SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-25703
GTC TELECOM CORP.
(Exact Name of Registrant as Specified in its Charter)
NEVADA 88-0318246
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3151 AIRWAY AVE., SUITE P-3, COSTA MESA, CALIFORNIA 92626
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (714) 549-7700
N/A
(Former name, former address and former fiscal year,
if changed since last report)
---------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's
class of common stock, as of the latest practicable date:
Title of each class of Common Stock Outstanding at May 15, 2000
----------------------------------- -------------------------------
Common Stock, $0.001 par value 19,263,211
Transitional Small Business Disclosure Format
(Check one);
Yes [ ] No [ X ]
<PAGE>
INDEX
GTC TELECOM CORP.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2000 (Unaudited) and
June 30, 1999
Consolidated Statements of Operations (Unaudited) three months
and nine months ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows (Unaudited) nine months
ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GTC TELECOM CORP.
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
March 31, June 30,
2000 1999
___________ ___________
(Unaudited)
ASSETS
Current assets:
Cash $ 532,942 $ 500
Accounts receivable 1,017,278 16,889
Deposits - 35,500
Prepaid expenses 99,092 23,319
___________ ___________
Total current assets 1,649,312 76,208
___________ ___________
Property and equipment, net of accumulated depreciation
of $138,306 and $32,186 at March 31, 2000
and June 30, 1999, respectively 340,073 365,126
Deposits 600,110 150,000
Other assets 50,361 68,735
___________ ___________
Total assets $ 2,639,856 $ 660,069
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses 3,016,792 688,178
Accrued payroll and related taxes 511,249 167,508
Current portion of obligation under capital lease 66,836 61,198
Notes payable 273,500 25,000
Deferred income 25,862 12,482
___________ ___________
Total current liabilities 3,894,239 954,366
Long-term liabilities:
Obligation under capital lease, net of current portion 81,841 132,697
___________ ___________
Total liabilities $ 3,976,080 $ 1,087,063
=========== ===========
Contingencies
Stockholders' deficit:
Preferred stock, $0.001 par value; 10,000,000 shares authorized;
none issued and outstanding - -
Common stock, $0.001 par value; 50,000,000 shares authorized;
18,757,211 (unaudited) and 15,286,824 shares issued and
outstanding at March 31, 2000 and June 30, 1999,
respectively 18,757 15,287
Additional paid-in-capital 7,639,168 3,452,282
Accumulated deficit (8,994,149) (3,894,563)
___________ ___________
Total stockholders' deficit (1,336,224) (426,994)
___________ ___________
Total liabilities and stockholders' deficit $ 2,639,856 $ 660,069
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
<PAGE>
<TABLE>
<CAPTION>
GTC TELECOM CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended Three Months Ended
March 31, March 31,
________________________ ___________________________
2000 1999 2000 1999
__________ _________ ___________ ____________
<S> <C> <C> <C> <C>
Revenues:
Telecommunications $ 2,287,296 $ 222,535 $ 1,442,867 $ 204,573
Internet services 30,648 - 13,691 -
__________ _________ ___________ ____________
Net revenues 2,317,944 222,535 1,456,558 204,573
__________ _________ ___________ ____________
Cost of sales:
Telecommunications 1,887,883 35,670 1,188,744 27,339
Internet services 264,572 - 29,279 -
Third party verification-telecom 201,238 24,342 118,361 24,342
__________ __________ ___________ ____________
Total cost of sales 2,353,693 60,012 1,336,384 51,681
__________ __________ ___________ ____________
Gross profit/(loss) (35,749) 162,523 120,174 152,892
Selling, general, and
administrative expenses 4,997,028 2,365,424 1,827,768 1,175,758
__________ ___________ ___________ ____________
Operating loss (5,032,777) (2,202,901) (1,707,594) (1,022,866)
Interest income/(expense) (61,605) 4,452 (39,552) 4,402
__________ ___________ ___________ ____________
Loss before provision for
income taxes (5,094,382) (2,198,449) (1,747,146) (1,018,464)
Provision for income taxes 5,204 600 1,704 200
__________ ___________ ___________ ____________
Net loss (5,099,586) (2,199,049) (1,748,850) (1,018,664)
========== =========== =========== ============
Basic and diluted net loss
per common share $ (0.31) $ (0.18) $ (0.10) $ (0.08)
========== =========== =========== ============
Basic and diluted weighted
average common shares outstanding 16,558,454 12,324,296 17,736,795 13,137,393
========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
<PAGE>
<TABLE>
<CAPTION>
GTC TELECOM CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
March 31,
_________________________
2000 1999
___________ ___________
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $(5,099,586) $(2,199,049)
Adjustments to reconcile net loss to net cash
used in operating activities:
Estimated fair market value of stock issued
for services 1,319,522 238,600
Estimated fair market value of options granted to
employees for compensation 104,022 26,400
Estimated fair market value of options and warrants
granted to a director and consultants for services
rendered 425,140 889,116
Estimated fair market value of stock issued to
employees for compensation - 5,225
Interest accrued on debt converted 5,000 -
Depreciation and amortization 124,494 12,657
Changes in operating assets and liabilities:
Accounts receivable and other current assets (1,040,657) (125,935)
Accounts payable and accrued expenses 2,328,610 141,091
Accrued payroll and related taxes 343,741 8,055
Deferred income 13,380 -
___________ ___________
Net cash used in operating activities (1,476,334) (1,003,840)
___________ ___________
Cash Flows From Investing Activities:
Purchases of property and equipment (81,068) (139,499)
Purchase of other assets - (122,395)
Deposits (450,110) -
___________ ___________
Net cash used in investing activities (531,178) (261,894)
___________ ___________
Cash Flows From Financing Activities:
Proceeds from sale of stock, net of offering
costs of $171,005 and $319,053 for the nine months
ended March 31, 2000 and 1999, respectively 2,215,172 1,210,947
Borrowings on note payable to stockholder 48,500 -
Principal payments under capital lease (45,218) -
Principal borrowings on notes payable 310,000 -
Principal repayments on notes payable (60,000) -
Proceeds from exercise of stock options 71,500 57,350
Collection of stock subscription receivable, net of
offering costs of $20,525 - 121,975
___________ ___________
Net cash provided by financing activities 2,539,954 1,390,272
___________ ___________
Net increase in cash 532,442 124,538
Cash at beginning of period 500 3,892
___________ ___________
Cash at end of period $ 532,942 $ 128,430
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ 57,606 $ -
Income taxes $ 5,204 $ -
</TABLE>
Supplemental disclosures on non-cash flow investing and financing activities:
During the three months ended March 31, 2000, the Company issued 55,000 shares
of restricted common stock pursuant to the conversion of a note payable with a
principal amount of $50,000 and $5,000 of interest.
During the nine months ended March 31, 1999, the Company issued 40,000 shares of
restricted common stock pursuant to the conversion of a note payable in the
amount of $80,000.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
GTC TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - MANAGEMENT'S REPRESENTATION:
The management of GTC Telecom Corp. and its subsidiaries (the "Company" or
"GTC") without audit has prepared the consolidated financial statements included
herein. The accompanying unaudited financial statements consolidate the
accounts of the Company and its wholly owned subsidiaries and have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Certain information and note disclosures normally
included in the consolidated financial statements prepared in accordance with
generally accepted accounting principles have been omitted. In the opinion of
the management of the Company, all adjustments considered necessary for fair
presentation of the consolidated financial statements have been included and
were of a normal recurring nature, and the accompanying consolidated financial
statements present fairly the financial position as of March 31, 2000, the
results of operations for the three and nine months ended March 31, 2000 and
cash flows for the nine months ended March 31, 2000.
It is suggested that these financial statements be read in conjunction with the
audited financial statements and notes for the year ended June 30, 1999,
included in the Company's Form 10-KSB filed with the Securities and Exchange
Commission on October 13, 1999. The interim results are not necessarily
indicative of the results for a full year.
NOTE 2 - DESCRIPTION OF BUSINESS:
GTC is a single source provider of various telecommunication and internet
related services. GTC was organized as a Nevada Corporation on May 17,1994 and
is currently based in Costa Mesa, California.
NOTE 3 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GOING CONCERN - The accompanying financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
normal course of business. The Company has negative working capital, reduced
cash levels, losses from operations through March 31, 2000 and a lack of
operational history, among other matters, raise substantial doubt about its
ability to continue as a going concern. The Company intends to fund operations
through debt and equity financing arrangements which management believes may be
insufficient to fund its capital expenditures, working capital, and other cash
requirements for the fiscal year ending June 30, 2000. Therefore, the Company
will be required to seek additional funds to finance its long term operations.
The successful outcome of future activities cannot be determined at this time
and there are no assurances that if achieved, the Company will have sufficient
funds to execute its intended business plan or generate positive operating
results.
The financial statements do not include any adjustments related to the
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of GTC Telecom Corp. and its wholly-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated.
START-UP ACTIVITIES - The Company has adopted Statement of Position No. 98-5
("SOP 98-5"), "Reporting the Costs of Start-Up Activities." SOP 98-5 requires
that all non-governmental entities expense the costs of start-up activities,
including organization costs as those costs are incurred. The adoption of this
standard did not have a material effect on the Company's results of operations,
financial position or cash flows.
COMPUTER SOFTWARE - The Company has adopted Statement of Position 98-1 ("SOP
98-1") "Accounting for the Cost of Computer Software Development or Obtained for
Internal Use." The adoption of this Statement of Position did not have a
material impact on the Company's results of operations, financial position or
cash flows.
<PAGE>
REVENUE AND RELATED COST RECOGNITION - The Company recognizes revenue during the
month in which services or products are delivered, as follows:
TELECOMMUNICATIONS RELATED SERVICES
The Company's long distance telecommunications service revenues are generated
when customers make long distance telephone calls from their business or
residential telephones or by using any of the Company's telephone calling cards.
Proceeds from prepaid telephone calling cards are recorded as deferred revenues
when the cash is received, and recognized as revenue as the telephone service is
utilized.
Telecommunication services cost of sales include the cost of long distance
service provided by MCI/WorldCom ("MCI/WorldCom") and other carriers and costs
paid for third party verification.
INTERNET RELATED SERVICES
Internet service revenues consist of monthly fees charged to subscribers for
Internet access and are recognized in the period service access is provided.
Internet service cost of sales include the cost of providing internet access.
EARNINGS PER SHARE - The Company has adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings Per Share." Under SFAS 128, basic
earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares assumed to be
outstanding during the period of computation. Diluted earnings per share is
computed similar to basic earnings per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Pro forma per share data has been computed using
the weighted average number of common shares outstanding during the period
assuming the Company was a C corporation since inception. Because the Company
has incurred net losses, basic and diluted loss per share are the same as
additional potential common shares would be anti-dilutive.
INCOME TAXES - The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under SFAS 109, 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. 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. A
valuation allowance is provided for significant deferred tax assets when it is
more likely than not that such assets will not be recovered.
RECLASSIFICATIONS - Certain reclassifications have been made to prior year
amounts to conform to current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the FASB issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet at their fair value. This statement, as
amended SFAS 137, is effective for financial statements for all fiscal quarters
of all fiscal years beginning after June 15, 2000. The Company does not expect
the adoption of this standard to have a material impact on its results of
operations, financial position or cash flows as it currently does not engage in
any derivative or hedging activities.
NOTE 4 - OTHER ASSETS:
Other assets consist of PUC carrier certifications the Company must obtain in
order to provide interstate and intrastate telephone service. Other assets are
recorded at cost and are being amortized using the straight-line method over the
useful life of 3 years. Amortization expense for the nine months ended March
31, 2000 and 1999 is $18,374 and none, respectively.
NOTE 5 - NOTES PAYABLE:
<PAGE>
Notes payable represents:
In January 2000, the Company borrowed $200,000 for working capital purposes from
a third party. The note was due February 28, 2000 plus interest of $20,000. If
all unpaid principal and interest was not paid by February 28, 2000, the
aggregate balance will accrue interest at 2% per month with no predetermined due
date. On April 11, 2000, the Company repaid $100,000 of the principal and is in
the process of renegotiating the terms of the note.
On December 31, 1999, the Company borrowed $60,000 for working capital purposes
from a third party which was due February 28, 2000 plus $6,000 of interest. On
March 30, 2000, the Company paid in full the principal and interest balance.
The Company borrowed funds from a stockholder for working capital purposes. The
note payable accrues interest at 10% and is due July 22, 2000. As of March 31,
2000, the total balance outstanding on note payable to stockholder was $73,500.
The Company borrowed $50,000 for working capital purposes from a third party.
The note bore interest at 10%, was due on August 6, 1999 and was secured by the
Company's receivables. On January 4, 2000, the principal and interest due of
$55,000 was converted into 55,000 shares of the Company's restricted common
stock.
NOTE 6 - COMMON STOCK ISSUANCES:
In January 2000, the Company issued 7,000 shares of the Company's common stock
valued at approximately $13,125 in exchange for consultation services.
In January 2000, the Company issued 200,000 shares of restricted common stock
valued at approximately $200,000 in lieu of rent owed by the Company from April
1999 through June 2000 for its headquarters and Customer Services operations in
Costa Mesa, California.
In January 2000, the Company entered into an agreement with an outside
consultant for investor and public relations services. Pursuant to the
agreement, the Company issued 56,637 shares of common stock valued at
approximately $200,000 for one year's services. In addition, the Company issued
options to purchase 60,000 shares of the Company's common stock as follows: 1)
20,000 shares at 100% of the closing bid price on January 28, 2000, 2) 20,000
shares at 200% of the closing bid price on January 28, 2000; and 3) 20,000
shares at 300% of the closing bid price on January 28, 2000. The options were
valued at $167,400 using the Black Scholes method and recorded as investor
relations expense in January 2000.
During the three and nine months ended March 31, 2000, the Company sold an
aggregate of 1,056,000 shares resulting in net proceeds to the Company of
approximately $1,029,877, net of offering costs of $25,780 to 18 "accredited"
investors and 2,386,500 shares resulting in net proceeds to the Company of
approximately $2,215,172, net of offering costs of $171,005, to 42 "accredited"
investors, respectively, pursuant to a Private Offering of 3,000,000 shares of
the Company's Common Stock at a price of $1.00 per share. The offering was
conducted without general solicitation or advertising and offered only to
"accredited" investors pursuant to Rule 506 of Regulation D of the Securities
Act of 1933.
During the nine months ended March 31, 2000, Paul Sandhu ("Mr. Sandhu" ), the
Company's President & CEO, Eric Clemons ("Mr. Clemons"), the Company's Chief
Operating Officer, and Gerald DeCiccio, the Company's Chief Financial Officer,
exercised options (previously granted pursuant to their employment contracts) to
purchase a total of 325,000 shares of the Company's common stock for $71,500.
During the nine months ended March 31, 2000, Mr. Sandhu and Mr. Clemons canceled
619,848 and 154,962, respectively, shares of the Company's common stock held by
each of them. It was determined that these shares were not cancelled in a
timely matter. As a result, these cancellations are reflected as a reduction in
the outstanding shares as of June 30, 1999.
In December 1999, the Company issued an aggregate of 282,575 shares to
consultants and attorneys in exchange for consultation and legal services
provided to the Company valued at approximately $545,150. These shares were
subsequently registered on Form S-8 filed with the Securities and Exchange
Commission on January 19, 2000.
<PAGE>
In October 1999, the Company issued 25,000 shares of "restricted" Common Stock
valued at $25,000 to an outside consultant in exchange for investor relations
services rendered. The issuance was an isolated transaction not involving a
public offering pursuant to section 4(2) of the Securities Act of 1933.
In September 1999, the Company issued an aggregate of 67,675 shares to
consultants and attorney's in exchange for consultation and legal services
provided to the Company valued at approximately $271,247. These shares were
subsequently registered on Form S-8 filed with the Securities and Exchange
Commission on October 6, 1999.
In September 1999, the Company issued 50,000 shares of "restricted" Common Stock
valued at $50,000 to Dan Baer in consideration for deferment of rent owed by the
Company from April 1999 to September 1999 for its headquarters and customer
service operations in Costa Mesa, CA. The issuance was an isolated transaction
not involving a public offering pursuant to section 4(2) of the Securities Act
of 1933.
In September 1999, the Company issued 15,000 shares of "restricted" Common Stock
valued at $15,000 to the Cutler Law Group, the Company's securities counsel in
exchange for legal services rendered. The issuance was an isolated transaction
not involving a public offering pursuant to section 4(2) of the Securities Act
of 1933.
During the nine months ended March 31, 1999, pursuant to various third party
agreements, the Company granted options and issued warrants to purchase the
Company's restricted common stock. Total expense of $889,114 was recognized in
the nine-month period ended March 31, 1999.
During the nine months ended March 31, 1999, the Company issued 158,000 shares
of restricted common stock, valued at $158,000 to outside consultants for
services rendered.
During the nine months ended March 31, 1999, the Company issued 16,050 shares of
common stock, valued at $80,600 to outside consultants for services rendered.
During the nine months ended March 31, 1999, the Company issued 1,530,000 shares
of restricted common stock pursuant to a private placement memorandum of
$1,210,947, net of offering costs of $319,053.
In October 1998, the Company issued 40,000 shares of restricted common stock
pursuant to the conversion of a note payable in the amount of $80,000.
On August 31, 1998, the Company (which at the time was designated Bobernco,
Inc., a Nevada corporation) acquired all of the outstanding common stock of
GenTel Communications, Inc., a Colorado corporation in a business combination
described as a "reverse acquisition." As part of the reorganization, the
Company issued 8,986,950 shares of its Common Stock to the shareholders of
GenTel in exchange for all of the outstanding shares of Common Stock of GenTel.
Such shares include the shares owned by officers and directors of the Company.
NOTE 7 - OPTIONS AND WARRANTS:
In January 2000, the Company entered into an agreement with a third party to
market the Company's products and services. The agreement requires the Company
to pay a monthly commission for each customer minute charged and collected from
the third party's efforts. In addition, the Company agreed to issue warrants to
purchase up to 1,000,000 shares of the Company's Common Stock at $1.88 per
share, at the rate of one share per customer brought to the Company by the
marketing company, subject to a minimum of 250,000 customers. No warrants have
been granted or earned as of the date of this filing.
On September 20, 1999, the Company's Board of Directors approved the GTC Telecom
Corp. 1999 Omnibus Stock Option Plan (the "Option Plan"), effective October 1,
1999. An aggregate of 750,000 shares of common stock are reserved for issuance
under the Plan during the year October 1, 1999 to September 30, 2000. For each
subsequent year beginning October 1, 2000, there shall be reserved for issuance
under the Plan that number of shares equal to 10% of the outstanding shares of
common stock on July 1 of that year. The exercise price for each option shall
be equal to 25% to 100% of the fair market value of the common stock on the date
of grant, as defined, and shall vest over a five year period. The Company
registered 750,000 shares underlying the options pursuant to its 1999 Stock
Option Plan on Form S-8 filed with the Securities and Exchange Commission on
October 6, 1999.
<PAGE>
On October 18, 1999, the Company's Board of Directors ("Board") granted,
pursuant to the Option Plan, an aggregate of 73,000 Incentive Stock Options (as
defined by the Plan), exercisable at $2.9375 per share (the fair market value of
the Company's Common Stock on the day of grant) to certain employees of the
Company and an aggregate of 360,000 Non-statutory Stock Options (as defined by
the Option Plan), exercisable at $1.10 per share, to the officers of the
Company, resulting in $661,500 of compensation expense charged to the Company
over a five year period. Total expense of $33,075 and $66,150 was recognized
during the three and nine months ended March 31, 2000, respectively. During the
period January 1, 2000 and May 10, 2000, an aggregate of 89,500 Incentive Stock
Options (as defined by the Plan), exercisable at $1.29 per share (the fair
market value of the Company's Common Stock on the day of grant) to certain
employees of the Company.
On October 20, 1999, the Company granted options to purchase 526,000 shares of
restricted Common Stock, at an exercise price of $1.00 per share, to John M.
Eger, a director of the Company. A total of approximately $257,740 of
compensation expense was recorded at the date of grant in October 1999.
During the nine months ended March 31, 1999, pursuant to various consulting and
outside service provider agreements, the Company issued to various consultants,
options to purchase 750,000 shares of the Company's restricted common stock at
an exercise price ranging from $0.01 to $1.00 per share (the Company estimated
the fair market value per share to be $1.00 on the date of each grant). The
options vest on the date of grant over a pre-determined vesting schedule and are
exercisable through November 2004. Total expense of $150,000 was recognized
during the nine months ended March 31, 1999.
Consulting expense, pursuant to APB 25 for previously issued options, recognized
in the three- and nine-month periods ended March 31, 2000, was $12,624 and
$37,872, respectively.
NOTE 8 - CONTRACTS:
In an effort to reduce the monthly minimum usage fees of its Internet Service
Provider Access, on December 29, 1999 the Company entered into a one year
agreement with Ziplink, Inc. for the Company's Internet Service Provider Access
service. Pursuant to the Agreement, the Company is subject to a monthly minimum
commitment of $500. In addition, GTC is committed to pay an additional set-up
fee of $100.
On February 3, 2000, the Company terminated its agreement with Level 3 and
signed a promissory note for amounts owed through that date of approximately
$90,189. The promissory note requires the Company to make nine monthly
installment payments of approximately $10,000 per month from February 15, 2000
through October 15, 2000. If the Company fails to make an installment payment,
then the unpaid balance is immediately due and payable. As of May 10, 2000, the
Company is current on the installment payments and the balance due on the
promissory note is approximately $60,000. The promissory note is personally
guaranteed by the Company's President & CEO. In addition, the Company is
relieved of its minimum usage obligations subsequent to February 3, 2000 through
the end of the contract.
On December 9, 1999, the Company entered into a consulting agreement with a
third party to assist the Company in its marketing efforts. Pursuant to the
Agreement, the Company is subject to the following:
1. Payment for consulting services of: (i) $8,000 each month for the
calendar months of December 1999 and January 2000, (ii) $10,000 each month for
calendar months February and March 2000, (iii) $12,000 each month for calendar
months April and May 2000, and (iv) $1.00 retainer for each calendar month
thereafter through January 2001. The payment for consulting services may be
terminated by the Company or by the marketing company given thirty (30) days
written notice.
2. Issue to the marketing company, up to 20,000 shares of the Company's
Common Stock at a rate of one share for each billed customer brought to the
Company by the marketing company by February 29, 2000, subject to a minimum of
5,000 customers. No shares have been issued or earned pursuant to this
agreement through May 10, 2000.
3. In addition, the Company may issue an additional 20,000 shares of Common
Stock and grant warrants to purchase 200,000 shares of the Company's Common
Stock at $2.57 per share if certain customer thresholds are met, as defined. As
of March 31, 2000, no additional shares have been issued or earned and no
additional warrants have been granted or earned.
<PAGE>
On November 13, 1999, the Company entered into an agreement with an Internet
Services Provider ("ISP") whereby the ISP will provide Digital Subscriber Line
("DSL") services for the Company. The agreement provides for no minimum monthly
revenue commitment and shall continue for one year and is automatically renewed
on a month-to-month basis unless terminated by the Company or by the ISP given
thirty (30) days written notice.
In connection with the Company's Private Offering, the Company entered into a
revised Investment Banking Agreement with Transglobal Capital Corporation
("TCC"), a licensed NASD broker on August 1, 1999. As part of this Agreement,
TCC agreed to provide the Company with consulting services and to assist the
Company in raising capital. In return, the Company agreed to compensate TCC
with a 13% commission on gross proceeds received in connection with the July 20,
1999 private offering. In addition, the Company agreed to issue TCC options to
purchase up to 300,000 shares of the Company's Common Stock at an exercise price
of $1.10 per share based upon 10% of the total proceeds raised by TCC.
Subsequent to the quarter ended March 31, 2000, the financing was completed and
as a result, options to purchase 239,400 shares of the Company's restricted
Common Stock at an exercise price of $1.10 per share will be granted.
Beginning in August 1999, the Company entered into negotiations with
MCI/WorldCom ("MCI/WorldCom"), its major supplier of long distance network
transmission services, in an effort to lower its network transmission costs. As
a result of these negotiations, MCI/WorldCom agreed to amend the existing
contract between the Company and MCI/WorldCom whereby MCI/WorldCom agreed to
reduce the Company's network transmission costs by approximately 40%.
Additionally, under the terms of the amendment, the minimum monthly purchase
requirement was increased to $12,000 per month and the total minimum purchase
requirement increased to $288,000. All remaining material terms of the contract
remain the same.
NOTE 9 - SEGMENT REPORTING:
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and/or marketing strategies.
The Company has four reportable segments: GTC Telecom Corp., CallingPlanet.com,
Inc.,ecallingcards.com, Inc. and U.S. Main Corporation.
GTC Telecom Corp. offers a variety of services designed to meet its customers
telecommunications and Internet related needs. CallingPlanet.com, Inc. offers
international calling using a PC to phone connection. ecallingcards.com, Inc.
offers prepaid calling cards purchased over the internet and U.S. Main
Corporation offers private label telecommunications and Internet related needs.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
The results of the segments are immaterial.
NOTE 10 - SUBSEQUENT EVENTS:
On May 1, 2000, the Board issued an aggregate of 57,500 current and previously
owed shares of the Company's restricted Common Stock valued at $71,875 to the
members of the Board pursuant to their agreement of director compensation. The
agreement of director compensation calls for payments of $1,500 and 2,500 shares
of the Company's restricted Common Stock per quarter. The issuance was an
isolated transaction not involving a public offering pursuant to section 4(2) of
the Securities Act of 1933.
On May 1, 2000, the Board granted, pursuant to the Option Plan, an aggregate of
198,350 Non-statutory Stock Options (as defined by the Plan), exercisable at
$1.25 per share (the fair market value of the Company's Common Stock on the day
of grant) to certain employees and officers of the Company. In addition, the
Board granted options to purchase 100,000 shares of restricted Common Stock, at
an exercise price of $1.25 per share (the fair market value of the Company's
Common Stock on the day of grant) to the members of the Board. However, in the
event that the trading price of the Company's Common Stock closes at or above
$5.00 per share for a minimum of five (5) consecutive trading days, the Options
shall become fully vested.
Subsequent to March 31, 2000, the Company completed its Private Offering,
selling an additional 448,500 shares which resulted in a total of 2,958,000
shares sold pursuant to the Private Offering. Total proceeds of the Private
Offering resulted in net proceeds to the Company of $2,721,682, net of offering
costs of $235,995.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENTS:
This Quarterly Report on Form 10-QSB contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The Company intends that such
forward-looking statements be subject to the safe harbors created by such
statutes. The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. Accordingly, to
the extent that this Quarterly Report contains forward-looking statements
regarding the financial condition, operating results, business prospects or any
other aspect of the Company, please be advised that the Company actual financial
condition, operating results and business performance may differ materially from
that projected or estimated by the Company in forward-looking statements. The
differences may be caused by a variety of factors, including but not limited to
adverse economic conditions, intense competition, including intensification of
price competition and entry of new competitors and products, adverse federal,
state and local government regulation, inadequate capital, unexpected costs and
operating deficits, increases in general and administrative costs, lower sales
and revenues than forecast, loss of customers, customer returns of products sold
to them by the Company, termination of contracts, loss of supplies,
technological obsolescence of the Company's products, technical problems with
the Company's products, price increases for supplies and components, inability
to raise prices, failure to obtain new customers, litigation and administrative
proceedings involving the Company, the possible acquisition of new businesses
that result in operating losses or that do not perform as anticipated, resulting
in unanticipated losses, the possible fluctuation and volatility of the
Company's operating results, financial condition and stock price, inability of
the Company to continue as a going concern, losses incurred in litigating and
settling cases, adverse publicity and news coverage, inability to carry out
marketing and sales plans, loss or retirement of key executives, changes in
interest rates, inflationary factors and other specific risks that may be
alluded to in this Quarterly Report or in other reports issued by the Company.
In addition, the business and operations of the Company are subject to
substantial risks that increase the uncertainty inherent in the forward-looking
statements. The inclusion of forward looking statements in this Quarterly
Report should not be regarded as a representation by the Company or any other
person that the objectives or plans of the Company will be achieved.
GENERAL OVERVIEW
The company's principal line of business is to provide long distance and
value-added services for small and medium-sized businesses and residential
customers throughout the United States. The Company's strategy has been to build
a subscriber base without committing capital or management resources to
construct its own network and transmission facilities. This strategy has allowed
the Company to add customers without being limited by capacity, geographic
coverage, or configuration of any particular network that the Company might
have developed. The Company believes that in order to stay competitive in the
future, it will need to construct its own network. Therefore, the Company has
initiated plans to either purchase or construct its own network. However, there
can be no assurances that the Company will be able to purchase or construct its
own network, or that is if it does purchase or construct its own network, that
it will remain competitive.
Recently, the Company has begun providing a number of Internet related services
such as the sale of electronic calling cards on its ecallingcards.com web site;
Internet access via Dial-Up, Wireless T-1, and DSL; and Internet Web Page
Hosting services. However, the Company's Internet related services are intended
to be a value-added service to attract customers to the Company's
Telecommunication services as opposed to a revenue-generating service.
The Company's services are marketed nationwide, through broadcasting and print
media, telemarketing, independent sales agents and its own sales force.
The Company's revenues consist of sales revenues from telecommunications and
Internet related services. These revenues are generated when customers make long
distance telephone calls from their businesses or residential telephones or by
using the Company's telephone calling cards. Proceeds from prepaid telephone
calling cards are recorded as deferred revenues when the cash is received and
recognized as revenue as the telephone service is utilized. The reserve for
deferred revenues is carried on the balance sheet as an accrued liability.
Internet related services are typically billed at a flat rate and are billed in
advance. Revenues are recognized in the period earned.
<PAGE>
Cost of sales include telecommunications service costs and costs paid for third
party verification. Telecommunications service costs paid by the Company are
based on the Company's customers' long distance usage. The Company pays its
carriers based on the type of call, time of call, duration of call, the
terminating telephone number, and terms of the Company's contract in effect of
the time of the call. General and administrative expenses consist of the cost
of customer acquisition, customer service, billing, cost of information systems
and personnel required to support the Company's operations and growth.
The Company, depending on the extent of its future growth, may experience
significant strain on its management, personnel, and information systems. The
Company will need to implement and improve operational, financial, and
management information systems. In addition, the Company is implementing new
information systems that will provide better record keeping, customer service
and billing. However, there can be no assurance that the Company's management
resources or information systems will be sufficient to manage any future growth
in the Company's business, and the failure to do so could have a material
adverse effect on the Company's business, results of operations and financial
condition.
RESULTS OF OPERATIONS OF THE COMPANY
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES - Revenues increased by $1,251,985 from $204,573 in the three months
ended March 31, 1999 to $1,456,558 in the three months ended March 31, 2000.
The increase was primarily due to the increase in telecommunications revenues of
$1,238,294 and internet revenues of $13,691. Beginning in early 1999, the
Company began to actively market its services and began realizing revenues from
the sale of such services. As of March 31, 2000, the Company had 47,879
telecommunication customers, with usage of long distance services of
approximately 24,695,000 minutes for the three months ended March 31, 2000 as
compared with 1,060 customers and approximately 430,000 minutes for the three
months ended March 31, 1999.
COST OF SALES - Cost of sales increased by $1,284,703 from $51,681 in the three
months ended March 31, 1999 to $1,336,384 in the three months ended March 31,
2000. The increase was primarily due to the increase in carrier costs
associated with the cost of long distance service of $1,161,405 and third party
verification costs associated with the increase in the newly acquired customers
of $94,019 for the three months ended March 31, 2000. In addition, the Company
incurred $29,279 of costs associated with its Internet services for the three
months ended March 31, 2000. As a percentage of revenue, cost of sales was
91.7% and 25.3% resulting in a gross margin of 8.3% and 74.7% for the three
months ended March 31, 2000 and 1999, respectively. In an effort to reduce the
monthly minimum usage fees of internet service provider access, the Company
entered into a one year agreement with a company which directly ties these fees
to the internet subscriber base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative ("S,G&A") expenses increased by $652,010 or 55.5% from $1,175,758
in the three months ended March 31, 1999 to $1,827,768 in the three months ended
March 31, 2000. For the three months ended March 31, 1999, the Company began to
realize sales from its telecommunications customers, thereby resulting in
significantly increased S,G&A expenses primarily from its customer service
operations and internet support costs. S,G&A expenses for the three months
ended March 31, 2000 were comprised primarily of stock and options valued at
$380,525 issued in exchange for services, options valued at approximately
$45,699 as supplemental compensation given to certain key employees;
approximately $588,093 in salaries and related taxes paid to employees;
Internet support costs of $24,560; depreciation expense of $43,310; and $745,581
of other operating expenses, primarily rent, legal services, LEC fees, and bad
debts. S,G&A expenses for the three months ended March 31, 1999 were comprised
primarily of shares valued at $79,750 issued to vendors in exchange for services
and rent; advertising expense of $102,237; bad debts of $251,591; stock and
options valued at $5,587 issued to supplement compensation to certain key
employees; and $736,593 of other operating expenses, primarily rent and
salaries. Net loss was $1,748,850 and $1,018,664 for the three months ended
March 31,2000 and 1999, respectively.
NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO NINE MONTHS ENDED MARCH 31, 1999
<PAGE>
REVENUES - Revenues increased by $2,095,409 from $222,535 in the nine months
ended March 31, 1999 to $2,317,944 in the nine months ended March 31, 2000. The
increase was primarily due to the increase in telecommunications revenues of
$2,064,761 and internet revenues of $30,648. For the nine months ended March
31, 1999, the Company had just begun marketing its services. Beginning in early
1999, the Company began to actively market its services and began realizing
revenues from the sale of such services. As of March 31, 2000, the Company had
47,879 telecommunication customers, with usage of long distance services of
approximately 38,322,000 minutes for the nine months ended March 31, 2000 as
compared with 1,060 customers and approximately 560,000 minutes for the nine
months ended March 31, 1999.
COST OF SALES - Cost of sales increased by $2,293,681 from $60,012 in the nine
months ended March 31, 1999 to $2,353,693 in the nine months ended March 31,
2000. The increase was primarily due to the increase in carrier costs
associated with the cost of long distance service of $1,852,213 and third party
verification costs associated with the increase in the newly acquired customers
of $176,896 for the nine months ended March 31, 2000. In addition, the Company
incurred $264,572 of costs associated with its Internet services for the nine
months ended March 31, 2000. As a percentage of revenue, cost of sales was
101.5% and 27.0% resulting in a gross loss of 1.5% and a gross margin of 73.0%
for the nine months ended March 31, 2000 and 1999, respectively. In an effort
to reduce the monthly minimum usage fees of internet service provider access,
the Company entered into a one year agreement with a company which directly ties
these fees to the internet subscriber base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative ("S,G&A") expenses increased by $2,631,604 or 111.3% from
$2,365,424 in the nine months ended March 31, 1999 to $4,997,028 in the nine
months ended March 31, 2000. For the nine months ended March 31, 2000 compared
to the nine months ended March 31, 1999, the Company began to realize sales from
its telecommunications and internet customers, thereby resulting in
significantly increased S,G&A expenses primarily from its customer service
operations and internet support costs. S,G&A expenses for the nine months ended
March 31, 2000 were comprised primarily of shares valued at approximately
$50,000 issued to a vendor for deferment of rent; options valued at
approximately $361,762 issued to a director of the Company and to supplement
compensation to certain key employees; stock and options valued at $380,525
issued in exchange for services; approximately $1,486,354 in salaries and
related taxes paid to employees; advertising expenses of $448,587; Internet
support costs of $454,283; bad debts of $241,136; depreciation expense of
$124,494; and $1,449,887 of other operating expenses, primarily rent, legal,
audit services, and LEC fees. S,G&A expenses for the nine months ended March
31, 1999 were comprised primarily of options valued at $595,998 issued in
exchange for services; shares valued at $238,600 issued to vendors in exchange
for services and rent; approximately $330,319 in salaries and related taxes
paid to employees; advertising expense of $253,402; bad debts of $251,591; stock
and options valued at $31,625 issued to supplement compensation to certain key
employees; and $663,889 of other operating expenses, primarily rent and investor
relations expenses. Net loss was $5,099,586 and $2,199,049 for the nine months
ended March 31, 2000 and 1999, respectively.
ASSETS AND LIABILITIES - Assets increased by $1,979,787 from $660,069 as of June
30, 1999 to $2,639,856 as of March 31, 2000. The increase was due primarily to
increases in cash of $532,442, long-term deposits of $450,110, associated with
the purchase of the Company's VoIP network, accounts receivables of $1,000,389
and decreases in other assets of $3,154, associated with the increase in
customer usage. Liabilities increased by $2,889,017 from $1,087,063 as of June
30, 1999 to $3,976,080 as of March 31, 2000. The increase was due primarily to
increases in accounts payable and accrued expenses of $2,328,614, payroll and
payroll related liabilities of $343,741, notes payable of $248,500 and increases
in other liabilities of $13,380, offset primarily by the decrease in capitalized
lease obligations of $45,218, associated with the increase in telecommunications
service costs, internet service provider access fees and customer service
operations as a result of the increase in customers.
STOCKHOLDERS' DEFICIT - Stockholders' deficit increased by $(909,230) from
$(426,994) as of June 30, 1999 to $(1,336,224) as of March 31, 2000. The
increase was attributable to the net loss of $5,099,586 in the nine months ended
March 31, 2000, offset primarily by the fair market value of stock issued for
services of $1,319,522; the fair market value of options granted to a director
of the Company and consultants for services rendered of $425,140; the fair
market value of options granted to employees for compensation of $104,022; the
exercise of stock options of $71,500; the conversion of a note payable of
approximately $50,000; amounts raised in the Company's recent private offerings
of its common stock of $2,215,172, net of offering costs of $171,005; and
interest accrued on debt converted of $5,000.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL - Overall, the Company had positive cash flows of $532,442 in the nine
months ended March 31, 2000 resulting from $2,539,954 of cash provided by the
Company's financing activities, offset by $1,476,334 of cash used in operating
activities and $531,178 of cash used in investing activities.
<PAGE>
CASH FLOWS FROM OPERATING ACTIVITIES - Net cash used in operating activities of
$1,476,334 in the nine months ended March 31, 2000 was primarily due to a net
loss of $5,099,586, offset partially by changes in operating assets and
liabilities, principally accounts payable and accrued expenses of $2,328,610,
accrued payroll and related taxes of $343,741 and deferred income of $13,380,
offset partially by accounts receivable and prepaid expenses of $1,040,657; the
fair market value of stock issued for services of $1,319,522; the fair market
value of options granted to a director of the Company and consultants for
services rendered of $425,140; the fair market value of options granted to
employees for compensation of $104,022; depreciation expense of $124,494; and
interest accrued on debt converted of $5,000.
CASH FLOWS FROM INVESTING ACTIVITIES - Net cash used in investing activities of
$531,178 in the nine months ended March 31, 2000 funded deposits of $450,110 and
the purchases of property and equipment of $81,068.
CASH FLOWS FROM FINANCING ACTIVITIES - Net cash provided by financing activities
of $2,539,954 in the nine months ended March 31, 2000 was primarily due to the
proceeds from sales of the Company's common stock of $2,215,172, net of offering
costs of $171,005; borrowings of short term debt of $298,500 and proceeds from
the exercise of stock options of $71,500; offset primarily by repayments on
capitalized lease obligations of $45,218.
SHORT-TERM FINANCING - As of June 30, 1999, the Company had raised approximately
$108,450, net of offering costs of $14,550, through the sale of 123,000 shares
of its common stock. During the three and nine months ended March 31, 2000, the
Company has sold an aggregate of 1,056,000 shares resulting in net proceeds to
the Company of approximately $1,029,877, net of offering costs of $25,780 and
2,386,500 shares resulting in net proceeds to the Company of approximately
$2,215,172, net of offering costs of $171,005, respectively, of its "restricted"
common stock pursuant to a private placement offering ("Private Offering") of
3,000,000 shares of the Company's common stock.
On May 10, 2000, the Company completed its Private Offering, selling an
additional 448,500 shares which resulted in a total of 2,958,000 shares sold
pursuant to the Private Offering. Total proceeds of the Private Offering
resulted in net proceeds to the Company of $2,721,682, net of offering costs of
$235,995.
In connection with the Company's Private Offering, the Company entered into a
revised Investment Banking Agreement with Transglobal Capital Corporation
("TCC"), a licensed NASD broker on August 1, 1999. As part of this Agreement,
TCC agreed to provide the Company with consulting services and to assist the
Company in raising capital. In return, the Company agreed to compensate TCC
with a 13% commission on gross proceeds received in connection with the July 20,
1999 private offering. In addition, the Company agreed to issue TCC options to
purchase up to 300,000 shares of the Company's Common Stock at an exercise price
of $1.10 per share based upon 10% of the total proceeds raised by TCC.
Subsequent to the quarter ended March 31, 2000, the financing was completed and
as a result, options to purchase 239,400 shares of the Company's restricted
Common Stock at an exercise price of $1.10 per share will be granted.
In January 2000, the Company entered into a short term note ("Term Note") with
an unrelated individual for $200,000 for working capital purposes. Under the
terms of the Term Note, the Company is required to repay the principal amount of
$200,000 plus one interest payment equal to $20,000 from the proceeds of an
upcoming offering of its securities or from receivables. If the Company does
not have an offering of its securities then repayment is due on or before
February 28, 2000. If not paid by February 28, 2000, the balance accrues
interest of 2% per month. On April 11, 2000, the Company repaid $100,000 of the
principal and is in the process of renegotiating the terms of the note.
On March 31, 1999, the Company borrowed $60,000 for working capital purposes
from a third party. All principal is due February 28, 2000 plus $6,000 of
interest. On March 30, 2000, the Company repaid the principal and interest of
$66,000.
The Company borrowed $50,000 for use as working capital from a third party. The
note bears interest at 10%, was due on August 6, 1999 and is secured by the
Company's receivables. On January 4, 2000, the principal and interest due of
$55,000 was converted into 55,000 shares of the Company's restricted common
stock.
<PAGE>
The funds from the sale of the Company's common stock as described above will be
used to fund the Company's ongoing operations. The Company does not currently
have sufficient capital to fund the acquisition of the Company's VoIP network,
and will need to raise such funds either through the additional sale of its
Common Stock or through debt financing (Please refer to the General Overview,
Long-Term Financing, and Capital Expenditure B VoIP Network section of this
document for further information). No assurances can be given, however, that
the Company will be able to raise the capital necessary to complete the
acquisition of its VoIP network. The failure to obtain the necessary capital
for its VoIP network will have a material adverse effect on the Company's
results of operations.
LONG-TERM FINANCING - On April 30, 1999, the Company entered into a financing
agreement (the "Financing Agreement") with Ascend Communications, Inc.
("Ascend") for $26 million in equipment financing, specifically for the purchase
of the Company' s VoIP network. Upon delivery of the equipment, which has yet
to occur, the terms of the financing will include thirty-three (33) monthly
payments of $942,760 and a five-year warrant for Ascend to purchase 315,151
shares of the Company's "restricted" Common Stock at an exercise price of $8.25
per share. The warrants include provisions for anti-dilution protection, net
exercise and registration rights. An additional amount of approximately $2.9
million, above and beyond the Financing Agreement, will be needed to complete
the purchase of the VoIP network. Delivery of the Ascend equipment has been
delayed until completion of the Company's reevaluation of the VoIP network as
described below.
Beginning in August 1999, the Company entered into negotiations with
MCI/WorldCom ("MCI/WorldCom"), its major supplier of long distance network
transmission services, in an effort to lower its network transmission costs. As
a result of these negotiations, MCI/WorldCom agreed to amend the existing
contract between the Company and MCI/WorldCom whereby MCI/WorldCom agreed to
reduce the Company's network transmission costs by approximately 40%.
Additionally, under the terms of the amendment, the minimum monthly purchase
requirement was increased to $12,000 per month and the total minimum purchase
requirement increased to $288,000. All remaining material terms of the contract
remain the same.
As a result of the Company's amended agreement with MCI/WorldCom, the Company
determined that it was necessary to reconfigure its VoIP network as previously
described. In August 1999, the Company began negotiations with Williams
Communications, a unit of Williams of Tulsa, Oklahoma ("Williams") to reevaluate
the configuration of the VoIP network. This reevaluation may or may not result
in a reduction of the cost of the VoIP network. The previously scheduled
January 2000 launch date of the VoIP network will be significantly delayed as a
result of such reevaluation. The Company anticipates that such reevaluation
will be completed by the third quarter of the year 2000.
Proceeds from the Private Offering will be used to meet the Company's working
capital and other cash requirements, and other equipment purchases in connection
with the expansion of its business. The Company does not currently have
sufficient capital to fund the acquisition of the Company's VoIP network, and
will need to raise such funds either through the additional sale of its Common
Stock or through debt financing. No assurances can be given, however, that the
Company will be able to complete the Private Offering or raise the capital
necessary to complete the acquisition of its VoIP network. The failure to
complete the Private Offering or to obtain the necessary capital for its VoIP
network will have a material adverse effect on the Company's results of
operations.
The Company believes that its anticipated funds from operations and funds from
the sale of its recent Private Offering will be insufficient to fund its capital
expenditures, working capital, and other cash requirements through at least
June 2000. Therefore, the Company will be required to seek additional funds to
finance its long term operations ("Additional Funds"). Should the Company fail
to raise the Additional Funds, the Company will have insufficient funds for the
Company's intended operations and capital expenditures for the next 12 months
and will have a material adverse effect on the Company's long-term results of
operations.
<PAGE>
CAPITAL EXPENDITURES
VOIP NETWORK
On April 30, 1999, the Company entered into an agreement with Williams, in which
Williams will design, install and maintain the Company's previously discussed
high speed, nationwide VoIP network. The total contract cost to the Company is
approximately $100,000,000 over a five-year term. Under the terms of the
agreement with Williams (the "Williams Agreement"), the Company is obligated to
pay Williams $28.9 million upon delivery of the network to the Company. The
Company obtained equipment financing for $26.0 million of the total contract
price from Ascend Communications, Inc. The Company is responsible for the
remaining $2.9 million. Please refer to Long-Term Financing, above for further
details regarding the Company's financing for the purchase of its VoIP Network.
In addition, the Company is obligated to pay Williams a monthly maintenance fee
of approximately $188,000 and an additional set-up fee of $270,000 beginning on
the first month following delivery of the Network increasing to approximately
$404,000 per month through the twelfth (12th) month of the Williams Agreement.
The monthly maintenance fee increases to approximately $639,000 per month
beginning with the thirteenth (13th) month and thereafter until the end of the
contract period. The remainder of the Williams Agreement is for its carrier
services in which the Company will pay approximately $520,000 per month over the
term of the contract. In addition, the financing will include a five- year
warrant to purchase 315,151 shares of the Company's common stock at an exercise
price of $8.25 per share. The warrant will include provisions for anti-dilution
protections, net exercise and registration rights. The Williams Agreement can
be terminated by the Company with six month's written notice to Williams.
Beginning in August 1999, the Company entered into negotiations with
MCI/WorldCom ("MCI/WorldCom"), its major supplier of long distance network
transmission services, in an effort to lower its network transmission costs. As
a result of these negotiations, MCI/WorldCom agreed to amend the existing
contract between the Company and MCI/WorldCom whereby MCI/WorldCom agreed to
reduce the Company's network transmission costs by approximately 40%.
Additionally, under the terms of the amendment, the minimum monthly purchase
requirement was increased to $12,000 per month and the total minimum purchase
requirement increased to $288,000. All remaining material terms of the contract
remain the same.
As a result of the Company's amended agreement with MCI/WorldCom, the Company
determined that it was necessary to reconfigure its VoIP network as previously
described. In August 1999, the Company began negotiations with Williams to
reevaluate the configuration of the VoIP network. This reevaluation may or may
not result in a reduction of the cost of the VoIP network. The previously
scheduled January 2000 launch date of the VoIP network will be significantly
delayed as a result of such reevaluation. The Company anticipates that such
reevaluation will be completed by the third quarter of the year 2000.
OTHER CAPITAL EXPENDITURES
The Company also expects to purchase approximately $200,000 of additional
equipment in connection with the expansion of its business. Because the Company
presently does not have the capital for such expenditures, it will have to raise
these funds. (See Long-Term Financing in this section).
SUBSIDIARIES
The Company has formed three wholly owned subsidiaries that offer different
products and services. They are managed separately because each business
requires different technology and/or marketing strategies.
The three subsidiaries are: CallingPlanet.com, Inc., ecallingcards.com, Inc. and
U.S. Main Corporation.
CallingPlanet.com, Inc. offers international calling using a PC to phone
connection. ecallingcards.com, Inc. offers prepaid calling cards purchased over
the internet and U.S. Main Corporation offers private label telecommunications
and Internet related needs.
GOING CONCERN
The Company's independent certified public accountants have stated in their
report included in the Company's 1999 Form 10-KSB, that the Company has incurred
operating losses in the last two years, has a working capital deficit and a
significant stockholders deficit. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
INFLATION
Management believes that inflation has not had a material effect on the
Company's results of operations.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company may from time to time be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations of discrimination, or
breach of contract actions incidental to the operation of its business. The
Company is not currently involved in any such litigation which it believes could
have a materially adverse effect on its financial condition or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2000, the Company issued 7,000 shares of the Company's common stock
valued at approximately $13,125 in exchange for consultation services.
In January 2000, the Company issued 200,000 shares of restricted Common Stock
valued at approximately $200,000 in lieu of rent owed by the Company from April
1999 through June 2000 for its headquarters and Customer Services operations in
Costa Mesa, California.
In January 2000, the Company entered into an agreement with an outside
consultant for investor and public relations services. Pursuant to the
agreement, the Company is required to issue common stock in an amount equivalent
to $200,000 for one year's services based on the closing bid price on January
28, 2000 of $3.53125 per share. In addition, the Company issued options to
purchase 60,000 shares of the Company's common stock. The options will be
granted over the following schedule: 1) 20,000 shares at 100% of the closing bid
price on January 28, 2000, 2) 20,000 shares at 200% of the closing bid price on
January 28, 2000 and, 3) 20,000 shares at 300% of the closing bid price on
January 28, 2000. The options were valued at $167,400 using the Black Scholes
method and recorded as investor relations expense in January 2000. The issuance
was an isolated transaction not involving a public offering pursuant to section
4(2) of the Securities Act of 1933.
As of May 10, 2000, the Company completed a Private Offering of 2,958,000 shares
resulting in net proceeds to the Company of approximately $2,721,682, net of
offering costs of $235,995 to 44 "accredited" investors pursuant to a Private
Offering of 3,000,000 shares of the Company's Common Stock at a price of $1.00
per share. The offering was conducted without general solicitation or
advertising and offered only to "accredited" investors pursuant to Rule 506 of
Regulation D of the Securities Act of 1933.
During the three and nine months ended March 31, 2000, Paul Sandhu ("Sandhu" ),
the Company's President & CEO, Eric Clemons ("Clemons"), the Company's Chief
Operating Officer, and Gerald DeCiccio, the Company's Chief Financial Officer,
exercised options to purchase a total of 275,000 shares of the Company's common
stock for $59,750 and 325,000 shares of the Company's common stock for $71,500,
respectively. The issuance was an isolated transaction not involving a public
offering pursuant to section 4(2) of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the security holders for a vote during the three
month period ended March 31, 2000.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(4) Exhibits
27 Financial Data Schedule
(5) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934. The
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GTC TELECOM CORP.
By /s/ S. Paul Sandhu
------------------------------
S. Paul Sandhu
President & CEO
Dated: May 15, 2000
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