U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
AMENDMENT NO. 2
TO
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION
12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
GTC TELECOM CORP.
(Name of small business issuer in its charter)
NEVADA 88-0318246
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number
3151 AIRWAY AVE., SUITE P-3
COSTA MESA, CALIFORNIA 92626
(Address of Principal Executive Offices) (Zip Code)
(714) 549-7700
(Registrant's Telephone Number, Including Area Code)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(None)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $0.001
Title of Class
<PAGE>
TABLE OF CONTENTS
PART I
Item 1 Description of Business.
Item 2 Management's Discussion and Analysis or Plan of
Operation.
Item 3 Description of Property.
Item 4 Security Ownership of Certain Beneficial Owners
and Management.
Item 5 Directors, Executive Officers, Promoters and
Control Persons.
Item 6 Executive Compensation.
Item 7 Certain Relationships and Related Transactions.
Item 8 Description of Securities.
PART II
Item 1 Market Price of and Dividends on the
Registrant's Common Equity and Other Shareholder
Matters.
Item 2 Legal Proceedings.
Item 3 Changes In and Disagreements With Accountants.
Item 4 Recent Sales of Unregistered Securities.
Item 5 Indemnification of Directors and Officers.
PART F/S
Financial Statements.
PART III
Item 1 Index to Exhibits.
Item 2 Description of Exhibits.
<PAGE>
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
GTC Telecom Corp. (the "Company" or "GTC") is 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.
GTC Telecom Corp. was organized as a Nevada Corporation on May 17,
1994 and is currently based in Costa Mesa, California.
On August 31, 1998, GTC Telecom Corp. (which at the time was
designated Bobernco, Inc., a Nevada corporation ("Bobernco")
acquired all of the outstanding common stock of GenTel
Communications, Inc., a Colorado corporation ("GenTel") in a
business combination described as a "reverse acquisition." For
accounting purposes, the acquisition has been treated as the
acquisition of Bobernco (the Registrant) by GenTel.
GenTel Communications, was formerly known as GenX, LLC ("GenX").
GenX, a Delaware limited liability company was formed on May 29,
1997. GenTel Communications, a Colorado corporation was formed on
December 9, 1997 and was inactive until its reorganization with
GenX. Effective February 3, 1998, pursuant to a plan of
reorganization, the members of GenX converted their members'
interest into 8,786,950 shares of the Common Stock of GenTel.
Subsequently, GenX was dissolved. At the time of its acquisition by
Bobernco, GenTel operated as provider of long distance telephone
services.
Immediately prior to the acquisition, Bobernco had 1,800,000 shares
of Common Stock outstanding. As part of Bobernco's reorganization
with GenTel, Bobernco issued 8,986,950 shares of its Common Stock
to the shareholders of GenTel in exchange for 8,986,950 shares of
GenTel Common Stock. Immediately following the merger, Bobernco
changed its name to GTC. Bobernco had no significant operations
prior to the merger. Subsequent to the acquisition, the former
shareholders of GenTel constituted 83.31% of the total outstanding
shares of the Common Stock of the Company and the original
shareholders of Bobernco constituted 16.69% of the total outstanding
shares of the Common Stock of the Company. The Company's common
stock currently trades on the NASD OTC Bulletin Board under the
symbol "GTCC."
BUSINESS OF THE ISSUER
The Company currently offers a variety of services designed to meet
its customers' telecommunications and Internet related needs. The
Company's services consists of the following:
TELECOMMUNICATIONS RELATED SERVICES
The Company is currently licensed in 44 states and the District of
Columbia to provide long distance telecommunications services. The
Company primarily services small and medium sized businesses and
residential customers throughout the United States. The Company has
positioned itself to be a low-cost provider in the marketplace. By
offering low rates, the Company expects to add customers at an
accelerated pace. To date, the Company has operated as a
switchless(1), nonfacilities-based reseller of long distance
services. By committing to purchase large usage volumes from
carriers such as MCI/WorldCom, Inc. pursuant to contract tariffs(2),
the Company has been able to procure substantial discounts and offer
low-cost, high-quality long distance services to its customers at
rates below the current standard industry levels.
____________________
1 Switchless resellers of long distance services do not
utilize any of their own lines, or switching equipment.
2 Contract tariffs are services and rates based on contracts
negotiated with individual customers, but also available to all customers.
<PAGE>
The Company provides long distance telephone service under a variety
of plans. These include outbound service, inbound toll-free 800
service and dedicated private line services(3) for data. The
Company does not currently provide local telephone service. The
Company's long distance services are billed on a monthly basis
either directly by the Company or by the Local Exchange Carrier(4)
("LEC") through the services of Billing Concepts, Inc. dba U.S.
Billing ("USBI"). If these services are billed directly by the
Company, the customer has a choice of paying by credit card or
sending payment to the Company. If these services are billed by the
LEC, the LEC is responsible for collecting the amount billed and
remitting the proceeds to the Company. The Company is also in the
process of purchasing a voice-over-IP ("VoIP")(5) technology network
to complement its long distance telecommunications services. Please
refer to the Management's Discussion and Analysis section of this
Document. In addition, the Company is also exploring the
possibility of providing local telephone service. Whether the
Company will be able to provide local telephone services is
dependent on its ability to negotiate contracts with third-party
providers of local telephone service on favorable terms. The
Company has initiated negotiations with certain local telephone
providers but has not reached any agreements. Therefore, there can
be no assurances that the Company will be able to offer local
telephone service.
____________________
3 Private Line uses circuits dedicated to a specific customer
to connect that customer's equipment to both ends of the line.
4 A company providing local telephone service.
5 Voice calls carried over a private (packet-switched) network
of equipment using Internet protocol (codes) to route the messages.
<PAGE>
INTERNET RELATED SERVICES
The Company also recently began providing a variety of Internet
related services. These services, available to both consumer and
business users, include prepaid calling cards at the Company's
ecallingcards.com web site; Internet Services Provider access
through dial-up(6), Digital Subscriber Line ("DSL")(7), and Wireless
T-1 methods(8); and Internet Web Page development and hosting
services(9). The Company's Internet related services are billed
using the same methods as those used for billing its
Telecommunication services. The Company's Internet related
services, with the exception of its prepaid calling cards, are
provided pursuant to contracts with third-party providers, who
remain competitors with the Company. By contracting with
third-party providers to purchase large quantities of usage volumes,
the Company is able to secure significant discounts which then
allows the Company to offer these services to its end-users at rates
at or lower than its competitors.
____________________
6 Modem access via traditional telephone lines.
7 Digital Subscriber Line ("DSL") utilizes advanced technology
to transmit data over copper lines at speeds up to 1,000 faster than
Dial-Up service.
8 Wireless T-1 services are Internet connections using
microwave or radio frequencies, without the use of a cable
connection, that can transfer data at speeds up to 1.5 million
bits-per-second.
9 Web Page Hosting services permits customers to market
themselves on the Internet without having to invest significantly in
technology infrastructure and operations staff.
<PAGE>
The Company's 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 $14.95 monthly fee. DSL
service provides a faster, more efficient method for communicating
digital data over telephone lines. DSL speeds are significantly
faster than conventional modem speeds (up to 1.1 Mbps versus 56 kbps
for Dial-up service). The monthly DSL service charge ranges from
$100 to $260 depending on speed and service options. A one-time
set-up fee of $500 is also charged.
Currently, the Company's Wireless T-1 services are only available in
the Southern California region. Wireless T-1 allows businesses to
utilize connections at 1.5 Mbps without contracting for T-1 service
from local telephone companies. Wireless T-1 Service fees range
from $299 to $899 per month with a one-time set-up fee of $2,500.
The Company plans on expanding this service to include other
regions. Whether the Company is able to provide its Wireless T-1
services to other regions depends on whether the Company will be
able to secure contracts with third-party suppliers on favorable
terms. There can be no assurances that the Company will be able to
obtain such contracts and therefore be able to expand its Wireless
T-1 service to other regions.
The Company's Internet Web Page Hosting services are currently
available on a nationwide basis. Internet Web Page Hosting services
provides space on the Company's 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 $88.6 billion U.S. long distance industry is dominated by the
nation's three largest long distance providers, AT&T, MCI/WorldCom
and Sprint, which together generated approximately 80.3% of the
aggregate revenue of all U.S long distance interexchange carriers in
1997. Other long distance companies, some with national
capabilities, accounted for the remainder of the market.
Based on published FCC estimates(10), toll service revenues of U.S.
long distance interexchange carriers have grown from $38.8 billion
in 1984 to $88.6 billion in 1997. While industry revenues have
grown at a compounded annual rate of 6.6% since 1984, the revenues
of carriers other than AT&T, MCI/WorldCom and Sprint have grown at a
compounded rate of 33.7% during the same period. As a result, the
aggregate market share of all interexchange carriers other than
AT&T, MCI/WorldCom and Sprint has grown from 2.6% in 1984 to 19.8%
in 1997. During the same period, the market share of AT&T declined
from 90.1% to 44.5%.
____________________
10 As published on the FCC's Website located at
www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/SOCC/97socc.pdf.
<PAGE>
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, or
"LATAs." The 22 operating companies, which were combined into seven
Regional Bell Operating Companies, or "RBOCs", were given the right
to provide local telephone service, local access service to long
distance carriers and intraLATA toll service (service within LATAs),
but were prohibited from providing interLATA service (service
between LATAs). 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 LECs 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.
On February 8, 1996, the President signed the Telecommunications Act
(the "Act"), which 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 LEC's equal access and
nondiscrimination obligations with respect to the local services
market by requiring LECs to permit interconnection(11) to their
networks and establishing among other things, LEC obligations with
respect to access, resale, number portability(12), dialing
parity(13), access to rights-of-way(14), and mutual compensation.
In essence the Act codifies the LEC's duty to provide to
independent service providers (such as the Company) access to the
LEC's network under the same terms and restrictions which the LEC is
subject to. The Act allows the Company to compete with previously
established long distance and local telephone providers under the
same terms and conditions as those providers are subject to.
____________________
11 Customer equipment (i.e. customer's telephone or modem)
which connects to the service provider's equipment.
12 Number portability is the capability of individuals,
businesses, and organizations to retain their existing telephone
number(s) and the same quality of service when switching to a
new local service provider.
13 The duty to provide dialing parity to competing providers
of telephone exchange service and telephone toll service, and the
duty to permit all such providers to have nondiscriminatory access
to telephone numbers, operator services, directory assistance, and
directory listing, with no unreasonable dialing delays
14 The duty to afford access to the poles, ducts, conduits, and
rights-of-way of a LEC to competing providers of telecommunications
services on same rates and terms afforded to the LEC.
<PAGE>
Regulatory, judicial and technological factors have helped to create
the foundation for smaller companies to emerge as competitive
alternatives to AT&T, MCI/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 LEC networks is,
in most cases, available to all long distance carriers.
DEVELOPMENT AND STRATEGY OF THE COMPANY
The Company's telecommunication services are currently licensed in
the states of Alabama, Arizona, Arkansas, California, Colorado,
Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas,
Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota,
Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New
Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma,
Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas,
Utah, Vermont, Virginia, Washington, Washington D.C.,West Virginia,
Wisconsin, and Wyoming. The Company is in the process of obtaining
licences to provide its services in the remaining states, except
Alaska. However, there can be no assurances that the Company will
be successful in obtaining such licences.
The Company plans to market its products and services using four
methods. The first of those methods is to do an aggressive
concentrated media campaign that utilizes a professional advertising
agency. The Company launched its 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 advertisement. The Company intends to continue to
utilize both broadcasting and print media campaigns in the future.
The Company incurred approximately $418,000 or 74.4% of its total
marketing budget of approximately $562,000 on this marketing method
for the fiscal year ending June 30, 1999. The Company's ability to
continue such media campaigns in the future is dependent upon the
Company's ability to secure financing for such media campaigns.
Therefore, there can be no assurances that it will be able to
continue to utilize such media campaigns in the future.
The second method of marketing the Company's products and services
is through outside telemarketing agencies. The Company presently
utilizes the services of two telemarketing firms. These firms are
paid on a commission only basis. The Company estimates that it
will cost an average of thirty-five dollars ($35.00) to obtain each
customer using this method, while the average customer generates two
hundred and forty dollars ($240.00) in revenue per year. The
Company currently utilizes the services of two telemarketing
companies. These companies operate on a nationwide basis. As of
March 31, 1999, these companies have generated 964 customers for the
Company's telecommunications services. The Company incurred
approximately $26,200 or 4.7% of its total marketing budget of
approximately $562,000 on this marketing method for the fiscal year
ending June 30, 1999.
The third method of marketing the Company's products and services
utilizes its own sales force and independent sales agents working on
its behalf. The sales force will consist of properly trained
professionals within the industry that are currently looking for an
opportunity to sell at rates that are lower than the industry
standard. Many of these professionals will come from companies such
as MCI/WorldCom, LCI International, TelCo and Frontier
Communications where the average calling rate is 10-12 cents per
minute. The Company has recently hired a V.P. of Sales from
MCI/WorldCom and a National Accounts Manager from Cable & Wireless
Communications PLC, both with extensive sales and marketing
backgrounds in the telecommunications industry. In addition, the
Company has already engaged in discussions with many potential
representatives to work for the Company based on commission-only (8%
to 10% of collected billings) compensation packages. However, there
can be no assurances that the Company will be successful in
retaining its in-house sales force or in acquiring independent sales
agents to work on its behalf at the commission-only compensation
packages described. The Company incurred approximately $75,300
or13.4% of its total marketing budget of approximately $562,000 on
this marketing method for the fiscal year ending June 30, 1999.
The fourth method of marketing the Company's products and services
utilizes the Internet. The Company currently markets and
distributes its Telecommunications and Internet related services
through the Internet utilizing its gtctelecom.com and
ecallingcards.com web pages. The Company also plans to market
international calling plans as well as co-brand calling cards and
advertise domestic long distance rates on the Internet through joint
agreements such as its agreement with Community Connect Inc.'s
online community for Asian Americans, AsianAvenue.com. There can be
no assurances that such joint agreements will continue or that the
Company will be able to develop such joint agreements in the future.
The Company incurred approximately $42,500 or 7.5% of its total
marketing budget of approximately $562,000 on this marketing method
for the fiscal year ending June 30, 1999.
The Company believes these four marketing methods will be adequate
to sustain the Company now and for the foreseeable future.
<PAGE>
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. Competition in the long
distance business is based upon pricing, customer service, billing
services and perceived quality. The Company competes against
various national and regional long distance carriers that are
composed of both facilities-based providers and switchless resellers
offering essentially the same services as the Company. Several of
the Company's competitors are substantially larger and have greater
financial, technical and marketing resources. The Company believes
that it is able to compete with these competitors by providing high
quality service at the lowest price possible.
The Company believes 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, the Company is 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,
the Company believes that it 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 the Company believes it has human and
technical resources to pursue its strategy and compete effectively
in this competitive environment, its success will depend upon its
continued ability to profitably provide high quality, high value
services at prices generally competitive with, or lower than, those
charged by its competitors. There can be no assurances that the
Company will be able to compete successfully in these markets.
The Company currently links its switching equipment with
transmission facilities and services purchased or leased from
MCI/WorldCom and will continue to resell services obtained from
MCI/WorldCom, which will remain a competitor of the Company for the
provision of telecommunications services. However, there can be no
assurances that the Company will be able to continue to provide its
Telecommunication Services through MCI/WorldCom.
In a continual effort to lower the costs of its services, the
Company has entered into a contract with the Williams Company to
purchase its own nationwide long distance and Internet Network based
on VoIP technology. Please refer to the Management's Discussion and
Analysis of Operations section of this document for further details.
The Company believes that by developing its own network, the
Company will be able to substantially lower the transmission costs
of its telecommunication service.
The Telecommunications Act is intended to introduce more competition
to U.S. telecommunications markets. The legislation opens the local
services market by requiring LECs to permit interconnection to their
networks and establishing, among other things, LEC obligations with
respect to access, resale, number portability, dialing parity,
access to rights-of-way and mutual compensation. The legislation
also codifies the LECs' equal access and nondiscrimination
obligations and preempts most inconsistent state regulation. The
legislation also contains special provisions that eliminate
restrictions on the RBOCs providing long distance services, which
means that the Company 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.
The RBOCs have been prohibited from providing interLATA
interexchange telecommunications services under the terms of the
AT&T decree. The Telecommunications Act authorizes the RBOCs to
provide certain interLATA interexchange telecommunications services
immediately and others upon the satisfaction of certain conditions.
Such legislation includes certain safeguards against anticompetitive
conduct by the RBOCs in the provision of interLATA service.
Anticompetitive conduct could result from, among other things, a
RBOC'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 RBOCs and the impact that any
anticompetitive conduct would have on the Company's business and
prospects. Because of the name recognition that the RBOCs 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
<PAGE>
relationships, as well as the possibility
of favorable interpretations of the Telecommunications Act by the
RBOCs, it may be more difficult for other providers of long distance
services, such as the Company, to compete to provide long distance
services to RBOC customers. At the same time, as a result of the
Telecommunications Act, RBOCs have become potential customers for
the Company's long distance services.
Internet Related 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 the Company expects
that competition will continue to intensify. Many of the Company's
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 the Company.
The Company believes that its Internet Related Services are marketed
at competitive rates and provide quality and services comparable to
its competitors. However, the Company's Internet Related Services
are intended more as a value added service to attract customers to
the Company's Telecommunication Services as opposed to a revenue
generating service. In furtherance of this, the Company is
currently offering its FreeNet service which provides free unlimited
Internet service provider access to users of the Company's long
distance service. In order to qualify for the FreeNet program, the
customer must be a current user of the Company's long distance
services, pay a monthly fee of $4.95 and incur a minimum of $10.00
in long distance fees per month. Customers who do not qualify for
the FreeNet program will pay a monthly fee of $9.95 for the
Company's Internet service provider service. The Company
anticipates that revenue generated exclusively from the Company's
Internet Related Services will be immaterial to the Company's
results of operations. Rather, the Company expects to derive
sufficient revenue from its Telecommunication Services and Internet
related advertising revenue to pay for the costs of its Internet
Related Services.
In a continual effort to lower the costs of its services, the
Company has entered into an agreement with the Williams Company to
purchase its own nationwide long distance and Internet Network based
on VoIP technology. Please refer to Management's Discussion and
Analysis of Operations section of this document for further details.
The Company believes that by developing its own network, the
Company will be able to substantially lower the acquisition costs of
its Internet services.
CUSTOMER ATTRITION
The Company believes that a high level of customer attrition is a
characteristic of the domestic residential long distance and
Internet related industries. Attrition is attributable to a variety
of factors, including the termination of customers by the Company
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 have a material adverse
effect upon the Company's future results of operations and financial
conditions.
DEPENDENCE ON KEY CUSTOMERS
The Company is not dependent on any single customer for a
significant portion of its annual sales. The Company's customer
base changes on a continuous basis as new 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
<PAGE>
billings. Under the terms of the three-year contract entered into with
MCI/WorldCom on August 10, 1998 the Company is obligated to a minimum
monthly revenue commitment of $10,000 commencing March 1999. The
contract expires on September 30, 2001. Pursuant to the terms of the
contract with MCI/WorldCom, the Company must pay liquidated damages
in an amount equal to the aggregate minimum revenue 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 relations with MCI/WorldCom are 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.
In the event that MCI/WorldCom were to discontinue its service to
the Company, the Company believes, based upon discussions that the
Company has had with other long distance providers and based on such
providers' published contract tariffs, that it could negotiate and
obtain contracts with other long distance providers to resell long
distance services at rates at or below its current contract tariffs
with MCI/WorldCom. If the Company were to enter into contracts with
another provider, however, the Company believes it would take
approximately thirty (30) days to switch end users to that provider.
Although the Company has the right to switch its current customers
to an alternative underlying carrier, the Company's customers have
the right to discontinue their service with the Company at any time.
Accordingly, the termination or non-renewal of the Company's
contract tariffs with MCI/WorldCom or the loss of telecommunications
services from MCI/WorldCom would likely have a material adverse
effect on the Company's results of operations and financial
condition. In an effort to minimize the Company's dependence on
MCI/WorldCom, the Company has entered into a contract with the
Williams Company to purchase its own nationwide long distance and
Internet Network based on VoIP technology. Please refer to the
Management's Discussion and Analysis of Operations section of this
document for further details.
The Company does not currently have its own Internet Network.
Currently, the Company provides its Internet Service Provider Access
services pursuant to a contract with Epoch Networks, Inc. dba Epoch
Internet ("Epoch"). Under the terms of the three year contract with
Epoch dated February 3, 1999, the Company is obligated to an initial
monthly minimum revenue commitment of $0.00 increasing to $25,000
per month over a seven month ramp up period beginning March 1, 1999
to September 1, 1999 and thereafter until the end of the contract
period ending on February 28, 2002. The loss of Internet Service
Provider access, or a reduction of service quality by Epoch, could
have a material adverse effect on the Company's results of
operations. Pursuant to the terms of the contract with Epoch, the
Company must pay liquidated damages in an amount equal to the
aggregate minimum revenue commitment for the remaining term of the
contract if the Company terminates the contract prior to the
expiration date. In a continual effort to lower costs
(approximately $13.00 per customer using Epoch), the Company is
currently in the process of locating alternative or additional
Internet Services Providers to supplement or replace its current
provider.
As a result of this effort, on April 6, 1999, the Company entered
into a one-year agreement with Level 3 Communications, LLC ("Level
3") to provide its Internet Service Provider Access. The agreement,
which begins in July 1999, provides for the Company to initially pay
$36,000 per month with an initial set-up fee of $8,000. As Level 3
is able to provide service throughout the nation, the Company's
monthly minimum commitment will increase from $36,000 per month to a
maximum $60,750 per month. In addition, the Company is committed to
pay an additional set-up fee of up to $5,500. It is the Company's
intention to use Level 3 for its primary Internet Service Provider
beginning in July 1999. Cost per customer using Level 3 is
approximately $3.00 versus $13.00 per customer using Epoch.
Additionally, the Company believes that the services provided by
Level 3 are superior to those provided by Epoch.
As a result of this decision, the Company is currently in the
process of negotiating the termination of its agreement with Epoch.
Unless the Company is able to negotiate the termination of its
agreement with Epoch on more favorable terms, the Company will be
committed to pay Epoch a monthly minimum of $25,000 beginning in
September, 1999 or an aggregate of $792,500 over the entire term of
the contract (terminating on February 28, 2002).
<PAGE>
The Company's Wireless T-1 services are currently provided pursuant
to a contract with Global Pacific Internet ("Global"). Currently,
the Company's T-1 services are available only in the Southern
California region. Under the terms of its contract with Global, the
Company is not subject to a monthly minimum revenue commitment.
Although the Company believes that its relations with Global are
strong and should remain so with continued contract compliance, the
loss of Wireless T-1 services provided by Global, or a reduction in
the quality of service the Company receives from Global could have a
material adverse effect on the Company' s results of operations.
The Company anticipates that it would take between thirty (30) to
sixty (60) days to locate a replacement supplier in the event that
the Company's agreement with Global is terminated. The Company
currently plans to expand its Wireless T-1 services to other
regions. However, there can be no assurances that the Company will
or will be able to expand this service to other regions.
Previously, the Company's Internet Web Page Development service was
provided pursuant to contracts with Service One Communications, Inc.
("Service One") and OhGolly.com, Inc. ("OhGolly"). Web Pages
developed by Service One and OhGolly.com are housed within the
Company's own computer servers. On May 21, 1999, the Company
terminated its contracts with Service One and OhGolly.com for
non-performance of Service One and OhGolly's duties under the
contract. Under the terms of the contracts, the Company is not
obligated to pay Service One or OhGolly any additional sums beyond
the termination of the contracts. The Company anticipates that it
will require between thirty (30) to sixty (60) days to locate a
replacement supplier. The Company is currently in the process of
locating a replacement supplier and anticipates that it will be able
to create new Web Pages beginning in approximately mid July 1999.
Until the Company is able to locate a replacement supplier, it will
not able to develop additional Web Pages. Current Web Page Hosting
users, however, are unaffected by the termination of the Company's
agreements with Service One and OhGolly. As the Company considers
its Web Page Development service to be only a value added service to
attract customers to its Telecommunication Services as opposed to a
material revenue generating service, the Company does not anticipate
that the termination of its contracts with Service One and OhGolly
will have a material adverse effect on the Company's results of
operations.
REGULATION
The Company's provision of communications services is 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 the Company's financial
condition or results of operations, particularly if those policies
make it more difficult for the Company to obtain service from
MCI/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 the business or financial
condition or results of operations of the Company.
Federal
The Company is 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 the
Company 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 pursuant to streamlined tariffing procedures. The FCC
also has the authority to impose more stringent regulatory
requirements on the Company and change its regulatory classification
from nondominant to dominant. In the current regulatory atmosphere,
the Company believes, however, that the FCC is unlikely to do so.
<PAGE>
The FCC imposes only minimal reporting requirements on nondominant
resellers, although the Company is subject to certain reporting,
accounting and record-keeping obligations. Both domestic and
international nondominant carriers, including the Company, must
maintain tariffs on file with the FCC.
At present, 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 essentially 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.
State
The Company is subject to varying levels of regulation in the states
in which it currently anticipates providing intrastate
telecommunications services. The vast majority of the states
require the Company to apply for certification to provide intrastate
telecommunications services, or at least to register or to be found
exempt from regulation, before commencing intrastate service. The
vast majority of states also require the Company to file and
maintain detailed tariffs listing its 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 the Company expands its efforts to resell long distance services,
the Company will have to remain attentive to relevant federal and
state regulations. FCC rules prohibit the switching (also commonly
known as "Slamming") of a consumer's long distance provider without
the consumer's consent. However, this does not apply to the
switching of the Company's underlying carrier for its existing
customers. The rules also specify how that consent can be obtained.
Most states have consumer protection laws that further define the
framework within which the Company's marketing activities must be
conducted. The Company intends to comply fully with all laws and
regulations, and the constraints of federal and state restrictions
could impact the success of direct marketing efforts.
The Company is not currently subject to any State or Federal
regulation with respect to its Internet related services. However,
there can be no assurances that the Company will not be subject to
such regulations in the future. Additionally, the Company is not
aware of any pending legislation that would have a material adverse
effect on the Company's operations.
PATENTS, TRADEMARKS, LICENSES
The Company does not depend upon any patents or trademarks to
conduct its business; nor does the Company hold any such patents or
trademarks. The Company is required to hold licenses with the
Federal Communication Commission for the operation of its
telecommunication services. The Company is also required to hold
licenses in the states in which it provides intrastate long distance
services. Currently, the Company is licensed in 44 states and the
District of Columbia to provide intrastate services. The Company's
federal and state telecommunication licenses are of indefinite
length and will remain effective so long as the Company complies
with all Federal and State regulations.
The Company is currently in the process of securing licenses for
operation of its telecommunication services in the remainder of the
United States, except Alaska. The Company's ability to obtain
licenses in the remaining states is dependent on the Company's
ability to meet each state's specific guidelines. Although the
Company anticipates that it will able to secure licenses in these
states, there can be no assurances that the Company will be
successful in obtaining such licenses.
COST OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
<PAGE>
The Company currently has no costs associated with compliance with
environmental regulations. However, there can be no assurances that
the Company will not incur such costs in the future.
NUMBER OF EMPLOYEES
As of June 30, 1999, the Company employed approximately 20 people
on a full time basis.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements
that are subject to business and economic risks and uncertainties,
and the Company's actual results could differ materially from those
forward-looking statements. The following discussion regarding the
financial statements of the Company should be read in conjunction
with the financial statements and notes thereto.
GENERAL OVERVIEW
The company's principal line of business is to provide long distance
and value-added services for small and medium-sized businesses and
residential customers throughout the United States. The Company's
strategy has been to do build a subscriber base without committing
capital or management resources to construct its own network and
transmission facilities. This strategy has allowed the Company to
add customers without being limited by capacity, geographic
coverage, or configuration of any particular network that the
Company might have developed. In order to remain competitive, the
Company believes that it must continue to offer its services at the
lowest rates possible. The Company believes that in order to
continue to offer lower than industry average rates, as well as
reduce its dependency on major suppliers, the Company will need to
purchase its own network. In furtherance of this, the Company has
entered into a contract with Williams Communications to design,
install, and maintain a voice-over-IP network for the Company.
Please refer to Capital Expenditures-VoIP Network in this section
for further details. Management believes that the creation of such
a network will allow it to continue to offer its telecommunication
and Internet services below the industry average.
Recently, the Company has begun providing a number of Internet
related services such as the sale of electronic calling cards on its
ecallingcards.com web site; Internet access via Dial-Up, Wireless
T-1, and DSL; and Internet Web Page Hosting services.
The Company's services are marketed nationwide, through broadcasting
and print media, telemarketing, independent sales agents and its
own sales force.
The Company's revenues consist of sales revenues from
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 the Company's
telephone calling cards. Proceeds from prepaid telephone calling
cards are recorded as deferred revenues when the cash is received
and recognized as revenue as the telephone service is utilized. The
reserve for deferred revenues is carried on the balance sheet as an
accrued liability. Internet related services are typically billed
at a flat rate and are billed in advance. Revenues are recognized
in the period earned.
Cost of Sales include telecommunications service costs and
commissions paid for customer acquisition. Telecommunications
service costs paid by the Company are based on the Company's
customers' long distance usage. The Company pays its carriers based
on the type of call, time of call, duration of call, the terminating
telephone number, and terms of the Company's contract in effect at
the time of the call. General and administrative expenses consist
of the cost of customer service, billing, cost of information
systems and personnel required to support the Company's operations
and growth.
The Company, depending on the extent of its future growth, may
experience significant strain on its management, personnel, and
information systems. The Company will need to implement and improve
operational, financial, and management information systems. In
addition, the Company is implementing new information systems that will
<PAGE>
provide better record-keeping, customer service and billing.
However, there can be no assurance that the Company's management
resources or information systems will be sufficient to manage any
future growth in the Company's business, and the failure to do so
could have a material adverse effect on the Company's business,
results of operations and financial condition.
In 1998, the Company determined to change its fiscal year to June
30. As previously discussed, the Company acquired all of the
outstanding common stock of GenTel on August 31, 1998. Following
the acquisition, the Company adopted the business plan of GenTel and
changed its name to GTC.
RESULTS OF OPERATIONS OF THE COMPANY
The following discussion assumes that the acquisition of GenTel by
the Company occurred as of June 30, 1997.
Prior to the acquisition of GenTel by the Company, the Company had
no revenues or expenses for the fiscal year ended December 31, 1996
or the six-month period ended June 30, 1997.
Revenues
Revenues for the three- and nine-month periods ended March 31, 1999
were $204,573 and $222,535, respectively, compared with the three-
and nine-month periods ended March 31, 1998 of $497,312 and
$497,312, respectively (no revenue generated during the first six
months of fiscal year 1998). Beginning fiscal year 1999, the
Company began the selling of its long distance services pursuant to
its business plan which resulted in revenues for the nine-months
ended March 31, 1999 which were comprised primarily of $180,600 from
Web development and hosting services and $41, 935 from
telecommunication services. Prior to fiscal year 1999 the Company's
revenues for the three- and nine-month periods ended March 31, 1998
was derived solely from the one-time bulk sale of long distance
calling cards in February 1998. Pursuant to the Company's newly
adopted business plan for its telecommunication services, the
Company began to acquire telecommunication customers, primarily
through the use of telemarketing. For the nine months ended March
31, 1999, the Company had approximately 1,060 telecommunication
customers, with usage of long distance services of approximately
430,000 minutes.
Cost of Sales
Cost of sales for the three- and nine-month periods ended March 31,
1999 were $65,626 and $85,665, respectively, compared with the
three- and nine-month periods ended March 31, 1998 of $447,312 and
$447,312, respectively (no costs of sales were incurred during the
first six months of fiscal year 1998). Cost of sales for the
nine-months ended March 31, 1999 were comprised primarily of carrier
costs of $35,670, associated with the cost of long distance service
provided by MCI/WorldCom, $25,653 for commissions paid for customer
acquisition and $24,342 for the cost of third party verification on
its newly acquired customers. Cost of sales for the three- and
nine-month periods ended March 31, 1998 was comprised of the cost of
acquiring the long distance calling cards for its one time bulk sale
in February 1998. As a percentage of revenue, cost of sales was
38.5% for the nine months ended March 31, 1999 resulting in a gross
margin of 61.5%.
Selling, General and Administrative Expenses
Selling, general and administrative ("S,G&A") expenses for the
three- and nine-month periods ended March 31, 1999 were $1,160,408
and $2,339,771, respectively, compared with $117,413 and $228,575
for the three- and nine-month periods ended March 31, 1998. For the
three- and nine-month periods ended March 31, 1999, the Company
began to realize sales from its telecommunications customers,
thereby resulting in significantly increased S,G&A expenses. S,G&A
expenses for the nine-months ended March 31, 1999 were comprised
primarily of advertising expenses of $258,000; warrants valued at
$653,000 issued to an investor relations company ($503,000) and a
marketing company ($150,000) in exchange for services; shares valued
at approximately $381,000 issued to vendors in exchange for services
and rent; provision for bad debts of approximately $249,500; options
valued at approximately $48,150 issued to supplement compensation to
certain key employees; approximately $271,000 in salaries paid to
employees; and $479,121 of other operating expenses, primarily rent,
legal services, and investor relations. S,G&A
<PAGE>
expenses of $228,575 for the nine months ended March 31, 1998 were
comprised primarily of options valued at approximately $71,250 issued
to supplement compensation to certain key employees; approximately $57,900 in
salaries paid to employees; and $99,425 of other operating expenses,
primarily legal services. Net loss was $2,199,049 and $178,575 for
the nine months ended March 31,1999 and 1998, respectively.
Assets and Liabilities
Assets were $519,293 as of March 31, 1999. Assets consisted
primarily of accounts receivables of $67,915, cash of $128,430,
other current assets of $58,020, equipment with a net book value of
$145,566 and other long term assets of $119,632. Liabilities were
$226,696 as of March 31, 1999. Liabilities consisted primarily of
accounts payable of $148,641, payroll and payroll related
liabilities of $45,794, and other liabilities of $32,261.
Stockholders' Equity
Stockholders' equity was $292,597 as of March 31, 1999.
Stockholders' equity consisted primarily of $1,599,731 raised in the
GenX and the Company's recent private offering of its Common Stock,
offset primarily by the accumulated deficit at March 31, 1999 of
$2,731,936.
RESULTS OF OPERATIONS FOR GENTEL FROM MAY 29, 1997 (INCEPTION) TO
JUNE 30, 1998.
Revenues
For the period from inception to June 30, 1998, revenues for GenTel
totaled $497,312. This amount was from the bulk sale of long
distance calling cards.
Cost of Sales
Cost of Sales for the period from inception to June 30, 1998 of
$447,312 was comprised of the cost of acquiring the long distance
calling cards.
Selling, General & Administrative Expenses (S,G & A)
For the period from inception to June 30, 1998, S,G & A totaled
$582,087 comprised of salaries of approximately $200,000; shares
valued at approximately $95,000 issued to the CEO and Vice-President
of GenTel, options valued at approximately $81,000 issued to an
investor relations company, options valued at approximately $71,000
issued to certain key employees to supplement compensation,
professional fees of approximately $57,000 and rent of approximately
$22,000. Net loss for the period of inception to June 30, 1998 was
$532,887.
Assets and Liabilities
GenTel's assets as of June 30, 1998 were $162,085. Assets consisted
primarily of subscriptions receivable of $142,500, computer
equipment of $17,394 and cash of $3,892. Liabilities as of June 30,
1998 were $178,075. Liabilities consisted primarily of notes
payable to shareholder of $80,000; deferred salaries of $70,000;
accrued offering costs of $20,525 and accounts payable of $7,550.
Stockholders' Deficit
Stockholders' deficit as of June 30, 1998 was ($15,990).
Stockholders' deficit consisted primarily of $269,225 raised in the
sale of GenX member interests through a private placement, options
valued at $71,250 issued to key employees to supplement compensation
and stock valued at $95,000 issued to GenTel's CEO and
Vice-President to supplement compensation, offset primarily by a
net loss of $532,887 for the period ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
<PAGE>
Prior the acquisition of GenTel by the Company, GenTel achieved
positive cash flows of $3,892 resulting from $227,250 of cash
provided from the Company's financing activities, offset by $205,964
of cash used in operating activities and $17,394 of cash used in
investing activities.
Net cash used in operating activities of $205,964 was primarily due
to a net loss of $532,887 offset partially by options granted for
compensation ($152,672), stock issued to the Company's CEO and Vice
President for compensation ($95,000), and increases in operating
liabilities, principally accounts payable ($7,550) and accrued
expenses ($70,000).
Net cash used in investing activities of $17,394 funded purchases of
computer equipment. Net cash provided by financing activities of
$227,250 was primarily due to the proceeds from sales of equity
interests of GenTel's predecessor, GenX, of $146,500 and borrowings
on notes payable to a shareholder of $80,000.
Short-Term Financing
On February 12, 1999, the Company completed a private placement
offering of 1,535,000 shares of the Company's restricted (as that
term is defined by Rule 144 of the Securities Act of 1933) Common
Stock at a price of $1.00 per share, resulting in $1,330,000 raised,
net of issuance costs paid for brokers and finder's fees from the
offering.
In connection with the Company's private placement, the Company
entered into an Investment Banking Agreement with Transglobal
Capital Corporation ("TCC"), a licensed NASD broker on November 19,
1998. As part of this Agreement, TCC agreed to provide the Company
with consulting services and to assist the Company in raising
capital. In return, the Company agreed to compensate TCC with an
initial fee of 50,000 shares of the Company's restricted Common
Stock and to pay TCC a 13% commission on gross proceeds on financing
received by the Company as a result of TCC's efforts. In addition,
the Company agreed to issue TCC options to purchase 100,000 shares
of the Company's Common Stock at an exercise price of $0.01 upon
receipt of the first tranche of $100,000 in financing; an option to
purchase an additional 100,000 shares of the Company's Common Stock
at an exercise price of $0.01 upon receipt of $250,000 in financing;
an option to purchase an additional 100,000 shares of the Company's
Common Stock at an exercise price of $0.01 upon receipt of $500,000
in financing; and options to purchase an additional 300,000 shares
of the Company's Common Stock at an exercise price of $0.01 upon the
receipt of $1,000,000 in financing. As of June 30, 1999, all
600,000 options have vested and have been exercised. The difference
between the exercise price (6,000 at $.01 per share) and the fair
market value of the underlying restricted stock ($600,000 at $1.00
per share) has been charged against additional paid in capital.
In late March 1999, the Company initiated a private placement
offering of 1,000,000 shares of the Company's restricted (as that
term is defined by Rule 144 of the Securities Act of 1933) Common
Stock at a price of $5.00. As of April 15, 1999, the Company had
not received any offers for subscriptions to this private offering.
The Company believes that no offers were received primarily due to
the fact that the Company's "free trading" common stock has been
trading at a price close to the $5.00 price of the private offering
as of late March 1999.
On April 21, 1999, the Company replaced its $5.00 offering with a
private placement offering of 2,000,000
shares of the Company's restricted (as that term is defined by Rule
144 of the Securities Act of 1933) Common Stock at a price of $3.00.
The Company anticipates that this Private Offering will raise
approximately $5,220,000, net of issuance costs paid for brokers and
finder's fees, should the total offering be sold.
As of July 20, 1999, the Company had sold only 41,000 shares of its
Common Stock pursuant to its $3.00 private offering. Due to insufficient
interests which the Company believes is a result of the fact that its
"free trading" common stock has been trading at a price close to the $3.00
price of the private offering as of late July 1999, the Company decided to
replace its $3.00 private offering. On July 20, 1999, the Company replaced
its $3.00 offering with a private placement offering (the "Private Offering")
of 2,000,000 shares of the Company's restricted (as that term is defined by
Rule 144 of the Securities Act of 1933) Common Stock at a price of $1.00.
The Company anticipates that this Private Offering will raise approximately
$1,740,000, net of issuance costs paid for brokers and finder's fees, should
the total offering be sold. Purchasers of the Company's $3.00 private offering
will receive additional shares of the Company's restricted common stock so as
to reduce their purchase price to that of the $1.00 private offering.
In addition, the Company is currently negotiating with an institutional
investor for the purchase of up to $6,000,000 of the Company's
restricted (as that term is defined by Rule 144 of the Securities
Act of 1933) Common Stock, at a price equal to 84% of the market price
of the stock on the day of purchase, pursuant to Rule 506 promulgated
under Regulation D of the Securities Act of 1933 (the "Institutional
Offering"). In conjunction with the investment, the Company will agree to
register these shares under the Securities Act of 1933 within 120 days of
the sale. However, there can be no assurances that the Company will be able
to complete such sale.
On July 6, 1999, the Company entered into a short term note (the
"Note") with an individual for the amount of $50,000 for use as
working capital. Under the terms of the note, the Company will be
required to repay the principal amount of $50,000 within 30 days
with 10% interest. The Note is secured by the Company's receivable.
<PAGE>
The funds from the Private Offering and the Institutional Offering
will be used principally to complete the purchase of the Company's
VoIP network (Please refer to the General Overview, Long-Term
Financing, and Capital Expenditure-VoIP Network section of this
document for further information) and fund its on-going operations.
No assurances can be given, however, that the Company will be able
to complete either the Private Offering or the Institutional
Offering. The failure to complete either offering may have a
material adverse effect on the Company's operations.
Long-Term Financing
On April 30, 1999, the Company entered into a financing agreement
(the "Financing Agreement") with Ascend Communications, Inc. for $26
million in equipment financing, specifically for the purchase of
the Company' s VoIP network. The terms of the financing include
thirty-three (33) monthly payments of $942,760 beginning February 1,
2000. In addition, the Financing Agreement will include a five-year
warrant agreement to purchase 315,151 shares of the Company's
restricted (as that term is defined by Rule 144 of the Securities
Act of 1933) Common Stock at an exercise price of $8.25 per share.
The warrants include provisions for anti-dilution protection, net
exercise and registration rights. An additional amount of
approximately $2.9 million, above and beyond the Financing
Agreement, will be needed to complete the purchase of the VoIP
network. The payment terms of this additional amount are still
being negotiated.
The Private Offering and the Institutional Offering are designed to
complete the purchase of the Company's VoIP network, meet the
Company's working capital and other cash requirements, and other
equipment purchases in connection with the expansion of its business.
The Company believes that its anticipated funds from operations,
funds from the prior sale of equity interests of GenTel's
predecessor, GenX, and funds from the sale of its recent and ongoing
Private Offering and Institutional Offering of the Company's common
stock, may be insufficient to fund its capital expenditures, working
capital, and other cash requirements for the next 12 months.
Therefore, the Company will be required to seek additional funds to
finance its long term operations ("Additional Funds"). Should the
Company fail to complete any of the Private, Institutional Offering, of
Additional Funds, the Company will have insufficient funds for
the Company's intended operations and capital expenditures for the
next 12 months and will have a material adverse effect on the
Company's long-term results of operations.
CAPITAL EXPENDITURES
VoIP Network
On April 30, 1999, the Company entered into an agreement with
Williams Communications, a unit of Williams of Tulsa, Oklahoma
("Williams"), in which Williams Communications will design, install,
and maintain the Company's previously discussed high speed, nationwide
VoIP network. The total contract cost to the Company is
approximately $100,000,000 over a five-year term. Under the terms
of the agreement with Williams Communications (the "Williams
Agreement"), the Company is obligated to pay Williams $28.9 million
upon delivery of the network to the Company. The Company obtained
equipment financing for $26.0 million of the total contract price
from Ascend Communications, Inc. The Company is responsible for the
remaining $2.9 million. Please refer to Long-Term Financing, above
for further details regarding the Company's financing for the
purchase of its VoIP Network. In addition, the Company is obligated
to pay Williams a monthly maintenance fee of approximately $188,000
and an additional set-up fee of $270,000 beginning on the first
month following delivery of the Network (which is currently
scheduled for January 2000) increasing to approximately $404,000 per
month through the twelfth (12th) month of the Williams Agreement.
The monthly maintenance fee increases to approximately $639,000 per
month beginning with the thirteenth (13th) month and thereafter
until the end of the contract period (approximately through December
2004). The remainder of the Williams Agreement is for its carrier
services in which the Company will pay approximately $520,000 per
month over the term of the contract. In addition, the financing
will include a five-year warrant to purchase 315,151 shares of the
Company 's common stock at an exercise price of $8.25 per share.
The warrant will include provisions for anti-dilution protections,
net exercise and registration rights. The Williams Agreement can be
terminated by the Company with six month's written notice to
Williams.
<PAGE>
Other Capital Expenditures
The Company also expects to purchase approximately $200,000 of
additional equipment in connection with the expansion of its
business. Because the Company presently does not have the capital
for such expenditures, it will have to raise these funds. (See
Long-Term Financing in this section).
GOING CONCERN
The Company's independent certified public accountants have stated
in their report included in this Form 10SB, that the Company has no
current source of revenue and, without realization of additional
capital, it would be unlikely for the Company to continue as a going
concern. As stated in Short-Term Financing and Long-Term Financing
in this section, the Company believes that if it is successful in
raising these funds, that its certified public accountants would not
issue a going concern modification regarding the Company's
financial condition in its upcoming Fiscal Year 1999 report.
However, there can be no assurances that the Company will be able to
raise sufficient capital to meet its needs. If the Company is not
successful in raising the necessary capital, then the Company
believes that its independent certified public accountants would
issue an opinion with a similar going concern modification regarding
the Company's financial condition.
INFLATION
Management believes that inflation has not had a material effect on
the Company's results of operations.
YEAR 2000 DISCLOSURE
The Company has completed a review of its computer systems and
non-information technology ("non-IT") systems to identify all
systems that could be affected by the inability of many existing
computer and microcontroller systems to process time-sensitive data
accurately beyond the year 1999, referred to as the Year 2000 or Y2K
issue. The Company is dependent on third-party computer systems and
applications, particularly with respect to such critical tasks as
accounting, billing and the underlying carrier (MCI/WorldCom) of its
long distance telephone service. The Company also relies on its own
computer and non-IT systems (which consists of personal computers,
internal telephone systems, internal network server, Internet server
and associated software and operating systems). In conducting the
Company's review of its internal systems, the Company performed
operational tests of its systems which revealed no Y2K problems. As
a result of its review, the Company has discovered no problems with
its systems relating to the Y2K issue and believes that such systems
are Y2K compliant. Additionally, the Company has obtained written
assurances from all of its major suppliers of third-party computer
systems and applications, including all suppliers referenced in the
Major Supplier section of this document, indicating that they have
completed a review of their respective computer systems and that
such systems are Y2K compliant. Costs associated with the Company's
review were not material to its results of operations.
While the Company believes that its procedures have been designed to
be successful, because of the complexity of the Year 2000 issue and
the interdependence of organizations using computer systems, there
can be no assurances that the Company's efforts, or those of third
parties with whom the Company interacts, have fully resolved all
possible Year 2000 issues. Failure to satisfactorily address the
Year 2000 issue could have a material adverse effect on the Company.
The most likely worst case Y2K scenario which management has
identified to date is that, due to unanticipated Y2K compliance
problems, the Company may be unable to bill its customers, in full
or in part, for services used. Should this occur, it would result
in a material loss of some or all gross revenue to the Company for
an indeterminable amount of time, which could cause the Company to
cease operations. Although the Company has received written
assurances from its major suppliers that they are, or will be, Year
2000 compliant, should any such supplier fail to adequately address
the Year 2000 problem, the Company's only recourse for any damages
suffered as a result would be through litigation. The Company has
not yet developed a contingency plan to address this worst case Y2K
scenario, and does not intend to develop such a plan in the future.
<PAGE>
ITEM 3 - DESCRIPTION OF PROPERTY
Effective June 1, 1998, the Company began leasing approximately
2,712 square feet of administrative office space in Costa Mesa,
California at a monthly rental rate of $5,017 per month. This
facility serves as the Company's headquarters and primary place of
business. The monthly rental rate is scheduled to increase to
$5,560 on June 1, 1999, through the end of the lease. The lease
expires on May 31, 2001.
In addition, on February 8, 1999, the Company entered into a
month-to-month lease for approximately 1,987 square feet of office
space for its customer service operation, at a monthly rental rate
of $3,676 per month, at its headquarters building in Costa Mesa.
The lease obligates the Company to pay the first three months of
rent and will automatically expire on February 7, 2000, unless
previously terminated either by the Company or by Lessor given
thirty (30) days written notice.
Due to anticipated growth, the Company is in the process of looking
for new space for its headquarters and customer service operations.
The Company believes that it will be able to locate such space on
reasonable rates and terms.
<PAGE>
ITEM 4 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 1999, certain
information with respect to the Company's equity securities owned of
record or beneficially by (i) each Officer and Director of the
Company; (ii) each person who owns beneficially more than 5% of each
class of the Company's outstanding equity securities; and (iii) all
Directors and Executive Officers as a group.
<TABLE>
<S> <C> <C> <C>
Title Common Stock Percent of
of Class Name and Address of Beneficial Owner Outstanding Outstanding
============ =================================== =========== ===========
Common Stock Paul Sandhu(1) 5,069,088 33.99%
3151 Airway Avenue, Suite P-3
Costa Mesa, CA 92626.
Common Stock Eric Clemons(2) 1,819,522 12.20%
3151 Airway Avenue, Suite P-3
Costa Mesa, CA 92626.
Common Stock Mark Fleming(3) 10,000 0.07%
3151 Airway Avenue, Suite P-3
Costa Mesa, CA 92626.
Common Stock Gerald A. DeCiccio(4) 25,000 0.17%
3151 Airway Avenue, Suite P-3
Costa Mesa, CA 92626.
Common Stock Frank Naccarelli(5) 0 0.00%
3151 Airway Avenue, Suite P-3
Costa Mesa, CA 92626.
Common Stock Clay T. Whitehead 526,316 3.53%
3151 Airway Avenue, Suite P-3
Costa Mesa, CA 92626.
Common Stock Reet Trust(6) 2,000,000 13.41%
21520 Yorba Linda
Suite 6227
Yorba Linda, CA 92887
Common Stock Michelson Group 1,417,008 9.50%
5000 Birch Street
Suite 9600
Newport Beach, CA 92660
All Directors and 7,449,926 52.04%
Officers as a Group
(6 Persons in total)
</TABLE>
(1) Includes an aggregate of 200,000 options to acquire shares of
Company common stock in accordance with Mr. Sandhu's
employment agreement.
(2) Includes an aggregate of 100,000 options to acquire shares of
Company common stock in accordance with Mr. Clemons'
employment agreement.
(3) Does not include an aggregate of an additional 90,000 options
to acquire shares of Company common stock which vest in 1/3
increments each year beginning October 14, 1999 in accordance
with Mr. Fleming's employment agreement.
(4) Does not include an aggregate of an additional 125,000
options to acquire shares of Company common stock which vest
in 1/3 increments each year beginning December 1, 1999 in
accordance with Mr. DeCiccio's employment agreement.
(5) Does not include an aggregate of an additional 45,000 options
to acquire shares of Company common stock which vest 1/3
increments each year beginning March 15, 2000 in accordance
with Mr. Naccarelli's employment agreement.
<PAGE>
(6) 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.
The Company believes 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.
ITEM 5 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names and ages of the current
directors and executive officers of the Company, the principal
offices and positions with the Company held by each person and the
date such person became a director or executive officer of the
Company. The executive officers of the Company are elected annually
by the Board of Directors. The directors serve one year terms until
their successors are elected. The executive officers serve terms of
one year or until their death, resignation or removal by the Board
of Directors. There are no family relationships between any of the
directors and executive officers. In addition, there was no
arrangement or understanding between any executive officer and any
other person pursuant to which any person was selected as an
executive officer.
The directors and executive officers of the Company are as follows:
Name Age Positions
Paul Sandhu 38 Chief Executive Officer, President,
and Chairman of the Board
Eric Clemons 28 Director, Chief Operating Officer,
Secretary and Treasurer
Gerald A. DeCiccio 41 Chief Financial Officer
Mark Fleming 41 Executive Vice President
Frank Naccarelli 44 Vice President of Sales
Clay T. Whitehead 57 Director
PAUL SANDHU is currently the Company's President and Chief
Executive Officer. Mr. Sandhu has been with GenTel since its
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 the Company's Chief Operating
Officer. Mr. Clemons has been with GTC since its inception. Mr.
Clemons has over eight (8) years experience with sales and marketing
organizations. Mr. Clemons
<PAGE>
most recently was Vice President of Marketing for Intelligent Electronic
Communications managing a staff of 50 employees. Mr. Clemons has
attended The Wharton School of Business executive management programs.
GERALD A. DECICCIO joined the Company in January, 1999 as
Chief Financial Officer. Mr. DeCiccio has over eighteen years
experience in the financial and accounting field. Prior to joining
GTC, 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.
MARK FLEMING joined the Company in October 1998 as
Executive Vice President. Mr. Fleming has sixteen 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.
FRANK NACCARELLI joined GTC in March 1999 as its Vice
President of Sales. In this role, he will be responsible for
leading the Company's national sales efforts with large corporate
accounts as well as the Company's Commercial Sales Agent Programs.
Prior to joining the Company, Mr. Naccarelli worked with
MCI/WorldCom. During his 20 year term with MCI/WorldCom, Mr.
Naccarelli's duties involved responsibility for P & L management,
and regional and national sales. Mr. Naccarelli received his
Associates of Arts degree in Business Administration from the
University of Pittsburgh in 1978.
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.
ITEM 6 - EXECUTIVE COMPENSATION
On December 1, 1998, the Company entered into an Employment
Agreement with Paul Sandhu, the Company's President and CEO, whereby
the Company will pay Mr. Sandhu an annual salary of $84,000.
Pursuant to the Agreement, Mr. Sandhu's salary shall increase to
$168,000 should the Company either maintain a positive cash flow for
two consecutive months, or the Company successfully completes a Form
SB-2 registered offering of its securities. In addition to his
annual salary, the Agreement confirmed the prior issuance of options
to purchase 200,000 shares of the Company's Common Stock at an
exercise price of $0.2375 previously granted to Mr. Sandhu pursuant
to an employment agreement between Mr. Sandhu and GenTel dated
January 5, 1998. These options vested upon execution of the
Agreement. The Agreement may be canceled at any time by either the
Company or Mr. Sandhu.
<PAGE>
However, if the Company terminates the Agreement without cause, as
defined in the Agreement, the Company shall be obligated to pay
Mr. Sandhu 25% of his annual salary as severance.
On December 1, 1998, the Company entered into an Employment
Agreement with Eric Clemons, the Company's Chief Operating Officer
("COO"), whereby the Company will pay Mr. Clemons an annual salary
of $76,000. Pursuant to the Agreement, Mr. Clemons' salary shall
increase to $152,000 should the Company either maintain a positive
cash flow for two consecutive months, or the Company successfully
completes a Form SB-2 registered offering of its securities. In
addition to his annual salary, the Agreement confirmed the prior
issuance of options to purchase 100,000 shares of the Company's
Common Stock at an exercise price of $0.2375 previously granted to
Mr. Clemons pursuant to an employment agreement between Mr. Clemons
and GenTel dated January 5, 1998. These options vested upon
execution of the Agreement. The Agreement may be canceled at any
time by either the Company or Mr. Clemons. However, if the Company
terminates the Agreement without cause, as defined in the Agreement,
the Company shall be obligated to pay Mr. Clemons 25% of his annual
salary as severance.
On December 1, 1998, the Company entered into an Employment
Agreement with Gerald DeCiccio, the Company's Chief Financial
Officer, whereby the Company will pay Mr. DeCiccio an annual salary
of $105,000. Pursuant to the Agreement, Mr. DeCiccio's salary shall
increase to $144,000 should the Company either maintain a positive
cash flow for two consecutive months, or the Company successfully
completes a Form SB-2 registered offering of its securities. In
addition to his annual salary, the Agreement grants Mr. DeCiccio
options to purchase 150,000 shares of the Company's Common Stock.
Twenty-five thousand (25,000) of the options are set to vest six (6)
months from the execution of the Agreement at an exercise price of
$.01, expiring three years from the date of vesting if not
exercised. The remaining 125,000 options are scheduled to vest in
1/3 increments each following year provided that Mr. DeCiccio is
employed with the Company. The Agreement may be canceled at any
time by either the Company or Mr. DeCiccio. However, if the Company
terminates the Agreement without cause, as defined in the Agreement,
the Company shall be obligated to pay Mr. DeCiccio 25% of his annual
salary as severance.
On October 14, 1998, the Company entered into an Employment
Agreement with Mark Fleming, the Company's Executive Vice-President,
whereby the Company will pay Mr. Fleming an annual salary of
$70,000. Pursuant to the Agreement, Mr. Fleming's salary shall
increase to $107,000 should the Company either maintain a positive
cash flow for two consecutive months, or the Company successfully
completes a Form SB-2 registered offering of its securities. In
addition to his annual salary, the Agreement grants Mr. Fleming
options to purchase 100,000 shares of the Company's Common Stock.
Ten thousand (10,000) of the options are set to vest six (6) months
from the execution of the Agreement at an exercise price of $.01,
expiring three years from the date of vesting if not exercised. The
remaining 90,000 options are scheduled to vest in 1/3 increments
each following year provided that Mr. Fleming is employed with the
Company. The Agreement may be canceled at any time by either the
Company or Mr. Fleming. However, if the Company terminates the
Agreement without cause, as defined in the Agreement, the Company
shall be obligated to pay Mr. Fleming 25% of his annual salary as
severance.
On March 3, 1999, the Company entered into an Employment Agreement
with Frank Naccarelli, the Company's Vice-President of Sales,
whereby the Company will pay Mr. Naccarelli an annual salary of
$85,000. In addition to his annual salary, the Agreement grants Mr.
Naccarelli options to purchase 45,000 shares of the Company's Common
Stock at $5.50 per share. Fifteen Thousand (15,000) options are
scheduled to vest in 1/3 increments each following year provided
that Mr. Naccarelli is employed with the Company. The Agreement may
be canceled at any time by either the Company or Mr. Naccarelli.
However, if the Company terminates the Agreement without cause, as
defined in the Agreement, the Company shall be obligated to pay Mr.
Naccarelli 25% of his annual salary as severance.
<PAGE>
SUMMARY COMPENSATION TABLE
The Summary Compensation Table shows certain compensation
information for services rendered in all capacities for the six
months ending December 31, 1998, the period ended June 30, 1998, and
the fiscal year ended December 31, 1997. Other than as set forth
herein, no executive officer's salary and bonus exceeded $100,000 in
any of the applicable years. The following information includes the
dollar value of base salaries, bonus awards, the number of stock
options granted and certain other compensation, if any, whether paid
or deferred.
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Restricted Securities
Name Other Annual Stock Underlying LTIP All Other
and Principal Salary Bonus Compensation Awards Options Payouts Compensation
Position Year ($) ($) ($) ($) SARs(#) ($) ($)
- ------------ ---- ------ ----- ------------ --------- --------- -------- -----------
Paul Sandhu 1998 0 -0- -0- -0- -0- -0- -0-
(President, (12/31)
CEO)
1998 40,000 -0- -0- 76,000 200,000 -0- -0-
(6/30)
1997 n/a -0- -0- -0- -0- -0- -0-
Eric Clemons 1998 11,500 -0- -0- -0- -0- -0- -0-
(COO) (12/31)
1998 40,500 -0- -0- 19,000 100,000 -0- -0-
(6/30)
1997 n/a -0- -0- -0- -0- -0- -0-
</TABLE>
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
<TABLE>
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SAR'S EXERCISE OF
OPTIONS/SAR'S GRANTED TO EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED (#) IN FISCAL YEAR ($/Sh) DATE
- ---- -------------- ----------------- ---------- --------------
<S> <C> <C> <C> <C>
Paul Sandhu 200,000 67% 0.2375 January, 2003
Eric Clemons 100,000 33% 0.2375 January, 2003
</TABLE>
<TABLE>
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 Realized Options/SARs At FY-End (#) At FY-End($)
Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ------ ------------------ -------------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
Paul Sandhu -0- -0- 200,000/0 47,500/0
Eric Clemons -0- -0- 100,000/0 23,750/0
</TABLE>
COMPENSATION OF DIRECTORS
For the fiscal years ended 1996, 1997 and 1998, and the six months
ended December 31, 1998, Directors of the Company received no
compensation. Beginning with the third quarter of fiscal year 1999,
Directors will receive $1,500 and 2,500 shares of the Company's
restricted (as that term is defined by Rule 144 of the Securities
Act of 1933) Common Stock per quarter.
ITEM 7 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 17, 1998, the Company entered into a Corporate Development
Agreement with the Michelson Group. As part of the Agreement,
Michelson has agreed to provide consultation and corporate
development services on behalf of the Company. In return, the
Company has agreed to compensate the Michelson Group in the amount
of $6,500 per month in addition to warrants to purchase up to 9.9%
of the outstanding shares of the Common Stock of the Company (as
calculated following the completion of the July 21, 1998 private
placement) at an exercise price of $0.01. Pursuant to the
Agreement, the Michelson Group has agreed that the exercise of the
warrants adhere to the following schedule: one fourth of the
warrants can be exercised upon execution of the Agreement; an
additional one fourth when the Company breaks escrow on its initial
private placement of securities; an additional one fourth once the
Company's market capitalization reaches $40,000,000; and the
remaining one fourth upon the Company breaking escrow on a debt or
equity financing of $3,000,000 or more. Pursuant to an amendment to
the Agreement in November 3, 1998, the Company agreed to waive the
requirements for the vesting of the fourth tranche of warrants
provided under this Agreement. These warrants resulted in $584,516
being charged by the Company for consulting fees rendered in fiscal
1998 and 1999. As of June 30, 1999, all 1,417,008 of the vested
options have been exercised.
On August 31, 1998, the Company (which at the time was designated
Bobernco, Inc., a Nevada corporation) acquired all of the
outstanding common stock of GenTel Communications, Inc., a Colorado
corporation in a business combination described as a "reverse
acquisition." As part of the reorganization, the Company issued
8,986,950 shares of its Common Stock to the shareholders of GenTel
in exchange for all of the outstanding shares of Common Stock of
GenTel. Such shares include the shares owned by officers and
directors of the Company as set forth in the Section "Security
Ownership of Certain Beneficial Owners and Management" hereunder.
<PAGE>
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.
ITEM 8 - DESCRIPTION OF SECURITIES
COMMON STOCK
The Company's Articles of Incorporation authorize the issuance of
50,000,000 shares of Common Stock, $0.001 par value per share, of
which 14,914,472 were outstanding as of May 31, 1999. Pursuant to
the Agreement and Plan of Reorganization dated August 31, 1998, the
Company approved a 2-for-1 reverse stock split of its Common Stock.
All references to the numbers of shares of the Company's Common
Stock are adjusted to reflect the 2-for-1 reverse split of the
Company's Common Stock. Holders of shares of Common Stock are
entitled to one vote for each share on all matters to be voted on by
the stockholders. Holders of Common Stock have no cumulative voting
rights. Holders of shares of Common Stock are entitled to share
ratably in dividends, if any, as may be declared, from time to time
by the Board of Directors in its discretion, from funds legally
available therefor. In the event of a liquidation, dissolution or
winding up of the Company, the holders of shares of Common Stock are
entitled to share pro rata all assets remaining after payment in
full of all liabilities. Holders of Common Stock have no preemptive
rights to purchase the Company's common stock. There are no
conversion rights or redemption or sinking fund provisions with
respect to the common stock. All of the outstanding shares of
Common Stock are fully paid and non-assessable.
TRANSFER AGENT
The transfer agent for the Common Stock is Alpha Tech Stock
Transfer, 4505 South Wasatch Blvd., Suite 205, Salt Lake City, UT
84124.
<PAGE>
PART II
ITEM 1 - MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER SHAREHOLDER MATTERS
MARKET INFORMATION
The following table sets forth the high and low bid prices for
shares of the Company 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. The Company's Common Stock was not listed on the
NASDAQ Bulletin Board during 1997. On April 21, 1998, the Company's
Common Stock began listing on the NASDAQ exchange under the trading
symbol BBRI. However, the Company's Common Stock did not begin
trading until after the Company merged with GenTel on August 31,
1998 wherein the trading symbol for the Company's Common Stock
changed to GTCC.
<TABLE>
BID PRICES
YEAR PERIOD HIGH LOW
<S> <C> <C> <C>
1998 First Quarter. . . . . . . . . . n/a n/a
Second Quarter . . . . . . . . . n/a n/a
Third Quarter. . . . . . . . . . n/a n/a
Fourth Quarter . . . . . . . . . 4.41 3.33
1999 First Quarter. . . . . . . . . .11.125 3.25
Second Quarter . . . . . . . . . 8.625 3.56
</TABLE>
NUMBER OF SHAREHOLDERS
The number of beneficial holders of record of the Common Stock of
the Company as of the close of business on June 30, 1999 was
approximately 169. Many of the shares of the Company's Common Stock
are held in a "street name" and consequently reflect numerous
additional beneficial owners.
DIVIDEND POLICY
To date, the Company has declared no cash dividends on its Common
Stock, and does not expect to pay cash dividends in the next term.
The Company intends to retain future earnings, if any, to provide
funds for operation of its business.
ITEM 2 - LEGAL PROCEEDINGS
The Company may from time to time be involved in various claims,
lawsuits, disputes with third parties, actions involving allegations
of discrimination, or breach of contract actions incidental to the
operation of its business. The Company is not currently involved in
any such litigation which it believes could have a materially
adverse effect on its financial condition or results of operations.
ITEM 3 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Prior to the acquisition of GenTel by Bobernco as previously
described, the Company engaged Barry L. Friedman, P.C., Certified
Public Accountants ("Mr. Friedman"), to audit the Company' s
financial statements for the fiscal years ended December 31, 1996,
December 31, 1997, and June 30, 1998. Mr. Friedman's opinions on
the financial statements for these periods included modifications
relating to going concern. GenTel's Certified Public Accountants
were Corbin & Wertz.
Subsequent to the acquisition of GenTel by Bobernco, Corbin & Wertz,
was retained by the Company as their principal accountant to audit
the Company's financial statements effective March 23, 1999. There
have been no
<PAGE>
disagreements between Barry L. Friedman and Management
of the type required to be reported under this Item 3 since the date
of Mr. Friedman's engagement.
ITEM 4 - RECENT SALES OF UNREGISTERED SECURITIES
On August 31, 1998, the Company (which at the time was designated
Bobernco, Inc., a Nevada corporation ("Bobernco") acquired all of
the outstanding common stock of GenTel Communications, Inc., a
Colorado corporation ("GenTel") in a business combination described
as a "reverse acquisition". As part of the reorganization, the
Company issued 8,986,950 shares of its Common Stock to the
shareholders of GenTel in exchange for all of the outstanding shares
of Common Stock of GenTel. Such shares include the shares owned by
officers and directors of the Company as set forth in the Section
"Security Ownership of Certain Beneficial Owners and Management"
hereunder. This issuance was conducted under an exemption under
Section 4(2) of the Securities Act of 1933.
In August, 1998, the Company issued 6,000 and 5,000 shares of
"restricted" (as that term is defined under Rule 144 of the
Securities Act of 1933) Common Stock to Azad Rob and Elizabeth
Hurtado, respectively, two (2) employees of the Company, in lieu of
salary and as a retention bonus valued at $2,850 for Mr. Rob and
$2,375 for Ms. Hurtado. This issuance was conducted under an
exemption under Section 4(2) of the Securities Act of 1933.
In September, November, 1998, and June 1999, the Company issued
1,417,008 shares of "restricted" (as that term is defined under Rule
144 of the Securities Act of 1933) Common Stock to the Michelson
Group, pursuant to a Corporate Development Agreement entered into
between the Company and the Michelson Group. This issuance was
conducted under an exemption under Section 4(2) of the Securities
Act of 1933.
In November, 1998, the Company issued 7,300 shares of its Common
Stock to MRC Legal Services Corp., the Company's securities counsel,
under Rule 504 of Regulation D promulgated under the Securities Act
of 1933, in consideration for legal services rendered.
In November, 1998, the Company issued 50,000 shares of "restricted"
(as that term is defined under Rule 144 of the Securities Act of
1933) Common Stock to Dan W. Baer in consideration for deferment of
$27,769 in rent owed by the Company from July 1998 to November 1998
for its headquarters in Costa Mesa, CA. The Company was required to
pay a total of $27,769 in deferred rent in three payments beginning
on November 19, 1998 through January 4, 1999 in addition to its
regular rent due each month under its lease. All payments of
deferred rent have been made under the terms of the agreement. This
issuance was conducted under an exemption under Section 4(2) of the
Securities Act of 1933.
In November, 1998, the Company issued 40,000 shares of "restricted"
(as that term is defined under Rule 144 of the Securities Act of
1933) Common Stock to Benjamin Abelson pursuant to a convertible
note entered into between the Company and Mr. Abelson in the amount
of $80,000. This issuance was conducted under an exemption under
Section 4(2) of the Securities Act of 1933.
In December, 1998, the Company issued 30,000 shares of "restricted"
(as that term is defined under Rule 144 of the Securities Act of
1933) Common Stock to Lance Steinhart, Esq., the Company's Federal
Communication Commission regulatory counsel, an accredited investor,
in consideration for legal services rendered. The issuance was
exempt under Section 4(2) of the Securities Act of 1933.
In January, 1999, the Company issued 8,750 shares of its Common
Stock to MRC Legal Services Corp., the Company's securities counsel,
under Rule 504 of Regulation D promulgated under the Securities Act
of 1933, in consideration for legal services rendered.
In February, 1999, the Company issued 7,000 shares of "restricted"
(as that term is defined under Rule 144 of the Securities Act of
1933) Common Stock to MRC Legal Services Corp., the Company's
securities counsel, in consideration for legal services rendered.
The issuance was exempt under Rule 506 of Section 4(2) of the
Securities Act of 1933.
<PAGE>
In February, 1999, the Company completed a private placement
offering of 1,535,000 "restricted" (as that term is defined under
Rule 144 of the Securities Act of 1933) shares of the Company's
Common Stock under Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933 to "accredited" investors at a price of $1.00
per share, resulting in net proceeds to the Company of approximately
$1,330,000.
In February, 1999, the Company issued 46,000 shares of "restricted"
(as that term is defined under Rule 144 of the Securities Act of
1933) Common Stock to Elwood Sprenger in accordance with a
consulting Agreement entered into between the Company and Mr.
Sprenger whereby the Company agreed to grant Mr. Sprenger 150,000
options to purchase the Company's Common Stock at an exercise price
of $1.00. The issuance was exempt under Section 4(2) of the
Securities Act of 1933.
In March, 1999, the Company issued 25,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933)
Common Stock to the Zomaya Group in exchange for advertising
services. The issuance was exempt under Section 4(2) of the
Securities Act of 1933.
In March, 1999, the Company issued 50,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933)
Common Stock to Transglobal Capital Corporation ("Transglobal"),
pursuant to an Investment Banking Agreement entered into between the
Company and Transglobal. The issuance was exempt under Section 4(2)
of the Securities Act of 1933.
On May 4, 1999, the Company issued 526,316 shares of "restricted"
(as that term is defined under Rule 144 of the Securities Act of
1933) Common Stock to Clay T. Whitehead, a director of the Company,
pursuant to an option agreement entered into between the Company and
Mr. Whitehead in April, 1999 which granted Mr. Whitehead an option
to purchase up to 526,316 shares of the Company's Common Stock at an
exercise price of $0.475 per share. A total of approximately
$1,328,950 of compensation expense will be recorded at the date of
grant in April, 1999. The issuance was exempt under Section 4(2) of
the Securities Act of 1933.
In June, 1999, the Company issued 31,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933)
Common Stock pursuant to a Private Placement offering of 2,000,000
pursuant under Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933 to "accredited" investors at a price of $3.00
per share, resulting in net proceeds to the Company of approximately
$78,450.
On July 6, 1999, the Company issued 600,000 shares of "restricted"
(as that term is defined under Rule 144 of the Securities Act of
1933) Common Stock to Transglobal Capital Corporation
("Transglobal"), pursuant to TransGlobal's Stock Option Agreement entered
into between the Company and Transglobal. The issuance was exempt
under Section 4(2) of the Securities Act of 1933.
ITEM 5 - INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation Laws of the State of Nevada and the Company's Bylaws
provide for indemnification of the Company's Directors for
liabilities and expenses that they may incur in such capacities. In
general, Directors and Officers are indemnified with respect to
actions taken in good faith in a manner reasonably believed to be
in, or not opposed to, the best interests of the Company, and with
respect to any criminal action or proceeding, actions that the
indemnitee had no reasonable cause to believe were unlawful.
Furthermore, the personal liability of the Directors is limited as
provided in the Company's Articles of Incorporation.
Beginning in March, 1999, the Company maintains a policy of
Directors and Officers Liability Insurance with an aggregate
coverage limit of $2,000,000.
<PAGE>
PART F/S
INDEX TO FINANCIAL STATEMENTS
The Financial Statements required by this Item are included at the
end of this report beginning on page F-1 as follows:
GenTel Communications, Inc. Audited Financial Statements
for the Periods Ended June 30, 1999 and 1998 F-1
GTC Telecom Corp. Pro Forma Combined Financial Statements
(Unaudited) F-16
Bobernco, Inc. Audited Financial Statements for the
Periods Ended June 30, 1998, December 31, 1997, and
December 31, 1996 F-18
Interim Financial Statements of GTC Telecom Corp.
for Period Ending March 31, 1999 (Unaudited) F-30
The above financial statements are presented pursuant to
an Agreement and Plan of Reorganization dated August 31,
1998 which GenTel Telecommunication, Inc. (the "Company")
merged with and into Bobernco, Inc. For financial
reporting purposes, the Company is considered the acquiror
and therefore the predecessor, and Bobernco, Inc. is
considered the acquiree, and therefore, its financial
statements are included pursuant to Item 310 (c) of
Regulation S-B.
PART III
ITEM 1 - INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
*(2) Agreement and Plan of Reorganization dated
August 1998 between
Bobernco, Inc. and GenTel Communications, Inc.
*(3.1) Articles of Incorporation
*(3.2) Certificate of Amendment of Articles of
Incorporation, filed with the
Nevada Secretary of State on March 30, 1998
*(3.3) Certificate of Amendment of Articles of
Incorporation filed with the
Nevada Secretary of State on September 3, 1998
*(3.4) Bylaws of Bobernco, Inc. (The "Corporation")
*(10.1) Michelson Group Corporate Development
Agreement, dated June 17,
1998, including amendment
*(10.2) One Plus Billing and
Information Management,
Service Agreement, dated
September 8, 1998,
including addendum
*(10.3) MCI/WorldCom Telecommunication
Resale Contracts
*(10.3.1) Program Enrollment
*(10.3.2) Rate and Discount Schedule
<PAGE>
*(10.3.3) Service Schedule
*(10.3.4) Telecommunications Service
Agreement
*(10.4) Investment Banking Agreement, dated
November 19, 1998
*(10.5) Employment Agreement by and between GTC
Telecom, Inc., a Nevada
corporation and Mark Fleming, dated October
14, 1998
*(10.6) Employment Agreement by and between GTC
Telecom, Inc., a Nevada
corporation and Eric Clemons, dated
December 1, 1998
*(10.7) Employment Agreement by and between
GTC Telecom, Inc., a Nevada
corporation and Jerry DeCiccio, dated
December 1, 1998
*(10.8) Employment Agreement by and between GTC
Telecom, Inc., a Nevada
corporation and Paul Sandhu, dated December
1, 1998
*(10.9) Employment Agreement by and between
GTC Telecom, Inc., a Nevada
corporation and Frank Naccarelli, dated
March 3, 1999
*(10.10) Lease dated February 5, 1999
between Southern California Sunbelt
Developers, Inc., and GTC Telecom, a Nevada
corporation; Eric
Clemons; and Paul Sandhu Jointly and
Severally as Tenant ("Tenant")
relating to premises at Suite K-104 The
John Wayne Executive Guild
Center, 3151 Airway Avenue, Costa Mesa,
California 92626
*(10.11) Global Pacific Internet Reseller
Agreement between Global Pacific
Internet and GTC Telecom, dated
January 25, 1999
*(10.12) Telecommunications Service
Agreement by and between
International Telephone and
Electronics, LLC and GTC Telecom
*(10.13) Sales Representative Agreement
between GTC Telecom, Inc. and
OhGolly.com, Inc., dated March 9, 1999
*(10.14) Purchase and Services Agreement
between GTC Telecom, Inc. and
Service One Communications, Inc.,
dated March 9, 1999
*(10.15) Branded Services Agreement between
Epoch Networks, Inc. dba Epoch
Internet and GTC Telecom, Inc.,
dated February, 1999
*(10.16) Lease dated May 22, 1998 between
Southern California Sunbelt
Developers, Inc., and GenTel
Communications, Inc., a Colorado
Corporation; Eric Clemons; and Paul
Sandhu Jointly and Severally as
Tenant ("Tenant") relating to
premises at Suite P-3 The John
Wayne Executive Guild Center, 3151
Airway Avenue, Costa Mesa, CA 92626
*(10.17) Agreement for Purchase and Sale of
Equipment dated April 28, 1999
between GTC Telecom and Williams
Communications, Inc.
*(10.18) Ascend Financing Agreement
*(10.19) Terms and Conditions Agreement between
Level 3 Communications and GTC Telecom
(10.20) Promissory Note between Jennifer
Wong and GTC Telecom Corp.
dated July 8, 1999.
____________________
* Previously Filed
<PAGE>
ITEM 2 - DESCRIPTION OF EXHIBITS
Not applicable
SIGNATURES
In accordance with Section 12 of the Securities Exchange
Act of 1934, the registrant caused this registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized.
GTC TELECOM CORP.
Date: July 20, 1999
By: /s/ Paul Sandhu
Paul Sandhu
President & Chief Executive Officer
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
GenTel Communications
We have audited the accompanying balance sheet of GenTel
Communications, formerly known as GenX, LLC, (a development stage
company) (the "Company") as of June 30, 1998, and the related
statements of operations, stockholders' equity (deficit) and cash flows for
the periods ended June 30, 1998 and 1997 and for the period from
May 29, 1997 (date of inception) through June 30, 1998. 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 generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of the Company as of June 30, 1998, and the results of its
operations and its cash flows for the periods ended June 30, 1998
and 1997 and for the period from May 29, 1997 (date of inception)
through June 30, 1998 in conformity with generally accepted
accounting principles.
As discussed in Note 1, the Company has been in the development
stage since its inception on May 29, 1997. Realization of a
major portion of the assets is dependent upon the Company's
ability to raise funds through debt or equity offerings, and the
success of future operations. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Corbin & Wertz
CORBIN & WERTZ
Irvine, California
March 4, 1999
F-1
<PAGE>
GENTEL COMMUNICATIONS
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
JUNE 30, 1998
ASSETS
Current assets:
Cash $ 3,892
Stock subscription receivable 142,500
Total current assets 146,392
Computer equipment, net of accumulated
dereciation of $1,701 15,693
$ 162,085
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 7,550
Accrued expenses 90,525
Total current liabilities 98,075
Convertible note payable to stockholder 80,000
Total liabilities 178,075
Commitments and contingencies
Stockholders' deficit:
Common stock, $0.0001 par value;
100,000,000 shares authorized;
8,986,950 shares issued and
outstanding (including 313,010
shares subscribed) 899
Additional paid-in capital 515,998
Deficit accumulated during the development stage (532,887)
Total stockholders' deficit (15,990)
$ 162,085
F-2
<PAGE>
GENTEL COMMUNICATIONS
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<S> <C> <C> <C>
MAY 29, 1997 MAY 29, 1997
(DATE OF (DATE OF
YEAR ENDED JUNE 30, INCEPTION) INCEPTION)
JUNE 30, THROUGH THROUGH
1998 JUNE 30, 1997 JUNE 30,
Net revenues $ 497,312 $ - $ 497,312
Cost of sales 447,312 - 447,312
Gross profit 50,000 - 50,000
Selling, general
and administrative
expenses 582,087 - 582,087
Loss before
provision
for taxes (532,087) - (532,087)
Provision for taxes 800 - 800
Net loss $(532,887) $ - (532,887)
Basic and diluted net
loss per common share $ (0.06) $ - (0.06)
Basic and diluted weighted
average common shares
outstanding 8,511,610 8,089,488 8,479,139
</TABLE>
F-3
<PAGE>
GENTEL COMMUNICATIONS
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED JUNE 30, 1998 AND
THE PERIOD FROM MAY 29, 1997 (DATE OF INCEPTION)
THROUGH JUNE 30, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE TOTAL
MEMBERS' INTEREST COMMON STOCK PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE EQUITY
Balance, May 29, 1997
(date of inception) - $ - - $ - $ - $ - $ -
Founders' capital
contribution 736.5 750 - - - - 750
Balance, June 30, 1997 736.5 750 - - - - 750
Members' cash
contributions:
August 1997 4.0 20,000 - - - - 20,000
September 1997 4.0 20,000 - - - - 20,000
October 1997 5.0 25,000 - - - - 25,000
November 1997 7.0 35,000 - - - - 35,000
December 1997 6.0 30,000 - - - - 30,000
January 1998 2.0 10,000 - - - - 10,000
Subscribed 35.5 177,500 - - - - 177,500
Offering costs - (49,025) - - - - (49,025)
Balance, February 3,1998 800.0 269,225 - - - - 269,225
Conversion of GenX, LLC
to GenTel Communications
(conversion rate of
10,983.69 to 1) on
February 3, 1998 (800.0) (269,225) 8,786,950 879 268,346 - -
Estimated fair market
value of options
granted to employees
for compensation
on January 5, 1998 - - - - 71,250 - 71,250
Estimated fair market - - - - 81,422 - 81,422
value of vested warrants
granted for services
rendered on June 17, 1998
Estimated fair market
value of restricted
common stock issued
to CEO and Vice
President for
compensation on
June 30, 1998 - - 200,000 20 94,980 - 95,000
Net loss - - - - - (532,887) (532,867)
Balance, June 30, 1998 - $ - 8,986,950 $ 899 $515,998 $(532,887) $(15,990)
F-4
<PAGE>
GENTEL COMMUNICATIONS
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
</TABLE>
<TABLE>
<S> <C> <C> <C>
MAY 29, 1997 MAY 29, 1997
(DATE OF INCEPTION) (DATE OF INCEPTION)
YEAR ENDED THROUGH THROUGH
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998
Cash flows from operating activities:
Net loss $(532,887) $ - $ (532,887)
Estimated fair market value of options
granted to employee for compensation 71,250 - 71,250
Estimated fair market value of vested
warrants granted for services rendered 81,422 81,422
Estimated fair market value of stock issued
to CEO and Vice President for compensation 95,000 - 95,000
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 1,701 - 1,701
Changes in operating assets and
liabilities:
Accounts payable 7,550 - 7,550
Accrued expenses 70,000 - 70,000
Net cash used in operating activities (205,964) - (205,964)
Cash flows used in investing activities:
Purchases of computer equipment (17,394) - (17,394)
Cash flows from financing activities:
Founders' capital contribution - 750 750
Proceeds from sale of GenX units, net of
offering costs of $28,500 146,500 - 146,500
Notes payable to stockholder 80,000 - 80,000
Net cash provided by financing activities 226,500 750 227,250
Net increase in cash 3,142 750 3,892
Cash at beginning of period 750 - -
Cash at end of period $ 3,892 $ 750 $ 3,892
Supplemental disclosure of cash flow information -
Cash paid during period for:
Interest $ - $ - $ -
Income and franchise taxes $ - $ - $ -
</TABLE>
Supplemental disclosure on non-cash investing and
financing activities:
During the year ended June 30, 1998, the Company issued
313,010 shares of common stock in exchange for
a $142,500 stock subscription receivable, net of accrued offering costs
of $20,525. All amounts were collected and paid subsequent to
June 30, 1998.
F-5
<PAGE>
GENTEL COMMUNICATIONS
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 1998 AND 1997 AND
FOR THE PERIOD FROM MAY 29, 1997 (DATE OF INCEPTION)
THROUGH JUNE 30, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
PRINCIPLES
Organization and Operations
GenTel Communications ("GenTel") (a development stage company)
(the "Company"), was formerly known as GenX, LLC, ("GenX").
GenX, a Delaware limited liability company was formed on
May 29, 1997. GenTel Communications, a Colorado corporation,
was formed December 9, 1997 and was inactive until the
reorganization. Effective February
3, 1998 and pursuant to a plan of reorganization, the members of
GenX converted their members' interest into common stock of
GenTel and GenX was dissolved. These financial statements
include the activity of GenX from the date of GenX's inception,
with operations commencing in August 1997. The Company has been
in the development stage since its formation. During the
development stage, the Company is primarily engaged
in raising capital, obtaining financing, advertising and
promoting the Company, and administrative functions. The
Company intends to provide long distance service primarily to
small and medium-sized businesses and residential customers
throughout the United States. The Company's long distance
service offerings include outbound
service, inbound toll-free 800 service, dedicated private line
services for data, wireless T1 service and website development
and hosting.
Going Concern
The accompanying financial statements have been prepared assuming
the Company will continue as a going concern, which contemplates,
among other things, the realization of assets and satisfaction of
liabilities in the normal course of business. The Company's losses
from operations through June 30, 1998 and lack of operational
history, among other matters, raise substantial doubt about its
ability to continue as a going concern. The Company intends to fund
operations through debt and equity financing arrangements (see Note
7) which management believes will be sufficient to fund its capital
expenditures, working capital requirements and other cash
requirements for the fiscal year ending June 30, 1999.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles 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 period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial Accounting Standards Board ("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, accrued
expenses and note payable to stockholder approximates their
estimated fair values due to the short-term maturities
of those financial instruments.
F-6
<PAGE>
GENTEL COMMUNICATIONS
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE PERIODS ENDED JUNE 30, 1998 AND 1997 AND
FOR THE PERIOD FROM MAY 29, 1997 (DATE OF INCEPTION)
THROUGH JUNE 30, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
PRINCIPLES, CONTINUED
Risks and Uncertainties
The Company is a start up company subject to the substantial
business risks and uncertainties inherent to such an entity,
including the potential risk of business failure.
Year 2000
The Year 2000 issue relates to limitations in computer systems
and applications that may prevent proper recognition of the Year
2000. The potential effect of the Year 2000 issue on the Company
and its business partners will not be fully determinable until
the Year 2000 and thereafter. If Year 2000 modifications are
not properly completed either by the Company or entities with which
the Company conducts business, the Company's revenues and financial
condition could be adversely impacted.
Dependent on Key Customers
The Company is not dependent on any single customer for a
significant portion of its annual sales. The Company's customer
base changes on a continuous basis as new 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 the three-year contract entered
into with MCI/WorldCom on August 10, 1998, the Company is
obligated to a minimum monthly revenue commitment of $10,000
commencing March 1999. The contract expires on September 30, 2001.
Pursuant to the terms of the contract with MCI/WorldCom, the
Company must pay liquidated damages in an amount equal to the
aggregate minimum revenue 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 are 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.
Computer Equipment
Computer equipment is stated at cost. Depreciation is computed
using the straight-line method over the useful life of 3 years.
F-7
<PAGE>
GENTEL COMMUNICATIONS
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE PERIODS ENDED JUNE 30, 1998 AND 1997 AND
FOR THE PERIOD FROM MAY 29, 1997 (DATE OF INCEPTION)
THROUGH JUNE 30, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
PRINCIPLES, CONTINUED
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.
During 1995, the FASB issued 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 and intangible assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. Based on
its analysis, the Company believes that no impairment of the carrying
value of its long-lived assets existed at June 30, 1998.
Stock-Based Compensation
During 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which defines a fair value based method of
accounting for stock-based compensation. However, SFAS 123 allows
an entity to continue to measure compensation cost related
to stock and stock options issued to employees using the intrinsic
method of accounting prescribed by Accounting Principles Board Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Entities
electing to remain with the accounting method of APB 25 must make pro
forma disclosures of net income (loss), as if the fair value method of
accounting defined in SFAS 123 had been applied. The Company has
elected to account for its stock-based compensation to employees
under APB 25.
Revenue Recognition
The Company recognizes revenue during the month in which services
or products are delivered, as follows:
The Company's long distance telecommunications service revenues
are generated when customers make long distance telephone calls from
their business or residential telephones or by using any of the
Company's telephone calling cards. Proceeds from prepaid
telephone calling cards are recorded as deferred revenues when the
cash is received, and recognized as revenue as the telephone service is
utilized. The reserve for deferred revenues, if any, is carried
on the balance sheet as an accrued liability.
F-8
<PAGE>
GENTEL COMMUNICATIONS
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE PERIODS ENDED JUNE 30, 1998 AND 1997 AND
FOR THE PERIOD FROM MAY 29, 1997 (DATE OF INCEPTION)
THROUGH JUNE 30, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
PRINCIPLES, CONTINUED
Earnings Per Share
The Company has adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings Per Share."
Under SFAS 128, basic earnings per share is computed by
dividing income available to common shareholders by the
weighted-average number of common shares
assumed to be outstanding during the period of computation.
Diluted earnings per share is computed similar to basic earnings per
share except that the denominator is increased to include the
number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional
common shares were dilutive. Pro forma per share data has been computed
using the weighted average number of common shares outstanding
during the period assuming the Company was a C corporation since
inception. Because the Company has incurred net losses, basic
and diluted loss per share are the same as additional potential
common shares would be anti-dilutive.
Income Taxes
The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting
for Income Taxes." Under SFAS 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. A valuation allowance is provided for significant deferred tax
assets when it is more likely than not that such assets will not
be recovered.
New Accounting Pronouncements
In June 1997, the FASB issued 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 as is effective for fiscal
years beginning after December 15, 1997. The Company does not
expect that SFAS 130 will have a material effect on its financial
statements.
In June 1997, FASB issued Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information" was issued. SFAS 131 will
change 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. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. As the Company is currently
in the development stage, the Company does not expect that SFAS 131
will have a near-term material effect on its financial
statements.
F-9
<PAGE>
GENTEL COMMUNICATIONS
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE PERIODS ENDED JUNE 30, 1998 AND 1997 AND
FOR THE PERIOD FROM MAY 29, 1997 (DATE OF INCEPTION)
THROUGH JUNE 30, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
PRINCIPLES, CONTINUED
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 is
effective for financial statements for all fiscal quarters
of all fiscal years beginning after June 15, 1999. The
Company does not expect the adoption of this standard to
have a material impact on its results
of operations, financial position or cash flows as it currently
does not engage in any derivative or hedging activities.
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position No. 98-5 ("SOP 98-5"),
"Reporting the Costs of Start-Up Activities." SOP 98-5 requires
that all non-governmental entities expense the costs of start-up
activities, including organization costs as those costs are
incurred. SOP 98-5 is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company does not
expect the adoption of this standard to have a material effect on
its results of operations, financial position or cash flows.
NOTE 2 - CONVERTIBLE NOTE PAYABLE TO STOCKHOLDER
Convertible note payable to stockholder represents monies
borrowed from a stockholder for working capital purposes.
The note payable accrues interest at 12.50% and is payable
in two installments of $40,000 plus interest due on November 15, 1998
and May 15, 1999. The note is convertible into 40,000 shares of
restricted common stock at $2.00 per share. Subsequent to the
Merger (see Note 7), the stockholder exercised the conversion feature.
NOTE 3 - STOCKHOLDERS' EQUITY
Stock Options
Under the terms of employment agreements with its CEO and Vice
President, the Company issued options to purchase 300,000 shares
of the Company's common stock at an exercise price of 50% of the
fair market value at the date the option was granted (estimated by the
Company to be $0.475 at January 5, 1998). The options vested
100% on the date of grant and are exercisable through January 5, 2003
(remaining contractual life at June 30, 1998 is 4 1/2 years).
F-10
<PAGE>
GENTEL COMMUNICATIONS
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE PERIODS ENDED JUNE 30, 1998 AND 1997 AND
FOR THE PERIOD FROM MAY 29, 1997 (DATE OF INCEPTION)
THROUGH JUNE 30, 1998
NOTE 3 - STOCKHOLDERS' EQUITY, CONTINUED
A summary of all employee stock option activity for the periods
ended June 30, 1998 and 1997 follows:
<TABLE>
<S> <C> <C>
OPTIONS WEIGHTED
AVERAGE EXERCISE
PRICE
_______ _________
Balance, May 29, 1997 - $ -
Granted - -
Balance, June 30, 1997 - -
Granted 300,000 0.2375
Balance, June 30, 1998 300,000 $ 0.2375
Exercisable, June 30, 1998 300,000 $ 0.2375
Weighted average fair value of $ .32
options granted in 1998
</TABLE>
SFAS 123 Pro Forma Information
Pro forma information regarding net income (loss) is required by
SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of
SFAS 123. The fair value for these options was estimated at the date
of grant using the Black Scholes option pricing model with the
following assumptions for the period ended June 30, 1998: risk
free interest rate of 5.52%; dividend yield of 0%; expected life of
the options of 1 year; and volatility factor of the expected market
price of the Company's common stock of 135%.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the option vesting
period. Adjustments are made for options forfeited prior to vesting.
The effect on compensation expense and net loss had compensation cost
for the Company's stock option issuances been determined based on
fair value on the date of grant consistent with the provisions of
SFAS 123 is as follows:
<TABLE>
<S> <C> <C>
Periods Ended June 30,
1998 1997
____ ____
Net loss, as reported $(532,887) $ -
Adjustment to compensation expense
under SFAS 123 (24,750) -
Pro forma net loss $(557,637) $ -
</TABLE>
F-11
<PAGE>
GENTEL COMMUNICATIONS
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE PERIODS ENDED JUNE 30, 1998 AND 1997 AND
FOR THE PERIOD FROM MAY 29, 1997 (DATE OF INCEPTION)
THROUGH JUNE 30, 1998
NOTE 3 - STOCKHOLDERS' EQUITY, CONTINUED
<TABLE>
<S> <C> <C>
Periods Ended June 30,
1998 1997
_____ _____
Loss per common share:
As reported $ (.06) $ -
Pro forma $ (.07) $ -
</TABLE>
NOTE 4 - INCOME TAXES
The tax effects of temporary differences that give rise to
deferred taxes at June 30, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax asset:
Net operating loss carryforward $ 146,000
Expenses recognized for granting
of options and warrants 62,000
Other, net 6,000
_______
Total gross deferred tax asset 214,000
Less valuation allowance (214,000)
Net deferred tax asset $ -
</TABLE>
The valuation allowance increased by approximately $214,000
during the year ended June 30, 1998. No current provision
for income taxes for the periods ended June 30, 1998 and 1997
is required, except for minimum state taxes, since the
Company incurred taxable losses during such years.
The provision for income taxes for fiscal 1998 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:
<TABLE>
<S> <C>
Computed tax benefit at federal statutory rate $(181,000)
State income tax benefit, net of federal effect (34,000)
Increase in valuation allowance 214,000
Other, net 1,800
_________
$ 800
</TABLE>
As of June 30, 1998, the Company had net operating loss
carryforwards of approximately $379,000 and $190,000 for federal
and state income tax reporting purposes, which expire in 2013 and
2003, respectively.
F-12
<PAGE>
GENTEL COMMUNICATIONS
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE PERIODS ENDED JUNE 30, 1998 AND 1997 AND
FOR THE PERIOD FROM MAY 29, 1997 (DATE OF INCEPTION)
THROUGH JUNE 30, 1998
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Lease Agreements
The Company leases certain facilities for its corporate and
operations offices under a non-cancelable operating lease
agreement that expires in 2001.
Future annual minimum commitments under this lease agreement are
as follows:
<TABLE>
<S> <C>
Years Ending
June 30,
----
1999 $ 60,745
2000 66,715
2001 61,156
------
$ 188,616
</TABLE>
Rent expense was $22,115 and $0 for the periods ended June 30,
1998 and 1997, respectively.
Employment Agreements
On January 5, 1998, the Company entered into five-year employment
agreements with its CEO and majority stockholder and its Vice
President. Under the terms of the agreements, the CEO and the
Vice President will receive an annual salary and options to purchase
Company common stock (see Note 3). In addition, the Company
retains an option to extend each employee's employment and renew the
agreement annually for up to ten additional years. Subsequent to
year-end, these agreements were modified to one-year at-will
employment agreements.
Contracts and Agreements
On June 17, 1998, the Company entered into an agreement with The
Michelson Group, Inc. ("Michelson"), whereby Michelson will
perform corporate development services such as, but not limited to,
selecting key employees, attracting capital investors, providing
advice on stock option plans and maintaining an ongoing stock
market support system. Pursuant to the agreement, the Company
will pay Michelson a monthly fee of $6,500. In addition, the Company
agrees to issue Michelson warrants to purchase that number of shares of
common stock of the Company which would, upon exercise, result in
Michelson holding 9.9% of the outstanding shares of the Company
(estimated to be a maximum of 1,417,008 shares) upon the
completion of a proposed bridge financing. The warrants vest
as follows: one-fourth vest immediately, one-fourth when
the Company breaks escrow on a confidential private placement
memorandum offering (see Note 7), one-fourth when the Company's market
capitalization reaches $40 million and one-fourth when the Company
breaks escrow on a round of debt or equity financing of $3 million
or more. Subsequent to June 30, 1998, all warrants vested.
The agreement is effective through June 2000. The fair value of
these warrants was estimated at the dates of grant using the Black
Scholes pricing model with the following
F-13
<PAGE>
GENTEL COMMUNICATIONS
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE PERIODS ENDED JUNE 30, 1998 AND 1997 AND
FOR THE PERIOD FROM MAY 29, 1997 (DATE OF INCEPTION)
THROUGH JUNE 30, 1998
NOTE 5- COMMITMENTS AND CONTINGENCIES, CONTINUED
assumptions for the period ended June 30, 1998: risk free interest
rate of 5.52%; dividend yield of 0%; expected life of the options
of less than 1 year; and volatility factor of the expected market
price of the Company's common stock of 135%. Total consulting expense
which will be recognized over the vesting period is $584,516, of
which $81,442 was recognized at June 30, 1998.
Subsequent to the Merger (see Note 7), Michelson exercised its
warrants to purchase 1,417,008 shares of GTC stock at an exercise
price of $.01 per share.
NOTE 6 - EARNINGS PER SHARE
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share
computations:
<TABLE>
<S> <C> <C>
Periods Ended June 30,
1998 1997
Numerator for basic and diluted earnings per share:
Net loss charged to common stockholders $(532,887) $ -
Denominator for basic and diluted earnings per share:
Weighted average shares 8,511,610 8,089,488
Basic and diluted earnings per share $ (0.06) $ -
</TABLE>
NOTE 7 - SUBSEQUENT EVENTS
Merger
Pursuant to an Agreement and Plan of Reorganization dated August
31, 1998, the Company completed a merger with and into Bobernco, Inc.
(the "Merger"). Under the terms of the tax-free reorganization
and merger, all of the Company's common stock was converted to
8,986,950 shares of Bobernco common stock and, as a result, the
separate corporate existence of the Company ceased and Bobernco
continued as the surviving corporation. Thus, all additional
subsequent events are disclosed in Bobernco's separate audited
financial statements. The directors and officers of the Company
immediately prior to the merger became the directors and officers
of Bobernco, which subsequently changed its corporate name
to GTC Telecom Corp. ("GTC"). However, if the merger had
occurred at the beginning of the year, the pro forma financial
statements as of June 30, 1998 would be as follows:
Net sales $ 497,312
Cost of sales $ 447,312
Net loss $(534,161)
Basic and dilutive loss per share $ (0.05)
Basic and dilutive weighted average
common shares outstanding 10,311,610
F-14
<PAGE>
GENTEL COMMUNICATIONS
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FOR THE PERIODS ENDED JUNE 30, 1998 AND 1997 AND
FOR THE PERIOD FROM MAY 29, 1997 (DATE OF INCEPTION)
THROUGH JUNE 30, 1998
NOTE 7 - SUBSEQUENT EVENTS, CONTINUED
Private Placement of Common Stock
On July 21, 1998, the Company issued a confidential private
placement memorandum offering of 500,000 shares of common stock
at $1.00 per share. After the Merger, this offering was amended
to become an offering of GTC. Per an amendment dated January 29,
1999 the maximum offering was increased to 1,500,000 shares.
GTC was able to raise approximately $1,330,000 (net of
issuance costs paid for brokers and finder's fees) from
the offering.
F-15
<PAGE>
GTC TELECOM CORP.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
Effective August 31, 1998, GenTel Communications ("GenTel")
completed a merger with and into Bobernco, Inc. ("Bobernco").
Under the terms of the tax-free reorganization and merger, all of
the Company's common stock was converted to 8,986,950 shares of
Bobernco common stock and, as a result, the separate corporate
existence of the Company ceased and Bobernco continued as the
surviving corporation. The directors and officers of the Company
immediately prior to the merger became the directors and officers of
Bobernco, which subsequently changed its name to GTC Telecom Corp.
("GTC").
The following unaudited pro forma combined statement of operations
was prepared as if the merger were consummated on July 1, 1997. GTC
believes no adjustments are necessary to present fairly the
unaudited pro forma combined financial statements as the transaction
was, in effect, a recapitalization of GenTel with an inactive
corporation to allow GenTel additional access to capital markets in
the future. These financial statements are not necessarily
indicative of what actual results would have been had the
transaction occurred on July 1, 1997, nor do they purport to
indicate the future results of GTC. The unaudited pro forma
combined financial statements should be read in conjunction with
GenTel's audited financial statements and accompanying notes and the
audited financial statements of Bobernco and related notes appearing
elsewhere.
After June 30, 1998 management believes results of operations of both
companies for the two months of July and August 1998 are immaterial and
as a result a pro forma statement of operations for the two months
ended August 31, 1998 is not presented.
F-16
<PAGE>
GTC TELECOM CORP.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED JUNE 30, 1998
GENTEL
COMMUNICATIONS
BOBERNCO, INC.PRO FORMA ADJUSTMENTS
PRO FORMA
<TABLE>
GENTEL Pro forma
Communications Bobernco, Inc. Adjustments Pro forma
<S> <C> <C> <C> <C>
NET REVENUES $ 497,312 $ - $ - $ 497,312
COST OF SALES 447,312 - - 447,312
__________ __________ _________ __________
GROSS PROFIT 50,000 - - 50,000
SELLING, GENERAL AND ADMIN-
ISTRATIVE EXPENSES 582,087 1,274 - 583,361
__________ __________ _________ __________
LOSS BEFORE PROVISION FOR
INCOME TAXES (532,087) (1,274) - (533,361)
PROVISION FOR INCOME TAXES 800 - - 800
__________ __________ _________ __________
NET LOSS $ (532,887) $ (1,274) $ - (534,161)
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.06) $ - $ - $ (0.05)
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING 8,511,610 1,800,000 - 10,311,610
</TABLE>
F-17
<PAGE>
BOBERNCO, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
June 30, 1998
December 31, 1997
December 31, 1996
F-18
<PAGE>
TABLE OF CONTENTS
INDEPENDENT AUDITORS' REPORT 1
ASSETS 2
LIABILITIES AND STOCKHOLDERS' EQUITY 3
STATEMENT OF OPERATIONS 4
STATEMENT OF STOCKHOLDERS' EQUITY 5
STATEMENT OF CASH FLOWS 6
NOTES TO FINANCIAL STATEMENTS 7-10
F-19
<PAGE>
BARRY L. FRIEDMAN, PC.
CERTIFIED PUBLIC ACCOUNTANT
1582 TULITA DRIVE
OFFICE (702) 361-8414
LAS VEGAS, NEVADA 89123 FAX NO. (702) 896-0278
INDEPENDENT AUDITORS' REPORT
Board of Directors March 22, 1999
Bobernco, Inc.
Costa Mesa, California
I have audited the accompanying Balance Sheets of Bobernco, Inc.,(A
Development Stage Company), as of June 30, 1998, December 31, 1997, and
December 31, 1996, and the related statements of operations, stockholders'
equity and cash flows for period January 1, 1998, to June 30, 1998, and the
two years ended December 31, 1997, and December 31, 1996. These financial
statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based
on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. I believe that my audit provides a
reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bobernco, Inc., (A
Development Stage Company), as of June 30, 1998, December 31, 1997, and
December 31, 1996, and the results of its operations and cash flows for the
period January 1, 1998, to June 30, 1998, and the two years ended December
31, 1997, and December 31, 1996, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note #3 to the
financial statements, the Company has suffered recurring losses from
operations and has no established source of revenue. This raises substantial
doubt about its ability to continue as a going concern. Management's plan
in regard to these matters are also described in Note #3. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ Barry L. Friedman
Barry L Friedman
Certified Public Accountant
F-20
<PAGE>
BOBERNCO, INC.
(A Development Stage Company)
BALANCE SHEET
ASSETS
<TABLE>
June December December
30, 1998 31, 1997 31, 1996
<S> <C> <C> <C>
CURRENT ASSETS: $ 0 $ 0 $ 0
TOTAL CURRENT ASSETS $ 0 $ 0 $ 0
OTHER ASSETS:
Organization Costs (Net) $ 44 $ 68 $ 116
TOTAL OTHER ASSETS $ 44 $ 68 $ 116
TOTAL ASSETS $ 44 $ 68 $ 116
</TABLE>
See accompanying notes to financial statements & audit report
F-21
<PAGE>
BOBERNCO, INC.
(A Development Stage Company)
BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
June December December
30, 1998 31, 1997 31, 1996
<S> <C> <C> <C>
CURRENT LIABILITIES:
Officers Advances (Note#6) $ 1,250 $ 0 $ 0
TOTAL CURRENT LIABILITIES $ 1,250 $ 0 $ 0
STOCKHOLDERS' EQUITY: (Note 1)
Common stock par value, $.001
authorized 50,000,000 shares
issued and outstanding at
December 31, 1996-3,000,000 shs $ 3,000
December 31, 1997-3,000,000 shs $ 3,000
June 30, 1998-6,000,000 shares $ 6,000
Additional paid in Capital -3,000 0 0
Accumulated loss -4,206 -2,932 - 2,884
TOTAL STOCKHOLDERS' EQUITY $ -1,206 $ 68 $ 116
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 44 $ 68 $ 116
</TABLE>
See accompanying notes to financial statements & audit report
F-22
<PAGE>
BOBERNCO, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
<TABLE>
Jan. 1, Year Year May 17, 1994
1998 to Ended Ended (inception)
Jun. 30, Dec. 31, Dec. 31, to Jun. 30,
1998 1997 1996 1998
<S> <C> <C> <C> <C>
INCOME:
Revenue $ 0 $ 0 $ 0 $ 0
EXPENSES:
General, Selling
and Administrative $ 450 $ 0 $ 0 $ 3,210
Accounting 800 0 0 800
Amortization 24 48 48 196
Total Expenses $ 1,274 $ 48 $ 48 $ 4,206
Net Profit/Loss(-) $-1,274 $ - 48 $ - 48 $- 4,206
Net Profit/Loss(-)
per weighted
share (Note 1) $ -.0002 $ NIL $ NIL $ -.0007
Weighted average
number of common
shares outstanding 6,000,00 6,000,000 6,000,000 6,000,000
</TABLE>
See accompanying notes to financial statements & audit report
F-23
<PAGE>
BOBERNCO, INC.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
Additional Accumu-
Common Stock paid-in lated
Shares Amount capital Deficit
<S> <C> <C> <C> <C>
Balance,
December 31, 1995 3,000,000 $ 3,000 $ 0 $- 2,836
Net loss year ended
December 31, 1996 - 48
Balance,
December 31, 1996 3,000,000 $ 3,000 $ 0 $- 2,884
Net loss year ended
December 31, 1997 - 48
Balance,
December 31, 1997 3,000,000 $ 3,000 $ 0 $- 2,932
March 30, 1998
Forward stock
split 2:1 3,000,000 +3,000 - 3,000
Net loss,
January 1, 1998
to June 30, 1998 - 1,274
Balance,
June 30, 1998 6,000,000 $ 6,000 $- 3,000 $- 4,206
</TABLE>
See accompanying notes to financial statements & audit report
F-24
<PAGE>
BOBERNCO, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
<TABLE>
Jan. 1, Year Year May 17, 1995
1998, to Ended Ended (inception)
Jun. 30, Dec. 31, Dec. 31, to Jun. 30,
1998 1997 1996 1998
<S> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Loss $ - 1,274 $ - 48 $ - 48 $- 4,206
Adjustment to
reconcile net loss
to net cash
provided by operating
activities
Amortization +24 +48 +48 +196
Changes in assets and
liabilities:
Organization Costs -240
Increase in current
liabilities: +1,250 0 0 +1,250
Net cash used in
operating activities $ 0 $ 0 $ 0 - 3,000
Cash Flows from
investing activities 0 0 0 0
Cash Flows from
Financing Activities:
Issuance of common
Stock for cash 0 0 0 +3,000
Net increase (decrease)
in cash $ 0 $ 0 $ 0 $ 0
Cash,
beginning of period 0 0 0 0
Cash,
end of period $ 0 $ 0 $ 0 $ 0
</TABLE>
See accompanying notes to financial statements & audit report
F-25
<PAGE>
BOBERNCO, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
June 30, 1998, December 31, 1997, and December 31, 1996
NOTE 1 - HISTORY AND ORGANIZATION OF THE COMPANY
The Company was organized May 17, 1994, under the laws of the State of
Nevada, as Bobernco, Inc. The Company currently has no operations and, in
accordance with SFAS #7, is considered a development stage company.
On May 24, 1994, the company issued 3,000,000 shares of $.001 par value
common stock for $ 3,000. in cash.
NOTE 2 - ACCOUNTING POLICIES AND PROCEDURES
Accounting policies and procedures have not been determined except as follows:
1. The Company uses the accrual method of accounting.
2. Earnings per share is computed using the weighted average number of
common shares outstanding.
3. The Company has not yet adopted any policy regarding payment of
dividends. No dividends have been paid since inception.
4. Organization costs of $ 240.00 are being amortized over a 60 month period
commencing may 17, 1994, to May 16, 1999.
NOTE 3 - GOING CONCERN
The Company's financial statements are prepared using the generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. However, the Company has no current source of revenue. Without
realization of additional capital, it would be unlikely for the Company to
continue as a going concern. It is management's plan to seek additional
capital through a merger with an existing operating company.
NOTE 4 - WARRANTS AND OPTIONS
There are no warrants or options outstanding to acquire any additional
shares of common stock.
F-26
<PAGE>
BOBERNCO, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS CONTINUED
June 30, 1998, December 31, 1997, and December 31, 1996
NOTE 5 - RELATED PARTY TRANSACTION
The Company neither owns or leases any real or personal property. Office
services are provided without charge by a director. Such costs are
immaterial to the financial statements and, accordingly, have not been
reflected therein. The officers and directors of the Company are involved in
other business activities and may, in the future, in other business
opportunities. If a specific business opportunity becomes available, such
persons may face a conflict in selecting between the Company and their other
business interests. The Company has not formulated a policy for the
resolution of such conflicts.
NOTE 6 - OFFICERS ADVANCES
While the Company is seeking additional capital through a merger with an
existing operating company, an officer of the Company has advanced funds on
behalf of the Company to pay for any costs incurred by it. These funds are
interest free.
NOTE 7 - SUBSEQUENT EVENTS (UNAUDITED)
MERGER
Pursuant to an Agreement and Plan of Reorganization dated August 31, 1998,
the Company completed a merger with Gentel Communications ("Gentel"). Under
the terms of the tax-free reorganization and merger, the Company issued
8,986,950 of its shares to the shareholders of Gentel. As a result, the
separate corporate existence of Gentel ceased and the Company continued as
the surviving corporation. The directors and officers of Gentel immediately
prior to the merger became the directors and officers of the Company, which
subsequently changed its corporate name to GTC Telecom Corp.
STOCK ISSUANCES
On July 21, 1998, Gentel issued a confidential private placement memorandum
offering of 500,000 shares of common stock at $1.00 per share. After the
merger (described above), this offering was amended to become an offering of
the Company. Per an amendment dated January 29, 1999, the maximum offering
was increased to 1,500,000 shares.The Company was able to raise
approximately $1,397,000, net of issuance costs paid for brokers and
finder's fees, from the offering.
F-27
<PAGE>
BOBERNCO, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS CONTINUED
June 30, 1998, December 31, 1997, and December 31, 1996
STOCK FOR SERVICES
In August 1998, the Company issued 11,000 restricted shares of common stock,
with a fair market value of $0.475 per share, to two employees of the
Company in lieu of salary.
Pursuant to various agreements subsequent to June 30, 1998, the Company
agreed to issue a total of 12,300 shares of common stock and 7,000 shares of
restricted common stock at $1.00 per share and 3,750 restricted shares of
common stock at one-third of the issue date's bid price per share for legal
services rendered.
On November 19, 1998, the Company entered into an Investment Banking
Agreement with Transglobal Capital Corporation ("TCC"), a licensed NASD
broker. Pursuant to the agreement, TCC will provide consulting services and
assist the Company with raising capital. The agreement, provides for the
Company to compensate TCC with an initial fee of 50,000 shares of the
Company's restricted common stock and a 13% commission on gross proceeds
received. In addition, the Company agreed to issue TCC options to purchase a
total of 600,000 shares of the Company's restricted common stock, at an
exercise price of $0.01 per share, when certain financing benchmarks are
obtained, as defined , with each option having a five-year life. As of the
date of our report, all 600,000 options have been granted pursuant to the
agreement. The difference between the exercise price and the fair market
value of the restricted common stock will be charged against additional
paid-in capital.
Pursuant to an agreement dated November 30, 1998, the Company issued 50,000
restricted shares of common stock, with a fair market value of $1.00 per
share, for deferment of rent.
Pursuant to an agreement dated January 13, 1999, the Company issued 30,000
restricted shares of common stock, with a fair market value of $1.00 per
share, for legal services rendered.
In March 1999, the Company issued options to purchase 25,000 shares of
restricted stock, at a price of $1.00 per share, for advertising.
STOCK OPTIONS AND WARRANTS
Subsequent to June 30, 1998, 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 91,000 shares of
restricted common stock at a price of $.01 per share and vesting over a
period of one year from the date of grant. A total of approximately $63,600
of compensation expense will be recorded over the vesting period. In addition,
the Company issued options to purchase 254,000 shares of restricted common
stock at a price ranging from $1.00 to $5.00 per share and vesting over a
period of six months to three years from date of grant. A total of
approximately $81,700 of compensation expense will be recorded over the
vesting period.
F-28
<PAGE>
BOBERNCO, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS CONTINUED
June 30, 1998, December 31, 1997, and December 31, 1996
OPERATING AGREEMENTS
On June 17, 1998, Gentel entered into an agreement with The Michelson Group,
Inc., ("Michelson"), whereby Michelson will perform corporate development
services such as, but not limited to, selecting key employees, attracting
capital investors, providing advice on stock option plans and maintaining an
ongoing stock market support system. Pursuant to the agreement, the Company
will pay Michelson a monthly fee in of $ 6,500. In addition, the company
agrees to issue Michelson warrants to purchase that number of shares of
common stock of the Company which would, upon exercise, result in Michelson
holding 9.9% of the outstanding shares of the Company upon the completion of
a proposed bridge financing. The agreement is effective through June 2000.
Subsequent to June 30, 1998, in accordance with the tax-free reorganization
and merger, all of the warrants were exercised into 1,135,000 restricted
shares of common stock.
In August 1998, the Company entered into a three-year carrier contract with
WorldCom, Inc. covering a potential volume purchase of $300,000 of long
distance telephone time. The contract provides for a minimum monthly revenue
commitment of $10,000 commencing March 1999.
On September 8, 1998, the Company entered into a agreement with a billing
company who will provide processing services for customer billing and
collections. In addition the billing company will provide financing
opportunities through a third-party lender for amounts up to 70% of eligible
accounts receivable, as defined.
On October 26, 1998, the Company entered into a 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 $1,425 per month.
On February 3, 1999, the Company entered into an agreement with an Internet
Access Provider ("IAP") whereby the IAP will provide internet services for
the Company. The agreement provides for a minimum monthly revenue commitment
of $25,000 beginning September 1999. The Agreement shall continue for a
period of three years and is automatically renewed for additional,
successive one-year periods unless terminated by the Company.
F-29
<PAGE>
GTC TELECOM CORP.
BALANCE SHEET (UNAUDITED)
<TABLE>
March 31,
1999
ASSETS
<S> <C>
Current assets:
Cash $128,430
Accounts receivable, less allowance for doubtful accounts of
$249,524 67,915
Other current assets 58,020
--------------------
Total current assets 254,365
Property and equipment, net of accumulated depreciation of $14,358 145,566
Other assets 119,362
--------------------
Total assets $519,293
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $148,641
Deferred income and other liabilities 78,055
--------------------
Total current liabilities 226,696
--------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value; 50,000,000 shares
authorized; 14,388,156 shares issued and outstanding 14,388
Additional paid-in-capital 3,010,145
Accumulated deficit (2,731,936)
--------------------
Total stockholders' equity 292,597
--------------------
Total liabilities and stockholders' equity $519,293
==========
F-30
<PAGE>
GTC TELECOM CORP.
STATEMENTS OF OPERATIONS (UNAUDITED)
</TABLE>
<TABLE>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net revenues $204,573 $497,312 $222,535 $497,312
Cost of sales 65,626 447,312 85,665 447,312
--------- --------- --------- ---------
Gross profit 138,947 50,000 136,870 50,000
Selling, general and
administrative expenses (1,160,408) (117,413) (2,339,771) (228,575)
Other income 3,397 -- 4,452 --
--------- --------- --------- ---------
Loss before provision for
income taxes (1,018,064) (67,413) (2,198,449) (178,575)
Provision for income taxes 200 -- 600 --
--------- --------- --------- ---------
Net loss $(1,018,264) $(67,413)$(2,199,049) $(178,575)
============ ========= ========== ==========
Basic and diluted net loss
per common share ($0.08) ($0.01) ($0.18) ($0.02)
============ ========= ========== ==========
Basic and diluted weighted
average common shares
outstanding 13,137,393 8,786,400 12,324,296 8,419,080
</TABLE>
F-31
<PAGE>
GTC TELECOM CORP.
STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
Nine Months Ended
March 31,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,199,049) $(178,575)
Fair market value of options granted for compensation 689,893 71,250
Fair market value of stock issued for compensation 490,768 --
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 12,657 --
Provision for losses on accounts receivable 249,524 --
Changes in operating assets and liabilities:
Accounts receivable (317,437) --
Other current assets (58,020) --
Accounts payable 141,091 --
Accrued expenses 8,055 --
---------- ----------
Net cash used in operating activities (982,518) (107,325)
---------- ----------
Cash flows from investing activities:
Purchases of equipment (139,499) (6,600)
PUC certifications and web site development (122,395) --
---------- ----------
(261,894) (6,600)
---------- ----------
Cash flows from financing activities:
Proceeds from sale of GTC common shares, net of
offering costs of $232,027 1,200,975 --
Collection of stock subscription receivable, net of
offering costs of $20,525 121,975 --
Proceeds from exercise of stock options 46,000 --
Proceeds from sale of GenX units and related
conversion into Gentel common shares, net
of offering costs of $28,500 -- 117,500
---------- ----------
Net cash provided by financing activities 1,368,950 117,500
---------- ----------
Net increase in cash 124,538 3,575
Cash at beginning of period 3,892 --
---------- ----------
Cash at end of period $ 128,430 $ 3,575
============ ==========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest -- --
Income and franchise taxes -- --
</TABLE>
Supplemental disclosure on non-cash investing and financing activities:
During the period ended March 31, 1999, the holder of a $80,000
convertible notes payable elected to convert such note into
40,000 shares of the Company's common stock in accordance
with the conversion option.
F-32
<PAGE>
GTC TELECOM CORP.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
1. MANAGEMENT'S REPRESENTATION:
The management of GTC Telecom Corp. (the "Company" or "GTC")
without audit has prepared the financial statements included
herein. Certain information and note disclosures normally
included in the financial statements prepared in accordance with
generally accepted accounting principles have been omitted. In
the opinion of the management of the Company, all adjustments
considered necessary for fair presentation of the financial
statements have been included and were of a normal recurring
nature, and the accompanying financial statements present fairly
the financial position as of March 31, 1999, the results of
operations for the three months and nine months ended March 31,
1999, and cash flows for the nine months ended March 31, 1999.
The results of operations for the three months and nine months
ended March 31, 1998 and cash flows for the nine months ended
March 31, 1998 are for GenTel Communications ("GenTel"),
the predecessor to GTC (see Note 4).
It is suggested that these financial statements be read in
conjunction with the GenTel audited financial statements and
notes for the period from May 29, 1997 (date of inception)
through June 30, 1998, and the Bobernco, Inc. ("Bobernco")
audited financial statements and notes for the period ended June
30, 1998, included in this Form 10-SB. The interim results are
not necessarily indicative of the results for a full year.
2. DEVELOPMENT STAGE:
Prior to June 30, 1998, in accordance with Statement of
Financial Accounting Standards No. 7 ("SFAS 7"), "Accounting and
Reporting by Development Stage Enterprises," the Company was
considered a development stage enterprise. Subsequent to June
30, 1998, the Company began deriving revenue from its planned
principal operations. Therefore, all references to SFAS 7 have
been removed.
3. OTHER ASSETS:
The Company capitalizes the costs associated with the development of
its website and carrier certification. Other assets are amortized
using the straight-line method over the assets' estimated useful lives
ranging from 2 to 3 years.
4. PROFORMA:
Pursuant to an Agreement and plan of Reorganization dated August 31, 1998,
GenTel completed a merger with and into Bobernco, Inc. (the "Merger").
Under the terms of the tax-free reorganization and merger, all of the
Company's common stock was converted to 8,986,950 shares of Bobernco
common stock and, as a result, the separate corporate existence of GenTel
ceased and Bobernco continued as the surviving corporation. Thus, all
additional subsequent events are disclosed in Bobernco's separate audited
financial statements. Bobernco subsequently changed its name to GTC.
However, if the merger had occurred at the beginning of the year July 1,
1997, the pro forma financial statements for the Nine months ended
March 31, 1999 and March 31, 1998 are as follows:
<TABLE>
March 31, March 31,
1999 1998
<S> <C> <C>
Net sales $ 222,535 $ 497,312
Cost of sales $ 85,665 $ 447,312
Net loss $(2,199,049) $ (179,037)
Basic and dilutive loss per share $ (0.18) $ (0.02)
Basic and dilutive weighted average
common shares outstanding 12,234,296 10,219,080
</TABLE>
5. SUBSEQUENT EVENTS:
On April 21, 1999, the Company initiated a private placement offering of
2,000,000 shares of the Company's restricted (as that term is defined
by Rule 144 of the Securities Act of 1933) Common Stock at a price of $3.00
per share. Issuance costs paid for broker and finder's fees will offset
against capital raised.
F-33
<PAGE>
On April 30, 1999, the Company entered into an agreement with
Williams Communications, a unit of Williams of Tulsa, Oklahoma
("Williams"), in which Williams Communications will design, install,
maintain the Company's previously discussed high speed, nationwide
VoIP network. The total contract cost to the Company is
approximately $100,000,000 over a five-year term. Under the terms
of the agreement with Williams Communications (the "Williams
Agreement"), the Company is obligated to pay Williams $28.9 million
upon delivery of the network to the Company. The Company obtained
equipment financing for $26.0 million of the total contract price
from Ascend Communications, Inc. The Company is responsible for the
remaining $2.9 million. Please refer to Long-Term Financing, above
for further details regarding the Company's financing for the
purchase of its VoIP Network. In addition, the Company is obligated
to pay Williams a monthly maintenance fee of approximately $188,000
and an additional set-up fee of $270,000 beginning on the first
month following delivery of the Network (which is currently
scheduled for January 2000) increasing to approximately $404,000 per
month through the twelfth (12th) month of the Williams Agreement.
The monthly maintenance fee increases to approximately $639,000 per
month beginning with the thirteenth (13th) month and thereafter
until the end of the contract period (approximately through December
2004). The remainder of the Williams Agreement is for its carrier
services in which the Company will pay approximately $520,000 per
month over the term of the contract. In addition, the financing
will include a five-year warrant to purchase 315,151 shares of the
Company 's common stock at an exercise price of $8.25 per share.
The warrant will include provisions for anti-dilution protections,
net exercise and registration rights. The Williams Agreement can be
terminated by the Company with six month's written notice to
Williams.
In conjunction with the development of its web portal site, the Company has
entered into the following agreements:
1. On May 12, 1999, the Company entered into a financing
agreement for approximately $205,000 for equipment. Terms of
the financing include thirty-six (36) monthly payments of
$6,737.60 beginning June 1, 1999. This lease will be
accounted for as a capital lease.
2. On April 6, 1999, the Company entered into a one-year
agreement with a company who will provide the dial up
Internet infrastructure. The agreement, beginning July 1999,
provides for the Company to initially pay $36,000 per month
and an initial set-up fee of $8,000. As the supplier is able
to provide service throughout the nation, The Company's
monthly minimum commitment will increase from $36,000 per
month to a maximum $60,750 per month. In addition, the
Company is committed to pay a set-up fee of up to $5,500.
3. On March 31, 1999, the Company entered into a one-year
agreement with a company who will provide Internet data
services. The agreement, beginning May 1999, provides for
the Company to pay $8,220 per month and an initial set-up fee
of $3,790.
4. On April 21, 1999, the Company entered into a two-year
agreement with a company who will provide technical support
services. The agreement, beginning June 1999, obligates the
Company to an initial monthly minimum revenue commitment of
$4,000 in month 1, $5,000 in months 2 and 3 and increasing to
$9,300 per month beginning in month 4 over the remainder of
the agreement.
5. On March 29, 1999, the Company entered into a one-year
agreement with a company who will provide access to certain
Internet content. The agreement, beginning June 1999,
provides for the Company to pay $5,000 per month and an
initial set-up fee of $5,000.
On April 15, 1999 (date of grant), the Company issued options to
a director to purchase 526,316 shares of the Company's restricted
common stock at an exercise price of $0.475 per share. The options
vest 100% on the date of grant and are exercisable for three years.
On April 16, 1999, the director exercised these options for $250,000.
A total of approximately $1,328,950 of compensation expense was recorded
in April 1999 in connection with the granting of this option.
In June, 1999, the Company issued 31,000 shares of "restricted"
(as that term is defined under Rule 144 of the Securities Act of 1933)
Common Stock pursuant to a Private Placement offering of 2,000,000 pursuant
under Rule 506 of Regulation D and Section 4(2) of the Securities Act
of 1933 to "accredited" investors at a price of $3.00 per share,
resulting in net proceeds to the Company of approximately $78,450.
On July 6, 1999, the Company entered into a short term note (the "Note")
with an individual for the amount of $50,000 for use as working capital.
Under the terms of the Note, the Company will be required to repay the
principal amount of $50,000 within 30 days with 10% interest.
The Note is secured by the Company's accounts receivable.
On July 6, 1999, the Company issued 600,000 shares of "restricted"
(as that term is defined under Rule 144 of the Securities Act of 1933)
Common Stock, resulting in net proceeds to the Company of approximately
$6,000, to Transglobal Capital Corporation ("TransGlobal"),
pursuant to TransGlobal's stock option agreement entered into between
the Company and TransGlobal. The issuance was exempt under Section 4(2)
of the Securities Act of 1933.
F-34
[GTC TELECOM INC. LETTERHEAD]
July 6, 1999
This loan agreement made between:
GTC Telecom Inc.
3151 Airway Avenue
Suite P-3
Costa Mesa, CA 92626
And
Jennifer Young
419 San Madelo
Coalinga, CA 93210
Whereas, Ms. Young, an individual, and GTC Telecom (hereinafter
"GTC"), a long distance company,
Whereas, GTC agrees to loan GTC the sum of $50,000 for 30 days,
Whereas, GTC agrees to return in full the principal amount of
$50,000 on August 6, 1999,
Whereas, GTC will also agree to pay 10% interest per 30 day period,
payable on the 6th of each month,
Whereas, GTC will also guarantee the principal amount against their
monthly receivables,
Now therefore it is mutually agreed upon as evidenced by signatures
below:
/s/Jennifer Young 7-6-99
Jennifer Young
/s/Paul Sandhu 7-5-99
Paul Sandhu
GTC Telecom Inc.
President
