Filed pursuant to Rule 424(b)(3)
Registration No. 333-40062
PROSPECTUS
7,580,012 SHARES OF COMMON STOCK
GLOBAL iTECHNOLOGY, INC.
(f/k/a Global Telecommunication Solutions, Inc.)
The information in this prospectus is not complete and may be changed.
The selling stockholders may not sell the Common Stock until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell the Common Stock and it is not soliciting an
offer to buy the Common Stock in any state where the offer or sale is not
permitted.
The selling stockholders listed on page 33 of this prospectus are
offering and selling up to 7,580,012 shares of Common Stock. All proceeds from
the sale of the Common Stock under this prospectus will go to the selling
stockholders. We will not receive any proceeds from the sale of such Common
Stock. Of the 7,580,012 shares offered, 2,148,910 shares are issuable upon
exercise of options and warrants. If all of these securities are exercised, we
will receive up to $7,123,135.36 in gross proceeds. All proceeds that we
receive, if any, will be used for working capital and general corporate
purposes.
The selling stockholders will pay all brokerage commissions and
discounts attributable to the sale of the shares plus fees and expenses relating
to the registration of their shares. We are responsible for all other costs,
expenses and fees incurred in registering the shares offered by this prospectus,
which are estimated to be $15,000.
Our Common Stock is traded under the symbol "GTST" on the OTC Bulletin
Board. The last reported sale price on the OTC Bulletin Board for our Common
Stock on June 21, 2000 was $3/8 per share.
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is July 10, 2000
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). You may read and copy any document we file at the SEC's public
reference room at the following locations:
- Main Public Reference Room
450 Fifth Street, N.W.
Washington, D.C. 20549
- Regional Public Reference Room
75 Park Place, 14th Floor
New York, New York 10007
- Regional Public Reference Room
Northwestern Atrium Center
500 West Madison Street, Suite 1400
Chicago, Illinois 60661-2511
You may obtain information on the operation of the SEC's
public reference rooms by calling the SEC at (800) SEC-0330.
We are required to file these documents with the SEC
electronically. You can access the electronic versions of these filings on the
Internet at the SEC's web site, located at http://www.sec.gov.
We have included this prospectus in our registration statement
that we filed with the SEC (the "Registration Statement"). The Registration
Statement provides additional information that we are not required to include in
the prospectus. You can receive a copy of the entire Registration Statement as
described above. Although this prospectus describes the material terms of
certain contracts, agreements and other documents filed as exhibits to the
Registration Statement, you should read the exhibits for a more complete
description of the document or matter involved.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this prospectus are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the safe harbor created thereby. These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company or we "believe,"
"anticipate," "estimate," "expect" or words of similar import as they relate to
us or our management. Similarly, statements that describe our future plans,
objectives or goals are forward-looking statements. Such forward-looking
statements are subject to certain risks and uncertainties, including those
described in the section captioned "Risk Factors" below.
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TABLE OF CONTENTS
Page
Prospectus Summary................................. 7
Risk Factors....................................... 9
Use of Proceeds.................................... 14
Dividend Policy.................................... 14
Market Price of the Registrant's Common Equity
and Related Stockholder Matters................. 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................... 16
Business........................................... 18
Management......................................... 21
Security Ownership of Certain Beneficial
Owners and Management........................... 28
Certain Relationships and Related Transactions..... 29
Selling Stockholders............................... 33
Description of Capital Stock....................... 35
Plan of Distribution............................... 36
Legal Matters...................................... 36
Experts............................................ 37
Index to Financial Statements and Exhibits......... F-1
5
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[INSIDE COVER OF PROSPECTUS]
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PROSPECTUS SUMMARY
AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS
"WE," "US" OR "COMPANY" MEAN GLOBAL ITECHNOLOGY, INC. F/K/A GLOBAL
TELECOMMUNICATION SOLUTIONS, INC. AND ITS SUBSIDIARIES. THIS SUMMARY HIGHLIGHTS
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS AND IS NOT COMPLETE AND MAY
NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN THE
COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY.
THE COMPANY
We have been in the business of marketing and distributing prepaid phone
cards. In 1999, we determined to discontinue and sell the prepaid phone card
business as a result of the long history of losses in this line of business and
an increasingly competitive environment.
Certain of our subsidiaries filed voluntary bankruptcy petitions in October
1999 to facilitate the possible sale of the phone card assets, which are the
subject of liabilities that greatly exceed their fair market value. Effective
March 31, 2000, our subsidiaries sold their assets to JD Services, Inc., a
prepaid phone card provider located in Salt Lake City, Utah for a purchase price
of $2.1 million, of which: $750,000 consisted of debtor-in-possession financing
forgiveness and the balance of $1.35 million consisted of the assumption of our
obligation to provide telecommunications services in respect of previously
activated phone cards.
We intend to focus on developing, operating and entering into strategic
relationships to implement promotional and other direct marketing services using
telephony, the Internet and wireless communication techniques. In February 2000,
together with certain strategic partners, we formed Enticent.com, an incentive
marketing and promotional company that allows businesses to communicate
one-to-one with existing and potential customers through both on-line and
off-line permission-marketing programs.
We have experienced significant cash flow difficulties during the last
several years. Our ability to implement our new business strategy is contingent
upon our ability to obtain additional financing. We are negotiating with
potential financing sources in an attempt to raise additional debt or equity
capital but we are uncertain whether additional financing will be available on
acceptable terms or at all, and we have no agreements, understandings or
commitments with respect to such additional debt or equity capital.
We have significant liabilities that will continue even though several of
our subsidiaries have filed voluntary petitions with the Court for the District
of Delaware under Chapter 11 of the Bankruptcy Code. These liabilities aggregate
approximately $5 million. We are currently negotiating with these creditors in
an effort to settle the amounts due at less than the amount recorded on the
balance sheet and on favorable terms. We are uncertain whether we will be
successful in these efforts.
We are incorporated under the laws of the State of Delaware. Effective July
2000, our name was changed from Global Telecommunications Solutions, Inc. to
Global iTechnology, Inc. In March 2000, our Board of Directors, subject to
stockholder approval, approved changing our name from "Global Telecommunications
Solutions, Inc." to "Global iTechnology, Inc." Our principal executive offices
are located at 317 Madison Avenue, Suite 807, New York, New York 10017, and our
telephone number at that address is (212) 697-6131.
THE OFFERING
Common Stock offered by the selling
stockholders............................ 7,580,012 shares
Common Stock outstanding................ 15,561,841 shares(1)
Use of proceeds......................... We will not receive any proceeds from
the sale of the shares of Common Stock
by the selling stockholders. We will,
however, receive proceeds from the
exercise of warrants and options.
Risk factors............................ An investment in the Common Stock
offered hereby involves a great deal
of risk. See "Risk Factors."
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OTC Bulletin Board symbol............... "GTST"
--------------------------
(1) Based on information available to us as of June 1, 2000. Does not include
(i) 877,135 shares of Common Stock reserved for issuance upon exercise of
options granted under our 1994 Stock Option Plan; (ii) 2,471,002 shares
of Common Stock reserved for issuance upon other outstanding options; and
(iii) 565,658 shares of Common Stock issuable upon exercise of
outstanding warrants. EXCEPT AS OTHERWISE INDICATED, ALL REFERENCES IN
THIS PROSPECTUS TO THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING DO
NOT INCLUDE THE FOREGOING SHARES.
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RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK IS HIGHLY SPECULATIVE, INVOLVES A HIGH
DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY THOSE PERSONS WHO ARE ABLE TO
AFFORD A LOSS OF THEIR ENTIRE INVESTMENT. IN EVALUATING OUR BUSINESS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACtORS IN
ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS.
RISKS RELATING TO OUR FINANCIAL CONDITION
OUR ABILITY TO EXERCISE OUR BUSINESS PLAN AND THE LIQUIDATIOn OR SETTLEMENT
VALUE OF OUR ASSETS AND LIABILITIES COULD BE SIGNIFICANTLY IMPACTED IF WE ARE
UNABLE TO RAISE ADDITIONAL FINANCING OR RESOLVE OUR OUTSTANDING LIABILITIES.
At March 31, 2000 and December 31, 1999, we, excluding the assets and
liabilities relating to our subsidiaries in bankruptcy, had cash of $58,000 and
$302,000, respectively, and a working capital deficit of $4.7 million and $4.4
million, respectively. We continue to generate negative cash losses from
operations. Subsequent to March 31, 2000, we borrowed $200,000 on a demand basis
including $125,000 from our Chairman of the Board and the balance of $75,000
from two (2) of the Selling Shareholders at an interest rate of 8% per annum.
We will need additional financing and a favorable resolution of our
outstanding indebtedness to continue our operations and execute our business
plan. At March 31, 2000, substantially all our current liabilities related to
indebtedness incurred directly by us in connection with the discontinued phone
card business. We are currently negotiating with the various parties in an
effort to reach settlements regarding the amounts due on favorable terms to us.
We are uncertain whether we can raise additional capital or resolve our
outstanding liabilities on acceptable terms or at all. If such efforts are
unsuccessful we may be unable to continue as a going concern which could
significantly impact the liquidation or settlement value of our assets and
liabilities.
WE HAVE A HISTORY OF LOSSES, A SIGNIFICANT WORKING DEFIcIT AND EXPECT THAT
LOSSES WILL CONTINUE IN THE FUTURE.
At March 31, 2000 our accumulated deficit was $80.9 million, our deficit in
stockholders' equity was $23.9 million and our working capital deficit was $4.7
million. For the three months ended March 31, 2000 we had net income of $365,504
but for the fiscal years ended December 31, 1999 and 1998, we incurred net
losses of $14,809,847 and $28,558,062, respectively. We have incurred a net loss
in each year of our existence and have financed our operations primarily through
sales of equity and debt securities. The independent auditors' report on our
financial statements for the year ended December 31, 1999 states that our
recurring losses from operations and significant net working capital deficiency
raise substantial doubt about our ability to continue as a going concern. We
expect to incur net losses for the foreseeable future. We may never achieve or
sustain significant revenues or profitabilty on a quarterly or annual basis in
the future.
WE MAY BE UNABLE TO OBTAIN THE FINANCInG WE NEED TO CONTINUE OUR OPERATIONS.
We have experienced significant cash flow difficulties during the last
several years, particularly in our efforts to expand the prepaid phone card
business. Our ability to implement our recently changed business strategy is
contingent upon our ability to obtain additional financing. We are presently
negotiating with potential financing sources in an attempt to raise additional
debt or equity capital, but to date have been unsuccessful. In addition, because
several of our subsidiaries are in bankruptcy, it may be even more difficult for
us to obtain the necessary financing. We have no commitments, agreements or
understandings regarding additional financings and we may be unable to obtain
additional financing on satisfactory terms or at all.
OUR SUBSIDIARIES AGREEMENTS WITH JD SERVICES, INC. MAY rEQUIRE US TO PAY $1.2
MILLION TO OUR FORMER PRESIDENT.
As part of the agreement with JD Services, Inc., Randy Cherkas, our former
President, has agreed to release us from $1.2 million owed to him so long as he
receives at least $700,000 from our subsidiaries who declared bankruptcy or us
by October 2000. If Mr. Cherkas does not receive $700,000, we will be liable for
the full amount which could be $1.2 million less any payments that Mr. Cherkas
has received. We are unable to predict whether we will have sufficient working
capital to pay Mr. Cherkas. Our failure to pay any amounts due to Mr. Cherkas
could jeopardize our ability to continue in operation.
IT IS IMPOSSIBLE TO PREDICT THE IMPACT ON US Of THE PLAN OF LIQUIDATION OF OUR
SUBSIDIARIES.
Our subsidiaries have filed with the U.S. Bankruptcy Court for the District
of Delaware a plan of liquidation, and such plan is in the process of being
reviewed. Subject to certain exceptions, acceptance of a liquidation plan
requires
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approval of the bankruptcy court and the affirmative vote (i.e., more than 50%
of the number and at least 66-2/3% of the dollar amount, both with regard to
claims actually voted) of each class of creditors and equity holders, whose
claims are impaired by the liquidation plan. If the subsidiaries fail to submit
a liquidation plan within the exclusive period prescribed or any extension
thereof, any creditor or equity holder will be free to file a liquidation plan
with the bankruptcy court and solicit acceptances thereof. Until the liquidation
plan is approved, the impact on us of the liquidation plan, if any, cannot be
predicted.
WE MAY LOSE THE ENTIRE AMOUNT OF OUR INVESTMENT IN ENTICENT.COM.
In order for us to realize the value of our $179,000 investment,
Enticent.com will need to generate revenues. Enticent.com's ability to generate
revenues will depend on several factors, including its ability to generate
additional capital. We are unable to predict whether Enticent.com will raise
additional capital or will be able to generate revenues.
WE MAY HAVE PREFERENTIAL PAYmENT BANKRUPTCY OBLIGATIONS.
As part of the liquidation of our subsidiaries in bankruptcy, our
subsidiaries in bankruptcy are required to review payments made to various
parties during the year prior to the bankruptcy filing date of October 28, 1999.
To be included in such review will be any payment made by our subsidiaries in
bankruptcy to us during the year prior to the bankruptcy filing. Should it
ultimately be determined that any of these payments were "preferential" in
nature, we would be required to repay these amounts to our subsidiaries in
bankruptcy. At March 31, 2000, no review as to the "preferential" nature of
transfers from our subsidiaries in bankruptcy to us has been undertaken. However
given our financial condition, should any repayment to our subsidiaries in
bankruptcy by us be required, we may lack sufficient assets to make such payment
and may be required to offer promissory notes and/or our equity securities in
satisfaction of any such obligation.
THERE ARE LIMITATIONS ON OUR NET OPERATING LOSS CARRYFORWARD.
We estimate that at December 31, 1999 for United States Federal income tax
purposes, we had net operating loss and research and experimental tax credit
carryforwards of approximately $38,900,000 to offset future federal taxable
income and tax expiring in years 2007 through 2019. The availability of the net
operating loss carryforward is limited after an ownership change within the
meaning of Section 382 of the Internal Revenue Code of 1986, as amended. We
believe that as a result of several prior transactions, we will be subject to
significant limitations on the use of the net operating loss carryforward.
RISKS RELATING TO OUR BUSINESS
WE RECENTLY CHANGED OUR BUSINESS FOCUS AND OUR POTENTIAL RELATIONSHIPS ARE
UNSPECIFIED.
Following the disposition of our prepaid phone card business, our new
business strategy is to focus on developing, operating and entering into
strategic relationships to implement promotional and other direct marketing
services using telephony, the Internet and wireless communication techniques.
However, other than our investment in Enticent.com, a newly formed entity which
has only recently commenced operations and generated revenues we have no
commitments, agreements or understandings regarding additional strategic
relationships and we may be unable to enter into additional strategic
relationships on satisfactory terms or at all. Accordingly, we are unsure
whether we will be able to implement our business strategy.
WE EXPECT TO ENTER INTO FUTURE AGREEMENTS, WHICH RESULT IN SIGNIFICANT DILUTION
OR SUBSTANTIAL INDEBTEDNESS, WITHOUT STOCKHOLDER APPROVAL. STOCKHOLDERS MAY BE
uNABLE TO REVIEW ANY POTENTIAL AGREEMENTS.
In all likelihood, stockholders will be unable to review the terms of or
vote on any potential relationships in which we may enter. Consequently,
stockholders are dependent upon the Board of Directors' judgment with respect to
any such transactions. These transactions, if realized, may involve the issuance
of a significant number of additional equity securities which could cause
significant dilution or the incurrence, assumption or issuance by us of
substantial indebtedness and the undertaking by us of material obligations
including, among other things, long-term employment, consulting or management
agreements.
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WE HAVE NO OPERATING HISTORY WITH OUR NEW BUSINESS AND, ACCORDINGLY, OUR
HISTORIC FINANCIAL RESULTS WILL NOT REFLECT OUR FUTURE RESULTS OF OPERATIONS AND
OUR KEY PERSONNEL MAY LACK THE EXPERTISE TO MANAGE THE CHANGE IN FOCUS.
We have no operating history in implementing promotional and other direct
marketing services and have no revenues from such business. Prior to this year,
our revenues were derived primarily from the marketing and distribution of
prepaid phone cards, a business we have discontinued. We believe that
comparisons of our current and future operating results to pre-2000 operating
results are not meaningful and should not be relied upon as indicative of future
performance. In addition, our new business will require new financial and
management controls, reporting systems and procedures. Our key personnel may be
unable to implement such controls, systems and procedures and if they are
unsuccessful our results of operations could be materially adversely affected.
WE HAVE NO PRESENT SOURCE OF REVENUES.
We recently disposed of our prepaid phone card business and we lack any
strategic relationships that are likely to generate revenues in the near future.
We will lack any significant revenues until such time as either we enter into a
relationship with an existing business that generates revenues or we develop a
business that becomes profitable. We are unable to predict whether we will enter
into any such relationships or that any businesses we develop will become
profitable.
BECAUSE OUR BUSINESS MODEL IS UNPROVEN, WE CANNOT ASSURE YOU THAT OUR REVENUE
WILL GROW OR THAT WE WILL BECOME PROFITABLE.
Our business model depends upon our ability to develop and market technology
and products which allow our prospective customers to integrate Internet and
traditional sales channels. The potential profitability of this business model
is unproven. Finally, we may be forced by competitive pressures, industry
consolidation or otherwise, to change our business model. Our business model may
not be successful and we may not sustain revenue growth or achieve or sustain
profitability.
SEVERAL OF OUR SUBSIDIARIES ARE IN BANKRUPTCY WHICH MAY IMPACT OUR REPUTATION.
We are unable to determine the effect that the bankruptcy proceedings of our
subsidiaries will have on our future reputation and our relationships with
potential strategic partners, vendors, customers or employees.
OUR INTERESTS MAY DIFFER FROM OUR STRATEGIC PARTNERS.
Because our business focus is to enter into strategic relationships, we will
be exposed to the risk that potential strategic partners may at any time have
economic, business or legal interests or goals that are inconsistent with ours.
In addition, a strategic partner may be unable to meet its economic or other
obligations to the venture and we may be required to fulfill those obligations.
WE MAY FACE CLAIMS FOR ACTIVITIES OF OUR CLIENTS USING OUR PRODUCTS AND SERVICES
WHICH COULD HARM OUR BUSINESS.
Some of our products and services may involve the transmission of
information over the Internet. Our products or services could be used to
transmit harmful applications, negative message, unauthorized reproduction of
copyrighted material, inaccurate data or computer viruses to end users. Any
transmission of this kind could damage our reputation or give rise to legal
claims against us. We could spend a significant amount of time and money
defending these legal claims.
In addition, our clients may not comply with federal, state and local laws
when promoting their products and services. We cannot predict whether our role
in facilitating these marketing activities would expose us to liability under
these laws. Any claims made against us could be costly and time-consuming to
defend. If we are exposed to this kind of liability, we could be required to pay
substantial fines or penalties, redesign our business methods, discontinue some
of our services or otherwise expend resources to avoid liability.
IF THE MARKET FOR E-COMMERCE FAILS TO GROW, OUR REVENUES WILL NOT GROW.
Our success will depend in large part on the continued growth in the use of
the Internet for commerce. We do not have direct control over the expansion of
e-commerce, and to the extent that the market for e-commerce does not increase,
our potential customer base and revenues will not grow.
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In addition, critical and unresolved issues concerning the commercial use of
the Internet may affect the development of the market for our products and
services, including:
o the ability of consumers, sellers and other intermediaries to conduct
e-commerce on a secure basis;
o the reliability of the Internet for e-commerce, including the regular
availability of e-commerce sites;
o the availability of low-cost access to the Internet for consumers; and
o availability of sufficient telecommunications bandwidth to consumers to
enhance their ability to interact in the e-commerce shopping process.
WE MUST ADAPT TO RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY.
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions, short development cycles and evolving
industry standards. The recent growth of the Internet and intense competition in
our industry exacerbate these market characteristics. Our future success will
depend on our ability to adapt to rapidly changing technologies by maintaining
and improving the performance features and reliability of our services. We may
experience technical difficulties that could delay or prevent the successful
development, introduction or marketing of new products and services. In
addition, any new enhancements to our products and services must meet the
requirements of our current and prospective users. We could incur substantial
costs to modify our services of infrastructure to adapt to rapid technological
change.
WE DEPEND ON THE DEVELOPMENT Of THE INTERNET INFRASTRUCTURE.
A number of factors may inhibit Internet usage, including inadequate network
infrastructure, security concerns, inconsistent quality of services, and lack of
availability of cost-effective, high-speed service. If Internet usage grows, the
Internet infrastructure may not be able to support the demands placed on it by
this growth and its performance and reliability may decline. In addition, a
number of Web-based businesses have experienced interruptions in their services
as a result of outages and other delays occurring throughout the Internet. If
outages or delays occur frequently in the future, Internet usage, as well as
electronic commerce and the usage of our products and services could grow more
slowly or decline, and this could have an adverse effect on our business.
WE MAY DEPEND ON THE ACCEPTANCE OF ONLINE PROMOTIONAL PROGRAMS.
Our success may also depend on the continued growth and acceptance of online
promotional programs. Although loyalty and promotional programs have been used
extensively in conventional marketing and sales channels, they have only
recently begun to be used online. Our success may depend on our ability to
attract and retain members, advertisers, loyalty partners and promotional
providers. Our ability to attract and retain members will depend on our
marketing efforts and on the quality of each member's experience, including the
number and relevance of the direct marketing offers we provide and the perceived
value of the incentives we offer. Our ability to generate significant revenue
from advertisers and loyalty partners will depend on our ability to
differentiate ourselves through the technology and services we provide and
obtain adequate participation from consumers in our online direct marketing and
promotional programs. Incentive providers are also a critical element of our
business. The attractiveness of our program to current and potential members,
and loyalty partners, depends in large part on the attractiveness of the
incentive opportunities that we offer. To the extent that any online promotional
program we may use does not achieve market acceptance among members, loyalty
partners and incentives providers, our business would be materially and
adversely affected.
WE FACE COMPETITION.
We intend to focus on developing, operating, and entering into strategic
relationships with third parties to implement our business plan to provide
promotional and other direct marketing services utilizing telephony, the
Internet and wireless communication technologies. To accomplish our strategy, we
must raise additional capital. If we are able to raise additional capital
necessary to achieve our objectives, we will be competing with others desiring
to invest in identical opportunities and many of these competitors will have
longer operating histories, greater name recognition, larger client bases and
significantly greater financial, technical and marketing resources than us.
Additionally, the opportunities that we are pursuing are in the promotion
services market, which market, especially as it relates to the Internet, is
intensely competitive. We expect competition in this market to continue to
intensify as a result of increasing market size, greater visibility of the
market opportunity for Internet promotion services and minimal barriers to
entry. Industry consolidation may also increase competition. We compete with
many types of companies, including both online and offline promotion companies,
large Internet publishers, search engine and other Internet portal companies, a
variety of Internet-based advertising networks and other companies that
facilitate the marketing of products and services on the Internet. Many of our
existing competitors, as well as a number of potential new competitors, have
longer operating histories, greater name recognition, larger client bases and
significantly greater financial, technical and marketing resources than us. This
may allow them to compete more effectively and be more responsive to industry
and technological change than us. We may be unable to compete successfully and
competitive pressures may reduce its revenues and result in increased losses or
reduced profits.
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WE NEED TO HIRE AND RETAIN QUALIFIED PERSONNEL TO OPERATE OUR GROWING BUSINESS.
Our success is largely dependent on the personal efforts of Shelly Finkel,
our Chairman of the Board, Paul A. Silverstein, a Director and our Chief
Strategy Officer, Lee Montellaro, our Chief Financial Officer and other key
personnel. The loss of Messrs. Finkel, Silverstein and Montellaro's services
could have a material adverse effect on our business and prospects. While we
have employment agreements with Messrs. Finkel, Silverstein and Montellaro, Mr.
Finkel's employment agreement requires him to devote only 50% of his business
time to our business. In addition, we have experienced significant turnover with
respect to our executive officers. To implement our new business strategy and
manage our growth successfully, we are dependent upon, among other things,
recruiting and retaining qualified management, marketing, sales, technical and
creative personnel with experience in our business. It is difficult to locate
management, marketing, sales, technical and creative personnel with the
combination of skills and attributes required to execute our strategy.
Accordingly, we are unable to predict whether we will be able to hire or retain
necessary personnel.
OTHER RISKS
WE HAVE A LIMITED TRADING MARKET, AND THE PRIcE OF OUR COMMON STOCK MAY BE QUITE
VOLATILE.
There is a limited public trading market for our Common Stock on the OTC
Bulletin Board. We cannot assure you that a regular trading market for our
Common Stock will ever develop or that, if developed, it will be sustained. As
is the case with the securities of many emerging companies, the market price of
our Common Stock may also be highly volatile. Factors such as our operating
results and announcements by us or our competitors of new products or services,
may significantly impact the market price of our securities.
In addition, in recent years, the stock market has experienced a high level
of price and volume volatility and market prices for the securities of many
companies have experienced wide fluctuations not necessarily related to the
operating performance of such companies. Our Common Stock may also experience
such volatility.
OUR OPERATING RESULTS AND FINANCIAL CONDITION COULD BE NEGATIVELY IMPACTED BY
SEVERAL PENDING LITIGATION MATTERS.
From time to time, we are involved in litigation incidental to our business.
Such litigation can be expensive and time consuming to prosecute or defend and
could cause our customers to delay or cancel purchase orders until such lawsuits
are resolved. While we believe we have adequately accrued for all of our pending
litigation, we believe that our pending litigation matters, in the aggregate,
could have a material adverse effect on our operating results and financial
condition if resolved against us.
THE EXERCISE OR CONVERSION OF OUTSTANDING DERIVATIVE SECURItIES INTO COMMON
STOCK WILL DILUTE THE PERCENTAGE OWNERSHIP OF OUR OTHER STOCKHOLDERS. THE SALE
OF SUCH COMMON STOCK iN THE OPEN MARKET COULD ADVERSELY AFFECT THE MARKET PRICE
OF OUR COMmON STOCK.
As of June 1, 2000, there were outstanding options and warrants to purchase
an aggregate of 3,913,795 shares of our Common Stock and more options will be
granted in the future under our employee benefit plan. Substantially all of the
shares of common stock underlying such securities are or will be registered for
resale under the Securities Act. The exercise or conversion of outstanding stock
options, warrants or other convertible securities will dilute the percentage
ownership of our other stockholders. In addition, any sales in the public market
of shares of our Common Stock issuable upon the exercise or conversion of such
stock options, warrants or convertible securities , or the perception that such
sales could occur, may adversely affect the prevailing market price of our
common stock. Moreover, our ability to obtain additional equity capital could be
adversely affected since the holders of outstanding warrants and options will
likely exercise these securities when we probably could obtain any needed
capital on terms more favorable than those provided by these securities. We lack
control over the timing of any exercise or the number of shares issued or sold
if exercises occur.
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FUTURE SALES OF RESTRICTED SHARES COULD DECREASE THE MARKET PRICE OF OUR COMMON
STOCK AND IMPAIR OUR ABILITY TO RAISE CAPItAL.
Future sales of common stock by existing stockholders under exemptions from
registration or through the exercise of outstanding registration rights could
materially adversely affect the market price of our common stock and could
materially impair our future ability to raise capital through an offering of
equity securities. A substantial number of shares of common stock are, or will
be in the near future, available for sale under exemptions from registration or
are being registered pursuant to registration rights and we are unable to
predict the effect, if any, that market sales of these shares or the
availability of these shares for future sale will have on the market price of
the common stock prevailing from time to time.
WE DO NOT PAY DIVIDENDS.
We have never declared or paid dividends on our Common Stock and do not
intend to pay dividends in the foreseeable future. The payment of dividends in
the future will be at the discretion of our Board of Directors.
CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION COULD HAVE EFFECTS THAT
CONFLICT WITH THE INTERESTS OF OUR STOCKHOLDERS.
Certain provisions of our certificate of incorporation could make it more
difficult for a third party to acquire control of us, even if such change in
control would be beneficial to our stockholders. For example, our certificate of
incorporation allows us to issue preferred stock without stockholder approval.
Our certificate of incorporation also provides for a board of directors divided
into three classes, each of which generally serves for a term of three years,
with only one class of directors being elected in each year. In addition,
certain "anti-takeover" provisions of the Delaware General Corporation Law may
restrict the ability of our stockholders to authorize a merger, business
combination or change of control.
USE OF PROCEEDS
The selling stockholders will receive all of the proceeds from the sale of
the shares of Common Stock offered hereby. We will not receive any of the
proceeds from the sale of the shares of the Common Stock by the selling
stockholders. We will, however, receive proceeds from the exercise price of
options or warrants underlying shares of Common Stock which are being reoffered
through this Prospectus. If all options and warrants exercisable at prices of
$5.00 per share or less are exercised, we will realize gross proceeds in the
amount of $1,220,330. If other options and warrants having higher exercise
prices are exercised we could realize additional proceeds of $5,902,805.36. Such
proceeds will be contributed to working capital and will be used for general
corporate purposes.
DIVIDEND POLICY
We have not paid cash dividends on our Common Stock since our inception. We
do not intend to pay cash dividends on our Common Stock in the foreseeable
future. We currently intend to reinvest earnings, if any, in the development and
expansion of our business. The declaration of dividends in the future will be at
the election of our Board of Directors and will depend upon our earnings,
capital requirements and financial position, general economic conditions and
other relevant factors.
MARKET PRICE OF THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Our Common Stock is currently traded on the OTC Bulletin Board under the
symbol "GTST." The following table sets forth the high and low prices on the OTC
Bulletin Board for the periods indicated, as reported by the OTC Bulletin Board.
The quotations are interdealer prices without adjustment for retail markups,
markdowns or commissions and do not necessarily represent actual transactions.
These prices may not necessarily be indicative of any reliable market value.
High Low
1998
First Quarter.............................. $8 $5 7/8
Second Quarter............................. $7 7/8 $3 1/8
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Third Quarter.............................. $3 5/16 $1 1/4
Fourth Quarter............................. $2 $3/4
1999
First Quarter.............................. $2 $11/16
Second Quarter............................. $1 1/18 $1/2
Third Quarter.............................. $13/16 $3/8
Fourth Quarter ............................ $1/2 $1/32
2000
First Quarter.............................. $2 5/8 $3/32
Second Quarter (through June 1, 2000)...... $1 1/2 $1/4
On June 21, 2000, the last reported sale price of the Common Stock on the
OTC Bulletin Board was $3/8 per share.
As of June 1, 2000, there were 15,561,841 shares of common stock held of
record by 124 holders. We believe that there are more than 500 beneficial
holders of our Common Stock.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. The discussions of results, causes and trends
should not be construed to imply any conclusion that such results or trends will
necessarily continue in the future.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Continuing Operations
The Company has no sales or cost of sales to report for the three months
ended March 31, 2000 and 1999 because of the discontinuance of the Company's
phone card business and because the results of operations of the Company's
investment in Enticent are reported on the equity method.
General and administrative expenses consist mainly of salaries and
professional fees. Salary expense during the three months ended March 31, 2000
declined from that which was reported in the similar period of 1999 as a result
of the decline in the number of employees. Salary expense in the three months
ended March 31, 2000 was further reduced as a result of the Debtor's reimbursing
the Company for service performed by the Company's employees on their behalf.
Such reimbursement will cease as the Debtors' operations wind-down. Professional
fees during the year 2000 period also declined from that reported in 1999 as a
result of a lower level of activity.
Equity in net loss from affiliate for the three months ended March 31, 2000
reflects the Company's share of the net loss of Enticent for that period.
Enticent began operations effectively in late 1999.
The per share loss from continuing operations declined in the three months
ended March 31, 2000 from that reported in the prior year as a result of the
aforementioned decline in general and administrative expenses.
Discontinued Operations
The loss from discontinued operations for the three months ended March 31,
2000 declined slightly from that reported in the similar period in the prior
year as a result of a decline in activity. The gain on disposal of discontinued
operations results from the sale of the Debtors' fixed assets to J D Services
effective March 31, 2000.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
With the discontinuance of its phone card business, the Company intends to
focus on developing, operating, and entering into strategic relationships with
companies implementing promotional and other marketing services utilizing
telephony, the Internet and wireless communication technologies.
Net sales from continuing operations resulted from sales by the Company's
new start-up operations TalkToGo and Imagine, both involved in the development
and marketing of promotional programs to business customers. Subsequent to
December 31, 1999 the Company exchanged its investment in these two companies
for a 44% interest Enticent. Enticent 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 27% realized on the
initial sales in this market is indicative of gross profits that can be
realized.
Selling, general and administrative expenses for the year ended December 31,
1999 from continuing operations decreased by $702,056 (29%) to $1,762,275 from
$2,464,331 reported in the similar period in 1998. This decline primarily
resulted from the restructuring plan implemented in the later part of 1998 as
well as cost reduction actions implemented in the fourth quarter of 1999. In
addition, during 1999, the Company substantially reduced professional fees paid
to accountants and attorneys that, in 1998, was the second largest component of
general and administrative expenses after salaries.
The loss from discontinued operations relating to the phone card business
was $11,691,874 for the year ended December 31, 1999 compared to $24,365,356 for
the prior year. The $12,673,482 decline primarily resulted from the fact that in
1999 the Company recorded $2,114,087 goodwill impairment, a decrease of
$10,676,781 from that reported in 1998. Selling, general and administrative
expenses related to the discontinued operations also declined in 1999 vs.
16
<PAGE>
1998 as a result of the aforementioned restructuring plan. These declines in
selling general and administrative expenses however were offset by higher costs
of sales resulting in a negative gross margin in 1999.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant losses and negative earnings before
interest, tax and depreciation and amortization during 1997, 1998 and 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 phone card business,
coupled with an increasingly competitive environment, the Company elected to
exit the prepaid phone card business but continue its interactive marketing
operations. To accomplish this, the Debtors filed voluntary petitions with the
Court for the District of Delaware under Chapter 11 of the Bankruptcy Code on
October 28, 1999. The Debtors intend to sell or liquidate the assets of the
phone card operations with the proceeds of such sale or liquidation, to be
distributed to the Debtors' creditors pursuant to a liquidating plan of
reorganization.
At December 31, 1999, the Company, excluding the assets and liabilities
relating to the Debtors, had cash and cash equivalents of $302,000 and a working
capital deficit of $4.4 million. Subsequent to December 31, 1999, the Company
continues to generate negative cash losses from operations.
At December 31, 1999 substantially all the Company's approximately $5
million in current liabilities relate to indebtedness incurred in connection
with the discontinued phone card business. At March 31, 2000, the Company,
excluding the assets and liabilities relating to the Debtors, had cash of
$58,000 and a working capital deficit of $4.7 million. At March 31, 2000
substantially all the Company's approximately $4.8 million in current
liabilities relate to indebtedness incurred in connection with the discontinued
phone card business. Because of contractual obligations, these liabilities are
the obligations of the Company rather than the Debtors, and are due to less than
ten creditors. The Company is currently negotiating with those parties in an
effort to settle the amounts due at less than the amount recorded on the balance
sheet. The Company is attempting to settle these liabilities on favorable terms
to the Company. Subsequent to March 31, the Company borrowed on a demand basis
$200,000 including $125,000 from our Chairman of the Board and the balance of
$75,000 from two (2) of the Selling Shareholders at an interest rate of 8% per
annum.
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
aforementioned outstanding liabilities, and raising additional capital.
Management of the Company cannot presently predict the outcome of these matters
and there can be no assurance that the Company will be successful in any of
these endeavors or that Mr. Finkel or other stockholders will provide additional
financing to the Company.
The Company's financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. However, absent
the Company's ability to execute its plans to increase revenues and gross
margins and arrange short-term financing, the Company may be unable to continue
as a going concern, which could significantly impact the liquidation or
settlement value of its assets and liabilities.
At December 31, 1999, the Company had net operating loss carryforwards
("NOLs") exceeding $38.9 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.
17
<PAGE>
BUSINESS
GENERAL
We were in the marketing and distribution of prepaid phone cards. In 1999,
our Board of Directors adopted a plan to discontinue and sell the prepaid phone
card business as a result of our subsidiaries long history of losses in this
line of business and an increasingly competitive environment. To facilitate the
possible sale of the phone card assets which are the subject of liabilities far
exceeding their fair market value, certain of our subsidiaries filed voluntary
petitions for relief with the Court for the District of Delaware under Chapter
11 of the Bankruptcy Code. The subsidiaries that filed for 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").
We intend to focus on developing, operating, and entering into strategic
relationships with companies to implement promotional and other direct marketing
services utilizing telephony, the Internet and wireless communication
technologies. The first of such investments is our investment in Enticent.com,
Inc. discussed below. Additionally, we intend to be a vehicle to take advantage
of business opportunities that our management believes are in the best interest
of our stockholders.
We presently have significant liabilities that will not be discharged as a
result of the Debtors having filed voluntary petitions with the Court for the
District of Delaware under Chapter 11 of the Bankruptcy Code. These liabilities
aggregate approximately $5 million. We are currently negotiating with these
creditors in an effort to settle the amounts due at less than the amount
recorded on the balance sheet. We are attempting to settle these liabilities on
favorable terms to us.
CORPORATE BACKGROUND
We were incorporated under the laws of the State of Delaware in December
1992. Our executive offices are located at 317 Madison Avenue, Suite 807, New
York, New York 10017 and our phone number at that address is (212) 697-6131.
Effective July 2000, our name was changed from Global Telecommunication
Solutions, Inc. to Global iTechnology, Inc.
E-COMMERCE BUSINESS
ENTICENT.COM, INC.
In February 2000, our wholly-owned subsidiaries Imagine Telecom, Inc. and
TalkToGo.com, along with certain of their management and strategic partners,
formed Enticent.com, Inc., ("Enticent") a startup entity. As a result of the
transaction, we are the largest stockholder of Enticent, owning 44% of its
outstanding issued and outstanding shares.
Enticent is primarily an incentive marketing and promotional company that
allows businesses to communicate one-to-one with existing and potential
customers through both online and offline permission-marketing programs. The
consumer's incentive may take many forms and be delivered through different
vehicles.
OTHER
We are presently negotiating an investment in or strategic relationship with
several other companies. We are unable to predict whether we will enter into any
additional transactions and if entered into, we are unable to determine the
impact such transaction will have on our stockholders.
SUBSIDIARY BANKRUPTCY
In September 1999, our Board of Directors adopted a plan to discontinue the
operations of the phone card business and to seek an acquirer of that business.
As a result of the substantial liabilities associated with the phone card
business, a subsequent decision was made resulting in the Debtors filing
voluntary petitions with the United States District Court for the District of
Delaware under Chapter 11 of the 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 failing that, the businesses would
be liquidated rather than reorganized. Effective March 31, 2000, the Debtors
sold their assets to JD Services, Inc., a prepaid phone card provider located in
Salt Lake City, Utah. The sale of the phone card assets is one of the final
steps in the discontinuance of the Company's phone card business.
18
<PAGE>
J D Services paid a purchase price of $2.1 million as follows: (i)
forgiveness of approximately $750,000 in debtor-in-possession financing
previously provided to the Debtors and (ii) assumption of approximately $1.35
million of our obligation to provide telecommunications services to previously
activated phone cards.
The Debtors have filed with the U.S. Bankruptcy Court for the District of
Delaware a plan of liquidation, and such plan is in the process of being
reviewed. As part of the liquidation of the Debtors, the Debtors are required to
review payments made to various parties during the year prior to the bankruptcy
filing date of October 28, 1999. To be included in such review will be any
payment made by the Debtors to us during the year prior to the bankruptcy
filing. Should it ultimately be determined that any of these payments were
"preferential" in nature, we would be required to repay these amounts to the
Debtors. At March 31, 2000, no review as to the "preferential" nature of
transfers from the Debtors to us has been undertaken. However given our
financial condition, should any repayment to the Debtors by us be required, we
may not have sufficient assets to make such payment and may be required to offer
promissory notes and/or our equity securities in satisfaction of any such
obligation.
COMPETITION
We intend to focus on developing, operating, and entering into strategic
relationships with third parties to implement its business plan to provide
promotional and other direct marketing services utilizing telephony, the
Internet and wireless communication technologies. To accomplish its strategy, we
must to raise additional capital. If we are able to raise additional capital
necessary to achieve our objectives, we will be competing with others desiring
to invest in identical opportunities and many of these competitors will have
longer operating histories, greater name recognition, larger client bases and
significantly greater financial, technical and marketing resources than us.
Additionally, the opportunities that we are pursuing are in the promotion
services market, which market, especially as it relates to the Internet, is
intensely competitive. We expect competition in this market to continue to
intensify as a result of increasing market size, greater visibility of the
market opportunity for Internet promotion services and minimal barriers to
entry. Industry consolidation may also increase competition. We compete with
many types of companies, including both online and offline promotion companies,
large Internet publishers, search engine and other Internet portal companies, a
variety of Internet-based advertising networks and other companies that
facilitate the marketing of products and services on the Internet. Many of our
existing competitors, as well as a number of potential new competitors, have
longer operating histories, greater name recognition, larger client bases and
significantly greater financial, technical and marketing resources than us. This
may allow them to compete more effectively and be more responsive to industry
and technological change than us. We may not be able to compete successfully and
competitive pressures may reduce its revenues and result in increased losses or
reduced profits.
EMPLOYEES
As of June 1, 2000, we had three (3) full-time employees and one (1)
part-time employee. None of our employees is covered by a collective bargaining
agreement. We have never experienced an employment-related work stoppage and we
consider our employee relations to be satisfactory.
PROPERTY
In July 1995, we entered into a sublease for 9,400 square feet of space
located at 40 Elmont Road, Elmont, New York. The term of the sublease is through
July 2000 and provides for an annual rent of $145,700, including utilities. In
February 1997, we subleased this space through July 2000 for a current annual
rent of $98,700.
In August 1998, we entered into a lease for 9,362 square feet of space
located at 10 Stow Road, Suite 200, Marlton, New Jersey, for our executive
offices and computer systems. The term of the lease is five years and provides
for an annual rent of $87,875 during the first year, $89,875 during the second
year, $92,683 during the third year, $95,492 during the fourth year and $98,301
during the fifth year. In connection with the sale of the Debtors' assets and
operations, J D Services has agreed to assume our entire obligation under this
lease. However, as of June 1, 2000, the landlord has not granted to us a release
from its obligations under the lease.
In April 2000, we entered into a lease for approximately 400 square feet of
space located at 317 Madison Avenue, New York for its executive offices. The
term of the lease is one year and provides for an annual rental of $37,800.
We believe that our facilities are adequate for our present purposes. We
believe that as we grow, we will require additional facilities, and that such
facilities will be readily available.
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LEGAL PROCEEDINGS
In June 1998, IDB Worldcom Services, Inc. ("Worldcom") commenced an action
against us 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. On September 7, 1999, we 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 our Common Stock.
On February 7, 2000, Star Telecommunications Inc. ("Star") obtained a
judgment against us in the total amount of $233,557 in connection with
litigation styled Star Telecommunications, Inc. v. Global Telecommunication
Solutions, Inc., Case No. -- 01001478, in the Superior Court, State of
California County of Santa Barbara, Anacapa Division. Star brought an action
against us for failure to pay Star for international long-distance
telecommunications services which Star provided to our operating subsidiaries
under a Carrier Service Agreement entered into between Star and us. We believe
we have adequately accrued for this liability.
On March 17, 1999, Gloria Diaz, Edward Ragar and Charles Ruggieri (all
former sales persons for the Company) commenced an action against us claiming in
the Superior Court of New Jersey, Somerset County Law Division, docket No.
L-432-99 that we owe them approximately $62,000 in the aggregate for salary,
commissions and reimbursement for business expenses. We dispute these claims and
are defending this matter. We believe we have adequately accrued for this
liability.
On December 3, 1999, MTS Communications, Inc. ("MTS") commenced an action
against us in the United States District for the District of New Jersey. MTS
claims that we owe it $368,697.55, together with interest, in connection with
operations of our Canadian subsidiary. We dispute MTS' claims and are defending
this matter. We believe we have adequately accrued for this liability.
We are also is involved in litigation incidental to our business. Such
litigation can be expensive and time consuming to prosecute or defend. We
believe that these pending litigation matters, in the aggregate, could have a
material adverse effect on our operating results and financial condition if
resolved against us.
20
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MANAGEMENT
The current executive officers, key employees and directors of the Company
are as follows:
Name Age Position
---- --- --------
Shelly Finkel(2) 55 Chairman of the Board
Paul A. Silverstein 39 Director and Chief Strategy Officer
Lee R. Montellaro 54 Chief Financial Officer, Treasurer and
Assistant Secretary
Donald L. Ptalis(1) 57 Director
Alan W. Kaufman(1) 62 Director
Jack N. Tobin(2) 58 Director
--------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
SHELLY FINKEL has been employed by the Company as Chairman of the Board
since April 1993 and was the Chief Executive Officer of the Company from April
1993 through March 1995. Mr. Finkel has been active in the promotional field
since June 1965 and has been the President of Shelly Finkel Management, Inc., a
New York-based personal management firm, since 1980.
PAUL A. SILVERSTEIN, 39, has been a consultant to the Company since April
1999, became a full time employee of an affiliate late in 1999 and from May 2000
has served as the Company's Chief Strategy Officer. From 1996 to the present,
Mr. Silverstein has served as an officer of Xxplore Children's PlayCenter, Inc.
a private childrens play center he founded. In 1992, Mr. Silverstein was a
founding President of the company that he left in 1996. He was appointed a Class
I Director in May 2000 to fill the vacancy created by the resignation of David
Lipson.
LEE R. MONTELLARO has been the Company's Chief Financial Officer since June
1999. From February 1998 until 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 October 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.
DONALD L. PTALIS has been a director of the Company since March 1996 and was
its Director of Strategic Development for the period December 1998 to May 1999.
Mr. Ptalis has served as President of PCI, Inc., a computer consulting company
that he founded since April 1997. From January 1995 to April 1997, Mr. Ptalis
was the President of Masque Sound & Recording Corp., a sound equipment rental
company. From June 1993 to December 1995, Mr. Ptalis managed his personal
investments. From 1987 to June 1993, Mr. Ptalis was the President and Chief
Executive Officer of Desks Inc., an office furniture supply company.
ALAN W. KAUFMAN has been a director of the Company since November 1994. Mr.
Kaufman has been a director since August 1997 and was Chairman of the Board from
May 1998 to May 1999 of QueryObject Systems Corporation ("QueryObject"), a
developer and marketer of business intelligence software. Mr. Kaufman served as
Chief Executive Officer of QueryObject from October 1997 to December 1998. From
April 1986 to December 1996, Mr. Kaufman held various positions, including Vice
President of Marketing and Vice President of Sales and Marketing, and Executive
Vice President of Sales, at Cheyenne Software, Inc. Mr. Kaufman was the founding
President of the New York Software Industry Association.
JACK N. TOBIN has been a director of the Company since March 1996. Since
March 1989, Mr. Tobin has been the President of Jack Tobin & Associates, Inc., a
marketing, public relations and lobbying firm that he founded. From November
1982 to November 1998, Mr. Tobin served as a member of the State of Florida
House of Representatives. As a member of the House of Representatives, Mr. Tobin
served as the Chairman of the Health and Rehabilitative Services, Science
Industry and Technologies and Business and Professional Regulation committees.
From November 1989 to November 1996, Mr. Tobin chaired the full committee or
subcommittee that regulates telecommunications companies operating within the
state.
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BOARD OF DIRECTORS
The Board of Directors of the Company is divided into three classes, each of
which serves for a term of three years, with only one class of directors being
elected in each year. The term of the first class of directors, currently
consisting of Shelly Finkel and Paul A. Silverstein, will expire at the annual
meeting of stockholders to be held in 2001; the term of the second class of
directors, currently consisting of Alan W. Kaufman and Donald L. Ptalis, will
expire at the annual meeting of stockholders to be held in 2000 as a result of
the Company not holding an annual meeting in 1999; and the term of the third
class of directors, currently consisting of Jack N. Tobin, will expire at the
annual meeting of stockholders to be held in 2000. In each case, each director
will hold office until the next annual meeting of stockholders at which his
class of directors is to be elected or until his successor is duly qualified and
appointed. Executive officers serve at the discretion of the Board.
The non-employee members of the Company's Board of Directors receive $500
for attending each board meeting and $250 for attending each committee meeting.
In addition, on March 31st of each calendar year, each person who is then a
non-employee director of the Company is granted immediately exercisable ten-year
options to purchase 10,000 shares of Common Stock at the fair market value
thereof on the date prior to the date of grant. See "Executive
Compensation--1994 Performance Equity Plan."
The Company has appointed a Compensation Committee and an Audit Committee of
the Board of Directors. The Compensation Committee, consisting of Shelly Finkel
and Jack N. Tobin, reviews the salaries and other compensation of the Company's
executive officers. The role of the Audit Committee, consisting of Alan W.
Kaufman and Donald L. Ptalis, is to review (1) the scope of Company's annual
audit and other services provided by the Company's independent auditors and (2)
the audit results and the auditors' recommendations regarding policies, systems
and controls.
INDEMNIFICATION AND ExCULPATION PROVISIONS
The Company's certificate of incorporation provides for indemnification of
officers and directors to the fullest extent permitted by Delaware law. In
addition, under the Company's certificate of incorporation, no director shall be
liable personally to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director; provided that the certificate of
incorporation does not eliminate the liability of a director for (1) any breach
of the director's duty of loyalty to the Company or its stockholders; (2) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (3) acts or omissions in respect of certain unlawful
dividend payments or stock redemptions or repurchases; or (4) any transaction
from which such director derives improper personal benefit.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's directors and
officers and persons who beneficially own more than ten percent of the Company's
Common Stock to file with the Securities and Exchange Commission ("Commission")
initial reports of ownership and reports of changes in ownership of Common Stock
in the Company. Officers, directors and greater-than-ten percent shareholders
are required by Commission regulation to furnish the Company with copies of all
Section 16(a) reports they filed. To the Company's knowledge, based solely on
review of the copies of such reports furnished to the Company and written
representation that no other reports were required, during the fiscal year ended
December 31, 1999, such persons complied with all Section 16(a) filing
requirements.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for the
past three years ended December 31, 1999 for the Company's Chairman, who acts in
the capacity of the Company's Chief Executive Officer, and four former executive
officers (collectively, the "Named Executive Officers") whose compensation
exceeded $100,000 for the year ended December 31, 1999. None of the Named
Executive Officers received noncash compensation benefits having a value
exceeding 10% of his cash compensation during 1997, 1998 or 1999.
22
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Awards Payouts
Name and Principal Bonus Options All Other
Position During Period Year Salary ($) ($) (No. of Shares) Compensation($)
---------------------- ---- ---------- --- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Shelly Finkel 1999 75,000(1) - 15,000(2) -
Chairman of the Board 1998 121,154 - 54,334(3) -
1997 750,000 - 103,334(3) --
Randolph Cherkas 1999 197,629(4) - 25,000 -
formerly President and director 1998 145,000(4) - 101,000 -
1997 -- -- -- --
Cory Eisner 1999 125,000 - 9,000 -
formerly Vice President of 1998 125,000 10,050 35,301 -
Marketing 1997 122,779 -- 25,000 --
Gary Liguori 1999 140,312(5) - 21,000 --
formerly Director of Wholesale 1998 88,121 - 24,999 -
Sales 1997 -- -- -- --
James Franklin 1999 125,000 - 9,000 -
formerly Chief Operating 1998 131,700 - 34,533 -
Officer 1997 -- - 25,000 --
</TABLE>
------------------------
(1) Does not include $24,000 paid Mr. Finkel in connection with the termination
of a lease agreement. See "Certain Relationships and Related Transactions --
General."
(2) Does not include immediately exercisable options to purchase 100,000 shares
of Common Stock granted in connection with the personal guaranty of debt
financing by the Company. See "Certain Relationships and Related Transactions --
General."
(3) Includes immediately exercisable options to purchase 3,334 shares of Common
Stock granted pursuant to the Company's 1994 Performance Equity Plan, which
provided for stock option grants to be made to each director of the Company on
March 31st of 1995 through 1998. See "1994 Performance Equity Plan."
(4) Does not include amount paid to Mr. Cherkas in connection with the NATW
merger described in "Certain Relationships and Related Transactions -- The NATW
Merger." Mr. Cherkas resigned as President and director of the Company effective
December, 1999. Includes $64,167 accrued and unpaid salary at December 31, 1999
that was paid to Mr. Cherkas in May 2000. See "Certain Relationships and Related
Transactions -- The NATW Merger."
(5) Does not include amount paid to Mr. Liguori in connection with the NATW
merger described in "Certain Relationships and Related Transactions -- The NATW
Merger." Mr. Liguori resigned as Director of Wholesale Sales of the Company
effective March 31, 2000. Includes $15,000 accrued and unpaid salary at December
31, 1999 that was paid to Mr. Liguori in May 2000. See "Certain Relationships
and Related Transactions -- The NATW Merger."
23
<PAGE>
The following table summarizes the number of shares and the terms of stock
options granted to the Named Executive Officers in 1999:
OPTIONS/SHARE GRANTS DURING YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Individual Grants
-----------------
$ of total
Options/Shares
Options/ Granted to Exercise
Name and Position Shares Employees in Price
During Period Granted Fiscal Year ($/share) Expiration Date
------------- ------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
Shelly Finkel 15,000(1) 1.5% $.50 1/3 3/23/05
Chairman of the Board 1/3 9/23/05
1/3 9/23/06
Randolph Cherkas 25,000 2.4% $.50 1/3 3/23/05
formerly President and director 1/3 9/23/05
1/3 9/23/06
Cory Eisner 9,000 * $.53 1/3 2/11/05
formerly Vice President of Marketing 1/3 8/11/05
1/3 8/11/06
Gary Liguori 18,000 4.5% $.53 1/3 2/11/05
formerly Director of Wholesale Sales 1/3 8/11/05
1/3 8/11/06
10,000 $.16 2/28/05
1,613 $2.25 2/28/05
2,386 $2.06 2/28/05
6,000 $2.25 2/28/05
8,000 $1.00 2/28/05
James Franklin
formerly Chief Operating Officer 9,000 * $.53 1/3 2/11/05
1/3 8/11/05
1/3 8/11/06
</TABLE>
-----------------
* less than 1%
(1) Does not include immediately exercisable options to purchase 100,000
shares of Common Stock granted in connection with the personal guaranty
of debt financing by the Company. See "Certain Relationships and Related
Transactions -- General."
The following table summarizes the number of exercisable and unexercisable
options held by the Named Executive Officers at December 31, 1999, and their
value at that date if such options were in-the-money.
24
<PAGE>
AGGREGATE YEAR-END OPTION VALUES AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
Value of Unexercised In-the-
Number of Unexercised Options Money Options at December 31,
Name and Position During Period at December 31, 1999 1999 ($)(1)
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shelly Finkel 147,336 42,000 - --
Chairman of the Board
Randolph Cherkas 49,000 77,000 - --
formerly President and director
Cory Eisner 58,969 27,000 - --
formerly Vice President of Marketing
Gary Liguori 17,999 28,000 - --
formerly Director of Wholesale Sales
James Franklin 33,200 35,333 - --
formerly Chief Operating Officer
</TABLE>
----------------
(1) Represents the positive difference, if any, between the aggregate market
value at December 31, 1999 of the Common Stock underlying the options (based on
a last sale price of $.094 on that date) and the options' aggregate exercise
price.
1994 PERFORMANCE EQUITY PLAN
In October 1994, the Board of Directors adopted, and the stockholders
approved, the 1994 Plan. In July 1998, the stockholders approved an amendment to
the 1994 Plan to (1) increase the number of shares of Common Stock available for
issuance under the 1994 Plan from 500,000 shares to 1,500,000 shares and (2)
revise the section of the 1994 Plan that provided for an annual automatic grant
of options to purchase 3,334 shares of Common Stock to each director to (a)
apply to only non-employee directors and (b) increase the number of options
granted annually to each non-employee director from 3,334 shares to 10,000
shares. The 1994 Plan currently authorizes the granting of awards to the
Company's key employees, officers, directors and consultants. Awards consist of
stock options (both nonqualified options and options intended to qualify as
incentive stock options under Section 422 of the Internal Revenue Code of 1986,
as amended), restricted stock awards, deferred stock awards, stock appreciation
rights and other stock-based awards, as described in the 1994 Plan. The 1994
Plan is administered by the Board of Directors, which determines the persons to
whom awards will be granted, the number of awards to be granted and the specific
terms of each grant, including the vesting thereof, subject to the provisions of
the 1994 Plan.
The Company has submitted for shareholder approval a proposal to approve an
amendment to the Company's 1994 Performance Equity Plan to increase the number
of shares of Common Stock available for issuance upon exercise of options and
other awards granted or which may be granted thereunder from 1,500,000 shares to
3,500,000 shares.
On March 31st of each calendar year during the term of the 1994 Plan,
assuming there are enough shares then available for grant under the 1994 Plan,
each person who is then a non-employee director of the Company is awarded stock
options to purchase 10,000 shares of the Company's Common Stock at the fair
market value thereof (as determined in accordance with the 1994 Plan), all of
which options are immediately exercisable as of the date of grant and have a
term of ten years. These are the only awards which may be granted to a director
of the Company under the 1994 Plan.
Each stock option may be granted at a price determined by the Board of
Directors, not to be less than 100% of the fair market value of the Common Stock
on the date prior to the date of grant (or 110% of the fair market value in the
case of qualified stock options granted to a holder of more than 10% of the
outstanding stock of the Company). The aggregate fair market value of shares for
which qualified stock options are exercisable for the first time by such
employee during any calendar year may not exceed $100,000. The 1994 Plan also
contains certain change in control provisions, which could cause options and
other awards to become immediately exercisable and restrictions and deferral
limitations applicable to other awards to lapse in the event any person
(excluding certain stockholders of the Company) acquires beneficial ownership of
more than 25% of the Company's outstanding shares of Common Stock.
As of December 31, 1999, options to purchase 996,368 shares of Common Stock
were outstanding under the 1994 Plan. At December 31, 1999, options outstanding
under the 1994 Plan include options to purchase 82,336 shares held by current
executive officers, at exercise prices ranging from $.53 to $17.625 per share.
In addition, pursuant to the terms of the 1994 Plan, on March 31, 1995, 1996,
1997 and 1998, the Company granted to each outside director of the Company
immediately exercisable ten-year options to purchase 3,334 shares for $17.625,
$15.75, $11.125 and $7.3125 per share, respectively and at March 31, 1999
options to purchase 10,000 shares at an option price of $.9375. In March
25
<PAGE>
2000, the Company granted to each non-employee director immediately exercisable
ten-year options to purchase 10,000 shares for $1.25 per share. The exercise
prices of all of the foregoing options are equal to the fair market value of the
Common Stock on the date prior to the date of grant.
In December 1999 and March, 2000, the Board of Directors authorized the
replacement of 406,868 stock options issued prior to August 1999 ("Original
Option"), held by employees of the Company whose employment with the Company had
or will terminate, with an aggregate of 274,703 vested stock options which
represents the number of Original Options that would have vested as of March 1,
2000. The option price for these stock options is the same price as the Original
Option, however, these options do not terminate within three months of the
employee leaving the employment of the Company but rather in 2005.
OTHER OPTIONS AND WARRANTS
In January 1998, the Company granted to JEB Partners options to purchase
60,000 shares of Common Stock at an exercise price of $6.125 per share in
consideration of JEB Partners rendering consulting services to the Company. Such
options are currently exercisable and will remain exercisable until January
2003.
In April 1998, the Company completed a private placement, pursuant to which
it derived net proceeds of approximately $1,135,000 through the sale of
$1,250,000 promissory notes and warrants to purchase 178,573 shares of Common
Stock. The warrants are exercisable through April 2001 at an initial exercise
price of $7.00 per share.
In April 1998, the Company issued to an investor, who agreed to purchase up
to $2,000,000 of Common Stock or other securities at a discount to the market
price of such securities, warrants to purchase 100,000 shares of Common Stock at
an exercise price of $7.50 per share. The warrants are immediately exercisable
and will remain exercisable until April 13, 2001. In connection with introducing
this investor to the Company, the Company granted to each of Messrs. Barry
Rubenstein, a stockholder of the Company, and Eli Oxenhorn options to purchase
50,000 shares of Common Stock at an exercise price of $7.125 per share. The
options are currently exercisable and will remain exercisable until April 1,
2003.
In October 1998, the Company issued to Penn Merchant warrants to purchase
30,000 shares of Common Stock until October 2003 at an exercise price of $1.625
per share in lieu of payment for the balance of monthly consulting fees owed to
Penn Merchant, which aggregated approximately $78,000.
In June 1999, in exchange for their personally guarantying a $500,000 debt
financing obtained by subsidiaries of the Company, the Company issued 100,000
options to purchase common stock to each of Messrs. Eli Oxenhorn and Barry
Rubenstein, a shareholder of the Company, and Mr. Shelly Finkel, Chairman and
shareholder of the Company. The exercise price is $.5625, the fair market value
of the common stock at the date of grant of the option, and the options expire
June 17, 2004. The value of the options, calculated using the Black-Scholes
option pricing model, of $92,792 was charged to additional paid in capital the
year ended December 31, 1999. As of April 3, 2000, this debt had been repaid by
the subsidiaries.
In June 1999, in connection with his employment as the Company's Chief
Financial Officer, Mr. Lee R. Montellaro was granted an option to acquire
320,000 shares of Common Stock. The options vest 120,000 shares at December 1,
1999, 120,000 shares at June 1, 2000, 40,000 shares June 1, 2001 and 40,000
shares June 1, 2002 and the exercise prices are $.75, $1.25, $1.75 and $2.00
respectively. In December 1999, Mr. Montellaro was granted another option,
vesting April 3, 2000, to acquire 200,000 shares of common stock at an option
price of $.25, a price higher than the closing price of a share of Common Stock
on the date of the grant of the option. The options expire five years from date
of vesting.
During the year ended December 31, 1999, the Company granted non-qualified
options to various sales representatives and sales brokers to purchase an
aggregate of 64,000 shares of Common Stock at exercise prices ranging from $.14
to $.75, the fair market value of the Common Stock at the date of grant of the
option. The options vest at various dates and expire five years from date of
vesting The value of those options, calculated using the Black-Scholes
option-pricing model, of $2,610 was charged to additional paid in capital in the
year ended December 31, 1999. At December 31, 1999, 6,500 of these options were
exercisable. Also in 1999, previously issued 1994 Plan vested options to acquire
20,000 shares of Common Stock at exercise prices ranging from $7.88 to $15.00
were converted to nonqualified options because their expiration dates had been
previously extended through 2004.
In December 1999 and March 2000, the Board of Directors authorized the
replacement of 40,000 non plan options held by employees of the Company whose
employment with the Company had or will terminate, with an aggregate of 35,000
vested stock options which represent the number of original options that would
have vested as of March 1, 2000.
26
<PAGE>
The option price for these stock options is the same price as the original
options however these options do not terminate within three months of the
employee leaving the employment of the Company but rather in 2005.
At December 31, 1999, 1,781,003 non-plan options were outstanding and
1,283,670 options were exercisable. At December 31, 1999, non-plan options
outstanding to purchase 730,000 shares are held by current executive officers,
at exercise prices ranging from $.25 to $6.563.
In May 2000, in connection with his employment as the Company's Chief
Strategy Officer, Mr. Paul A. Silverstein was granted an option to acquire
700,000 having the exercise price and vesting schedule as follows:
Number Exercise Price Vesting
------ -------------- -------
250,000 $ .50 Immediate
200,000 $ .75 At the time the closing price of the
Company's Common Stock on the OTC
Bulletin Board equals or exceeds $4.00
for 15 consecutive trading days
250,000 $1.50 At the time the closing price of the
Company's Common Stock on the OTC
Bulleting Board equals or exceeds
$7.00 for 15 consecutive trading days
The options expire five years from date of vesting.
OPTION REPRICING
In January 1998, the Company reduced the exercise prices of 196,683
outstanding options to purchase Common Stock from exercise prices ranging from
$7.88 to $18.38, to $6.563, the fair market value of the Common Stock on the
date of such repricing. 10,000 of the repriced options are held by Shelly
Finkel, Chairman of the Board. The exercise price of these options was reduced
from $9.99 per share. 29,303 of the repriced options are held by David Tobin,
former Vice President--Business Affairs and General Counsel. The exercise price
of 16,667 options was reduced from $18.375 per share and the exercise price of
12,636 options was reduced from $7.92 per share. 16,668 of the repriced options
are owned by Cory Eisner, former Vice President of Marketing. The exercise price
of 8,334 options was reduced from $15.00 per share, the exercise price of 3,334
options was reduced from $17.25 per share and the exercise price of 5,000
options was reduced from $7.875 per share.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Shelly
Finkel, its Chairman of the Board, Paul A. Silverstein, its Chief Strategy
Officer and Lee R. Montellaro, its Chief Financial Officer.
Mr. Finkel's employment agreement, as amended, provides for a term through
December 31, 2000, and requires him to devote at least 50% of his business time
to the management and operations of the Company. The agreement provides for a
base salary of $150,000 per annum, plus an annual cash bonus at the discretion
of the Board of Directors. If Mr. Finkel is terminated without cause, he will
continue to receive his salary through the remainder of his term of employment,
and will be paid a cash bonus equal to the last cash bonus paid to him. If Mr.
Finkel is terminated without cause after (1) the Company is sold or otherwise
acquired, or (2) a party that owns no more than 5% of the voting securities of
the Company acquires in one or more transactions beneficial ownership of more
than 35% of such securities (a "Change of Control"), Mr. Finkel will receive all
salary and bonus payments in a single lump sum payment. The agreement prohibits
Mr. Finkel from competing with the Company during the term of his employment and
for two years thereafter. In August 1998, Mr. Finkel voluntarily agreed to
reduce his salary from $150,000 to $75,000 per annum.
The Company entered into a one-year employment agreement with Paul
Silverstein on May 3, 2000 to serve as the Company's Chief Strategy Officer. The
agreement is for a one year term ending May 2, 2001 at an annual salary of
$125,000.
Mr. Montellaro's employment agreement provides for a term through June 1,
2002. The agreement provides for a base salary of $150,000 per annum plus an
annual cash bonus at the discretion of the Board of Directors. If Mr. Montellaro
is terminated without cause, he will continue to receive his base salary for one
year, and will be paid a cash bonus equal to the last cash bonus paid to him.
The agreement prohibits Mr. Montellaro from competing with the
27
<PAGE>
Company during the term of his employment and for one year thereafter. On April
1, 2000, Mr. Montellaro was awarded a $50,000 bonus by the Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 3, 2000, with
respect to (1) those persons or groups known to the Company to beneficially own
more than 5% of the outstanding shares of Common Stock, (2) each director of the
Company, (3) each Named Executive Officer and (4) all directors and executive
officers as a group. The information is determined in accordance with Rule 13d-3
promulgated under the Exchange Act based upon information furnished by the
persons listed or contained in filings made by them with the Commission. Under
this rule, a person is deemed to own beneficially the number of shares issuable
upon exercise of options, warrants or convertible securities it holds that are
exercisable within 60 days from April 3, 2000. Each beneficial owner's
percentage ownership is determined by assuming that convertible securities,
options or warrants that are held by such person (but not those held by any
other person) and which are exercisable within 60 days of April 3, 2000 have
been exercised.
<TABLE>
<CAPTION>
Shares
Beneficially
Name and Address of Beneficial Owner Owned Percent
------------------------------------ ----- -------
<S> <C> <C>
Wien Securities Corp. 1,329,651 8.5%
525 Washington Boulevard
Suite 3600
Jersey City, New Jersey 07310
Shelly Finkel 770,873(1) 4.7%
Randolph Cherkas 1,130,770(2) 6.8%
c/o GTS Prepaid, Inc.
10 Stow Road, Suite 200
Marlton, New Jersey 08053
Donald L. Ptalis 102,614(3) *
Alan W. Kaufman 35,005(4) *
Jack N. Tobin 30,002(5) *
Cory Eisner 67,939(6) *
Gary Liguori 116,230(7) *
James Franklin 48,433(8) *
Paul A. Silverstein 295,000(9) 1.9%
All executive officers and directors as a group (6 1,554,494(10) 9.1%
persons)
</TABLE>
----------------
* Less than 1%.
(1) Includes 262,336 shares underlying currently exercisable options.
Excludes 27,000 shares underlying options, 7,000 of which become
exercisable in December 2000, 10,000 of which become exercisable in
January 2001 and 5,000 of which become exercisable in each of September
2000 and 2001.
(2) Includes 92,333 shares underlying currently exercisable options.
Excludes 33,667 shares underlying options, 7,000 of which become
exercisable in December 2000, 10,000 of which become exercisable in
January 2001, and 8,333 of which become exercisable in each of September
2000 and 2001.
28
<PAGE>
(3) Includes 40,001 shares underlying currently exercisable options.
(4) Includes 33,336 shares underlying currently exercisable options.
(5) Represents shares underlying currently exercisable options.
(6) Includes 65,969 shares underlying currently exercisable options.
(7) Includes 33,999 shares underlying currently exercisable options.
Excludes 12,000 shares underlying options, 6,000 of which become
exercisable in each of August 2000 and 2001.
(8) Represents shares underlying currently exercisable options.
(9) Includes 250,000 shares underlying currently exercisable options.
(10) Includes those shares deemed to be included in the respective beneficial
ownership of Messrs. Finkel, Ptalis, Kaufman, Jack Tobin and
Silverstein, as described in notes 1, 3, 4, 5 and 9 above and another
officer. Does not include shares beneficially owned by Messrs. Cherkas,
Eisner, Liqouri and Franklin, each of whom are no longer employees of
the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leased space from JilJac Realty Company, a general partnership
owned by Gary Wasserson, the Company's former Chief Executive Officer, which
until August 1998, housed the Company's principal executive offices. The lease
expired in December 1999 and provided for an annual rent of $58,344 during 1999.
In December 1998, the Company offered holders of $3,050,000 aggregate
principal amount of promissory notes acquired from the Company in December 1996
the opportunity to convert their notes into shares of Common Stock at a
conversion rate of $0.968 per share and to exchange an aggregate of 683,333
common stock purchase warrants for shares of Common Stock at an exchange rate of
4.5555 warrants per share. $3,000,000 of the notes and 666,667 of the warrants
were converted into an aggregate of 3,245,518 shares of Common Stock. In
addition, holders that accepted this conversion offer forgave interest of
approximately $14,000 due on these notes. Among these holders were Shelly
Finkel, Chairman of the Board, and limited partnerships in which Barry
Rubenstein, a stockholder, is either a general partner or an officer and member
of a limited liability company that is a general partner. The remaining $50,000
of notes plus interest accrued were converted pursuant to the terms of the notes
into an aggregate of 71,736 shares of Common Stock at a conversion rate of
$.7025 per share.
In December 1998, the Company offered holders of $2,599,750 aggregate
principal amount of debentures acquired from the Company in June and September
1994 the opportunity to convert their debentures into shares of Common Stock at
a conversion rate of $0.80 per share. In January 1999, holders of $2,524,750
aggregate principal amount of debentures converted their debentures into
3,155,938 shares of Common Stock. Donald Ptalis, a director of the Company,
converted $50,000 of debentures into 62,500 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
remaining balance of the debentures was paid in December 1999.
In December 1998, the Company entered into an agreement with Shelly Finkel
Management ("SFM"), a company owned by Shelly Finkel, the Company's Chairman of
the Board, pursuant to which, in consideration of the Company's $48,000 payment
to SFM, SFM agreed to assume all of the obligations under the Company's lease
for its sales office in New York and to indemnify and hold the Company harmless
from all losses, costs and expenses associated with the lease arising after
December 31, 1998. To date, the Company has paid SFM $24,000.
In June 1999, in exchange for their personally guarantying a $500,000 debt
financing obtained by subsidiaries of the Company, the Company issued 100,000
options to purchase common stock to each of Messrs. Eli Oxenhorn and Barry
Rubenstein, a shareholder of the Company, and Mr. Shelly Finkel, Chairman and
shareholder of the Company. The exercise price is $.5625, the fair market value
of the common stock at the date of grant of the option, and the options expire
June 17, 2004. The value of the options, calculated using the Black-Scholes
option pricing model, of $92,792 was charged to additional paid in capital the
year ended December 31, 1999. As of April 3, 2000 this debt has been repaid by
the subsidiaries.
29
<PAGE>
David S. Tobin, son of Jack N. Tobin a director, served as outside counsel
to and Secretary of the Company in 1999. During 1999 Mr. Tobin and the law firms
with which he is affiliated received $152,000 in aggregate compensation,
including $25,000 accrued but unpaid at December 31, 1999, for legal services
rendered and payments required under a severance agreement entered into with Mr.
David Tobin in 1998 in connection with his termination of employment of the
Company. No other amounts are due Mr. David Tobin under the severance agreement.
Subsequent to March 31, the Company borrowed $200,000 on a demand basis
including $125,000 from our Chairman of the Board and the balance from Barry
Rubenstein and Eli Oxenhorn at an interest rate of 8% per annum.
The terms of the foregoing transactions were determined without arms' length
negotiations and could create, or appear to create, potential conflicts of
interest which may not necessarily be resolved in the Company's favor. All
future transactions and loans between the Company and its officers, directors
and principal stockholders or their affiliates will be on terms no less
favorable than could be obtained from unaffiliated third parties and will be
approved by a majority of the then disinterested directors of the Company.
THE NATW MERGER
On February 6, 1998 ("Merger Date"), the company acquired, through a merger,
all of the outstanding capital stock of Networks Around the World, Inc.
("NATW"), for a purchase price comprised of (i) $2,000,000 in cash, (ii) an
aggregate of 505,618 shares of common stock and (iii) $1,000,000 aggregate
principal amount of promissory notes ("NATW Notes"), secured by substantially
all of the assets of NATW. In addition, the Company was required to pay an Earn
Out to $2,0000,000 (the "Earn Out") in additional consideration to Randy
Charkas, the Company's former President and a former shareholder of NATW, if
certain sales and financial objectives are achieved. For the year ended December
31, 1999 and 1998, $702,455 and $838,900 respectively of the Earn Out has been
recorded as additional consideration. In April 1998, the former shareholders
agreed to defer payment of an aggregate of $1,000,000 of NATW Notes and Earn Out
from 1998 to January 1999. In December 1998, Randy Charkas preliminarily agreed
to convert the NATW Notes into Common Stock. The conversion of the NATW Notes
into 769,750 shares of Common Stock occurred in March 2000 after deducting from
the NATW Notes $376,185, which represents a reimbursement to the Company of
amounts due it under an indemnity contained in the NATW merger agreement (see
below). From the consummation of the NATW merger in February 1998 through the
date of the Assignment Agreement, the Company has paid Mr. Cherkas $341,355 of
the aggregate amount of $1,541,355 owed to him during that period under the Earn
Out. The remaining balance due Mr. Cherkas under the Earn Out is now payable to
him accordance with the Assignment Agreement as hereinafter defined.
As a result of the Company's subsidiaries' long history of losses in the
prepaid phone card business, coupled with an increasingly competitive
environment, the Company's Board of Directors in the third quarter of 1999
adopted a plan to discontinue and sell the prepaid phone card business. To
facilitate the possible sale of the phone card assets, certain of the Company's
subsidiaries have filed voluntary petitions with the U.S. Bankruptcy Court for
the District of Delaware ("Court") under Chapter 11 of the U.S. Bankruptcy Code
on October 28, 1999. The subsidiaries of the Company that filed for 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").
On January 31, 2000, the Debtors entered into an agreement ("Purchase
Agreement") to sell substantially all of their assets to J D Services, Inc. ("J
D Services"). Under the terms of the Purchase Agreement, J D Services will pay
an aggregate of $2.1 million as follows: (i) forgiveness of $750,000
debtor-in-possession financing previously provided to the Debtors and (ii)
assumption of Debtor's obligations to provide telecommunications services to
previously activated phone cards ("Deferred Liability"). The Purchase Agreement
also provides that should the Deferred Liability be determined to be less than
$1.35 million, the Debtors shall be due the difference ("True-up Amount").
A condition of the Purchase Agreement required that certain agreements,
including non-compete agreements among the Company, Debtors and Messrs. Cherkas
and Liguori be assigned to J D Services. These agreements with Messrs. Cherkas
and Liguori where entered into in connection with the Company's acquisition of
NATW in February 1998. To accomplish this assignment, defaults by the Company
and the Debtors under the various agreements had to be cured. With respect to
Messrs. Cherkas and Liguori, the Company and Debtors entered into an Agreement
Regarding The Assignment of Contacts, Cure Amounts and Related Matters on March
7, 2000, which was approved by the Court on March 22, 2000 ("Assignment
Agreement"). Under the terms of the Assignment Agreement, the Company, on May 3,
2000 paid Mr. Liguori $15,000 in unpaid bonuses due him and delivered 50,000
shares of Common Stock. Also, on May 3, 2000, the Company paid Mr. Cherkas
$94,000; $64,000 for accrued but unpaid salary and $30,000 for reimbursement of
legal fees. As provided by the Assignment Agreement, the Debtors paid Mr.
Liguori on May 3, 2000, $110,000 in full payment of the note, and related
interest, issued with the acquisition of NATW.
30
<PAGE>
With respect to approximately $1.2 million which remains due Mr. Cherkas
under the Earn Out, under the Assignment Agreement, he has agreed to release the
Company and the Debtors if he receives a minimum payment of $700,000, paid as
discussed below, by October 7, 2000. To the extent he does not receive the
minimum payment of $700,000, the amount due him by the Company shall be $1.2
million less any payments he receives under the Assignment Agreement.
The Assignment Agreement provides that Mr. Cherkas shall receive the
following amounts, if any:
o The True-up Amount not to exceed $500,000
o 70% of the amount of the Debtors' available cash remaining after
deduction amount for unpaid accrued Administrative Claims.
o At the election of the Company, an amount equal to the difference
between $700,000 and the amounts otherwise paid him under the
Assignment Agreement.
In connection with the NATW merger, the Company entered into an employment
agreement with Randolph Cherkas, the President of NATW, who was appointed
President and a director of the Company. Mr. Cherkas resigned these positions in
December, 1999, and his employment with the Company terminated effective the
date of the sale of the Debtors' assets.
The Company also entered into an employment agreement with Gary Liguori, the
Vice President of NATW, who was appointed the Director of Wholesale Sales of the
Company. Mr. Liguori's employment with the Company terminated effective the date
of the sale of the Debtors' assets.
Pursuant to the merger agreement, the Company granted piggyback registration
rights to Messrs. Cherkas and Liguori. Each of them also executed a lock-up
agreement (1) prohibiting the sale of such shares for one year after the closing
date and (2) limiting the number of shares that can be sold by each to 25% of
the shares acquired in connection with the NATW merger during any calendar
quarter during the one year period thereafter.
THE CCI MERGER
Also on the Merger Date, the Company acquired, through a merger, all of the
outstanding capital stock of Centerpiece Communications, Inc. ("CCI") for a
purchase price comprised of (1) $1,500,000 in cash, (2) 401,284 shares of Common
Stock, of which 47,891 shares were subsequently contributed back to the Company
(see below) and (3) a $1,000,000 aggregate principal amount promissory note
("CCI Note"), secured by substantially all of the assets of CCI. The CCI Note
accrued interest at a rate of 8% per annum and was originally payable as
follows: (1) $250,000 plus interest accrued thereon on October 31, 1998, (2)
$250,000 plus interest accrued thereon on January 1, 1999 and (3) four equal
payments of $125,000, plus interest accrued thereon, on April 1, 1999, July 1,
1999, October 1, 1999 and January 1, 2000. In April 1998, the former shareholder
of CCI agreed to defer payment of $250,000 of the CCI Note, plus interest, from
October 31, 1998 to January 1999. In November 1998, the CCI Note was converted
into Common Stock as described below.
In connection with the merger, the Company entered into an employment
agreement with J. Mark Rubenstein, the President of CCI, who was appointed the
Vice President--Wholesale Sales and a director of the Company. In November 1998,
the Company terminated Mr. Rubenstein's employment agreement, which was to
expire on December 31, 2000. Mr. Rubenstein's annual base compensation at the
time his employment ceased was $150,000. Pursuant to a termination agreement,
Mr. Rubenstein received approximately $150,000 in severance payments.
In connection with Mr. Rubenstein's departure and in full satisfaction of
his and the Company's obligations to each other, Mr. Rubenstein sold an
aggregate of 353,393 shares of Common Stock and the CCI Note for an aggregate
purchase price of $575,000. Among the purchasers were Shelly Finkel, Chairman of
the Board of the Company, Michael Hoppman, former Chief Financial Officer of the
Company, and Barry Rubenstein, a stockholder (no relation to J. Mark
Rubenstein). Mr. Rubenstein also contributed back to the Company 47,891 shares
of Common Stock with a fair market value of $69,867 in consideration of $298,364
that he owed to the Company relating to Access Telecom as described below. The
reserve for the loss on the settlement of $229,497 was recorded in the Company's
financial statements for the year ended December 31, 1998. After the group of
investors purchased the CCI Note and shares from Mr. Rubenstein, they accepted
the Company's offer to convert the principal amount of the CCI Note into 813,008
shares of Common Stock at a conversion rate of $1.23 per share.
31
<PAGE>
AGREEMENTS RELATING TO ACCESS TELECOM
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. Of this cost, $376,185 and $298,364 of the
estimated costs have been allocated to the former shareholders pursuant to
indemnification arrangements.
Pursuant to the respective merger agreements, the purchase price was
adjusted subsequent to the merger Date by an amount equal to cash of the
acquired company plus the net realizable value of accounts receivable of the
acquired company minus current liabilities of the acquired company as of the
Merger Date. In November 1998, the Company and the former shareholder of CCI
reached a settlement on the amount due to the Company related to Access.
Pursuant to the terms of the merger agreement, the former shareholder
contributed back to the Company 47,891 shares of common stock issued as part of
the merger consideration with a fair market value of $69,867 in consideration of
$298,364 that he owned to the Company. The loss on the settlement of $228,497
was recorded as an expense for the year ended December 31, 1998.
32
<PAGE>
SELLING STOCKHOLDERS
The following list of selling shareholders includes:
o the number of shares of common stock currently owned by each selling
shareholder
o the number of shares being offered for resale by this prospectus by
each selling shareholder; and
o the number and percentage of shares of common stock to be held by each
selling shareholder after the completion of this offering.
Except as otherwise indicated in the footnotes to such table, no such
selling shareholder has been an officer, director or employee of the Company for
the past three years. The registration of the shares does not necessarily mean
that the selling shareholders will sell all or any of the shares.
The selling shareholders provided us with all information with respect to
their share ownership. Because the selling shareholders may sell all or part of
their shares, we are unable to estimate the number of shares that will be held
by any selling shareholders upon termination of any offering made hereby. In
addition, beneficial ownership is determined in accordance with SEC rules and
generally include voting or investment power with respect to securities. Shares
of common stock subject to options, warrants and convertible preferred stock
currently exercisable or convertible, or exercisable or convertible within sixty
(60) days, are counted as outstanding for computing the percentage of the person
holding such options or warrants but are not counted as outstanding for
computing the percentage of any other person.
See "Plan of Distribution."
<TABLE>
<CAPTION>
Shares Beneficially Owned
After Offering
Amount and Amount and
Nature of Number of Shares Nature of Percentage
Name of Beneficial Holder Ownership(1) Offered Hereby Ownership of Class
------------------------- ------------ ---------------- ---------- -----------
<S> <C> <C> <C> <C>
Sheldon Finkel(2) 770,873(7) 797,873(7) 0 *
Lee Montellaro(3) 520,000(5) 520,000 0 *
Philip Bloom 626,334(9) 626,334 0 *
Gordy Freeman 643,391 643,391 0 *
Gerald Josephson 649,761(10) 649,761 0 *
Jeff and Nina Rubinstein 625,930(11) 625,930 0 *
Alan Silverman 650,000(12) 650,000 0 *
Wien Securities Corp. 1,376,080(4) 1,376,080 0 *
Barry Rubenstein 208,334(5) 150,000 0 *
Eli Oxenhorn 208,334(5) 150,000 0 *
The Marilyn and Barry Rubenstein 221,580 221,580 0 *
Foundation
Paul Silverstein(6) 260,000(5)(8) 260,000 0 *
David Tobin 151,667(5) 151,667 0 *
Anthony Casazza 5,000(5) 5,000 0 *
William Odelson 20,000(5) 20,000 0 *
John Slocum 31,000(5) 31,000 0 *
Gateway Communications Company 5,000(5) 5,000 0 *
Stabler Sochet Enterprises, Inc. 10,000(5) 10,000 0 *
Lee Wilson 4,500(5) 4,500 0 *
Edward J. Meegan 4,500(5) 4,500 0 *
Randy Cherkas 268,687 268,687 0 *
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Owned
After Offering
Amount and Amount and
Nature of Number of Shares Nature of Percentage
Name of Beneficial Holder Ownership(1) Offered Hereby Ownership of Class
------------------------- ------------ ---------------- ---------- -----------
<S> <C> <C> <C> <C>
Gary Liguori 32,231 32,231 0 *
Angela Moltzon 1,000(5) 1,000 0 *
Linda Maynes 5,000(5) 5,000 0 *
Coults (Jersey) Ltd. 71,429(5) 71,429 0 *
Amir L. Ecker 14,286(5) 14,286 0 *
Losly Capital Management 14,286(5) 14,286 0 *
Peter S. Rawlings 7,143(5) 7,143 0 *
Pennsylvania Merchant Group 130,000(5) 130,000 0 *
Frog Hollow Ptrs 16,667(5) 16,667 0 *
Craig Shapiro 25,000(5) 25,000 0 *
John Freeman 8,334(5) 8,334 0 *
Whale Securities 83,333(5) 83,333 0 *
</TABLE>
---------
* Less than 1% of outstanding Common Stock.
(1) Based on 15,561,841 shares of Common Stock issued and outstanding as of
June 1, 2000. Unless otherwise noted, we believe that all persons named
in the table have sole investment power with respect to all shares of
Common Stock beneficially owned by them. Under the federal securities
laws, a person is deemed to be the beneficial owner of securities that
can be acquired by that person within 60 days from the date hereof upon
the conversion of convertible securities or the exercise of warrants or
options. We have assumed for each person that any exercisable and
convertible securities that are held by that person (but not those held
by any other person) and that are exercisable or convertible within 60
days from the date hereof have been exercised or converted and that after
the offering, all underlying shares set forth under "Number of Shares
Offered Hereby" have been sold. Except where noted, none of the selling
stockholders has had any position, office or other material relationship
with the Company other than as a stockholder during the past three years.
(2) Sheldon Finkel has been employed by the Company as Chairman of the Board
since April 1993 and was the Chief Executive Officer of the Company from
April 1993 though March 1995.
(3) Lee R. Montellaro has been the Company's Chief Financial Officer since
June 1999.
(4) Includes 100,000 shares of Common Stock issuable upon exercise of option.
(5) Consists of shares issuable upon exercise of options or warrants.
(6) Paul Silverstein has been the Company's Chief Strategy Officer since May
2000.
(7) Includes 262,336 shares of Common Stock issuable upon exercise of
options. The column with respect to Number of Shares Offered Hereby also
includes 27,000 shares underlying options with are not presently
exercisable.
(8) Excludes 450,000 shares of Common Stock underlying options which
currently are not exercisable.
(9) Includes 7,143 shares of Common Stock issuable upon exercise of warrants.
(10) Includes 42,857 shares of Common Stock issuable upon exercise of
warrants.
(11) Includes 14,286 shares of Common Stock issuable upon exercise of
warrants.
(12) Includes 7,143 shares of Common Stock issuable upon exercise of warrants.
34
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of our capital stock does not
purport to be complete and is subject to, and qualified in its entirety by, the
provisions of our Certificate of Incorporation, as amended, and the Amended and
Restated Bylaws that are referenced as exhibits to this Registration Statement
and by provisions of applicable law.
COMMON STOCK
We are presently authorized to issue up to 35,000,000 shares of Common
Stock, $.01 par value per share. As of June 1, 2000, there were 15,561,841
shares of Common Stock outstanding. The holders of Common Stock are entitled to
one vote for each share held of record on each matter submitted to a vote of
stockholders. There is no cumulative voting for election of directors. Subject
to the prior rights of any series of Preferred Stock which may from time to time
be outstanding, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by our Board of Directors out of funds legally
available therefor, and, upon the liquidation, dissolution or winding up of the
Company, are entitled to share ratably in all assets remaining after payment of
liabilities and payment of accrued dividends and liquidation preference on the
Preferred Stock, if any. Holders of Common Stock have no preemptive rights and
have no rights to convert their Common Stock into any other securities.
PREFERRED STOCK
We are presently authorized to issue up to 1,000,000 shares of preferred
stock, $.01 par value per share. Such preferred stock may be issued in one or
more series, on such terms and with such rights, preferences and designations as
our Board of Directors may determine. Such preferred stock may be issued without
action by stockholders. No shares of preferred stock are currently outstanding.
However, any future issuance of preferred stock could adversely affect the
rights of the holders of Common Stock, and therefore reduce the value of our
Common Stock. In particular, specific rights granted to future holders of
preferred stock could be used to restrict our ability to merge with or sell our
assets to a third-party, thereby preserving control of the Company by its
present owners.
OPTIONS AND WARRANTS
There are currently outstanding options to purchase 3,348,137 shares of
Common Stock at exercise prices ranging from $.14 to $16.50, and outstanding
warrants to purchase 565,658 shares of Common Stock at exercise prices ranging
from $1.63 to $15.38.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our Common Stock is Continental Stock
Transfer & Trust Company.
35
<PAGE>
PLAN OF DISTRIBUTION
The selling shareholders may offer their shares at various times in one or
more of the following transactions:
o ordinary brokers transactions, which may include long or short sales
o cross or block trades or otherwise on the OTC Electronic Bulletin Board
o purchases by brokers, dealers or underwriters as principal and resale by
such purchasers for their own accounts pursuant to this prospectus
o "at the market" to or through market makers or into an existing market
for the common stock
o in other ways not involving market makers or established trading markets,
including direct sales to purchasers or sales effected through agents
o options, swaps or other derivatives
o any combination of the foregoing, or by any other legally available means
o in connection with short sales of shares of common stock
o option or other transactions
Brokers, dealers, underwriters or agents participating in the distribution
of the shares of common stock may receive compensation in the form of discounts,
concessions or commission from the selling shareholders and/or the purchasers of
shares of common stock for whom such broker-dealers may act as agent or to whom
they may sell as principal, or both, which compensation as to a particular
broker-dealer may be in excess of customary commissions. The selling
shareholders and any broker-dealers acting in connection with the sale of the
shares of common stock hereunder may be deemed to be underwriters within the
meaning of Section 2(11) of the Securities Act because of the number of shares
of common stock to be sold or reserved by such persons or entities or the manner
of sale of such shares, or both. If a selling shareholder or any broker-dealer
or other holders were determined to be underwriters any commissions received by
them and any profit realized by them on the resale of shares of common stock as
principals may be deemed underwriting compensation under the Securities Act.
Neither we nor any selling shareholder can presently estimate the amount of such
compensation. We don't know of existing arrangements between any selling
shareholder and any other shareholder, dealer, underwriter or agent relating to
the sale or distribution of the shares.
The selling shareholders have represented to us that any purchase or sale
of shares of common stock by them will comply with Regulation M promulgated
under the Securities Exchange Act of 1934. In general, Rule 102 under Regulation
M prohibits any person connected with a distribution of our common stock from
directly or indirectly bidding for, or purchasing for any account in which he or
she has a beneficial interest, any of our common stock or any right to purchase
our common stock, for a period of one business day before and after completion
of his or her participation in the distribution.
During the time a selling shareholder participates in a distribution,
Rule 104 under Regulation M prohibits the selling shareholders and any other
persons engaged in the distribution from engaging in any stabilizing bid or
purchasing our common stock except for the purpose of preventing or retarding a
decline in the open market price of our common stock. No such person may effect
any stabilizing transaction to facilitate any offering at the market. Inasmuch
as the selling shareholders will be reoffering and reselling our common stock at
the market, Rule 104 prohibits them from effecting any stabilizing transaction
in contravention of Rule 104 with respect to our common stock.
There can be no assurance that the selling shareholders will sell any or all
of the shares offered by them hereunder or otherwise.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Sommer & Schneider LLP, Garden City, New York. Olshan
Grundman Frome Rosenzweig & Wolosky LLP has served as counsel to the selling
stockholders.
36
<PAGE>
EXPERTS
The consolidated financial statements of Global iTechnology, Inc. f/k/a
Global Telecommunications Solutions, Inc. as of December 31, 1999 and 1998 and
for the years then ended included in this prospectus have been included in
reliance upon the report of Wiss & Company, LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
37
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
GLOBAL ITECHNOLOGY, INC.
Page
Independent Auditors' Report................................................F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998................F-2
Consolidated Statements of Operations and Comprehensive Loss for the
Years ended December 31, 1999 and 1998.................................F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years ended December 31, 1999 and 1998.................................F-4
Consolidated Statements of Cash Flows for the Years ended
December 31, 1999 and 1998.............................................F-5
Notes to Consolidated Financial Statements..................................F-6
Condensed Consolidated Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999..................................................F-22
Condensed Consolidated Statements of Operations (unaudited) for the three
months ended March 31, 2000 and 1999...................................F-23
Condensed Consolidated Statement of Cash Flows (unaudited) for the
three months ended March 31, 2000 and 1999.............................F-24
Notes to Condensed Consolidated Financial Statements
March 31, 2000 (unaudited).............................................F-25
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Global Telecommunication Solutions, Inc:
We have audited the accompanying consolidated balance sheets of Global
Telecommunication Solutions, Inc. and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations and comprehensive
loss, stockholders' equity (deficit) and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Global
Telecommunication Solutions, Inc. and subsidiaries as of December 31, 1999 and
1998, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
As discussed in Note 1, on October 28, 1999 all but two of the Company's
domestic subsidiaries applied for protection under Chapter 11 of the Bankruptcy
Code pursuant to a Reorganization plan that must be presented to the Court by
May 25, 2000. The accompanying consolidated financial statements do not purport
to reflect or provide for the consequences of the bankruptcy proceedings. In
particular, such consolidated financial statements do not purport to show a) as
to assets, their realizable value on a liquidation basis or their availability
to satisfy liabilities; b) as to prepetition liabilities, the amounts that may
be allowed for claims or contingencies, or the status and priority thereof; c)
as to stockholder accounts, the effect of any changes that may be made in the
capitalization of the Company; and d) as to operations, the effect of any
changes that may be made in its business.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a significant net working capital deficiency at December
31, 1999. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 3. The consolidatef financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
WISS & COMPANY, LLP
March 20, 2000
Livingston, New Jersey
F-1(a)
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
-------------- --------------
ASSETS
Current assets:
<S> <C> <C>
Cash $ 305,400 $ 1,604,166
Restricted cash - 300,000
Accounts receivable, net $ 242,826
Other assets 44,635 35,000
-------------- --------------
Total current assets 592,861 1,939,166
Property and equipment, net 54,737 324,322
Assets of liquidating subsidiaries 3,705,832 7,753,840
-------------- --------------
$ 4,353,430 $ 10,017,328
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,088,663 $ 210,719
Accrued license fee 1,221,979 831,684
Accrued earn-out to related party 1,200,000 634,085
Other accrued expenses 457,447 475,397
Accrued settlements 324,424 592,000
Accrued claims 601,698 368,698
Deferred revenues 101,854 -
Convertible notes payable - 2,599,750
Notes payable to related parties - 678,815
-------------- --------------
Total current liabilities 4,996,065 6,391,148
Other liabilities:
Notes payable to related party 628,815 -
Liquidating subsidiaries' liabilities subject to compromise - third parties 23,716,888 17,957,691
-------------- --------------
29,341,768 24,348,839
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 14,727,882 and 11,321,034 147,278 113,211
Additional paid-in capital 56,233,248 52,120,397
Accumulated deficit (81,322,086) (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) (24,988,338) (14,331,511)
-------------- --------------
$ 4,353,430 $ 10,017,328
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-2
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------------
1999 1998
----------------- ------------------
<S> <C> <C>
Net sales $ 306,963 $ -
Cost of sales (exclusive of depreciation) 223,283 -
----------------- ------------------
Gross profit 83,680 -
----------------- ------------------
Selling, general and administrative expenses 1,762,275 2,464,331
Depreciation and amortization 19,206 57,532
----------------- ------------------
Operating loss (1,697,801) (2,521,863)
Interest expense - (1,682,577)
----------------- ------------------
Loss from continuing operations (1,697,801) (4,204,440)
Loss from discontinued operations (11,691,874) (24,365,356)
----------------- ------------------
Loss before extraordinary item (13,389,675) $(28,569,796)
----------------- ------------------
Extraordinary loss on conversion of debt (1,420,172) -
----------------- ------------------
Net loss $ (14,809,847) $ (28,569,796)
----------------- ------------------
Foreign currency translation adjustment - 11,734
----------------- ------------------
Comprehensive loss $ (14,809,847) $ (28,558,062)
================= ==================
Basic and diluted loss per share:
Loss from continuing operations $ (0.12) $ (0.65)
Loss from discontinued operations (0.82) (3.76)
Extraordinary loss on conversion of debt (0.10) -
----------------- ------------------
Basic and diluted loss per share $ (1.04) $ (4.41)
================= ==================
Weighted average shares outstanding - basic and diluted 14,305,064 6,483,659
================= ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common stock Additional
paid-in Accumulated
Shares Amount capital deficit
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 5,084,870 $ 50,848 $ 39,689,698 $ (37,942,443)
Exercise of options 1,000 10 386 -
Amortization of deferred
compensation - - - -
Deferred compensation arising
from issuance of warrants - - 198,600 -
Issuance of common stock in
connection with merger 906,902 9,069 4,797,511 -
Issuance of warrants related to
April 1998 pirvate placement - - 658,927 -
Issuance of warrants and options
related to financing commitment - - 792,000 -
Issuance of common stock related
to October 1998 private
placement 1,198,000 11,980 1,834,770 -
Issuance of warrants
as compensation - - 78,345 -
Conversion of related party note
payable to common stock 813,008 8,130 1,051,870 -
Repurchased shares related to
receivable from related party - - - -
Conversion of December 1996 notes
payable to common stock 3,170,912 31,711 3,018,290 -
Issuance of common stock in
exchange for warrants 146,342 1,463 - -
Foreign currency translation - - - -
Net loss - - - (28,569,796)
----------- -------- ------------ ------------
Balance at December 31, 1998 11,321,034 $113,211 $ 52,120,397 $(66,512,239)
=========== ======== ============ ============
Exercise of options 1,865 18 1,264
Amortization of deferred
compensation
Conversion of convertible notes
payable to common stock 3,155,938 31,559 3,913,363
Conversion of trade debt to
common stock 10,000 100 5,212
Issuance of stock options for
financing fees - - 92,792
Issuance of stock options to sales
representatives and brokers - - 2,610
Conversion of trade debt to
common stock 239,045 2,390 97,610
Net loss - - - (14,809,847)
----------- -------- ------------ ------------
Balance at December 31, 1999 14,727,882 $147,278 $ 56,233,248 $(81,322,086)
=========== ======== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
other
Deferred comprehensive Treasury
compensation income stock Total
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $(294,650) $ 11,355 $ - $ 1,514,808
Exercise of options - - - 396
Amortization of deferred
compensation 487,148 - - 487,148
Deferred compensation arising
from issuance of warrants (198,600) - - -
Issuance of common stock in
connection with merger - - - 4,806,580
Issuance of warrants related to
April 1998 pirvate placement - - - 658,927
Issuance of warrants and options
related to financing commitment - - - 792,000
Issuance of common stock related
to October 1998 private
placement - - - 1,846,750
Issuance of warrants
as compensation - - - 78,345
Conversion of related party note
payable to common stock - - - 1,060,000
Repurchased shares related to
receivable from related party - - (69,867) (69,867)
Conversion of December 1996 notes
payable to common stock - - - 3,050,001
Issuance of common stock in
exchange for warrants - - - 1,463
Foreign currency translation - 11,734 - 11,734
Net loss - - - (28,569,796)
---------- ---------- ---------- ------------
Balance at December 31, 1998 $(6,102) $ 23,089 $ (69,867) $(14,331,511)
========== ========== ========== ============
Exercise of options 1,282
Amortization of deferred
compensation 6,102 6,102
Conversion of convertible notes
payable to common stock 3,944,922
Conversion of trade debt to
common stock 5,312
Issuance of stock options for
financing fees 92,792
Issuance of stock options to sales
representatives and brokers 2,610
Conversion of trade debt to
common stock 100,000
Net loss (14,809,847)
---------- ---------- ---------- ------------
Balance at December 31, 1999 $ - $ 23,089 $ (69,867) $(24,988,338)
========== ========== ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------
1999 1998
---------------- ---------------
Operating activities:
<S> <C> <C>
Net loss $ (14,809,847) $ (28,569,796)
Adjustment to reconcile net loss to net cash used in operating activities:
Loss from discontinued operations 11,691,874 24,365,356
Depreciation and amortization 19,206 57,532
Provision for bad debts 38,200 -
Amortization of deferred compensation 6,102 487,148
Amortization of unearned discount - 713,018
Amortization of deferred financing charges 4,995 1,672,700
Issuance of stock in exchange for warrants - 1,463
Issuance of warrants for services rendered - 78,345
Issuance of stock options for services 95,402 -
Loss on debt conversion 1,420,172 -
Loss on disposal of fixed assets 41,291 -
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable (281,026) -
Other assets (9,635) -
Accounts payable 877,944 -
Accrued license fees 390,295 -
Accrued note and earn-out to related party 515,915 -
Accrued expenses (131,642) -
Deferred revenues 101,854 -
---------------- ---------------
Cash used by continuing operating activities (28,900) -
Cash used by discontinued operating activities (1,571,148) (8,257,053)
---------------- ---------------
Cash used by operating activities (1,600,048) -
---------------- ---------------
Cash flows from financing activities:
Proceeds from bridge loan - 1,846,750
Proceeds from exercise of options 1,282 396
Payments on capital lease obligations - (95,298)
Letter of credit 300,000 (300,000)
Payments of deferred finance fees - (115,000)
---------------- ---------------
Net cash provided by financing activities 301,282 1,336,848
---------------- ---------------
Effects of foreign currency translation on cash - 11,734
---------------- ---------------
Net change in cash (1,298,766) -
Cash, beginning of year 1,604,166 -
================ ===============
Cash, end of year $ 305,400 $ -
================ ===============
Supplemental disclosures:
Cash paid for interest $ 231,866 $ 212,249
================ ===============
Deferred finance fees relating to options and warrants $ 11,838 $ 1,450,927
================ ===============
Deferred compensation relating to options and warrants $ - $ $ 198,600
================ ===============
Conversion of convertible notes payable into common stock $ 2,524,750 $ 3,087,500
================ ===============
Conversion of trade debt into common stock $ 105,312 $ -
================ ===============
Conversion of note payable to related party into common stock $ - $ 1,060,000
================ ===============
Issuance of stock options for financing fees $ 92,792 $ -
================ ===============
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
F-5
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) BUSINESS AND BASIS OF PRESENTATION
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 phone cards. As a result of
the Company's subsidiaries long history of losses in the prepaid phone card
business, coupled with an increasingly competitive environment, the Company's
Board of Directors in the third quarter of 1999 adopted a plan to discontinue
and sell the prepaid phone card business. To facilitate the possible sale of the
phone card assets, certain of the Company's subsidiaries have filed voluntary
petitions with the U.S. Bankruptcy Court for the District of Delaware ("Court")
under Chapter 11 of the U.S. Bankruptcy Code on October 28, 1999. The
subsidiaries of the Company that filed for 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's financial statements have been prepared in accordance with
the American Institute of Certified Public Accountants Statement of Position
90-7, "Financial Reporting by Entities in Reorganization ("SOP 90-7.")" The
Debtors have been operating their business as debtors-in-possession subject to
the jurisdiction of the Court.
As a result of the Company's decision to sell its phone card business and
the subsequent voluntary filing by the Debtors 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 Debtors have been
aggregated in the accompanying balance sheets.
The Company, which is not in bankruptcy, intends to focus on developing,
operating, and entering into strategic relationships with companies to implement
promotional and other direct marketing services utilizing telephony, the
Internet and wireless communication technologies.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiaries. Investments in 20 percent to 50
percent-owned affiliates are accounted for on the equity method. All significant
intercompany balances and transactions have been eliminated in consolidation.
ESTIMATES AND UNCERTAINTEES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, revenue and expenses and
the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results, as determined at a later date, could
differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable, accounts payable and other
liabilities of the entities not in bankruptcy approximate fair value because of
the short maturities of these amounts. The fair value of the Debtors' assets and
liabilities subject to settlement are not presently determinable as a result of
the Chapter 11 proceedings.
LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount of which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
F-6
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
CASH AND RESTRICTED CASH
Cash consists of highly liquid investments with an original maturity date
of three months or less. Restricted cash at December 31, 1998 consisted of a
deposit to secure a $300,000 letter of credit required under a carrier
arrangement.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company and the Debtors
to concentration of credit risk consist primarily of cash and unsecured trade
receivables. The Company and the Debtors therein maintains cash balances in
financial institutions which are insured by the Federal Deposit Insurance
Corporation up to $100,000 each.
The Company and the Debtors periodically review their trade receivables
and establish an allowance for uncollectible accounts. Management feels the
credit risk beyond the established allowance is limited.
REVENUE AND COST RECOGNITION
Substantially all the prepaid phone cards sold are non-refundable and have
expiration dates ranging from twelve to eighteen months after issuance or six to
twelve months after last use. The Company records the net sales price as
deferred revenue when cards are sold and recognizes revenue as the ultimate
consumer utilizes calling time, or in the case of promotional phone card
programs, during the period the program is executed. Deferred revenue relating
to unused calling time remaining at each card's expiration is recognized as
revenue upon the expiration of such card.
The primary costs of its prepaid phone cards include the cost of long
distance carrier services, regulatory fees and the design, production and
packaging of the cards. Costs are expensed as incurred, except the costs of
design and production of the card, which are included in inventory and are
expensed when the related revenue is recognized.
INVENTORY
Debtors inventory consists of phone card production and packaging costs
and is stated at the lower of cost or market, with cost determined using the
average cost method.
GOODWILL
Goodwill represents the unamortized excess of the cost over the fair
values of the net assets acquired in acquisitions. Amortization expense has
historically been computed using the straight-line method over 15 years.
The Company's policy is to evaluate the recoverability of goodwill based
on forecasted undiscounted cash flows from operations. Goodwill is assessed for
impairment whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable. Impairment losses are measured as the
amount by which the carrying amount of goodwill exceeds its fair value. When
impairment is indicated, such assets are written down to estimated fair value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets.
Expenditures for maintenance and repairs are charged to operations as incurred.
The estimated useful lives used in computing depreciation of property and
equipment are as follows:
Furniture and fixtures 5 years
Switching equipment 5 years
Computers and office equipment 3 years
Assets held under capital leases and leasehold improvements are amortized
over the lives of the respective leases or the useful life of the asset,
whichever is shorter.
The property and equipment of the Debtors is included in assets of
liquidating subsidiaries and related depreciation and amortization expense is
included in loss from discontinued operations.
COMPUTER SOFTWARE
Cost related to internal development or purchased software are capitalized
and amortized on a straight-line basis over their estimated useful life.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is
F-7
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
recognized in income in the period that includes the enactment date. Valuation
allowances are established when necessary to reduce the deferred tax asset to
the amount expected to be realized.
NET LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding. Basic and diluted net loss per
share for 1999 and 1998 were the same because potential common shares of
3,863,328 and 4,629,852, respectively, were not included in the calculation of
the net loss per share since their inclusion would be anti-dilutive.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for options granted by the Company is measured as
the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year presentation.
(3) GOING CONCERN
At December 31, 1999, the Company, excluding the assets and liabilities
relating to the Debtors, had cash of $305,400 and a working capital deficit of
$5 million. Subsequent to December 31, 1999, the Company continues to generate
negative cash losses from operations.
At December 31, 1999 substantially all the Company's current liabilities
relate to indebtedness incurred in connection with the discontinued phone card
business. These liabilities were incurred by the Company rather than the
Debtors, and are due to less than 10 entities. The Company is currently
negotiating with the various parties in an effort to reach settlements regarding
the amounts due. The Company is attempting to settle these liabilities on
favorable terms to the Company.
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 aforementioned outstanding liabilities, and raising additional
capital. Management of the Company cannot presently predict the outcome of these
matters and there can be no assurance that the Company will be successful in any
of these endeavors.
The accompanying consolidated financial statements have been prepared on a
going concern basis which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business.
However, absent the Company's ability to execute the plans described in the
following paragraph, the Company may be unable to continue as a going concern,
which could significantly impact the liquidation or settlement value of its
assets and liabilities.
F-8
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) DISCONTINUED OPERATIONS AND SUBSIDIARY CHAPTER 11 FILINGS
In accordance with SOP 90-7, balance sheets and statements of operations
for the Debtors are presented below:
Statement of Operations
Year Ended
December 31,
------------
1999 1998
---- ----
Net sales $ 33,141,377 $ 31,178,125
Cost of sales 34,887,896 29,629,086
------------ ------------
Gross profit (1,746,519) 1,549,039
Selling, general and administrative expense 5,679,632 8,730,658
Depreciation and amortization 1,846,492 1,856,806
Restructuring charge -- 1,091,436
Goodwill impairment 2,144,087 12,820,868
------------ ------------
Operating loss (11,416,730) (22,950,729)
Interest income 28,560 94,617
Interest expense (303,704) (1,509,244)
------------ ------------
Net loss from discontinued operations $(11,691,874) $(24,365,356)
============ ============
Balance Sheets
December 31,
---------------------------
1999 1998
---- ----
Current Assets:
Cash $ 594,143 $ --
Accounts receivable, net 1,102,229 3,234,106
Inventory 251,776 436,883
Other assets -- 68,929
----------- -----------
Total current assets 1,948,148 3,739,918
Goodwill, net 1,952,000
Property and equipment, net 1,707,684 1,901,080
Other assets, net 50,000 160,842
----------- -----------
Total assets of liquidating subsidiaries $ 3,705,832 $ 7,753,840
=========== ===========
Pre-petition current liabilities:
Accounts payable $ 8,638,408 $ 4,969,556
Accrued regulatory fees 5,836,021 2,749,223
Other accrued expenses 430,967 1,412,788
Deferred revenues 1,963,797 3,160,958
Estimated sales tax liability 5,429,514 5,665,166
Notes payable to related party 110,000 --
----------- -----------
22,408,707 17,957,691
Post-petition liabilities (Administrative Claims) 1,308,181 --
----------- -----------
Total liquidating subsidiaries'
liabilities subject to compromise-third
parties $23,716,888 $17,957,691
=========== ===========
F-9
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1999 RESTRUCTURING
In September 1999, the Company's Board of Directors adopted a plan to
discontinue the operations of the phone card business and to seek an acquirer of
that business. As a result of the substantial liabilities associated with that
business, a decision was made resulting in the Debtors filing voluntary
petitions with the 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. On January 31, 2000, the Debtors entered into an agreement to sell
substantially all of their assets to J D Services, Inc., a prepaid phone card
provider located in Salt Lake City, Utah ("J D Services"). Having the approval
of the United States Court for the District of Delaware, this sale is expected
to be complete in April 2000.
As a result of the decision to discontinue the phone card operation, the
results of operations of the phone card 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 phone card business as a
discontinued operation.
The net assets associated with the phone card business have been
segregated in the accompanying balance sheets. 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 phone card business have been segregated in the accompanying balance
sheet as "Liquidating subsidiaries' liabilities subject to compromise-third
parties." Included in that amount is approximately $270,587 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 phone cards and the
estimated liability to various payphone owners as dial around compensation. At
December 31, 1999 debts incurred by the Debtors subsequent to the bankruptcy
filing ("Administrative Claims"), in the amount of $1,308,181 are included in
"Liquidating subsidiaries' liabilities subject to compromise-third party."
Under federal bankruptcy laws, Administrative Claims have priority over
pre-petition liabilities. Therefore, 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 December 31, 1999, the Company's investment in and receivables from the
Debtors was approximately $22.1 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.
1998 RESTRUCTURING
During the year ended December 31, 1998, the Company recorded a $1,091,436
restructuring charge related to the closing of its Canadian subsidiary, costs
associated with consolidating the Company's operations and the modification of
employment agreements with three of the Company's executive officers. The
Company closed its Canadian subsidiary to focus on selling its products
domestically. The Company consolidated its operations from five to two locations
with the intent of reducing operating expenses, including salaries and benefits,
by eliminating duplicate positions at the various locations. As part of this
consolidation, three executives' employment agreements were amended, which
included the termination of their employment. The components of the charge,
which is classified as a separate line item in the operating results from the
discontinued operations for the year ended December 31, 1998 are as follows:
Canadian subsidiary closing costs $ 65,111
Consolidation costs 445,111
Compensation related to amendments to
executive employment agreements 581,214
----------
$1,091,436
==========
Costs associated with the closure of the Canadian subsidiary primarily
related to severance costs associated with employees terminated. Total revenues
and net income associated with the Canadian subsidiary were not material to the
F-10
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
results of operations. Costs associated with consolidating the Company's
operations included severance costs of $26,878 associated with employees
terminated. Incremental operating costs of $95,000 associated with closing the
Company's call center and lease termination costs of $97,236 associated with
moving the Company's corporate offices. In addition, fixed assets net of salvage
costs of $225,995 were disposed of in conjunction with the Company's
consolidation. The activities incorporated in the restructuring were completed
by December 31, 1998. At December 31, 1999 $67,613 is included in accrued
expenses in the Debtors balance sheet.
(5) ACQUISITIONS AND GOODWILL RELATING TO DISCONTINUED PHONE CARD BUSINESS
ACQUISITIONS
On February 6, 1998 ("Merger Date"), the Company acquired, through a
merger, all of the outstanding capital stock of Networks Around the World, Inc.
("NATW"), for a purchase price comprised of (i) $2,000,000 in cash, (ii) an
aggregate of 505,618 shares of common stock and (iii) $1,000,000 aggregate
principal amount of promissory notes ("NATW Notes"), secured by substantially
all of the assets of NATW. In addition, the Company was required to pay an Earn
Out to $2,000,000 (the "Earn Out") in additional consideration to Randy Cherkas,
the Company's former President and a former shareholder of NATW, if certain
sales and financial objectives are achieved. Accordingly, upon occurrence of
such events the additional consideration will increase goodwill. For the year
ended December 31, 1999 and 1998, $702,455 and $838,900 respectively of the Earn
Out has been recorded as additional consideration. In April 1998, the former
shareholders agreed to defer payment of an aggregate of $1,000,000 of NATW Notes
and Earn Out from 1998 to January 1999. In December 1998, the former
shareholders of NATW preliminarily agreed to convert the NATW Notes into common
stock. The conversion of the NATW Notes into 769,750 share of Common Stock
occurred in March 2000 after deducting from the NATW Notes $376,185, which
represents a reimbursement to the Company of amounts due it under an indemnity
contained in the merger agreement (see below). From the consummation of the NATW
merger in February 1998 through the date of the Assignment Agreement (See
"Subsequent Events"), the Company has paid Mr. Cherkas $341,355 of the aggregate
amount of $1,541,355 owed to him during that period under the Earn Out. The
remaining balance due Mr. Cherkas under the Earn Out is now payable to him in
accordance with the Assignment Agreement.
Also on the Merger Date, the Company acquired, through a merger, all of
the outstanding capital stock of Centerpiece Communications, Inc. ("CCI") for a
purchase price comprised of (i) $1,500,000 in cash, (ii) 401,284 shares of
common stock, of which 47,891 shares were subsequently contributed back to the
Company (see below) and (iii) a $1,000,000 aggregate principal amount promissory
note ("CCI Note"), secured by substantially all of the assets of CCI. In April
1998, the former shareholder of CCI agreed to defer payment of $250,000 of CCI
Notes, plus interest, from October 31, 1998 to January 1999. In November 1998,
the CCI Note was converted into 813,008 shares of common stock.
Each of the mergers was accounted for as a purchase. Accordingly, the
assets and liabilities were recorded at their estimated fair value at the date
of the mergers and the operating results of NATW and CCI were included in the
consolidated statement of operations from the Merger Date. The aggregate
purchase price paid for CCI and NATW was $5,019,590 and $8,089,410 respectively,
including the Earn Out related to the NATW transaction, substantially of which
was recorded as goodwill.
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. Of this cost, $376,185 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 that 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 by the discounted operations
during the year ended December 31, 1998.
F-11
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Pursuant to the respective merger agreements, the purchase price was
adjusted subsequent to the Merger Date by an amount equal to cash of the
acquired company plus the net realizable value of accounts receivable of the
acquired company minus current liabilities of the acquired company as of the
Merger Date. In November 1998, the Company and the former shareholder of CCI
reached a settlement on the amount due to the Company related to Access.
Pursuant to the terms of the merger agreement, the former shareholder
contributed back to the Company 47,891 shares of common stock issued as part of
the merger consideration with a fair market value of $69,867 in consideration of
$298,364 that he owed to the Company. The loss on the settlement of $228,497 was
recorded as a selling, general, and administrative expense in the Debtors
statement of operations for the year ended December 31, 1998.
GOODWILL
The Company has experienced significant net losses and negative cash flow
from operations subsequent to mergers in 1996 and 1998 culminating in the
Company's decision in the third quarter of 1999 to exit the phone card business.
In the third quarter of 1999 and fourth quarter of 1998, the Company reviewed
the recoverability of the carrying amount of the goodwill that had arisen
related to the mergers. In accordance with the Company's accounting policy, this
review encompassed the preparation and review of projections of undiscounted
cash flows. This review resulted in the conclusion that impairment losses of
$2,144,087 and $12,820,868 should be recognized to reduce goodwill to its
estimated fair value at December 31, 1999 and 1998 respectively. The following
table summarizes changes in the net book value of goodwill during 1999 and 1998.
Balance at December 31, 1997 $ 3,516,344
Goodwill recorded in connection with NATW and CCI mergers 12,218,740
1998 amortization expense (962,216)
Impairment charge (12,820,868)
------------
Balance at December 31, 1998 1,952,000
Additional earn-out recorded as goodwill 702,459
1999 amortization expense (510,372)
Impairment charge (2,144,087)
------------
Balance at December 31, 1999 $ --
============
Goodwill is included in assets of liquidating subsidiaries and the related
amortization expense and impairment charge is included in the loss from
discontinued operations.
(6) DEBT OBLIGATIONS
APRIL 1998 NOTES
In April 1998, the Company completed a private placement (the "April 1998
Private Placement") pursuant to which it received net proceeds of approximately
$1,135,000 through the sale of $1,250,000 convertible subordinated promissory
notes ("April 1998 Notes") and warrants to purchase 178,573 shares of common
stock ("April 1998 Warrants"). The April 1998 Warrants are exercisable through
April 2001 at an initial exercise price of $7.00 per share. The estimated fair
market value of these warrants of $658,927, along with expenses associated with
the April 1998 Private Placement of $115,000, were recorded as deferred
financing costs and were amortized to interest expense over the term of the
April 1998 Notes. The April 1998 accrued interest at the rate of 10% per annum
and was payable on the earlier of January 15, 1999 or the date of the closing of
a Qualified Private Placement. The holders had the right at any time to convert
all or any portion of the April 1998 Notes into the number of shares of common
stock determined by dividing the unpaid amount of the April 1998 Notes by the
Conversion Price. In October 1998, the notes were repaid with the proceeds from
the October 1998 Private Placement and all remaining deferred financing costs
were expensed.
DECEMBER 1996 NOTES
In December 1996, the Company completed a private placement (the "December
1996 Private Placement") from which the Company derived proceeds of $3,000,000
through the sale of $3,000,000 of promissory notes and warrants to purchase
1,000,000 shares of common stock. Based on negotiations with the note holders in
1998, the notes were payable as follows: $400,000 was due and payable on the
earlier of November 27, 1998 or the date on which the Company
F-12
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
undergoes a change in control; $2,600,000 was due on the earlier of January 15,
1999 or the date on which the Company undergoes a change of control. If the
notes were not paid upon maturity, the outstanding principal was to begin to
accrue interest at the rate of 12% per annum and the principal and accrued
interest was to become convertible into common stock, at the option of the
holders. In addition, the Company issued $50,000 of notes, which matured in
November 1998, and warrants to purchase 16,667 shares of common stock in payment
of certain legal fees associated with the December 1996 Private Placement. The
estimated fair market value of the warrants of $1,542,044, as determined by
independent appraisal, was recorded as a discount and is being amortized over
the term of the notes. During the years ended December 31, 1998 and 1997,
$713,018 and $771,022 of the discount was amortized to interest expense. In
December 1998, the notes were converted into 3,170,912 shares of common stock
CONVERTIBLE NOTES PAYABLE
In connection with the acquisition of Global Link Telecom Corporation
("Global Link") on February 29, 1996, the Company assumed $2,800,000 aggregate
principal amount of convertible debentures ("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. The Convertible Debentures bore
interest at 6% per annum, payable on May 31st and November 30th of each year. At
the option of the holders, the Convertible Debentures were immediately due and
payable upon a change in control of Global Link. The principal amount of the
convertible debentures was convertible at the option of the holders at any time
into shares of common stock at a conversion price of $9.264 per share. . During
the year ended December 31, 1997, $200,250 of the debentures were converted into
21,615 shares of common stock. In January 1999, holders of $2,524,750 aggregate
principal amount of debentures converted the debentures into 3,155,938 shares of
common stock. The remaining balance of the convertible debentures was paid in
December 1999.
NOTES PAYABLE TO RELATED PARTIES
In December 1998, the former shareholders of NATW preliminarily agreed to
offset the amounts due to the Company related to Access against the $1,000,000
of NATW Notes payable owed to the former shareholders of NATW, and to
subsequently convert the net amount due under the NATW Notes into common stock
at a conversion rate of $. 80 per share. In March 2000, after giving effect to
the Access settlement with the NATW note holders in the amount of $376,185, the
NATW Notes were converted in 769,750 shares of Common Stock with the remaining
balance of $110,000 (including accrued interest) payable in April 2000 by the
Debtors. At December 31, 1999 the $628,815 (including interest) is shown as a
long-term liability of the Company and the $110,000 is included in the Debtors'
liabilities as notes payable to related party.
(7) STOCKHOLDERS' EQUITY
JANUARY 1999 DEBT CONVERSION
In December 1998, the Company offered the holders of $2,599,750 aggregate
principal amount of debentures the opportunity to convert the debentures into
shares of common stock at a conversion rate of $.80 per share. In January 1999,
holders of $2,524,750 aggregate principal amount of debentures accepted the
offer and converted the debentures into 3,155,938 shares of common stock. In
connection with the conversion, the Company incurred an extraordinary loss of
$1,420,172 related to the difference between the market value of the shares
issued on the closing date and the conversion value. The remaining balance of
the convertible debentures was paid in December 1999.
DECEMBER 1998 DEBT CONVERSION
In December 1998, holders of $3,050,000 principal amount of promissory
notes converted their notes into an aggregate 3,170,912 shares of common stock.
Certain of the note holders also exchanged 666,667 common stock purchase
warrants for an aggregate of 146,342 shares of common stock. Further, certain
note holders forgave interest of $14,000 due on the notes.
NOVEMBER 1998 DEBT CONVERSION
In November 1998, J. Mark Rubenstein resigned as a director and officer of
the Company. Mr. Rubenstein was the former shareholder of CCI who joined the
Company in February 1998 when CCI merged with the Company. In connection with
his departure from the Company, Mr. Rubenstein sold to certain investors,
including Shelly Finkel, Chairman of the
F-13
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Board of the Company, Michael Hoppman, former Chief Financial Officer of the
Company and Barry Rubenstein, a stockholder (the "Investors") an aggregate of
353,393 shares of common stock and the $1,000,000 CCI Note for an aggregate
purchase price of $575,000.
In November 1998, the Company offered the Investors the opportunity to
convert the $1,000,000 CCI Note into shares of common stock at a conversion rate
of $1.23 per share (such price being equal to the average closing price of a
share of common stock during October 1998). The Investors accepted the
conversion offer and converted the CCI Note into an aggregate 813,008 shares
common stock.
OCTOBER 1998 PRIVATE PLACEMENT
In October 1998, the Company consummated the October 1998 Private
Placement from which it derived net proceeds of $1,846,750 through the sale of
1,198,000 shares of common stock for a purchase price of $1.625 per share. The
Company used a portion of the proceeds to repay $1,250,000 aggregate principal
amount of the April 1998 Notes and accrued interest of $24,315. In addition, in
lieu of compensating Pennsylvania Merchant Group ("PMG") for serving as
placement agent of the October 1998 Private Placement, the Company reduced the
exercise price of warrants to purchase 100,000 shares issued to PMG in July 1997
in connection with the provision of financial consulting services from $7.00 per
share to $1.625 per share. In addition, deferred finance charges of $289,501
were recorded to interest expense during the year ended December 31, 1998. Also
in October 1998, the Company issued 30,000 warrants with a value of $78,345 to
PMG as consideration for investment advisory services. The warrants are
exercisable at $1.62 per warrant through January 2001.
DEFERRED COMPENSATION
In January 1998, the Company entered into a one-year consulting agreement
with JEB Partners, pursuant to which JEB Partners agreed to provide investor
relations consulting services to the Company. In consideration for providing
such services, the Company agreed to issue JEB Partners warrants to purchase
60,000 shares of common stock. The estimated fair value of these options of
$198,600 was initially recorded as deferred compensation. Expense related to
this agreement of $6,102 and $192,498 was recorded during the years ended
December 31, 1999 and 1998. The value of these warrants was fully expensed as of
December 31, 1998.
In July 1997, the Company issued five-year warrants to an investment bank
to purchase 100,000 shares of common stock in consideration for a one-year
consulting agreement. The estimated fair value of these warrants of $350,000 was
recorded as deferred compensation and the Company has recorded expense related
to this agreement of $204,165. The value of these warrants was fully expensed as
of December 31, 1998.
In January 1997, the Company extended its consulting agreements with two
of its stockholders, pursuant to which the stockholders provided consulting
services to the Company for a two-year period ending December 1998. In
consideration for these services, the Company issued options to purchase 50,000
shares of common stock. The estimated fair market value of these options of
$151,648 was recorded as deferred compensation. The value of these options was
fully expensed as of December 31, 1998.
In January 1996, the Company issued five-year warrants to an underwriter
and/or its designees to purchase an aggregate of 66,667 shares of common stock
in consideration for consulting services. The estimated fair market value of
these warrants of $400,000 was recorded as deferred compensation. The value of
these warrants was fully expensed as of December 31, 1998.
In April and October 1995, the Company issued five-year warrants to
designees of the underwriter to purchase an aggregate of 33,334 shares of common
stock in consideration for providing the Company the right of first refusal to
pursue any prospective acquisition target in the phone card industry that the
underwriter identified through February 1998. The estimated fair market value of
these warrants of $117,000 was recorded as deferred compensation. The value of
these warrants was fully expensed as of December 31, 1998.
(8) INCOME TAXES
The Company had no current federal or state income tax liability for the
years ended December 31, 1999 and 1998 due to the net losses recorded for those
periods.
F-14
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The actual income tax expense differs from the "expected" tax benefit for
1999 and 1998, computed by applying the U.S. federal corporate tax rate of 34
percent to loss before income taxes, as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Computed "expected" tax benefit $(5,035,348) $(9,713,730)
Non-deductible impairment of goodwill 728,990 4,378,147
Increase in valuation allowance (net of effect of acquisitions) 4,719,553 6,132,601
State tax benefit (413,195) (797,018)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 is as follows:
1999 1998
---- ----
Deferred tax assets:
Benefit of net operating loss carryforward $ 14,326,722 $ 9,810,499
Depreciation 269,818 288,164
Capital loss carryforward 116,620 116,620
Allowance for uncollectible accounts receivable 161,405 144,318
Deferred revenue 759,953 1,262,487
Deferred compensation 476,203 473,947
Sales and excise tax liability 2,005,242 1,692,164
Other accruals 1,249,660 1,509,262
Less: valuation allowance (19,351,661) (15,286,192)
------------ ------------
Net deferred tax asset 13,962 11,269
Deferred tax liabilities:
Deferred costs (13,962) (11,269)
------------ -------------
Net deferred income taxes $ -- $ --
============ ============
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not some portion or the entire deferred
tax asset will be realized. The ultimate realization of the deferred tax asset
is dependent upon the generation of future taxable income during the periods in
which temporary differences or net operating loss carryforwards become
deductible. Management considers scheduled reversals of deferred tax
liabilities, projected future taxable income, and tax planning strategies which
can be implemented by the Company in making this assessment. Based upon the
Company's historical operating losses and scheduled reversal of deferred tax
liabilities, the Company has established a valuation allowance of $19,351,661 at
December 31, 1999. At December 31, 1999, the Company had net operating loss
carryforwards ("NOLs") aggregating approximately $38,900,000 expiring in years
2007 through 2019. Under Section 382 of the Internal Revenue Code of 1986, as
amended, utilization of prior NOL's is limited after an ownership change, as
defined in such Section 382, to an amount equal to the value of the loss
corporation's outstanding stock immediately before the date of the ownership
change, multiplied by the federal long-term tax exempt rate in effect during the
month that the ownership change occurred. As a result of the Global Link merger
and equity and financing transactions, the Company is subject to limitations on
the use of its NOL's as provided under Section 382. Accordingly, there can be no
assurance that a significant amount of existing NOL's will be available to the
Company.
(9) STOCK OPTIONS
1994 PLAN
The Company has reserved 1,500,000 shares of common stock under its 1994
incentive and nonqualified stock option plan ("1994 Plan"). The 1994 Plan
authorizes the granting of stock options, restricted stock awards, and deferred
stock awards and stock appreciation rights to key employees, officers, directors
and consultants. All incentive stock options which will be granted by the
Company, with the exception of those options granted to persons holding more
than ten percent of the voting common stock in the Company on the date of grant,
expire ten years after grant and are issued at exercise prices which are not
less than the fair market value of the common stock on the date of grant.
Incentive options
F-15
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
granted to persons holding more than ten percent of the voting common stock of
the Company on the date of grant expire five years after grant and are issued at
exercise prices which are not less than 110 percent of the fair market value of
the stock on the date of grant. Nonqualified stock options granted under the
1994 Plan may be granted at any price determined by the Board of Directors,
however, the price may not be less than the fair market value of the common
stock on the date of grant. Stock options vest over a period determined by the
Board of Directors. The 1994 Plan contains certain change in control provisions,
which include those that could cause options to become immediately exercisable.
In December 1999, the Board of Directors authorized the cancellation of
294,633 stock options issued prior to August 1999 ("Original Option") held by
non-executive employees of the Company whose employment with the Company had or
will terminate as a result of the sales of the Debtors' assets to J D Services.
Concurrently, the Board of Directors authorized the issuance to these employees
an aggregate of 185,934 vested stock options which represents the number of
Original Options that would have vested as of March 1, 2000. The option price
for these stock options is the same price as the Original Option however these
options do not terminate within three months of the employee leaving the
employment of the Company but rather on February 28, 2005.
A summary of activity under the 1994 Plan is as follows:
Weighted Average
Number of Shares Exercise Price
---------------- --------------
Outstanding at January 1, 1998 387,856 $ 5.37
Granted 958,511 2.32
Canceled (97,538) 4.95
Exercised (1,000) .41
--------- --------
Outstanding at December 31, 1998 1,247,829 3.94
Granted 531,034 .77
Canceled (780,630) 1.16
Exercised (1,865) .69
--------- --------
Outstanding at December 31, 1999 996,368 $ 3.29
========= ========
At December 31, 1999, 658,068 options were exercisable and 503,632 options
to purchase shares were available for future grant.
NON-PLAN OPTIONS
In exchange for their personally guarantying a $500,000 debt financing
obtained by the Debtors in June 1999, the Company issued 100,000 options to
purchase common stock to each of Messrs. Eli Oxenhorn and Barry Rubenstein, a
principal shareholder of the Company, and Mr. Shelly Finkel, Chairman and a
principal shareholder of the Company. The exercise price is $.5625, the fair
market value of the common stock at the date of grant of the option, and the
options expire June 17, 2004. The value of the options, calculated using the
Black-Scholes option-pricing model, of $92,792 was charged to additional paid in
capital the year ended December 31, 1999.
In connection with his employment as the Company's Chief Financial
Officer, in June 1999, Mr. Lee R. Montellaro was granted an option to acquire
320,000 shares of common stock. The options vest 120,000 shares at December 1,
1999, 120,000 shares at June 1, 2000, 40,000 shares June 1, 2001 and 40,000
shares June 1, 2002 and the exercise prices are $.75, $1.25, $1.75 and $2.00
respectively. In December 1999, Mr. Montellaro was granted another option,
vesting April 3, 2000, to acquire 200,000 shares of common stock at an option
price of $.25, a price higher than the fair market value of the common stock at
the date of the grant of the option. The options expire five years from date of
vesting.
During the year ended December 31, 1999 the Company granted non-qualified
options to various sales representatives and brokers of the Debtors to purchase
an aggregate of 64,000 shares of common stock at exercise prices ranging from
$.14 to $.75, the fair market value of the common stock at the date of grant of
the option. The options vest at various dates and expire five years from date of
vesting. The value of those options, calculated using the Black-Scholes
option-pricing model, of $2,610 was charged to additional paid in capital in the
year ended December 31, 1999. At December 31, 1999, 8,500 of these options were
exercisable. Also in 1999, previously issued 1994 Plan vested options to acquire
20,000 shares of common stock at exercise prices ranging from $7.88 to $15.00
where converted to nonqualified options because their expiration dates had been
previously extended through 2004.
F-16
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In December 1999, the Board of Directors authorized the cancellation of
15,000 Original Options, that were not issue under the 1994 Plan, held by
non-executive employees of the Company whose employment with the Company had or
will terminate as a result of the sales of the Debtors' assets to J D Services.
Concurrently, the Board of Directors authorized the issuance to these employees
and aggregate of 10,000 vested stock options which represents the number of
Original Options that would have vested as of March 1, 2000. The option price
for these stock options is the same price as the Original Option however these
options do not terminate within three months of the employee leaving the
employment of the Company but rather on February 28, 2005.
In connection with the financing commitment entered into in April 1998,
the Company granted 50,000 options to each of Messrs. Barry Rubenstein, a
shareholder of the Company, and Eli Oxenhorn as consideration for introducing
the investor to the Company. These options are exercisable until April 2003 and
have an exercise price of $7.13 per share.
In January 1998, in connection with a consulting agreement with JEB
Partners, the Company granted options to purchase 60,000 shares of common stock
at an exercise price of $6.13. The options were immediately exercisable and
expire five years from the date of grant.
During the year ended December 31, 1998, previously issued 1994 Plan
options to acquire 72,000 shares of common stock at exercise prices ranging from
$1.00 to $2.25 where converted to nonqualified options because their expiration
dates had been extended through 2005. At December 31, 1999, 46,000 of these
options were exercisable.
During the year ended December 31, 1997, the Company granted non-qualified
options to employees and officers of the Company to purchase an aggregate of
355,000 shares of common stock at exercise prices ranging from $6.44 to $6.56.
The options vest at various dates and expire five years from date of vesting.
During the years ended December 31, 1999 and 1998, 15,000 and 40,000 of these
options were respectively canceled and accordingly 300,000 options remain
outstanding. At December 31, 1999, 291,667 of these options were exercisable.
In July 1997, in connection with the Company's public stock offering the
Company granted to the representative of the underwriters an option to purchase
250,000 shares of common stock at an exercise price of $9.08 per share. The
option is exercisable commencing July 1998 for a period of four years.
In 1996, in connection with the Global Link merger, options and warrants
to purchase 145,000 shares of common stock of Global Link were converted into
options to purchase an aggregate of 36,645 shares of the Company's common stock
at exercise prices ranging from $.40 to $7.92. A total of 1,865 and 1,000 of
these options were exercised during the years ended December 31, 1999 and 1998,
respectively. In January 1998 certain of these options were repriced to $6.56,
the then fair value of the Company's common stock. The remaining balance of
these options expired in April 1999.
In February 1996, the Company granted nonqualified options to purchase an
aggregate of 58,334 shares of common stock at an exercise price of $18.38 per
share to officers of the Company. During the year ended December 31, 1997,
41,667 of these options were canceled. The options vest in three annual
installments commencing in February 1997 and will remain exercisable for a
period of five years from the date of vesting. In January 1998, these options
were repriced to $6.56, the then fair value of the Company's common stock.
In April 1995, the Board of Directors granted to certain consultants
nonqualified stock options to purchase an aggregate of 2,500 shares of common
stock at an exercise price of $16.50 per share. Such options were immediately
exercisable and expire five years from the date of grant.
In March 1995, the Company granted non-qualified options to purchase
33,334 shares of common stock at an exercise price of $15.00 per share to a
former officer of the Company. The options vest 33 1/3% per annum commencing
March 20, 1996 and will remain exercisable for a period of five years from the
date of vesting. At December 31, 1999 all these options were exercisable.
In October 1994, the Board of Directors granted to certain officers and/or
directors immediately exercisable ten-year options to purchase 25,000 shares of
common stock at an exercise price of $9.99 per share. In January 1998, certain
of these options were repriced to $6.56, the then fair value of the Company's
common stock.
At December 31, 1999, 1,781,003 non-plan options were outstanding and
1,283,670 options were exercisable.
STOCK OPTION RE-PRICING
In January 1998, the Company reduced the exercise price of 196,683
outstanding options to purchase common stock from exercise prices ranging from
$7.88 to $18.38, to the then fair market value of the common stock of $6.56.
F-17
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SUMMARIZED INFORMATION FOR 1994 PLAN AND NON-PLAN STOCK OPTIONS
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------------------------- -------------------------
Weighted Average Weighted
Number of Remaining Average Number of
Exercisable Price Range Shares Contractual Life Exercise Price Shares Average Price
----------------------- --------- ---------------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C>
$ .14 to $ 6.00 1,628,882 4.97 years $ .81 834,218 $ 1.58
$ 6.00 to $10.00 1,044,309 6.40 $ 7.17 998,340 $ 7.50
$10.01 and over 104,180 7.96 $14.92 104,180 $14.92
--------- ---- ------ --------- ------
2,777,371 5.62 $ 3.73 1,936,738 $ 5.35
========= ==== ====== ========= ======
</TABLE>
As of December 31, 1999, the Company has reserved an aggregate of
3,281,003 shares of common stock for issuance upon the exercise of options.
SFAS NO. 123
The Company applies APB Opinion No. 25 in accounting for stock options
and, accordingly, no compensation cost has been recognized for its stock options
in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss would have increased to the
pro forma amounts indicated below:
1999 1998
---- ----
Net loss: As reported $(14,809,847) $ (28,569,796)
Pro forma $(15,428,190) $ (29,829,794)
Net loss per share: As reported $ (1.04) $ (4.41)
Pro forma $ (1.08) $ (4.60)
The per share weighted-average fair value of stock options granted during
1999 and 1998 was $.48 and $1.67 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: 1999
expected dividend yield 0%, risk-free interest rate of 6.00%, expected life of 3
years and volatility of 405%; 1998 expected dividend yield 0%, risk-free
interest rate of 4.15%, expected life of 3 years and volatility of 214%.
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of normal publicly traded options, and because changes in
the subjective input assumptions can materially affect fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of fair value of its employees stock options.
Pro forma net loss reflects only options granted after 1994. Therefore,
the full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net loss amounts presented above
because compensation cost is reflected over the options vesting period and
compensation cost for options granted prior to January 1, 1995 is not
considered.
(11) WARRANTS
The following warrants to purchase common stock were outstanding at
December 31, 1999:
Issue Date Shares Exercise Price Expiration Date
---------- ------ -------------- ---------------
October 1998 30,000 $ 1.63 October 2003
April 1998 178,573 $ 7.00 April 2003
April 1998 100,000 $ 7.50 April 2001
July 1997 100,000 $ 1.63 January 2001
December 1996 66,666 $ 7.50 November 2001
February 1996 7,085 $ 13.64 February 2000
January 1996 66,667 $ 15.38 December 2000
F-18
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 1995 16,667 $ 15.00 October 2000
April 1995 16,667 $ 15.00 April 2000
-------
582,325
=======
During the year ended December 31, 1999 various warrants, including those
issued in connection with the Company's initial public offering, to acquire an
aggregate of 1,720,560 shares of the Company's common stock expired.
As of December 31, 1999, the Company had reserved 582,325 shares of common
stock for issuance upon exercise of warrants.
(10) COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company's future minimum annual rental commitments, net of amounts
subleased, at December 31, 1999 under operating leases for office space are as
follows:
Year Amount
---- --------
2000 $123,735
2001 93,152
2002 95,961
2003 81,918
-------- --------
Total $394,766
========
Rent expense for the years ended December 31, 1999 and 1998 amounted to
approximately $138,000 and $369,000, respectively.
Included in the minimum annual rental commitments is rent for the
Company's executive offices in Marlton, New Jersey which it intends to vacate in
connection with the sale of the Debtors' operations to J D Services. For the
years 2000 thorough 2004 the aggregate lease commitment is $361,373. J D
Services has agreed to assume the Company's entire obligation under this lease.
However, as of April 3, 2000, the landlord has not granted to the Company a
release from its obligations under the lease.
In August 1995, the Company entered into a lease for approximately 1,930
square feet of space for its sales offices located at 60 East 42nd Street, New
York, New York. The term of the lease is 62 months and provides for an annual
rent of $45,248. In December 1998, the Company entered into an agreement with
Shelly Finkel Management ("SFM"), a company owned by Shelly Finkel, the
Company's Chairman of the Board, pursuant to which, in consideration of the
Company's $48,000 payment to SFM, SFM agreed to assume all of the obligations
under the lease and indemnify and hold the Company harmless from all losses,
costs and expenses associated with the lease arising after December 31, 1998. To
date, the Company has paid SFM $24,000.
EMPLOYMENT ARRANGEMENTS
The company has entered into employment arrangements with two officers of
the Company which provide for aggregate base salaries of $300,000 per annum. The
arrangements, which expire on varying dates also provide for annual bonuses and
covenants not-to-compete during the employment term and for one year thereafter.
During the year ended December 31, 1999 one officer voluntarily waived $75,000
of base compensation.
LITIGATION
In June 1998, IDB Worldcom Services, Inc. ("Worldcom") commenced an action
against the Company in the Court of Common Pleas of Philadelphia, Pennsylvania.
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.
F-19
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On February 7, 2000, Star Telecommunications Inc. ("Star") obtained a
judgment against the Company in the total amount of $233,557 in connection with
litigation styled Star Telecommunications, Inc. v. Global Telecommunications
Solutions, Inc., Case No. 01001478, in the Superior Court, State of California
County of Santa Barbara, Anacapa Division. Star brought an action against the
Company for failure to pay Star for international long-distance
telecommunications services which Star provided to the Company's operating
subsidiaries under a carrier service agreement entered into between Star and the
Company. The Company believes it has adequately accrued for this liability.
On March 17, 1999, Gloria Diaz, Edward Ragar and Charles Ruggieri (all
former sales people for the Company) commenced an action against the Company
claiming in the Superior Court of New Jersey, Somerset County Law Division,
docket No. L-432-99 alleging that the Company owes them approximately $62,000 in
the aggregate for salary, commissions and reimbursement for business expenses.
The Company disputes these claims and is defending this matter. The Company
believes it has adequately accrued for this liability.
On December 3, 1999, MTS Communications, Inc. ("MTS") commenced an action
against the Company in the United States District for the District of New
Jersey. MTS claims that the Company owes it $368,697, together with interest, in
connection with operations of the Company's Canadian subsidiary. The Company
disputes MTS' claims and is defending this matter. The Company believes it has
adequately accrued for this liability.
The Company also is involved in litigation incidental to its business.
Such litigation can be expensive and time consuming to prosecute and defend. The
Company believes that these pending litigation matters, in the aggregate, could
have a material adverse effect on its operating results and financial condition
if resolved against the Company.
LICENSE
In August 1995, the Company obtained a nonexclusive license from a third
party relating to various patents related to telecommunications processes
utilized in the Debtors' operations. The term of the license is through November
2011, when the last patent expires. However the Company ceased utilizing the
technology December 31, 1999.
The Company is obligated to make minimum payments of $50,000 annually over
the term of the agreement. Royalty expense amounted to $390,295 and $537,640 for
the years ended December 31, 1999 and 1998, respectively. No payments were made
during the years ended December 31, 1999 and 1998 and the Company is presently
attempting to negotiation a settlement of the $1,221,979 due under the agreement
at December 31, 1999.
(11) SUBSEQUENT EVENTS
J D SERVICES
On January 31, 2000, the Debtors entered into an agreement ("Purchase
Agreement") to sell substantially all of their assets to J D Services. The sale
transaction is to be consummated in April 2000. Under the terms of the Purchase
Agreement, J D Services will pay an aggregate of $2.1 million as follows: (i)
forgiveness of $750,000 debtor-in-possession financing previously provided to
the Debtors and (ii) assumption of Debtor's obligations to provide
telecommunications services to previously activated phone cards "Deferred
Liability." The Purchase Agreement also provides that should the Deferred
Liability be determined to be less than $1.35 million, the Debtors shall be due
the difference ("True-up Amount".)
A condition of the Purchase Agreement required that certain agreements,
including non-compete agreements among the Company, Debtors and Messrs. Cherkas
and Liguori be assigned to J D Services. These agreements with Messrs. Cherkas
and Liguori where entered into in connection with the Company's acquisition of
NATW in February 1998. To accomplish this assignment, defaults by the Company
and the Debtors under the various agreements had to be cured. With respect to
Messrs. Cherkas and Liguori, the Company and Debtors entered into an Agreement
Regarding The Assignment of Contacts, Cure Amounts and Related Matters on March
7, 2000, which was approved by the Court on March 22, 2000 ("Assignment
Agreement".) Under the terms of the Assignment Agreement, the Company is to pay
Mr. Liguori on April 17, 2000 $15,000 in unpaid bonus and 50,000 shares of
common stock. Also on April 17, 2000 the Company is to pay Mr. Cherkas $94,000;
$64,000 for accrued but unpaid salary and $30,000 for reimbursement of legal
fees. The Assignment Agreement also provides that the Debtors shall on April 28,
2000 pay Mr. Liguori $110,000 in payment of his portion of the NATW Note and
related interest. (See Note 5 with respect to the settlement of Mr. Cherkas'
portion of the NATW Note.)
F-20
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
With respect to approximately $1.2 million due Mr. Cherkas under the Earn
Out, under the Assignment Agreement, he has agreed to release the Company and
Debtors so long as he receives a minimum payment of $700,000, paid as discussed
below, by October 7, 2000. To the extent he does not receive the minimum payment
of $700,000, the amount due him by the Company shall be $1.2 million less any
payments he receives under the Assignment Agreement.
The Assignment Agreement provides that Mr. Cherkas shall receive the
following amounts, if any:
o The True-up Amount not to exceed $500,000
o 70% of the amount of the Debtors' available cash remaining
after deduction amount for unpaid accrued Administrative
Claims.
o At the election of the Company, an amount equal to the
difference between $700,000 and the amounts otherwise paid him
under the Assignment Agreement.
It is impossible to predict the amount of cash, if any, Mr. Cherkas will
receive under the Assignment Agreement and accordingly the Company could be
liable to Mr. Cherkas up to $1.2 million if he does not receive a minimum of
$700,000 from the Debtors and/or the Company, by October 2000. While proceeds
from the sales of assets of the Debtors may satisfy the Earn Out, since the
Company remains liable should the Debtors not satisfy the debt, at December 31,
1999 the entire amount due Mr. Cherkas of $1.2 million is reflected as a
liability of the Company and not the Debtors.
The Debtors have exclusive right, until May 25, 2000, to file with the
Court a plan of liquidation ("Plan"). Such period may be extended at the
discretion of the Court. Subject to certain exceptions in the Bankruptcy Code,
acceptance of a Plan requires approval of Court and the affirmative vote (i.e.
more than 50% of the number and at least 66 2/3% of the dollar amount, both with
regard to claims actually voted) of each class of creditors and equity holders
of the Company, whose claims are impaired by the Plan. If the Debtors fail to
submit a Plan within the exclusive period prescribed or any extension thereof,
any creditor or equity holder will be free to file a Plan with the Court and
solicit acceptances thereof. Until the Plan is approved, the impact on the
Company of the Plan, if any, cannot be predicted. In addition should the assets
of the Debtors not be sufficient to pay Administrative Claims, the Debtors would
not be able to confirm a Plan and a trustee would be appointed by the Court to
administer the Debtors' estate.
ENTICENT
On February 1, 2000, the Company exchanged its investments in its recently
formed subsidiaries Imagine and TalkToGo for an interest in Enticent, also a
startup entity. As a result of the transaction, the Company will be the largest
shareholder of Enticent, owning 44% of the outstanding shares. Accordingly, in
the future, the Company's investment in Enticent will be recorded on the equity
basis.
SPRINT
On March 7, 2000 the Debtors negotiated a settlement with Sprint
Corporation with respect to post-petition indebtedness whereby Sprint
Corporation accepted $675,000 in full settlement of $932,295 due it as reflected
in the balance sheet for the discontinued operations.
F-21
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
--------------------------------------
2000 1999
----------------- -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 57,926 $ 302,067
Other assets 41,640 44,635
------------ ------------
Total current assets 99,566 346,702
Investment in and advances to affiliate 179,390 140,502
Property and equipment, net -- 26,640
Assets of liquidating subsidiaries 1,221,918 3,705,832
------------ ------------
$ 1,500,874 $ 4,219,676
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,046,817 $ 1,053,612
Accrued license fee 1,221,979 1,221,979
Accrued earn-out to related party
1,200,000 1,200,000
Other accrued expenses
1,295,213 1,302,026
------------ ------------
Total current liabilities 4,764,009 4,777,617
Other liabilities:
Notes payable to related party -- 628,815
Liquidating subsidiaries' liabilities subject to compromise - third parties 20,646,190 23,716,888
------------ ------------
25,410,199 29,123,320
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 15,497,632 and 14,727,882 154,976 147,278
Additional paid-in capital 56,854,365 56,233,248
Accumulated deficit (80,871,888) (81,237,392)
Accumulated other comprehensive income 23,089 23,089
Less: Treasury stock, 47,891 shares
(69,867) (69,867)
------------ ------------
Total stockholders' equity (deficit) (23,909,325) (24,903,644)
------------ ------------
$ 1,500,874 $ 4,219,676
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
F-22
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2000 1999
----------------- ----------------
<S> <C> <C>
General and administrative expenses $ 199,528 $ 398,990
Depreciation and amortization - 4,287
----------------- ----------------
Operating loss (199,528) (403,277)
Equity in net loss from affiliate (26,029) -
----------------- ----------------
Loss from continuing operations (225,557) (403,277)
----------------- ----------------
Discontinued operations:
Loss from discontinued operations (1,017,745) (1,182,556)
Gain on disposal of discontinued operations 1,608,806 -
----------------- ----------------
591,061 (1,182,556)
----------------- ----------------
Income (loss) before extraordinary item 365,504 (1,585,833)
Extraordinary loss on conversion of debt - (1,420,172)
----------------- ----------------
Net income (loss) $ 365,504 $ (3,006,005)
================= ================
Primary income (loss) per share:
Loss from continuing operations $ (0.01) $ (0.03)
Income (loss) from discontinued operations 0.04 (0.09)
Extraordinary loss on conversion of debt - (0.10)
----------------- ----------------
Primary income (loss) per share $ 0.03 $ (0.22)
================= ================
Weighted average shares outstanding - primary 14,440,946 13,903,091
================= ================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
F-23
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------------
2000 1999
------------------ ------------------
Operating activities:
<S> <C> <C>
Net income (loss) $ 365,504 $ (3,006,005)
Adjustment to reconcile net loss to net cash used in operating activities:
Loss from discontinued operations 1,017,745 1,182,556
Depreciation and amortization - 4,287
Amortization of deferred compensation - 6,102
Amortization of deferred financing charges - 4,995
Loss on debt conversion - 1,420,172
Gain on sale of fixed assets (1,608,806) -
Loss from equity investment 26,029
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable - -
Other assets 29,635 (17,343)
Accounts payable (6,795) 339,012
Accrued license fees - 127,632
Accrued note and earn-out to related party - (534,056)
Accrued expenses (6,813) 63,484
Deferred revenues - -
------------------ ------------------
Cash used by continuing operating activities (183,501) (409,164)
Cash used by discontinued operating activities - (392,787)
------------------ ------------------
Cash (used) by operating activities (183,501) (801,951)
------------------ ------------------
Investing activities:
Advances to affiliate (60,640) -
------------------ ------------------
Net cash (used) by financing activities (60,640) -
------------------ ------------------
Net change in cash (244,141) (801,951)
Cash, beginning of year 302,067 1,604,166
------------------ ------------------
Cash, end of year $ 57,926 $ 802,215
================== ==================
Supplemental disclosures:
Fair value of common stock issued upon note conversion $ - $ 3,944,922
================== ==================
Conversion of note payable to related party into common stock $ 628,815 $ -
================== ==================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
F-24
<PAGE>
GLOBAL TELECOMMUNICATION SOLUTIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2000
(unaudited)
(1) Business and Basis of Presentation
Business
Global Telecommunication Solutions, Inc. (the "Company") was incorporated on
December 23, 1992 and historically, through certain subsidiaries, was engaged in
the marketing and distribution of prepaid phone cards. As a result of the
Company's subsidiaries long history of losses in the prepaid phone card
business, coupled with an increasingly competitive environment, the Company's
Board of Directors adopted a plan to discontinue and sell the prepaid phone card
business. To facilitate the possible sale of the phone card assets, these
subsidiaries filed voluntary petitions with the U.S. Bankruptcy Court for the
District of Delaware ("Court") under Chapter 11 of the U.S. Bankruptcy Code on
October 28, 1999. The subsidiaries of the Company that filed for 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").
On January 31, 2000, the Debtors entered into an agreement to sell their fixed
assets to J D Services, Inc. ("J D Services") (See below.)
The Company's financial statements have been prepared in accordance with the
American Institute of Certified Public Accountants Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization ("SOP 90-7.")" The Debtors
have been operating their business as debtors-in-possession subject to the
jurisdiction of the Court.
As a result of the Company's decision to sell its phone card 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.
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. Operating results for the three months ended
March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
(2) Going Concern
At March 31, 2000 the Company, excluding the assets and liabilities relating
to the Debtors, had cash of $58,000 and a working capital deficit of $4.7
million. Subsequent to March 31, 2000, the Company continues to generate
negative cash losses from operations.
At March 31, 2000 substantially all the Company's current liabilities relate
to indebtedness incurred in connection with the discontinued phone card
business. These liabilities were incurred by the Company rather
F-25
<PAGE>
than the Debtors, and are due to less than 10 entities. The Company is currently
negotiating with the various parties in an effort to reach settlements regarding
the amounts due. The Company is attempting to settle these liabilities on
favorable terms to the Company.
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
aforementioned outstanding liabilities, and raising additional capital.
Management of the Company cannot presently predict the outcome of these matters
and there can be no assurance that the Company will be successful in any of
these endeavors.
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business.
(3) Loss Per Share
For the three months ended March 31, 2000 and 1999 income (loss) per share is
computed by dividing the net income (loss) by the weighted average number of
shares of Common Stock. For the three months ended March 31, 2000 fully diluted
income (loss) per share has not been presented to include the effect of Common
Stock equivalents since the impact is insignificant. For the three months ended
March 31, 1999, common stock equivalents are excluded from the income (loss) per
share calculation because the effect would be antidilutive.
(4) Reclassifications
Certain reclassifications have been made to the 1999 condensed consolidated
financial statements to conform to the 2000 presentation.
(5) Debtors Sale of Assets and Discontinued Operations
On January 31, 2000, the Debtors entered into an agreement ("Purchase
Agreement") to sell substantially all of their assets to J D Services. The sale
transaction was consummated effective April 1, 2000 pursuant to an order of the
Court. Under the terms of the Purchase Agreement, J D Services will pay an
aggregate of $2.1 million as follows: (i) forgiveness of $750,000
debtor-in-possession financing previously provided to the Debtors and (ii)
assumption of Debtor's obligations to provide telecommunications services to
previously activated phone cards "Deferred Liability." The Purchase Agreement
also provides that should the Deferred Liability be less than $1.35 million, the
Debtors shall be due the difference ("True-up Amount".) As a result of this
sale, the Debtors realized a gain of $1,608,806.
A condition of the Purchase Agreement required that certain agreements,
including non-compete agreements among the Company, Debtors and Messrs. Cherkas
and Liguori be assigned to J D Services. These agreements with Messrs. Cherkas
and Liguori were entered into in connection with the Company's acquisition of
Networks Around the World, Inc. ("NATW") in February 1998. To accomplish this
assignment, defaults by the Company and the Debtors under the various agreements
had to be cured. With respect to Messrs. Cherkas and Liguori, the Company and
Debtors entered into an Agreement Regarding The Assignment of Contacts, Cure
Amounts and Related Matters on March 7, 2000, which was approved by the Court on
March 22, 2000 ("Assignment Agreement".) Under the terms of the Assignment
Agreement, the Company, on May 3, 2000, paid Mr. Liguori $15,000 in unpaid
bonuses due him and delivered to him 50,000 shares of Common Stock. Also on May
3, 2000, the Company paid Mr. Cherkas $94,000; $64,000 for accrued but unpaid
salary and $30,000 for reimbursement of legal fees. As provided by the
Assignment Agreement, the Debtors paid Mr. Liguori on May 3, 2000, $110,000 in
payment of the note, and related interest, issued in connection with the
acquisition of NATW.
With respect to approximately $1.2 million due Mr. Cherkas under an earn-out
agreement entered into in
F-26
<PAGE>
connection with the NATW acquisition ("Earn Out"), under the Assignment
Agreement he has agreed to release the Company and Debtors if he receives a
minimum payment of $700,000 by October 7, 2000, paid as discussed below. To the
extent he does not receive the minimum payment of $700,000, the amount due him
by the Company shall be $1.2 million, less any payments he receives under the
Assignment Agreement.
The Assignment Agreement provides that Mr. Cherkas shall receive the
following amounts, if any:
o The True-up Amount not to exceed $500,000
o 70% of the amount of the Debtors' available cash remaining
after deduction of amounts for unpaid accrued administrative
expenses.
o At the election of the Company, an amount equal to the
difference between $700,000 and the amounts otherwise paid him
under the Assignment Agreement.
It is impossible to predict the amount of cash, if any, Mr. Cherkas will
receive under the Assignment Agreement and accordingly the Company could be
liable to Mr. Cherkas up to $1.2 million if he does not receive a minimum of
$700,000 from the Debtors and/or the Company by October 7, 2000. While proceeds
from the sales of assets of the Debtors may satisfy the Earn Out, since the
Company remains liable should the Debtors not satisfy the debt the entire amount
due Mr. Cherkas of $1.2 million is reflected as a liability of the Company on
its balance sheet and not the Debtors.
The Debtors have exclusive right, until May 25, 2000, to file with the Court
a plan of liquidation ("Plan"). Such period may be extended at the discretion of
the Court. Subject to certain exceptions in the Bankruptcy Code, acceptance of a
Plan requires approval of the Court and the affirmative vote (i.e. more than 50%
of the number and at least 66 2/3% of the dollar amount, both with regard to
claims actually voted) of each class of creditors and equity holders of the
Company, whose claims are impaired by the Plan. If the Debtors fail to submit a
Plan within the exclusive period prescribed or any extension thereof, any
creditor or equity holder will be free to file a Plan with the Court and solicit
acceptances thereof. Until the Plan is approved, the impact on the Company of
the Plan, if any, cannot be predicted. In addition should the assets of the
Debtors not be sufficient to pay administrative priority claims, the Debtors
would not be able to confirm a Plan and a trustee would be appointed by the
Court to administer the Debtors' estate.
Operating results from the discontinued operations of the Debtors for each of
the three months ended March 31, 2000 and 1999 is as follows:
2000 1999
------------------ -----------------
Net sales $ 3,259,959 $ 7,423,389
Cost of sales 3,242,223 6,644,873
------------------ -----------------
Gross Profit 17,736 778,516
Selling, general and
administrative expense 783,673 1,409,577
Depreciation and amortization 251,808 364,019
Operating loss (1,017,745) (995,080)
Interest income - 14,338
Interest expense - (201,814)
================== =================
Net loss from discontinued
Operations $ (1,017,745) $ (1,182,556)
================== =================
F-27
<PAGE>
Summary balances sheets of the discontinued operations of the Debtors is as
follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------------ -------------------
Current assets:
<S> <C> <C>
Cash $ 279,905 $ 594,143
Accounts receivable, net 892,013 1,102,229
Inventory -- 251,776
------------------ -------------------
Total current assets 1,171,918 1,948,148
Property and equipment, net -- 1,707,684
Other assets, net 50,000 50,000
------------------ -------------------
Total assets of liquidating subsidiaries $ 1,221,918 $ 3,705,832
================== ==================
Pre-petition current liabilities:
Accounts payable $ 8,975,322 $ 8,638,408
Accrued regulatory fees 5,836,021 5,836,021
Other accrued expenses 138,497 430,967
Deferred revenues -- 1,963,797
Estimated sales tax liability 5,402,446 5,429,514
Notes payable to related party 110,000 110,000
------------------ -------------------
20,462,286 22,408,707
Post-petition administrative claims 183,904 1,308,181
------------------ -------------------
Total liquidating subsidiaries' liabilities
subject to compromise - third parties $20,646,190 $23,716,888
================== ==================
</TABLE>
(6) Debt Settlement
In connection with the NATW acquisition, the Company issued notes in the
aggregate amount of $1 million of which $900,000 were payable to Mr. Cherkas. In
December 1998, Mr. Cherkas preliminarily agreed to convert his note into Common
Stock. The conversion of the note into 769,750 shares of Common Stock occurred
in March 2000 after deducting from the note $376,185, which represents a
reimbursement to the Company of amounts due it under an indemnity contained in
the NATW merger agreement.
(7) Investment in Affiliates
On February 1, 2000, the Company exchanged its investments in its recently
formed subsidiaries Imagine Telecom, Inc. and TalkToGo.com, Inc. for a 44%
interest in Enticent.com, Inc. ("Enticent"), also a startup entity. As a result
of the transaction the Company will be the largest shareholder of Enticent,
owning 44% of the outstanding shares. Accordingly the Company's investment in
Enticent is recorded on the equity basis.
(8) Litigation
On February 7, 2000, Star Telecommunications Inc. ("Star") obtained a
judgment against the Company in the total amount of $233,557 in connection with
litigation styled Star Telecommunications, Inc. v. Global Telecommunications
Solutions, Inc., Case No. 01001478, in the Superior Court, State of California
County of Santa Barbara, Anacapa Division. Star brought an action against the
Company for failure to pay Star for international long-distance
telecommunications services which Star provided to the Company's operating
subsidiaries under a Carrier Service Agreement entered into between Star and the
Company. The Company believes it has adequately accrued for this liability.
F-28
<PAGE>
On March 17, 1999, Gloria Diaz, Edward Ragar and Charles Ruggieri (all former
sales people for the Company's subsidiaries) commenced an action against the
Company in the Superior Court of New Jersey, Somerset County Law Division,
docket No. L-432-99 alleging that the Company owes them approximately $62,000 in
the aggregate for salary, commissions and reimbursement for business expenses.
The Company disputes these claims and is defending this matter. The Company
believes it has adequately accrued for this liability.
On December 3, 1999, MTS Communications, Inc. ("MTS") commenced an action
against the Company in the United States District for the District of New
Jersey. MTS claims that the Company owes it $368,697, together with interest, in
connection with operations of the Company's Canadian subsidiary. The Company
disputes MTS' claims and is defending this matter. The Company believes it has
adequately accrued for this liability.
The Company also is involved in litigation incidental to its business. Such
litigation can be expensive and time consuming to prosecute and defend. The
Company believes that these pending litigation matters, in the aggregate, could
have a material adverse effect on its operating results and financial condition
if resolved against the Company.
(9) Subsequent Event
In April 2000, the Company borrowed $125,000 from Mr. Shelly Finkel, chairman
and a principal shareholder of the Company at an interest rate of 8% per annum.
Subject to the negotiation of a definitive agreement, including provisions
regarding repayment and security for the loan, the Company borrowed the money on
a demand basis.
F-29
