U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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( ) TRANSITION REPORT PURSUANT TO 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.
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(Exact name of small business issuer as specified in its charter)
Delaware 13-3698386
- -------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10 Stow Road, Suite 200, Marlton, New Jersey 08053
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(Address of principal executive offices)
(856) 797-3434
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(Issuer's telephone number including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No |_|.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of August 13, 1999, the issuer had
outstanding 14,440,946 shares of Common Stock, par value $.01 per share.
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Page
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Part I. Financial Information
Item I. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 1999 (unaudited) and
December 31, 1998..................................................3
Consolidated Statements of Operations - Three and six months
ended June 30, 1999 and 1998 (unaudited)...........................4
Consolidated Statements of Cash Flows - Six months ended
June 30, 1999 and 1998 (unaudited).................................5
Notes to Consolidated Financial Statements.........................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................11
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds................16
Item 5. Other Information........................................16
Item 6. Exhibits and Reports on Form 8-K.........................16
Signatures........................................................17
2
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GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
---------------------------------
1999 1998
--------------- ---------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,397,239 $ 1,604,166
Restricted cash 300,000 300,000
Accounts receivable, net of reserve for doubtful accounts of $307,004
and $361,336 2,559,502 3,234,106
Inventories 395,717 436,883
Other assets 355,241 103,929
--------------- ---------------
Total current assets 5,007,699 5,679,084
--------------- ---------------
Goodwill, net 1,626,667 1,952,000
Property and equipment, net 2,417,538 2,225,402
Other assets, net 205,888 160,842
--------------- ---------------
Total assets $ 9,257,792 $ 10,017,328
=============== ===============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 6,616,306 $ 5,180,275
Accrued regulatory and license fees 5,429,384 3,580,907
Accrued earn-out payable to related party 497,541 634,085
Accrued expenses 2,485,288 2,978,883
Deferred revenues 3,496,759 3,160,958
Estimated sales and excise tax liability 5,465,504 5,665,166
Short-term borrowings 450,000 -
Convertible notes payable, current 75,000 2,599,750
Notes payable to related parties, net 548,815 548,815
--------------- ---------------
Total current liabilities 25,064,597 24,348,839
--------------- ---------------
Commitments and Contingencies (Notes 5, 6, 8, 9 and 10)
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 14,478,837 and 11,321,034 144,770 113,211
Additional paid in capital 56,135,760 52,120,397
Accumulated deficit (72,040,557) (66,512,239)
Deferred compensation - (6,102)
Accumulated other comprehensive income 23,089 23,089
Less: Treasury stock, 47,891 shares (69,867) (69,867)
--------------- ---------------
Total stockholders' equity (deficit) (15,806,805) (14,331,511)
--------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 9,257,792 $ 10,017,328
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements
3
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GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
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1999 1998 1999 1998
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 9,817,614 $ 8,030,272 $17,241,003 $13,164,668
Cost of sales (Exclusive of depreciation) 9,716,104 7,544,232 16,360,977 12,738,342
Estimated costs of carrier default (Note 4) - - - 550,000
---------------- --------------- --------------- ---------------
Gross profit 101,510 486,040 880,026 (123,674)
---------------- --------------- --------------- ---------------
Selling, general and administrative expenses 2,162,917 2,911,697 3,971,484 5,392,015
Depreciation and amortization
444,394 580,673 812,700 950,329
---------------- --------------- --------------- ---------------
Operating loss (2,505,801) (3,006,330) (3,904,158) (6,466,018)
---------------- --------------- --------------- ---------------
Interest income 9,902 5,536 24,240 60,471
Interest expense 26,414 917,447 228,228 1,312,947
---------------- --------------- --------------- ---------------
Loss before extraordinary item (2,522,313) (3,918,241) (4,108,146) (7,718,494)
Extraordinary loss (Note 7) - - 1,420,172 -
---------------- --------------- --------------- ---------------
Net loss $(2,522,313) $ (3,918,241) $ (5,528,318) $ (7,718,494)
================ =============== =============== ===============
Basic and diluted loss per share:
Loss before extraordinary item $ (0.17) $ (0.65) $ (0.29) $ (1.33)
Extraordinary loss -- -- (0.10) --
---------------- --------------- --------------- ---------------
Basic and diluted loss per share $ (0.17) $ (0.65) $ (0.39) $ (1.33)
================ =============== =============== ===============
Weighted average shares outstanding - basic and diluted 14,429,081 5,991,772 14,167,539 5,806,383
================ =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these statements
4
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GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
June 30,
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1999 1998
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<S> <C> <C>
Operating activities:
Net loss $(5,528,318) $(7,718,494)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 812,700 950,329
Provision for bad debts 180,000 208,261
Amortization of deferred compensation 6,102 322,070
Amortization of unearned discount - 385,511
Amortization of deferred financing charges 4,995 578,264
Loss on debt conversion 1,420,172 -
Issuance of stock options to consultants 102,000 -
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable 494,604 (2,141,314)
Inventories 41,166 (327,779)
Deferred costs - 32,764
Other current assets and other assets (301,353) 150,542
Accounts payable 1,436,031 1,525,430
Accrued expenses and other regulatory fees 1,218,338 1,537,381
Deferred revenues 335,801 2,261,825
Estimated sales and excise taxes payable (199,662) 663,200
--------------- ---------------
Net cash provided by (used in) operating activities 22,576 (1,572,010)
--------------- ---------------
Investing activities:
Purchases of property and equipment (679,503) (982,314)
Acquisitions and related costs - (5,170,234)
--------------- ---------------
Net cash used in investing activities (679,503) (6,152,548)
--------------- ---------------
Financing activities:
Proceeds from bridge loan - 1,250,000
Proceeds from short-term borrowings 450,000 -
Payments on capital lease obligations - (75,903)
Payments of deferred finance fees - (115,000)
--------------- ---------------
Net cash provided by financing activities 450,000 1,059,097
--------------- ---------------
Effects of exchange rates on cash - 12,950
--------------- ---------------
Net decrease in cash (206,927) (6,652,511)
Cash and cash equivalents, beginning of period 1,604,166 7,867,566
--------------- ---------------
Cash and cash equivalents, end of period $ 1,397,239 $ 1,215,055
=============== ===============
Supplemental disclosures:
Cash paid for interest $ 25,197 $ 79,049
=============== =============
Deferred finance fees relating to options and warrants $ - $ 1,450,927
=============== =============
Deferred compensation relating to options and warrants $ - $ 198,600
=============== =============
Fair value of common stock issued upon note conversion $ 3,944,922 $ -
=============== =============
Issuance of common stock in connection with acquisition $ - $ 4,806,580
=============== =============
Issuance of notes payable in connection with acquisition $ - $ 2,000,000
=============== =============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
5
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GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(unaudited)
(1) Business and Basis of Presentation
Business
Global Telecommunication Solutions, Inc. (the "Company") was incorporated on
December 23, 1992 and is engaged in the marketing and distribution of prepaid
phone cards. The Company's phone cards provide consumers access to long distance
service through its switching facilities and long distance network arrangements.
The majority of the Company's customers are retail establishments, distributors
and businesses which sell phone cards to the ultimate user, or which acquire the
Company's phone cards to promote their business or products.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999.
(2) Loss Per Share
Weighted average shares of common stock for the three and six months ended June
30, 1999 and 1998 do not include common stock equivalents as their effect would
be anti-dilutive.
(3) Reclassifications
Certain reclassifications have been made to the 1998 consolidated financial
statements to conform to the 1999 presentation.
(4) Acquisitions
On February 6, 1998, 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. In addition, the Company is required to pay up to $2,000,000 ("Earn Out")
in additional consideration to Randy Cherkas, the Company's President, if
certain sales and financial objectives are achieved. Upon the achievement of
such objectives the additional consideration will increase goodwill. For the
year ended December 31, 1998, $838,900 of the Earn Out was recorded as
additional consideration. For the six months ended June 30, 1999, no additional
Earn Out was recorded. In April 1998, the former shareholders agreed to defer
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the NATW Notes and Earn Out from 1998 to January 1999. In December 1998, the
former shareholders of NATW agreed to convert the NATW Notes into common stock
(see Note 6). From the consummation of the NATW merger in February 1998 through
June 30, 1999, the Company has paid Mr. Cherkas $341,359 of the aggregate amount
of $838,900 accrued during that period under the Earn Out. 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 to him under the Earn Out.
Also in February 1998, 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 were subsequently contributed back to the Company;
and (iii) a $1,000,000 aggregate principal amount promissory note ("CCI Note"),
secured by substantially all of the assets of CCI. In November 1998, the CCI
Note was converted into 813,008 shares of common stock.
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
provide telecommunications services related to such cards aggregated $1,761,097
during the year ended December 31, 1998. For the six months ended June 30, 1999,
no additional costs related to such cards were recorded. For purposes of the
consolidated financial statements contained herein, $451,185 of the estimated
costs was allocated to the former shareholders of NATW pursuant to
indemnification arrangements (see Note 6).
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 first half of 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,
1998.
Six Months Ended
June 30, 1998
-----------------
Net sales $ 15,479,187
Net loss $(8,429,513)
Net loss per share $ (1.38)
Pro forma adjustments include recording amortization expense on goodwill,
interest expense on the notes payable to former shareholders, and the
elimination of intercompany sales and income taxes.
The pro forma results of operations are not necessarily indicative of the actual
results of operations that would have occurred had the purchase been made at the
beginning of 1998, or of results which may occur in the future.
(5) 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
that point of sale rather than based upon card usage. The Company has not filed
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<PAGE>
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. Due to changes in certain state sales tax statutes
providing that sales and use taxes on prepaid phone cards are payable at the
point of sale by the retailers, rather than the telecommunications provider, and
the restructuring of the Company's corporate organization, the Company no longer
provides for state sales, use and gross receipts taxes beginning in the second
quarter of 1999.
(6) Notes Payable to Related Parties
In December 1998, the former shareholders of NATW 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
4).
(7) Convertible Notes Payable
In connection with the Company's acquisition, through a merger, of Global Link
Telecom Corporation in February 1996, 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 were secured by a first lien on all assets of
the Company. In December 1998, the Company offered holders of the remaining
$2,599,750 aggregate principal amount of debentures the opportunity to convert
the 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 the debentures into 3,155,938 shares of common stock. In
connection with the conversion, the Company recorded an extraordinary loss of
$1,420,172 related to the difference between the market value of the shares on
the conversion date ($3,944,922) as compared to the carrying value of the debt.
(8) Liquidity
The Company has incurred significant losses and negative earnings before
interest, tax and depreciation and amortization during 1997, 1998 and the first
half of 1999. In the second half of 1998, the Company implemented a
restructuring plan in an effort to reduce administrative overhead costs and to
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 of debt to equity. Notwithstanding these
efforts, as of June 30, 1999, the Company had a working capital deficit of
approximately $20.1 million and its total liabilities exceeded its total assets
by approximately $15.8 million. While the Company's cash balance has increased
by $595,024 since March 31, 1999, including $450,000 in proceeds from short-term
borrowing, to $1,397,239 at June 30, 1999, the Company has not attained positive
earnings before interest, tax and depreciation and amortization. The Company has
managed its increased cash flow from increased sales and by obtaining favorable
terms with its vendors. The Company's sales (activations) have increased by 36%
during the quarter ended June 30, 1999, compared to the quarter ended March 31,
1999. This has positively impacted short term cash collections, which is the
Company's principal source of cash used to satisfy its obligations. Until the
Company is able to raise additional debt or equity capital, it must continue to
increase monthly sales and maintain favorable terms with its vendors in order to
continue its operations as they currently exist. There can be no assurance that
the Company will continue to increase monthly sales and maintain favorable terms
with its vendors. There can be no assurance that additional financing will be
available, or if available, that the Company will be able to obtain it on
acceptable terms.
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(9) Regulatory Charges
On May 8, 1997, the Federal Communications Commission ("FCC") issued an order to
implement the provisions of the Telecommunications Act of 1996 relating to the
preservation and advancement of universal telephone service (the "Universal
Service Order"). The Universal Service Order requires all telecommunications
carriers providing interstate telecommunications services to contribute to
universal service by contributing to a fund (the "Universal Service Fund").
Universal Service Fund contributions will be assessed based upon intrastate,
interstate and international "end-user" gross telecommunications revenue
effective January 1, 1998. Although the FCC has not yet finally determined the
contribution assessment rate, the Company estimates the assessment could be as
much as 5% of such revenue for 1998 through June 30, 1999, 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 have been made as of June 30, 1999.
The 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. While the Company believes that it has adequately accrued for this
liability, which has been estimated based upon pay telephone specific
identifiers that are received by the Company as part of the call detail records,
it is possible that the ultimate settlement payments made to third parties could
differ from amounts accrued and the amount of such differences could be
material. No payments related to these fees have been made as of June 30, 1999.
(10) Litigation
In June 1998, IDB WorldCom Services, Inc. ("Worldcom") commenced an action
against the Company in the Court of Common Pleas of Philadelphia, Pennsylvania.
The complaint alleges that from March 1995 through March 1997, Worldcom provided
certain long distance and other telecommunications services for which it was not
paid. Worldcom alleges that the Company owes Worldcom $698,419, inclusive of
interest, for such services. The Company has retained counsel in this matter and
will vigorously defend this action. The Company believes that it has adequately
accrued for this liability, after giving effect to the Company's offsets and
counterclaims.
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.
(11) Short-term Borrowings
Effective June 1, 1999, the Company obtained $450,000 in short-term financing.
Pursuant to the terms of the financing agreement, borrowings are limited to 80%
of eligible accounts receivable, are secured by the Company's receivables and
are personally guaranteed by three of the Company's stockholders. In
consideration for providing the personal guarantees, these stockholders were
granted immediately exercisable options to purchase an aggregate of 300,000
shares of the Company's common stock for $0.5625 per share. The financing
provides for borrowings at an interest rate based upon the prime rate of
Wachovia Bank, N.A. plus 1.0% plus a monthly fee equal to 0.8%. The Company
plans to use the financing for working capital. At June 30, 1999, the balance of
the short-term loan equaled $450,000 and no additional financing was available.
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(12) New Accounting Pronouncements
In March 1999, the Financial Accounting Standards Board issued an exposure
draft, Accounting for Certain Transactions Involving Stock Compensation. This
exposure draft addresses the application of Accounting Standards Board No. 25 to
stock-based compensation granted to independent contractors and independent
members of an entity's board of directors, as well as the accounting for option
repricing and modification to the terms of a stock option or award. The Company
intends to review this exposure draft to determine its impact on the Company's
financial position and results of operations.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-QSB and in future filings by the Company with
the Securities and Exchange Commission, 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," "the Company 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.
Results of Operations
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Net sales for the second quarter of 1999 were $9,817,614 compared to
$8,030,272 for the second quarter of 1998. The 22% increase in net sales
resulted from the Company's aggressive pursuit of relationships with
distributors that sell the cards to retailers by offering greater discounts and
commissions to retailers and/or reduced per-minute charges to consumers.
The Company's gross margins decreased to 1% of net sales for the second
quarter of 1999, from 6% of net sales for the comparable period in the prior
year. The primary reasons for the decrease in the gross margins were an increase
in the sale of cards to distributors with greater discounts and sales of cards
with reduced per-minute rates to consumers. The decrease was partially offset
by: (i) a decrease in the Company's telecommunications carrier costs,
particularly domestic origination and termination and Mexico termination;
(ii) the recognition of approximately $288,500 in Mexican Value-Added tax
receivable and (iii) the restructuring of the Company's corporate organization,
which allowed the Company to eliminate its accrual for the state sales, use and
gross receipts taxes during the second quarter of 1999.
Selling, general and administrative expenses decreased to $2,162,917
(22% of net sales) for the second quarter of 1999, compared to $2,911,697 (36%
of net sales) for the second quarter of 1998. The significant reduction in
expenses is associated with the Company's restructuring plan implemented in
1998. During 1998, the Company closed its Canadian subsidiary, consolidated its
operations from five to two locations, and amended three executives' employment
agreements, which included the termination of their employment and reduced the
salaries associated with these employment agreements.
Depreciation and amortization expense decreased to $444,394 for the
second quarter of 1999 from $580,673 for the second quarter of 1998. The reason
for the 23% decrease was (i) a reduction of $97,000 in amortization expense,
resulting from the reduction of goodwill in December 1998 and (ii) a reduction
of approximately $39,000 in depreciation expense as the Company has decreased
its spending on fixed assets.
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Investment and interest income was $9,902 for the second quarter of
1999, compared to $5,536 for the second quarter of 1998. The increase was due to
the Company's relatively higher cash position during the second quarter of 1999
compared to the second quarter of 1998.
Interest expense for the second quarter of 1999 decreased to $26,414
from $917,447 for the second quarter of 1998, primarily due to the conversion of
approximately $6.6 million of debt to equity.
For the foregoing reasons, the Company incurred a net loss of
$2,522,313 for the second quarter of 1999, compared to a net loss of $3,918,241
for the second quarter of 1998.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net sales for the six months ended June 30, 1999 were $17,241,003
compared to $13,164,668 for the six months ended June 30, 1998. The 31% increase
in net sales was due to the addition of several new distributors during 1999 and
the increase in sales to existing distributors.
The Company's gross margins increased to 5% of net sales for the six
months ended June 30, 1999, from negative 1% of net sales for the comparable
period in the prior year. The primary reasons for the increase in the gross
margins were: (i) a charge during the six months ended June 30, 1998 related to
carrier default costs aggregating $550,000 associated with Access Telecom, Inc.
("Access"), a provider of long distance services that ceased providing such
services on cards purchased by the Company; (ii) a decrease in the Company's
telecommunications carrier costs, particularly domestic origination and
termination and Mexico termination; and (iii) the restructuring of the Company's
corporate organization, which allowed the Company to reduce and then eliminate
its accrual for the state sales, use and gross receipts taxes during the first
six months of 1999. These decreases were offset by: (i) an increase in the sale
of cards to distributors with greater discounts and (ii) sales of cards with
reduced per-minute rates to consumers.
Selling, general and administrative expenses decreased to $3,971,484
(23% of net sales) for the six months ended June 30, 1999, compared to
$5,392,015 (41% of net sales) for the six months ended June 30, 1998. The
significant reduction in expenses is associated with the Company's restructuring
plan implemented in 1998. During 1998, the Company closed its Canadian
subsidiary, consolidated its operations from five to two locations, and amended
three executives' employment agreements, which included the termination of their
employment and reduced the salaries associated with these employment agreements.
Depreciation and amortization expense decreased to $812,700 for the six
months ended June 30, 1999 from $950,329 for the six months ended June 30, 1998.
The primary reason for the 14% decrease was a reduction in amortization expense,
resulting from the reduction of goodwill in December 1998.
Investment and interest income was $24,240 for the six months ended
June 30, 1999, compared to $60,471 for the six months ended June 30, 1998. The
decrease was due to the Company's relatively higher cash position during the
first quarter of 1998.
Interest expense for the six months ended June 30, 1999 decreased to
$228,228 from $1,312,947 for the six months ended June 30, 1998, primarily due
to the conversion of approximately $6.6 million of debt to equity.
In January 1999, holders of $2,524,750 aggregate principal amount of
debentures converted the debentures into 3,155,938 shares of common stock. In
connection with the conversion, the Company incurred an extraordinary loss of
$1,420,172 related to the difference between the market value of the shares on
the conversion date ($3,944,922) as compared to the carrying value of the debt.
For the foregoing reasons, the Company incurred a net loss of
$5,528,318 for the six months ended June 30, 1999, compared to a net loss of
$7,718,494 for the six months ended June 30, 1998.
12
<PAGE>
Liquidity and Capital Resources
At June 30, 1999, the Company had cash and cash equivalents of
$1,397,239 and a working capital deficit of $20,056,898, compared to $1,604,166
and $18,669,755, respectively, at December 31, 1998.
Net cash provided by operating activities for the six months ended June
30, 1999 of $22,576 was primarily due to the Company's net loss, offset by
non-cash items aggregating $2,525,969 such as depreciation and amortization,
provision for bad debts and financing costs. The cash used related to the loss
from operations was partially offset by decreases in accounts receivable as the
Company has implemented aggressive collection efforts. Net cash used in
investing activities for the six months ended June 30, 1999 consisted of
$679,503 of capital expenditures. Net cash provided by financing activities
totaled $450,000. Effective June 1, 1999, the Company obtained $450,000 in
short-term financing. Pursuant to the terms of the financing agreement,
borrowings are limited to 80% of eligible accounts receivable, are secured by
the Company' receivables and are personally guaranteed by Shelly Finkel,
Chairman of the Board, Barry Rubenstein and Eli Oxenhorn, principal stockholders
of the Company. In consideration for providing the personal guarantees, Messrs.
Finkel, Rubenstein and Oxenhorn each were granted immediately exercisable
options to purchase 100,000 shares of the Company's common stock for $0.5625 per
share. The financing provides for borrowings at an interest rate based upon the
prime rate of Wachovia Bank, N.A. plus 1.0% plus a monthly fee equal to 0.8%.
The Company plans to use the financing for working capital. At June 30, 1999,
the balance of the short-term loan equaled $450,000 and no additional financing
was available.
In February 1998, the Company acquired, through a merger, all of the
outstanding capital stock of NATW for a purchase price comprised of (i)
$2,000,000 in cash, (ii) an aggregate of 505,618 shares of common stock and
(iii) $1,000,000 aggregate principal amount of promissory notes ("NATW Notes"),
secured by substantially all of the assets of NATW. 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, if certain sales and financial
objectives are achieved. Upon the achievement of such objectives the additional
consideration will increase goodwill. For the year ended December 31, 1998,
$838,900 of the Earn Out was recorded as additional consideration. For the six
months ended June 30, 1999, no additional Earn Out was recorded. 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 agreed to convert the NATW Notes into common stock (see
below). From the consummation of the NATW merger in February 1998 through June
30, 1999, the Company has paid Mr. Cherkas $341,359 of the aggregate amount of
$838,900 owed to him during that period under the Earn Out. Mr. Cherkas
has the opportunity to earn up to an additional $1,161,000 under the Earn Out.
The Company currently is negotiating with Mr. Cherkas the payment terms of
amounts owed to him under the Earn Out.
Also in February 1998, the Company acquired, through a merger, all of
the outstanding capital stock of CCI for a purchase price comprised of (i)
$1,500,000 in cash; (ii) 401,284 shares of common stock, of which 47,891 were
subsequently contributed back to the Company; and (iii) a $1,000,000 aggregate
principal amount promissory note, secured by substantially all of the assets of
CCI. In November 1998, the CCI Note was converted into 813,008 shares of common
stock.
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,
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 the six months ended June 30, 1999, no additional costs
related to such cards were recorded. For purposes of the consolidated financial
statements contained herein, $451,185 of the estimated costs was allocated
to the former shareholders of NATW pursuant to indemnification arrangements.
In December 1998, the former shareholders of NATW agreed to offset the
amounts due to the Company related to Access 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
13
<PAGE>
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.
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 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 the 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 earnings
before interest, tax and depreciation and amortization during 1997, 1998 and the
first half of 1999. In the second half of 1998, the Company implemented a
restructuring plan in an effort to reduce administrative overhead costs and to
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 of debt to equity. Notwithstanding these
efforts, as of June 30, 1999, the Company had a working capital deficit of
approximately $20.1 million and its total liabilities exceeded its total assets
by approximately $15.8 million. While the Company's cash balance has increased
by $595,024 since March 31, 1999, including $450,000 in proceeds from short-term
borrowing, to $1,397,239 at June 30, 1999, the Company has not attained positive
earnings before interest, tax and depreciation and amortization. The Company has
managed its increased cash flow from increased sales and by obtaining favorable
terms with its vendors. The Company's sales (activations) have increased by 36%
during the quarter ended June 30, 1999, compared to the quarter ended March 31,
1999. This has positively impacted short term cash collections, which is the
Company's principal source of cash used to satisfy its obligations. Until the
Company is able to raise additional debt or equity capital, it must continue to
increase monthly sales and maintain favorable terms with its vendors in order to
continue its operations as they currently exist. There can be no assurance
that the Company will continue to increase monthly sales and maintain favorable
terms with its vendors. There can be no assurance that additional financing will
be available, or if available, that the Company will be able to obtain it on
acceptable terms.
At June 30, 1999, the Company had net operating loss carryforwards
("NOLs") aggregating approximately $28,900,000 available to offset future
taxable income. Under Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"), utilization of prior NOLs is limited after an ownership
change, as defined in this section, to an amount equal to the value of the loss
corporation's outstanding stock immediately before the date of the ownership
change, multiplied by the federal long-term tax-exempt rate in effect during the
month that the ownership change occurred. The Company is subject to limitations
on the use of its NOLs as provided pursuant to Section 382. Accordingly, there
can be no assurance that a significant amount of existing NOLs will be utilized
by the Company.
Year 2000 Compliance
The Company has reviewed its critical computer systems, primarily the
telecommunications switching equipment and computer hardware and software
systems, 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 the Company's inability to provide services to its customers. In
addition, the Company also has reviewed other non-information technology
equipment, such as the phone system and alarm system, for year 2000 compliance.
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 has received
14
<PAGE>
year 2000 upgrades for its telecommunications switches. The Company has
installed the upgrade on half of its switches and the remaining half will be
upgraded by August 31,1999. Certain related software upgrades, which are
expected to be year 2000 compliant, are in the final stages of beta testing.
These upgrades will be installed by September 30,1999.
As part of the year 2000 compliance review, the Company has contacted
its primary vendors and is in the process of contacting its significant
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their year 2000 compliance issues. 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 or its
operations. The Company has received certification from 85% of its vendors that
they are either year 2000 compliant or are taking the necessary steps to become
year 2000 compliant. The Company expects to receive the remaining certifications
by August 31, 1999.
The Company believes that the primary risks associated with the year
2000 are: (i) the loss of power to one or more of its telecommunications
switches for an extended period of time, or (ii) the failure of a third party
telecommunications carrier to provide transport carrier services. Such failure
could disrupt the Company's daily operations significantly. While the Company
believes that its year 2000 compliance review procedures will adequately address
its internal year 2000 issues, until the Company receives responses from all of
its significant vendors and customers, the overall risks associated with the
year 2000 issue remains 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 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.
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 September 1999 in the event that its year 2000
compliance initiatives, particularly those that relate to third parties, fall
behind schedule.
15
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
(c) Recent Sales of Unregistered Securities
During the three months ended June 30, 1999, the Company made the
following sales of unregistered securities:
<TABLE>
<CAPTION>
Consideration
Received and
Description of
Underwriting or
Other Discounts to If Option,
Market Price Exemption from Warrant or Convertible
Date of Title of Number Afforded to Registration Security Terms or
Sale Security Sold Purchasers Claimed Exercise or Conversion
------------- -------------- ------------- ---------------------- ---------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
6/1/99 Options to 320,000 options granted - no 4(2) 120,000 shares exercisable from
purchase other consideration 12/1/99 to 12/1/04 for $0.75
Common Stock received by Company per share; 120,000 shares
until exercise exercisable from 6/1/00 to
6/1/05 for $1.25 per share;
40,000 shares exercisable from
6/1/01 to 6/1/06 for $1.75 per
share; 40,000 shares
exercisable from 6/1/02 to
6/1/07 for $2.00 per share
6/18/99 Options to 300,000 options granted in 4(2) exercisable from 6/18/99 to
purchase consideration for 6/17/04 at an exercise price of
Common Stock providing personal $0.5625 per share
guarantee for
financing - no other
consideration
received by Company
until exercise
------------- -------------- ------------- ---------------------- ---------------- ---------------------------------
</TABLE>
Item 5. Other Information
Lee Montellaro became the Company's Chief Financial Officer effective
June 1, 1999. From February 1998 to May 1999, Mr. Montellaro was the Chief
Financial Officer of Paging Management, Inc., a private reseller of paging
services. From July 1997 to February 1998, Mr. Montellaro was Chief Financial
Officer and Treasurer of Intek Global Corporation, a communications carrier with
divisions in manufacturing, distribution and research and development. From July
1995 to July 1997, Mr. Montellaro was Managing Director of Bonnlee Associates,
Inc., a private consulting organization. From 1987 to June 1995, Mr. Montellaro
was employed by The Luxcel Group, Inc. ("Luxcel"), a wireless communications
company. From 1987 to 1992, Mr. Montellaro was Chief Financial Officer of Luxcel
and from June 1992 to June 1995, he served as Luxcel's Chief Executive Officer.
Mr. Montellaro is a certified public accountant. In connection with his
employment with the Company, Mr. Montellaro receives a base annual salary of
$125,000 and was granted options to purchase an aggregate of 320,000 shares of
common stock, 120,000 of which become exercisable in December 1999 at an
exercise price of $0.75 per share, 120,000 of which become exercisable in June
2000 at an exercise price of $1.25 per share, 40,000 of which become exercisable
in June 2001 at an exercise price of $1.75 per share and 40,000 of which become
exercisable in June 2002 at an exercise price of $2.00 per share. The options
will remain exercisable for five years from the date of vesting.
Effective July 6, 1999, the Company's securities were delisted from the
Boston Stock Exchange for failure to meet the $500,000 stockholders equity
maintenance requirement. The Company's securities currently are traded on the
OTC Bulletin Board.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (6/30/99)
(b) Current Reports on Form 8-K
None.
16
<PAGE>
SIGNATURES
In accordance with requirements of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: August 16, 1999
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
By: /s/ Lee R. Montellaro
-----------------------------------
Lee R. Montellaro, Chief Financial Officer
(and principal accounting officer)
17
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page
- --------------- ------------------------ -----
27 Financial Data Schedule 19
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,397,239
<SECURITIES> 0
<RECEIVABLES> 2,559,502
<ALLOWANCES> 307,004
<INVENTORY> 395,717
<CURRENT-ASSETS> 5,007,699
<PP&E> 3,976,295
<DEPRECIATION> (1,558,757)
<TOTAL-ASSETS> 9,257,792
<CURRENT-LIABILITIES> 25,064,597
<BONDS> 0
<COMMON> 144,770
0
0
<OTHER-SE> (15,951,575)
<TOTAL-LIABILITY-AND-EQUITY> 9,257,792
<SALES> 17,241,003
<TOTAL-REVENUES> 17,241,003
<CGS> 16,360,977
<TOTAL-COSTS> 16,360,977
<OTHER-EXPENSES> 4,784,184
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 203,988
<INCOME-PRETAX> (4,108,146)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,108,146)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,420,172)
<CHANGES> 0
<NET-INCOME> (5,528,318)
<EPS-BASIC> (.39)
<EPS-DILUTED> (.39)
</TABLE>
