UP TO 15,680,715 SHARES OF COMMON STOCK
GTC TELECOM CORP.
[GRAPHIC OMITED]
This prospectus is part of a registration statement that covers the resale
of up to:
- - 15,000,000 shares of our common stock issuable pursuant to a common stock
purchase agreement between us and Bluefire Capital, Inc., as further described
in this prospectus. See "Common Stock Purchase Agreement" beginning on page 11
.;
- - 150,000 shares of our common stock issuable by us upon the exercise of a
warrant held by Bluefire Capital, Inc.;
- - 105,000 shares of our common stock previously issued to Alan Stone and
Richard Goldman, principal and consultant of Alan Stone & Company, our former
investor relations firm;
- - 285,715 shares of our common stock previously issued to Dan Kern;
- - 40,000 shares of our common stock underlying warrants previously issued to
Steve Barnes; and
- - 100,000 shares of our common stock underlying warrants previously issued
to Magnum Financial, Inc., our current investor relations firm.
The selling shareholders may resell these shares, and resell the shares
issuable upon exercise of the warrants, using this prospectus.
Bluefire Capital, Inc. is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with its sales.
Our common stock is currently traded on the OTC Bulletin Board under the
trading symbol GTCC. Our market price on the OTC Bulletin Board was $0.22 per
share as of January 22, 2002.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this prospectus is January 23, 2002.
1
GTC TELECOM CORP.
TABLE OF CONTENTS
PROSPECTUS SUMMARY 3
SUMMARY CONSOLIDATED FINANCIAL INFORMATION 4
RISK FACTORS 5
USE OF PROCEEDS 10
COMMON STOCK PURCHASE AGREEMENT 11
SELLING SHAREHOLDERS 16
PLAN OF DISTRIBUTION 18
DESCRIPTION OF BUSINESS 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 28
MANAGEMENT 33
EXECUTIVE COMPENSATION 35
DESCRIPTION OF PROPERTY 37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 38
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 40
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S 41
DESCRIPTION OF SECURITIES 42
EXPERTS 43
LEGAL MATTERS 43
AVAILABLE INFORMATION 44
FINANCIAL STATEMENTS F-1
2
THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE INFORMATION
THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ
THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE MORE DETAILED INFORMATION
REGARDING OUR COMPANY, THE RISKS OF PURCHASING OUR COMMON STOCK DISCUSSED UNDER
"RISK FACTORS," AND OUR FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES.
PROSPECTUS SUMMARY
THE COMPANY
We are a provider of various Telecommunication services, including long distance
telephone and calling card services as well as various Internet related services
including Internet service provider access and web page hosting. We were
organized on May 17, 1994 and are currently based in Costa Mesa, California.
Our common stock currently trades on the NASD OTC Bulletin Board under the
symbol "GTCC."
Our principal office is located at 3151 Airway Ave., Suite P-3, Costa Mesa,
CA 92627, telephone number (714) 549-7700. Our worldwide website is
www.gtctelecom.com. Information contained on our website is not part of this
prospectus.
THE OFFERING
This offering relates to the resale of common stock by certain persons who
are, or will become, shareholders of our company. The selling shareholders
consist of:
- - Bluefire Capital, Inc., which intends to resell up to 15,000,000 shares of
common stock to be issued under a Common Stock Purchase Agreement, dated
September 19, 2001 and up to 150,000 shares of common stock underlying warrants.
- - 105,000 shares of our common stock previously issued to Alan Stone and
Richard Goldman, principal and consultant of Alan Stone & Company, our former
investor relations firm;
- - 285,715 shares of our common stock previously issued to Dan Kern;
- - 40,000 shares of our common stock underlying warrants, exercisable at
$0.50 per share, previously issued to Steve Barnes; and
- - 100,000 shares of our common stock underlying warrants, exercisable
between $0.5156 and $1.5156 per share, previously issued to Magnum Financial,
Inc., our current investor relations firm.
COMMON STOCK OFFERED Up to 15,680,715 shares by our selling
shareholders
COMMON STOCK OUTSTANDING
BEFORE THE OFFERING 20,396,622 as of September 30, 2001
USE OF PROCEEDS We will not receive any proceeds from the sale of
The shares offered by the selling shareholders. Any
proceeds we receive from the sale of shares of
common stock under the Common Stock Purchase
Agreement or from the cash exercise of warrants will
be used for general corporate purposes and repayment
of debt.
RISK FACTORS The securities offered hereby involve a high degree
of risk and immediate substantial dilution.
See "Risk Factors" and "Dilution."
OVER-THE-COUNTER BULLETIN
BOARD SYMBOL GTCC
3
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth some information which appears in our
consolidated financial statements as of June 30, 2001 and for the two-years then
ended, and our interim consolidated financial statements for the three months
ended September 30, 2001 and 2000. This table does not present all of the
financial information contained in our consolidated financial statements and
related notes contained elsewhere in this prospectus. Therefore, this financial
information should be read in conjunction with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section in this
prospectus and our consolidated financial statements and related notes included
elsewhere in this prospectus.
FOR THE THREE FOR THE THREE FOR THE FOR THE
MONTHS ENDED MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 JUNE 30, 2001 JUNE 30, 2000
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED)
------------------- ------------------- -------------- --------------
STATEMENT OF OPERATION DATA:
Revenues 4,378,183 2,769,954 13,964,544 4,696,087
Cost of goods sold 2,552,604 1,746,139 7,965,782 4,032,587
Gross profit 1,825,579 1,023,815 5,998,762 663,500
Total operating expenses 2,192,219 2,020,725 8,317,686 7,696,832
Interest expense, net (120,984) (93,237) (504,901) (142,441)
Net loss (496,305) (1,094,386) (2,832,258) (7,180,991)
Net loss per share-basic and dilutive (0.02) (0.05) (0.14) (0.42)
SEPTEMBER 30, 2001 JUNE 30, 2001
(UNAUDITED) (AUDITED)
------------------- -------------------
BALANCE SHEET DATA:
Cash 504,791 219,878
Accounts Receivable 1,659,378 1,514,972
Other Assets 304,105 220,611
Total Equipment 265,326 222,584
Total Assets 2,733,600 2,178,045
Total Current Liabilities 8,469,847 7,458,312
Total Liabilities 8,469,847 7,458,312
Stockholders' Deficit (5,736,247) (5,280,267)
4
RISK FACTORS
OUR COMPANY IS SUBJECT TO VARIOUS RISKS WHICH MAY MATERIALLY HARM OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. YOU SHOULD CAREFULLY CONSIDER
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS
FILING BEFORE DECIDING TO PURCHASE OUR COMMON STOCK. THESE ARE NOT THE ONLY
RISKS AND UNCERTAINTIES THAT WE FACE. IF ANY OF THESE RISKS OR UNCERTAINTIES
ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE
MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
Risks Related To Our Business
WE HAVE AN EXTREMELY LIMITED OPERATING HISTORY AND LARGE ACCUMULATED
DEFICIT WHICH MAKES IT DIFFICULT TO ASSESS OUR FUTURE GROWTH.
Our executive officers commenced our major lines of business - providing
long distance and Internet service - relatively recently. Although we were
originally formed in 1994, we did not commence our current lines of business
until late 1998. Accordingly, your evaluation of GTC will be based on an
extremely limited operating history. You must consider that our prospects are
subject to the risks, expenses and uncertainties frequently encountered by
companies in the early stage of development in new and rapidly evolving markets.
As of September 30, 2001, we had an accumulated deficit of $5,736,247. Although
we have experienced revenue growth in recent months, we cannot be certain that
our revenues will continue to increase. We have not achieved profitability to
date. We currently expect to increase our operating expenses significantly,
expand our sales and marketing operations and continue to develop and extend our
Telecommunications and Internet related services. If these expenses continue to
exceed revenues, our business, results of operations and financial condition
could be harmed. Our independent certified public accountants have stated in
their report included with our audited financial statements for the fiscal years
ended June 30, 2001 and 2000, that we have incurred operating losses in the last
two years, have a working capital deficit and a significant stockholders'
deficit. These conditions raise substantial doubt about our ability to continue
as a going concern.
WE ARE DEPENDENT ON A LIMITED NUMBER OF SUPPLIERS.
We currently depend upon WorldCom, Inc., as our sole provider of long
distance service. We contract with WorldCom to provide us with long distance
services which we resell to our customers. We will continue to depend upon
WorldCom to provide transmission facilities, maintenance and international long
distance services for the foreseeable future. This agreement is probably our
most vital agreement and our ability to provide our long distance service
depends upon whether we can continue to maintain a favorable relationship with
WorldCom. WorldCom may terminate its contract with us for limited reasons,
including for nonpayment, for national defense purposes or if the provision of
services to us were we to have a substantial adverse impact on WorldCom's
network. Under the terms of the contract, WorldCom is required to provide us
with a minimum notice of 5-days in the case of a material breach prior to
termination of the contract. If we were to switch to another provider, we
believe that it would take approximately thirty days to switch our customers to
a new provider. Although we believe that we have the right to switch our
customers without their consent to such other providers, our customers in
return, have the right to discontinue such service at any time. Accordingly,
the termination or nonrenewal of our contract with WorldCom or the loss of the
telecommunications services provided by WorldCom would likely harm our telephone
business.
We do not have our own Internet Network. We currently provide our Internet
Service Provider Access services pursuant to agreements with various outside
companies. We are subject to a monthly minimum commitment of $1,500 through
December 2001. Subsequently, the monthly minimum commitment is $500 per month.
Although we believe that our relations with these companies are strong and
should remain so with continued contract compliance, the termination of our
contracts with these companies, the loss of Internet services provided by them,
or a reduction in the quality of service we receive from them could harm our
business.
5
COMPETITION IN OUR MARKETS IS VERY INTENSE.
The long distance telecommunications industry is highly competitive and
affected by the introduction of new services by, and the market activities of,
major industry participants, including AT&T Corp., WorldCom, Sprint Corporation,
local exchange carriers such as Verizon, and other national and regional
interexchange carriers. Competition in the long distance business is based upon
pricing, customer service, billing services and perceived quality. We compete
against various national and regional long distance carriers that are composed
of both facilities-based providers (those that carry long distance traffic on
their own equipment) and switchless resellers (those that resell long distance
carried by facilities-based providers) offering essentially the same services as
we do. Several of our competitors are substantially larger and have greater
financial, technical and marketing resources. Although we believe that we have
the human and technical resources to pursue our strategy and compete effectively
in this competitive environment, our success will depend upon our continued
ability to profitably provide high quality, high value services at prices
generally competitive with, or lower than, those charged by our competitors.
We expect to encounter continued competition from major domestic and
international communications companies. In addition, we may be subject to
additional competition due to the enactment of the Telecommunications Act of
1996, the development of new technologies and increased availability of domestic
and international transmission capacity. A continuing trend toward business
combinations and alliances in the telecommunications industry may create
significant new competitors, which may have financial, personnel and other
resources significantly greater than ours. Other potential competitors include
cable television companies, wireless telephone companies, electric utilities,
microwave carriers and private networks of large end users.
The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increasing transmission capacity for services similar to those provided by us.
We cannot predict which of many possible future product and service offerings
will be important to maintain our competitive position or what expenditures will
be required to develop and provide such products and services.
The market for Internet-based online services is relatively new, intensely
competitive and rapidly changing. Since the advent of commercial services on the
Internet, the number of Internet Service Providers and online services competing
for users' attention and spending has proliferated because of, among other
reasons, the absence of substantial barriers to entry, and we expect that
competition will continue to intensify. Many of our current and potential
competitors such as Earthlink, PsiNet, AOL, UUNET, Microsoft Network, and
Prodigy have longer operating histories, larger customer bases, greater brand
recognition and significantly greater financial, marketing and other resources.
These competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and to devote greater
resources to the development, promotion and sale of their products and services
than we are.
We currently believe that our Internet Related Services are marketed at
competitive rates and provide quality and services comparable to our
competitors. However, our Internet Related Services are intended more as a
value added service to attract customers to our Telecommunication Services as
opposed to a revenue generating service. We are offering unlimited dial-up
service for $9.95 per month. We anticipate that revenue generated exclusively
from our Internet Related Services will not be significant to our business for
the foreseeable future. Rather, we expect to derive sufficient revenue from our
Telecommunication Services and Internet related advertising revenue to pay for
the costs of our Internet Related Services.
WE HAVE AN ACCUMULATED PAST DUE PAYROLL TAX LIABILITY.
We have recorded an accrual for past due payroll taxes due to the
under-reporting of our payroll tax liability. As a result, at September 30,
2001, we had accrued approximately $1,225,000 in past due payroll taxes
including approximately $309,000 of penalties and interest. We intend on using
a portion of the funds raised in this Offering to meet this liability. Failure
to satisfactorily address this liability may substantially harm our business.
OUR CUSTOMERS ARE FREE TO CHANGE THEIR TELECOMMUNICATION PROVIDER.
Our customers are not obligated to purchase any minimum usage amount and
can discontinue service, without penalty, at any time. Therefore, we cannot
know if our customers will continue to buy their long distance telephone service
through us. In the event that a significant portion of our customers decide to
purchase long distance service from another long distance service provider, we
do not know if we would be able to replace our customer base from other sources.
Loss of a significant portion of our customers could harm our business.
6
A high level of customer attrition is inherent in the long distance
industry, and our revenues are affected by such attrition. Attrition is
attributable to a variety of factors, including termination of customers by us
for nonpayment and the initiatives of existing and new competitors as they
engage in, among other things, national advertising campaigns, telemarketing
programs and the issuance of cash or other forms of incentives.
OUR OFFICERS AND DIRECTORS OWN A LARGE PERCENTAGE OF OUR COMMON STOCK AND
THEREFORE HAVE SIGNIFICANT INFLUENCE OVER OUR AFFAIRS.
As of September 30, 2001, our present directors and executive officers, and
their respective affiliates beneficially owned approximately 31% of our
outstanding common stock, along with vested options to purchase an additional
1,266,000 shares of our Common Stock. As a result of their ownership, the
directors and executive officers and their respective affiliates collectively
are able to significantly influence all matters requiring shareholder approval,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership may also have the effect of
delaying or preventing a change in control of GTC.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION.
We are subject to regulation by the FCC and by various state public service
and public utility commissions as a nondominant provider of long distance
services. We are required to file tariffs for interstate and international
service with the FCC, which tariffs are presumed lawful and become effective on
one day's notice. We are also required to file tariffs or obtain approval for
intrastate service provided in most of the states in which we market long
distance services. By engaging in direct marketing to end users, we will be
subject to applicable regulatory standards for marketing activities and the
increased FCC and state attention to certain marketing practices may become more
significant to us. Additionally, certain marketing practices, including the
methods and means to convert a customer's long distance telephone service from
one carrier to another, have recently been subject to increased regulatory
review at both the federal and state levels. This increased regulatory review
could impede our possible future acquisition of new business from other
resellers. Our marketing activities mandate compliance with applicable state
and federal regulations. We are unable to predict the effect of such increased
regulatory review.
OUR COMMON STOCK MAY BE DEEMED TO BE "PENNY STOCK."
Our common stock may be deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny
stocks are stock:
- - With a price of less than $5.00 per share;
- - That are not traded on a "recognized" national exchange;
- - Whose prices are not quoted on the Nasdaq automated quotation system
(Nasdaq listed stock must still have a price of not less than $5.00 per share);
or
- - In issuers with net tangible assets less than $2.0 million (if the issuer
has been in continuous operation for at least three years) or $5.0 million (if
in continuous operation for less than three years), or with average revenues of
less than $6.0 million for the last three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our
common stock to resell shares to third parties or to otherwise dispose of them.
This could cause our stock price to decline.
7
Risks Related To This Offering
IF THE PRICE OR THE TRADING VOLUME OF OUR COMMON STOCK DOES NOT REACH
CERTAIN LEVELS, WE WILL BE UNABLE TO DRAW DOWN ALL OR SUBSTANTIALLY ALL OF THE
$20 MILLION UNDER THE EQUITY LINE.
The maximum amount of each draw down under our equity line facility is
equal to 10% of weighted average price of our stock for the 60 calendar period
prior to the draw down multiplied by the total trading volume for that 60
calendar day period. If our stock price and trading volume falls below certain
levels, then we will not be able to draw down all $20 million pursuant to the
proposed equity line facility with Bluefire. For example, during the 60
calendar day period ended October 22, 2001, our weighted average stock price was
$0.2672 per share and our total daily trading volume was 1,235,700 shares.
Based on such stock price and trading volume levels, the maximum draw down
amount available to us during such period would have been $33,018 per draw down.
Additionally, Bluefire Capital, Inc. is only obligated to initially
purchase up to $10 million of our common stock and is only obligated to purchase
the remaining $10 million once the volume weighted average price of our common
stock equals or exceeds $4 for 10 consecutive trading days; our average daily
volume exceeds 75,000 shares; and our market cap equals or exceeds $30 million.
Accordingly, our stock price and the trading volume of our stock will have
to increase substantially in the future in order for us to have access to the
full $20 million under the equity line.
OUR COMMON STOCK PURCHASE AGREEMENT WITH BLUEFIRE AND THE ISSUANCE OF
SHARES TO BLUEFIRE CAPITAL, INC. THEREUNDER MAY CAUSE SIGNIFICANT DILUTION TO
OUR STOCKHOLDERS AND, TOGETHER WITH GUIDANCE WE ISSUE TO ANALYSTS AND THE
FINANCIAL COMMUNITY, MAY HAVE AN ADVERSE IMPACT ON THE MARKET PRICE OF OUR
COMMON STOCK.
The resale by Bluefire Capital, Inc. of the common stock that it purchases
from us will increase the number of our publicly traded shares, which could
depress the market price of our common stock. Moreover, as all the shares we
sell to Bluefire Capital, Inc. will be available for immediate resale, the mere
prospect of our sales to it could depress the market price for our common stock.
The shares of our common stock issuable to Bluefire under the equity line
facility will be sold at a 12% discount to the volume-weighted average daily
price of our common stock during the applicable drawdown period and the proceeds
paid to us upon each drawdown will be net of a 4% expense fee paid to Bluefire,
an escrow agent fee of $500, and our legal fees of 1%. If we were to require
Bluefire Capital, Inc. to purchase our common stock at a time when our stock
price is low, our existing common stockholders will experience substantial
dilution. The issuance of shares to Bluefire Capital, Inc. will therefore dilute
the equity interest of existing stockholders and could reduce the market price
of our common stock.
The perceived risk of dilution may cause our stockholders to sell their
shares, which would contribute to a downward movement in the stock price of our
common stock. Moreover, the perceived risk of dilution and the resulting
downward pressure on our stock price could encourage investors to engage in
short sales of our common stock. By increasing the number of shares offered for
sale, material amounts of short selling could further contribute to progressive
price declines in our common stock.
In addition, from time to time, we issue guidance to analysts and the
financial community regarding our projected results for future periods and
revisions to guidance previously issued. The dissemination of guidance or
revisions to guidance previously issued may increase the volatility of our stock
price.
THE COMMON STOCK PURCHASE AGREEMENT LIMITS THE NUMBER OF SHARES OF COMMON
STOCK THAT BLUEFIRE CAPITAL, INC. MAY HOLD AT ANY ONE TIME TO 9.9%, WHICH MAY
FURTHER LIMIT OUR ABILITY TO DRAW DOWN AMOUNTS THAT WE REQUEST AND WHICH MAY
CAUSE US TO SIGNIFICANTLY CURTAIL THE SCOPE OF OUR OPERATIONS AND ALTER OUR
BUSINESS PLAN.
The common stock purchase agreement provides that we may not sell shares of
our common stock pursuant to our draw down right under such agreement if such
sale would cause Bluefire to beneficially own more than 9.9% of our issued and
outstanding common stock at any one time. Accordingly, we may have to
significantly curtail the scope of our operations and alter our business plan
if, at the time of one or more draw downs, this 9.9% restriction results in our
inability to draw down some or all of the amounts requested in any draw down
notice.
8
WE MAY USE THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH YOU MAY NOT
AGREE.
Net proceeds to us from any sales to Bluefire Capital, Inc. will be used
principally for the continued development and implementation of our services,
advertising, marketing, repayment of debt and for general corporate purposes.
We have not allocated any specific amount of our net proceeds for any particular
purpose. Consequently, our management will have broad discretion with respect
to the expenditure of the net proceeds of any sales to Investor, including
discretion to use the proceeds in ways with which you may not agree.
OUR COMMON STOCK HAS EXPERIENCED IN THE PAST, AND IS EXPECTED TO EXPERIENCE
IN THE FUTURE, SIGNIFICANT PRICE AND VOLUME VOLATILITY, WHICH SUBSTANTIALLY
INCREASES THE RISK OF LOSS TO PERSONS OWNING OUR COMMON STOCK.
Because of the limited trading market for our common stock, and because of
the possible price volatility, you may not be able to sell your shares of common
stock when you desire to do so. During the first three quarters of 2001, our
stock price ranged from a high of $0.4844 to a low of $0.18 per share. The
inability to sell your shares in a rapidly declining market may substantially
increase your risk of loss because of such illiquidity and because the price for
our common stock may suffer greater declines because of its price volatility.
BECAUSE BLUEFIRE CAPITAL, INC. IS A RESIDENT OF A FOREIGN COUNTRY, IT MAY
BE DIFFICULT OR IMPOSSIBLE TO OBTAIN OR ENFORCE JUDGMENTS AGAINST BLUEFIRE.
Bluefire Capital, Inc. is a resident of the Cayman Islands and a
substantial portion of its assets are located outside of the United States. As
a result, it may be difficult or impossible to effect service of process on
Bluefire within the United States. It may also be difficult or impossible to
enforce judgments entered against Bluefire in courts in the United States based
on civil liability provisions of the securities laws of the United States. In
addition, judgments obtained in the United States, especially those awarding
punitive damages, may not be enforceable in foreign countries.
9
USE OF PROCEEDS
We will not realize any proceeds from the sale of the common stock by the
selling shareholders; rather, the selling shareholders will receive those
proceeds directly. We will, however, receive proceeds from the cash exercise of
warrants by the selling shareholders. We will not receive any of the proceeds
from the sale of shares by Bluefire Capital, Inc. that it has obtained under the
common stock purchase agreement or upon exercise of the warrants by Bluefire.
However, if we exercise, in our sole discretion, any draw downs under the equity
line of credit, we will receive the net sale price of any common stock we sell
to Bluefire under the terms of the common stock purchase agreement described in
this prospectus. We intend to use the net proceeds from any sales to Bluefire
or from the cash exercise of warrants by the selling shareholders, primarily for
the continued development and implementation of our services, advertising,
marketing, repayment of debt and for general corporate purposes. Management
will have significant flexibility and discretion in applying the net proceeds.
Pending any use, we will invest the net proceeds of any common stock sold to
Bluefire in short-term, investment grade, interest-bearing securities.
10
COMMON STOCK PURCHASE AGREEMENT
On September 19, 2001, we entered into a common stock purchase agreement
with Bluefire Capital, Inc., a Cayman Island corporation, for the future
issuance and purchase of shares of our common stock. This common stock purchase
agreement establishes what is sometimes termed an equity line of credit or an
equity draw down facility.
In general, the draw down facility operates like this: the investor,
Bluefire, has committed to provide us up to $10 million (with an additional
commitment of $10 million if certain events occur) as we request it over a 36
month period, in return for common stock we issue to Bluefire. During this
period, provided that six trading days have elapsed since the last draw down
pricing period, we may request a draw down which is priced, at our sole
election, over a pricing period of either six consecutive trading days or 20
consecutive trading days. The amount we can draw at each request must be at
least $25,000. The maximum amount we can actually draw for each request is
determined by a formula set forth in the common stock purchase agreement. The
maximum draw down formula is described in greater detail on page 12. We are
obligated to draw down a minimum of $500,000 during the life the agreement. The
aggregate total of all draw downs under the equity draw down facility cannot
exceed $20 million.
As discussed above, every time we exercise a draw down, we will notify the
Bluefire whether the pricing period relating to that draw down request is either
a short pricing period, that is, six business days long, or a long pricing
period, that is, 20 business days long.
Short Pricing Period
If we elect the short pricing period, the pricing period is six trading
days long, beginning on the second trading day prior to the date the draw down
notice is delivered and ending on the third trading day after the draw down
notice is delivered. After the completion of the short pricing period, the
final draw down amount for that draw down and the number of shares to be issued
is determined. We are entitled to receive funds on the fifth trading day
following the delivery of a draw down notice or two trading days after the end
of the pricing period. The formula for determining the actual draw down amounts,
the number of shares that we issue to Bluefire and the price per share paid by
Bluefire, as to a short pricing period, are described in greater detail
beginning on page 11.
Long Pricing Period
If we elect the long pricing period, the pricing period is 20 business days
long beginning on or after the date the draw down notice is delivered. The long
pricing period will be divided into two 10 trading day settlement periods.
After each 10 trading day settlement period, the final draw down amount for that
settlement period is determined. We are entitled to receive funds on the 12th
day and the 22nd day following the delivery of a draw down notice or one day
after the end of each settlement period. We then use the formulas in the common
stock purchase agreement to determine the number of shares that we will issue to
Bluefire in return for that money. The formula for determining the actual draw
down amounts, the number of shares that we issue to Bluefire and the price per
share paid by Bluefire as to a long pricing period are described in greater
detail beginning on page 12.
Warrants
In connection with the common stock purchase agreement, we issued to
Bluefire at the initial closing a warrant certificate to purchase up to 150,000
shares of our common stock. The warrant is exercisable until March 19, 2005.
The exercise price of the warrant is $0.3471. Bluefire is under no obligation
to exercise this warrant.
THE DRAW DOWN PROCEDURE AND THE STOCK PURCHASES
We may request a draw down by faxing to Bluefire a draw down notice,
stating the amount of the draw down that we wish to exercise, whether the
pricing period is short or long and, as to long pricing periods only, the
minimum threshold price at which we are willing to sell the shares.
11
Limitations on the Amount of the Draw downs
Common Stock Purchase Agreement Limitations
No draw down can be less than $25,000 or more than 10% of the weighted
average price of our common stock for the 60 days prior to the date of our
request multiplied by the total trading volume of our common stock for the 60
days prior to our request. A sample calculation of the maximum draw down is
described on page 13.
Additionally, if any of the following events occur during the pricing
period, the investment amount for that pricing period will be reduced by 1/20
for long pricing periods and an additional number of days so affected will be
added on to the end of the pricing period for short pricing periods and the
price of any trading day during a pricing period on which the event occurred
will have no effect on the pricing of the shares purchased during that pricing
period:
trading in the common stock is suspended for more than three hours, in the
aggregate, or if any trading day is shortened because of a public holiday; or
if sales of previously drawn down shares pursuant to the registration
statement of which this prospectus is a part are suspended by us because of
certain potentially material events for more than three hours, in the aggregate.
Additionally, during long pricing periods only, if the volume weighted
average price is less than the minimum threshold price we designate in the draw
down notice, the investment amount for that pricing period will be reduced by
1/20 and the volume weighted average price of any trading day during that period
will have no effect on the pricing of the shares purchased. In other words, if
our pricing committee sets a threshold price too high, and if our stock price
does not consistently meet that level during the 20 trading days after our draw
down request, then the amount that we can draw and the number of shares that we
will issue to Bluefire will be reduced. On the other hand, if we set a threshold
price too low and our stock price falls significantly but stays above the
threshold price, then we will be able to draw down our draw down request, but we
will have to issue a greater number of shares to Bluefire at the reduced price.
If we draw on the equity draw down facility, then we cannot make another draw
down request until the following draw down period, which is six consecutive
trading days.
The common stock purchase agreement does not permit us to draw funds if the
issuance of shares of common stock to Bluefire pursuant to the draw down would
cause Bluefire to beneficially own more than 9.9% of our issued and outstanding
common stock at the time of issuance. In such cases, we will not be permitted
to issue the shares otherwise issuable pursuant to the draw down and Bluefire
will not be obligated to purchase those shares. Of course, any of Bluefire's
resales of shares would reduce the number of shares it beneficially owns, and
would enable us to issue additional shares to Bluefire without violating this
9.9% condition.
Number of Shares Purchased during a Draw down
Short Pricing Period
The number of shares that we issue to Bluefire in connection with a short
pricing period will be equal to the actual draw down amount divided by 88% of
the lowest closing bid price during the pricing period. As discussed above, if
trading is suspended for any given trading day or sales made pursuant to the
registration statement are suspended, the pricing period will be extended for a
number of days equal to the number of days so affected and the closing bid
prices on those days affected are ignored in the calculation of the number of
shares issued.
Long Pricing Period
The 20 consecutive trading days immediately following the draw down notice
are used to determine the number of shares that we will issue to Bluefire in
connection with a long pricing period, which then allows us to calculate the
price per share that Bluefire will pay for our shares.
To determine the number of shares of common stock that we can issue in
connection with a long pricing period, take 1/20 of the actual draw down amount,
and for each of the 20 trading days immediately following the date on which we
give notice of the draw down, divide it by 88% of the volume-weighted average
daily trading price of our common stock
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for that day. The 88% accounts for Bluefire's 12% discount. The sum of these 20
daily calculations produces the maximum number of common shares that we can
issue, unless, as described above, the volume-weighted average daily price for
any given trading day is below the threshold amount, trading is suspended for
any given trading day or sales made pursuant to the registration statement are
suspended, in which case those days are ignored in the calculation.
Sample Calculation of Stock Purchases in Connection with a Long Pricing Period
The following is an example of the calculation of the draw down amount and
the number of shares we would issue to Bluefire in connection with that draw
down during a long pricing period based on the assumptions noted in the
discussion below.
Sample Draw down Amount Calculation
For purposes of this example, suppose that we provide a draw down notice to
Bluefire, and that we set the threshold price at $0.20 per share, below which we
will not sell any shares to Bluefire during this draw down period. Suppose
further that the total daily trading volume for the 60 days prior to our draw
down notice is 2,000,000 shares and that the average of the volume-weighted
average daily prices of our common stock for the 60 days prior to the notice is
$0.25. Under these hypothetical numbers, the maximum amount of the draw down is
as follows:
the total trading volume for the 60 days prior to our draw down notice of
2,000,000 shares is, multiplied by
the average of the volume-weighted average daily prices of our common stock
for the 60 days prior to the draw down notice of $0.25, multiplied by 10%
equals $50,000.
The maximum amount we can draw down under the formula is therefore capped
at $50,000, subject to further adjustments if the volume-weighted average daily
price of our common stock for any of the 20 trading days following the draw down
notice is below the threshold price we set of $0.20. For example, if the
volume-weighted average daily price of our common stock is below $0.20 on two of
those 20 days, the $50,000 would be reduced by 1/20 for each of those days and
our draw down amount would be 18/20 of $50,000 or $45,000.
Sample Calculation of Number of Shares
Using the same hypothetical numbers set forth above, and assuming that the
volume-weighted average daily price for our common stock is as set forth in the
table below, the number of shares to be issued based on any trading day during
the draw down period can be calculated as follows:
1/20 of the draw down amount of $50,000 divided by
88% of the volume-weighted average daily price.
For example, for the first trading day in the example in the table below,
the calculation is as follows: 1/20 of $50,000 is $2,500. Divide $2,500 by 88%
of the volume-weighted average daily price for that day of $0.25 per share, to
get 11,364 shares. Perform this calculation for each of the 20 measuring days
during the draw down period, excluding any days on which the volume-weighted
average daily price is below the $0.20 threshold price, and add the results to
determine the number of shares to be issued. In the table below, there are two
days which must be excluded: days 14 and 15.
After excluding the days that are below the threshold price, the amount of
our draw down in this example would be $45,000, $25,000 of which would be
settled on day 12 for the first settlement period, and $20,000 of which would be
settled on day 22 for the second settlement period. The total number of shares
that we would issue to Bluefire for this draw down request would be a total of
209,077 shares, so long as those shares do not cause the Bluefire's beneficial
ownership to exceed 9.9% of our issued and outstanding common stock. Bluefire
would pay $45,000, or $0.22 per share, for these shares.
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VOLUME
WEIGHTED DRAW
TRADING AVERAGE DOWN NUMBER OF
DAY PRICE (1) AMOUNT SHARES SOLD
- -------- ----------- --------- -----------
1 $ 0.25 $2,500.00 11,364
2 $ 0.24 $2,500.00 11,837
3 $ 0.23 $2,500.00 12,352
4 $ 0.24 $2,500.00 11,837
5 $ 0.24 $2,500.00 11,837
6 $ 0.26 $2,500.00 10,927
7 $ 0.23 $2,500.00 12,352
8 $ 0.28 $2,500.00 10,146
9 $ 0.27 $2,500.00 10,522
10 $ 0.24 $2,500.00 11,837
11 $ 0.23 $2,500.00 12,352
12 $ 0.27 $2,500.00 10,522
13 $ 0.23 $2,500.00 12,352
14 $ 0.19 $ 0.00 0
15 $ 0.19 $ 0.00 0
16 $ 0.22 $2,500.00 12,913
17 $ 0.25 $2,500.00 11,364
18 $ 0.24 $2,500.00 11,837
19 $ 0.25 $2,500.00 11,364
20 $ 0.25 $2,500.00 11,364
TOTAL: $45,000.00 209,077
----------- ---------
______________________
(1) The share prices are illustrative only and should not be interpreted as
a forecast of share prices or the expected or historical volatility of the share
prices of our common stock.
We would receive the amount of our draw down $45,000 less a 4% cash expense
fee paid to Bluefire of $1,800 and less a $500 escrow fee, a 1% legal fee of
$450 for net proceeds to us of approximately $42,250. The delivery of the
requisite number of shares and payment of the draw down will take place through
an escrow agent. The escrow agent pays the net proceeds to us, after
subtracting its escrow fee, and 4% expense fee to Bluefire.
We are registering 15,000,000 shares to be sold to Bluefire in under the
common stock purchase agreement. Therefore, in order for us to receive the
maximum $20,000,000 commitment, the average sale price of our shares will need
to be $1.33. Unless our share price increases dramatically, we will need to
register additional shares in order to access the $20,000,000 maximum.
Necessary Conditions Before Bluefire Is Obligated to Purchase Our Shares
The following conditions must be satisfied before Bluefire is obligated to
purchase any common shares that we may request from time to time:
- a registration statement for the shares must be declared effective by
the Securities and Exchange Commission and must remain effective and available
as of the draw down settlement date for making resales of the common shares
purchased by Bluefire;
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- trading in our common shares must not have been suspended by the
Securities and Exchange Commission or the OTCBB;
- we must not have merged or consolidated with or into another company
or transferred all or substantially all of our assets to another company, unless
the acquiring company has agreed to honor the common stock purchase agreement;
- no statute, rule, regulation, executive order, decree, ruling or
injunction may be in effect which prohibits consummation of the transactions
contemplated by the common stock purchase agreement; and
- we shall not have experienced any adverse effect on the business,
operations, properties or financial condition that is material and adverse to us
and our subsidiaries and affiliates, taken as a whole and/or any condition,
circumstance, or situation that would prohibit or otherwise materially interfere
with the our ability to perform any of our material obligations under the common
stock purchase agreements, its exhibits or its obligations under any other
material agreement.
Restrictions on Future Financings
The common stock purchase agreement prevents us from entering into any other
standby equity-based credit facilities during the term of the Common Stock
Purchase Agreement.
Termination of the Common Stock Purchase Agreement
The equity draw down facility established by the common stock purchase
agreement will terminate 36 months from the effective date of the registration
statement of which this prospectus forms a part. The facility shall also
terminate if we file for protection from creditors, if our common stock is no
longer quoted on the Over-The-Counter Bulletin Board, and not promptly relisted
on Nasdaq, Nasdaq SmallCap Market, the American Stock Exchange or the New York
Stock Exchange.
Indemnification of Bluefire
Bluefire is entitled to customary indemnification from us for any losses or
liabilities suffered by it based upon material misstatements or omissions from
the common stock purchase agreement, registration statement and the prospectus,
except as they relate to information supplied by Bluefire to us for inclusion in
the registration statement and prospectus.
15
SELLING SHAREHOLDERS
The following table provides certain information with respect to shares offered
by the selling shareholders:
OUTSTANDING PERCENTAGE OF PERCENTAGE OF
SHARES SHARES SHARES TO BE OUTSTANDING
BENEFICIALLY BENEFICIALLY ACQUIRED UNDER SHARES TO BE SHARES TO BE
SELLING OWNED BEFORE OWNED BEFORE THE LINE OF SOLD IN THE OWNED AFTER
STOCKHOLDER OFFERING OFFERING(1) CREDIT(2) OFFERING THE OFFERING(3)
- ---------------------- -------------- -------------- --------------- ------------ ---------------
Bluefire Capital, Inc. 150,000(4) * 15,000,000 15,150,000 -
Alan Stone 70,000 * N/A 70,000 -
Richard Goldman 35,000 * N/A 35,000 -
Dan Kern 285,715 1.4% N/A 285,715 -
Steven Barnes 124,960(5) * N/A 40,000 *
Magnum Financial 145,000(6) * N/A 100,000 *
_________________________________________
* Represents less than 1% of outstanding shares.
(1) Percentage of outstanding shares prior to offering is based on
20,396,622 shares of common stock outstanding as of September 30, 2001 plus the
290,000 shares underlying warrants being registered in this offering.
(2) Reflects an estimate of the number of shares that could be purchased
under the Equity Line of Credit.
(3) Percentage of outstanding shares is based on 20,396,622 shares of common
stock outstanding as of September 30, 2001, together with the 15,000,000 shares
of common stock that may be purchased from our company under the Equity Line of
Credit and 290,000 shares underlying warrants being registered in this offering.
(4) Reflects shares underlying warrants to acquire 150,000 shares of common
stock at an exercise price of $0.3471 per share.
(5) Includes 40,000 shares underlying warrants to acquire common stock at an
exercise price of $0.50 per share.
(6) Includes 100,000 shares underlying warrants to acquire common stock, of
which 33,333 are exercisable at $0.5156 per share; 33,333 are exercisable at
$1.0156 per share; and 33,334 are exercisable at $1.5156 per share.
16
Shares Offered by Bluefire Capital, Inc.
We are registering for potential sale by Bluefire Capital, Inc., a total of
15,150,000 shares of common stock. Bluefire is engaged in the business of
investing in publicly traded equity securities for its own account. Bluefire's
principal offices are located at Harbour Centre, 4th floor, George Town, Cayman
Islands. Investment decisions for Bluefire are made by its board of directors.
Except for warrants to purchase up to 150,000 shares of our common stock at an
exercise price of $0.3471 per share, Bluefire does not currently own any other
of our securities as of the date of this prospectus. Other than its obligation
to purchase common shares under the common stock purchase agreement, it has no
other commitments or arrangements to purchase or sell any of our securities.
There are no business relationships between Bluefire and us other than as
contemplated by the common stock purchase agreement.
Alan Stone & Company Shares
We are registering for potential sale by Alan Stone and Richard Goldman, a
principal and contractor of Alan Stone & Company, a total of 105,000 shares of
common stock. Alan Stone & Company was previously engaged by us to provide
investor and public relations services. Mr. Stone is the principal of Alan
Stone & Company. Mr. Goldman is an independent contractor of Alan Stone &
Company.
Dan Kern Shares
We are registering for potential sale by Dan Kern, a total of 285,715
shares of common stock. Mr. Kern is an unrelated shareholder of the Company.
During the past three years, Mr. Kern has not been officer or director of the
Company.
Steven Barnes Shares
We are registering for potential sale by Steven Barnes, a total of 40,000
shares of common stock. Mr. Barnes is an unrelated shareholder of the Company.
During the past three years, Mr. Barnes has not been officer or director of GTC.
Magnum Financial, Inc. Shares
We are registering for potential sale by Magnum Financial, Inc., a total of
100,000 shares of common stock. Magnum Financial is currently retained by us to
provide investor and public relations services.
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PLAN OF DISTRIBUTION
GENERAL
A majority of the shares of common stock to be registered by this
registration statement are being offered by Bluefire Capital, Inc. Bluefire is
offering the common shares for its account as statutory underwriter, and not for
our account. We will not receive any proceeds from the sale of common shares by
Bluefire. Bluefire may be offering for sale up to 15,000,000 common shares
which it may acquire pursuant to the terms of the stock purchase agreement more
fully described under the section of this prospectus entitled "The Common Stock
Purchase Agreement." Bluefire is a statutory underwriter within the meaning of
the Securities Act of 1933 in connection with such sales of common shares and
will be acting as an underwriter in its resales of the common shares under this
prospectus. Bluefire has, prior to any sales, agreed not to effect any offers
or sales of the common shares in any manner other than as specified in the
prospectus and not to purchase or induce others to purchase common shares in
violation of any applicable state and federal securities laws, rules and
regulations and the rules. We will pay the costs of registering the shares
under this prospectus, including legal fees.
To permit Bluefire to resell the common shares issued to it under the stock
purchase agreement, we agreed to register those shares and to maintain that
registration. To that end, we have agreed with Bluefire that we will prepare
and file such amendments and supplements to the registration statement and the
prospectus as may be necessary in accordance with the Securities Act and the
rules and regulations promulgated thereunder, to keep it effective until the
earliest of any of the following dates:
- - the date after which all of the common shares held by Bluefire or its
transferees that are covered by the registration statement have been sold by
Bluefire or its transferees pursuant to such registration statement;
- - the date after which all of the common shares held by Bluefire or its
transferees that are covered by the registration statement may be sold, in the
opinion of our counsel, without restriction under the Securities Act of 1933; or
- - the date that is thirty-six (36) months from the effective date of the
registration statement.
Shares of common stock offered through this prospectus may be sold from
time to time by Bluefire, or by pledgees, donees, transferees or other successor
in interest to Bluefire. We will supplement this prospectus to disclose the
names of any pledges, donees, transferees, or other successors in interest that
intend to offer common stock through this prospectus.
Sales may be made on the over-the-counter market or otherwise at prices and
at terms then prevailing or at prices related to the then current market price,
or in negotiated private transactions, or in a combination of these methods.
Bluefire will act independently of us in making decisions with respect to the
form, timing, manner and size of each sale. We have been informed by Bluefire
that there are no existing arrangements between it and any other stockholder,
broker, dealer, underwriter or agent relating to the distribution of this
prospectus. Bluefire is an underwriter in connection with resales of its
shares.
The common shares may be sold in one or more of the following manners:
- - a block trade in which the broker or dealer so engaged will attempt to
sell the shares as agent, but may position and resell a portion of the block as
principal to facilitate the transaction;
- - purchases by a broker or dealer for its account under this prospectus; or
- - ordinary brokerage transactions and transactions in which the broker
solicits purchases.
In effecting sales, brokers or dealers engaged by Bluefire may arrange for
other brokers or dealers to participate. Except as disclosed in a supplement to
this prospectus, no broker-dealer will be paid more than a customary brokerage
commission in connection with any sale of the common shares by Bluefire.
Brokers or dealers may receive commissions,
18
discounts or other concessions from the selling stockholders in amounts to be
negotiated immediately prior to the sale. The compensation to a particular
broker-dealer may be in excess of customary commissions. Profits on any resale
of the common shares as a principal by such broker-dealers and any commissions
received by such broker-dealers may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933. Any broker-dealer participating
in such transactions as agent may receive commissions from Bluefire, and, if
they act as agent for the purchaser of such common shares, from such purchaser.
Broker-dealers who acquire common shares as principal may thereafter resell
such common shares from time to time in transactions, which may involve crosses
and block transactions and which may involve sales to and through other
broker-dealers, including transactions of the nature described above, in the
over-the-counter market, in negotiated transactions or otherwise at market
prices prevailing at the time of sale or at negotiated prices, and in connection
with such resales may pay to or receive from the purchasers of such common
shares commissions computed as described above. Brokers or dealers who acquire
common shares as principal and any other participating brokers or dealers may be
deemed to be underwriters in connection with resales of the common shares.
In addition, any common shares covered by this prospectus which qualify for
sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
this prospectus. However, since Bluefire is an underwriter, Rule 144 of the
Securities Act is not available to Bluefire to sell its shares. We will not
receive any of the proceeds from the sale of these common shares, although we
have paid the expenses of preparing this prospectus and the related registration
statement of which it is a part.
Bluefire is subject to the applicable provisions of the Exchange Act,
including without limitation, Rule 10b-5 and Regulation M thereunder. Under
applicable rules and regulations under the Exchange Act, any person engaged in a
distribution of the common shares may not simultaneously purchase such
securities for a period beginning when such person becomes a distribution
participant and ending upon such person's completion of participation in a
distribution. In addition, in connection with the transactions in the common
shares, Bluefire will be subject to applicable provisions of the Exchange Act
and the rules and regulations under that Act, including, without limitation, the
rules set forth above. These restrictions may affect the marketability of the
common shares.
Bluefire will pay all commissions and its own expenses, if any, associated
with the resale of the common shares, other than the expenses associated with
preparing this prospectus and the registration statement of which it is a part.
UNDERWRITING COMPENSATION AND EXPENSES
The underwriting compensation for Bluefire will depend on the amount of
financing that we are able to obtain under the stock purchase agreement, up to a
maximum of approximately $3,200,000 if we are able to obtain the entire
$20,000,000 in financing. Bluefire will purchase shares under the stock
purchase agreement at a price equal to 88% of the volume-weighted average daily
price of our common stock, for each day in the pricing period with respect to
each draw down request. Bluefire is also entitled to a 4% expense fee on the
amount of each drawdown.
We also issued to Bluefire a warrant to purchase 150,000 shares of our
common stock at an exercise price of $0.3471. The warrant expires March 19,
2005.
At the initial closing of the transaction on September 19, 2001, we paid
$15,000 to Bluefire (with an additional $10,000 due in 30 days) as a
non-accountable expense fee, and $10,000 to cover the fees and expenses of
Bluefire's counsel. As additional consideration for the equity line of credit,
we granted Bluefire a warrant to purchase up to 150,000 shares of common stock
at a price of $0.3471 per share at any time prior to March 19, 2005.
LIMITED GRANT OF REGISTRATION RIGHTS
We granted registration rights to Bluefire to enable it to sell the common
stock it purchases under the common stock purchase agreement. In connection
with any such registration, we will have no obligation:
- - to assist or cooperate with Bluefire in the offering or disposition of
such shares;
19
- - to indemnify or hold harmless the holders of any such shares, other than
Bluefire, or any underwriter designated by such holders;
- - to obtain a commitment from an underwriter relative to the sale of any
such shares; or
- - to include such shares within any underwritten offering we do.
We will assume no obligation or responsibility whatsoever to determine a
method of disposition for such shares or to otherwise include such shares within
the confines of any registered offering other than the registration statement of
which this prospectus is a part.
We will use our best efforts to file, during any period during which we are
required to do so under our registration rights agreement with Bluefire, one or
more post-effective amendments to the registration statement of which this
prospectus is a part to describe any material information with respect to the
plan of distribution not previously disclosed in this prospectus or any material
change to such information in this prospectus. This obligation may include, to
the extent required under the Securities Act of 1933, that a supplemental
prospectus be filed, disclosing
- the name of any broker-dealers;
- the number of common shares involved;
- the price at which the common shares are to be sold;
- the commissions paid or discounts or concessions allowed to
broker-dealers, where applicable;
- that broker-dealers did not conduct any investigation to verify the
information set out or
incorporated by reference in this prospectus, as supplemented; and
- any other facts material to the transaction.
Our registration rights agreement with Bluefire permits us to restrict the
resale of the shares Bluefire has purchased from us under the common stock
purchase agreement for a period of time sufficient to permit us to amend or
supplement this prospectus to include material information. If we restrict
Bluefire during any pricing period or the 10 consecutive business days after a
pricing period and our stock price declines during the restriction period, we
are required to pay to Bluefire cash to compensate Bluefire for its inability to
sell shares during the restriction period. The amount we would be required to
pay would be the difference between the highest daily volume weighed average
price of the common stock during the restriction period and the volume weighted
average price of the common stock on the trading day immediately following the
date that we inform Bluefire that the restriction period has ended.
OTHER SELLING SHAREHOLDERS
The securities being offered by the other selling shareholders will be
offered from time to time on the over-the-counter bulletin board, in privately
negotiated sales or on other markets. We believe that virtually all such sales
will occur on the over-the-counter bulletin board in transactions at prevailing
market rates. Any securities sold in brokerage transactions will involve
customary brokers' commissions.
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DESCRIPTION OF BUSINESS
OVERVIEW
We are a provider of various Telecommunication services, including long
distance telephone, and calling card services as well as various Internet
related services including Internet service provider access and web page
hosting. We were organized as a Nevada Corporation on May 17, 1994 and are
currently based in Costa Mesa, California. Our common stock currently trades on
the NASD OTC Bulletin Board under the symbol "GTCC."
We currently offer a variety of services designed to meet our customers'
telecommunications and Internet related needs. The services we provide are:
TELECOMMUNICATIONS RELATED SERVICES
We are currently licensed in every state (except Alaska) and the District
of Columbia to provide long distance telecommunications services. We primarily
service small and medium sized businesses and residential customers throughout
the United States of America and have positioned ourselves to be a low-cost
provider in the marketplace. By offering low rates, we expect to rapidly add
customers. To date, we have operated as a switchless, nonfacilities-based
reseller of long distance services. As such, we do not utilize or possess our
own telecommunications network. By committing to purchase large usage volumes
from carriers such as WorldCom, Inc., we have been able to procure substantial
discounts and offer low-cost, high-quality long distance services to our
customers at rates below the current standard industry levels.
We provide long distance telephone service under a variety of plans. These
include outbound service, inbound toll-free 800 service and dedicated private
line service for data. We do not currently provide local telephone service.
Our long distance services are billed on a monthly basis either directly by us
or by a customer's local telephone company, through the services of Billing
Concepts, Inc., dba U.S. Billing. If these services are billed directly by us,
the customer has a choice of paying by credit card or sending payment to us. If
these services are billed by the local telephone company, that company is
responsible for collecting the amount billed and remitting the proceeds to us.
In addition, we have recently obtained licenses in the states of California,
Florida, New York, New Jersey, and Texas to operate as a local telephone company
(commonly referred to in the industry as a Competitive Local Exchange Carrier,
or CLEC) which could allow us to provide local telephone service. Whether we
will be able to provide local telephone services is dependent on our ability to
negotiate contracts with third-party providers of local telephone service on
favorable terms. We have initiated negotiations with certain local telephone
providers but have not reached any agreements. Therefore, we do not currently
know if we will be able to offer local telephone service.
INTERNET RELATED SERVICES
We currently provide an international personal computer to telephone
telecommunication service through our wholly owned subsidiary CallingPlanet.com,
Inc. This service, accessible at www.callingplanet.com, allows customers to
make international long distance phone calls using their computers. In
addition, we also provide a variety of other Internet related services. These
services, available to both consumer and business users, include prepaid calling
cards through eCallingCards.com, Inc., our wholly owned subsidiary whose web
site is located at www.ecallingcards.com; Internet Services Provider access
through telephone dial-up, and Internet web page development and hosting
services. Our Internet related services are billed using the same methods as
those used for billing our Telecommunication services. Our Internet related
services, with the exception of our prepaid calling cards, are provided
according to contracts with third-party providers, who also compete against us.
By contracting with third-party providers to purchase large quantities of usage
volumes, we are able to secure significant discounts which then allows us to
offer these services to our customers at rates equal to or less than our
competitors.
Our Internet service provider access service is currently provided on a
nationwide basis. Dial-up service provides unlimited Internet access and
several related services using conventional modems at access speeds up to 56
kbps for a monthly fee of $9.95.
21
Our Internet web page hosting services are currently available on a
nationwide basis. Internet web page hosting services provide space on our Web
Server computers for customers to publish their own web pages. Internet web
page hosting fees are $29.95 per month, with a one-time set-up fee of $29.95.
TELECOMMUNICATIONS INDUSTRY BACKGROUND
The $98.2 billion U.S. long distance industry is dominated by the nation's
three largest long distance providers, AT&T, WorldCom and Sprint, which together
generated approximately 74.7% of the aggregate revenue of all U.S. long distance
carriers in 1999. Other long distance companies, some with national
capabilities, accounted for the remainder of the market.
Based on published FCC estimates(1) toll service revenues of U.S. long
distance carriers, including GTC, have grown from $38.8 billion in 1984 to $98.2
billion in 1999. While industry revenues have grown at a compounded annual rate
of 6.4% since 1984, the revenues of carriers other than AT&T, WorldCom and
Sprint have grown at a compounded rate of 31.4% during the same period. As a
result, the aggregate market share of all long distance carriers other than
AT&T, WorldCom and Sprint has grown from 2.6% in 1984 to 25.3% in 1999. During
the same period, the market share of AT&T declined from 90.1% to 40.9%.
Prior to the Telecommunications Act, signed by President Clinton on
February 8, 1996, the long distance telecommunications industry had been
principally shaped by a court decree between AT&T and the United States
Department of Justice, known as the Modification of Final Judgment (the "Consent
Decree") that in 1984 required the divestiture by AT&T of its 22 Bell operating
companies and divided the country into some 200 Local Access and Transport
Areas, known in the industry as "LATAs". The 22 operating companies, which were
combined into seven Regional Bell Operating Companies, or "RBOCs" (such as
Verizon and Pacific Bell), were given the right to provide local telephone
service, local access service to long distance carriers and intraLATA toll
service (service within LATAs, also known as local telephone service), but were
prohibited from providing interLATA service (service between LATAs, also known
as long distance service). The right to provide interLATA service was maintained
by AT&T and the other carriers.
To encourage the development of competition in the long distance market,
the Consent Decree and the FCC require most local telephone companies to provide
all carriers with access to local exchange services that is equal in type,
quality and price to that provided to AT&T and with the opportunity to be
selected by customers as their preferred long distance carrier. These so-called
equal access and related provisions are intended to prevent preferential
treatment of AT&T.
The Telecommunications Act of 1996 is intended to introduce more
competition to U.S. telecommunications markets. In addition to codifying the
provisions of the Consent Decree, the Act codifies the local telephone
companies' equal access and nondiscrimination obligations with respect to the
local services market by requiring them to provide to independent service
providers (such as GTC Telecom) access to their network under the same terms and
restrictions which they are subject to. The Act allows us to compete with
previously established long distance and local telephone providers under the
same terms and conditions as those providers are subject to.
Regulatory, judicial and technological factors have helped to create the
foundation for smaller companies to emerge as competitive alternatives to AT&T,
WorldCom and Sprint for long distance telecommunications services. The FCC
requires that AT&T not restrict the resale of its services, and the Consent
Decree and regulatory proceedings have ensured that access to local telephone
networks is, in most cases, available to all long distance carriers.
OUR DEVELOPMENT AND STRATEGY
Our telecommunication services are currently licensed in every state
(except Alaska) and the District of Columbia. We market our products and
services using six important, but very distinct, strategies as follows:
Independent Affiliates
The backbone of our overall market and development strategy involves the
pursuit and establishment of strategic affiliations and alliances with major
telecommunication and Internet service companies through partnerships and co-
___________________________
(1) As published on the FCC's Website located at
www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/SOCC/99socc.pdf.
22
branding. We have already been successful in establishing these alliances with
known companies, such as Best Buy, MasterCard International and NewsMax, in the
telecommunication and Internet service industries.
Internet Use
The second method of marketing our products and services utilizes the
Internet. We currently market and distribute our telecommunications and Internet
related services through the Internet using our www.gtctelecom.com and our
wholly-owned subsidiary www.ecallingcards.com websites. We also market
international calling plans through our wholly-owned subsidiary
www.CallingPlanet.com, as well as co-brand calling cards and advertise domestic
long distance rates on the Internet. Co-branding is done through joint
agreements such as Community Connect Inc.'s online community for Asian
Americans, www.AsianAvenue.com.
Regarding CallingPlanet.com, we currently focus our marketing through local
partners and vendors in each country. CallingPlanet.com also targets customers
who do not have PC's or Internet connections by encouraging the local partners
to open Kiosks equipped with PC's and Internet hook-up. Through these marketing
partners, CallingPlanet.com's goal is to be a household name worldwide in the
planet calling area.
Our Own Sales Force
The third method of marketing utilizes our own sales force and independent
sales agents. A sales force was developed that consists of properly trained
professionals from within the telecommunications industry who are looking for an
opportunity to sell at rates that are lower than the industry standard.
Many of these professionals have come from our competitors where the
average calling rate is 10-12 cents per minute. Our Vice President of Sales
comes from WorldCom with an extensive sales and marketing background in the
telecommunications industry.
Advertising
We plan to employ an aggressive concentrated media campaign that utilizes a
professional advertising agency as our fourth method of marketing. We launched
our first media campaign on March 1, 1999, utilizing television and radio
advertisement and print media targeting Southern California, as well as
nationwide audiences, using cable television advertisements. We intend to
continue to utilize both broadcasting and print media campaigns in the future
given sufficient funds.
We have also been very successful in obtaining new customers through
important "word-of-mouth" free advertising. Many customers are extremely
satisfied with the service provided by us and inform relatives or friends about
our excellent rates and this invaluable free advertising for us results in new
business.
Direct Marketing
The fifth method of marketing our products and services is direct
marketing. We have developed brochures for all products and services that can
be used as a direct marketing tool and for product promotions. In addition, we
are considering direct mail marketing for new target markets.
National Recognition
We will continue to pursue and capitalize on national media recognition, as
we have done with Kiplinger and Consumer Reports, to boost consumer awareness in
the marketplace. We will capitalize on this type of recognition through
strategic press releases and other media opportunities.
We believe these six marketing methods will be adequate to sustain us now
and for the foreseeable future.
23
COMPETITION
Telecommunication Services
The long distance telecommunications industry is highly competitive and
affected by the introduction of new services by, and the market activities of,
major industry participants, including AT&T Corp., WorldCom, Sprint Corporation,
local exchange carriers such as Verizon, and other national and regional long
distance carriers. Competition in the long distance business is based upon
pricing, customer service, billing services and perceived quality. We compete
against various national and regional long distance carriers that are composed
of both facilities-based providers (those that carry long distance traffic on
their own equipment) and switchless resellers (those that resale long distance
carried by facilities-based providers) offering essentially the same services as
we do. Several of our competitors are substantially larger and have greater
financial, technical and marketing resources. We believe that we are able to
compete with these competitors by providing high quality service at the lowest
price possible.
We believe that the pricing strategies and cost structures of the major
long distance carriers have resulted historically in their charging higher rates
to the small-to-medium sized business customer. Small-to- medium-sized business
customers typically are not able to make the volume commitments necessary to
negotiate reduced rates under individualized contracts. By committing to large
volumes of traffic, we are guaranteeing traffic to the major long distance
carrier while relieving the major long distance carrier of the administrative
burden of qualifying and servicing large numbers of small-to-medium-sized
accounts. To be successful, we believe that we must have lower overhead costs
and be able to efficiently market the long distance product, process orders,
verify credit and provide customer service to a large number of accounts.
Although we believe we have the people to pursue our strategy and compete
effectively in this competitive environment, our success will depend upon our
continued ability to profitably provide high quality, high value services at
prices generally competitive with, or lower than, those charged by our
competitors.
We currently link our switching equipment with transmission facilities and
services purchased or leased from WorldCom and will continue to resell services
obtained from WorldCom, which will remain a competitor of ours for the
provisioning of telecommunications services.
As discussed above, the Telecommunications Act is intended to introduce
more competition to U.S. telecommunications markets. In furtherance of this,
the legislation contains special provisions that eliminate restrictions on local
phone companies (such as Pacific Bell or Verizon) to provide long distance
services, which means that we will face competition for providing long distance
services from well capitalized, well known companies that prior to this time
could not compete in long distance service.
Local phone companies have been prohibited from providing long distance
telecommunications services under the terms of the AT&T consent decree. The
Telecommunications Act now authorizes them to provide certain long distance
telecommunications services immediately and others upon the satisfaction of
certain conditions. Such legislation includes certain safeguards against
anticompetitive conduct by the local phone companies in the provision of long
distance service. Anticompetitive conduct could result from, among other
things, a local phone company's access to all subscribers on its existing
network as well as its potentially lower costs related to the termination and
origination of calls within its territory. It is impossible to predict whether
such safeguards will be adequate to protect against anticompetitive conduct by
the local phone companies and the impact that any anticompetitive conduct would
have on our business. Because of the name recognition that local phone
companies have in their existing markets and the established relationships that
they have with their existing local service customers, and their ability to take
advantage of those relationships, as well as the possibility of favorable
interpretations of the Telecommunications Act by the local phone companies, it
may be more difficult for other providers of long distance services, such as us,
to compete to provide long distance services to those companies' customers. At
the same time, as a result of the Telecommunications Act, local phone companies
have become potential customers for our long distance services.
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Internet Related Services
The market for Internet-based online services is relatively new, extremely
competitive and changes rapidly. Since the start of commercial services on the
Internet, the number of Internet Service Providers and online services competing
for users' attention and spending has grown because of, among other reasons, the
absence of substantial barriers to entry, and we expect that competition will
continue to intensify. Many of our current and potential competitors such as
Earthlink, PsiNet, AOL, UUNET, Microsoft Network, and Prodigy have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources. These
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements and to devote greater resources to the
development, promotion and sale of their products and services than we can.
We believe that our Internet related services are marketed at competitive
rates and provide quality and services comparable to our competitors. However,
our Internet related services are intended primarily to be a value-added service
to attract customers to our telecommunication services as opposed to a
revenue-generating service. We offer unlimited dial-up service for $9.95 per
month. We anticipate that revenue generated exclusively from our Internet
related services will be immaterial to our results of operations. Rather, we
expect to derive sufficient revenue from our telecommunication services and
Internet related advertising revenue to pay for the costs of our Internet
related services.
CUSTOMER ATTRITION
We believe that a high level of customer attrition occurs in the domestic
residential long distance and Internet related industries. Attrition is
attributable to a variety of factors, including the termination of customers by
us for non-payment and the initiatives of existing and new competitors as they
engage in, among other things, national advertising campaigns, telemarketing
programs and the issuance of cash or other forms of incentives. Such attrition
could harm our future results of operations and financial conditions.
DEPENDENCE ON KEY CUSTOMERS
We are not dependent on any single customer for a significant portion of
our annual sales. Our customer base changes on a continuous basis as new
customers are added or old customers removed.
MAJOR SUPPLIERS
We do not own our own long distance network, and according to our contract
with WorldCom, we currently depend primarily upon WorldCom to provide for the
transmission of phone calls by our customers and to provide the call detail
records upon which we base our customers billings.
In August 1999, we entered into negotiations with WorldCom in an effort to
lower our network transmission costs. As a result of these negotiations,
WorldCom agreed to amend our existing contract whereby WorldCom agreed to reduce
our 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, we successfully negotiated an additional amendment to our
contract with WorldCom in September 2000. The amendment further reduces our
network 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.
According to the terms of our contract with WorldCom, we must also pay an
amount equal to the aggregate minimum revenue requirement for the remaining term
of the contract if we terminate the contract prior to the expiration date.
Although we believe that our relationship with WorldCom is strong and should
remain so with continued contract compliance, the termination of our contract
with WorldCom, the loss of telecommunications services provided by WorldCom, or
a reduction in the quality of service we receive from WorldCom could harm our
results of operations. In addition, the accurate and prompt billing of our
customers is dependent upon the timeliness and accuracy of call detail records
provided to us by WorldCom. Although we have received consistent, accurate
information from WorldCom in the
25
past, we cannot know if accurate information will be provided by WorldCom on a
timely basis in the future, the failure of which would harm our results of
operations.
In the event that WorldCom were to discontinue its service to us, we
believe, based upon discussions that we have had with other long distance
providers and based on such providers' published contract tariffs, that we could
negotiate and obtain contracts with other long distance providers to resell long
distance services at rates at its current contract tariffs with WorldCom. If we
were to enter into contracts with another provider, however, we believe it would
take approximately thirty (30) days to switch end users to that provider.
Although we have the right to switch our current customers to an alternate
underlying carrier, our customers have the right to discontinue their service
with us at any time. Accordingly, the termination or non-renewal of our
contract tariffs with WorldCom or the loss of telecommunications services from
WorldCom would likely harm our results of operations and financial condition.
We do not currently have our own Internet network. Currently, we provide
our Internet service provider access services according to agreements with
various outside companies for the provisioning of our Internet service provider
access service. According to these Agreements, we are subject to monthly
minimum commitments of $1,500 through December 2001. After that, the monthly
minimum commitment is $500 per month. Although we believe that our relationship
with these companies is strong and should remain so with continued contract
compliance, the termination of our contracts with these companies, the loss of
Internet services provided by these companies, or a reduction in the quality of
service we receive from these companies could harm our results of operations.
In the event that these companies were to discontinue their service to us, we
believe, based upon discussions that hawse have had with other Internet service
providers, that we could negotiate and obtain contracts with Internet service
providers at comparable rates.
REGULATION
In order to provide communications services, we are subject to government
regulation. Federal law regulates interstate and international
telecommunications, while states have jurisdiction over telecommunications that
originate and terminate within the same state. Changes in existing policies or
regulations in any state or by the FCC could materially adversely affect our
financial condition or results of operations, particularly if those policies
make it more difficult for us to obtain service from WorldCom or other long
distance companies at competitive rates, or otherwise increase the cost and
regulatory burdens of marketing and providing service. There can be no
assurance that the regulatory authorities in one or more states or the FCC will
not take action having an adverse effect on our business or financial condition
or results of operations.
Federal
We are classified by the FCC as a nondominant carrier. After the recent
reclassification of AT&T as nondominant, only the LECs are classified as
dominant carriers among domestic carriers. Because AT&T is no longer classified
as a dominant carrier, certain pricing restrictions that formerly applied to
AT&T have been eliminated, which could make it easier for AT&T to compete with
us for low volume long distance subscribers. The FCC generally does not
exercise direct oversight over charges for service of nondominant carriers,
although it has the statutory power to do so. Nondominant carriers are required
by statute to offer interstate services under rates, terms, and conditions that
are just, reasonable and not unreasonably discriminatory. The FCC has the
jurisdiction to act upon complaints filed by third parties, or brought on the
FCC's own motion, against any common carrier, including nondominant carriers,
for failure to comply with its statutory obligations. Nondominant carriers are
required to file tariffs listing the rates, terms and conditions of service,
which are filed according to streamlined tariffing procedures. The FCC also has
the authority to impose more stringent regulatory requirements on us and change
our regulatory classification from nondominant to dominant. In the current
regulatory atmosphere, we believe, however, that the FCC won't do this. The FCC
imposes only minimal reporting requirements on nondominant resellers, although
we are subject to certain reporting, accounting and record-keeping obligations.
Both domestic and international nondominant carriers, including us, must
maintain tariffs on file with the FCC.
Today, the FCC exercises its regulatory authority to set rates primarily
with respect to the rates of dominant carriers, and it has increasingly relaxed
its control in this area. Even when AT&T was classified as a dominant carrier,
the FCC most recently employed a "price cap" system, which exempted most of
AT&T's services, including virtually all of its commercial and 800 services,
from traditional rate of return regulation because the FCC believes that these
services were subject to adequate competition.
26
State
We are subject to different levels of regulation in the states in which we
provide intrastate telecommunications services. Most of the states require that
we apply for certification to provide intrastate telecommunications services, or
at least to register or to be found exempt from regulation, before providing
intrastate service. The vast majority of states also require us to file and
maintain detailed tariffs listing our rates for intrastate service. Many states
also impose various reporting requirements and/or require prior approval for
transfers of control of certified carriers, corporate reorganizations,
acquisitions of telecommunications operations, assignments of carrier assets,
including subscriber bases, carrier stock offerings and incurrence by carriers
of significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated or revoked by state regulatory
authorities for failure to comply with state law and the rules, regulations and
policies of the state regulatory authorities. Fines and other penalties,
including the return of all monies received for intrastate traffic from
residents of a state, may be imposed for such violations. In certain states,
prior regulatory approval may be required for acquisitions of telecommunications
operations.
As we expand our efforts to resell long distance services, we will have to
pay attention to federal and state regulations. FCC rules prohibit switching
(also commonly known as "Slamming") of a consumer's long distance provider
without the consumer's consent and specify how that consent can be obtained.
Most states have consumer protection laws that further define the framework
within which our marketing activities must be conducted. We intend to comply
fully with all laws and regulations, and the constraints of federal and state
restrictions could impact the success of direct marketing efforts.
We are not currently subject to any State or Federal regulation with
respect to our Internet related services. However, we cannot know if we will
not be subject to such regulations in the future. Additionally, we are not
aware of any pending legislation that would harm our business.
PATENTS, TRADEMARKS, LICENSES
We do not depend upon any patents or trademarks to conduct our business;
nor do we hold any such patents or trademarks. We are required to hold licenses
with the Federal Communication Commission for the operation of its
telecommunication services. We are also required to hold licenses in the states
in which we provide intrastate long distance services. Currently, we are
licensed in every state (except Alaska) and the District of Columbia to provide
intrastate services. Our federal and state telecommunication licenses are of
indefinite length and will remain effective so long as we comply with all
Federal and State regulations.
COST OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
We currently have no costs associated with compliance with environmental
regulations and do not expect to incur such expenses in the foreseeable future.
NUMBER OF EMPLOYEES
As of September 30, 2001, we employed approximately 85 people on a full
time basis.
LEGAL PROCEEDINGS
From time to time, we may 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 our business. We are not
currently involved in any such litigation which we believe could have a
materially adverse effect on our financial condition or results of operations.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion contains certain forward-looking statements that
are subject to business and economic risks and uncertainties, and our actual
results could differ materially from those forward-looking statements. The
following discussion regarding our financial statements should be read in
conjunction with the financial statements and notes thereto.
GENERAL OVERVIEW
Our principal line of business is to provide long distance telephone and
value-added services for small and medium-sized businesses and residential
customers throughout the United States. Our strategy has been to build a
subscriber base without committing capital or management resources to construct
our own network and transmission facilities. This strategy has allowed us to
add customers without being limited by capacity, geographic coverage, or
configuration of any particular network that we might have developed.
We also provide a number of Internet related services such as: the sale of
electronic calling cards on our ecallingcards.com web site; Internet access via
Dial-Up, and Internet Web Page Hosting services. Currently, our Internet
related services are intended to be a value-added service to attract customers
to our Telecommunication services as opposed to a significant revenue generating
service.
Our services are marketed nationwide through sales affiliates, independent
sales agents and our own sales force.
Our revenues consist of revenues from telecommunication and Internet
related services. These revenues are generated when customers make long
distance telephone calls from their business or residential telephones or by
using our 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 consists of telecommunications service costs and the costs of
providing internet access. Telecommunications service costs are based on
customers' long distance usage. We pay our carriers based on the type of call,
time of call, duration of call, the terminating telephone number, and terms of
our contract in effect at 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 our operations and growth.
RESULTS OF OPERATIONS OF THE COMPANY
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
REVENUES - Revenues increased by $1,608,229 or 58.1% from $2,769,954 in the
three months ended September 30, 2000 to $4,378,183 in the three months ended
September 30, 2001. The increase was due primarily to the increase in
telecommunications revenues of $1,533,077 and internet revenues of $75,152. The
backbone of GTC's overall market and development strategy involves the pursuit
and establishment of strategic affiliations and alliances with major
telecommunication and Internet service companies through partnerships and
co-branding. We had 67 and 34 affiliates as of September 30, 2001 and 2000,
respectively. In addition, as of September 30, 2001, we had 125,297
telecommunication customers, with usage of long distance services of
approximately 66,229,000 minutes for the three months ended September 30, 2001
as compared with 79,708 customers and approximately 44,788,000 minutes for the
three months ended September 30, 2000.
COST OF SALES - Cost of sales increased by $806,465 or 46.2% from
$1,746,139 in the three months ended September 30, 2000 to $2,552,604 in the
three months ended September 30, 2001. 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
$748,630 for the three months ended September 30, 2001. In addition, the costs
associated with our Internet services increased $57,835 for the three months
ended September 30, 2001. As a percentage of revenue, cost of sales was 58.3%
and 63.0% resulting in a gross margin of 41.7% and 37.0% for the three months
ended September 30, 2001 and 2000, respectively.
28
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative ("S,G&A") expenses increased by $171,494 or 8.5% from $2,020,725
in the three months ended September 30, 2000 to $2,192,219 in the three months
ended September 30, 2001. For the three months ended September 30, 2000, we
began to realize a significant increase in sales from our telecommunications
customers, thereby resulting in significantly increased S,G&A expenses primarily
from our customer service operations and internet support costs. S,G&A expenses
for the three months ended September 30, 2001 were comprised primarily of
$1,108,768 in salaries and related taxes paid to employees; billing related
costs of $324,975; rent of $81,400; bad debt of $148,806; depreciation and
amortization expense of $61,478; amortization of previously issued options to
employees valued at $33,075; and $433,717 of other operating expenses, primarily
sales commissions, 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, 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 our employees; 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.
INTEREST EXPENSE - Net interest expense increased by $27,747 from $93,237
for the three months ended September 30, 2001 to $120,984 for the three months
ended September 30, 2001. The increase was primarily due to interest owed on
outstanding balances due to WorldCom.
As a result, net loss was $496,305, or $0.02 loss per share, and $1,094,386, or
$0.05 loss per share, for the three months ended September 30, 2001 and 2000,
respectively.
ASSETS AND LIABILITIES - Assets increased by $555,555 from $2,178,045 as of
June 30, 2001 to $2,733,600 as of September 30, 2001. The increase was due
primarily to increases in accounts receivable of $144,406, cash of $284,913,
prepaid expenses made on our registration statement of $58,575, and other assets
of $67,661, associated with the increase in customer usage. Liabilities
increased by $1,011,535 from $7,458,312 as of June 30, 2001 to $8,469,847 as of
September 30, 2001. The increase was due primarily to increases in accounts
payable and accrued expenses of $1,038,257 (net of the conversion of $4,861,604
of previously recorded accounts payable into a short-term note payable), payroll
and payroll related liabilities of $17,521, and decreases in obligations under
capital lease of $42,764 due to principal payments, and deferred income of
$1,479, 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 $(455,980) from
$(5,280,267) as of June 30, 2001 to $(5,736,247) as of September 30, 2001. The
increase was attributable to the net loss of $496,305 in the three months ended
September 30, 2001, offset primarily by the amortization of compensation expense
related to previously issued options to employees in the amount of $33,075, and
the fair market value of stock issued for services of $7,250.
Fiscal Year Ended June 30, 2001 Compared to Fiscal Year Ended June 30, 2000
REVENUES - Revenues increased by $9,268,457 or 197.4% from $4,696,087 for
the year ended June 30, 2000 to $13,964,544 for the year ended June 30, 2001.
The increase was due primarily to the increase in telecommunications revenues of
$9,212,241 and in Internet revenues of $56,216. The backbone of our overall
market and development strategy involves the pursuit and establishment of
strategic affiliations and alliances with major telecommunication and Internet
service companies through partnerships and co-branding. We had 86 and 37
affiliates as of June 30, 2001 and 2000, respectively. In addition, as of June
30, 2001, we had approximately 116,824 telecommunication customers, with usage
of long distance services of approximately 218,540,000 minutes for the year
ended June 30, 2001 as compared with approximately 65,555 telecommunication
customers, with usage of long distance services of approximately 74,033,000
minutes for the year ended June 30, 2000.
COST OF SALES - Cost of sales increased by $3,933,195 or 97.5% from
$4,032,587 for the year ended June 30, 2000 to $7,965,782 for the year ended
June 30, 2001. The increase was primarily due to the increase in carrier costs
associated with increased telecommunications service revenues, partially offset
by decreased costs associated with the local access of $4,132,950 for the year
ended June 30, 2001. In addition, the costs associated with our Internet
services decreased $199,755 for the year ended June 30, 2001. In an effort to
reduce the monthly minimum usage fees of internet service provider access, we
entered into a one year agreement with a company which directly ties these fees
to the internet
29
subscriber base. As a percentage of revenue, cost of sales was 57.0% and 85.9%
resulting in a gross margin of 43.0% and 14.1% for the years ended June 30, 2001
and 2000, respectively
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative ("S,G&A") expenses increased by $620,854 or 8.1% from $7,696,832
for the year ended June 30, 2000 to $8,317,686 for the year ended June 30, 2001.
For the year ended June 30, 2001, we began to realize a significant increase in
sales from our telecommunications customers, thereby resulting in significantly
increased S,G&A expenses primarily from our customer service operations and
Internet support costs.
In addition, non-cash items were approximately $(123,000) and approximately
$2,290,000 for the years ended June 30, 2001 and 2000, respectively, and cash
items increased by approximately $3,034,000 or 56.1% from approximately
$5,407,000 for the year ended June 30, 2000 to approximately $8,441,000 for the
year ended June 30, 2001. S,G&A expenses for the year ended June 30, 2001 were
comprised primarily of $3,704,792 in salaries and related taxes paid to
employees; a one-time settlement credit of $357,800 from the cancellation of a
consulting agreement; billing related costs of $1,237,465; advertising expense
of $171,108; rent of $314,172; bad debt of $312,201; sales commissions of
$350,364; depreciation and amortization expense of $220,390; options valued at
approximately $140,100 issued to our employees; warrants valued at approximately
$40,333 issued to an outside consultant; and $2,184,561 of other operating
expenses, primarily investor relations, internal telephone usage, 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 year ended June 30, 2000 were comprised primarily of
shares valued at approximately $250,000 issued to a vendor for deferment of
rent; options valued at approximately $121,790 issued to our employees and
directors; stock and options valued at $1,918,774 issued in exchange for
services; approximately $2,388,276 in salaries and related taxes paid to
employees; advertising expenses of $1,004,103; Internet support costs of
$667,913; bad debts of $475,241; the costs of third party verification for newly
acquired customers of $260,247; depreciation and amortization expense of
$173,946; and $436,542 of other operating expenses, primarily investor
relations, legal, consulting, audit services, and LEC fees.
INTEREST EXPENSE - Net interest expense increased by $362,460 from $142,441
for the year ended June 30, 2000 to $504,901 for the year ended June 30, 2001.
The increase was primarily due to interest owed on outstanding balances due to
WorldCom.
As a result, net loss was $2,832,258, or $0.14 loss per share, and
$7,180,991, or $0.42 loss per share, for the years ended June 30, 2001 and 2000,
respectively.
ASSETS AND LIABILITIES - Assets increased by $665,392 from $1,512,653 as of
June 30, 2000 to $2,178,045 as of June 30, 2001. The increase was due to
increases in accounts receivables of $882,421 (due to the increase in customer
usage), notes receivable of $77,500, net of decreases in property and equipment
and other assets of $283,071 and cash of $11,458. Liabilities increased by
$3,470,742 from $3,987,570 as of June 30, 2000 to $7,458,312 as of June 30,
2001. The increase was due to increases in accounts payable and accrued
expenses of $3,062,738, primarily for amounts owed to WorldCom (associated with
the increase in customer usage), and accrued payroll and payroll related
liabilities of $770,015 (primarily for amounts associated with past due payroll
taxes), offset primarily by the decrease in capitalized lease obligations of
$91,139, the conversion of notes payable into common stock of $125,000, the
decrease in notes payable of $73,500, and decreases in other liabilities of
$72,372.
STOCKHOLDERS' DEFICIT - Stockholders' deficit increased by $(2,805,350)
from $(2,474,917) as of June 30, 2000 to ($5,280,267) as of June 30, 2001. The
increase was attributable to the current year net loss of $2,832,258, a one-time
settlement credit of $357,800 from the cancellation of a contract payable in
stock and options previously granted to an outside consultant, offset by the
issuance of restricted common stock for conversion of notes payable of $125,000;
the fair market value of options granted to employees for compensation of
$140,100; the fair market value of options and warrants granted to outside
consultants of $40,333, the fair market value of warrants granted in connection
with notes payable of $13,500, and the fair market value of stock issued to
consultants of $54,730 and note receivable officer of $11,045.
30
Liquidity and Capital Resources
GENERAL - Overall, we had positive cash flows of $284,913 in the three
months ended September 30, 2001 resulting from $484,347 of cash provided by our
operating activities, offset by $98,095 of cash used in investing activities and
$101,339 of cash used in financing activities.
CASH FLOWS FROM OPERATING ACTIVITIES - Net cash provided by operating
activities of $484,347 in the three months ended September 30, 2001 was
primarily due to a net loss of $496,305, offset partially by changes in
operating assets and liabilities, principally accounts payable and accrued
expenses of $1,038,257, and accrued payroll and related taxes of $17,521, offset
partially by accounts receivable and other current assets of $325,450, and
deferred income of $1,479; the fair market value of stock issued for services of
$7,250; the amortization of previously issued options vesting to employees in
the current period of $33,075; depreciation and amortization expense of $61,478;
and the increase in allowance for doubtful receivables of $150,000.
CASH FLOWS FROM INVESTING ACTIVITIES - Net cash used in investing
activities of $98,095 in the three months ended September 30, 2001 funded
purchases of property and equipment of $98,095.
CASH FLOWS FROM FINANCING ACTIVITIES - Net cash used in financing
activities of $101,339 in the three months ended September 30, 2001 was
primarily due to prepayment of registration statement costs of $58,575 and
principal payments under capital lease of $42,764.
FINANCING - We believe that our funds from operations will be sufficient to
fund our daily operations beginning in December 2001. However, our funds from
operations will not be sufficient to fund repayment of our long term debts and
contingent liabilities (see below). Therefore, we will be required to seek
additional funds either through debt or equity financing to finance these debts
and contingencies. Our inability to raise additional funds, may harm our long
term operational viability.
EQUITY FINANCING - Effective September 19, 2001, we entered into a common
stock purchase agreement ("Agreement") with Bluefire Capital, Inc. ("Bluefire").
The Agreement entitles us to issue and sell common stock to Bluefire in the form
of draws for up to an aggregate of $20,000,000, as defined in the agreement,
from time to time during a three year period beginning on the date of the filing
of an effective registration statement. We are filing this registration
statement to register the shares subject to the common stock purchase agreement.
As of September 30, 2001, we incurred fees to date in the amount of $58,575
related to the registration statement, under prepaid expenses in the
accompanying consolidated balance sheet.
LONG-TERM DEBT - On October 19, 2001, we converted $4,861,604 of a total
payable balance due of $6,173,612 to WorldCom into a short-term note payable.
The note bears interest at 12%, unless we are unable to make the monthly
payments as required, at which time the interest rate increases to 18%. The
note provides for interest only payments of approximately $48,000 for the first
three months, commencing October 15, 2001. Monthly principal and interest
payments increase to $100,000 beginning January 15, 2002, with a balloon payment
of $4,480,475 due on September 15,2002. The note is secured by substantially
all of our assets. The note also provides that if we make all scheduled
payments, WorldCom may renegotiate the repayment of remaining balance into
promissory note with terms similar to existing note.
CONTINGENT LIABILITIES - On April 30, 1999, we 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 us. Subsequently, due to Williams's
inability to deliver the VoIP network as contracted and as a result of an
amendment to the WorldCom contract, we determined to discontinue our agreement
with Williams. As a result of our discontinuation of the contract with
Williams, we may be subject to accrued costs of $600,110. We are in
negotiations with Williams to modify or eliminate these charges. However, we
cannot know if such negotiations will result in a favorable outcome. No amounts
have been recorded related to the discontinuation of the contract as of
September 30, 2001.
We have recorded an accrual for past due payroll taxes as of September 30,
2001 due to the under-reporting of our payroll tax liability. As a result, we
have accrued approximately $1,225,000, including approximately $309,000 of
penalties and interest, under accrued payroll and related taxes in the
accompanying balance sheet at September 30, 2001. We expect this matter to be
settled and the related accrual paid by December 2002.
31
Capital Expenditures
We expect to purchase approximately $200,000 of additional equipment in
connection with the expansion of our business. Because we presently do not have
the capital for such expenditures, we will have to raise these funds.
SUBSIDIARIES
We have 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. plans to offer wireless
telecommunication services.
GOING CONCERN
Our independent certified public accountants have stated in their report
included in our annual report on Form 10-KSB, that we have incurred operating
losses in the last two years, have a working capital deficit and a significant
stockholders' deficit. These conditions raise substantial doubt about our
ability to continue as a going concern.
INFLATION
Our management believes that inflation has not had a material effect on our
results of operations.
32
MANAGEMENTMANAGEMENT
Information concerning our current executive officers and directors is set forth
in the following table:
Name Age Position(s)
- --------------------------------------------------------------------------------
Paul Sandhu 40 Chief Executive Officer and Chairman of the Board
Eric Clemons 30 Director, President, Secretary and Treasurer
Gerald DeCiccio 44 Director and Chief Financial Officer
Mark Fleming 43 Chief Operating Officer
John M. Eger 61 Director
Clay T. Whitehead 62 Director
PAUL SANDHU is currently our Chief Executive Officer. Mr. Sandhu was with
our predecessor GenTel, since our inception. Mr. Sandhu has over ten (10) years
experience with start-up and emerging growth companies. Mr. Sandhu was
Co-Founder, President and Co-Owner of Maximum Security ("Maximum"), a Security
and surveillance company he started in 1992. While at Maximum, Mr. Sandhu
actively managed a staff of over 200 employees. In 1997 Mr. Sandhu sold the
business to his partner. Mr. Sandhu graduated from the University of Punjab in
India with a degree in Engineering.
ERIC CLEMONS is currently our President. Mr. Clemons was with our
predecessor GenTel, since our inception. Mr. Clemons has over eight (8) years
experience with sales and marketing organizations. Prior joining GTC in March
1997, Mr. Clemons was Vice President of Marketing for Intelligent Electronic
Communications managing a staff of 50 employees. Between 1989 and 1994, Mr.
Clemons was a licensed NASD broker. As a broker, Mr. Clemons was subject to
three claims related to such engagement and subsequently an administrative
action by the NASD related to his work as a licensed broker. Mr. Clemons was
found liable for an award of $4,000 on one of the actions and subsequently in
April 1997, was fined $65,000 and barred from association with any NASD member
with the ability for re-application following a period of two years.
GERALD DECICCIO joined us in January 1999 as Chief Financial Officer. Mr.
DeCiccio has over twenty years experience in the financial and accounting field.
Prior to joining us, Mr. DeCiccio was the Vice President of Finance and
Administration for National Telephone & Communications, Inc., ("NT&C") a $150
million inter-exchange carrier and provider of communications products and
services. While at NT&C, Mr. DeCiccio managed NT&C's finance, accounting, human
resources and legal departments. Between 1995 and 1997, Mr. DeCiccio was the
Corporate Controller for Newport Corporation, a $140 million multi-national
manufacturer / distributor of laser and optics products. Prior to that, Mr.
DeCiccio was the Director of Audit and Quality Systems for Sunrise Medical,
Inc., a $750 million multi-national manufacturer / distributor of health care
products. From 1980 to 1984, Mr. DeCiccio was a Supervising Senior Accountant
for Ernst and Young. Mr. DeCiccio received his Bachelor of Science in
Accounting from Loma Linda University, and his Masters of Science in Finance and
Systems Technology from the University of Southern California. Mr. DeCiccio is
a Certified Public Accountant in the State of California.
33
MARK FLEMING joined us in October 1998 and is currently our Chief Operating
Officer. Mr. Fleming has eighteen years of business strategy, planning, and
analysis experience within the competitive consumer products / services
industries. For the past seven years, Mr. Fleming worked in the
telecommunications industry, holding several finance and marketing management
positions at MCI. Some of the key business / operational issues that Mr.
Fleming managed while at MCI included pricing strategy, market positioning, new
product development, sales channel and customer service performance reviews,
capital investment decisions and overall business planning / analysis for
Residential Markets and Local Services divisions. Mr. Fleming received his
Bachelor of Arts degree in Business Administration from Principia College in
1980, and attained his Masters in Business Administration, with honors from the
University of Southern California in 1986.
JOHN M. EGER is a telecommunication lawyer and former counsel to the
international law firm Morrison and Forester and is currently the holder of the
prestigious Lionel Van Deerlin Endowed Chair of Communications and Public Policy
at San Diego State University. He is also the President and CEO of the World
Foundation for Smart Communities, a non-profit, non-governmental educational
program dedicated to helping communities understand the importance of
information technology as a catalyst for transforming life and work in the 21st
Century. Professor Eger formerly headed CBS Broadcast International, which he
established, and was Senior Vice President of the CBS Broadcast Group. From
1971 through 1973, Professor Eger was legal assistant to the chairman of the
Federal Communications Commission, and from 1974 through 1976 served as
Telecommunications Advisor to Presidents Nixon and Ford and was also the Head of
the White House Office of Telecommunications Policy (OTP). Earlier in his
career, Professor Eger served as a data communications specialist and design
director of information systems for the Bell System. From 1976 through 1981, he
was a Washington, DC based telecommunications attorney. Until recently,
Professor Eger served as Chairman of the Board of the San Diego Processing
Corporation, Chairman of San Diego Mayor Susan Golding's City of the Future
Advisory Committee and Chairman of Governor Pete Wilson's California Commission
on Information Technology.
CLAY T. WHITEHEAD is currently President of Clay Whitehead Associates, a
strategic consulting and business development company which concentrates on the
telecommunications and media industries. Clay Whitehead Associates primarily
works with large companies to develop business projects in the areas of
telecommunications and television. Mr. Whitehead has participated in the
formation, strategy development, regulatory posture, and financing of a number
of telecommunications businesses in the United States and internationally. Mr.
Whitehead has also served as a special assistant to President Nixon, with policy
responsibility for NASA, the Atomic Energy Commission, and the National Science
Foundation. From 1971 to 1974, he was director of the U.S. Office of
Telecommunications Policy. From 1979 to 1983, Mr. Whitehead founded and was
president of Hughes Communications, Inc., a subsidiary of Hughes Aircraft
Company. Mr. Whitehead also currently serves on the board of directors for
Prudential Funds.
Disclosure of Commission Position on Indemnification for Securities Act
Liabilities
Our articles of incorporation limit the liability of directors to the
maximum extent permitted by Nevada law. This limitation of liability is subject
to exceptions including intentional misconduct, obtaining an improper personal
benefit and abdication or reckless disregard of director duties. Our articles
of incorporation and bylaws provide that we may indemnify our directors,
officer, employees and other agents to the fullest extent permitted by law. Our
bylaws also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether the bylaws would permit indemnification.
We currently have an insurance policy for our officers and directors.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
34
EXECUTIVE COMPENSATION
The following table shows certain compensation information for services rendered
in all capacities for the fiscal years ended June 30, 2001, 2000 and 1999.
Other than as listed below, no executive officer's salary and bonus exceeded
$100,000 in any of the listed years. The following information includes the
dollar value of base salaries, bonus awards, the number of stock options granted
and certain other compensation, if any, whether paid or deferred.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------- AWARDS PAYOUTS
-------------------------------
OTHER RESTRICTED SECURITIES ALL
NAME AND ANNUAL STOCK UNDERLYING LTIP OTHER
PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPESATION
POSITION YEAR ($) ($) ($) ($) SARS (#) ($) ($)
- ---------------------------------------------------------------------------------------------------------------------------
Paul Sandhu 2001
(CEO) (6/30) $ 105,000 -0- 10,000(1) -0- 132,500 -0- 13,000(2)
2000
(6/30) 126,000 -0- -0- -0- 217,500 -0- -0-
1999
(6/30) 85,500 -0- -0- -0- -0- -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------
Eric Clemons 2001
(President) (6/30) 145,667 13,680 10,000(1) -0- 132,500 -0- 100,000(2)
2000
(6/30) 133,000 -0- -0- -0- 167,500 -0- -0-
1999
(6/30) 90,836 -0- -0- -0- -0- -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------
Gerald DeCiccio 2001
(CFO) (6/30) 138,000 -0- -0- -0- 177,500 -0- -0-
2000
(6/30) 139,708 -0- -0- -0- 75,000 -0- -0-
1999
(6/30) 54,102 -0- -0- -0- 150,000 -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------
Mark Fleming 2001
(COO) (6/30) 124,583 -0- -0- -0- 50,000 -0- -0-
2000
(6/30) 121,042 -0- -0- -0- 75,000 -0- -0-
1999
(6/30) 62,083 -0- -0- -0- 100,000 -0- -0-
- ---------------------------------------------------------------------------------------------------------------------------
(1) Amounts paid for directors fees
(2) Non-business expenses paid on behalf of the officers
35
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SAR'S GRANTED
OPTIONS/SAR'S GRANTED TO EMPLOYEES IN FISCAL EXERCISE OF BASE PRICE
NAME (#) YEAR ($/SH) EXPIRATION DATE
---------------------- ----------------------- ------------------------ ---------------
Paul Sandhu 7,500(1) <1% $ 0.01 1/2/04
125,000(2) 15.8% $ 0.6875 10/5/10
---------------------- ----------------------- ------------------------ ---------------
Eric Clemons 7,500(3) <1% $ 0.01 1/2/04
125,000(2) 15.8% $ 0.6875 10/5/10
---------------------- ----------------------- ------------------------ ---------------
Gerald DeCiccio 125,000(4) 15.8% $ 0.50 11/2/03
2,500(5) <1% $ 0.01 1/2/04
50,000(2) 6.3% $ 0.6875 10/5/10
---------------------- ----------------------- ------------------------ ---------------
Mark Fleming 50,000(2) 6.3% $ 0.6875 10/5/10
---------------------- ----------------------- ------------------------ ---------------
(1) Represents options issued on 1/2/01 pursuant to Mr. Sandhu's Director
Compensation agreement.
(2) Represents options issued on 10/5/00 in accordance with the 1999 Stock
Option Plan.
(3) Represents options issued on 1/2/01 pursuant to Mr. Clemon's Director
Compensation agreement.
(4) Represents options issued on 11/2/00 pursuant to Mr. DeCiccio's Director
Compensation agreement.
(5) Represents options issued on 1/2/01 pursuant to Mr. DeCiccio's Director
Compensation agreement.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN
SECURITIES UNDERLYING THE-MONEY OPTION/SARS
SHARES ACQUIRED ON VALUE OPTIONS/SARS AT FY-END (#) AT FY-END ($)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---------------------- ------------------------ -------------------------- --------------------------
Paul Sandhu 0 n/a 65,000 / 285,000 7,250 / 0
Eric Clemons 0 n/a 55,000 / 245,000 7,250 / 0
Gerald DeCiccio 0 n/a 225,834 / 151,666 725 / 0
Mark Fleming 0 n/a 85,000 / 140,000 2,900 / 0
Executive Employment Agreements
We currently have employment agreements with each of the executives listed
above. The employment agreements obligate us to pay a severance payment equal
to 25% of the executive's salary if he is terminated without cause. Cause is
defined in the agreements as either a willful act of dishonesty, conviction of a
felony, or the failure or refusal of the executive to properly perform his
duties.
Compensation of Directors
For the fiscal years ended 1996, 1997 and 1998, and the six months ended
December 31, 1998, our Directors received no compensation. Beginning with the
third quarter of fiscal year 1999 through December 31, 2000, Directors received
$1,500 and 2,500 options to purchase our common stock per quarter. Beginning
January 1, 2001, the outside directors each receive $4,000 per quarter, $1,000
per major committee meeting as contemplated in the respective committee charter,
$1,000 each for the Chairman of the Audit and Compensation committees per year
of service, 2,500 options per quarter priced at fair market value on the date of
grant, and 2,500 options each per quarter priced at fair market value on the
date of grant for the Chairman of the Audit and Compensation committees. The
inside directors receive no compensation.
36
DESCRIPTION OF PROPERTY
Currently, we lease a total of 10,624 square feet of office space for our
headquarters and customer service operations in Costa Mesa, California at an
aggregate monthly rental rate of $23,548.
On May 21, 2001, we entered into a month-to-month addendum to our existing
June 1, 1998 lease. This addendum incorporates all of our leased facilities
totaling 8,621 square feet into one lease. The addendum automatically expires
on May 31, 2002, unless previously terminated by us or by the lessor given
seventy-five (75) days written notice. The monthly rental rate increased to
$19,247 on June 1, 2001.
On July 24, 2001, we entered into a thirty-six (36) month addendum to our
existing June 1, 1998 lease. This addendum replaces 2,934 square feet of the
May 21, 2001 addendum with 4,939 square feet for continued expansion of its
customer service operations. The addendum automatically expires on July 31,
2004, unless previously terminated by us or by the lessor given seventy-five
(75) days written notice. The monthly rental rate applicable to this addendum
increased to $10,859 on August 1, 2001.
37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 2001, certain information
with respect to the equity securities owned of record or beneficially by:
- - each of our Officers and Directors;
- - each person who owns beneficially more than 5% of each class of our equity
securities; and
- - all Directors and Executive Officers as a group.
COMMON STOCK PERCENT OF
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OUTSTANDING OUTSTANDING
- ----------------------- ----------------------------- ---------- ------------
Paul Sandhu(1)
3151 Airway Avenue, Suite P-3
Common Stock Costa Mesa, CA 92626. 3,997,215 19.60%
- ----------------------- ----------------------------- ---------- ------------
Eric Clemons(2)
3151 Airway Avenue, Suite P-3
Common Stock Costa Mesa, CA 92626. 750,522 3.68%
- ----------------------- ----------------------------- ---------- ------------
Mark Fleming(3)
3151 Airway Avenue, Suite P-3
Common Stock Costa Mesa, CA 92626. 135,000 0.66%
- ----------------------- ----------------------------- ---------- ------------
Gerald A. DeCiccio(4)
3151 Airway Avenue, Suite P-3
Common Stock Costa Mesa, CA 92626. 307,500 1.51%
- ----------------------- ----------------------------- ---------- ------------
John M. Eger(5)
3151 Airway Avenue, Suite P-3
Common Stock Costa Mesa, CA 92626. 568,500 2.79%
- ----------------------- ----------------------------- ---------- ------------
Clay T. Whitehead(6)
3151 Airway Avenue, Suite P-3
Common Stock Costa Mesa, CA 92626. 566,816 2.78%
- ----------------------- ----------------------------- ---------- ------------
Reet Trust(7)
21520 Yorba Linda,Suite 6227
Common Stock Yorba Linda, CA 92887 2,000,000 9.81%
- ----------------------- ----------------------------- ---------- -------------
All Directors and
Officers as a
Group (6
Persons in total) 6,325,583 31.01%
- ----------------------- ----------------------------- ---------- -------------
____________________________
(1) Includes 120,000 options to acquire shares of common stock in accordance
with Mr. Sandhu's director compensation agreement and our employee benefit plan.
Does not include an aggregate of 230,000 unvested options to acquire shares of
common stock granted in accordance with our employee benefit plan.
(2) Includes 100,000 options to acquire shares of common stock in accordance
with Mr. Clemons' director compensation agreement and our employee benefit plan.
Does not include an aggregate of 200,000 unvested options to acquire shares of
common stock in accordance with our employee benefit plan.
(3) Includes an aggregate of 135,000 options to acquire shares of common
stock in accordance with Mr. Fleming's employment agreement and our employee
benefit plan. Does not include an aggregate of 90,000 unvested options to
acquire shares of common stock in accordance with our employee benefit plan.
38
(4) Includes an aggregate of 287,500 options to acquire shares of common
stock in accordance with Mr. DeCiccio's employment and director compensation
agreements and our employee benefit plan. Does not include an aggregate of
90,000 unvested options to acquire shares of common stock in accordance with our
employee benefit plan.
(5) Includes an aggregate of 568,500 options to acquire shares of common
stock in accordance with Mr. Eger's director compensation agreement and our
employee benefit plan. Does not include an aggregate of 40,000 unvested options
to acquire shares of common stock in accordance with our benefit plan.
(6) Includes an aggregate of 55,000 options to acquire shares of common
stock in accordance with Mr. Whitehead's director compensation agreement and our
employee benefit plan. Does not include an aggregate of 40,000 unvested options
to acquire shares of common stock in accordance with our benefit plan.
(7) The trustee of the Reet Trust is Teg Sandhu, father of Paul Sandhu.
However, Paul Sandhu disclaims any beneficial ownership to the shares held by
the Reet Trust.
We believe that the beneficial owners of securities listed above, based on
information furnished by such owners, have sole investment and voting power with
respect to such shares, subject to community property laws where applicable.
Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Shares of stock subject to options or warrants currently
exercisable, or exercisable within 60 days, are deemed outstanding for purposes
of computing the percentage of the person holding such options or warrants, but
are not deemed outstanding for purposes of computing the percentage of any other
person.
39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We borrow funds, from time to time, from our Chief Executive Officer for
working capital purposes. To date, the borrowings total $73,500 and accrue
interest at 10% and are due on demand. As of June 30, 2001, we repaid the
principal balance. No interest was accrued or paid as of June 30, 2001 and
2000.
On November 3, 2000, we granted options to purchase 125,000 shares of
restricted common stock, at an exercise price of $0.50 per share (the fair
market value of our common stock on the date of grant), to Gerald A. DeCiccio,
one of our directors. The options are exercisable through November 2003. These
shares were subsequently registered on Form S-8 with the Commission on November
16, 2001.
During fiscal year 2000, Mr. Sandhu and Mr. Clemons canceled 619,848
and 154,962, respectively, shares of our common stock held by each of them. It
was determined that these shares had not been previously cancelled in a timely
manner. As a result, these cancellations are reflected as a reduction in the
outstanding shares as of July 1, 1998.
On October 20, 1999, we granted options to purchase 526,000 shares of
restricted Common Stock, at an exercise price of $1.00 per share (the fair
market value of our Common Stock on the day of grant), to John Eger, one of our
directors. The options are exercisable through October 2002.
40
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
The following table sets forth the high and low bid prices for shares of
our common stock for the periods noted, as reported by the National Daily
Quotation Service and the NASDAQ Bulletin Board. Quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. Our common stock was not listed on the NASDAQ
Bulletin Board during 1997. On April 21, 1998, our common stock began listing
on the NASDAQ Over-The-Counter Bulletin Board under the trading symbol BBRI.
However, our common stock did not begin trading until after we acquired GenTel
on August 31, 1998 wherein our trading symbol changed to GTCC.
CALENDAR BID PRICES
YEAR PERIOD HIGH LOW
---------------------------------------------------
1998 First Quarter n/a n/a
Second Quarter n/a n/a
Third Quarter 4.75 4.50
Fourth Quarter 4.41 3.33
1999 First Quarter 11.125 3.25
Second Quarter 8.625 3.56
Third Quarter 4.9375 2.00
Fourth Quarter 3.8125 1.75
2000 First Quarter 3.75 1.71875
Second Quarter 2.09375 0.7188
Third Quarter 0.8438 0.50
Fourth Quarter 0.9062 0.2188
2001 First Quarter 0.4844 0.25
Second Quarter 0.44 0.22
Third Quarter 0.31 0.18
On September 30, 2001, the last sales price per share of our common stock, as
reported by the NASDAQ Over-The-Counter Bulletin Board, was $0.22.
NUMBER OF SHAREHOLDERS
The number of beneficial holders of record of our common stock as of the
close of business on September 30, 2001 was approximately 209. Many of the
shares of our common stock are held in "street name" and consequently reflect
numerous additional beneficial owners.
DIVIDEND POLICY
To date, we have declared no cash dividends on our common stock, and we do
not expect to pay cash dividends in the next term. We intend to retain future
earnings, if any, to provide funds for operation of our business.
41
DESCRIPTION OF SECURITIES
Authorized Capital Stock. The authorized capital stock of our company
currently consists of 50,000,000 shares of common stock, par value $0.001 and
20,000,000 shares of preferred stock, par value $0.001. As of September 30,
2001, we have 20,396,622 shares of common stock outstanding and no shares of
preferred stock designated or outstanding.
Common Stock. Each share of common stock entitles the holder to one vote on
each matter submitted to a vote of our shareholders, including the election of
directors. There is no cumulative voting. Subject to preferences that may be
applicable to any outstanding preferred stock, shareholders are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Board of Directors. Shareholders have no preemptive, conversion or other
subscription rights. There are no redemption or sinking fund provisions
available to the common stock. In the event of liquidation, dissolution or
winding up of our company, shareholders are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding.
Preferred Stock. The Board of Directors is authorized, subject to any
limitations prescribed by the Nevada Revised Statutes, or the rules of any
quotation system or national securities exchange on which stock of our company
may be quoted or listed, to provide for the issuance of shares of preferred
stock in one or more series; to establish from time to time the number of shares
to be included in each such series; and to fix the rights, powers, preferences,
and privileges of the shares of such series, without any further vote or action
by the shareholders. Depending upon the terms of the preferred stock
established by the Board of Directors, any or all series of preferred stock
could have preference over the common stock with respect to dividends and other
distributions and upon liquidation of our company or could have voting or
conversion rights that could adversely affect the holders of the outstanding
common stock. We have no present plans to issue any shares of preferred stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES OF INCORPORATION, BYLAWS AND
NEVADA LAW
The following provisions of the Articles of Incorporation and Bylaws of our
company could discourage potential acquisition proposals and could delay or
prevent a change in control of our company. Such provisions may also have the
effect of preventing changes in the management of our company, and preventing
shareholders from receiving a premium on their common stock.
Authorized but Unissued Stock. The authorized but unissued shares of common
stock and preferred stock are available for future issuance without shareholder
approval. These additional shares may be utilized for a variety of corporate
purposes, including future public offerings to raise additional capital,
corporate acquisitions and employee benefit plans.
Blank Check Preferred Stock. The existence of authorized but unissued and
unreserved shares of preferred stock may enable the Board of Directors to issue
shares to persons friendly to current management which would render more
difficult or discourage an attempt to obtain control of our company by means of
a proxy contest, tender offer, merger or otherwise, and thereby protect the
continuity of our company's management.
Nevada Business Combination Law. The State of Nevada has enacted legislation
that may deter or frustrate takeovers of Nevada corporations. The Nevada
Business Combination Law generally prohibits a Nevada corporation from engaging
in a business combination with an "interested shareholder" (defined generally as
any person who beneficially owns 10% or more of the outstanding voting stock of
our company or any person affiliated with such person) for a period of three
years following the date that such shareholder became an interested shareholder,
unless the combination or the purchase of shares made by the interested
shareholder on the interested shareholder's date of acquiring shares is approved
by the board of directors of the corporation before that date. A corporation
may not engage in any combination with an interested shareholder of the
corporation after the expiration of three years after his date of acquiring
shares unless:
- - The combination or the purchase of shares made by the interested
shareholder is approved by the board of directors of the corporation before the
date such interested shareholder acquired such shares;
- - A combination is approved by the affirmative vote of the holders of stock
representing a majority of the outstanding voting power not beneficially owned
by the interested shareholder proposing the combination, or any affiliate or
associate of the interested shareholder proposing the combination, at a meeting
called for that purpose no earlier than three years after the interested
shareholder's date of acquiring shares; or
42
- - The aggregate amount of cash and the market value, as of the date of
consummation, of consideration other than cash to be received per share by all
of the holders of outstanding common shares of the corporation not beneficially
owned by the interested shareholder, satisfies the fair value requirements of
Section 78.441 of Nevada Revised Statutes.
Special Meetings of Shareholders. Special meetings of the shareholders of
our company may be called by our Board of Directors or other persons authorized
to do so under Nevada law. Under applicable Nevada law, shareholders do not
have the right to call a special meeting of the shareholders. This may have the
effect of discouraging potential acquisition proposals and could delay or
prevent a change in control of our company by precluding a dissident shareholder
from forcing a special meeting to consider removing the Board of Directors or
otherwise.
Transfer Agent and Registrar. Transfer On-line is the transfer agent and
registrar for our common stock. Its address is 227 SW Pine St., Suite 300,
Portland, OR. 97204.
EXPERTS
Our balance sheet as of June 30, 2001 and the related statements of operations,
stockholders deficit and cash flows for the fiscal years ended June 30, 2001 and
2000 appearing in this prospectus have been audited by Corbin & Wertz,
independent auditors, as stated in their report therein, and are included herein
in reliance upon the report of such firm given their authority as experts in
accounting and auditing. There have been no disagreements between Corbin &
Wertz and Management since the date of their engagement.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for us by The Cutler Law Group, a Professional Law Corporation, Newport Beach,
California. Mr. M. Richard Cutler, principal of the Cutler Law Group is the
beneficial owner of 40,500 shares of Common Stock of the Company. Other
employees of the Cutler Law Group hold an additional 400 shares of the Common
Stock of the Company.
43
AVAILABLE INFORMATION
For further information with respect to us and the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto. Statements herein concerning the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
such contract or other statement filed with the Securities and Exchange
Commission or included as an exhibit, or otherwise, each such statement, being
qualified by and subject to such reference in all respects.
Reports, registration statements, proxy and information statements, and other
information filed by us with the Securities and Exchange Commission can be
inspected and copied at the public reference room maintained by the Securities
and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at its regional offices located at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of these materials may be
obtained at prescribed rates from the Public Reference Section of the Securities
and Exchange Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. The Securities and Exchange Commission maintains a site on the World
Wide Web (http://www.sec.gov) that contains reports, registration statements,
proxy and information statements and other information. You may obtain
information on the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330.
44
INDEX TO FINANCIAL STATEMENTS Page
Report of Independent Auditors . . . . . . . . F-2
Consolidated balance sheets at June 30, 2001 and
September 30, 2001 (Unaudited) . . . . . . . . F-3
Consolidated statements of operations for the years
Ended June 30, 2001 and 2000 and for the three
month period ended September 30, 2001 (unaudited)
and 2000 (unaudited) . . . . . . . . F-4
Consolidated statements of stockholders' deficit for
the years ended June 30, 2001 and 2000 . . . . . . . . F-5
Consolidated statements of cash flows for the years
Ended June 30, 2001 and 2000 and for the three
month period ended September 30, 2001 (unaudited)
and 2000 (unaudited) . . . . . . . . F-7
Notes to consolidated financial statements . . . . . . . . F-9
All other schedules are omitted as the required information is not present or is
not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the financial statements or
notes thereto.
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
GTC Telecom Corp.
We have audited the accompanying consolidated balance sheet of GTC Telecom Corp.
(the "Company") and subsidiaries as of June 30, 2001 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the years in the two-year period then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of GTC
Telecom Corp. at June 30, 2001 and the consolidated results of their operations
and their cash flows for each of the years in the two-year period then ended, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As disclosed in Note 1, the
Company has incurred operating losses in the last two years, and has a working
capital deficit of $5,522,587, liabilities from the underpayment of payroll
taxes and contingent liabilities from cancelled contracts, and a stockholders'
deficit of $5,280,267 at June 30, 2001. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 1. The
consolidated financial statements do not include any adjustments that may result
from the outcome of this uncertainty.
/s/ CORBIN & WERTZ
Irvine, California
July 27, 2001
F-2
GTC TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
ASSETS 2001 2001
(UNAUDITED)
Cash $ 504,791 $ 219,878
Accounts receivable, net of allowance for doubtful accounts
of $360,000 and $210,000, respectively 1,659,378 1,514,972
Deposits 89,426 77,426
Related party note receivable 100,000 100,000
Prepaid expenses 101,068 23,449
------------- -------------
Total current assets 2,454,663 1,935,725
Property and equipment, net of accumulated depreciation
of $432,878 and $377,523, respectively 265,326 222,584
Other assets 13,611 19,736
------------- -------------
Total assets $ 2,733,600 $ 2,178,045
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 1,851,726 $ 5,675,073
Accrued payroll and related taxes 1,661,749 1,644,228
Note payable 4,861,604 -
Obligation under capital lease 45,360 88,124
Deferred income 49,408 50,887
------------- -------------
Total current liabilities 8,469,847 7,458,312
------------- -------------
Commitments and 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; 20,396,622 and 20,371,622 shares
issued and outstanding, respectively 20,397 20,372
Additional paid-in-capital 8,707,779 8,667,479
Note receivable officer (60,306) (60,306)
Accumulated deficit (14,404,117) (13,907,812)
------------- -------------
Total stockholders' deficit (5,736,247) (5,280,267)
------------- -------------
Total liabilities and stockholders' deficit $ 2,733,600 $ 2,178,045
============= =============
See independent auditors report and accompanying notes
to consolidated financial statements.
F-3
GTC TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30, Year Ended June 30,
------------ ------------ ------------ ------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(unaudited) (unaudited)
Revenues:
Telecommunications $ 4,293,419 $ 2,760,342 $13,867,163 $ 4,654,922
Internet services 84,764 9,612 97,381 41,165
------------ ------------ ------------ ------------
Total revenues 4,378,183 2,769,954 13,964,544 4,696,087
------------ ------------ ------------ ------------
Cost of sales:
Telecommunications 2,488,242 1,739,612 7,888,648 3,755,698
Internet services 64,362 6,527 77,134 276,889
------------ ------------ ------------ ------------
Total cost of sales 2,552,604 1,746,139 7,965,782 4,032,587
------------ ------------ ------------ ------------
Gross profit 1,825,579 1,023,815 5,998,762 663,500
Selling, general and administrative
expenses 2,192,219 2,020,725 8,317,686 7,696,832
------------ ------------ ------------ ------------
Operating loss (366,640) (996,910) (2,318,924) (7,033,332)
Interest expense, net (120,984) (93,237) (504,901) (142,441)
------------ ------------ ------------ ------------
Loss before provision for income taxes (487,624) (1,090,147) (2,823,825) (7,175,773)
Provision for income taxes 8,681 4,239 8,433 5,218
------------ ------------ ------------ ------------
Net loss $ (496,305) $(1,094,386) $(2,832,258) $(7,180,991)
============ ============ ============ ============
Net loss available to common
shareholders per common
share $ (0.02) $ (0.05) $ (0.14) $ (0.42)
============ ============ ============ ============
Basic and diluted weighted average
common shares outstanding 20,377,057 19,967,544 20,031,313 17,105,139
============ ============ ============ ============
See independent auditors report and accompanying notes
to consolidated financial statements.
F-4
GTC TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE TWO-YEAR PERIOD ENDED JUNE 30, 2001
Additional Note Total
Common Stock Paid-in Receivable Accumulated Stockholders'
Shares Amount Capital Officer Deficit Deficit
---------- ------- ---------- --------- ------------- ------------
BALANCE AT JUNE 30, 1999 15,286,824 $15,287 $3,452,282 $ -- $ (3,894,563) $ (426,994)
Issuance of common stock
pursuant to private
placements, net of offering
costs of $288,395 2,825,000 2,825 2,533,780 -- -- 2,536,605
Sale of common stock for
cash 250,000 250 249,750 -- -- 250,000
Estimated fair market value of
stock issued for services
rendered 1,175,720 1,176 2,009,798 -- -- 2,010,974
Estimated fair market value of
options granted to
consultants for services
rendered -- -- 157,800 -- -- 157,800
Estimated fair market value of
options granted to directors
and employees for
compensation -- -- 121,790 -- -- 121,790
Cashless exercise of stock
options 375,000 375 71,875 -- -- 72,250
Issuance of restricted
common stock for
conversion of note payable 55,000 55 54,945 -- -- 55,000
Advances to officer, net -- -- -- (71,351) -- (71,351)
Net loss -- -- -- -- (7,180,991) (7,180,991)
---------- ------- ---------- --------- ------------- ------------
BALANCE AT JUNE 30, 2000 19,967,544 19,968 8,652,020 (71,351) (11,075,554) (2,474,917)
---------- ------- ---------- --------- ------------- ------------
See independent auditors report and accompanying notes
to consolidated financial statements.
F-5
GTC TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE TWO-YEAR PERIOD ENDED JUNE 30, 2001
Additional Note Total
Common Stock Paid-in Receivable Accumulated Stockholders'
Shares Amount Capital Officer Deficit Deficit
---------- ------- ---------- --------- ------------- ------------
Estimated fair market value of
stock issued for services
rendered 150,000 150 54,580 -- -- 54,730
Estimated fair market value of
options granted to consultants
for services rendered -- -- 53,833 -- -- 53,833
Estimated fair market value of
options granted to directors
and employees for
compensation -- -- 140,100 -- -- 140,100
Cancellation of previously
issued stock and options (56,637) (57) (357,743) -- -- (357,800)
Issuance of restricted common
stock for conversion of notes
payable 310,715 311 124,689 -- -- 125,000
Advances to officer, net -- -- -- 11,045 -- 11,045
Net loss -- -- -- -- (2,832,258) (2,832,258)
BALANCE AT JUNE 30, 2001 20,371,622 $20,372 $8,667,479 $(60,306) $(13,907,812) $(5,280,267)
See independent auditors report and accompanying notes
to consolidated financial statements.
F-6
GTC TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
September 30, Year Ended June 30,
------------------------- --------------------------
2001 2000 2001 2000
----------- ------------ ----------- ------------
(unaudited) (unaudited)
Cash Flows From Operating Activities:
Net loss $ (496,305) $(1,094,386) $(2,832,258) $(7,180,991)
Adjustments to reconcile net loss to
net cash provided by/(used in)
operating activities:
Estimated fair market value of options
granted to directors and employees
for compensation 33,075 33,076 140,100 121,790
Estimated fair market value of warrants
granted in connection with notes
payable - 13,500 13,500 -
Estimated fair market value of options
and warrants granted to consultants
for services rendered - - 40,333 157,800
Estimated fair market value of stock
issued for services 7,250 - 54,730 2,010,974
Cancellation of previously issued
stock and options - - (357,800) -
Increase in allowance for doubtful
accounts 150,000 10,182 197,068 13,450
Interest accrued on debt converted - - - 5,000
Reduction of note receivable for
services rendered - 22,500 22,500 -
Depreciation and amortization 61,478 53,860 220,390 173,946
Changes in operating assets and
liabilities:
Accounts receivable and other
current assets (325,450) (448,422) (1,072,263) (779,958)
Accounts payable and accrued
expenses 1,038,257 859,918 3,062,738 2,014,343
Accounts payroll and related taxes 17,521 268,899 770,015 778,955
Deferred income (1,479) 6,742 (60,582) 98,987
----------- ------------ ------------ ------------
Net cash provided by/(used in) operating
activities 484,347 (274,131) 198,471 (2,585,704)
----------- ------------ ------------ ------------
Cash Flows From Investing Activities:
Purchases of property and equipment (98,095) (13,896) (46,109) (156,686)
Loan to related party under note receivable - (50,000) (100,000) (22,500)
Advances to officer, net - (71,465) 11,045 (71,351)
Deposits - - 101,564 150,000
----------- ------------ ------------ ------------
Net cash used in investing activities (98,095) (135,361) (33,500) (100,537)
----------- ------------ ------------ ------------
See independent auditors report and accompanying notes
to consolidated financial statements.
F-7
GTC TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Three Months Ended
September 30, Year Ended June 30,
------------------------ --------------------------
2001 2000 2001 2000
----------- ----------- ----------- ------------
(unaudited) (unaudited)
Cash Flows From Financing Activities:
Principal borrowings on notes payable to
stockholders - 200,000 225,000 48,500
Principal repayments on notes payable to
stockholders - - (273,500) -
Prepayment of registration statement costs (58,575) - - -
Principal borrowings on notes payable - - - 310,000
Principal repayments on notes payable - (21,244) (36,790) (213,396)
Proceeds from sale of stock, net offering
costs of $288,395 - - - 2,786,605
Principal repayments under capital lease
obligations (42,764) - (91,139) (14,632)
---------- ---------- ---------- -----------
Net cash provided by/(used in) financing
activities (101,339) 178,756 (176,429) 2,917,077
---------- ---------- ---------- -----------
Net increase/(decrease) in cash 284,913 (230,736) (11,458) 230,836
Cash at beginning of period 219,878 231,336 231,336 500
---------- ---------- ---------- -----------
Cash at end of period $ 504,791 $ 600 $ 219,878 $ 231,336
========== ========== ========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 9,324 $ 79,737 $ 69,772 $ 127,621
========== ========== ========== ===========
Income taxes $ 8,681 $ 4,239 $ 8,433 $ 5,218
========== ========== ========== ===========
Supplemental disclosure of non-cash investing and financing activities:
During the year ended June 30, 2001, the Company issued 285,715 shares of
restricted common stock pursuant to the conversion of a note payable with a
principal amount of $100,000.
During the year ended June 30, 2001, the Company issued 25,000 shares of
restricted common stock pursuant to the conversion of a note payable with a
principal amount of $25,000.
During the year ended June 30, 2000, the Company issued 55,000 shares of
restricted common stock pursuant to the conversion of a note payable with a
principal amount of $50,000 and accrued interest of $5,000.
During the year ended June 30, 2000, the Company converted $90,189 of accounts
payable into a promissory note (see Note 6).
During the year ended June 30, 2000, certain employees exercised options to
purchase 375,000 shares of the Company's common stock in lieu of salary of
$72,250.
See independent auditors report and accompanying notes
to consolidated financial statements.
F-8
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2001
- --------------------------------------------------------------------------------
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS - GTC Telecom Corp. and subsidiaries (the "Company"
or "GTC") provide various telecommunication services, including long distance
telephone and calling card services as well as various Internet related services
including Internet service provider access and web page hosting. GTC Telecom
Corp. was organized as a Nevada Corporation on May 17, 1994 and is currently
based in Costa Mesa, California.
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. At June 30, 2001, the Company has
negative working capital of $5,522,587, liabilities from the underpayment of
payroll taxes (see Note 11), contingent liabilities from cancelled contracts
(see Note 11), and a stockholders' deficit of $5,280,267; in addition, through
June 30, 2001, the Company has losses from operations and a lack of profitable
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/or increase margins
through continued negotiations with MCI/WorldCom (see Note 11) and other cost
cutting measures. In the absence of significant increases in revenues and
margins, the Company intends to fund operations through additional debt and
equity financing arrangements. 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 in
consolidation.
UNAUDITED FINANCIAL STATEMENTS - The accompanying unaudited financial statements
as of and for the three months ended September 30, 2001 and 2000 have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial statements. Accordingly, these
financial statements do not include certain information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. However, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) which, in the option of management, are necessary in order to fairly
present the financial statements. The results of operations for interim periods
are not necessarily indicative if the results to be expected for the full year.
These financial statements should be read in conjunction with the Company's
audited financial statements, and notes thereto, which are included herein.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates. Significant estimates made by management
are, among others, provisions for losses on accounts receivable, realizability
of long-lived assets and estimates for income tax valuations.
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.
CONCENTRATION OF CREDIT RISK - The Company sells its telephone and network
services to individuals and small businesses throughout the United States and
does not require collateral. Reserves for uncollectible amounts are provided,
which management believes are sufficient.
F-9
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2001
- --------------------------------------------------------------------------------
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
DEPENDENT ON KEY CUSTOMERS - The Company is not dependent on any single customer
or groups of affiliated customers for a significant portion of its annual sales.
The Company's customer base changes on a continuous
basis as customers are added or removed.
MAJOR SUPPLIERS - The Company does not own its own long distance network, and
pursuant to the Company's contract with MCI/WorldCom, the Company currently
depends primarily upon MCI/WorldCom to provide for the transmission of phone
calls by its customers and to provide the call detail records upon which the
Company bases its customers billings. Under the terms of an amended contract
entered into with MCI/WorldCom on August 10, 1998 (and last amended in September
2000), the Company is obligated to a minimum monthly commitment of $520,000 per
month through August 2003.
Pursuant to the terms of the contract with MCI/WorldCom, the Company must pay
liquidated damages in an amount equal to the aggregate minimum requirement for
the remaining term of the contract if the Company terminates the contract prior
to the expiration date. Although the Company believes that its relationship
with MCI/WorldCom is strong and should remain so with continued contract
compliance, the termination of the Company's contract with MCI/WorldCom, the
loss of telecommunications services provided by MCI/WorldCom, or a reduction in
the quality of service the Company receives from MCI/WorldCom could have a
material adverse effect on the Company's results of operations. In addition,
the accurate and prompt billing of the Company's customers is dependent upon the
timeliness and accuracy of call detail records provided to the Company by
MCI/WorldCom.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost. Depreciation
is computed using the straight-line method over the useful life of 3 to 5 years.
During the year ended June 30, 2001 and 2000, total depreciation expense was
$195,890 and $149,447, respectively.
Betterments, renewals, and extraordinary repairs that extend the lives of the
assets are capitalized; other repairs and maintenance charges are expensed as
incurred. The cost and related accumulated depreciation applicable to assets
retired are removed from the accounts, and the gain or loss on disposition is
recognized in current operations.
LONG-LIVED ASSETS - The Company has adopted Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," which requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
accordance with the provisions of SFAS 121, the Company regularly reviews
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. Based
on this analysis, the Company management believes that no impairment of the
carrying value of its long-lived assets existed at June 30, 2001.
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.
Telecommunication services cost of sales consists of the cost of long distance
service provided by MCI/WorldCom and other carriers.
F-10
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2001
- --------------------------------------------------------------------------------
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 consists of the cost of providing internet
access.
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 adoption of SAB 101 did
not have a material impact on the Company's financial position or results of
operations.
DEFERRED REVENUE - Deferred revenue represents 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 or when the calling card expires.
ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising
expense was $171,108 and $1,004,103 for fiscal 2001 and 2000, respectively.
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.
STOCK-BASED COMPENSATION - The Company accounts for stock-based compensation
issued to employees using the intrinsic value based method as prescribed by
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." Under the intrinsic value based method, compensation is
the excess, if any, of the fair value of the stock at the grant date or other
measurement date over the amount an employee must pay to acquire the stock.
Compensation, if any, is recognized over the applicable service period, which is
usually the vesting period.
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." This standard, if fully adopted, changes the method of
accounting for employee stock-based compensation plans to the fair value based
method. For stock options and warrants, fair value is determined using an
option pricing model that takes into account the stock price at the grant date,
the exercise price, the expected life of the option or warrant and the annual
rate of quarterly dividends. Compensation expense, if any, is recognized over
the applicable service period, which is usually the vesting period.
The adoption of the accounting methodology of SFAS 123 is optional and the
Company has elected to continue accounting for stock-based compensation issued
to employees using APB 25; however, pro forma disclosures, as if the Company
adopted the cost recognition requirements under SFAS 123, are required to be
presented (see Note 7).
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation, 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
Company's financial statements.
F-11
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2001
- --------------------------------------------------------------------------------
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 (there were no additional common shares at either
June 30, 2001 or 2000). Pro forma per share data has been computed using the
weighted average number of common shares outstanding during the periods.
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.
FAIR VALUES OF FINANCIAL INSTRUMENTS - The FASB issued Statement of Financial
Accounting Standards No. 107 ("SFAS 107"), "Disclosures About Fair Value of
Financial Instruments." SFAS 107 requires disclosure of fair value information
about financial instruments when it is practicable to estimate that value. The
carrying amount of the Company's cash, receivables, trade payables, and accrued
expenses approximates their estimated fair values due to the short-term
maturities of those financial instruments. The fair value of related party
notes receivable and note receivable officer are not determinable as these
transactions are with a related party.
COMPREHENSIVE INCOME - The Company has adopted Statement of 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 has adopted
Statement of 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.
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, 2000The adoption of this
standard did not have a material impact on it's the Company's results of
operations, financial position or cash flows as it currently does not engage in
any derivative or hedging activities.
ACCOUNTING FOR WEB SITE DEVELOPMENT COSTS - In March 2000, the Emerging Issues
Task Force reached a consensus on Issue No. 00-2, "Accounting for Web Site
Development Costs" ("EITF 00-2") to be applicable to all web site development
costs incurred for the quarter beginning after June 30, 2000. 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 the
Company's financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS - In July 2001, the FASB issued Statement of
Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations",
which is effective for business combinations initiated after June 30, 2001. SFAS
141 eliminates the pooling of interest method of accounting for business
combinations and requires that all business combinations occurring after July 1,
2001 are accounted for under the purchase method. The Company does not expect
SFAS 141 to have a material impact on its financial statements.
F-12
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2001
- --------------------------------------------------------------------------------
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
In July 2000, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective for
fiscal years beginning after December 15, 2001. Early adoption is permitted for
entities with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements have not been previously issued. SFAS 142
addresses how intangible assets that are acquired individually or with a group
of other assets should be accounted for in the financial statements upon their
acquisition and after they have been initially recognized in the financial
statements. SFAS 142 requires that goodwill and intangible assets that have
indefinite useful lives not be amortized but rather be tested at least annually
for impairment, and intangible assets that have finite useful lives be amortized
over their useful lives. SFAS 142 provides specific guidance for testing
goodwill and intangible assets that will not be amortized for impairment. In
addition, SFAS 142 expands the disclosure requirements about goodwill and other
intangible assets in the years subsequent to their acquisition. Impairment
losses for goodwill and indefinite-life intangible assets that arise due to the
initial application of SFAS 142 are to be reported as resulting from a change in
accounting principle. However, goodwill and intangible assets acquired after
June 30, 2001 will be subject immediately to the provisions of SFAS 142. The
Company does not expect SFAS 142 to have a material effect on its financial
statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143 ("SFAS 143"), "Accounting for Asset Retirement Obligations", SFAS 143
establishes standards associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
The Company has not yet assessed the impact of this standard on its financial
statements, but does not expect the impact to be material.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS 144 addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of. The
provisions of SFAS 144 are effective for financial statements issued for fiscal
years beginning after December 15, 2001, and interim periods within these fiscal
years, with early adoption encouraged. The Company does not expect SFAS 144 to
have a material impact on its financial statements.
RECLASSIFICATIONS - Certain reclassifications have been made to 2000 amounts to
conform to 2001 presentation.
NOTE 2 PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of June 30, 2001:
Computer equipment $465,965
Furniture and office equipment 58,238
Telephone equipment 75,904
--------
600,107
Less accumulated depreciation (377,523)
--------
$222,584
========
NOTE 3 OTHER ASSETS
Other assets consist of PUC carrier certifications the Company must obtain in
order to provide interstate and intrastate telephone service. They are recorded
at cost and are being amortized using the straight-line method over the useful
life of three years. Amortization expense for the years ended June 30, 2001 and
2000 is $24,500 and $24,499, respectively.
F-13
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2001
- --------------------------------------------------------------------------------
NOTE 4 OBLIGATION UNDER CAPITAL LEASE
The Company is a lessee of certain property and equipment under a capital lease
that is to expire in April 2002 (see below). Terms of the lease call for
monthly payments of $6,738. The asset and liability under capital leases are
recorded at the lower of the present value of the minimum lease payments or the
fair market value of the related assets. The asset is depreciated over its
estimated useful life.
Future minimum annual commitments under lease arrangements are as follows:
Years Ending
June 30,
-------------
2002 $ 93,872
Total minimum future lease payments 93,872
Less: Amounts representing interest (5,748)
---------
Present value of net minimum lease payments $ 88,124
=========
The following is an analysis of the leased equipment under capital leases as of
June 30, 2001, which is included in property and equipment (Note 2).
Computer equipment $205,416
Less: Accumulated depreciation (142,649)
---------
$62,767
=========
Interest incurred pursuant to the capital lease obligation was $16,065 and
$19,653 for fiscal years 2001 and 2000, respectively.
NOTE 5 RELATED PARTY TRANSACTIONS
NOTE RECEIVABLE OFFICER
As of June 30, 2001, the Company has net advances to an officer of $60,306. The
advances accrue interest at 10% (no interest income has been recorded as of June
30, 2001) and are due on demand. The Company has reclassified the note
receivable as an increase to stockholders' deficit at June 30, 2001.
OTHER
In September 2000, the Company borrowed $200,000 for working capital purposes
from a shareholder of a related-party company. The borrowings, which accrue
interest at 12%, require no monthly principal and interest payments with all
unpaid principal and interest due on March 25, 2001 and are secured by the
Company's receivables. As of June 30, 2001, the Company has repaid the
principal and interest due. 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 (see Note 8).
During fiscal year 2001, in connection with the transaction noted above, the
Company advanced $100,000 to a company related to the above referenced
noteholder. The advance, which accrues interest at 12%, required no monthly
principal or interest payments with all unpaid principal and interest due on
March 25, 2001. The Company is in the process of renegotiating the repayment.
No interest has been paid or accrued as of June 30, 2001. In addition, the
Company was issued warrants to purchase 50,000 shares of restricted common stock
of the related-party company at an exercise price of $2.00 per share. Since
this company is not a public entity, GTC valued the
F-14
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2001
- --------------------------------------------------------------------------------
NOTE 5 RELATED PARTY TRANSACTIONS, CONTINUED
warrants at $0. The warrants are exercisable for a period of ten (10) years
from the date of issuance.
The Company borrows funds from the Company's Chief Executive Officer for working
capital purposes from time to time. The borrowings accrue interest at 10% and
are due on demand. As of June 30, 2001, the Company has repaid the principal
balance. No interest was accrued or paid for the years ended June 30, 2001 and
2000.
NOTE 6 NOTES PAYABLE
In January 2000, the Company borrowed $200,000 for working capital purposes from
a third party. The note was due February 28, 2000 plus accrued interest of
$20,000. If all unpaid principal and interest was not paid by February 28,
2000, the aggregate balance was to accrue interest at 2% per month with no
predetermined due date. On April 11, 2000, the Company repaid $100,000 of the
principal balance. On May 15, 2001, the noteholder converted the principal
balance outstanding of $100,000 into 285,715 restricted shares of the Company's
common stock at $0.35 per share (the fair market value on the date of conversion
was $0.32). These shares also have piggyback registration rights. In addition,
the Company will repay $15,000 of the accrued interest in three equal
installments in June, July, and August 2001 with all remaining accrued interest
forgiven (see Note 9).
On March 2, 2001, the Company issued a one-year convertible note to an
accredited shareholder of the Company in the amount of $25,000. Pursuant to the
terms of the note, the note is convertible by the noteholder into shares of the
Company's common stock at a conversion rate of $1.00 per share. The note earns
12% interest payable at maturity. On May 31, 2001, the noteholder exercised the
conversion feature into 25,000 shares of the Company's common stock (see Note
9).
In fiscal 1999, the Company borrowed $50,000 for working capital purposes from a
third party. The note, which accrued interest at 10% per annum, was due on
August 6, 1999. During fiscal 2000, the noteholder converted the note payable
and accrued interest, totaling $55,000 into 55,000 shares of the Company's
restricted common stock at $1.00 per share (estimated to be the fair market
value on the date of conversion based on the price per share of the current
private placement memorandum).
On February 3, 2000, the Company terminated its agreement with a vendor and
signed a promissory note for amounts owed of $90,189. The promissory note
required the Company to make nine monthly installment payments of approximately
$10,000 per month beginning February 15, 2000 through October 15, 2000. If the
Company failed to make an installment payment, then the unpaid balance was
immediately due and payable. The Company has repaid the balance due. The
promissory note was personally guaranteed by the Company's Chief Executive
Officer.
NOTE 7 STOCK OPTIONS
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 or 1,996,754 shares for the year beginning
October 1, 2000. 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.
From time to time, the Company issues non-plan stock options pursuant to various
agreements and other compensatory arrangements to employees and third parties.
On October 5, 2000, the Company's Board of Directors ("Board") granted, pursuant
to the Option Plan, an aggregate of 203,650 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 certain employees of the Company
and an aggregate of 300,000 Non-statutory Stock Options (as defined by the
Option Plan), exercisable at $0.6875 per share (the fair market value of the
Company's common stock on the day of grant) to the directors of the Company.
During fiscal
F-15
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2001
- --------------------------------------------------------------------------------
NOTE 7 STOCK OPTIONS, CONTINUED
year 2001, an additional 109,900 Incentive Stock Options (as defined by the
Plan) were granted, exercisable at exercise prices between $0.25 and $0.72 per
share (each issuance priced at the fair market value of the Company's common
stock on the day of grant) to certain employees of the Company.
During fiscal year 2001, the Board issued options to purchase an aggregate of
52,500 shares of the Company's common stock, at exercise prices between $0.01
and $0.2969 per share, valued at $7,800, to the members of the Board pursuant to
their agreement of director compensation. The options are exercisable through
April 2004.
On November 3, 2000, the Company granted options to purchase 125,000 shares of
restricted common stock, at an exercise price of $0.50 per share, to a director
of the Company (the fair market value of the Company's common stock on the date
of grant). The options are exercisable through November 2003.
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 to be charged to the Company over the five
year vesting period at $132,300 per year beginning in fiscal year 2001 through
fiscal year 2005. During fiscal year 2000, an aggregate of 94,000 additional
Incentive Stock Options (as defined by the Plan) were granted, exercisable at
$1.37 per share (each issuance priced at the fair market value of the Company's
common stock on the day of grant) to certain employees of the Company. The
options are exercisable through October 2009.
During fiscal 2000, the Company entered into various employment agreements
wherein the Company has agreed to supplement compensation to certain key
employees in the form of stock options. Pursuant to the agreements, the Company
issued options to purchase 75,000 shares of restricted common stock during
fiscal 2000, at an exercise price of $2.72 per share and vesting over three
years from date of grant. A total of approximately $50,490 of compensation
expense was recorded in fiscal 2000 relating to employment agreement options.
In January 2000, the Company entered into an agreement with an outside
consultant for investor and public relations services. Pursuant to the
agreement, the Company issued 56,637 shares of common stock valued at $200,000
for services (see Note 9). In addition, the Company issued options to purchase
60,000 shares of the Company's common stock as follows: 1) 20,000 shares at 100%
of the closing bid price on January 28, 2000, 2) 20,000 shares at 200% of the
closing bid price on January 28, 2000 and, 3) 20,000 shares at 300% of the
closing bid price on January 28, 2000. The options were valued at $157,800
using the Black Scholes method and recorded as investor relations expense under
Selling, General and Administrative expense in the accompanying Statement of
Operations. 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. As a result, the Company reversed the transaction
and recorded the value of the previously issued stock and warrants of $357,800
as a reduction in Selling, General, and Administrative expense.
On May 1, 2000, the Board issued options to purchase an aggregate of 57,500
shares of the Company's common stock, at an exercise price of $0.01, valued at
$71,300, to the members of the Board pursuant to their agreement of director
compensation. The options are exercisable through May 2003.
On May 1, 2000, the Board granted, pursuant to the Option Plan, an aggregate of
194,100 Non-statutory Stock Options (as defined by the Plan), exercisable at
$1.25 per share (the fair market value of the Company's common stock on the day
of grant) to certain employees and officers of the Company. In addition, the
Board granted options to purchase 100,000 shares of restricted common stock, at
an exercise price of $1.25 per share (the fair market value of the Company's
common stock on the day of grant) to the members of the Board. However, in the
event that the trading price of the Company's common stock closes at or above
$5.00 per share for a minimum of five consecutive trading days, the options
shall become fully vested. The options are exercisable through May 2010.
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 a director
of the Company (the fair market value of the Company's common stock on the day
of grant). The options are exercisable through October 2002.
F-16
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2001
- --------------------------------------------------------------------------------
NOTE 7 STOCK OPTIONS, CONTINUED
A following is a status of the stock options outstanding at June 30, 2001 and
2000 and the changes during the years then ended:
2001 2000
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
----------- --------- ---------- -------
Outstanding, beginning of year 2,156,500 $ 1.7365 765,000 $1.7577
Granted 791,050 0.5788 1,779,000 1.4189
Exercised -- -- (375,000) 0.1920
Expired/Forfeited (255,550) 3.097 (12,500) 4.1750
----------- --------- ---------- -------
Outstanding, end of year 2,692,000 $ 1.2671 2,156,500 $1.7365
=========== ========= ========== =======
Exercisable at end of year 1,441,730 $ 1.3216 1,089,401 $1.5578
=========== ========= ========== =======
Wtd avg fair value of options
granted $ 0.81 $ 1.39
========= =======
1,436,950 of the options outstanding at June 30, 2001 have exercise prices
between $0.01 and $1.00, with a weighted average exercise price of $0.74 and a
weighted average remaining contractual life of 4.7 years. 876,000 of these
options are exercisable at June 30, 2001. 951,050 of the options outstanding at
June 30, 2001 have exercise prices between $1.01 and $2.00, with a weighted
average exercise price of $1.16 and a weighted average remaining contractual
life of 7.4years. 381,730 of these options are exercisable at June 30, 2001.
The remaining 304,000 options have exercise prices between $2.94 and $5.50, with
a weighted average exercise price of $4.10 and a weighted average remaining
contractual life of 4.1 years. 184,000 of these options are exercisable at June
30, 2001.
SFAS 123 Proforma Information:
The fair market value of each option granted in 2001 and 2000 to consultants and
other third parties is estimated using the Black-Scholes option pricing method
per SFAS 123. The Black-Scholes option-pricing model used the following
assumptions for the years ended June 30, 2001 and 2000, respectively: (i) no
dividend yield for each year, (ii) average volatility of 203 percent and 152
percent, (iii) weighted-average risk-free interest rate of approximately 6.25
percent and 6.25 percent, and (iv) expected life of 1 year.
Had compensation cost for the Company's 2001 and 2000 options granted to
employees been determined consistent with SFAS 123, the Company's net loss and
net loss per share for the year ended June 30, 2001 and 2000 would approximate
the pro forma amounts below:
Years ended June 30,
2001 2000
As Reported Pro Forma As Reported Pro Forma
------------ ------------ ------------ ------------
Net loss $(2,832,258) $(3,017,965) $(7,180,991) $(7,455,503)
Basic and diluted loss
per share $(0.14) $(0.15) $(0.42) $(0.44)
NOTE 8 WARRANTS
From time to time, the Company issues warrants pursuant to various consulting
agreements.
In September 2000, the Company agreed to issue to a 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 valued at approximately $13,500 (based on the
Black-Scholes pricing model) (see Note 5). The warrants are exercisable for a
period of two years from the date of issuance and contain piggy-back
registration rights.
F-17
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2001
- --------------------------------------------------------------------------------
NOTE 8 WARRANTS, CONTINUED
In November 2000, pursuant to an agreement with an outside consultant for
investor and public relations services, 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 shall have piggyback registration rights and were
valued at $40,333 (based on the Black Scholes pricing model) which the Company
recorded as investor relations expense
In May 2001, the Company entered into a letter of intent ("LOI") 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 shares of the Company's common stock as follows:
1. Warrants to purchase 50,000 shares of the Company's restricted common
stock at an exercise price of $0.25 per share valued at approximately $13,500
(pursuant to SFAS 123 based on the Black-Scholes option pricing model). These
warrants have been granted but will not vest until execution of the definitive
agreement.
2. Warrants to purchase 50,000 shares of the Company' restricted common
stock priced at the fair market value on the date of the launch of the Company
on the marketing company's website
3. Additional warrants at the rate of one restricted share per customer
brought to the Company by the marketing company for every 100,000 customers.
The warrants are priced at the lowest fair market value within 60 calendar days
of the date of grant. No warrants have been granted or earned as of the date of
this filing.
No warrants were granted or issued during fiscal 2000.
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 earned or granted as of the date of this filing.
The following represents a summary of the warrants outstanding at June 30, 2001
and 2000 and changes during the years then ended:
2001
Weighted
Average
Exercise
Warrants Price
-------- -------
Outstanding, beginning of year -- --
Granted 190,000 $0.7056
Exercised -- --
Expired/Forfeited -- --
-------- -------
Outstanding, end of year 190,000 $0.7056
======== =======
Exercisable at the end of the year 140,000 $ 0.87
======== =======
The fair value of each warrant granted during 2001 is estimated using the
Black-Scholes option-pricing model on the date of grant using the following
assumptions: (i) no dividend yield, (ii) average volatility of 170 percent,
(iii) weighted-average risk-free interest rate of approximately 6.2 percent, and
(iv) expected life of 3 years.
190,000 of the warrants outstanding at June 30, 2001 have exercise prices
between $0.25 and $1.516, with a weighted average exercise price of $0.71 and a
weighted average remaining contractual life of 4.3 years. 140,000 of these
warrants are exercisable at June 30, 2001.
F-18
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2001
- --------------------------------------------------------------------------------
NOTE 9 COMMON STOCK ISSUANCES
During the fiscal year ended June 30, 2000, the Company issued 2,825,000 shares
of restricted common stock pursuant to a private placement memorandum for
$2,536,605, net of offering costs of $288,395. The private placement memorandum
was closed as of June 2000.
During the fiscal year ended June 30, 2000, the Company issued 250,000 shares of
restricted common stock for $250,000 to two unaffiliated investors.
During the fiscal year ended June 30, 2000, the Company issued 305,000 shares of
restricted common stock, valued at $305,000 (estimated by the Company to be
$1.00 per share) in exchange for consultation services rendered.
In September 1999, the Company issued 67,675 shares of common stock, valued at
$271,247 (based on the market value on the date of grant) to consultants in
exchange for consultation and legal services rendered.
In December 1999, the Company issued 282,575 shares of common stock, valued at
$539,666 (based on the market value on the date of grant) to consultants in
exchange for consultation and legal services rendered.
In January 2000, the Company issued 7,000 shares of the Company's common stock
valued at $13,118 (based on the market value on the date of grant) in exchange
for consultation services rendered.
In January 2000, the Company entered into an agreement with an outside
consultant for investor and public relations services. Pursuant to the
agreement, the Company issued 56,637 shares of common stock valued at $200,000
(based on the market value on the date of grant) for services. 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 (see Note 7).
In May 2000, the Company issued 456,833 shares of common stock, valued at
$682,000 (based on the market value on the date of grant) to consultants in
exchange for consultation and legal services rendered.
During fiscal year 2000, the Company issued 55,000 shares of restricted common
stock pursuant to the conversion of a note payable with a principal amount of
$50,000 and accrued interest of $5,000.
During fiscal year 2000, the Company's Chief Executive Officer, President, and
Chief Financial Officer, and certain other employees, exercised options to
purchase a total of 375,000 shares of the Company's common stock in lieu of
salary for $72,250.
In October 2000, the Company issued 20,000 shares of restricted common stock
valued at $11,250 (based on the market price on the date of grant) for services
rendered. In connection with this issuance, the Company recorded advertising
expense of $11,250. These shares also have a provision for piggyback
registration rights.
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 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 were
valued using the market price on the date of each grant. During the period
ended June 30, 2001, the Company issued 105,000 shares of common stock valued at
$32,524 (based on the market price on the date of grant) pursuant to this
agreement and recorded the amount as investor relations expense.
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 issue to the investor relations company 25,000
shares of the Company's restricted common stock valued at $10,956 (based on the
market price on the date of grant) and recorded the amount as investor relations
expense.
On May 31, 2001, a $25,000 noteholder exercised the conversion feature of the
note into 25,000 restricted shares of the Company's common stock (see Note 6).
F-19
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2001
- --------------------------------------------------------------------------------
NOTE 9 COMMON STOCK ISSUANCES, CONTINUED
On May 15, 2001, a noteholder converted the principal balance outstanding of
$100,000 into 285,715 restricted shares of the Company's common stock at $0.35
per share (the fair market value on the date of conversion was $0.32) (see Note
6). These shares also have piggyback registration rights.
During fiscal year 2000, Mr. Sandhu and Mr. Clemons canceled 619,848 and 154,962
shares, respectively, of the Company's common stock held by each of them. It
was determined that these shares were not cancelled in a timely matter. As a
result, these cancellations are reflected as a reduction in the outstanding
shares as of July 1, 1998.
NOTE 10 INCOME TAXES
The tax effects of temporary differences that give rise to deferred taxes are as
of June 30, 2001:
Deferred tax asset:
Net operating loss carryforward $ 7,880,000
Expense recognized for granting options and warrants 570,000
Allowance for doubtful accounts 90,000
-----------
Total gross deferred tax asset 8,540,000
Less valuation allowance (8,540,000)
Net deferred tax asset $ --
The valuation allowance increased by $4,060,629 during the year ended June 30,
2001. No current provision for income taxes for the periods ended June 30, 2001
and 2000 is required, except for minimum state taxes, since the Company incurred
taxable losses during such years.
The provision for income taxes for fiscal 2001 and 2000 was $800 and differs
from the amount computed by applying the U.S. Federal income tax rate of 34% to
loss before income taxes as a result of the following as of:
June 30
2001 2000
----------- ---------
Computed tax benefit at federal statutory rate $ (960,000) $(2,440,000)
State income tax benefit, net of federal effect (83,000) (237,000)
Increase in valuation allowance 4,060,629 2,682,218
Tax benefit from exercise of stock options in
fiscal 1999 and 2000 not previously recognized (3,009,196) --
----------- ---------
$ 8,433 $ 5,218
As of June 30, 2001, the Company had net operating loss carryforwards of
approximately $18,900,000 and $16,400,000 for federal and state income tax
reporting purposes, which begin expiring in 2013 and 2003, respectively.
In the event the Company were to experience a greater than 50% change in
ownership as defined in Section 382 of the Internal Revenue Code, the
utilization of the Company's net operating loss carryforwards could be severely
restricted.
F-20
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2001
- --------------------------------------------------------------------------------
NOTE 11 COMMITMENTS AND CONTINGENCIES
Contingencies - 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 June 30, 2001.
PAYROLL TAXES -The Company has recorded an accrual for past due payroll taxes as
of June 30, 2001 due to the under-reporting of the Company's payroll tax
liability. As a result, the Company has accrued approximately $1,205,000
(including approximately $252,000 of penalties and interest) under accrued
payroll and related taxes in the accompanying balance sheet at June 30, 2001.
The Company expects this matter to be settled and the related accrual paid by
December, 2002.
OPERATING LEASES - Effective July 24, 2001, the Company leases a total of 10,624
square feet of office space for its headquarters and customer service operations
in Costa Mesa, California at a monthly rental rate of $23,548 through July 31,
2004, unless terminated by either party with 75 days notice.
Future minimum annual commitments under long term facility lease and supplier
arrangements (see below) are as follows:
Years Ending Facility
June 30, Leases Supplier Total
- ------------- ----------- ----------- ----------
2002 $ 278,000 $ 6,240,000 $ 6,518,000
2003 283,000 4,160,000 4,443,000
2004 283,000 -- 283,000
2005 24,000 -- 24,000
----------- ----------- ----------
868,000 $10,400,000 $11,268,000
=========== =========== ===========
Rent expense for the fiscal years ended June 30, 2001 and 2000 was $315,317 and
$322,880, respectively.
CONTRACTS AND AGREEMENTS -
The Company provides its Internet Service Provider Access services pursuant to
agreements with various outside companies for the provisioning of the Company's
Internet Service Provider Access service. These agreements require the Company
to pay the greater of actual incurred usage or a minimum monthly fee. The
Company is subject to monthly minimum commitments of $1,500 through December
2001. Subsequently, the monthly minimum commitment is $500 per month. Total
amount paid pursuant to this agreement was $63,363 for the year ended June 30,
2001.
The Company does not own its own long distance network, and pursuant to the
Company's contract with MCI/WorldCom, the Company currently depends primarily
upon MCI/WorldCom to provide for the transmission of phone calls by its
customers and to provide the call detail records upon which the Company bases
its customers billings. Under the terms of an amended contract entered into
with MCI/WorldCom on August 10, 1998 (and last amended in September 2000), the
Company is obligated to a minimum monthly commitment of $520,000 per month
through August 2003. For the years ended June 30, 2001 and 2000, the Company
paid $5,468,164 and $2,239,778 respectively, pursuant to this agreement.
Currently, the Company owes $5,186,503 to WorldCom (including accrued interest
on the unpaid balance totaling $463,483 at June 30, 2001) which is included in
Accounts Payable at June 30, 2001. The Company is finalizing negotiations with
WorldCom for the repayment of this amount. The Company is currently required to
accrue interest on unpaid balances of 18% per annum.
F-21
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2001
- --------------------------------------------------------------------------------
NOTE 11 COMMITMENTS AND CONTINGENCIES, CONTINUED
The Company has an agreement with a billing company who provides processing
services for customer billing and collections. In addition the billing company
will provide financing through a third-party lender for amounts up to 60% of
eligible accounts receivable, as defined. For the years ended June 30, 2001
and 2000, the Company paid $70,921 and $121,043, respectively, in fees to the
billing company pursuant to this agreement.
The Company has an agreement to become a licensed user of a telecommunications
management and accounting software program. The agreement, which expires in
October 2003, unless terminated by the Company, has a five-year renewal feature
and provides for the Company to pay a minimum of $1,425 per month. For the
years ended June 30, 2001 and 2000, the Company paid $41,021 and $17,309,
respectively, pursuant to this agreement.
NOTE 12 EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:
Three Months Ended
September 30, Year Ended June 30,
2001 2000 2001 2000
------------ ----------- ----------- ------------
(unaudited) (unaudited)
Numerator for basic and diluted earnings
per share:
Net loss charged to common stockholders $ (496,305) $(1,094,386) $(2,832,258) $(7,180,991)
Denominator for basic and diluted earnings
per share:
Weighted average shares 20,377,057 19,967,544 20,031,313 17,105,139
Basic diluted earnings per share $ (0.02) $ (0.05) $ (0.14) $ (0.42)
NOTE 13 SUBSEQUENT EVENTS (UNAUDITED)
On October 19, 2001, the Company converted $4,861,604 of a total payable balance
of $6,173,612 due to a third party (which the Company has recorded under
accounts payable in the accompanying balance sheet at June 30, 2001) into a
short-term note payable ("the Note"). The Note bears interest at 12%, unless
the Company is unable to make the monthly payments as required, at which time
the interest rate increases to 18%. The note provides for interest only
payments of approximately $48,000 for the first three months, commencing October
15, 2001, with monthly principal and interest payments of $100,000 commencing
January 15, 2002, with a balloon payment of $4,480,475 due on September 15,
2002. The Note is secured by substantially all of the assets of the Company (as
defined in the agreement). The note also provides that if the Company makes all
scheduled payments pursuant to the Note, the noteholder may renegotiate the Note
in good faith with the then outstanding balance being due under a new promissory
note with terms similar to this Note.
In September 2001, the Company entered into an agreement with an outside
consultant for investor and public relations services. Pursuant to the
agreement, the Company issued to the investor relations company 25,000 shares of
our restricted common stock valued at $7,250 (based on the market price on the
date of grant) and recorded the amount as investor relations expense under
selling, general and administrative expenses in the accompanying consolidated
statement of operations.
On August 17, 2001, the Company issued to a shareholder options to purchase
100,000 shares of the Company's restricted common stock for fund raising
activities performed in fiscal year 2001, at an exercise price of $0.35 per
share. The options vested on the date of grant and are exercisable for a period
of two years from the date of issuance. No compensation expense is to be
recognized due to the fact the options were issued in connection with fund
raising activities.
F-22
GTC TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2001
- --------------------------------------------------------------------------------
NOTE 13 SUBSEQUENT EVENTS (UNAUDITED), CONTINUED
During the period ended September 30, 2001, the Company issued options to
certain employees to purchase an aggregate of 21,500 shares of restricted common
stock at an average exercise price of $0.27 per share (each issuance priced at
the estimated fair market value of our common stock on the date of the grant).
The options vest over five years from the date of the grant and are exercisable
through September 2011.
During the period ended September 30, 2001, the Company issued options to
certain board of directors to purchase an aggregate of 10,000 shares of
restricted common stock, at an exercise price of $0.30 per share (the estimated
fair market value on the date of grant). The options vested on the date of
grant and are exercisable through October 2004.
In October 2001, the Company signed a definitive agreement with a third party to
market the Company's products and services (see Note 8). As a result, the
warrants (see Note 8) vested and $25,000 of expenses will be recognized during
the second quarter ending December 31, 2001.
Effective September 19, 2001, the Company entered into a common stock purchase
agreement ("Agreement") with Bluefire Capital, Inc. ("Bluefire"). The Agreement
entitles the Company to issue and sell common stock to Bluefire in the form of
draws for up to an aggregate of $20,000,000, as defined in the Agreement, from
time to time during a three year period beginning on the date of the filing of
an effective registration statement. The Company must file a proper
registration statement under the Securities Act with the Securities and Exchange
Commission ("SEC") within sixty days of the execution of this Agreement. As of
September 30, 2001, the Company has yet to file a registration statement with
the SEC and has recorded fees incurred to date in the amount of $58,575 related
to the registration statement, under prepaid expenses in the accompanying
consolidated balance sheet.
Under the Agreement, each draw must be for a minimum of $100,000 up to a maximum
draw amount equal to 10% of the weighted average price for the Company's common
stock for the 60 calendar days immediately prior to the draw down pricing
period, as defined, multiplied by the total aggregate trading volume in respect
of the common stock for such period. Pursuant to the Agreement, the Company
must draw a minimum of $500,000 over the term of the Agreement, or the Company
shall pay liquidated damages within five days from the end of the Agreement, as
defined in the Agreement.
The number of shares of common stock to be issued in connection with each draw
shall be equal to the draw amount divided by either 88% of the lowest bid price
during the short term pricing period or 88% of the volume weighted average price
during the long pricing period, dependent on whether the Company elects a short
term pricing period or a long pricing period at the time the draw notice is
delivered to Bluefire, as defined in the Agreement.
In addition , the Company issued a warrant to Bluefire to purchase 150,000
shares of common stock at an exercise price of $0.3471 per share. The warrants
vested on the date of grant and are exercisable through March 19, 2005. no
consulting expense is to be recognized due to the fact the warrants were issued
in connection with equity fund raising activities.
F-23
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR 15,680,715 SHARES
OTHER PERSON TO PROVIDE ANY INFORMATION OR MAKE ANY OF COMMON STOCK
REPRESENTATIONS ABOUT GTC TELECOM CORP. EXCEPT
THE INFORMATION OR REPRESENTATIONS CONTAINED IN THIS
PROSPECTUS. YOU SHOULD NOT RELY ON ANY ADDITIONAL
INFORMATION OR REPRESENTATIONS IF MADE.
_____________________
This prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy
any securities:
- - except the common stock offered by this prospectus;
- - in any jurisdiction in which the offer or
solicitation is not authorized;
- - in any jurisdiction where the dealer or other GTC TELECOM CORP.
salesperson is not qualified to make the offer or
solicitation;
- - to any person to whom it is unlawful to make the
offer or solicitation; or
- - to any person who is not a United States resident [GRAPHIC OMITED]
or who is outside the jurisdiction of the
United States.
The delivery of this prospectus or any accompanying _____________________
sale does not imply that:
- - there have been no changes in the affairs of GTC PROSPECTUS
Telecom Corp. after the date of this prospectus; or
- - the information contained in this prospectus is _____________________
correct after the date of this prospectus.
_____________________
UNTIL FEBURARY 18, 2002 (25 DAYS AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT) ALL DEALERS THAT
EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. January 23, 2002