U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1999
------------------------
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______________ to _______________
Commission file number 1-13478
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
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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)
(609) 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 May 13, 1999, the issuer had
outstanding 14,430,946 shares of Common Stock, par value $.01 per share.
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 1999 (unaudited)
and December 31, 1998...............................................3
Consolidated Statements of Operations - Three months ended
March 31, 1999 and 1998 (unaudited).................................4
Consolidated Statements of Cash Flows - Three months ended
March 31, 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............................................10
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds..................14
Item 6. Exhibits and Reports on Form 8-K...........................14
Signatures..........................................................15
2
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GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
---------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 802,215 $ 1,604,166
Restricted cash 300,000 300,000
Accounts receivable, net of reserve for doubtful accounts of $242,335
and $361,336 1,995,467 3,234,106
Inventories 351,622 436,883
Other assets 75,715 103,929
--------------- ---------------
Total current assets 3,525,019 5,679,084
--------------- ---------------
Goodwill, net 1,789,333 1,952,000
Property and equipment, net 2,414,549 2,225,402
Other assets, net 201,404 160,842
--------------- ---------------
Total assets $ 7,930,305 $ 10,017,328
=============== ==============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 4,640,490 $ 5,180,275
Accrued regulatory and license fees 4,392,234 3,580,907
Accrued earn-out payable to related party 497,541 634,085
Accrued expenses 2,874,964 2,978,883
Deferred revenues 2,597,009 3,160,958
Estimated sales and excise tax liability 5,690,744 5,665,166
Convertible notes payable, current 75,000 2,599,750
Notes payable to related parties, net 548,815 548,815
--------------- ---------------
Total current liabilities 21,316,797 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 14,476,972 and 11,321,034 144,770 113,211
Additional paid in capital 56,033,760 52,120,397
Accumulated deficit (69,518,244) (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) (13,386,492) (14,331,511)
--------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 7,930,305 $ 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>
Three months ended
March 31,
------------------------------
1999 1998
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<S> <C> <C>
Net sales $ 7,423,389 $ 5,134,396
Cost of sales (exclusive of depreciation) 6,644,873 5,194,110
Costs of carrier default - 550,000
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Gross profit (loss) 778,516 (609,714)
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Selling, general and administrative expenses 1,808,567 2,480,318
Depreciation and amortization 368,306 369,656
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Operating loss (1,398,357) (3,459,688)
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Interest income 14,338 54,935
Interest expense 201,814 395,500
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Loss before extraordinary item (1,585,833) (3,800,253)
Extraordinary loss 1,420,172 -
-------------- -------------
Net loss $ (3,006,005) $(3,800,253)
=============== ==============
Basic and diluted loss per share $ (0.22) $ (0.68)
=============== ==============
Weighted average shares outstanding - basic and diluted 13,903,091 5,618,935
=============== ==============
</TABLE>
The accompanying notes are an integral part of these statements
4
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GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Operating activities:
Net loss $ (3,006,005) $ (3,800,253)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 368,306 369,656
Provision for bad debts 90,000 208,261
Amortization of deferred compensation 6,102 187,380
Amortization of unearned discount - 192,755
Amortization of deferred financing charges 4,995 27,843
Loss on debt conversion 1,420,172 -
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable 1,148,639 (1,589,808)
Inventories 85,261 (215,733)
Deferred costs - (4,191)
Other current assets and other assets (17,343) 95,779
Accounts payable (539,785) 246,000
Accrued expenses, accrued earn out, and accrued fees 570,864 256,151
Deferred revenues (563,949) 2,002,252
Sales and excise taxes payable 25,578 117,998
--------------- ---------------
Net cash used in operating activities (407,165) (1,905,910)
--------------- ---------------
Investing activities:
Purchases of property and equipment (394,786) (735,182)
Acquisitions and related costs - (4,512,868)
--------------- ---------------
Net cash used in investing activities (394,786) (5,248,050)
--------------- ---------------
Financing activities:
Payments on capital lease obligations - (60,936)
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Net cash used in financing activities - (60,936)
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Effects of exchange rates on cash - 16,459
--------------- ---------------
Net decrease in cash (801,951) (7,198,437)
Cash and cash equivalents, beginning of period 1,604,166 7,867,566
--------------- ---------------
Cash and cash equivalents, end of period $ 802,215 $ 669,129
=============== ==============
Supplemental disclosures:
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 statements
5
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GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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 months ended March 31, 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 months ended March 31,
1999 and 1998 does 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 three months ended March 31, 1999, no
additional Earn Out was recorded. In April 1998, the former shareholders agreed
to defer 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 March 31, 1999, the Company has paid Mr. Cherkas $341,359 of the
aggregate amount of $838,900 accrued during that period under the Earn Out. To
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date, Mr. Cherkas has the opportunity to earn up to an additional $1,161,100
under the Earn Out. The Company currently is negotiating with Mr. Cherkas the
payment terms of amounts owed and to be owed to him under the Earn Out.
Also 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
the Company of providing telecommunications services related to such cards
aggregated $1,761,097. For purposes of the consolidated financial statements
contained herein, $451,185 and $298,364 of the costs have been allocated to the
former shareholders pursuant to indemnification arrangements.
In addition to the $1,761,097 indicated above, the Company paid Access $350,000
for cards purchased subsequent to the Merger Date for which it received no
services. Additionally, the Company spent approximately $200,000 to print cards
which could only be used on Access's platform and, therefore, are of no use to
the Company. Accordingly, the total estimated aggregate carrier default of
$550,000 was recorded in cost of goods sold during the first quarter 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.
Three Months Ended
March 31, 1998
--------------------
Net sales $ 7,448,915
Net loss $(4,331,272)
Net loss per share $ (0.72)
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
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. Changes in certain state sales tax statutes
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<PAGE>
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 have allowed the
Company to reduce its accrual rate for the state sales, use and gross receipts
taxes. This reduction, however, was offset by an accrual for Universal Service
Fund (see Note 9) which the Company started to accrue in the second quarter of
1998.
(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 $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 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.
(8) Liquidity
The Company has incurred significant losses and negative cash flow from
operations during 1997 and 1998. In the second half of 1998, the Company
implemented a restructuring plan in an effort to reduce administrative overhead
costs and 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 in debt to equity.
Notwithstanding these efforts, as of March 31, 1999, the Company had a working
capital deficit of approximately $17.8 million and its total liabilities
exceeded its total assets by approximately $13.4 million. As of March 31, 1999,
the Company has experienced significant cash flow difficulties and may be unable
to meet its obligations in the short term. Although the Company's cash balance
has increased from $802,215 at March 31, 1999 to approximately $1,000,000 at May
13, 1999, the Company's sales have declined steadily during the three quarters
ended March 31, 1999. This has negatively impacted receivable levels and short
term cash collections, which is the Company's principal source of cash used to
satisfy its obligations. As a result, the Company needs to raise capital in
order to continue its operations. During the first quarter of 1999, the Company
negotiated with several potential financing sources in an attempt to raise
additional debt capital. However, to date, the Company has been unsuccessful in
its attempts to secure short-term financing. The failure to obtain such
financing could have a material adverse effect on the Company.
(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
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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 March 31, 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 March 31, 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. 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.
No payments related to these fees have been made as of March 31, 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) 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.
9
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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 March 31, 1999 Compared to Three Months Ended March 31, 1998
Net sales for the first quarter of 1999 were $7,423,389 compared to
$5,134,396 for the first quarter of 1998. The primary reason for the increase in
net sales was due to the mergers in February 1998 of Networks Around the World,
Inc. ("NATW") and Centerpiece Communications, Inc. ("CCI"). The quarter ended
March 31, 1999 included a full three months of revenues from the merged
companies whereas the quarter ended March 31, 1998 included only two months of
revenues from the merged companies. In addition, revenues increased as the
Company has aggressively pursued (i) relationships directly with retail
businesses such as convenience stores, supermarkets, drug stores, and check
cashers by utilizing the GTS branded phone card which carries higher margins and
(ii) relationships with distributors that sell the cards to retailers offering
greater discounts and commissions to retailers and/or reduced per-minute charges
to consumers.
The Company's gross margins increased to 10% of net sales for the first
quarter of 1999, from negative 12% of net sales for the comparable period in the
prior year. The primary reasons for the increase in the gross margins were: (i)
a decrease in the Company's telecommunications carriers costs, particularly
domestic origination and termination and Mexico termination; (ii) an increase in
retail sales at higher margins; (iii) carrier default costs in the first quarter
of 1998 aggregating $550,000 associated with the default by Access Telecom, Inc.
("Access Telecom"), a provider of long distance services that ceased providing
such services on cards purchased by the Company; (iv) changes in 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 (v) the restructuring of the Company's corporate organization
0which allowed the Company to reduce its accrual rate for the state sales, use
and gross receipts taxes. This reduction, however, was offset by an accrual for
Universal Service Fund (see Note 9) which the Company started to accrue in the
second quarter of 1998.
Selling, general and administrative expenses decreased to $1,808,567
(24% of net sales) for the first quarter of 1999, compared to $2,480,318 (48% of
net sales) for the first 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
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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 remained relatively constant,
decreasing slightly to $368,306 for the first quarter of 1999 from $369,656 for
the first quarter 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.
Investment and interest income was $14,338 for the first quarter of
1999, compared to $54,935 for the first quarter of 1998. The decrease was
primarily due to the Company's relatively lower cash position during the first
quarter of 1999 compared to the first quarter of 1998.
Interest expense for the first quarter of 1999 decreased to $201,814
from $395,500 for the first quarter of 1998, primarily due to the conversion of
approximately $6.6 million in debt to equity.
For the foregoing reasons, the Company incurred a net loss of
$3,006,005 for the first quarter of 1999, compared to a net loss of $3,800,253
for the first quarter of 1998.
Liquidity and Capital Resources
At March 31, 1999, the Company had cash and cash equivalents of
$802,215 and a working capital deficit of $17,791,778, compared to $1,604,166
and $18,669,755, respectively, at December 31, 1998.
Net cash used in operating activities for the three months ended March
31, 1999 of $407,165 was primarily due to the Company's net loss, offset by
non-cash items aggregating $1,889,575 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 more aggressive collection efforts. Net cash used in
investing activities for the three months ended March 31, 1999 consisted of
$394,786 of capital expenditures.
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 three
months ended March 31, 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 March
31, 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. To date, 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 and to be 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.
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Pursuant to the respective merger agreements, the Company and the
former shareholders of NATW and CCI agreed to share certain costs related to any
underlying carrier's failure to provide telecommunications services to phone
cards purchased by NATW and CCI prior to the mergers. In February 1998, Access
Telecom, a primary provider of telecommunications services to NATW and CCI prior
to and after the respective mergers, ceased providing such services to the
prepaid phone cards that it had sold to each of NATW and CCI, despite receiving
payment for substantially all of the phone cards. The cost to provide
telecommunications services related to such cards aggregated $1,761,097 during
the year ended December 31, 1998. For the three months ended March 31, 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 has been 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 Telecom against the $1,000,000 of
NATW Notes payable to the former shareholders of NATW, and to subsequently
convert the net amount due under the NATW Notes into common stock at a
conversion rate of $0.80 per share. The Company and the former shareholders of
NATW have not reached a final settlement on the amount due to the Company
related to Access Telecom. It is possible that the actual settlement could
materially differ from the $451,185 currently reflected as a reduction in the
$1,000,000 NATW Note.
In December 1998, the Company offered holders of $2,599,750 aggregate
principal amount of debentures acquired from the Company in June and September
1994 the opportunity to convert their debentures into shares of common stock at
a conversion rate of $0.80 per share. In January 1999, holders of $2,524,750
aggregate principal amount of debentures converted their debentures into
3,155,938 shares of common stock. The Company offered the debenture holders the
opportunity to convert their debentures into shares because the Company
anticipated that it would not be able to pay off the principal amount of the
debentures when due in June and September 1999.
The Company has incurred significant losses and negative cash flow from
operations during 1997 and 1998. In the second half of 1998, the Company
implemented a restructuring plan in an effort to reduce administrative overhead
costs and improve the efficiency of its operations. Specific actions taken
included the consolidation of facilities, including the closure of its Canadian
operations and the termination of certain employment contracts. In addition, the
Company negotiated the conversion of $6,574,750 in debt to equity as discussed
above. Notwithstanding these efforts, as of March 31, 1999, the Company had a
working capital deficit of approximately $17.8 million and its total liabilities
exceeded its total assets by approximately $13.4 million. As of March 31, 1999,
the Company has experienced significant cash flow difficulties and may be unable
to meet its obligations in the short term. Although the Company's cash balance
has increased from $802,215 at March 31, 1999 to approximately $1,000,000 at May
13, 1999, the Company's sales have declined steadily during the three quarters
ended March 31, 1999. This has negatively impacted receivable levels and short
term cash collections, which is the Company's principal source of cash used to
satisfy its obligations. As a result, the Company needs to raise capital in
order to continue its operations. During the first quarter of 1999, the Company
negotiated with several potential financing sources in an attempt to raise
additional debt capital. However, to date, the Company has been unsuccessful in
its attempts to secure short-term financing. The failure to obtain such
financing could have a material adverse effect on the Company.
At March 31, 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.
12
<PAGE>
Year 2000 Compliance
The Company has reviewed its critical computer systems and other
computer-based operational equipment to identify how the Company may be impacted
by the Year 2000 problem. The Year 2000 problem arises because many computer
systems may not recognize the correct date at the rollover of the two-digit year
value to 00. This could cause systems to fail or process transactions
incorrectly, thus causing disruptions to operations or an inability of the
Company to provide services to its customers. The Company has contacted the
suppliers of its computer-based systems and has received written confirmation
from its suppliers that its critical computer software and hardware is Year 2000
compliant. The Company estimates the costs of its Year 2000 compliance issues
will be less than $100,000, which is not expected to be material to the
Company's financial position, cash flow or results of operations.
As part of the Company's Year 2000 compliance review, the Company is in
the process of contacting its primary vendors and customers to determine the
extent to which the Company is vulnerable to those third parties' failure to
remediate their Year 2000 compliance issues. The Company is in the early stages
of this phase of its Year 2000 review and will continue to contact its
significant vendors and customers as part of its Year 2000 compliance review.
However, there can be no guarantee that the systems of the companies on which
the Company's business relies will be timely converted or that failure to
convert by another company will not have a material adverse effect on the
Company and its operations.
The Company believes that the risks associated with the Year 2000
issues primarily relate to the failure of its suppliers and key customers to
timely address their Year 2000 issues. Such failure could result in significant
disruption to the Company's daily operations. While the Company believes that
its Year 2000 compliance review procedures will adequately address the Company's
internal Year 2000 issues, until the Company receives responses from its
significant vendors and customers, the overall risks associated with the Year
2000 issue remain difficult to accurately describe and quantify, and there can
be no guarantee the Year 2000 issue will not have a material adverse effect on
the Company's business, operating results and financial position.
The Company currently has not implemented a Year 2000 contingency plan.
The Company intends to devote the resources necessary to assure that Year 2000
compliance issues are resolved. The Company plans to develop and implement a
contingency plan by the end of June 1999 in the event the Company's Year 2000
compliance initiatives, particularly those that relate to third parties, fall
behind schedule.
13
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
(c) Recent Sales of Unregistered Securities
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (3/31/99)
(b) Current Reports on Form 8-K
None.
14
<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: May 13, 1999
GLOBAL TELECOMMUNICATION SOLUTIONS, INC.
By: /s/ Randy Cherkas
-------------------------------------
Randy Cherkas, President and Principal
Financial Officer
15
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page
27 Financial Data Schedule (3/31/99) 17
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-31-1999
<CASH> 802,215
<SECURITIES> 0
<RECEIVABLES> 1,995,467
<ALLOWANCES> 242,335
<INVENTORY> 351,622
<CURRENT-ASSETS> 3,525,019
<PP&E> 3,631,175
<DEPRECIATION> 1,216,626
<TOTAL-ASSETS> 7,930,305
<CURRENT-LIABILITIES> 21,316,797
<BONDS> 0
<COMMON> 144,770
0
0
<OTHER-SE> 13,531,262
<TOTAL-LIABILITY-AND-EQUITY> 7,930,305
<SALES> 7,423,389
<TOTAL-REVENUES> 7,423,389
<CGS> 6,644,873
<TOTAL-COSTS> 2,176,873
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 201,814
<INCOME-PRETAX> (1,585,833)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,585,833)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,420,172)
<CHANGES> 0
<NET-INCOME> (3,006,005)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
