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 SEPTEMBER 30, 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 October 31, 2000
----------------------------------- -------------------------------
Common Stock, $0.001 par value 19,950,907
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 September 30, 2000 (Unaudited) and June 30,
2000
Consolidated Statements of Operations (Unaudited) three months ended
September 30, 2000 and 1999
Consolidated Statements of Cash Flows (Unaudited) three months ended
September 30, 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
September 30, June 30,
2000 2000
-----------------------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash $ 600 $ 231,336
Accounts receivable, net of allowance for doubtful accounts of
$23,632 and $13,450 at September 30, 2000 and June 30, 2000,
respectively 1,032,627 632,551
Deposits 209,780 178,990
Notes receivable 50,000 22,500
Prepaid expenses 38,049 30,675
-----------------------------
Total current assets 1,331,056 1,096,052
Property and equipment, net of accumulated depreciation of
$229,368 and $181,633 at September 30, 2000 and June 30,
2000, respectively 338,526 372,365
Other assets 38,111 44,236
-----------------------------
Total assets $ 1,707,693 $ 1,512,653
=============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses 3,472,253 2,612,335
Accrued payroll and related taxes 1,143,112 874,213
Obligation under capital lease 179,263 179,263
Notes payable 317,695 138,939
Deferred income 118,211 111,469
-----------------------------
Total current liabilities 5,230,534 3,916,219
-----------------------------
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;
19,967,544 shares issued and outstanding at September 30,
2000 and June 30, 2000, respectively 19,968 19,968
Additional paid-in-capital 8,698,596 8,652,020
Note receivable officer (71,465) --
Accumulated deficit (12,169,940) (11,075,554)
-----------------------------
Total stockholders' deficit (3,522,841) (2,403,566)
-----------------------------
Total liabilities and stockholders' deficit $ 1,707,693 $ 1,512,653
=============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
GTC TELECOM CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
September 30,
2000 1999
---------------------------
<S> <C> <C>
Revenues:
Telecommunications $ 2,760,342 $ 138,865
Internet services 9,612 230
---------------------------
Total revenues 2,769,954 139,095
---------------------------
Cost of sales:
Telecommunications 1,739,612 166,602
Internet services 6,527 80,075
---------------------------
Total cost of sales 1,746,139 246,677
---------------------------
Gross profit/(loss) 1,023,815 (107,582)
Selling, general, and administrative expenses 2,020,725 1,068,187
---------------------------
Operating loss (996,910) (1,175,769)
Interest expense, net (93,237) (9,890)
---------------------------
Loss before provision for income taxes (1,090,147) (1,185,659)
Provision for income taxes 4,239 3,911
===========================
Net loss $ (1,094,386) $(1,189,570)
Net loss available to common shareholders
per common share $ (0.05) $ (0.08)
===========================
Basic and diluted weighted average common shares
outstanding 19,967,544 15,494,813
===========================
</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)
Three Months Ended
September 30,
2000 1999
<S> <C> <C>
---------------------------
Cash Flows From Operating Activities:
Net loss $ (1,094,386) $ (1,189,570)
Adjustments to reconcile net loss to net cash used in operating activities:
Estimated fair market value of options granted to
employees for compensation 33,076 12,624
Estimated fair market value of warrants granted in
connection with notes payable 13,500 --
Estimated fair market value of stock issued for services -- 336,000
Reduction of note receivable for services rendered 22,500 --
Allowance for doubtful receivables 10,182 --
Depreciation and amortization 53,860 40,079
Changes in operating assets and liabilities:
Accounts receivable and other current assets (448,422) (54,074)
Accounts payable and accrued expenses 859,918 201,240
Accrued payroll and related taxes 268,899 138,013
Deferred income 6,742 3,508
---------------------------
Net cash used in operating activities (274,131) (512,180)
---------------------------
Cash Flows From Investing Activities:
Purchases of property and equipment (13,896) --
Notes receivable (50,000) --
Advances to stockholder (71,465) --
Deposits -- (180,110)
---------------------------
Net cash used in investing activities (135,361) (180,110)
---------------------------
Cash Flows From Financing Activities:
Principal borrowings on notes payable 200,000 50,000
Principal repayments on notes payable (21,244) --
Proceeds from sale of stock, net of offering costs of
$60,170 -- 626,830
Borrowings on note payable to stockholder -- 48,500
Principal payments under capital lease -- (14,633)
---------------------------
Net cash provided by financing activities 178,756 710,697
---------------------------
Net increase/(decrease) in cash (230,736) 18,407
Cash at beginning of period 231,336 500
---------------------------
Cash at end of period 600 18,907
===========================
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ 79,737 $ 1,487
Income taxes $ 4,239 $ 3,711
</TABLE>
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 September 30, 2000, and
the results of operations and cash flows for the three months ended September
30, 2000.
It is suggested that these financial statements be read in conjunction with the
audited consolidated financial statements and notes for the year ended June 30,
2000, included in the Company's Form 10-KSB filed with the Securities and
Exchange Commission on October 4, 2000. The interim results are not necessarily
indicative of the results for a full year.
NOTE 2 - DESCRIPTION OF BUSINESS:
GTC provides various Telecommunication services, including long distance
telephone and calling card services, various Internet related services including
Internet Service Provider access and Web Page Hosting and wireless
telecommunication services. GTC Telecom Corp. 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 consolidated 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 of $3,899,478, liabilities from the underpayment of payroll taxes (see
Note 7), contingent liabilities from cancelled contracts (see Note 7), a
stockholders' deficit of $3,522,841, losses from operations through September
30, 2000 and a lack of operational history, among other matters, that raise
substantial doubt about its ability to continue as a going concern. The Company
hopes to continue to increase revenues from additional revenue sources and
increase margins as a result of amending its contract with MCI/WorldCom (see
Note 7) and other cost cutting measures. In the absence of significant revenues
and profits, the Company intends to fund operations through additional 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, 2001. Therefore, the Company may 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.
These circumstances raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
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.
RISKS AND UNCERTAINTIES - The Company has limited operating history and is
subject to the substantial business risks and uncertainties inherent to such an
entity, including the potential risk of business failure.
REVENUE AND RELATED COST RECOGNITION - The Company recognizes revenue during the
month in which services or products are delivered, as follows:
<PAGE>
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.
Telecommunication services cost of sales includes the cost of long distance
service provided by MCI/WorldCom and other carriers.
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 includes the cost of providing internet access.
DEFERRED REVENUE - Deferred revenue represent proceeds from prepaid telephone
calling cards which are recorded as deferred revenue when the cash is received.
The Company recognizes the revenue in the statement of operations as the
telephone service is utilized.
LOSS 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.
COMPREHENSIVE INCOME - The Company had adopted Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The adoption of SFAS 130
has not materially impacted the Company's financial position or results of
operations as the Company has no items of comprehensive income.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION - The Company had adopted
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information." SFAS 131 changes the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information in
their quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues and its major customers.
As approximately 99% of the Company's revenues, loss from operations and
identifiable assets are from the telecommunications segment, the Company has not
made segment disclosures in the accompanying financial statements.
RECLASSIFICATIONS - Certain reclassifications have been made to prior year
amounts to conform to current year presentation.
ACCOUNTING FOR WEB SITE DEVELOPMENT COSTS - The Company has adopted the Emerging
Issues Task Force Issue No. 00-2, "Accounting for Web Site Development Costs"
("EITF 00-2"). The consensus states that for specific web site development
costs, the accounting for such costs should be accounted for under AICPA
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The adoption of EITF 00-2 did
not have a material effect on its financial statements.
ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION - The Company
adopted FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB 25," an
interpretation of APB 25. FIN 44 clarifies the application of APB 25 for (a)
the definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence for various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The adoption of FIN 44 did not
have a material effect on the financial statements.
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS:
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - 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 by SFAS 137, is effective for financial statements for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The adoption of
this standard did not 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.
REVENUE RECOGNITION - In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition," which
outlines the basic criteria that must be met to recognize revenue and provide
guidance for presentation of revenue and for disclosure related to revenue
recognition policies in financial statements filed with the Securities and
Exchange Commission. The effective date of this pronouncement is the fourth
quarter of the fiscal year beginning after December 15, 1999. The Company
believes that adopting SAB 101 will not have a material impact on its financial
position and results of operations.
NOTE 4 - NOTE RECEIVABLE OFFICER:
During the first quarter ended September 30, 2000, the Company advanced an
officer $71,465. The advance accrues interest at 10% (no interest income has
been earned as of September 30, 2000) and is due December 31, 2000. The Company
has reclassed the notes receivable as a reduction to stockholders' deficit at
September 30, 2000.
NOTE 5 - NOTES PAYABLE:
In September 2000, the Company entered into a promissory note with a shareholder
in the amount of $200,000. The note, which accrues interest at 12%, is due on
March 25, 2001 and is secured by the Company's receivables. In addition, the
Company agreed to issue to the noteholder warrants to purchase 40,000 shares of
the Company's restricted Common Stock at an exercise price of $0.50 per share
valued at approximately $13,500 (based on the Black-Scholes pricing model) which
the Company has expensed in the current quarter as interest expense. The
warrants are exercisable for a period of two (2) years from the date of issuance
and contain piggy-back registration rights.
NOTE 6 - OPTIONS AND WARRANTS:
On October 5, 2000, the Company's Board of Directors granted, pursuant to the
Option Plan, an aggregate of 511,150 Incentive Stock Options (as defined by the
Plan), exercisable at $0.6875 per share (the fair market value of the Company's
Common Stock on the day of grant) to directors, officers and employees of the
Company. Pursuant to APB 25, no compensation expense is to be recognized on the
issuance of these options.
Compensation expense, pursuant to APB 25 for previously issued options, was
recognized for $33,076 and $12,624 in the three month period ended September 30,
2000 and 1999, respectively.
NOTE 7 - CONTRACTS AND CONTINGENCIES:
Beginning in August 1999, the Company entered into negotiations with
MCI/WorldCom ("MCI/WorldCom") in an effort to lower its network transmission
costs. As a result of these negotiations, MCI/WorldCom agreed to amend the
existing contract 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. In an
effort to continue to reduce its long distance network transmission costs, the
Company successfully negotiated an additional amendment to its contract in
September 2000. The amendment further reduces the Company's network
<PAGE>
transmission costs by approximately 30%. In addition, under the terms of the
amendment, the contract is extended to August 31, 2003 and the minimum monthly
purchase requirement increased to $400,000 per month for the months August 2000
to January 2001 and then increases to $520,000 per month from February 2001 to
the end of the contract. The total minimum purchase requirement of the contract
increased to $18,000,000. All remaining material terms of the contract remain
the same. For the three month period ended September 30, 2000 and 1999, the
Company paid $1,244,222 and $79,315, respectively, pursuant to this agreement.
On April 30, 1999, the Company entered into an agreement with Williams
Communications, a unit of Williams of Tulsa, Oklahoma ("Williams"), in which
Williams was to design, install and maintain a high speed, nationwide VoIP
network for the Company. Subsequently, due to Williams' inability to deliver
the VoIP network as contracted and as a result of the previously discussed
amendments to the MCI/WorldCom contract, the Company determined to discontinue
its agreement with Williams. As a result of the Company's discontinuation of
its contract with Williams, the Company may be subject to $600,110 in fees. The
Company is in negotiations with Williams to modify or eliminate these charges.
However, no assurances can be made that such negotiations will result in a
favorable outcome. No amounts have been recorded related to the discontinuation
of the contract as of September 30, 2000.
The Company has recorded an accrual for past due payroll taxes as of September
30, 2000 due to the under-reporting of the Company's payroll tax liability. As
a result, the Company has accrued approximately $907,000, including penalties
and interest, under accrued payroll and related taxes in the accompanying
balance sheet at September 30, 2000. The Company expects this matter to be
settled and the related accrual paid by June 30, 2001.
NOTE 8 - SUBSEQUENT EVENTS:
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 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 or 56,637 shares. In addition, the Company issued options to
purchase 60,000 shares of the Company's common stock. The options were to 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 $157,800 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. In October 2000, pursuant to an agreement,
the consultant accepted a cash payment of $6,280 in lieu of the 56,637 shares of
the Company's common stock and the 60,000 options.
In October 2000, the Company entered into an agreement with an outside
consultant for investor and public relations services. Pursuant to the
agreement, the Company agreed to the following:
1. Payment for services of (i) $6,500 per month for the calendar months
November 2000 to February 2001, and (ii) $7,500 per calendar month thereafter.
The payment for services may be terminated by the Company or by the investor
relations company given sixty (60) days written notice.
2. Issue to the investor relations company, 15,000 shares of the Company's
restricted common stock for each month the agreement is in effect. These shares
shall have piggyback registration rights and will be valued using the market
price on the date of each grant.
<PAGE>
In November 2000, the Company entered into an agreement with an outside
consultant for investor and public relations services. Pursuant to the
agreement, the Company agreed to the following:
1. Payment for services of (i) $3,000 per month for the calendar months of
November and December 2000, (ii) $5,000 per month for calendar months January
and February 2001, and (iii) $7,000 per calendar month thereafter. Following an
initial term of six (6) months, the agreement is renewable on a month-to-month
basis.
2. Issue to the investor relations company, 25,000 shares of the Company's
restricted common stock.
3. In addition, the Company granted warrants to purchase 100,000 shares of
the Company's common stock. The warrants have an exercise price as follows: 1)
33,333 shares at the closing bid price on November 1, 2000, 2) 33,333 shares at
the closing bid price on November 1, 2000 plus $0.50 per share and, 3) 33,334
shares at the closing bid price on November 1, 2000 plus $1.00 per share. The
warrants were valued at approximately $40,000(based on the Black Scholes pricing
model) which the Company recorded as investor relations expense in November
2000.
<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's 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.
Recently, the Company began 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.
Cost of sales include telecommunications service costs and the costs providing
internet access. 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 (including costs paid for third party verification), 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 SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
REVENUES - Revenues increased by $2,630,859 from $139,095 in the three months
ended September 30, 1999 to $2,769,954 in the three months ended September 30,
2000. The increase was primarily due to the increase in telecommunications
revenues of $2,621,477 and internet revenues of $9,382. Beginning in early
1999, the Company began to actively market its services and began realizing
revenues from the sale of such services. As of September 30, 2000, the Company
had 79,708 telecommunication customers, with usage of long distance services of
approximately 44,788,000 minutes for the three months ended September 30, 2000
as compared with 6,781 customers and approximately 2,094,000 minutes for the
three months ended September 30, 1999.
COST OF SALES - Cost of sales increased by $1,499,462 from $246,677 in the three
months ended September 30, 1999 to $1,746,139 in the three months ended
September 30, 2000. The increase was primarily due to the increase in carrier
costs associated with increased telecommunications service revenues partially
offset by decreased costs associated with local access of $1,573,010 for the
three months ended September 30, 2000. In addition, the costs associated with
its Internet services decreased $73,548 for the three months ended September 30,
2000. 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 in
January 2000 which directly ties these fees to the internet subscriber base. As
a percentage of revenue, cost of sales was 63.0% and 177.3% resulting in a gross
margin of 37.0% and a gross loss of 77.3% for the three months ended September
30, 2000 and 1999, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative ("S,G&A") expenses increased by $952,538 or 89.2% from $1,068,187
in the three months ended September 30, 1999 to $2,020,725 in the three months
ended September 30, 2000. For the three months ended September 30, 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 September 30, 2000 were comprised primarily of $849,680 in salaries
and related taxes paid to employees; billing related costs of $216,967;
advertising expense of $108,803; rent of $83,909; bad debt of $76,862;
depreciation and amortization expense of $53,860; options valued at
approximately $33,076 issued to employees of the Company; and $597,568 of other
operating expenses, primarily consulting services, costs of third party
verification for newly acquired customers, internet support costs and audit and
legal costs. S,G&A expenses for the three months ended September 30, 1999 were
comprised primarily of shares valued at approximately $50,000 issued to a vendor
for deferment of rent; options valued at approximately $12,624 issued to
supplement compensation to certain key employees; approximately $409,252 in
salaries and related taxes paid to employees; advertising expenses of $170,618;
Internet support costs of $104,639; depreciation and amortization expense of
$40,079; and $280,975 of other operating expenses, primarily rent, legal, audit
services, and investor relations. Net loss was $1,094,386 and $1,189,570 for
the three months ended September 30, 2000 and 1999, respectively.
ASSETS AND LIABILITIES - Assets increased by $195,040 from $1,512,653 as of June
30, 2000 to $1,707,693 as of September 30, 2000. The increase was due primarily
to increases in accounts receivable of $400,076, deposits of $30,790, notes
receivable of $27,500 and decreases in cash of $230,736 and other assets of
$32,590, associated with the increase in customer usage. Liabilities increased
<PAGE>
by $1,314,315 from $3,916,219 as of June 30, 2000 to $5,230,534 as of September
30, 2000. The increase was due primarily to increases in accounts payable and
accrued expenses of $859,918, payroll and payroll related liabilities of
$268,899, notes payable of $178,756 and increases in other liabilities of
$6,742, 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 $(1,119,275) from
$(2,403,566) as of June 30, 2000 to $(3,522,841) as of September 30, 2000. The
increase was attributable to the net loss of $1,094,386 in the three months
ended September 30, 2000, and note receivable officer of $71,465, offset
primarily by the fair market value of options to employees for compensation of
$33,076 and the fair market value of warrants granted in connection with notes
payable of $13,500.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL - Overall, the Company had negative cash flows cash flows of $230,736 in
the three months ended September 30, 2000 resulting from $178,756 of cash
provided by the Company's financing activities, offset by $274,131 of cash used
in operating activities and $135,361 of cash used in investing activities.
CASH FLOWS FROM OPERATING ACTIVITIES - Net cash used in operating activities of
$274,131 in the three months ended September 30, 2000 was primarily due to a net
loss of $1,094,386, offset partially by changes in operating assets and
liabilities, principally accounts payable and accrued expenses of $859,918,
accrued payroll and related taxes of $268,899 and deferred income of $6,742,
offset partially by accounts receivable and other current assets of $448,422;
the fair market value of warrants granted in connection with notes payable of
$13,500; the fair market value of options vesting in the current period of
$33,076; depreciation and amortization expense of $53,860; reduction of notes
receivable for services provided of $22,500; and allowance for doubtful
receivables of $10,182.
CASH FLOWS FROM INVESTING ACTIVITIES - Net cash used in investing activities of
$135,361 in the three months ended September 30, 2000 funded purchases of
property and equipment of $13,896; notes receivable of $50,000; and
distributions to officer of $71,465.
CASH FLOWS FROM FINANCING ACTIVITIES - Net cash provided by financing activities
of $178,756 in the three months ended September 30, 2000 was primarily due to
borrowings of short term debt of $200,000 offset primarily by repayments on
notes payable of $21,244.
SHORT-TERM FINANCING - On September 23, 2000, the Company entered into a
promissory note with an unaffiliated accredited shareholder resulting in net
proceeds to the Company in the amount of $200,000. Pursuant to the terms of the
promissory note, the balance and simple interest in the amount of 12% are due
and payable to the noteholder on March 25, 2001 and the note is secured by the
Company's receivables. In addition, the Company agreed to issue to the
noteholder warrants to purchase up to 40,000 shares of the Company's restricted
Common Stock at an exercise price of $0.50 per share. The warrants are
exercisable for a period of two (2) years from the date of issue and contain
piggy-back registration rights.
The Company borrows funds from the Company's President & CEO for working capital
purposes. The borrowings accrue interest at 10% and are due on demand. As of
September 30, 2000, the note payable to the Company's President & CEO was
$2,149. No interest was accrued or paid as of September 30, 2000 and 1999.
The funds from the promissory note as described above will be used to fund the
Company's ongoing operations.
LONG-TERM FINANCING - The Company believes that its anticipated funds from
operations will be insufficient to fund its capital expenditures, working
capital, and other cash requirements through at least June 2001. Therefore, the
Company will be required to seek additional funds either through debt or equity
financing 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 which may have a material adverse effect on the Company's
long-term results of operations.
<PAGE>
CONTINGENT LIABILITIES - On April 30, 1999, the Company entered into an
agreement with Williams Communications, a unit of Williams of Tulsa, Oklahoma
("Williams"), in which Williams was to design, install and maintain a high
speed, nationwide VoIP network for the Company. Subsequently, due to Williams's
inability to deliver the VoIP network as contracted and as a result of an
amendment to the MCI/WorldCom contract, the Company determined to discontinue
its agreement with Williams. As a result of the Company's discontinuation of
its contract with Williams, the Company may be subject to accrued costs of
$600,110. The Company is in negotiations with Williams to modify or eliminate
these charges. However, no assurances can be made that such negotiations will
result in a favorable outcome.
The Company has recorded an accrual for past due payroll taxes as of September
30, 2000 due to the under-reporting of the Company's payroll tax liability. As
a result, the Company has accrued approximately $907,000, including penalties
and interest, under accrued payroll and related taxes in the accompanying
balance sheet at September 30, 2000. The Company anticipates having this matter
settled by June 30, 2001.
CAPITAL EXPENDITURES
The Company 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 four wholly owned subsidiaries that offer different
products and services. They are managed separately because each business
requires different technology and/or marketing strategies.
The four subsidiaries are: CallingPlanet.com, Inc., ecallingcards.com, Inc.,
U.S. Main Corporation, and GTC Wireless, Inc.
CallingPlanet.com, Inc. offers international calling using a PC to phone
connection. ecallingcards.com, Inc. offers prepaid calling cards purchased over
the internet, U.S. Main Corporation offers private label telecommunications and
Internet related needs and GTC Wireless, Inc. offers wireless telecommunication
services.
GOING CONCERN
The Company's independent certified public accountants have stated in their
report included in the Company's 2000 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
None in the period covered by this report.
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 September 30, 2000.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) 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
By /s/ Gerald A. DeCiccio
----------------------------------
Gerald A. DeCiccio
Chief Financial Officer
Dated: November 14, 2000
