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 September 30, 1999
----------------------------
( ) 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
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(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 November 19, 1999, the issuer
had outstanding 14,679,991 shares of Common Stock, par value $.01 per share.
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
<TABLE>
Page
----
<S> <C> <C>
Part I. Financial Information
Item I. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1999 (unaudited) and
December 31, 1998........................................................................3
Condensed Consolidated Statements of Operations - Three and nine months
ended September 30, 1999 and 1998 (unaudited)............................................4
Condensed Consolidated Statements of Cash Flows - Nine months ended
September 30, 1999 and 1998 (unaudited)..................................................5
Notes to Condensed Consolidated Financial Statements.....................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..............................................................................11
Part II. Other Information
Item 1. Legal Proceedings..............................................................14
Item 2. Changes in Securities and Use of Proceeds......................................14
Item 3. Defaults Upon Senior Securities................................................15
Item 6. Exhibits and Reports on Form 8-K...............................................15
Signatures..............................................................................16
</TABLE>
2
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
(Unaudited)
September 30, December 31,
-----------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 624,699 $ 1,604,166
Restricted cash - 300,000
Accounts receivable, net 115,023 -
Other assets - 35,000
-----------------------------------
Total current assets 739,722 1,939,166
Property and equipment, net 209,334 324,322
Assets of liquidating subsidiaries 5,706,195 7,753,840
================ ================
Total assets $ 6,655,251 $ 10,017,328
================ ================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 411,681 $ 210,719
Accrued license fees 1,115,049 831,684
Accrued earn-out payable to related party 1,037,556 634,085
Other accrued expenses 989,792 1,436,095
Deferred revenues 8,870 -
Convertible notes payable 45,000 2,599,750
Notes payable to related parties, net 723,815 678,815
---------------- ----------------
Total current liabilities 4,331,763 6,391,148
Liquidating subsidiaries' liabilities
subject to compromise - third party 23,459,707 17,957,691
---------------- ----------------
Total liabilities 27,791,470 24,348,839
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Commitments and Contingencies
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 14,488,837 and 11,321,034 144,870 113,211
Additional paid in capital 56,135,660 52,120,397
Accumulated deficit (77,369,971) (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) (21,136,219) (14,331,511)
---------------- ----------------
Total liabilities and stockholders' equity (deficit) $ 6,655,251 $ 10,017,328
================ ================
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ------------------------------------
1999 1998 1999 1998
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 99,833 $ - $ 99,833 $ -
Cost of sales (Exclusive of depreciation) 42,649 - 42,649 -
---------------- --------------- ---------------- ----------------
Gross profit 57,184 - 57,184 -
Selling, general and administrative expenses 392,630 681,614 1,253,620 1,768,069
Depreciation and amortization 4,339 236,729 11,825 736,632
---------------- --------------- ---------------- ----------------
Loss before extraordinary item and
discontinued operations (339,785) (918,343) (1,208,261) (2,504,701)
Extraordinary loss - - 1,420,172 -
Loss from discontinued operations 4,680,317 3,579,348 8,229,299 9,711,484
---------------- --------------- ---------------- ----------------
Net loss $(5,020,102) $(4,497,691) $(10,857,732) $ (12,216,185)
================ =============== ================ ================
Basic and diluted loss per share:
Loss before extraordinary item and discontinued operations $ (0.02) $ (0.15) $ (0.08) $ (0.43)
Extraordinary loss - - (0.10) -
Loss from discontinued operations (0.33) (0.60) (0.58) (1.65)
---------------- --------------- ---------------- ----------------
Basic and diluted loss per share $ (0.35) $ (0.75) $ (0.76) $ (2.08)
================ =============== ================ ================
Weighted average shares outstanding - basic and diluted 14,437,903 5,993,916 14,259,894 5,873,128
================ =============== ================ ================
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Nine months ended
September 30,
-------------------------------
1999 1998
-------------- ------------
<S> <C> <C>
Operating activities:
Net loss from continuing operations $(2,628,433) $(2,504,701)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 11,825 736,632
Amortization of deferred compensation 6,102 419,193
Amortization of unearned discount - 578,266
Amortization of deferred financing charges 4,995 1,134,779
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 115,023 (2,141,314)
Inventories - (327,779)
Deferred costs - 32,764
Other current assets and other assets (35,000) 150,542
Accounts payable 200,962 1,525,430
Accrued expenses and licensing fees (162,938) 1,537,381
-------------- ------------
Net cash provided by (used in) operating activities (1,065,292) 1,141,193
-------------- ------------
Investing activities:
Purchases of property and equipment 142,054 -
Cash advanced to liquidating subsidiaries (156,229) (8,863,615)
-------------- ------------
Net cash provided by (used in) investing activities 85,825 (8,863,615)
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Financing activities:
Proceeds from bridge loan - 1,250,000
Proceeds from exercise of options - 400
Payments on capital lease obligations - (81,901)
Payments of deferred finance fees - (115,000)
-------------- ------------
Net cash provided by financing activities - 1,053,499
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Effects of exchange rates on cash - 12,950
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Net decrease in cash (979,467) (6,655,973)
Cash and cash equivalents, beginning of period 1,604,166 7,867,566
-------------- ------------
Cash and cash equivalents, end of period $ 624,699 $ 1,211,593
============== ============
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(unaudited)
(1) Business and Basis of Presentation
Business
Global Telecommunication Solutions, Inc. (the "Company") was incorporated on
December 23, 1992 and historically, through its subsidiaries, has been engaged
in the marketing and distribution of prepaid phonecards. As a result of the
Company's subsidiaries' long history of losses in the prepaid phonecard
business, coupled with an increasingly competitive environment, the Company's
Board of Directors adopted a plan to discontinue and sell the prepaid phonecard
business. To facilitate the possible sale of the phonecard assets, certain of
the Company's subsidiaries have filed voluntary petitions with the U.S.
Bankruptcy Court for the District of Delaware under Chapter 11 of the U.S.
Bankruptcy Code. The subsidiaries of the Company that filed for bankruptcy court
protection are Global Link Telecom Corporation, GTS Holding Corp., Inc.,
TelTime, Inc., Network Services System, Inc., Network Services System, L.P., GTS
Marketing, Inc., Global Telecommunication Solutions, L.P., Networks Around the
World, Inc. and Centerpiece Communications, Inc (collectively the "Debtors").
The Company now intends to focus on its direct one-to-one interactive marketing
business utilizing telephony, the Internet and wireless communication
technologies.
Basis of Presentation
The accompanying unaudited condensed 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.
As a result of the Company's decision to sell its phonecard business and the
subsequent voluntary filing by certain of the Company's subsidiaries under
Chapter 11 of the U.S. Bankruptcy Code, the operations of that business are
presented herein as discontinued operations and the assets and liabilities of
the filing subsidiaries have been aggregated in the accompanying balance sheets.
Operating results for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for future periods,
including the year ending December 31, 1999.
(2) Discontinued Operations and Subsidiary Chapter 11 Filings
In September 1999, the Company's Board of Directors adopted a plan to
discontinue the operations of the phonecard business and to seek an acquirer of
that business. As a result of the substantial liabilities associated with that
business, a subsequent decision was made resulting in the Debtors filing
voluntary petitions with the U.S. Bankruptcy Court for the District of Delaware
under Chapter 11 of the U.S. Bankruptcy Code on October 28, 1999. In making
these filings, the Debtors indicated to the court that a purchaser for the
assets of the Debtors was being sought, but that failing that, the businesses
would be liquidated rather than reorganized. The Debtors are currently
negotiating with several potential acquirers of their assets. Under Chapter 11,
certain claims against the Debtors in existence prior to the filing of the
voluntary petitions for relief under the federal bankruptcy laws are stayed
while the Debtors continue business operations as Debtors-in-possession.
6
<PAGE>
As a result of these actions, for financial reporting purposes, the results of
operations of the phonecard business have been segregated from continuing
operations and reported as a separate line item on the statement of operations.
The Company has restated the prior period financial statements included herein
to present the operating results of the phonecard business as a discontinued
operation.
The assets associated with the phonecard business have been separately
segregated in the accompanying balance sheet and at September 30,1999 intangible
assets related to the business of approximately $2 million have been written off
and have been included in the loss from discontinued operations. The liabilities
associated with the phonecard business have been segregated in the accompanying
balance sheet as "Subsidiary liabilities subject to compromise." Included in
that amount is approximately $500,000 in secured debt payable with the remaining
balance being unsecured liabilities due trade creditors and vendors, estimated
sales tax liabilities payable and other regulatory fees, deferred revenue
related to outstanding phonecards and the estimated liability to various
payphone owners as dial around compensation.
Because under federal bankruptcy laws obligations incurred by the Debtors after
a petition for bankruptcy is filed have priority over pre-petition liabilities,
no provision for estimated losses to be incurred during the period of
liquidation or sale has been made since it is currently anticipated that to the
extent additional liabilities and/or losses are incurred, the value of the
assets available to settle subsidiary liabilities subject to compromise will be
reduced.
At September 30, 1999, the Company's investment in and receivables from the
Debtors was approximately $23.7 million. The Company does not anticipate
receiving any substantial proceeds from the Debtors' estate. Accordingly,
neither the receivable due from the Debtors nor the payable due to the Company
as a liability subject to compromise has been reflected in the accompanying
balance sheet.
Operating results from the discontinued operations are as follows:
<TABLE>
Three months ended Nine months ended
September 30, September 30,
----------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 9,566,208 $ 9,359,063 $ 26,807,210 $ 22,523,731
Cost of sales 10,508,629 8,647,063 26,869,606 21,935,405
----------- ----------- ------------ ------------
Gross profit (942,421) 712,000 (62,396) 588,326
Selling, general and
administrative expenses 1,329,083 2,175,746 4,439,577 6,481,306
Restructuring charge - 891,436 - 891,436
Depreciation and amortization 2,370,410 276,344 3,484,936 726,770
----------- ----------- ------------ ------------
Operating loss (4,641,914) (2,631,526) (7,986,909) (7,511,186)
Interest income 4,292 16,864 28,533 77,335
Interest expense (42,695) (364,686) (270,923) (2,277,633)
----------- ----------- ------------ ------------
Net loss from discontinued
operations $ (4,680,317) $(3,579,348) $(8,229,299) $(9,711,484)
============= ============ ============ ============
</TABLE>
7
<PAGE>
Summary balance sheets at September 30, 1999 of the discontinued operations
which subsidiaries are being liquidated are as follows:
September 30, December 31,
1999 1998
------------- -----------
Current assets:
Cash and cash equivalents $ 808,996 $ -
Accounts receivable, net 2,271,720 3,234,106
Inventory 262,307 436,883
Other assets 366,343 68,929
------------ -----------
Total current assets 3,709,366 3,739,918
Goodwill, net - 1,952,000
Property and equipment, net 1,851,209 1,901,080
Other assets, net 145,620 160,842
------------ ------------
Total assets $ 5,706,195 $ 7,753,840
============ ============
Current liabilities:
Accounts payable $ 8,014,208 $ 4,969,556
Accrued regulatory fees 5,290,380 2,749,223
Other accrued expenses 1,027,561 1,412,788
Deferred revenues 3,652,101 3,160,958
Estimated sales and excise tax liability 5,475,457 5,665,166
--------------------------------
Total current liabilities $ 23,459,707 $ 17,957,691
================================
(3) Loss Per Share
Weighted average shares of common stock for the three and nine months ended
September 30, 1999 and 1998 do not include common stock equivalents, as their
effect would be anti-dilutive.
(4) Reclassifications
Certain reclassifications have been made to the 1998 consolidated financial
statements to conform to the 1999 presentation.
(5) Amounts Due to Officer and Related Parties
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, and
former majority shareholder of NATW, 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 nine
months ended September 30, 1999, an additional $540,015 of Earn Out was
recorded. From the consummation of the NATW merger in February 1998 through
September 30, 1999, the Company has paid Mr. Cherkas $341,359 of the aggregate
amount of $1,378,915 accrued during that period under the Earn Out. Mr. Cherkas
has the opportunity to earn up to an additional $621,085 under the Earn Out.
8
<PAGE>
Also in connection with the NATW acquisition, the shareholders of NATW agreed to
indemnify the Company against certain losses resulting from any underlying
carrier's failure to provide telecommunications services to phonecards purchased
by NATW prior to the merger. In February 1998, Access Telecom, Inc. ("Access"),
a primary provider to NATW prior to and after the merger, ceased providing such
services to the prepaid phonecard that it had sold to NATW, despite receiving
payment for substantially all of the phonecards. As a result of this the former
shareholders of NATW are required to indemnify the Company for a portion of its
losses.
In April 1998, the former shareholders agreed to defer the NATW Notes and Earn
Out from 1998 to January 1999. Subject to the completion of negotiations
regarding the determination of the Access liability, in December 1998, Mr.
Cherkas agreed to offset the amounts due to the Company related to Access
against his portion of the NATW Notes payable, and to convert the net amount due
him under the NATW Notes into common stock at a conversion rate of $0.80 per
share. However, during 1999, negotiations with the former shareholders of NATW
continued and the Company did not pay amounts due under the NATW Notes and Earn
Out. The Company has received written notice from the former shareholders
advising the Company of the default and further indicating that unless the
Company cures the defaults within the time frames permitted under the NATW Note
and Earn Out agreements, which it has not done, the former shareholders could
take legal action against the Company. Additionally, Mr. Cherkas has advised the
Company that it is currently in default under his employment agreement with the
Company because it has failed to pay amounts due thereunder. As a result of
these defaults, Mr. Cherkas has advised the Company that he believes he can
terminate his employment agreement and that his non-compete agreement would not
be enforceable.
At September 30, 1999, all amounts currently owed the NATW shareholders are
reflected in the accompanying financial statements, less an estimate of the
Access indemnity of $376,185. While negotiations with the NATW shareholders are
continuing, given the proposed liquidation/or sale of the Company's phonecard
business, it is impossible to predict at this time the resolution of the
negotiations with Mr. Cherkas and the other NATW shareholder. It is possible
that the actual settlement could materially differ from amounts currently
reflected in the Company's financial statements.
(6) 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.
On September 14, 1999, the remaining $75,000 in outstanding convertible
debentures became due and payable. The debenture holders agreed to accept
repayment of their debentures over the three-month period ending December 15,
1999 and at September 30, 1999 the remaining principal balance on these
debentures was $45,000.
(7) 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 alleged that from March 1995 through March 1997, Worldcom provided
certain long distance and other telecommunications services for which it was not
paid. Worldcom alleged that the Company owed Worldcom $698,419, inclusive of
interest, for such services. On September 7, 1999, the Company settled this
matter with Worldcom for $400,000 of which $300,000 is payable in cash over 22
months and the $100,000 balance was paid through this issuance of 239,045 shares
of the Company's common stock which shares were issued subsequent to September
30, 1999.
9
<PAGE>
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.
(8) New Accounting Pronouncement
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.
(9) Subsequent Event
On October 28, 1999 the Debtors filed voluntary petitions with the U.S.
Bankruptcy Court for the District of Delaware ("Court") under Chapter 11 of the
U.S. Bankruptcy Code. The Debtors elected to seek Court protection to facilitate
the possible sale of their assets. The Company intends to sell the assets of the
phonecard operations to a buyer who will continue to run the business. The
Debtors are presently operating under Chapter 11 and are subject to the
jurisdiction of the Court.
In conjunction with the Chapter 11 filing, the Court has granted the Debtors use
of its cash collateral and existing bank arrangements to conduct its operations.
The Debtors' suppliers have, in turn, resumed granting the Debtors payment
terms, most of which require a deposit and/or weekly payments. In light of the
Debtors' current projected operations and cash flow, management believes that
the Debtors have the financial resources to maintain their current level of
operations until a sale agreement is reached, but no later than December 31,
1999. The Debtors also are seeking debtor in possession financing from the
potential acquirers of the phonecard business.
Schedules will be filed in early December 1999 with the Court setting forth the
assets and liabilities of the Debtors as of the filing date, October 28, 1999.
Differences between amounts shown by the Debtors and claims filed by creditors
will be investigated and resolved. The ultimate amount and settlement terms for
such liabilities are subject to acceptance by the Court, and accordingly, are
not presently determinable.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-QSB and in future filings by the Company with
the Securities and Exchange Commission, 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 September 30, 1999 Compared to Three Months Ended September
30, 1998
Net sales from continuing operations resulted from sales by the
Company's new start-up operations involved in the marketing of promotional
programs to business customers. The Company is currently in the process of
developing joint venture relationships with third parties and expects that these
relationships will be the driving force behind future sales.
The Company believes the gross profit percentage of approximately 57%
realized on the initial sales by this business, is indicative of gross profits
that can be realized. Accordingly, it is for this reason the Company has decided
to refocus its efforts to develop incentive based loyalty marketing programs
that create one-to-one marketing opportunities utilizing interactive
telecommunications rewards online and offline.
Selling, general and administrative expenses for the three months ended
September 30, 1999 decreased by $288,984 (42%) to $392,630 from $681,614
reported in the similar period in 1998. This decrease resulted from a
restructuring plan implemented in the later part of 1998. Given the Company's
efforts to exit the phonecard business and refocus its business efforts, it is
not possible at this time to determine whether the current level of selling,
general and administrative expenses is indicative of future expense levels.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Net sales from continuing operations resulted from sales by the
Company's new start-up operations involved in the marketing of promotional
programs to business customers. The Company believes the gross profit percentage
of approximately 57% realized on the initial sales by this business is
indicative of gross profits that can be realized. Accordingly, the Company has
decided to refocus its efforts to the development of incentive based loyalty
marketing programs that create one-to-one marketing opportunities utilizing
interactive telecommunications rewards online and offline.
Selling, general and administrative expenses for the nine months ended
September 30, 1999 decreased by $514,449 (29%) to $1,253,620 from $1,768,069
reported in the similar period in 1998. This decline resulted from the
previously noted restructuring plan implemented in the later part of 1998.
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.
11
<PAGE>
Liquidity and Capital Resources
The Company has incurred significant losses and negative earnings
before interest, tax and depreciation and amortization during 1997, 1998 and the
first nine months 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 September 30, 1999, the Company had a substantial working capital
deficit and its total liabilities exceeded its total assets by approximately $21
million. As a result of the Company's long history of losses in the prepaid
phonecard business, coupled with an increasingly competitive environment, the
Company elected to exit the prepaid phonecard business but will continue its
interactive marketing operations. To accomplish this, the Debtors filed
voluntary petitions with the U.S. Bankruptcy Court for the District of Delaware
under Chapter 11 of the U.S. Bankruptcy Code on October 28, 1999. The Debtors
intend to sell or liquidate the assets of the phonecard operations with the
proceeds of such sale or liquidation going to the estate of the Debtors rather
than the Company.
At September 30, 1999 the Company, excluding the assets and liabilities
relating to the Debtors, had negative working capital of approximately $3.5
million. The Company's ability to continue in operation and execute its new
business plan is subject to various factors including, but not limited to,
resolving its outstanding liabilities, raising additional capital and itself
not being forced to seek bankruptcy court protection. Management of the Company
can not presently predict the outcome of these matters and there can be no
assurance that the Company will be successful in any of these endeavors.
At September 30, 1999, the Company had net operating loss carryforwards
("NOLs") exceeding $30 million 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, 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
year 2000 upgrades for its telecommunications switches. The Company has
installed the upgrade on all of its switches along with related software
upgrades and has tested backup power supplies.
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 its significant vendors,
as well as substantially all its other vendors, that they are 2000 compliant.
12
<PAGE>
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. The Company believes
that its year 2000 compliance review procedures adequately address its internal
year 2000 issues. With respect to external issues, based upon responses the
Company received from all of its significant vendors and customers, the overall
risks associated with the year 2000 issue appears to be minimal but 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 believes that its year 2000 compliance issues are
resolved. However, the Company intends to have staff available to resolve any
issues that may develop including the re-routing of telephone traffic from
affected to unaffected carriers should that be necessary.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In June 1998, IDB Worldcom Services, Inc. ("Worldcom") commenced an
action against the Company in the Court of Common Pleas of Philadelphia,
Pennsylvania. The complaint alleged that from March 1995 through March 1997,
Worldcom provided certain long distance and other telecommunications services
for which it was not paid. Worldcom alleged that the Company owed Worldcom
$698,419, inclusive of interest, for such services. On September 7, 1999, the
Company settled this matter with Worldcom for $400,000, of which $300,000 is
payable in cash over 22 months and the $100,000 balance was paid through this
issuance of 239,045 shares of the Company's common stock which shares were
issued subsequent to September 30, 1999.
Item 2. Changes in Securities
(c) Recent Sales of Unregistered Securities
During the three months ended September 30, 1999, the Company made the
following sales of unregistered securities:
<TABLE>
------------- --------------- ------------ ---------------------- ----------------- --------------------------------
Consideration
Received and
Description of
Underwriting or
Other Discounts to Exemption from If Option, Warrant or
Date of Sale Title of Number Sold Market Price Registration Convertible Security, Terms of
Security Afforded to Claimed Exercise or Conversion
Purchasers
------------- --------------- ------------ ---------------------- ----------------- --------------------------------
<S> <C> <C> <C> <C> <C>
7/22/99 Options to 48,500 Options granted - no 4(2) 16,167 shares exercisable on
purchase other consideration each of 7/22/99, 7/22/00 and
Common Stock received by Company 7/22/01 and for five years
until exercise from date of vesting at an
exercise price of $.50 per
share.
8/9/99 Common Stock 10,000 Consulting Services 4(2) N/A
8/11/99 Options to 206,600 Options granted - no 68,867 shares exercisable on
purchase other consideration 4(2) each of 2/11/00, 8/11/00 and
Common Stock received by Company 8/11/01 and for five years
until exercise from date of vesting at an
exercise price of $.53 per
share.
9/7/99 Options to 15,000 Options granted - no 4(2) Exercisable on 9/7/00 and for
purchase other consideration five years from date of
Common Stock received by Company vesting at an exercise price
until exercise of $.50 per share.
9/7/99 Common Stock 239,045 Settlement of 4(2) N/A
litigation
9/23/99 Options to 40,000 Options granted - no 4(2) 13,333 shares exercisable on
purchase other consideration each of 3/23/00, 9/23/00 and
Common Stock received by Company 9/23/01 and for five years
until exercise from date of vesting at an
exercise price of $.50 per
share.
</TABLE>
14
<PAGE>
Item 3. Defaults Upon Senior Securities
In connection with the NATW merger in February 1998, the Company issued
to the former shareholders of NATW $1,000,000 aggregate principal amount of
promissory notes "NATW Notes"). 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 April 1998, the note holders agreed to
defer $500,000 originally payable under the NATW Notes in 1998 to January 1999.
Subject to the completion of negotiations regarding the determination
of the Access liability discussed in Note 5 herein, in December 1998, Randy
Cherkas, the Company's President and former majority shareholder of NATW, agreed
to offset the amounts due to the Company related to Access against his portion
of the NATW Notes payable, and to convert the net amount due him under the NATW
Notes into common stock at a conversion rate of $0.80 per share. However, during
1999, negotiations with the former shareholders of NATW continued and the
Company did not pay amounts due under the NATW Notes. As of September 30, 1999,
the Company owed an aggregate of $1,100,000 including principal and interest
accrued thereon, under the NATW Notes.
The Company has received written notice from the former shareholders of
NATW advising the Company of the default and further indicating that unless the
Company cures the default within the time frames permitted under the NATW Notes,
which it has not done, the former shareholders could take legal action against
the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (September 30, 1999)
(b) Current Reports on Form 8-K
Current Report on Form 8-K, dated September 23, 1999, filed with the SEC
on September 29, 1999, relating to the change in the Company's certifying
accountant.
Current Report on Form 8-K, dated October 28, 1999, filed with the SEC
on November 5, 1999, relating to certain subsidiaries of the Company filing for
voluntary protection under chapter 11 of title 11 of the United States Code in
the United States Bankruptcy Court for the District of Delaware.
15
<PAGE>
SIGNATURES
In accordance with requirements of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 19, 1999
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
By: /s/ Lee R. Montellaro
------------------------------------------
Lee R. Montellaro, Chief Financial Officer
16
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page
- -------------- ----------- ----
27 Financial Data Schedule 18
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 624,699
<SECURITIES> 0
<RECEIVABLES> 115,023
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 739,722
<PP&E> 209,334
<DEPRECIATION> (7,431)
<TOTAL-ASSETS> 6,655,251
<CURRENT-LIABILITIES> 4,331,763
<BONDS> 0
<COMMON> 144,870
0
0
<OTHER-SE> (21,281,089)
<TOTAL-LIABILITY-AND-EQUITY> 6,655,251
<SALES> 99,833
<TOTAL-REVENUES> 99,833
<CGS> 42,649
<TOTAL-COSTS> 42,649
<OTHER-EXPENSES> 1,265,445
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,208,261)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,208,261)
<DISCONTINUED> (8,229,299)
<EXTRAORDINARY> (1,420,172)
<CHANGES> 0
<NET-INCOME> (10,857,732)
<EPS-BASIC> (.39)
<EPS-DILUTED> (.39)
</TABLE>
