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 DECEMBER 31, 1999
[ ] 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 January 31, 2000
----------------------------------- -------------------------------
Common Stock, $0.001 par value 17,602,574
Transitional Small Business Disclosure Format
(Check one);
Yes [ ] No [ X ]
<PAGE>
INDEX
GTC TELECOM CORP.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
-Balance Sheets at December 31, 1999 (Unaudited) and June 30, 1999
-Statements of Operations (Unaudited) Three months and six months ended
December 31, 1999 and 1998
-Statements of Cash Flows (Unaudited) Six months ended December 31, 1999 and
1998
-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.
BALANCE SHEETS
<S> <C> <C>
December 31, June 30,
1999 1999
----------- ----------
(Unaudited)
ASSETS
Current assets:
Cash $ 8,137 $ 500
Accounts receivable 486,417 16,889
Deposits 35,500 35,500
Prepaid expenses 22,005 23,319
----------- ----------
Total current assets 552,059 76,208
----------- ----------
Property and equipment, net of accumulated depreciation
of $101,120 and $32,186 at December 31, 1999
and June 30, 1999, respectively 329,569 365,126
Deposits 600,110 150,000
Other assets 56,485 68,735
----------- ----------
Total assets $ 1,538,223 $ 660,069
=========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses 2,076,638 688,178
Accrued payroll and related taxes 445,649 167,508
Current portion of obligation under capital lease 64,901 61,198
Notes payable 183,500 25,000
Deferred income 26,467 12,482
----------- ----------
Total current liabilities 2,797,155 954,366
Long-term liabilities:
Obligation under capital lease, net of current portion 99,293 132,697
----------- ----------
Total liabilities $ 2,896,448 $ 1,087,063
----------- ----------
Contingencies
Stockholders' deficit:
Common stock, $0.001 par value; 50,000,000 shares authorized;
17,107,574 (unaudited) and 15,286,824 shares issued and
outstanding at December 31, 1999 and June 30, 1999,
respectively 17,108 15,287
Additional paid-in-capital 5,869,966 3,452,282
Accumulated deficit (7,245,299) (3,894,563)
----------- ----------
Total stockholders' deficit (1,358,225) (426,994)
----------- ----------
Total liabilities and stockholders' deficit $ 1,538,223 $ 660,069
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
GTC TELECOM CORP.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<S> <C> <C> <C> <C>
Six Months Ended Three Months Ended
December 31, December 31,
1999 1998 1999 1998
---------- --------- --------- ---------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Telecommunications $ 844,429 $ 17,962 $ 705,564 $ 17,962
Internet services 16,957 - 16,727 -
---------- --------- --------- ---------
Net revenues 861,386 17,962 722,291 17,962
---------- --------- --------- ---------
Cost of sales:
Telecommunications 699,139 8,331 574,185 8,331
Internet services 235,293 - 155,218 -
Third party verification 82,877 - 62,302 -
---------- --------- --------- ---------
Total cost of sales 1,017,309 8,331 791,705 8,331
---------- --------- --------- ---------
Gross profit/(loss) (155,923) 9,631 (69,414) 9,631
Selling, general, and
administrative expenses 3,169,260 1,189,666 2,079,996 1,009,155
---------- --------- --------- ---------
Operating loss (3,325,183) (1,180,035) (2,149,410) (999,524)
Interest income/(expense) (22,053) 50 (12,163) 50
---------- --------- --------- ---------
Loss before provision for
income taxes (3,347,236) (1,179,985) (2,161,573) (999,474)
Provision for income taxes 3,500 400 (407) 200
---------- --------- --------- ---------
Net loss (3,350,736) (1,180,385) (2,161,166) (999,674)
========== ========= ========= =========
Basic and diluted net loss
per common share $ (0.21) $ (0.10) $ (0.13) $ (0.09)
========== ========= ========= =========
Basic and diluted weighted
average common shares outstanding 15,975,687 11,284,629 16,458,035 11,689,702
========== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
GTC TELECOM CORP.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<S> <C> <C>
Six Months Ended
December 31,
--------------------------
1999 1998
___________ ___________ ------------ -----------
Cash Flows From Operating Activities:
Net loss $ (3,350,736) $(1,180,385)
Adjustments to reconcile net loss to net cash
used in operating activities:
Estimated fair market value of stock issued
for services 906,397 158,850
Estimated fair market value of options granted to
employees for compensation 58,323 20,813
Estimated fair market value of options and warrants
granted to a director and consultants for services
rendered 257,740 714,129
Estimated fair market value of stock issued to
employees for compensation - 5,225
Depreciation and amortization 81,184 3,200
Changes in operating assets and liabilities:
Accounts receivable and prepaid expenses (468,214) (4,800)
Accounts payable and accrued expenses 1,388,460 85,058
Accrued payroll and related taxes 278,141 (4,567)
Deferred income 13,985 -
------------- -----------
Net cash used in operating activities (834,720) (202,477)
------------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment (33,377) (6,208)
Purchase of other assets - (30,000)
Deposits (450,110) -
------------- -----------
Net cash used in investing activities (483,487) (36,208)
------------- -----------
Cash Flows From Financing Activities:
Proceeds from sale of stock, net of offering
costs of $145,225 and $48,083 for the six months
ended December 31, 1999 and 1998, respectively 1,185,295 186,917
Borrowings on note payable to stockholder 48,500 -
Principal payments under capital lease (29,701) -
Borrowings on short term debt 110,000 -
Proceeds from exercise of stock options 11,750 11,350
Collection of stock subscription receivable, net of
offering costs of $5,525 - 36,975
------------- -----------
Net cash provided by financing activities 1,325,844 235,242
------------- -----------
Net increase (decrease) in cash 7,637 (3,443)
Cash at beginning of period 500 3,892
------------- -----------
Cash at end of period $ 8,137 $ 449
============= ===========
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $ 11,015 $ -
Income taxes $ 3,504 $ -
============= ===========
Supplemental disclosures on non-cash flow investing and financing activities:
During the six months ended December 31, 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.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
GTC TELECOM CORP.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - MANAGEMENT'S REPRESENTATION:
The management of GTC Telecom Corp. (the "Company" or "GTC") without audit has
prepared the financial statements included herein. Certain information and note
disclosures normally included in the 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 financial statements have been included and were of a normal
recurring nature, and the accompanying financial statements present fairly the
financial position as of December 31, 1999, the results of operations for the
three and six months ended December 31, 1999 and cash flows for the six
months ended December 31, 1999.
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 December 31, 1999 and a lack of
operational history, among other matters, raise substantial doubt that 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 is 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.
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. SOP 98-5 is effective
for financial statements for fiscal years beginning after December 15, 1998.
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.
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.
<PAGE>
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 six months ended December
31, 1999 and 1998 is $12,250 and none, respectively.
<PAGE>
NOTE 5 - NOTES PAYABLE:
Notes payable represents:
On December 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.
The Company borrowed monies from a stockholder for working capital purposes.
The note payable accrues interest at 10% and is due July 22, 2000. As of
December 31, 1999 and June 30, 1999, the note payable to stockholder was $73,500
and $25,000, respectively.
The Company borrowed $50,000 for working capital purposes from a third party.
The note bears interest at 10%, was due on August 6, 1999 and is secured by the
Company's receivables. The Company is in the process of renegotiating the terms
of the Note.
NOTE 6 - COMMON STOCK ISSUANCES:
During the three and six months ended December 31, 1999, the Company sold an
aggregate of 643,500 shares resulting in net proceeds to the Company of
approximately $558,465, net of offering costs of $85,035 and 1,330,500 shares
resulting in net proceeds to the Company of approximately $1,185,295, net of
offering costs of $145,225, respectively, to 27 "accredited" investors under an
ongoing Private Offering of 2,000,000 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.
In December 1999, the Company issued an aggregate of 282,575 shares to
consultants and attorney's 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.
During the three months ended December 31, 1999, Paul Sandhu ("Mr. Sandhu" ),
the Company's President & CEO, and Eric Clemons ("Mr. Clemons"), the Company's
Chief Operating Officer, exercised options (previously granted pursuant to
their employment contracts) to purchase a total of 50,000 shares of the
Company's common stock for $11,750.
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.
On October 4, 1999, Mr. Sandhu and Mr. Clemons canceled 581,480 and 145,370,
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 in the outstanding shares as of June
30, 1999 and December 31, 1999.
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 Company was required to pay a total
of $42,360 deferred rent in nine payments beginning January 1, 2000 through
September 1, 2000 in addition to its regular rent due each month under its
lease. The issuance was an isolated transaction not involving a public offering
pursuant to section 4(2) of the Securities Act of 1933.
<PAGE>
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 six months ended December 31, 1998, pursuant to third party
agreements, the Company granted options and issued warrants to purchase
the Company's restricted common stock. Total expense of $632,707 and $714,129
was recognized in the three- and six-month periods ended December 31, 1998,
respectively.
During the six months ended December 31, 1998, the Company issued 80,000 shares
of restricted common stock, valued at $80,000 (estimated by the Company to be
$1.00 per share) to outside consultants for services rendered.
During the six months ended December 31, 1998, the Company issued 7,300 shares
of common stock, valued at $32,850 to outside consultants for services rendered.
During the six months ended December 31, 1998, the Company issued 235,000 shares
of restricted common stock pursuant to a private placement memorandum of
$186,917, net of offering costs of $48,083.
During the six months ended December 31, 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.
During the three months ended September 30, 1998, the Company issued 11,000
shares of restricted common stock, valued at $5,225 (estimated by the Company to
be $0.475 per share) to employees in lieu of salary.
NOTE 7 - OPTIONS AND WARRANTS:
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.
On October 18, 1999, the Company's Board of Directors 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 was recognized during the three and six
months ended December 31, 1999.
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.
<PAGE>
During the six months ended December 31, 1998, 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 six months ended December 31, 1998.
Consulting expense recognized in the three- and six- month periods ended
December 31, 1999, was $12,624 and $25,248, 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. GTC is currently in the process of negotiating an early
termination of the agreement with Level 3. Unless the Company is able to
negotiate the termination of the agreement with Level 3 on more favorable terms,
the Company will be committed to continue to pay Level 3's minimum usage fees
of $36,000 per month until July 2000, or an aggregate of $252,000 over the
remaining term 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 LaRae given thirty (30) days written notice.
2. Issue to the marketing company, up to 20,000 shares of the Company's
Common Stock for each billed customer brought to the Company by the marketing
company by February 29, 2000, subject to a minimum of 5,000 customers. As
of December 31, 1999, no shares have been issued or earned pursuant to this
agreement.
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 December 31, 1999, no additional shares have been issued or earned and no
additional warrants have been granted
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 ongoing 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 200,000 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. As of
December 31, 1999, no options have been 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.
<PAGE>
NOTE 9 - SUBSEQUENT EVENTS:
Beginning January 17, 2000, the Company leased an additional 2,934 square feet
for continued expansion of its customer service operation at a monthly rental
rate of $6,295 and for the Company to pay the first three and one-half months
rent.The addendum is coterminous with the Company's June 1, 1998 lease and
will automatically expire on May 31, 2001, unless previously terminated by
the Company or by the lessor given ninety (90) days written notice.
With this addendum, the Company leases a total of 8,621 square feet of office
space for its headquarters and customer service operations in Costa Mesa,
California at a monthly rental rate of $18,182.
In consideration of the lease addendum, the Company has agreed to issue 45,000
shares of restricted Common Stock valued at approximately $41,100 in lieu of
rent owed from January 17, 2000 through June 2000. The issuance was an isolated
transaction not involving a public offering pursuant to section 4(2) of the
Securities Act of 1933.
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 borrowed $200,000 for working capital purposes from
a third party The note is payable in full on February 28, 2000 plus interest
equal to $20,000. If all unpaid principal and interest is not paid by February
28, 2000, the balance accrues interest of 2% per month with no predetermined due
date.
In January 2000, the Company issued 155,000 shares of restricted Common Stock
valued at approximately $155,000 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 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.
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.
<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.
As previously discussed, the Company acquired all of the outstanding common
stock of GenTel on August 31, 1998. Following the acquisition, the Company
adopted the business plan of GenTel and changed its name to GTC.
RESULTS OF OPERATIONS OF THE COMPANY
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1998
REVENUES - Revenues increased by $704,329 from $17,962 in the three months ended
December 31, 1998 to $722,291 in the three months ended December 31, 1999. The
increase was primarily due to the increase in telecommunications revenues of
$687,602 and internet revenues of $16,727. For the three months ended December
31, 1998, 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 December 31, 1999, the Company
had 24,194 telecommunication customers, with usage of long distance services
of approximately 11,534,000 minutes for the three months ended December 31,
1999 as compared with 554 customers and approximately 130,000 minutes for
the three months ended December 31, 1998.
COST OF SALES - Cost of sales increased by $783,374 from $8,331 in the three
months ended December 31, 1998 to $791,705 in the three months ended December
31, 1999. The increase was primarily due to the increase in carrier costs
associated with the cost of long distance service of $565,854 and third party
verification costs associated with the increase in the newly acquired customers
of $62,302 for the three months ended December 31, 1999. In addition, the
Company incurred $155,218 of costs associated with its Internet services for the
three months ended December 31, 1999. As a percentage of revenue, cost of sales
was 109.6% and 46.4% resulting in a gross loss of 9.6% and a gross margin of
53.6% for the three months ended December 31, 1999 and 1998, 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 $1,070,841 or 106.1% from
$1,009,155 in the three months ended December 31, 1998 to $2,079,996 in the
three months ended December 31, 1999. For the three months ended December 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
three months ended December 31, 1999 were comprised primarily of options
valued at approximately $303,439 issued to a director of the Company and to
supplemental compensation given to certain key employees; approximately $489,009
in salaries and related taxes paid to employees; advertising expenses of
$273,544; Internet support costs of $325,084; depreciation expense of $41,106;
and $647,814 of other operating expenses, primarily rent, legal, audit services,
and bad debts. S,G&A expenses for the three months ended December 31, 1998
were comprised primarily of options valued at $514,576 issued in exchange for
services; shares valued at $158,850 issued to vendors in exchange for
services and rent; advertising expense of $151,165; stock and options valued
at $20,813 issued to supplement compensation to certain key employees; and
$163,751 of other operating expenses, primarily rent and salaries. Net loss
was $2,161,166 and $999,674 for the three months ended December 31,1999 and
1998, respectively.
<PAGE>
ASSETS AND LIABILITIES - Assets increased by $878,154 from $660,069 as of June
30, 1999 to $1,538,223 as of December 31, 1999. The increase was due primarily
to increases in long-term deposits of $450,110, associated with the purchase
of the Company's VoIP network and accounts receivables of $469,528 and decreases
in other assets of $41,484, associated with the increase in customer usage.
Liabilities increased by $1,809,385 from $1,087,063 as of June 30, 1999 to
$2,896,448 as of December 31, 1999. The increase was due primarily to
increases in accounts payable and accrued expenses of $1,388,460, payroll
and payroll related liabilities of $278,141, notes payable of $158,500 and
increases in other liabilities of $13,985 offset primarily by the decrease in
capitalized lease obligations of $29,701 , 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 $(931,231) from
$(426,994) as of June 30, 1999 to $(1,358,225) as of December 31, 1999. The
increase was attributable to the net loss of $3,350,736 in the six months ended
December 31, 1999, offset primarily by the fair market value of stock issued for
services of $906,397, the fair market value of options granted to a director of
the Company of $257,740, the fair market value of options granted to employees
for compensation of $58,323, the exercise of stock options of $11,750 and
amounts raised in the Company's recent private offerings of its common stock of
$1,185,295, net of offering costs of $145,225.
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1998
REVENUES - Revenues increased by $843,424 from $17,962 in the six months ended
December 31, 1998 to $861,386 in the six months ended December 31, 1999. The
Increase was primarily due to the increase in telecommunications revenues of
$826,467 and internet revenues of $16,957. For the six months ended December 31,
1998, 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 December 31, 1999, the Company
had 24,194 telecommunication customers, with usage of long distance services of
approximately 13,628,000 minutes for the six months ended December 31, 1999 as
compared with 554 customers and approximately 130,000 minutes for the six
months ended December 31, 1998.
COST OF SALES - Cost of sales increased by $1,008,978 from $8,331 in the six
months ended December 31, 1998 to $1,017,309 in the six months ended December
31, 1999. The increase was primarily due to the increase in carrier costs
associated with the cost of long distance service of $690,808 and third party
verification costs associated with the increase in the newly acquired customers
of $82,877 for the six months ended December 31, 1999. In addition, the Company
incurred $235,293 of costs associated with its Internet services for the six
months ended December 31, 1999. As a percentage of revenue, cost of sales was
118.1% and 46.4% resulting in a gross loss of 18.1% and a gross margin of 53.6%
for the six months ended December 31, 1999 and 1998, 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 $1,979,594 or 166.4% from
$1,189,666 in the six months ended December 31, 1998 to $3,169,260 in the six
months ended December 31, 1999. For the six months ended December 31, 1999
compared to the six months ended December 31, 1998, 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 costs. S,G&A expenses for the six months ended December
31, 1999 were comprised primarily of shares valued at approximately $50,000
issued to a vendor for deferment of rent; options valued at approximately
$316,063 issued to a director of the Company and to supplement compensation to
certain key employees; approximately $898,261 in salaries and related taxes paid
to employees; advertising expenses of $444,162; Internet support costs of
$429,723; depreciation expense of $81,184; and $949,867 of other operating
expenses, primarily rent, legal, audit services, and bad debts. S,G&A expenses
for the six months ended December 31, 1998 were comprised primarily of options
valued at $595,998 issued in exchange for services; shares valued at $158,850
issued to vendors in exchange for services and rent; advertising expense of
$151,165; stock and options valued at $26,038 issued to supplement compensation
to certain key employees; and $257,615 of other operating expenses, primarily
rent and salaries. Net loss was $3,350,736 and $1,180,385 for the six months
ended December 31,1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL - Overall, the Company had positive cash flows of $7,637 in the six
months ended December 31, 1999 resulting from $1,325,844 of cash provided by the
Company's financing activities, offset by $834,720 of cash used in operating
activities and $483,487 of cash used in investing activities.
CASH FLOWS FROM OPERATIONS - Net cash used in operating activities of $834,720
in the six months ended December 31, 1999 was primarily due to a net loss of
$3,350,736, offset partially by changes in operating assets and liabilities,
principally accounts payable and accrued expenses of $1,388,460, accrued payroll
and related taxes of $278,141 and deferred income of $13,985, offset partially
by accounts receivable and prepaid expenses of $468,214; the fair market value
of stock issued for services of $906,397; the fair market value of options
granted to a director of the Company of $257,740; the fair market value of
options granted to employees for compensation of $58,323; and depreciation
expense of $81,184.
<PAGE>
CASH FLOWS FROM INVESTING - Net cash used in investing activities of $483,487 in
the six months ended December 31, 1999 funded deposits of $450,110 and the
purchases of property and equipment of $33,377.
CASH FLOWS FROM FINANCING - Net cash provided by financing activities of
$1,325,844 in the six months ended December 31, 1999 was primarily due to the
proceeds from sales of the Company's common stock of $1,185,295, net of offering
costs of $145,225 borrowings of short term debt of $158,500 and proceeds from
the exercise of stock options of $11,750, offset primarily by repayments on
capitalized lease obligations of $29,701.
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 six months ended December 31, 1999,
the Company has sold an aggregate of 643,500 shares resulting in net proceeds to
the Company of approximately $558,465, net of offering costs of $85,035 and
1,330,500 shares resulting in net proceeds to the Company of approximately
$1,185,295, net of offering costs of $145,225, respectively, of its "restricted"
common stock at $1.00 per share pursuant to an ongoing private placement
offering ("Private Offering") of 2,000,000 shares of the Company's common stock.
In connection with the Company's ongoing 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 200,000 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. As of
December 31, 1999, no options have been 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 December 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.
As of July 22, 1999, the Company had borrowed $73,500 from its President and
CEO. These borrowings ("Borrowings") were for use as working capital. The
Company does not expect to borrow any additional funds beyond the total amount
currently borrowed from the President and CEO. Under the terms of the
Borrowings, the Company will be required to repay the principal of $73,500 by
July 22, 2000 with 10% interest. The Borrowings are not secured.
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. The Company is in the process of renegotiating the
repayment of the Note.
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 - VoIP Network section of this
document for further information). 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.
<PAGE>
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 Company anticipates that
the currently scheduled launch date of the VoIP network (currently scheduled for
January 2000) will be significantly delayed as a result of such reevaluation.
The Company anticipates that such reevaluation will be completed in the first
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 and ongoing Private Offering will be insufficient to fund
its capital expenditures, working capital, and other cash requirements for the
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 complete any of the Private Offering or 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.
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.
<PAGE>
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 Company
anticipates that the currently scheduled launch date of the VoIP network
(currently scheduled for January 2000) will be significantly delayed as a result
of such reevaluation. The Company anticipates that such reevaluation will be
completed in the first 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).
GOING CONCERN
The Company's independent certified public accountants have stated in their
report included in this 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.
YEAR 2000 DISCLOSURE
The Year 2000 (or "Y2K") issue involves the potential for system and processing
failures of date-related data resulting from computer-controlled systems using
two digits rather than four to define the applicable year. For instance,
computer programs that contain time-sensitive software may recognize a date
using two digits of "00" as the year 1900 rather than the year 2000. This could
result in system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar ordinary business activities. We have
completed a review of our computer systems and non-information technology
("non-IT") systems to identify all systems that could be affected by the Year
2000 issue. We are dependent on third-party computer systems and applications,
particularly with respect to such critical tasks as accounting, billing and our
underlying carrier (MCI/WorldCom) of our long distance telephone service. We
also rely on our own computer and non-IT systems (which consists of personal
computers, internal telephone systems, internal network server, Internet server
and associated software and operating systems). In conducting a review of our
internal systems, we have performed operational tests of our systems which
revealed no Y2K problems. As a result of our review, we have discovered no
problems with our systems relating to the Y2K issue and believe that such
systems are Y2K compliant. Additionally, we have obtained written assurances
from all of our major suppliers of third-party computer systems and
applications, indicating that they have completed a review of their respective
computer systems and that such systems are Y2K compliant. Costs associated with
our review were not material to our results of operations.
Although the Company did not experience any problems related to the Y2K issue at
the turnover between the year 1999 and 2000, because of the complexity of the
Y2K issue and the interdependence of organizations using computer systems, there
can be no assurances that the Company's efforts, or those of third parties with
whom it interacts, have fully resolved all possible Y2K issues. Failure to
satisfactorily address the Y2K issue could have a material adverse effect on
GTC. The most likely worst case Y2K scenario which management has identified to
date is that, due to unanticipated Y2K compliance problems, the Company may be
unable to bill its customers, in full or in part, for services used. Should
this occur, it would result in a material loss of some or all gross revenue for
an indeterminable amount of time, which could cause the Company to cease
operations. Although the Company has received written assurances from its major
suppliers that they are, or will be, Year 2000 compliant, should any such
supplier fail to adequately address the Year 2000 problem, our only recourse for
any damages suffered as a result would be through litigation. We have not yet
developed a contingency plan to address this worst case Y2K scenario, and do not
intend to develop such a plan in the future.
<PAGE>
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
During the three and six months ended December 31, 1999, the Company sold an
aggregate of 643,500 shares resulting in net proceeds to the Company of
approximately $558,465, net of offering costs of $85,035 and 1,330,500 shares
resulting in net proceeds to the Company of approximately $1,185,295, net of
offering costs of $145,225, respectively, to 27 "accredited" investors under an
ongoing Private Offering of 2,000,000 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.
In December 1999, the Company issued an aggregate of 282,575 shares to
consultants and attorney's 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.
During the three months ended December 31, 1999, Paul Sandhu ("Sandhu" ), the
Company's President & CEO, and Eric Clemons ("Clemons"), the Company's Chief
Operating Officer, exercised options to purchase a total of 50,000 shares of the
Company's common stock for $11,750.
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.
On October 4, 1999, Sandhu and Clemons canceled 581,480 and 145,370,
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 in the outstanding shares as of June
30, 1999 and December 31, 1999.
In September 1999, the Company issued an aggregate of 67,675 shares to seven
consultants of the Company and the Cutler Law Group, the Company's securities
counsel, in exchange for consultation and legal services provided to the Company
valued at approximately $271,247. The transactions were isolated transactions
not involving a public offering exempt under Section 4(2) of the Securities Act
of 1933. 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 Company was required to pay a total
of $42,360 deferred rent in nine payments beginning January 1, 2000 through
September 1, 2000 in addition to its regular rent due each month under its
lease. 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 13, 1999, the Company held its Annual meeting of Shareholders. Up
for consideration by the shareholders at the meeting were three proposals
submitted by the Company's Board of Directors.
<PAGE>
(a) The first proposal involved the election of the Company's Board of
Directors. Set forth below is the name of each director elected at the meeting
and the number of votes cast for their election, the number of votes against
their election, the number of votes abstained and the number of non-votes:
Number of Number of Number of Number of
Name Votes "For" Votes "Against" Votes "Abstain" "Non-Votes"
- ----------------- ----------- --------------- --------------- -----------
S. Paul Sandhu 10,965,262 0 78,073 5,236,664
Eric A. Clemons 10,965,262 0 78,073 5,236,664
Clay T. Whitehead 10,965,262 0 78,073 5,236,664
John M. Eger 10,965,262 0 78,073 5,236,664
(b) The second proposal up for consideration involved the approval and
ratification of the GTC Telecom 1999 Omnibus Stock Option Plan for the
directors, officers and employees of GTC. Set forth below are the number of
votes for, against, abstain and non-votes for this proposal:
Number of Number of Number of Number of
Votes "For" Votes "Against" Votes "Abstain" "Non-Votes"
----------- --------------- --------------- -----------
10,375,927 15,200 652,210 5,236,662
(c) Proposal Three requested the approval of the Shareholders to amend the
Articles of Incorporation of GTC to add a class of preferred stock. Set forth
below are the number of votes for, against, abstain and non-votes for this
proposal:
Number of Number of Number of Number of
Votes "For" Votes "Against" Votes "Abstain" "Non-Votes"
----------- --------------- --------------- -----------
8,349,419 666,038 78,200 7,186,342
ITEM 5. OTHER INFORMATION
On October 20, 1999, John M. Eger was appointed to the Board of Directors to
fill a vacancy. Mr. Eger was re-elected to the Board of Directors at the
Company's Annual Shareholder's meeting on December 13, 1999.
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
Dated: February 10, 2000
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