the Company shall then be closed or that
certificates representing such shares of Common Stock shall not then be actually
delivered to the Holder.
<PAGE>
In addition to and without limiting the rights of the Holder under any
other terms set forth herein, the Holder shall have the right, upon written
request by the Holder delivered or transmitted to the Company together with this
Warrant, to exchange this Warrant, in whole or in part at any time on or before
the Expiration Date, for the number of shares of Common Stock of the Company
having an aggregate current market price on the date of such exchange
(determined as provided in Section C hereof) equal to the difference between (a)
the aggregate current market value on the date of such exchange (determined as
aforesaid) of the shares of Warrant Stock designated by the Holder, and (b) the
aggregate Exercise Price the Holder would have paid to the Company to purchase
such designated shares of Warrant Stock upon exercise of this Warrant. Upon such
exchange, the number of shares of Warrant Stock purchasable upon exercise of
this Warrant shall be reduced by such designated number of shares Warrant Stock
and, if a balance of purchasable shares of Warrant Stock remains after such
exchange, the Company shall execute and deliver to the Holder a new Warrant
evidencing the right to purchase such balance of shares of Warrant Stock;
provided, that no fractional shares shall be issuable upon such exchange, and if
the number of shares of Common Stock determined in accordance with the foregoing
formula is other than a whole number, the Company shall pay the Holder an amount
by check, determined in accordance with the provisions of Section C hereof.
B. Reservation of Shares. The Company hereby agrees that at all times
there shall be reserved for issuance and/or delivery upon exercise of this
Warrant such number of shares of its Common Stock as shall be required for
issuance and/or delivery upon exercise of this Warrant.
C. Fractional Shares. The Company shall not be required to issue
certificates representing fractions of shares of Common Stock of the Company
upon the exercise of the Warrants, nor shall it be required to issue scrip or
pay cash in lieu of any fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Common Stock of the Company or other
securities, properties or rights.
D. Exchange, Assignment or Loss of Warrant. This Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Warrants of different denominations entitling the
Holder hereof to purchase in the aggregate the same number of shares of Common
Stock purchasable hereunder. This Warrant may be sold, transferred, assigned or
hypothecated by the Holder at any time subject to compliance with the Securities
Act of 1933, as amend (the "Act") and applicable state securities law. Any such
assignment shall be made by surrender of this Warrant to the Company or at the
office of its stock transfer agent, if any, with the Assignment Form annexed
hereto duly executed and funds sufficient to pay any transfer tax; whereupon the
Company shall, without charge, execute and deliver a new Warrant in the name of
the assignee named in such instrument of assignment and this Warrant shall
promptly be cancelled. This Warrant may be divided or combined with other
Warrants which carry the same rights upon presentation hereof at the office of
the Company or at the office of its stock transfer agent, if any, together with
a written notice specifying the names and denominations in which new Warrants
are to be issued and signed by the Holder hereof. The term "Warrant" as used
herein includes any Warrants issued in substitution for or replacement of this
Warrant, or into which this Warrant may be divided or exchanged. Upon receipt by
the Company of evidence satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and, in the case of loss, theft or destruction, of
reasonably satisfactory indemnification, and upon surrender and cancellation of
this Warrant, if mutilated, the Company will execute and deliver a new Warrant
of like tenor and date. Any such new Warrant executed and delivered shall
constitute an additional contractual obligation on the part of the Company,
whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be
enforceable in accordance with its terms.
2
<PAGE>
E. Rights of the Holder. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company either at law or equity,
and the rights of the Holder are limited to those expressed in this Warrant or
incorporated by reference herein and are not enforceable against the Company to
the extent not set forth herein or incorporated by reference herein.
F. Anti-Dilution Provisions. The Exercise Price of the Warrants and the
number of shares of Common Stock issuable upon exercise of the Warrants shall be
subject to adjustment from time to time as hereinafter set forth in Article IV
of the Note and Warrant Purchase Agreement dated as of April 8, 1998 ("Purchase
Agreement").
G. Transfer to Comply With the Act.
1. This Warrant or the Warrant Stock or any other security
issued or issuable upon exercise of this Warrant may not be offered or sold
except in conformity with the Act, as amended, and then only against receipt of
an agreement of such person to whom such offer or sale is made to comply with
the provisions of this Section G with respect to any resale or other disposition
of such securities.
2. The Company may cause the following legend to be set forth
on each Warrant and certificate representing Warrant Stock or any other security
issued or issuable upon exercise of this Warrant not theretofore distributed to
the public pursuant to an effective registration statement under the Act, unless
counsel for the Company is of the opinion as to any such certificate that an
exemption from registration under the Act is available and that such legend is
unnecessary:
"The securities represented by this warrant certificate have
not been registered under the Securities Act of 1993 and may
not be transferred or sold unless (i) a registration statement
under such act is then in effect with respect thereto, (ii) a
written opinion reasonably satisfactory to the issuer from
counsel for the issuer or other counsel for the holder
reasonably acceptable to the issuer has been obtained to the
effect that no such registration is required or (iii) a
"no-action" letter or its then equivalent has been issued by
the staff of the Securities and Exchange Commission."
3. The Holder of this Warrant and the Warrant Stock is
entitled to registration rights in accordance with Article IV of the Purchase
Agreement.
H. Applicable Law. This Warrant shall be governed by, and construed in
accordance with, the internal laws of the Commonwealth of Pennsylvania without
giving effect to conflict of laws.
GLOBAL TELECOMMUNICATION
SOLUTIONS, INC.
Attest:
_______________________________ By:_______________________________
David Tobin, Secretary Randy Cherkas, President
3
<PAGE>
PURCHASE FORM
Date:_____________
The undersigned hereby irrevocably elects to exercise the within
Warrant to the extent of purchasing _________ shares of Common Stock and hereby
makes payment of $_________ in payment of the actual exercise price thereof.
--------------------
INSTRUCTIONS FOR REGISTRATION OF STOCK
--------------------
Name ____________________________________________________________
(Please typewrite or print in block letters)
Address __________________________________________________________
__________________________________________________________
__________________________________________________________
Signature ________________________________________________________
4
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED, _____________________________________________
hereby sells, assigns and transfers unto
Name _______________________________________________________________
(Please typewrite or print in block letters)
Address ____________________________________________________________
the right to purchase Stock represented by this Warrant to the extent of
_______________ shares as to which such right is exercisable and does hereby
irrevocably constitute and appoint ________________________________________
attorney, to transfer the same on the books of the Company with full power of
substitution in the premises.
Signature___________________________
Dated:______________
5
<PAGE>
EXHIBIT 4.13
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
COMMON STOCK PURCHASE AGREEMENT
This Common Stock Purchase Agreement (this "Agreement') is made as of
September 17, 1998 between Global Telecommunication Solutions, Inc., a Delaware
corporation (the "Company"), with its principal office at 10 Stow Road, Suite
200, Marlton, New Jersey 08053, and each of the purchasers who are signatories
hereto and any other purchasers who are made a party to this Agreement pursuant
to Section l hereof (individually, a "Purchaser" and collectively, the
"Purchasers").
RECITALS
The Company has engaged Pennsylvania Merchant Group (the "Placement
Agent") as exclusive agent of the Company in connection with the placement and
sale (the "Offering") of 1,198,000 shares of the Company's Common Stock, $.01
par value per share (the "Shares"). The Shares will be sold by the Company to
Purchasers in reliance upon an exemption from the registration requirements of
Section 5 of the Securities Act of 1933, as amended (the "Act"), pursuant to the
provisions of Section 4(2) of the Act and Regulation D thereunder. The purchase
price of the Shares (the "Offering Price") will be $1.625. The Placement Agent
has delivered to each prospective purchaser a private placement memorandum,
dated September 17, 1998 (the "Placement Memorandum"), describing the Company's
business, financial and operating condition, the Offering and information
regarding risks to be evaluated when contemplating an investment in the Company
through the Offering.
AGREEMENT
In consideration of the mutual promises, representations, warranties
and conditions set forth in this Agreement, the Company and each Purchaser,
severally and not jointly, agree as follows:
1. PURCHASE AND SALE OF SHARES.
1.1 Issue of Shares.
(a) The Company has authorized the issuance and
sale of up to 1,198,000 shares of its Common Stock pursuant to the provisions of
this Agreement.
(b) In reliance upon the Purchaser's
representations and warranties contained in Section 4 hereof and subject to the
terms and conditions set forth herein, the Company hereby agrees to sell to each
Purchaser the aggregate number of Shares set forth below such Purchaser's
signature on the signature page bearing such Purchaser's name at the Offering
Price.
(c) In reliance upon the representations and
warranties of the Company contained herein, and subject to the terms and
conditions set forth herein, each Purchaser hereby agrees to purchase the number
of Shares set forth on the signature page bearing such Purchaser's name at the
Offering Price. Each Purchaser shall severally, and not jointly, be liable for
only the purchase of the Shares that appear on the signature page hereof that
relates to such Purchaser.
<PAGE>
(d) The Company's agreement with each of the
Purchasers is a separate agreement, and the sale of the Shares to each of the
Purchasers is a separate sale.
2. CLOSING DATE; DELIVERY.
2.1 Closing. The closing of the sale and purchase of the
Shares under this Agreement (the "Closing") shall consist of the sale and
purchase of at least 1,198,000 Shares and shall be held at the offices of the
Placement Agent at such time and date selected by the Placement Agent and the
Company occurring on or before October 15, 1998, or such later date to which the
offering period is extended by the Company and the Placement Agent (the "Closing
Date").
2.2 Delivery. At the Closing, each Purchaser shall have
delivered to the Company, by wire transfer, payment of the Offering Price of the
Shares for which it subscribed, unless other means of payment have been agreed
upon by the Company and the Purchaser. Subject to the terms and conditions
hereof, the Company will deliver to each Purchaser stock certificates,
registered in the name of the Purchaser, representing the Shares purchased by
the Purchaser from the Company.
3. REPRESENTATIONS AND WARRANTIES OF GTS.
The Company hereby represents and warrants to each Purchaser as of the
date hereof as follows, and all such representations and warranties shall be
true and correct as of the Closing Date as if then made and shall survive the
Closing:
3.1 Organization. Each of the Company and its subsidiaries is
a corporation, duly incorporated, validly existing and in good standing under
the laws of its respective jurisdiction of incorporation. Each of the Company
and its subsidiaries has all requisite power and authority to own or lease its
property and to conduct its business as now conducted. Each of the Company and
its subsidiaries holds all licenses and permits required for the conduct of its
business as now conducted, which, if not obtained, would have a material adverse
effect on the business, financial condition or results of operations of the
Company or its subsidiaries. Each of the Company and its subsidiaries is
qualified as a foreign corporation and is in good standing in all states where
the conduct of its business or its ownership or leasing of property requires
such qualification, except where the failure so to qualify would not have a
material adverse effect on the business, financial condition or results of
operations of the Company or its subsidiaries.
3.2 Capitalization. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Placement Memorandum under
the caption "SUMMARY - The Offering." All of the issued and outstanding shares
of the Company's Common Stock have been duly authorized, validly issued and are
fully paid and nonassessable. The Company has reserved 4,860,555 shares of
Common Stock for the issuance of options, warrants, calls, commitments,
agreements, conversion or other rights of any character, contingent or
otherwise, to purchase or otherwise acquire shares of Common Stock from the
Company at any time, or upon the happening of any stated event.
3.3 Authority. The Company has all requisite power and
authority to enter into this Agreement and the registration rights agreement in
2
<PAGE>
substantially the form of Exhibit A hereto (the "Registration Rights Agreement")
and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the Registration Rights Agreement
and the consummation of the transactions contemplated hereby and thereby have
been duly authorized by all necessary corporate action on the part of the
Company and, upon their execution and delivery by the Company and the other
signatories thereto, such documents will constitute valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, subject as to enforceability to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws relating to or affecting
creditors' rights from time to time in effect and subject to general equity
principles, and may be limited by principles of public policy.
3.4 Securities Filings.
(a) The Company has filed with the Securities
and Exchange Commission (the "SEC") the documents set forth at Exhibit A of the
Placement Memorandum (the "SEC Filings"). The Company has filed with the SEC all
reports and all other filings required to be filed with the SEC under the rules
and regulations of the SEC.
(b) The SEC Filings conform in all material
respects to the requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations of the SEC thereunder as of
their respective filing dates and do not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading as of their respective
filing dates. The documents or portions thereof that were incorporated by
reference in the SEC Filings pursuant to the requirements of the Exchange Act,
when such incorporated documents or portions were first filed with the SEC,
conformed in all material respects with any applicable requirements of the
Exchange Act and the rules and regulations of the SEC thereunder.
(c) The financial statements of the Company
included in the SEC Filings fairly present in all material respects the
consolidated financial position and results of operations of the Company and its
subsidiaries at the dates and for the periods to which they apply, and such
financial statements have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved
except as otherwise stated therein subject to year end adjustments in the case
of interim financial statements.
3.5 Issuance of the Shares. The Shares, when issued pursuant
to the terms of this Agreement, will be duly and validly authorized and issued,
fully paid and nonassessable.
3.6 No Conflict with Law or Documents. The execution, delivery
and consummation of this Agreement and the Registration Rights Agreement and the
transactions contemplated hereby and thereby will not (a) conflict with any
provisions of the Certificate of Incorporation or By-laws of the Company or any
of its subsidiaries or (b) result in any violation of or default or loss of a
benefit, or permit the acceleration of any obligation, under, in each case, upon
the giving of notice, the passage of time, or both, any mortgage, indenture,
lease, agreement or other instrument, permit, franchise, license, judgment,
order, decree, law, ordinance, rule or regulation applicable to the Company or
any of its properties, except with respect to clause (b), if such violation,
default or loss would not have a material adverse effect on the business,
operations or financial condition of the Company and its subsidiaries.
3.7 Consents, Approvals and Private Offering. Except for any
filings required under federal laws and except for any state "blue sky" filings
which will be made by the Placement Agent, all of which shall have been made as
3
<PAGE>
of the Closing Date to the extent required as of such time, no consent,
approval, order or authorization of, or registration, declaration or filing
with, any federal, state, local or foreign governmental authority is required to
be made or obtained by the Company in connection with the execution and delivery
of this Agreement and the Registration Rights Agreement and the consummation of
the transactions contemplated hereby and thereby.
3.8 Absence of Certain Developments. Except as described in
the Placement Memorandum, since June 30, 1998 the Company has not (a) incurred
or become subject to any material liabilities, absolute or contingent, except
current liabilities incurred, and liabilities under contracts entered into, in
the ordinary course of business, consistent with past practices; (b)
mortgaged, pledged or subjected to any lien, charge or other encumbrance any of
its assets, tangible or intangible; (c) sold, assigned or transferred any of its
assets or canceled any debts or obligations except in the ordinary course of
business, consistent with past practices; (d) suffered any extraordinary losses,
or waived any rights of substantial value; (e) entered into any material
transaction other than in the ordinary course of business, consistent with past
practices; or (f) otherwise had any change in its condition, financial or
otherwise, except as shown on or reflected in the consolidated balance sheet as
of June 30, 1998 that is included in the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1998, except for changes in the ordinary
course of business, consistent with past practices, none of which individually
or in the aggregate has been materially adverse to the Company. Except as
described in the SEC Filings, the Company has not entered into any agreement
since June 30, 1998 of the type that would be required under the SEC's rules and
regulations to be filed as an exhibit to a Quarterly Report on Form 10-QSB.
3.9 Litigation. Except as described in the Placement
Memorandum, there are no actions, suits, proceedings or investigations pending
against or affecting the Company or any of its subsidiaries that in the
aggregate could reasonably be anticipated to result in any material adverse
effect on the Company.
3.10 Registration Rights. Each of the Shares shall be entitled
to the registration rights provided by the Registration Rights Agreement in the
form included herein as Exhibit A.
3.11 Disclosure. The Placement Memorandum does not contain any
untrue statement of material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading
under the circumstances under which they were made.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.
Each Purchaser hereby represents and warrants to, and covenants with,
severally as to itself and not jointly with any other Purchaser, the Company as
follows:
4.1 Legal Power. The Purchaser has the requisite corporate,
partnership, trust or fiduciary power, as appropriate, and is authorized, if the
Purchaser is a corporation, partnership, trust or fiduciary to enter into this
Agreement to purchase the Shares hereunder and to carry out and perform its
obligations under the terms of this Agreement and the Registration Rights
Agreement.
4.2 Due Execution. Each of this Agreement and the Registration
Rights Agreement has been duly authorized, if the Purchaser is a corporation,
partnership, trust or fiduciary, executed and delivered by the Purchaser, and,
upon due execution and delivery by the Company, each of this Agreement and the
4
<PAGE>
Registration Rights Agreement will be a valid and binding agreement of the
Purchaser enforceable against the Purchaser in accordance with their respective
terms, subject as to enforceability to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws relating to or affecting creditors'
rights from time to time in effect and subject to general equity principles, and
may be limited by principles of public policy.
4.3 Investment Representations.
(a) The Purchaser is acquiring the Shares for
its own account, not as nominee or agent, for investment and not with a view to
or for resale in connection with, any distribution or public offering thereof
within the meaning of the Act, except pursuant to an effective registration
statement or exemption from registration under the Act.
(b) The Purchaser understands that (i) the
Shares have not been registered under the Act by reason of a specific exemption
therefrom, and may not be transferred or resold except pursuant to an effective
registration statement or exemption from registration; (ii) each certificate
representing the Shares will be endorsed with the following legends:
A) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE
AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE
EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND
ANY APPLICABLE STATE SECURITIES LAWS;
B) Any legend required to be placed thereon by applicable
federal or state securities laws; and (iii) the Company will instruct any
transfer agent not to register the transfer of any of the Shares unless the
conditions specified in the foregoing legend are satisfied.
(c) The Purchaser has received and reviewed the
Placement Memorandum. In addition, the Purchaser has been furnished with such
materials and has been given access to such information relating to the Company
as it or its qualified representative has requested and has been afforded the
opportunity to ask questions regarding the Company and the Shares, all as the
Purchaser has found necessary to make an informed investment decision. The
Purchaser has received no representation or warranty from the Company or its
officers, employees or agents with respect to its investment and has received no
information relating to the operations or business of the Company and its
subsidiaries other than as set forth in this Agreement, the Placement Memorandum
and in the publicly-filed documents of the Company.
(d) The Purchaser has experience in investing in
securities of companies in the developmental stage, such as the Company, and
acknowledges that the Purchaser is able to fend for itself and to assess the
economic risk of investment in the Shares and has such knowledge and experience
in financial and business matters that it can be assumed to be capable of
evaluating the merits and risks of an investment in the Shares and of protecting
its interests in such an investment. The Purchaser has not been organized for
the purpose of acquiring the Shares.
5
<PAGE>
(e) The Purchaser's primary residence is at the
address set forth under such Purchaser's name on the signature page of this
Agreement.
(f) The Purchaser is an "accredited investor" as
such term is defined in Rule 501 under the Act and was not formed for the
specific purpose of acquiring the Shares.
(g) The Purchaser understands that its
investment involves a certain degree of risk and that there is no assurance as
to the future performance of the Company.
5. COVENANTS OF THE COMPANY.
5.1 Information. So long as the Company is subject to the
periodic reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company shall deliver to each holder of Shares all annual, quarterly or other
reports furnished to the Company's stockholders, including (i) as soon as
available, and in any event within 90 days after the end of each fiscal year of
the Company, a consolidated balance sheet of the Company and its consolidated
subsidiaries, if any, as of the end of such fiscal year and the related
consolidated statements of operations, stockholders' equity and cash flows for
such fiscal year, setting forth in each case in comparative form the figures for
the previous fiscal year, all prepared in accordance with generally accepted
accounting principles and reported on by independent certified public
accountants of recognized national standing and (ii) as soon as available, and
in any event within 45 days after the end of the first three fiscal quarters of
each fiscal year of the Company, a consolidated balance sheet of the Company and
its consolidated subsidiaries, if any, as of the end of such quarter and the
related consolidated statements of operations and stockholders' equity (together
with any other quarterly financial statements being prepared by the Company at
such time), setting forth in each case in comparative form the figures for the
corresponding quarter and the corresponding portion of the Company's previous
fiscal year, all certified, subject to normal year-end adjustments, as to
fairness of presentation and consistency by the chief financial officer or the
chief accounting officer of the Company.
6. CONDITIONS TO CLOSING.
6.1 Conditions to Obligations of the Purchaser. Each
Purchaser's obligation to purchase the Shares at the Closing is subject to the
fulfillment, at or prior to the Closing, of all of the following conditions:
(a) Representations and Warranties True;
Performance of Obligations. The representations and warranties made by the
Company in Section 3 hereof shall be true and correct in all material respects
at the Closing with the same force and effect as if they had been made on and as
of said date. Except as described in or contemplated in the Placement
Memorandum, the business, assets, financial condition and results of operations
of the Company shall not have been adversely affected in any material way prior
to the Closing. The Company shall have performed in all material respects all
obligations herein required to be performed by it on or prior to the Closing.
(b) Proceedings and Documents. All corporate
and other proceedings in connection with the transactions contemplated at the
Closing hereby and all documents and instruments incident to such transactions
shall be reasonably satisfactory in substance and form to the Purchaser.
6
<PAGE>
(c) Qualifications, Legal Investment. All
authorizations, approvals, or permits, if any, of any governmental authority or
regulatory body of the United States or of any state that are required in
connection with the lawful sale and issuance of the Shares pursuant to this
Agreement shall have been duly obtained and shall be effective on and as of the
Closing Date. At the time of the Closing, the sale and issuance of the Shares
shall be legally permitted by all laws and regulations to which the Purchaser
and the Company are subject.
(d) Registration Rights Agreements. The Company
shall have entered into the Registration Rights Agreement.
6.2 Conditions to Obligations of the Company. The Company's
obligation to issue and sell the Shares at the Closing is subject to the
fulfillment to the Company's satisfaction, on or prior to the Closing, of the
following conditions:
(a) Representations and Warranties True. The
representations and warranties made by the Purchaser in Section 4 hereof shall
be true and correct at the Closing with the same force and effect as if they had
been made on and as of the Closing.
(b) Performance of Obligations. The Purchaser
shall have performed and complied in all material respects with all agreements
and conditions herein required to be performed or complied with by the Purchaser
on or before the Closing Date, and each Purchaser shall have delivered payment
to the Company in respect of its purchase of Shares.
(c) Qualifications, Legal Investment. All
authorizations, approvals, or permits, if any, of any governmental authority or
regulatory body of the United States or of any state that are required in
connection with the lawful sale and issuance of the Shares pursuant to this
Agreement shall have been duly obtained and shall be effective on and as of the
Closing Date. At the time of the Closing, the sale and issuance of the Shares
shall be legally permitted by all laws and regulations to which each Purchaser
and the Company are subject.
7. MISCELLANEOUS.
7.1 Governing Law. This Agreement shall be governed by and
construed under the laws of the Commonwealth of Pennsylvania without regard to
principles of conflict of laws.
7.2 Successors and Assigns. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto.
7.3 Entire Agreement. This Agreement and the other documents
delivered pursuant hereto and thereto, constitute the full and entire
understanding and agreement among the parties with regard to the subject matter
hereof and thereof and no party shall be liable or bound to any other party in
any manner by any representations, warranties, covenants or agreements except as
specifically set forth herein or therein. Nothing in this Agreement, express or
implied, is intended to confer upon any party, other than the parties hereto and
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
herein.
7.4 Severability. In case any provision of this Agreement
shall be invalid, illegal or unenforceable, it shall, to the extent practicable,
7
<PAGE>
be modified so as to make it valid, legal and enforceable and to retain as
nearly as practicable the intent of the parties, and the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
7.5 Amendment and Waiver. Except as otherwise provided herein,
any term of this Agreement may be amended, and the observance of any term of
this Agreement may be waived, either generally or in a particular instance,
either retroactively or prospectively, and either for a specified period of time
or indefinitely, with the written consent of the Company and the Purchaser. Any
amendment or waiver effected in accordance with this section shall be binding
upon each future holder of any Shares purchased under this Agreement, including
securities into which such Shares have been converted, and the Company.
7.6 Notices. All notices and other communications required or
permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery, on the first business day following mailing by overnight
courier, or on the fifth day following mailing by registered or certified mail,
return receipt requested, postage prepaid, addressed to the Company or the
Purchaser at the respective addresses included herein.
7.7 Fees and Expenses. The Company and the Purchaser shall
bear their own expenses and legal fees incurred on their behalf with respect to
this Agreement and the transactions contemplated hereby.
7.8 Titles and Subtitles. The titles of the sections and
subsections of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
7.9 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
8
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
COMMON STOCK PURCHASE AGREEMENT
SIGNATURE PAGE
Please complete two copies of the Signature Page and return both copies to:
Global Telecommunication Solutions, Inc., 10 Stow Road, Suite 200, Marlton, New
Jersey 08053.
___________________________________ _________________________________
Purchaser's Name - Please Print Nominee Name (if appropriate)
___________________________________ _________________________________
Social Security/Tax I.D. Number Telephone Number
___________________________________ _________________________________
Address City, State and Zip Code
___________________________________ _________________________________
Signature Date
- -------------------------------------------------------------------------------
Number of Shares $________ Aggregate
to Be Purchased Per Share Purchase Price
X = $
FUNDS SHOULD BE WIRED TO: SUMMIT BANK/Trust, Attention: Shernetta Harris
Hackensack, NJ ABA #021202162 GL A/C 477-02. For credit to the Account of
_____________ Trust Account #
- ------------------------------------------------------------------------------
AGREED AND ACCEPTED:
By:_____________________________ Date:____________________________
Mary Bowler
Vice President - Administration
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
By:_____________________________ Date:____________________________
Randy Cherkas, President
9
<PAGE>
EXHIBIT 4.14
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement") made as of the 1st day
of October, 1998, among GLOBAL TELECOMMUNICATION SOLUTIONS, INC., a Delaware
corporation ("GTS"), PENNSYLVANIA MERCHANT GROUP, a Delaware corporation (the
"Agent") and the persons listed on the signature pages hereto (the "Investors").
RECITALS:
GTS is offering (the "Offering") for sale of 1,198,000 shares of its
Common Stock, $.01 par value per share (the "Shares"), pursuant to a Private
Placement Memorandum dated September 18, 1998 (the "Memorandum").
The execution and delivery of this Agreement is a condition to the
offering of the Shares pursuant to the Memorandum.
NOW, THEREFORE, in consideration of the premises and covenants set
forth herein, and intending to be legally bound hereby, the parties hereto agree
as follows:
1. Certain Definitions. As used herein, the following terms
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange
Commission, or any other federal agency at the time administering the federal
securities law.
"Common Stock" shall mean the Common Stock, $.01 par value, of
GTS.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as shall be in effect at the time.
"Registration Expenses" shall mean the expenses so described
in Section 8 hereof.
"Restricted Stock" shall mean the shares of Common Stock
purchased by the Investors pursuant to the Memorandum and any shares of Common
Stock or other securities of GTS received as a stock dividend or other
distribution in respect to the Shares.
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as shall be in effect at the time.
<PAGE>
"Selling Expenses" shall mean the expenses so described in
Section 8 hereof.
2. Restrictive Legend. Each certificate representing the Shares and,
except as otherwise provided in Section 3 hereof, each certificate issued upon
exchange or transfer of any of the Shares, shall be stamped or otherwise
imprinted with a legend substantially in the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS.
THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH
A VIEW TO OR FOR RESALE IN CONNECTION WITH THE DISTRIBUTION
THEREOF. NO DISPOSITION OF THE SECURITIES MAY BE MADE UNLESS
(i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS IS THEN IN EFFECT WITH
RESPECT THERETO, (ii) A WRITTEN OPINION REASONABLY
SATISFACTORY TO THE COMPANY FROM COUNSEL FOR THE COMPANY OR
OTHER COUNSEL FOR THE HOLDER REASONABLY ACCEPTABLE TO THE
COMPANY HAS BEEN OBTAINED TO THE EFFECT THAT NO SUCH
REGISTRATION IS REQUIRED OR (iii) A "NO-ACTION" LETTER OR ITS
THEN EQUIVALENT HAS BEEN ISSUED BY THE STAFF OF THE SECURITIES
AND EXCHANGE COMMISSION.
3. Notice of Proposed Transfer. Prior to any proposed transfer of any
Shares or Restricted Stock (other than under the circumstances described in
Sections 4 or 5 hereof), the holder thereof shall give written notice to GTS of
its intention to effect such transfer. Each such notice shall describe the
manner of the proposed transfer and, if requested by GTS, shall be accompanied
by an opinion of counsel satisfactory to GTS to the effect that the proposed
transfer may be effected without registration under the Securities Act,
whereupon such holder shall be entitled to transfer such securities in
accordance with the terms of its notice. Each certificate representing the
Shares or the Restricted Stock transferred as provided by this Section 3 shall
bear the legend set forth in Section 2 hereof, except that no such certifi cate
shall bear such legend if (i) such transfer is in accordance with the provisions
of Rule 144(k) or any other rule permitting public sale without registration
under the Securities Act or (ii) the opinion of counsel referred to in Section 2
hereof is to the further effect that the transferee and any subsequent
transferee (other than an affiliate of GTS) would be entitled to transfer such
securities in a public sale without registration under the Securities Act.
4. Required Registration.
(a) Within 60 days after the Closing Date (as defined in the
Memorandum) of the Offering, GTS shall use its best efforts to register under
the Securities Act all of the shares of Restricted Stock; provided, however,
that GTS shall not be obligated to effect any registration statement with
respect to Restricted Stock under this Section 4 if, in the opinion of counsel
satisfactory to GTS and to the holders of such Restricted Stock, the proposed
transfer may be effected without registration under the Securities Act and any
certificate evidencing the shares to be transferred need not bear a restrictive
legend.
5. Registration Procedures. If and whenever GTS is required by the
provisions of Sections 4 or 5 hereof to effect the registration of any shares of
Restricted Stock under the Securities Act, GTS will use its best efforts, as
expeditiously as possible, to:
2
<PAGE>
(a) prepare and file with the Commission a registration
statement which, in the case of an underwritten public offering pursuant to
Section 4 hereof, shall be on Form S-1 or other form of general applicability;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified in paragraph (a) above and to comply with the
provisions of the Securities Act with respect to the disposition of all
Restricted Stock covered by such registration statement in accordance with the
sellers' intended method of disposition set forth in such registration statement
for such period;
(c) furnish to each seller such number of copies of the
registration statement and the prospectus included therein, including each
prospectus subject to completion, as such persons may reasonably request in
order to facilitate the public sale or other disposition of the Restricted Stock
covered by such registration statement;
(d) immediately notify each seller under such registration
statement and each under writer, at any time when a prospectus relating thereto
is required to be delivered under the Securities Act, of the happening of any
event as a result of which the prospectus contained in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing;
In connection with each registration hereunder, the selling
holders of Restricted Stock will furnish to GTS in writing such information with
respect to themselves and the proposed distribution by them and execute such
documents regarding the Restricted Stock held by the sellers and the intended
method of disposition thereof as shall be reasonably necessary in order to
assure compliance with federal and applicable state securities laws.
6. "Market Stand-Off" Agreement. Each holder of Restricted Stock hereby
agrees that, during the 180-day period following the effective date of a
registration statement of GTS filed under the Securities Act, it shall not,
unless otherwise permitted by GTS and such underwriter, sell or otherwise
transfer or dispose of, other than to persons who agree to be similarly bound,
any Restricted Stock of GTS held by it at any time during such period except
Restricted Stock included in such registration. In order to enforce this
covenant, GTS may impose stop-transfer instructions with respect to the
Restricted Stock of each holder of Restricted Stock and the shares or securities
of every other person subject to the foregoing restriction until the end of such
period.
7. Expenses. All expenses incurred by GTS in complying with Sections 4
or 5 hereof, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel and independent public
accountants for GTS, fees of the National Association of Securities Dealers,
Inc., transfer taxes, fees of transfer agents and registrars and costs of
issuance, but excluding any Selling Expenses, are herein called "Registration
Expenses." All underwriting discounts and selling commissions and their
professional fees, if any applicable to the sale of Restricted Stock are herein
called "Selling Expenses."
GTS will pay all Registration Expenses in connection with each
registration statement filed pursuant to Sections 4 or 5. All Selling Expenses
in connection with any registration statement filed pursuant to Sections 4 or 5
hereof shall be borne by the participating sellers
3
<PAGE>
8. Indemnification and Contribution.
(a) In the event of a registration of any of the Restricted
Stock under the Securities Act pursuant to Sections 4 or 5 hereof, GTS will
indemnify and hold harmless each seller and underwriter of such Restricted Stock
thereunder and each other person, if any, who controls such seller or
underwriter within the meaning of the Securities Act, against any and all
losses, claims, damages or liabilities, joint or several, to which such seller
or underwriter or controlling person may become subject under the Securities Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) result from any untrue statement or alleged untrue statement
of any material fact contained in any registration statement under which such
Restricted Stock was registered under the Securities Act pursuant to Sections 4
or 5 hereof, any prospectus subject to completion or final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse each such seller, each such underwriter and each such
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that GTS will not be liable in any such
case if and to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission so made in conformity with information furnished by
such seller, such underwriter or such controlling person in writing specifically
for use in such registration statement or prospectus.
(b) In the event of a registration of any of the Restricted
Stock under the Securities Act pursuant to Sections 4 or 5 hereof, each seller
of such Restricted Stock thereunder will indemnify and hold harmless GTS and
each person, if any, who controls GTS within the meaning of the Securities Act,
each officer of GTS who signs the registration statement, each director of GTS
and each underwriter and any controlling person thereof from any and all losses,
claims, damages or liabilities, joint or several, to which GTS or such officer
or director or underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) result from any untrue statement or
alleged untrue statement of any material fact contained in the registration
statement under which such Restricted Stock was registered under the Securities
Act pursuant to Sections 4 or 5 hereof, any prospectus subject to completion or
final prospectus contained therein, or any amendment or supplement thereof, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse GTS and each such officer,
director, underwriter and controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; and provided, however, that such
seller will be liable hereunder in any such case if and only to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in reliance upon and in conformity with information pertaining to such
seller, as such, furnished in writing to GTS by such seller specifically for use
in such registration statement or prospectus; provided, further, however, that
the liability of each seller hereunder shall be limited to the proportion of any
such loss, claim, damage, liability or expense which is equal to the proportion
that the public offering price of the shares sold by such seller under such
registration statement bears to the total public offering price of all
securities sold thereunder, but not to exceed the proceeds received by such
seller from the sale of Restricted Stock covered by such registration statement.
(c) Promptly after receipt by an indemnified party hereunder
of notice of the commence ment of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to any indemnified party except to the extent of any damages resulting from such
4
<PAGE>
omission. In case any such action shall be brought against any indemnified party
and it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 9 for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation and of liaison with counsel so selected; provided,
however, that if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be reasonable defenses available to it which are
different from or additional to those available to the indemnifying party or if
the interests of the indemnified party reasonably may be deemed to conflict with
the interests of the indemnifying party, the indemnified party shall have the
right to select a separate counsel and to assume such legal defenses and
otherwise to participate in the defense of such action, with the expenses and
fees of such separate counsel and other expenses related to such participation
to be reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution in
circumstances in which the benefits of the indemnity agreements provided for in
the preceding subsections of this Section 9 are for any reason held to be
unavailable to the underwriters, GTS or each seller of Restricted Stock, then
GTS will contribute to the damages paid by the several underwriters or each
seller of Restricted Stock, the underwriters will contribute to the damages paid
by GTS or each seller of the Restricted Stock, as the case may be, and each
seller of Restricted Stock will contribute to the damages paid by the
underwriters or GTS, as the case may be; provided that no person guilty of
fraudulent misrepresentation within the meaning of Section 11(f) of the
Securities Act shall be entitled to contribution from any party who was not
guilty of such fraudulent misrepresentation. In determining the amount of
contribution to which the respective parties are entitled, there shall be
considered the relative benefits received by each party from the offering of the
Restricted Stock taking into account the portion of the proceeds of the offering
realized by each, the parties' relative knowledge and access to information
concerning the matter with respect to which the claim was asserted, the
opportunity to correct and prevent any statement or omission, and any other
equitable considerations appropriate in the circumstances. GTS, the underwriters
and each seller of Restricted Stock agree that it would not be equitable if the
amount of such contribution were determined by pro rata or per capita
allocation, even if the underwriters were treated as one entity for such
purpose. No underwriter or person controlling such underwriter shall be
obligated to make contribution hereunder which in the aggregate exceeds the
total public offering price of the stock purchased by such underwriter under the
underwriting agreement, less the aggregate amount of any damages which such
underwriter and its controlling persons have otherwise been required to pay in
respect of the same or any substantially similar claim. The underwriters'
obligations to contribute shall be several in proportion to their respective
underwriting obligations and not joint. For purpose of this Section 9, each
person, if any, who controls an underwriter within the meaning of Section 15 of
the Securities Act shall have the same rights to contribution as such
underwriter; each director of GTS, each officer of GTS who signed the
registration statement, and each person who controls each seller of Restricted
Stock within the meaning of Section 15 of the Securities Act shall have the same
rights to contribution as each seller of Restricted Stock.
9. Changes in Common Stock. If, and as often as, there are any changes
in the Common Stock by way of stock split, stock dividend, combination or
reclassification, or through merger, consolidation, reorganization or
recapitalization, or by any other means, appropriate adjustment shall be made in
the provisions hereof, as may be required, so that the rights and privileges
granted hereby shall continue with respect to the Common Stock as so changed.
10. Representations, Warranties and Covenants of GTS. GTS represents
and warrants to the Investors as follows:
5
<PAGE>
(a) The execution, delivery and performance of this Agreement
by GTS have been duly authorized by all requisite corporate action and will not
violate any provision of law, any order of any court or other agency of
government, the Certificate of Incorporation or Bylaws of GTS, or any provision
of any indenture, agreement or other instrument to which it or any or its
properties or assets is bound, or conflict with, result in a breach of or
constitute, with due notice or lapse of time or both, a default under any such
indenture, agreement or other instrument, or result in the creation or
imposition of any lien, charge or encumbrance of any nature whatsoever upon any
of the properties or assets of GTS.
(b) This Agreement has been duly executed and delivered by GTS
and constitutes the legal, valid and binding obligation of GTS, enforceable in
accordance with its term, except as enforcement of this Agreement may be limited
by bankruptcy, insolvency or other similar laws affecting creditors' rights
generally and that the remedy of specific performance is subject to the
discretion of the court before which proceedings therefore are brought and
except as enforceability of any indemnification provision may be limited under
federal and state securities laws.
(c) With a view to making available to the holders of
Restricted Stock the benefits of Rule 144 promulgated under the Securities Act
and any other rule or regulation of the Commission that may at any time permit a
holder to sell securities of GTS to the public without registration or pursuant
to a registration on Form S-3, GTS agrees to:
(i) make and keep public information available,
as those terms are understood and defined in Rule 144 under the Securities Act,
at all times;
(ii) take such reasonable action as is necessary
to enable the holders of Restricted Stock to utilize Form S-3 for the sale of
their Restricted Stock;
(iii) file with the Commission in a timely manner all
reports and other documents required of GTS under the Securities Act and the
Exchange Act; and
(iv) furnish to any holder, so long as such holder
owns any Restricted Stock, forthwith upon request: (a) a written statement by
GTS that it has complied with the reporting requirements of Rule 144, the
Securities Act and the Exchange Act, or that it qualifies as a registrant whose
securities may be resold pursuant to Form S-3 at any time after it so qualifies,
(b) a copy of the most recent annual or quarterly report of GTS and such other
reports and documents so filed by GTS and (c) such other information as may be
reasonably requested in availing any holder of any rule or regulation of the
Commission which permits the selling of any such securities without registration
or pursuant to such form.
11. Amendments and Waivers.
(a) Except with respect to the provisions of Sections 4 or 5
hereof, changes in or additions to any provision of this Agreement may be made
or compliance with any term, covenant, agreement, condition or provision set
forth herein may be omitted or waived, either generally or in a particular
instance and either retroactively or prospectively, upon written consent of GTS
and the holders of not less than a majority of the Restricted Stock.
(b) No consent shall be required from any party to this
Agreement that no longer holds any Restricted Stock.
6
<PAGE>
12. Miscellaneous.
(a) All covenants and agreements contained in this Agreement
by or on behalf of any of the parties hereto shall bind and inure to the benefit
of the respective successors and assigns of the parties hereto whether so
expressed or not, provided that upon a transfer of shares of Restricted Stock,
the transferee shall send GTS written notice setting forth its address and its
agreement to be bound by the terms of this Agreement. Without limiting the
generality of the foregoing, the registration rights conferred herein on the
holders of Restricted Stock shall inure to the benefit of any and all subsequent
holders from time to time of the Restricted Stock.
(b) All notices, requests, consents and other communications
hereunder shall be in writing and shall be mailed by first class registered
mail, postage prepaid, addressed as follows:
(i) if to GTS, at its offices at 10 Stow Road,
Suite 200, Marlton, New Jersey 08053; Attention: President;
(ii) if to the Agent, at its offices at Four
Falls Corporate Center, West Conshohocken, PA 19428;
(iii) if to the Investors, at their respective
addresses set forth on the signatures pages hereto; and
(iv) if to any subsequent holder of Restricted
Stock, at such address as may have been furnished to GTS in writing by such
holder;
or, in any case, at such other address or addresses as shall have been furnished
in writing to GTS in the case of a holder of Restricted Stock or to the holders
of Restricted Stock in the case of GTS.
(c) This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
(d) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(e) If this Agreement shall conflict in any way with all or
any portion of any other agreement or instrument to which any party hereto is a
party, this Agreement shall supersede such conflicting agreement or instrument
or portion thereof.
(f) Wherever possible, each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any portion of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
7
<PAGE>
IN WITNESS WHEREOF, GTS, the Agent and the Investors have executed this
Agreement as of the date first above written.
GLOBAL TELECOMMUNICATION INVESTOR (INDIVIDUAL)
SOLUTIONS, INC.
By:______________________________ __________________________
Randy Cherkas, President (Signature)
___________________________
(Name - Please Print)
___________________________
(Address)
___________________________
(Social Security Number)
PENNSYLVANIA MERCHANT GROUP INVESTOR (ENTITY)
By:____________________________ ____________________________
(Name - Please Print)
___________________________
(Address)
___________________________
(Tax Identification Number)
By:_________________________
Name:_______________________
Title:______________________
8
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation Date of Incorporation Status
- ---- ------------- --------------------- ------
<S> <C> <C> <C>
Global Link Telecom Corporation Delaware March 28, 1994 Wholly-owned subsidiary
GTS Marketing, Inc. Delaware April 3, 1995 Wholly-owned subsidiary
Global Telecommunication
Solutions (Canada) Inc. Winnipeg, Manitoba December 6, 1995 Wholly-owned subsidiary
Centerpiece Communications, Inc. New Jersey June 16, 1996 Wholly-owned subsidiary
Networks Around The World, Inc. New Jersey February 1, 1994 Wholly-owned subsidiary
Global Telecommunications Mexico, D.F. January 6, 1998 Wholly-owned subsidiary
Solutions de Mexico
GTS Holding Corp., Inc. Delaware November 16, 1998 Wholly-owned subsidiary
Teltime, Inc. Delaware November 12, 1998 Wholly-owned subsidiary of
GTS Holding Corp., Inc.
Network Services System, Inc. Delaware November 17, 1998 Wholly-owned subsidiary of
GTS Holding Corp., Inc.
Network Services System, L.P. Delaware December 2, 1998 Network Services System,
Inc. is the General Partner
of GTS Marketing, Inc. is
the Limited Partner
Global Telecommunication Delaware December 2, 1998 GTS Marketing, Inc. is the
Solutions, Inc. General Partner and Network
Services System, Inc. is
the Limited Partner
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Global Telecommunication Solutions, Inc.
We consent to incorporation by reference in the registration statements on Form
S-8 (No. 333-21339) and on Form S-3 (Nos. 333-6925, 333-19005 and 333-68577) of
Global Telecommunication Solutions, Inc. of our report dated April 9, 1999,
relating to the consolidated balance sheets of Global Telecommunication
Solutions, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations and comprehensive loss,
stockholders' equity (deficit) and cash flows for each of the years in the
two-year period ended December 31, 1998, which report appears in the December
31, 1998 Annual Report on Form 10-KSB of Global Telecommunication Solutions,
Inc.
Our report dated April 9, 1999, contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations and has a
significant net working capital deficiency at December 31, 1998 and has not made
certain payments of taxes and regulatory fees, which raise substantial doubt
about its ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
that uncertainty.
/s/ KPMG LLP
- -------------------
KPMG LLP
April 14, 1999
Philadelphia, Pennsylvania
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Global Telecommunication Solutions, Inc. and
subsidiaries as of December 31, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,604,166
<SECURITIES> 0
<RECEIVABLES> 3,595,442
<ALLOWANCES> (361,336)
<INVENTORY> 436,883
<CURRENT-ASSETS> 5,679,084
<PP&E> 3,392,113
<DEPRECIATION> (1,166,711)
<TOTAL-ASSETS> 10,017,328
<CURRENT-LIABILITIES> 24,348,839
<BONDS> 0
<COMMON> 113,211
0
0
<OTHER-SE> (14,218,300)
<TOTAL-LIABILITY-AND-EQUITY> 10,017,328
<SALES> 31,178,125
<TOTAL-REVENUES> 31,178,125
<CGS> 29,629,086
<TOTAL-COSTS> 29,629,086
<OTHER-EXPENSES> 27,021,630
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,286,439
<INCOME-PRETAX> (28,569,796)
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,569,796)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,569,796)
<EPS-PRIMARY> (4.41)
<EPS-DILUTED> (4.41)
</TABLE>
